L&T - WRKNG Capital

A Project Report
on
ANALYSIS
OF
WORKING CAPITAL MANAGEMENT
BY
BHAWNA KALRA
D.A.V.INSTITUTE OF MANAGEMENT
FARIDABAD
Location: M/s. Larsen & Toubro Limited
Switchgear Factory, Faridabad
A
SUMMER TRAINING
REPORT
ON
ANALYSIS OF WORKING CAPITAL MANAGEMENT
CONDUCTED AT
LARSEN & TOUBRO PVT. LTD.
IN PARTIAL FULFILMENT FOR THE DEGREE OF

MASTERS OF BUSINESS ADMINISTRATION (M.B.A.)
(SESSION 2006-2008)
SUBMITTED TO: SUBMITTED BY:

Controller of Examination Bhawna Kalra
Maharishi Dayanand MBA IIIrd Sem.
University, Rohtak Regn. No. 06-DAVM-302
DAV INSTITUTE OF MANAGEMENT

Faridabad
CERTIFICATION
This is to certify that the Project Report title Analysis of Working Capital submitted in partial
fulfillment for the award of MBA Degree of University School of Management Studies,
Maharishi Dayanand University, was carried out by Bhawna Kalra under my guidance. This
has not been submitted to any other University or Institution for the award of any
degree/diploma/certificate.
Signature of the Guide

BRIEF HISTORY
LARSEN & TOUBRO LIMITED was established in 1938, and a today India’s largest multi-
dimensional engineering and construction company involved in manufacturing and supplying
various types of industrial and household equipment.
Two Danish young men, Mr. HOLCK LARSEN & Mr. S. KRISTIAN
TOUBRO attended the same college and passed out as chemical and civil
engineers respectively decided to work in the same company, F.L. Smith
and Co, Copenhagen, Denmark. Mr. Toubro was sent to India in 1934 to
help, erect & commission machinery supplied for a cement plant by F.L.
Smith and Co. Fortunately Mr. Larsen was also sent to India in 1935 to assess the cement
manufacturing capabilities of various manufacturing groups. In 1938, the two Danes decided to
seek their fortunes in postwar India and so came together in that age of entrepreneur to set up
Larsen & Toubro, as a partnership firm by setting up a small office in downtown Mumbai (then
Bombay). Initially they began marketing Danish dairy equipment, which was a great success.
A year later, when World War II broke out, the fledgling Company’s genius for innovation
came to the fore. It began to make the products it used to import. In 1945, L&T was appointed
dealers of Caterpillar, the American earthmoving machinery giant. In 1946, the firm became a
limited company, and soon a nationwide network of offices was set up. L&T had set out a
charter for itself: the company would meet the needs of India’s emerging core sector. ‘In
Service Lies Success’ was enshrined as a corporate motto. Very soon L&T came to be known
for its quality and thus began the creation of one of the largest Indian company. The firm
became a public limited company in 1950. L&T steadily climbed the list of the top 200 Indian
companies - from 72 in 1966 to 25 in 1973. By then, it had developed a vast repertoire of skills
and a reputation for high quality goods and services. Over the next decade, most of L&T’s
activities had crystallized into products and services involving high technology and advanced
product development programmes.
It has now come a long way from its little office in Mumbai of 1938. In India, they are a visible
and vibrant presence. Some of India’s most sophisticated projects and most complex industrial
equipment carry the L&T insignia of excellence.
Mr. TOUBRO passed away in 1982 &. Mr. HOLCK LARSEN the CHAIRMAN EMERITUS
of company, passed away in 2003. He was awarded with Padma Bhushan on 26th Jan 2002.
Mr. A.M.NAIK, Chairman of the company

Company Profile
Larsen & Toubro Limited (L&T) is a technology-driven engineering and construction

organization, and one of the largest companies in India's private sector. It has additional
interests in manufacturing, services and Information Technology.
A strong, customer-focused approach and the constant quest for top-class quality have enabled
the Company to attain and sustain leadership in its major lines of business across seven
decades.
L&T has an international presence, with a global spread of offices. A thrust on international
business over the last few years has seen overseas earnings growing to 18 per cent of total
revenue. With factories and offices located around the country, further supplemented by a wide
marketing and distribution network, L&T's image and equity extends to virtually every district
of India.
Record of Achievements
L&T's signature of excellence is evident on:
• India's first indigenous hydrocracker reactor

• Oil and gas platform projects executed to global benchmarks
• The world's largest continuous catalyst regeneration reactor
The simultaneous execution of clean fuel projects at eight
•
refineries around India
• The world's biggest fluid catalytic cracking regenerator
• The world's longest product splitter
• Asia's highest viaduct - built for the Konkan Railway
• The world's longest LPG pipeline
• The world's longest cross country conveyor
• Building an international class football stadium in 260 days
MARKET CAPITALISATION OF L&T TILL DATE

EXCHANGE BSE
OPEN 2600.00
HIGH 2600.00
LOW 2438.00
TRADED QUATITY 228991
CURRENT 2450.45
% CHANGE -1.69
MARKET CAPITALISATION(in billions) 649.91
L&T has been ranked 5th among the Super Ten out of 20 Top admired Corporation in India.
L&T ranks first in the Engineering Business
OPERATING DIVISIONS
LARSEN & TOUBRO LIMITED has four main operating divisions along with Information
Technology.
ENGINEERING & CONSTRUCTION:
L&T’s Engineering & Construction i.e. EPC project business constitutes a critical part of
L&T’s engineering core. L&T has integrated its strengths in process technology, basic and
detailed engineering, equipment fabrication, procurement, project management, erection and
construction, and commissioning to offer single-point responsibility under stringent delivery
schedules. Strategic alliances with world leaders enable L&T to access technical know-how
and execute process intensive large-scale turnkey projects to maintain its leadership position.
ELECTRICAL & ELECTRONICS:
Electrical & Electronics division (EBG) is organized into two sectors, Electrical & Electronics,
comprising eight Strategic Business Units (SBUs). The Electrical business comprises Electrical
Standard Products, Electrical Systems & Equipment & Petrol Dispensing Pumps & Systems.
The Electronics business comprises Metering & Protection Systems, Control & Automation,
Medical Equipment & Systems, Embedded Software & Systems and Enterprise Networking
business.
L&T’s Electrical Sector has a comprehensive Quality, Environment and Safety management
system. The quality management system for design, development, production, marketing and
servicing has received ISO 9001 certification from BVQI, UK. The environment management
system at its Works has been certified for conformity to ISO 14001 by BVQI. The Division has
implemented Enterprise Resource Planning solution of SAP AG, Germany and went live at 35
locations across the country simultaneously in the ‘Big Bang’ mode in 1999.
HEAVY ENGINEERING:
L&T’s Heavy Engineering business activities are organized under self-reliant Strategic
Business Units (SBUs), each specializing in different product lines. They meet the needs of
major industries: chemical, petrochemical, refinery, fertilizer, oil & gas, man-made fiber,
power, iron & steel, paper & pulp, minerals & metals, cement, food & dairy, plastic & rubber.
Plant and equipment are designed and manufactured to customer specifications and various
stringent international codes as well as L&T’s own standards. Materials of construction: carbon
steel, low alloy steel, stainless steel, duplex steel, clad steel, nickel, monel, inconel, cupro-
nickel, copper, hastelloy, aluminium, titanium, zirconium, tantalum as well as composites
.L&T has supplied equipment to almost all process industries in India, and has exported
various critical equipment for the hydrocarbon industry abroad.
CONSTRUCTION:
L&T offers turnkey construction services and engineered turnkey industrial and infrastructure
projects in civil, mechanical, electrical and instrumentation engineering through ECC – its
Engineering, Construction and Contracts Division. The Headquarters of the Division is located
at Chennai. ECC’s track record is built upon timely completion, safety, quality and reliability.
Many of its Business Units, departments and facilities are accredited with ISO certificates.
Well-structured quality assurance systems ensure quality, safety and reliability at every stage
of construction. Regional offices at Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad,
Kolkata, and Mumbai carry out the execution of domestic projects. Area offices at Delhi,
Kolkata, Mumbai and Chennai carry out execution of overseas projects.
INFORMATION TECHNOLOGY:
TECHNOLOGY
LARSEN & TOUBRO INFOTECH LIMITED (L&T Infotech) offers comprehensive, end-to-
end software solutions and services. Leveraging the heritage and domain expertise of the
parent company, its services encompass a broad technology spectrum.
SOLUTIONS & SERVICES
• Domain Solutions: Financial services, Telecom, Utilities & Manufacturing.
• Enterprise Application Systems: Enterprise Resource Planning (ERP). Customer

Relationship Management (CRM), e-Procurement & Supply Chain Management (SCM),
Collaborative Product Commerce (CPC) and Enterprise Information Portals (EIP).
• Technology Solutions: Mobile computing, Embedded software and services; Enterprise

Application Integration & Geographic Information Systems Solutions, Web
Electrical & Electronics Division (EBG)
Electrical & Electronics Division (EBG) is one of the core businesses of Larsen & Toubro
Limited (L&T) - India’s largest engineering and construction conglomerate. This division is
engaged in the business of low voltage Switchgear products, Electrical systems, Energy meters,
Medical equipment, Petroleum dispensing pumps and Automation solutions.
This division is the largest manufacturer of low voltage switchgear and controlgear in India
and enjoys market leadership amidst competition from international players. A countrywide
network of Stockists take care of products’ distribution along with a widespread service
network. Offices of the L&T Group companies, located around the world, support the
requirements from export market.
EBG Performance (In Crores)

2005-2006 2004-2005 2003-2004
Gross Revenue 1582 1220 1019
EBITDA / Revenue % 15.5 12.7 12.9
Export Earnings 173 97 62
The division has a comprehensive Quality, Environment and Safety management system. The
Quality management system for design & development, production, sales, marketing and
servicing has received ISO 9001:2000 certification from BVQI. In addition, its manufacturing
facilities have been certified for conformity to ISO 14001 (Environmental Management
System) & OHSAS 18001 (Occupational Health and Safety Management System) by BVQI.
We have implemented Enterprise Resource Planning (ERP) solution of SAP AG, Germany and
went live at 35 locations across the country simultaneously in the ‘Big Bang’ mode in 1999.
ERP provides end-to-end integration across all business functions from suppliers to customers
over Internet and it is India’s first installation upgrade to Version 4.6C.
Strategic Business Units

Strategic Business Units (SBUs) of the division have operations at five locations in India –
two in Mumbai and one each in Ahmednagar, Mysore and Faridabad. One of the SBU Of
EBG is operating in Faridabad
Electrical Systems & Equipment (Operations at Faridabad)
L&T Faridabad division manufactures custom-built switchboards with conventional as well as

intelligent protection, control and communication to meet the power distribution and motor
control needs of key industries. L&T FSW continue to be the largest supplier of switchboard
panels in India and these switchboards have been installed at many prestigious plants in India.
The range of custom-built switchboards comprises fully drawout power control centres and
motor control centres, distribution boards and control panels – all conforming to IEC 60439-1
and IS 8623. Its Power Control Centre (PCC) type TF is rated up to 6000A and houses L&T-
made ACBs to take care of power distribution. The L&T-made Motor Control Centre (MCC)
type TQ is rated up to 5000A.
L&T FSW offer fixed distribution boards, Intelligent Relays integrated with the PCCs and
MCCs along with customized Human Machine Interface software and Power Quality
Management Systems from the business associates. Also offered are allied equipment like
busducts, transformers, MV switchgear, industrial batteries and cables, and undertakes turnkey
contracts for comprehensive system engineering, supply, installation, testing and
commissioning of switchboards and allied equipment. L&T offers assistance in product
selection, application engineering and detailed engineering, installation & commissioning,
retrofitting and upgradation of switchboards, after-sales service and training. L&T also designs
and manufactures enclosures in flat pack systems for switchboard assemblers world-wide.
Retrofitting solutions are offered for a wide range of LV & MV switchgear including IMCS.
ORGANIZATIONAL SET-UP Of FARIDABAD UNIT
DEPARTMENTAL STRUCTURE AT FSW
1. Marketing & Sales Department.
2. Design Department.
3. Production, Planning, Control & Materials Department
4. Production Department
Assembly Fabrication Paint Shop Maintenance
5. Switchgear quality & reliability (SQR) Department.
6. Personnel, HR & Administration Department
Personnel & HR Reception Security Computer Communication

& canteen facilities
7. Finance and account department
8. IT Service
FLOWCHART SHOWING THE CONNECTIVITY
BETWEEN ALL THE DEPARTMENTS
SALES &
CUSTOMER MARKETING
ENGINEERING & SHOP

DESIGN
PURCHASE
SQR
PLANNING
STORES
DISPATCH
ACKNOWLEDGEMENTS
I would like to take this opportunity to thank all the people who helped me in completion of
my management training and in the compilation of this report.
I would like to thank Mr. S. M. Saini (Deputy General Manager, L&T-Faridabad Switchgear
Works) for providing me with this unique opportunity of undergoing my training at L & T.
I extend sincere thanks to Mr. J. P. Kedia (Manager- Finance and Accounts Department) for
providing me guidance at each and every step of the training. I would always be obliged to him
because he shared his real-life experiences with me.
I am thankful to the other members of the finance department who explained me finance work,
solving queries and being there to help me whenever required.
Table of Contents
i. Abstract
ii. Introduction
1. Working Capital Management

1.1 Introduction
1.2 The operating Cycle and Working Capital Needs
1.3 Operating Cycle of L&T
1.4 Factors Affecting Working Capital Requirement
1.5 Liquidity Vs. Profitability- A Risk Return Trade Off
1.6 Working Capital Policy
2. Receivables Management
2.1 Need of Receivables
2.2 Objective of Receivable Management
2.3 Cost of Receivables
2.4 Trade off on Receivables
2.5 Determinants of Receivables
2.5.1 Credit Policy
2.5.2 Credit Control
2.6 Channel Financing
3. Payable Management
3.1 Discounting of Bills
4. Inventory Management
4.1 Types of Inventory
4.2 Need for Inventory
4.3 Objectives of Inventory Management
4.4 Cost of holding Inventory
4.5 Techniques for Inventory Management
4.5.1 Perpetual Inventory Verification
4.5.2 ABC Analysis
4.5.3 Economic Order Quantity
4.5.4 Reorder Point
4.5.5 Safety Stock
4.5.6 Lean manufacturing
a. Just In Time (JIT)
b. Kanban System
c. Kaizen
d. Single Piece Flow System
e. Gemba Walking
f. Virtual Storage
5. Cash management
5.1 Need of Cash
5.2 Objectives of Cash management
5.3 Cost of Holding Cash
5.5 Benefits of Cash management
5.6 Cash Budget
5.7 Techniques of managing Cash in L&T
6. Conclusion
7. Refrences
ABSTRACT
The project titled ‘Analysis Of Woking Capital Management’ aims at understanding and
analyzing the Working Capital Structure of the plant, Faridabad Switchgear Works
(FSW), a manufacturing unit of Larsen & Toubro Limited (L&T). Working capital
management comprises of four major parts – Inventory management, Receivables
management, Payable Management and Cash management. There are a number of tools
available for a proper working capital management. Most of them are studied as a part of the
project.
As a part of inventory management, various inventory management techniques are studied.

Most of these are being implemented in the plant (like PIV, ABC Analysis, JIT, Single Piece
Flow System etc). Even those tools, which are not practically implemented (like Reorder
Point, Safety Stock etc) are studied. These methods, along with their working and importance,
are studied in detail.
As far as receivables management is concerned, Credit Terms, Credit Policy, and

Collection Policy and Procedure are understood, giving special focus on how they are being
implemented practically. Also, there is an innovative technique being used by L&T for
managing its receivables efficiently. This technique, known as Channel Financing makes sure
that the receivables are collected almost instantly. Just like any other firm, even L&T is trying
to minimize its debtors, as far as possible. Collections are tried to be made as fast as they can,
and all these tools are very much focused and effective in doing so.
Apart from this, I did Discounting of Bills as a part of Payable management technique. It’s
an easy way to check the savings a firm can make by paying its suppliers early.
Another prominent tool being implemented at L&T is Sweeping Facility for Cash
Management . It makes sure that the cash is not lying idle, and is being used efficiently, and
moreover, is invested wisely, in case opportunities are there.
INTRODUCTION
PURPOSE:
The purpose of the report, ‘Analysis of Working Capital Management’, is to understand and
analyze the working capital structure of the manufacturing unit of L&T Limited, that is,
Faridabad Switchgear Works (FSW).
The objective was also to check the the real life situations in an industry as differing from
theories. The project will throw a light on how to link theory with the business world. Working
Capital Management is a part of Corporate Finance, and to understand it, one has to get
involved with it. Working with professionals gives us a feeling of how our future life would be,
and how we are supposed to behave in the business world.
LIMITATIONS:
The report covers the practices followed at one plant of the company, so the study that is being
carried, may be useful for just one factory, and not for others, as there may be difference in the
business module from one factory to another. Therefore, a generalization of this report, to
judge the efficiency of L&T Limited as a whole, cannot be done.
In addition, the project -span of 9-weeks, was insufficient for understanding, and analyzing the
working capital structure of a plant completely. Apart from this, the suggestions being made in
this report may or may not be practically applicable in the all types of industries.
SCOPE:
The report comprises of various suggestions, regarding the proper management of the working
capital, at each and every step of the processes that are taking place at the FSW factory.
Suggestions for improving the overall efficiency of the plant, by improving the working capital
structure of the plant, have been provided. This is be done by suggesting ideas to improve
inventory management, receivables management and cash management processes; separately,
as well as collectively.
METHODS OF COLLECTING DATA AND THEIR SOURCES:
In most of the cases, the data is collected on the spot from the persons involved in the different
processes. As far as possible, I have tried to collect data by myself. I also tried to get involved
with people from various departments, right from Accounts & Finance Department to Planning
& Purchase Department, Stores Department, Marketing Department, Fabrication Department
and Personnel Department.
Apart from self-experimenting and observing, I constantly interacted with various employees
of the Company and gathered useful information on related matters, which were used in the
report as well as for my personal knowledge.
Various books and internet sites, including that of L&T itself, have also helped me a lot in
collecting data and understanding concepts.
Working Capital Management
Every business needs investment to procure fixed assets, which remain in use for a longer
period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business
also needs funds for short-term purposes to finance current operations. Investment in short
term assets like cash, inventories, debtors etc., is called ‘Short-term Funds’ or ‘Working
Capital’. The ‘Working Capital’ can be categorized, as funds needed for carrying out day-
to-day operations of the business smoothly. The management of the working capital is
equally important as the management of long-term financial investment.
Every running business needs working capital. Even a business which is fully equipped with all
types of fixed assets required is likely to collapse, if it does not have;
a) Adequate supply of raw materials for processing;
b) Cash to pay for wages, power and other costs;
c) Creating a stock of finished goods to feed the market demand regularly; and,
d) The ability to grant credit to its customers.
Working capital is thus like the lifeblood of a business. The business will not be able to
carry on day-to-day activities without the availability of adequate working capital.
Working Capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the relationship that exists between them.
The current assets refers to those assets which in the ordinary course of business can be, or will
be converted into cash within one year without undergoing diminution in the value and without
disrupting the operations of firm. The major current assets are:-
 Cash
 Marketable Securities
 Accounts Receivables
 Inventory
The Current Liabilities are those liabilities which are intended, at their inception, to be paid in
the ordinary course of business, within a year, out of current assets or earnings of the concern.
The basic current liabilities are:-
 Accounts Payable
 Bills Payable
 Bank Overdraft
 Outstanding Expenses
The term Working Capital may be used in two different ways.

 Gross Working Capital (or total Working Capital): The gross working capital refers
to the firm’s investment in all the current assets taken together. For example, if a firm
has a cash balance of Rs. 50000, debtors of Rs. 70000 and inventory of raw material
and finished goods has been assessed at Rs. 100000, then the gross working capital of
the firm is Rs. 220000.
 Net Working Capital: The term net working capital may be defined as the excess of
total current assets over total current liabilities. The extent, to which these current
liabilities are delayed, the firm gets availability of funds for that period.
Gross Working Capital= Sum Total of Current Assets

= RM + WIP + FG + Debtors + Cash and Bank Balance
Net Working Capital= Difference between current assets and current
Liabilities
RM + WIP + FG + Debtors + Cash and Bank Balance
- Creditors – Direct wages - Overheads
The Operating Cycle and Working Capital Needs
The working Capital requirement of firm depends, to a great extent upon the operating cycle of
the firm. The operating cycle may be 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 may differ from one firm to another depending upon the size
and nature of the firm.
In case of manufacturing concern, this series starts from procurement of raw materials and
ending with the sales realization of finished goods. There is a time gap between happening of
the first event and happening of the last event. This time gap is called the operating cycle.
Thus, the operating cycle of a firm consists of the time required for the completion of the
chronological sequence of some or all of the following:
i. Procurement of raw materials and services.

ii. Conversion of raw materials into work-in-progress.
iii. Conversion of work-in-progress into finished goods.
iv. Sale of finished goods (cash or credit).
v. Conversion of receivables into cash.
Cash
Creditors
Debtors Raw material
Working
Value Expenses Value
Addition Addition
Finished Goods Work in Process
Figure:1 – Working capital Cycle
Explanation of diagram
Working capital cycle involves conversions and rotation of various constituents/components of

the working capital. Initially ‘cash’ is converted into raw materials. Subsequently, with the
usage of fixed assets resulting in value additions, the raw materials get converted into work in
process and then into finished goods. When sold on credit, the finished goods assume the form
of debtors who give the business cash on due date. Thus ‘cash’ assumes its original form again
at the end of one such working capital cycle but in the course it passes through various other
forms of current assets too. This is how various components of current assets keep on changing
their forms due to value addition. As a result, they rotate and business operations continue.
Thus, the working capital cycle involves rotation of various constituents of the working capital.
L&T’s Operating Cycle
The operating cycle of L&T is as follows:-
 Procurement of raw material
The operating cycle for a company primarily begins with the purchase of raw materials, which
are paid for after a delay representing the creditor's payable period. L&T is a capital goods
manufacturer. Some raw materials are procured from outside, some manufactured by its own.
Sometimes it may happen that company needs product in the form of raw material
manufactured by its own SBU’s. In this case stock is transferred within the company but it
won’t be considered as actual sale and no sale tax levied but it is liable to pay excise duty since
excise duty is paid on production and it is the liability of manufacturer.
 Conversion of Raw material into finished goods
These purchased raw materials are then converted by the production unit into finished
goods and then sold. The time lag between the purchase of raw materials and the sale of
finished goods is known as the inventory period.
Labor
Labor is vital for conversion of inputs into finished goods.
There are three types of labour here
Skilled Labor
Here a lob our hour rate is fixed and the number of hours required to perform that work
is determined and on the basis of this labor expenses are determined. This is treated as
fixed overheads.
Casual labor
This is not permanent labor. They are paid on daily basis to perform work of a non-
recurrent nature. They are sourced from the Contractors of the Company.
Vendoring
When there is a capacity constraint then a part of the work is done by vendors and the
parts manufactured by these vendors are assembled. This is also called job work
 Conversion of Work-in-progress into finished goods
 Sale of Finished Goods
Goods are sold either on cash basis or credit basis. Upon sale of finished goods on
credit terms, there exists a time lag between the sale of finished goods and the
collection of cash on sale. This period is known as the accounts receivables period
 Conversion of Receivables into Cash

There are basically two ways available to vendors to pay their dues to L&T. These are:-
Cash Payment method
In this a vendor is supposed to clear his dues within a limited amount of time and mode
of payment must be highly liquid. The vendors can pay by demand drafts, pay orders,
or cheques of party which are subject to realization.
Channel Financing
Channel financing is used to receive fast money from debtors. Most of the firms
generally sells goods or services on credit and it takes a little time to realize. Hence,
receivables form an important part of working capital management.
Liquidity versus Profitability- A Risk-Return Trade off
Net Working Capital has bearing on Profitability as well as risk. The term Profitability
used in this context is measured by profits after expenses. The term Risk is defined as the
probability that a firm will become technically insolvent so that it will not be able to meet
its obligations when they become due for payment.
It is said that greater the amount of working capital the less risk prone the firm is
The decision on how much working capital be maintained involves a trade-off because 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. Therefore, the net effect on the value of the firm should be
used to determine the optimal amount of working capital.
The goal of Working Capital Management is to manage current assets and liabilities in
such a way that a satisfactory level of working Capital is maintained.
The assessment of the working capital should be accurate even in the case
of small and micro enterprises where business operation is not very large. We know that
working capital has a very close relationship with day-to-day operations of a business.
Negligence in proper assessment of the working capital, therefore, can affect the day-to-
day operations severely. It may lead to cash crisis and ultimately to liquidation. An
inaccurate assessment of the working capital may cause either under-assessment or over-
assessment of the working capital and both of them are dangerous.
CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL
• Growth may be stunted. It may become difficult for the enterprise to undertake
profitable projects due to non-availability of working Capital.
• Implementation of operating plans may become difficult and consequently the profit
goals may not be achieved.
• Cash crisis may emerge due to paucity of working funds.
• Optimum capacity utilisation of fixed assets may not be achieved due to non-
availability of the working capital.
• The business may fail to honour its commitment in time, thereby adversely affecting its
credibility. This situation may lead to business closure.
• The business may be compelled to buy raw materials on credit and sell finished goods
on cash. In the process it may end up with increasing cost of purchases and reducing
selling prices by offering discounts. Both these situations would affect profitability
adversely.
• Non-availability of stocks due to non-availability of funds may result in production
stoppage.
While underassessment of working capital has disastrous implications on business, over

assessment of working capital also has its own dangers.
CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL
• Excess of working capital may result in unnecessary accumulation of

inventories.
• It may lead to offer too liberal credit terms to buyers and very poor
recovery system and cash management.
• It may make management complacent leading to its inefficiency.
• Over-investment in working capital makes capital less productive and
may reduce return on investment.
Working Capital: Policy
There is an inevitable relationship, between the sales and current assets. The actual and
forecasted sales have major impact on the amount of current assets which the firm must
maintain. So, depending upon the sales forecast, the financial manager should also estimate the
requirement of current assets.
There are three types of working capital policies which a firm may adopt i.e. moderate working
capital policy, conservative working capital policy, and aggressive working capital policy.
These policies describe the relationship between sales level and the level of current assets.
Current assets
Conservative
Moderate
Aggresive
Sales level
Figure 2 : Different types of working Capital

Policies
In case of moderate working capital policy, the increase in sales level will be
coupled with proportionate increase in level of current assets also e.g. if the sales
increase or expected to increase by 10%, then the level of current assets will also be
increased by 10%.
In case of conservative working capital policy, the firm does not like to take risk. For
every increase in sales, the level of current assets will be increased more than
proportionately. Such a policy tends to
reduce the risk of shortage of working capital by increasing the safety component of
current assets. The conservative working capital policy also reduces the risk of non
payment to liabilities.
In case of aggressive working capital policy the increase in sales does not result in
proportionate increase in current asset. For example, for 10% increase in sales the
level of current asset is increased by 7% only.
This aggressive policy has many implications-
• The risk of insolvency of the firm increases as the firm maintains low liquidity.
• The firm is exposed to greater risk as it may not be able to face unexpected change, in
the market
• Reduced investment in current assets will result in increase in profitability of the firm
L&T and its Working Capital policy
L&T follows conservative working capital policy i.e. for every increase in sales
level the level of current assets will be increased more than proportionately. Such a
policy tends to reduce the risk of shortage of working capital by increasing the safety
component of current assets. This policy also reduces the risk of non payment of
liabilities.
RECEIVABLES MANAGEMENT
The term Receivables is defined as debt owed to the firm by customers arising from the sale of
goods and services in the ordinary course of business. Receivables are a type of loan extended
by the seller to the buyer to facilitate purchase process. When companies sell their products
they sometimes demand cash on delivery, but in most cases they sell goods on credit and allow
a delay in payment. The customers’ promise to pay for their purchases constitutes valuable
assets; therefore accountants enter these promises in their balance sheet as accounts
receivables. Most of the businesses today sell goods and services on credit and it takes times
for the receivables to realize. Hence Receivables management forms an important part of
working capital management.
Need of Receivables
The sale of goods on credit is an essential part of working capital management. Credit sale are
treated as marketing tool to aid sale of goods. As a marketing tool, they are intended to
promote sales and increase profits. Hence Receivables management assumes significance in
the context of overall working capital management.
Objective of Receivables management
In a competitive environment, sometimes the firms are compelled and sometimes the firms
desire to adopt liberal credit policies for pushing up the sales. Higher credit sales at more
liberal terms will no doubt increase the profits of the firm, but simultaneously also increases
the risk of bad debts as well as result in more and more funds blocking in the receivables.
Thus, the objective of receivables management is matching the cost of increasing sales with the
benefits arising out of increases sales with the objective of maximizing the return on
investments of the firm.
Cost of Receivables
i) Cost of Financing: The credit sales delays the time of sales realization and therefore the
time gap between incurring the cost and the sales realization is extended. The firm on the other
hand, has to arrange funds to meet its own obligation towards payment to supplier, employees,
etc. these funds are to be procured at some explicit or implicit cost. This is known as the cost of
financing the receivables.
ii) Administrative Cost: A firm will be required to incur various costs in order to maintain the
record of credit customers before the credit sales as well as after the credit sales.
iii) Delinquency Cost: This is the cost incurred if there is any delay in payment by a customer.
iv) Cost of default by Customers: If there is default by customers and the receivables
becomes, partly or wholly unrealizable, then this amount, known as bad debt also becomes a
cost to the firms.
Costs
Total cost
of
receivables
Default cost
Delinquency Cost of
costs financing
Credit period
Administrative
(days)
Costs
Normal (20 days) Default (40 days)

Trade off on receivables
The trade off on receivables can be applied to find out whether to liberalize credit terms
or not. More liberal credit terms may be expected to generate higher sales revenue and higher
profits; but they increases the potential costs also as the chances of bad debts increases and
there will be decrease in liquidity of firms. On the other hand a stringent credit policy reduces
the profitability but may increase the liquidity of the firms. Thus, a firm should try to frame its
credit policy in such a way as to attain the best possible combination of profitability and
liquidity.
Figure 4 :
Credit
Policy,
Profitability
and
Liquidity of
a firm
Determinants of Receivables
In any firm the quantum of receivables is determined by several factors.
1. The percentage of credit sales to total sales. Higher the sales higher will be the
receivables. But this is not under the control of financial manager.
2. The terms of sale i.e. the credit and collection policies. These also determine the
quantum of receivables. These are under the control of financial manager.
So, the receivable management must be attempted by adopting a systematic approach

and considering the following aspects of receivables management:
• The Credit Policy
• The Credit Control
Credit Policy
A firm makes significant investment by extending credit to its customers and thus requires a
suitable and effective credit policy to control the level of total investment in the receivables.
The basic decision to be made regarding receivables is to decide how much credit be extended
to a customer and on what terms. This is what is known as credit policy. The credit policy may
be defined as set of parameters and principles that govern the extension of credit to its
customers. This requires the determination of
i) Credit standard
ii) Credit terms
The Credit Standards: when a firm sells on credit, it takes a risk about the paying capacity of
the customers. Therefore to be on safer side, it must set credit standards which should be
applied in selecting customers for credit sales. The following points should be noted while
setting the credit standard for a firm:
• Effect of particular standard on sales volume.
• Effect of a particular standard on the total bad debts of the firm
• Effect of a particular standard on the total collection cost.
Credit Terms: It refers to set of stipulations under which the credit is extended to the
customers. The credit terms specify how the credit will be offered, including the length of
the period for which the credit will be offered, the interest rate on the credit and the cost of
default.
Credit period: It refers to the length of time over which the customers are allowed to delay
payments.
Lengthening the credit period increases the sales by attracting more and more customers,
whereas squeezing the credit period has the distracting effect. The firm must consider the cost
involved in increasing the credit period which will result in increase in the investment in
receivables.
Discount terms: The customers are generally offered cash discount to induce them to make
prompt payments. Different discount rates may be offered for different periods e.g. 3%
discount if payment made within 10 days; 2% discount if payment made within 20 days. Both
the discount rate and the period within which it is available are reflected in the credit terms e.g.
3/10, 2/10, net 30 means

that a 3% cash discount if payment made within 10 days ; 2% discount if payment made within
20 days; otherwise full payment by the end of 30 days from the date of sale.
Practical Implementation
CREDIT TERMS:
Credit Period- The credit period at L&T is not constant. For some vendors, it is 30
days, for others, it may be 45 days or 60 days. This depends entirely on company’s policies. It
can be different for different vendors.
Cash discount- The cash discount offered by L&T is 2% to 1.75%, depending upon
cash discount period.
Cash discount period- The cash discount period allowed by L&T is 1 to 3 days.
This can be summarized as follows:

Credit Discount Period Credit Discount
(days) (%)
1 2
3 1.75
30/45/60 0
There are basically two ways available to vendors to pay their dues to L&T. These
are:
Cash:
In cash payment method, a vendor is supposed to clear his dues within a limited
amount of time. And the mode of payment must be highly liquid (Cheque or Demand Draft).
There are three options available with the vendors:
i) Blank Cheque Arrangement: In Blank Cheque arrangement, the vendors provide L&T blank
Cheques drawn on the name of L&T. As soon as the material is received and invoice is
generated, L&T is allowed to fill the relevant amount pertaining to the transaction that took
place between L&T and its vendor. This Cheque can be
cleared on the same day the invoice is generated.
ii) Cheque Arrangement: In simple Cheque arrangement, on

generation of invoice, a cheque is issued by the vendor drawn on
the name of L&T.
iii) Demand Draft (D.D.): Here, a demand draft is drawn on the name
of L&T, by the vendor, as soon as invoice is generated.
Control of Receivables
Once the credit has been extended to a customer as per credit policy, the next important step in
the management of receivables is the control of receivables. The things to be taken into
consideration are:-
1. The collection Procedure: The firm should have a built in system under which customer may
be reminded a few days in advance about the bill becoming due.
The collection procedure of the firm should neither be too lenient nor too strict. A strict
collection policy can affect the goodwill and damage the growth prospects of the sales. If the
firm has a lenient credit policy, the customers with a natural tendency towards slow payment
may become even slower to settle his accounts. Thus, the objective of collection procedure and
policies should be to speed up the slow paying customers and reduce the incidents of bad debts.
2. Monitoring of Receivables:-
The financial mangers should keep a watch on the credit worthiness of all the individual
customers as well as the total credit policy of the firm.
• A common method to monitor receivables is the collection Period or number of day’s
outstanding receivables.
Average collection period= Average Receivables

Credit sales per day
Another technique for monitoring the Receivables is known as aging schedule. The quality of
the receivables of a firm can be measured by looking at the age of receivables. The older the
receivables, the lower is the quality and greater the likelihood of a default. In the aging
schedule, the total outstanding receivables on particular days are classified into different age
groups together with percentage of total receivables that fall in each age group.
For example, the receivables of a firm, having a normal credit period of 30 days may be
classified as follows:
Age Group %of total outstanding

(Number of Days) Receivables
Less than 30 days 60%
31-45 days 20%
46-60 days 10%
61 and above 10%
Here the firm has a credit period of 30 days and 60% of the total receivables are less than 30
days old. 20% of the receivables are over due by 15 days, 10% of the receivables are overdue
but 30 days and 10% are over due by more than 30 days.
This type of aging schedule can provide a kind of an early warning suggesting
i) Deterioration of receivables quality
ii) Where to emphasize the appropriate corrective actions
3. Lines of Credit: It is the maximum amount a particular customer may have as due to the
firm at any time. Different lines of credit may be allowed to different customers. As long as the
customer’s unpaid balance remains within this maximum limit, the account may be routinely
handled. However if new order is going to increase the indebtedness of a customer beyond his
line of credit, then the case must be taken for an approval for a temporary increase in the line
of credit.
4.Accounting Ratios: Two accounting ratios may be calculated in particular may be calculated
to find out the changing pattern of receivables. These are
i) Receivables Turnover Ratio
ii) Average collection Period
Both the ratio should be calculated on a continuous basis to monitor the receivables. The ratios
so calculated for the firm must then be compared with the standard for that industry or with
past ratios of the same firm.
Channel Financing
Channel financing is different from the conventional lending since, in conventional

lending, the financing banks are generally not concerned as to how the suppliers of the firm
and dealers of the products of firm, are financing their activity. The weak financials of the
supplier (leading to delay in supply and non-availability of market credit) or the dealers of the
products (delay in receipt in payment leading to higher book debts) could adversely impact the
top-line(sales) as well as bottom-line(profits) of the financed firm. In the channel financing the
financing bank may have to find ways and means as to how the suppliers and buyers (dealers
of the product) can be financed through various instruments/facilities. Hence, the channel
financing adds value to the transaction for all the parties concerned, be it the
manufacturer/trader, the supplier of the inputs or the dealer/buyer or the financing bank.
Through channel financing, the business firms can out-source a major part of their
working capital needs thereby reducing their dependence on bank finance. For instance, it
need not avail of credit from its bank to pay off the supplier if the supplier gets the finance in
his own name from the bank for the raw materials supplied on credit in the form of say, drawee
bills financing. The bank can also allow loan to the dealer for the credit term that has been
fixed between the firm and the dealer in the form of receivable finance or finance against book
debts or factoring of the receivables. This enables the manufacturing firm to get cash
immediately for the finished goods supplied. . Thereafter, the bank makes a due diligence
assessment of the suppliers’/dealers’ standing and credit worthiness and decides to
provide finance on merit.
A simplified channel finance solution is as follows:-
Figure:-5
Step1: Supply of goods from Corporate to Channel Partner.

Step2: Advice to ABN AMRO to make payment for the purchase.
Step3: Payment by ABN AMRO for goods purchased by Channel Partner.
Step4: Repayment by Channel Partner to ABN AMRO Bank as per facility term.
Channel Finance Benefits to Corporate:
• Assured availability of finance to their Channel Partner's at lower than current cost.
• Corporate can use this as a Marketing tool and strengthen their relationship / reward
loyalty of the Channel Partners
• Release of funds from the balance sheet resulting in improvement in financial ratios.
• Conversion of balance sheet item to an off balance sheet liability.
• Greater efficiencies in the Corporate's receivable management and cash management
process.
• Ability to introduce payment discipline with their Channel Partners
Channel Finance Benefits to Channel Partners:
• Steady and cheaper source of working capital financing.

• Channel Partners can increase sales through higher purchasing power.
• Simplicity of documentation and approval procedures.
• High service and delivery standards compared to current neighborhood banker.
• Channel Partners may be able to increase profitability by availing of Cash discounts
from Corporate.
Channel finance benefits to banks:
• Increased customer base

• Since, the risk is diversified through finance to supplier, manufacturer and the dealers,
the credit exposure norms are better observe
The practice of channel financing is followed in L&T to a great extent and the company is
benefiting a lot through this system of collection of debtors.
The banks which provide Channel Financing facility to L&T are:-
 ICICI bank
 Deustche bank
Payable Management
As the firm sells goods on credit it may also procure/purchase raw material and finished goods
on credit basis. The payment for these purchases may be postponed for the period of credit
allowed by suppliers. So, the supplier of the firm in fact provides working capital to the
firm for the credit period.
For example, a firm makes a credit purchase of Rs. 60000 per month and the credit allowed by
supplier is two month, then the working capital supplied by creditors is Rs. 120000 (i.e. Rs.
60000*2months). It means the firm would be getting the supplies without however, making the
payment for two months. The postponement of payment to the creditors makes the firm to
utilize this money elsewhere or help the firm to sell on credit without blocking its own funds.
Since, Working Capital is the difference between current assets and current liabilities
and creditors form an important part of current liabilities. So, a firm can save a
considerable amount if these creditors are managed. The extent, to which the payment to
these current liabilities is delayed, the firm gets the availability of funds for that period. So, a
part of the funds required to maintain current assets is provided by current liabilities and the
firm will be required to invest the funds in only those current assets which are not financed by
current liabilities. So, the aim of the firms is to realize its debtors as fast as possible but too pay
its creditors as late as possible.
Creditors can be managed by discounting of bills.
Bill Discounting is a relatively new concept in India. When a firm buys goods on credit the
supplier will state a final payment date . To encourage firm to pay before final payment date ,
the supplier will offer a cash discount for prompt settlement. Now it’s the decision of firm
whether to avail or not that discount facility provided by supplier. For that they should see
whether it is profitable for them or not.
By using discounting of bills technique huge sums of money can be saved, by just paying the
discounted amount in time. Big firms, ( like L&T), which have huge cash reserves, generally,
get into a contract with financial institutuions or banks( like ICICI bank or L&T finance Ltd.).
These financial institutions pay the suppliers the requisite amount on behalf of these firms and
they charge some interest on the amount paid by them to the suppliers from these firms.
Benefits of Discounting of Bills
• Discounting of Bills make it easy to decide whether the discount being allowed by the
supplier is worth taking or not.
• Also, it make possible to calculate savings being received on account of availing
discount, in monetary terms
• It also helps in improving relationship between vendors/suppliers.
• It’s an indirect cash inflow , because the company is going to pay less than what it was
supposed to pay initially
• The cash thus saved can be invested elsewhere.
• It’s a win-win situation for both-the company as well as suppliers as the suppliers will
be getting money much before the stipulated time and the company is able to enjoy the
benefits of discount offered by the suppliers.
PRACTICAL IMPLEMENTATION
L&T uses bill discounting technique with all its major suppliers. For this L&T has arrangement
with L&T finance, which pays its suppliers on behalf of l&T within the time stipulated ( that is,
the time period for which the discount is allowed)
Here, is the cost benefit analysis ‘for discounting of bills’ done by Faridabad Switchgear
(FSW) with its various supplier. This is discounting for the bills whose due date was july
2007
Discount
Name of the Tenor Int for 90 amt Interest for Credit
party Gross amt(Rs) (days) Rate of int. . days 60/75 days 60/75 days Savings period
Sangeeta 555,066. 60
Industries 33 90 10.50% p.a. 14,211.22 10081.71 9474.15 607.56 days
M/S. 367,656. 60
U.K.Industries 75 90 10.50% p.a. 9,413.02 6519.15 6,275.35 243.8033 days
82,81 60
Manju Plastics 3.95 90 10.50% p.a. 2,120.26 1695.74 1,413.51 282.2307 days
Ace Cable
Industries Pvt. 475,909. 75
Ltd. 53 90 10.50% p.a. 12,184.59 10916.59 10,158.82 757.77 days
M/s Dishant 200,227. 60
Impex Pvt. Ltd. 98 90 10.50% p.a. 5,126.38 4089.59 3,417.59 672.0001 days
M/s Rakesh 115,9 60
Steels 01.18 90 10.50% p.a. 2,967.39 2365.33 1,978.26 387.0715 days
Sangeeta 894,01 2 60
Industries 3.51 90 10.50% p.a. 2,374.83 16238.07 14,916.55 1321.516 days
30,72 60
Manju Plastics 1.41 90 10.50% p.a. 768.88 629.35 512.58 116.7654 days
Industries 70 90 10.50% p.a. 22,190.76 15742.65 14,793.84 948.8118 days
Sangeeta 968,843 2 60
Industries .17 90 10.50% p.a. 4,805.04 17592.36 16,536.69 1055.667 days
Dhiman 319,278 60
Ace Cable
Industries Pvt. 894,587. 2 75
Ltd. 45 90 10.50% p.a. 2,903.89 20492.24 19,086.57 1405.67 days
Dhiman 319,278 60
M/S. 306,004. 60
Dhiman 524,373 60
Ace Cable
Industries Pvt. 418,254 75
Ltd. .89 90 10.50% p.a. 10,347.51 9508.92 8,622.92 886 days
Sangeeta 1,447,99 3 60
M/S. 99,69 60
U.K.Industries 3.51 90 10.50% p.a. 2,466.39 1765.31 1,644.26 121.0499 days
Sangeeta 558,812 60
Ace Cable
Ltd. .38 90 10.50% p.a. 8,806.02 8059.91 7,338.75 721.16 days
Sangeeta 717,226 60
Dhiman 447,326 60
Ace Cable
Ltd. 1.05 90 10.50% p.a. 8,143.88 7369.17 6,786.56 582.61 days
Dhiman 826,501 60
M/S. 347,748. 60
Sangeeta 1,760,11 4 60
Sangeeta 1,135,94 2 60
M/s Dishant 56,664 60
Impex Pvt. Ltd. .74 90 10.50% p.a. 1,450.77 1157.36 967.18 190.1783 days
Ace Cable
Industries Pvt. 226,255. 75
Ltd. 76 90 10.50% p.a. 5,792.77 5182.81 4,827.30 355.51 days
Ace Cable
Ltd. 1.75 90 10.50% p.a. 5,295.09 4902.81 4,412.58 490.23 days
Sangeeta 917,12 2 60
30,660 60
Manju Plastics .32 90.00 10.50% p.a. 758.53 627.66 505.69 121.9747 days
30288.
Net Savings 8
Table:- Discounting of Bill

We can see that discount be availed is more than interest being paid. Therefore, it is beneficial for the company to
convert their suppliers through bill discounting route.
This table is just a part of whole document which clearly signifies the importance of discounting of bills. We can
observe that just for the bills whose due date is on july we can have a savings of Rs. 30288.8.
A table depicting summary of savings which L&T was able to make, using bill discounting, for the year ended 31 st
March 2007 is given below:-
S.No. Drawer No. Of Bills Savings

1 Ace cables Industries Ltd. 63 73562.79
2 Bestech Electricals 4 1993.93
3 Dhiman Industries 9 -1063.32
4 Dishant Impex Pvt. Ltd 31 -11882.60
5 Manju Plastic 26 1283.78
6 Rakesh steels 17 -28211.21
7 Sangeeta Industries 82 67963.59
8 Trident Switchgears Pvt. Ltd. 8 2426.44
9 U.K. Industries 37 -12168.99
10 Wheels Polymers Pvt. Ltd. 8 33685.33
Total 285 127589.74
Table – Discounting of Bills – Overall Savings

Inventory Management
The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense,

inventory can be defined as an idle resource which has an economic value. It
is however, commonly used to indicate various items of stores kept in stock in
order to meet future demands.
Inventory is assets to the firm and requires investment and hence involves the
commitment of firm’s resources. The inventories need not be viewed as an idle asset
rather these are an integral part of firm’s operations.
Inventory refers to stockpile of products that a firm is offering for sale and the
component that makes up the product. We can also say that inventory is composed of
assets that will be sold in the future in the normal course of business. But the question
arises how much inventory be maintained? If the inventories are too big, they become
strain on the resources; however, if they are too small, the firm may loose sales.
In any organization, there may be following four types of inventory:
(a) Raw materials & parts-- These may include all raw materials,
components and assemblies used in the manufacture of a product;
(b) Consumables & Spares -- These may include materials required

for maintenance and day-to-day operation;
(c) Work in progress -- These are items under various stages of

production not yet converted as finished goods;
(d) Finished Products -- Finished goods not yet sold or put into use.
Need For Inventory
Every organization needs to maintain a minimum amount of inventory so as to fulfill its

customer’s demands. Also, the organizations foresee future demand and they plan their
inventory levels accordingly. These reasons can be classified as:
Transactionary motive: to meet the day to day requirements of sales, production
process, customer demand etc.
Precautionary motive: A firm should keep some inventory for unforeseen circumstances
also.
Speculative Motive: The firm keep some inventory in order to capitalize opportunity to
make profit.
Objectives of Inventory management
a. To ensure a continuous supply of raw materials to facilitate uninterrupted

production.
b. To maintain sufficient stock of raw materials in periods of short supply and
anticipate price changes.
c. To control inventory investment by maintaining optimum Inventory.
d. To minimize investment in inventory and to ensure maximum turnover of
inventory in an accounting period.
e. To ensure stocking of relevant materials in adequate quantities and to ensure that
unwanted or slow- moving items and/or non-moving items do not pile up.
f. To minimize inventory carrying costs in business- both ordering cost and carrying
cost.
g. To eliminate waste and delays in the process of manufacturing at all stages so as
to reduce inventory pile up.
h. To ensure adequate and timely supply of finished goods to the market through
proper distribution.
Cost of holding Inventory
Every firm maintains some stock of raw materials, work-in-progress and finished goods
depending upon the requirement and other features of the firm. It is benefited, by holding
inventory but there is cost involved with it. had these cost not there, there would not have
been any problem of inventory management and every firm would have maintained
higher and higher level of inventories. The cost of holding inventory includes the
following:-
• Ordering Cost- The cost associated with the acquisition or ordering of inventory
is known as ordering cost. Firms have to place order with suppliers to replenish
inventory of raw materials. Such expenses involved are referred to as ordering
cost. The ordering cost may have fixed component which is not affected by the
order size; and a variable component which changes with the order size. It
includes:
o Carriage Inward
o Insurance Inward
o Communication cost
o Stationary Cost
o Demurrage Charges
Ordering Cost= (A*O)/Q
where, A= Annual Requirement of a particular material in units or numbers

or kgs.
O= Ordering cost per order
Q= Lot size, in units
• Carrying Cost:
The very fact that the items are required to be kept in stock means additional expenditure
to the organization. The different elements of costs involved in holding inventory are as
follows:
(a) Interest on capital / cost of capital / opportunity costs
(b) Obsolescence and depreciation
(c) The cost of storage, handling and stock verification
(d) Insurance Costs
The average inventory carrying costs can, therefore, be as follows:
Interest/costs of capital/opportunity cost 15 to 25%

Obsolescence and depreciation cost 2 to 5%
Storage, handling etc. 3 to 5%
Insurance costs 1 to 2%
Total 21 to 37%
Carrying Cost is calculated by:
Carrying Cost= ( C*O)/Q
where, C is carrying cost
• Stock-out Cost (A Hidden Cost):
A stock out is a situation when the firm is not having units of an item in store but there is
demand for that either from the customers or production department. There is always a
cost of stock out in the sense that the firm faces a situation of lost sales or back orders.
Some examples are:
o Non availability/ small amount available with vendors
o Non availability of substitutes
o Quality desired not matching with the supplied ones
o Updated or improved product not available.
Total Cost
The total cost associated with inventory is the sum of ordering and carrying cost i.e.
Total cost= Carrying Cost+ Ordering Cost

= C*O/Q + A*O/Q
One Underlying principle should be kept in time that ordering cost and carrying cost are
inversely related to each other. Suppose the ordering cost increases because more number
of times the order is repeated, a direct consequence would be reduction in inventory held
and hence carrying cost would be less. Conversely, if the number of order is less, this
means that average value of inventory held is higher with the consequence of higher
inventory carrying cost.
Techniques used for inventory management

The finance department of every organization aims at maintaining an optimum level of
inventory on the basis of the trade-off between cost and benefit to maximize the owners
wealth. There are various tools for effective inventory management. The tool depends
upon the type of inventory, namely materials, work-in-progress or finished goods. some
of these tools have an impact not only on inventory but on whole structure of the
organization. They help in reducing cost and improving the efficiency of organization as
a whole.
Perpetual Inventory Verification

This is done to check out actual inventory level and is done on a continuous basis. In
PIV method, the amount of inventory is checked both in documents as well as stores.
Here, some items are checked randomly and while checking those items issues and
receipt of those items is stopped we can say that these items are brought to freezing state.
The database which, ideally, should be refreshed simultaneously whenever there is a
change in inventory and it should match with physical inventory level. Practically, these
two numbers rarely match. This happens because of various reasons, which may or may
not be under the control of management.
Some of the reasons for mismatch are:

• Delay in entering data
• Technical Errors (intranet or SAP not working)
• Documentation Error (document not submitted)
• Posting Error
• Material issued but document not processed
• Document processed but material not issued
• Material send for job work but not received effectively
• Pilferage
• Material waiting for quality check
Benefits Of Perpetual Inventory Verification

a. The exact amount of inventory present in the plant can be checked.
b. Checking it against the database of the stores can give us a fair idea about
how efficiently the system is working
c. Any faults in the system, regarding the errors associated with updating of
database of stores department can be traced.
Practical Implication
At L&T also PIV is done on a continuous basis it may be monthly, quarterly or 6

monthly. Some items are picked randomly and the selection takes into consideration that
an item should be checked at least once in a year. The item selected are counted
physically and, is then, matched against the database of store’s department. In case of any
discrepancies the root cause of mismatch are explored, and is minimized as far as
possible.
L&T maintains a list of ABC items. For PIV some items are randomly selected.
In the picture below these 24 items are selected for PIV and the quantity for each item as
it is in the database is shown.
Figure 6 – Selection of items for PIV
Now the list of items is sent to stores department where they check the database
inventory with physical inventory. Then the stores department sends the list back after
verification and find out the difference it its there.
Recommendations
• PIV should be done as frequently as possible.

• It should be made sure that data is updated from time to time that is as soon as
material is issued or received, corresponding data should be updated on the plant
database.
• Unless or until data is entered no material should be issued or received.
ABC Analysis
This is done to solve classification problem. The most important thing in inventory
control management is classification of different types of inventories to determine the
type and control required for each. The ABC analysis is based on the assumption that
same degree of control should not be exercised on all items of inventory. The ABC
analysis classifies various inventory items into three sets of groups of priority and
allocates managerial efforts in proportion of the priority. The most important items are
classified as class ‘A’ , those of intermediate importance are classified as class ‘B’ and
the remaining items are classified as class ‘C’.
The financial Manager should monitor different items belonging to different groups in
that order of priority. Utmost attention is required for class ‘A’ items, followed by
items in class ‘B’ and then items in class ‘C’.
This is done based on the experience
That 10% of items in the inventory accounts for 70% of consumption in value so they are
classified as ‘A’ class items
20% of items in the inventory account for 20% of consumption in value so they are
classified as ‘B” class items
70% of the items in the inventory accounts for 10% of consumption in value so they are
classified as ‘C’ class items.
Class No Of Inventory
Items (%) Value (%)
A 10 70
B 20 20
C 70 10
Total 100 100
Table :- ABC Analysis
Benefits Of ABC analysis
• It serves as a tool for classification for inventory.

• Each item can be given appropriate attention as per classification.
Limitations of ABC analysis

This system suffers from major drawback. An item of inventory may not be very
expensive, but may be very critical to production process and/ or may not be easily
available; still it will be classified under group ‘C’. It would require serious attention but
due to this classification, it will receive less attention. Similarly a not very important
component may receive extra attention then it deserves . In either case it is detrimental to
the growth of the company. This is a serious limitation of ABC analysis.
ABC analysis is strictly followed in L&T. It keeps an eye ion those items which are more
crucial for production process than others, such items are given due attention so that there
is neither an excess nor deficit of such materials. On the other hand there is not much to
worry about class B and class C items. There are around 7000 items which are
categorized as A, B, and C items.
Economic Order Quantity Model:
This is to solve order quantity problem.
After ABC analysis we get to know which item deserves how much attention. The next
Problem is to determine the lot size in which a particular item of inventory will be
required. The importance of effective inventory management is directly related to size of
the inventory. A firm should neither place too large or too small orders. The inventory
management basically focuses on maintaining an optimum level of inventory in order to
minimize the cost attached with different inventory levels.
The optimum level of inventory is known as Economic Order Quantity (EOQ) or
Economic lot size. This refers to that quantity per order, which ensures that total of
carrying and ordering cost is minimum.
The approach to determine EOQ is based on the following assumptions:-
• The total usage of particular item for a given period (usually a year) is known
with certainty and the usage rate is even throughout the year.
• There is no time gap between placing an order and getting its supply
• The cost per order of an item is constant and the cost of carrying inventory is also
fixed and is given as a percentage of average value of inventory.
• There are only two costs associated with the inventory, and these are the cost of
ordering and the cost of carrying the inventory.
EOQ is generally used to determine the order quantities of class ‘C’ items and
sometimes for class ‘B’ items also. This method is rarely used for class ‘A’ items because
class ‘A’ items are ordered only when requirement arises, there is no need to keep
inventory of class ‘A’ items.
The formula for estimating EOQ is:
EOQ= √ (2A*O)/C
Where, A = annual requirement of a particular material in units or numbers
Or Kgs
O = Ordering cost per order
C = carrying cost per unit
Figure 7 :- Graphical Presentation Of EOQ Model
Explanation
The figure shows that the total ordering cost for any particular item is decreasing as the
size per order is increasing. This will happen because with the increase in the size of
order, the total number of order for a particular item will decrease resulting in decrease in
the order cost. The total annual carrying cost is increasing with the increase in order size.
This will happen because the firm would be keeping more and more items in the stores.
However, the total cost of inventory (i.e. the total carrying cost + the total ordering cost)
initially reduces with the increase in size of order. The trade-off of these two costs is
attained at the level at which the total amount of cost is least. At this particular level the
order size is designated as the economic order quantity. If the firm places the orders for
that item of this economic order quantity, then the total annual cost of inventory of that
item will be minimized.
Benefits of EOQ
• It makes sure that there is neither an excess nor deficit of inventory.

• It saves cost as it saves carrying and ordering cost.
• It also results in strong relationship with vendors.
• It results in saving of time.
Practical Implication
EOQ is a relatively old technique for assessing the lot size of the order. Moreover, it
suffers from the disadvantage that the order cost is assumed to be uniform during a
particular period. The main point of problem in calculating EOQ is regarding the
estimation of ordering and carrying costs. Because there are no set rules to find exact
storage cost, maintenance cost etc. Since the production unit of L&T is involved in
manufacturing of tailor-made products, assessment of EOQ is not very relevant for this
kind of business line. However, the general usage items like nuts, bolts, crimps, wires,
batons, nails, lubricants, gaskets etc. are common for all types of items. Hence, it may
have restricted application in the FSW plant.
EOQ is estimated on the basis of prior experience and future requirements. This happens
so because it is very difficult to classify to calculate storage and maintenance costs. They
have to be estimated because there are no provisions available to calculate them. To
prove the usefulness of this method, some arbitrary costs (ordering cost and carrying
cost) are assumed. Accordingly, EOQ is calculated to show how this model works and
how it can be useful in maintaining proper inventory levels.
I
ITEM EOQ
SL98354BOOOS 219
CS94314KOOOS 237
SL97299OMOOS 327
SH97609OOKOS 245
SH97608OOMOS 258
Table – Economic Order Quantity
RECOMMENDATIONS:
• Provisions to calculate EOQ must be made because a guess work may

prove to be wrong.
• At first, the total cost involved in ordering, transporting, procurement,
storage and maintenance must be calculated. Than, a part of this
(say 20%) should be taken as carrying cost and rest as ordering cost.
Reorder point (under certainty conditions): To solve order point

problem:
Reorder point is that level of inventory at which an order should be placed for
replenishing the current stock of inventory. It may be defined as level of inventory
when fresh order should be placed for procuring additional inventory equal to the
economic order quantity. It is the inventory level which is equal to consumption during
the lead time.
Reorder point is calculated as:
Rρс = L*U
Where, L = Lead time (in days)

U = Average daily usage of inventory
Benefits of reorder point
• It makes sure that plant does not run out of stock in any given day.
• It makes it easier to keep track of inventory and to know when exactly next lot of
material is needed.
PRACTICAL IMPLEMENTATION:
Practically, reorder point is not calculated at L&T. Trends of requirements of various

items are observed and accordingly order point is estimated for different items. Here the
problem is in estimating exact lead times and average daily usage of inventory. The
difficulty in estimating lead time is that it is never fixed and also, it depends not only on
the material, but also on the supplies and his geographical location. A material which can
be ordered from different suppliers may have different lead times. As far as average daily
usage of inventory is concerned, the fact is that L&T follows engineered-to-order
business, i.e. it manufactures according to immediate demands. So, it becomes difficult to
estimate average daily usage of inventory. The demands keep fluctuating day-by-day.
To emphasize on the importance of reorder point, a calculation based on assumed lead
times and average daily usage of inventory is done. This can prove to be helpful in
implementing reorder point at L&T.
ITEM Rc
SL98354BOOOS 100
CS94314KOOOS 180
SL97299OMOOS 150
SH97609OOKOS 144
SH97608OOMOS 120
RECOMMENDATIONS:
• Reorder point is a useful tool and hence, should be implemented. It will make sure
that the plant does not run short of inventory for even a single day.
• Lead times should be estimated based on both – the type of material and the
supplier.
Safety stock: To overcome unexpected situations
The EOQ and the reorder point have some assumptions, which are not possible
practically. For instance, the demand for inventory is like to fluctuate from time to time.
The demand may exceed the anticipated level.
Similarly, the receipt of inventory from the suppliers may be delayed beyond the
expected lead time. The delay may be due to strikes, floods, transportation, and other
bottlenecks. To avoid such undesirable situations safety stock is maintained.
Safety Stock may be defined as the minimum additional inventory to serve as a
safety margin or buffer or cushion to meet an unexpected increase in usage resulting
from an unusually high demand and/or an uncontrollable late receipt of incoming
inventory.
Benefits of Safety Stock
• It is useful as it makes sure that even after reorder point is passed, the plant is able
to maintain its immediate demand.
• It acts as a buffer.
• It is an effective tool to minimize shortage cost.
The determination of the optimum safety stock involves dealing with uncertain demand.
The first step, therefore, is to estimate the probability of being out of stock as well as the
size of stock-out in terms of the shortage of inventory at different levels of safety stock.
To give an overview of the whole process, I calculated safety stock of a few items based
on certain assumptions regarding the stock-out acceptance factor, average number of
units per order, average daily usage of inventory and lead time.
ITEM Ss
SL98354BOOOS 156
CS94314KOOOS 256
SL97299OMOOS 213
SH97609OOKOS 187
SH97608OOMOS 209
Table – Safety Stock
Lean Manufacturing
There are many hidden wastes in any organisation . To get rid of these hidden wastes we
need to first unhide them. The best way to do this is to have a VISUAL FACTORY
where there is nothing hidden . Lean Manufacturing is a tool to enable us to achieve this
objective
Fundamentals of Lean Manufacturing :
1. Smooth flow of Material & Information to meet on demand service to customers

but without having to hold high inventories .
2. Elimination of hidden wastes .These wastes fall into seven basic categories :
a. Over Production
b. Defects/Rework
c. Motion
d. Transportation
e. High Inventory
f. Over processing &
g. Waiting
3. To achieve waste elimination , workplace organization using the 5 S System is
necessary:
a. Sort ... Remove unneeded items
b. Set –in – order... A place for everything and everything in its place (PEEP)
c. Shine ... Clean enough to inspect and expose any defect .
d. Standardize.. Create instructions and Standard Operating procedures
e. Sustain... Maintain the above through support and encouragement
4. Reducing Lead Time at every stage of every process through
a. Visual Controls using Kanban cards
b. Receiving material just in time (JIT).
c. Line Balancing to avoid up piling up of material at any stage.
d. Studying the flow of material or Value Stream Mapping.
e. Total Productive Maintenance to improve overall operation of the
equipment.
f. Set up time reduction using SMED (single minute exchange of dies ).
Lean manufacturing is a management philosophy focuses on reduction of the seven

wastes to improve overall customer value. Lean management (also known as Big JIT)
is a philosophy of operations management that seeks to eliminate waste in all aspects of
aspects of firm’s production activities: human relations, vendor relations, technology and
management of materials and inventory.
BY eliminating waste quality is improved, and automatically, production time and cost
are reduced. To solve the problem of waste lean manufacturing has several tools at its
disposal. All of these tools aim at reducing wastes, of one of several types, as far as
possible.
Some of the tools of lean manufacturing which helps in inventory management and
control are:-
• Just In time ( right amount in the right place at right time)

• Kaizen ( continuous improvement process)
• Kanban (pull production)
• Single Piece Flow System
• Gemba Walking
• Virtual Storage
Lean Manufacturing can be achieved by implementing following tools:
Just in Time Concept:

The basic philosophy behind JIT is that the firm should keep minimum level of inventory
on hand relying on suppliers to furnish ‘stock’ ‘just in time’ as and when required. This is
in direct contrast to the traditional inventory philosophy which emphasizes keeping
sufficient levels of safety stocks to ensure that production will not be interrupted.
Thus JIT system benefits in two ways:-
• By reducing the ordering cost. This is attempted by locating inventories supplies in
convenient locations.
• By reducing the safety stock . This is attempted by developing a strong relationship
with suppliers and setting up restocking strategies that cut time.
Just-in-time is implemented, nearly, at each and every stage of manufacturing/production

in the plant. Stores Department and Fabrication Departments are the main users of this
technique.
While manufacturing switchboards, earlier, for an order of say 1000 items in three
months period, one part of the whole manufacturing was done and than other steps took
place. So, inventory of material used to pile up. Also, the different parts used to lie
scattered here and there.
After implementation of JIT, the process is done such that all the steps are taken
simultaneously. So, material keeps moving. Moreover, provisions are made so that all the
parts of a product are kept together.
Procurement of packing cases is another good example of implementation of JIT
concept in L&T. All the finished goods need to be packed in wooden packing cases (also
known as crate packing cases).
There are certain issues related to wooden packing cases:
• They are bulky and over-sized.
• They have storing constraints.
• Dryness of wood up to a specific point is allowed (if the wood gets drier, it
becomes very difficult to pierce nails in it).
So, in order to avoid all these problems, what best can be done is – as soon as the
material is about to complete, the Final Assembly Department informs it to Packing and
Purchase Department. Now, packing and Purchase Department gets ready with their
wooden packing materials, just-in-time as the finished goods are received by them.
RECOMMENDATIONS:
• All the workers, especially those who are working in Fabrication

Department, Stores Department and Purchase Department, must be
given proper training regarding the practical implementation of JIT.
• Any sort of delay between any two processes should be minimized as far as
possible. Any kind of idle time should not be allowed.
• Another point that must be kept in mind is that, right amount of material should
pass from one stage to the other. There is no need to pile-up materials, which are
not going to be used immediately.
Kanban System
The Japanese refer to Kanban as a simple parts-movement system that depends on cards
and boxes/containers to take parts from one work station to another on a production line.
Kanban stands for Kan- card, Ban- signal. The essence of the Kanban concept is that a
supplier or the warehouse should only deliver components to the production line as and
when they are needed, so that there is no storage in the production area. Within this
system, workstations located along production lines only produce/deliver desired
components when they receive a card and an empty container, indicating that more parts
will be needed in production. In case of line interruptions, each work-station will only
produce enough components to fill the container and then stop. In addition, Kanban limits
the amount of inventory in the process by acting as an authorization to produce more
inventory. Since Kanban is a chain process in which orders flow from one process to
another, the production or delivery of components are pulled to the production line. In
contrast to the traditional forecast oriented method where parts are pushed to the line.
The Kanban method described here appears to be very simple. However, this is a "visual
record" procedure.
Figure 8 :- Kanban System
Advantages of Kanban Process
• A simple and understandable process

• Provides quick and precise information
• Low costs associated with the transfer of information
• Provides quick response to changes
• Limit of over-capacity in processes
• Avoids overproduction
• Is minimizing waste
• Control can be maintained
• Delegates responsibility to line workers
"Kanban represents an efficient tool to continuously rationalize the production process

and find the source of problems". Since the circulation of Kanban will stop if there is a
production problem on line, it is easy to both spot and correct the problem
instantaneously.
Kanban is implemented in Stores Department at L&T Faridabad. For this, a Kanban card
is attached with each and every item present in the Stores Department. Each Kanban
carries all the relevant information about the item, which is useful in estimating its
requirements. A typical Kanban card bears following information:
CAT NO.:.........................................................................................
DESCRIPTION:..............................................................................
INITIATOR:....................................................................................
BUYER:...........................................................................................
CONSUMPTION:...........................................................................
MAXIMUM LEVEL:......................................................................
MINIMUM LEVEL:........................................................................
REORDER LEVEL:........................................................................
Figure 4 – Kanban Card
RECOMMENDATIONS:
• CAT numbers should be different, that is no two CAT numbers should be
same.
• To make it more effective, no one should be permitted to take material out of or to
put back the material in the bin unless and until he has updated the entries on the
Kanban card.
• The data mentioned on the card attached with each bin should be updated as soon
as some material is issued from that bin.
• Reorder level should always be kept in mind so that as soon as that point is
reached, the bin should again be filled with the same material up to its optimum
capacity.
KaiZen
KAIZEN: For continuous improvement:
Kaizen literally stands for ‘Kai’-change and ‘Zen’-to become good. The Kaizen
philosophy lies behind many Japanese management concepts such as Total Quality
Control, Quality Control Circles, small group activities, labor relations, etc.
Kaizen is based on a Five-S framework:
a. Seiri - Tidiness
b. Seiton - Orderliness
c. Seiso - Cleanliness
d. Seiketsu - Standardized clean-up
e. Shitsuke - Discipline
Key elements of Kaizen are:
• Quality - Quality circles
• Effort - Suggestion for improvement
• Teamwork - Involvement of all employees
• Willingness - To change
• Communication
• Improved morale
• Personal discipline
The Kaizen method of continuous incremental improvements is an originally Japanese

management concept for incremental change.
The Kaizen cycle has four steps:
• Establishing a plan to change whatever needs to be improved
• Carrying out changes on a small scale
• Observing the results
• Evaluating both the results and the process and determining what has been learned
BENEFITS OF KAIZEN:
a. It improves safety.
b. It improves efficiency of workers as well as the whole plant.
c. It improves the dedication of the employees as it keeps them safe from any kind of
mishap.
d. It makes the plant well-organized.
There is a Gang Punching Machine in the fabrication department. Earlier, it had a
manual system for moving the sheet, to be punched, inside the machine and
simultaneously moving a knob. Once, a worker accidentally cut his fingers in the process
of Gang Punching.
To avoid any further mishaps, a wooden block was placed in the machine which could be
pushed to move sheets inside the machine and the need for pushing the sheet inside the
machine by hand was avoided. This ensured the safety of the employees working at the
machine.
Apart from this, there are many big and small changes made, like inclusion of stools to
help workers in cutting sheets, pathways, separate parking bays for keeping trolleys,
posters to provide information to employees regarding their safety, etc.
RECOMMENDATIONS:
• It should be checked that all the Kaizen principles followed are being
implemented properly.
• Employees should be asked to implement Kaizen principle on their own
and their valuable suggestions should be kept in mind, and as far as
possible, should be implemented.
• Another point that must be kept in mind is that Kaizen need not be a big change;
it can be as small as keeping a chart of most frequently used telephone numbers
near your desk, to big changes like replacing a number of old machines with a
multi-tasking/many-in-one machine
Single piece flow system
To become lean, companies have to create continuous flow wherever applicable.

Shortening the elapsed time from raw materials to finished goods leads to the best
quality, lowest cost, and shortest delivery time. Creating flow exposes inefficiencies
that demand immediate solutions. Everyone concerned is motivated to fix the problems
and inefficiencies because the plant will shut down if they don't.
Flow means that a customer order triggers the process of obtaining the raw materials
needed just for that customer's order. The raw materials then flow immediately to
supplier plants, where workers immediately fill the order with components, which flow
immediately to a plant, where workers assemble the order, and then the completed order
flows immediately to the customer. The whole process should take a few hours or days,
rather than a few weeks or months.
There are, Various steps involved in production of any item at L&T FSW plant. Every
second step acts as a customer to the previous step. Each step depends on its immediate
predecessor for performing its function.
A problem/delay at any one or more of the steps will lead to a halt in the production
process. So, each and every employee involved at different stages of the production
process is thoroughly trained, and is held responsible for his part in the production
process.
The production process starts with planning, where it is decided what is to be
produced in the next one month or so. After this, a blue-print of the products is made in
the programming stage. A computerized design is made by using various kinds of
programming softwares available with the plant. Now, the punching process on metal
sheets and other items starts followed by bending and drilling/tapping. To make the
product attractive and easy-to-use, powder coating is done. After that, painting of
different parts takes place. Finally, different parts are assembled together to get
theproduct as desired by the customer.
Thus, the layout of company should be such that all these processes should be done in a
continuous manner
Advantages of single piece flow system

Quality. It is much easier to build in quality in one-piece flow. Every operator is an
inspector and works to fix any problems in station before passing them on. But if defects
do get missed and passed on, they will be detected very quickly and the problem can be
immediately diagnosed and corrected.
Higher Productivity. In a one-piece-flow cell, we can quickly see who is too busy and
who is idle. It is easy to calculate the value-added work and then figure out how many
people are needed to reach a certain production rate.
Gemba Walking
Gemba means Actual Place. Instead of relying on reports to run a plant or company, the
manager should put on some walking shoes and "go and see" at the "actual place",
whether its a factory or a store. This Practice is also followed in L&T.
Virtual Storage
This is another technique of effective inventory management. Here the supplier is asked
to open their stores or warehouses within the premises of company and as and when the
material is required an order is placed to the supplier and the suppliers of the godown
deliver the goods to the company with the copy of invoice.
So, virtual storage helps to receive timely delivery of inventory as the goods are lying in
the godown and are issued as and when required.
However, this practice is not followed in L&T.
CASH MANAGEMENT
Cash is the most liquid current asset. It is the common denominator to which all current
assets can be reduced because the other major liquid assets, i.e. inventory and receivables
get eventually converted into cash. This clearly underlines the significance and essence of
cash management.
Cash can be defined in many ways, it’s not only the money in hand or bank, it is much
more than that.
Cash includes:
• Currency
• Cheques
• Drafts
• Demand deposits
• Marketable securities
• Time deposits
NEED OF CASH:
Cash, of all types, acts as a reserve pool of liquidity that provides cash quickly, as and
when needed. They also provide a short-term investment outlet for excess cash and are
also useful for meeting planned outflows of funds.
The major reasons of keeping cash are:
• Transaction motive – this refers to the holding of cash to meet routine cash
requirements
• Precautionary motive – these refer to the cash balances held in reserve for
random and unforeseen fluctuations in cash flows
• Speculative motive – it refers to the desire of a firm to take advantage of

opportunities which present themselves at unexpected moments
• Compensating motive – usually banks ask clients to maintain a minimum

balance of cash with them (bank). Since this balance can not be utilized by the
firms for transaction purposes, the banks themselves can use the amount to earn a
return. Such balances are compensating balances.
OBJECTIVES OF CASH MANAGEMENT:
The basic objectives of cash management can be classified majorly in the following three
types:
a. To meet the cash disbursement needs (payment schedule) – these include payments
to vendors as well as salaries to employees etc.
b. To minimize funds committed to cash balances – this is important as cash which is

lying idle is of no use to the firm
c. To synchronize inflows and outflows of cash – an excess of either inflow or outflow

may be detrimental to the growth of the company.
COST OF HOLDING CASH:

Cash management has some costs associated with it.
No earning power - Irrespective of the form in which cash is held as an
asset, it has no earning power. That is, cash does not earn any return.
Depreciation cost - Cash keeps lying idle, without earning anything; in

fact it keeps depreciating with time.
BENEFITS OF CASH MANAGEMENT:

Some of the major benefits of cash management are:
a. To prevent insolvency or bankruptcy arising out of inability of a firm to
meet its obligations.
b. The relationship with bank is not strained.
c. It helps in fostering good relations with trade creditors and suppliers of
raw materials, as prompt payment may help their own cash management.
d. A cash discount can be availed if payment is made within the due date
e. It leads to a strong credit rating
f. To take advantage of favorable business opportunities that may be
available periodically
g. The firm can meet unanticipated cash expenditure within a minimum of
strain during emergencies (strikes, fire, new market strategy by competitor
etc.)
Cash is the most liquid current asset. It is of vital importance to the daily operations of
business. While the proportion of assets held in the form of cash is very small, its
efficient management is crucial to the solvency of the business. Therefore, planning
cash and controlling its use are very important tasks.
Cash budgeting is a useful device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and outflows f cash
over a projected short period of time which may usually be a year ,half or a quarter
year. Effective cash management is facilitated if he cash budget is further broken down
into month, week or even on daily basis.
There are two components of cash budget

(i) cash inflows and
(ii) cash outflows.
The main sources for these flows are given hereunder:
Cash Inflows
(a) Cash sales
(b) Cash received from debtors
(c) Cash received from loans, deposits, etc
(d) Cash receipt of other revenue income
(e) Cash received from sale of investments or assets.
Cash Outflows
(a) Cash purchases
(b) Cash payment to creditors
(c) Cash payment for other revenue expenditure
(d) Cash payment for assets creation
(e) Cash payment for withdrawals, taxes
(f) Repayment of loans, etc.
A suggestive format for ‘Cash Budget’ is given below:
Cash Budget of M/s…

Particulars Months
January Feburary
March
Estimated cash inflows
------------
-----------
I. Total cash inflows
Estimated cash outflows

------------
-----------
II. Total cash outflows
III. Opening cash balance
IV. Add/Deduct surplus/Deficit

during the month (I–II)
V. Closing cash balance (III–IV)
VI. Minimum level of cash

Balance
VII. Estimated excesses or shortfall ofcash (V–VI)
How L&T Manages its cash?
Managing cash is very essential for the business since it is crucial for solvency of
business. L&T uses various techniques to manage its cash operations.
Sweeping Facility
Rather than keeping cash at different locations, the collections and disbursals of all the
locations are recorded and the cash is kept at one central location as it is quite
cumbersome for an organization to maintain records of collection and disbursals of cash
of its different offices. It also involves a number of extra personnel, and is certainly a
waste of work force, time and money. Also, the money lying scattered with various
offices is of no use as such, because it is simply lying idle. A better option will be to
deposit this cash into a bank, having central banking facility, where it can be invested to
earn some profit. For this a suitable multi-locational bank is selected, preferably the one,
which has branches in all the locations where the different offices of the company are
located.
Moreover, if all the money is kept at one place, it will definitely amount to a huge sum.
This huge sum will make it easier for the company to negotiate with the bank regarding
the interest rate which L&T is supposed to pay for availing such facility.
BENEFITS OF SWEEPING FACILITY:

It’s a win-win situation for both – the company and the bank. Both of the parties are
benefited by this technique.
Benefits for the company:

a. Gets a chance to negotiate with the bank over the interest rate which L&T
is supposed to pay to the bank.
b. This huge sum can be invested in business also, which will again prove to
be profitable.
Benefits for the bank:

a. Bank charges the company according to the services rendered by it.
b. Bank can use these funds for its daily business purposes.
Sweeping Facility service is a prominent tool used for proper cash management at L&T.
For this purpose L&T has selected Standard Chartered Bank because of its intensive
reach in nearly each and every corner of the country, especially in Delhi, Mumbai, Powai
and all other places where L&T offices are located and also because it has the facility of
Central Banking, which is a prerequisite for a bank to offer such service.
What happens is – all the money is deposited in one account. Now, as and when a center
in any particular region requires some money, it withdraws the same with the bank .
Later, the bank receives the same amount from the central account of L&T.
All the financial decisions regarding the selection of bank, its location and interest rate
etc are made at the Head Office of L&T – Treasury Department, L&T Mumbai.
All the offices are allowed to make cash collection and disbursals through a common
bank account of L&T at Standard chartered Bank, Mumbai.
Day Light Limit

Every Branch of L&T maintains two accounts one having the sweeping facility and one
not having. This day light limit is used where sweeping facility is not available. Here,
based on the past experience or on the basis of current business transactions daily cash
flows are estimated i.e. how much cash inflow will be there and how much cash outflow
will be there and based on this estimation that much amount is maintained in the account.
RECOMMENDATIONS:
Now-a-days most of the banks provide central banking facility, so the
main criterion of selection of bank should be the interest rate it is charging
for rendering such services (it should be as low as possible.
Conclusion
The objective of working capital management is to maintain the optimum balance of each
of the working capital components. This includes making sure that funds are held as cash
in bank deposits for as long as and in the largest amounts possible, thereby maximising
the interest earned. However, such cash may more appropriately be "invested" in other
assets or in reducing other liabilities.
When considering these techniques and strategies of Working capital, departments need
to recognise that each department has a unique mix of working capital components. The
emphasis that needs to be placed on each component varies according to department. For
example, some departments have significant inventory levels; others have little if any
inventory.
Furthermore, working capital management is not an end in itself. It is an integral part of

the department's overall management. The needs of efficient working capital
management must be considered in relation to other aspects of the department's financial
and non-financial performance.
Refrences
i. Khan, M. Y., and Jain P. K., ‘Financial Management’, Tata McGraw Hill,
New Delhi, 2004.
ii. Pandey I. M., ‘Financial Management’, Vikas Publishing House Pvt Ltd, New
Delhi, 2005.
iii. Rustogi, R. P. , ‘Financial Management’, Galgotia Publishing House, New
Delhi,2006
iv. www.l&t.com
v. www.google.com
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A Project Report

IN PARTIAL FULFILMENT FOR THE DEGREE OF

SUBMITTED TO: SUBMITTED BY:

DAV INSTITUTE OF MANAGEMENT

Signature of the Guide

Mr. A.M.NAIK, Chairman of the company

Larsen & Toubro Limited (L&T) is a technology-driven engineering and construction

L&T's signature of excellence is evident on:

• India's first indigenous hydrocracker reactor

MARKET CAPITALISATION OF L&T TILL DATE

ENGINEERING & CONSTRUCTION:

ELECTRICAL & ELECTRONICS:

SOLUTIONS & SERVICES

• Domain Solutions: Financial services, Telecom, Utilities & Manufacturing.

• Enterprise Application Systems: Enterprise Resource Planning (ERP). Customer

• Technology Solutions: Mobile computing, Embedded software and services; Enterprise

Electrical & Electronics Division (EBG)

EBG Performance (In Crores)

Strategic Business Units

Electrical Systems & Equipment (Operations at Faridabad)

L&T Faridabad division manufactures custom-built switchboards with conventional as well as

1. Marketing & Sales Department.

3. Production, Planning, Control & Materials Department

Assembly Fabrication Paint Shop Maintenance

5. Switchgear quality & reliability (SQR) Department.

6. Personnel, HR & Administration Department

Personnel & HR Reception Security Computer Communication

7. Finance and account department

ENGINEERING & SHOP

1. Working Capital Management

As a part of inventory management, various inventory management techniques are studied.

As far as receivables management is concerned, Credit Terms, Credit Policy, and

METHODS OF COLLECTING DATA AND THEIR SOURCES:

The term Working Capital may be used in two different ways.

Gross Working Capital= Sum Total of Current Assets

The Operating Cycle and Working Capital Needs

i. Procurement of raw materials and services.

Debtors Raw material

Finished Goods Work in Process

Figure:1 – Working capital Cycle

Working capital cycle involves conversions and rotation of various constituents/components of

 Conversion of Raw material into finished goods

 Conversion of Work-in-progress into finished goods

 Sale of Finished Goods

 Conversion of Receivables into Cash

While underassessment of working capital has disastrous implications on business, over

CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL

• Excess of working capital may result in unnecessary accumulation of

Figure 2 : Different types of working Capital

L&T and its Working Capital policy

Objective of Receivables management

Normal (20 days) Default (40 days)

So, the receivable management must be attempted by adopting a systematic approach

3/10, 2/10, net 30 means

This can be summarized as follows:

ii) Cheque Arrangement: In simple Cheque arrangement, on

Average collection period= Average Receivables

Age Group %of total outstanding

Channel financing is different from the conventional lending since, in conventional

Step1: Supply of goods from Corporate to Channel Partner.

Channel Finance Benefits to Corporate:

Channel Finance Benefits to Channel Partners: