A STUDY OF WORKING CAPITAL MANAGEMENT AT HIMSON TEXTILE ENGINEERING INDUSTRIES PVT. LTD.

[From 15th January 2004 to 15th March 2004] A Project Report submitted in partial fulfillment of the requirements For the awards of the degree of BACHELOR OF BUSINESS ADMINISTRATION TO SOUTH GUJARAT UNIVERSITY, SURAT Submitted By: VEKARIYA NARENDRA D. T.Y.B.B.A (Sem VI) Roll No. 101 Under the guidance of Prof. Parita Bangali Submitted To: THE CO ORDINATOR PROF. V.B. SHAH INSTITUTE OF MANAGEMENT & R.V. PATEL COLLEGE OF COMMERCE AMROLI (SURAT) March 2004

PROF. V.B. SHAH INSTITUTE OF MANAGEMENT & R.V. PATEL COLLEGE OF COMMERCE, AMROLI

CERTIFICATE OF THE FACULTY GUIDE

This is to certify that the Project Report entitled A STUDY OF WORKING CAPITAL MANAGEMENT at Himson Textile Eng. Ind. Pvt. Ltd. submitted in partial fulfillment of the requirements for the awards of the degree of BACHELOR OF BUSINESS ADMINISTRATION to SOUTH GUJARAT UNIVERSITY, SURAT is a record of bonafide research work carried out by Vekariya Narendra D. under my supervision and guidance.

Signature Prof. Parita Bangali (Project Guide)

Signature Co-ordinator

DECLARATION
I Vekariya Narendra D., here by declare that the project report entitled A Study of Working Capital Management under the guidance of Prof. Parita Bangali submitted in partial fulfillment of the requirements for the award of the degree of Bachelor of Business Administration to South Gujarat University, Surat is my original work research study carried out during 15th January, 2004 to 15th March, 2004 and not submitted for the award of any other degree/diploma/fellowship of other similar titles of prizes to any other institute/organization of university by any other person. Signature Place: - Surat Date: Vekariya Narendra D. T.Y.B.B.A. (Sem-VI) Roll No. : - 101

PROF. V.B. SHAH INSTITUTE OF MANAGEMENT & R.V. PATEL COLLEGE OF COMMERCE, AMROLI

ACKNOWLEDGEMENT
My debts are many and I acknowledge them with much pride and delight. I am very much thankful to Mr. Mahesh L. Abale, Co-ordinator of Prof. V.B. Shah Instituted of Management & R.V. Patel College of Commerce for extending to me in all consideration and cooperation, which a student can wish. I am extremely greatful to Mrs. Parita Bangali for her invaluable help and guidance through out my work. She kindly evinced keen interest in my work and furnished some useful comments, which could enrich the work substantially. I would also like to thank Mr. Keyur Bhatt, the HRD Manager of Company, who gives me Permission for this invaluable training. I am very happy to express heartful gratitude to Mr. Abdul Jariwala and Mr. Pankaj Savalia for their guidance and co-operation throughout study. In fact it is very difficult to acknowledge all the names and nature of help and encouragement. I never forget the help and facility provide directly or indirectly to me by all. Last but not least, I would like to thank all my friends and staff members at company.

Vekariya Narendra D. March 2004

INDEX

Chapter No. 1 2 3 4 5 6 7 8 9 10

Subject Introduction of Company Working Capital Management (Theory) Problem Definition Objective of Study Limitation of Study Analysis of Working Capital Mgt. Finding & Suggestion Bibliography Annexure Approved Synopsis

Page No

LIST OF TABLE
Table No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Table Name Financing working capital of Co. Working Capital Assembly Growth in Gross working capital Net W.C. to Net Assets Ratio Operating Cycle of Ratio Inventory Management in Co. Receivable Management in Co. Cash Management in Co. Current Ratio Quick Ratio Composition of Gross W.C. Circulation of Gross W.C. Circulation of Net W.C. Cash Position Ratio Long term depth to Net W.C. Ratio Current Liability to Total Asset Ratio Current Assets to Total Assets Ratio Working Capital Ratios Page No

LIST OF FIGURES & GRAPHS

Table No. 1 2 1 2 3 4 5 6 7 8 9 Table Name FIGURES Operating Cycle of Mfg. Firm Permanent & Temporary W.C. GRAPHS Growth in Gross Working Capital Net W. C. to New Asset Ratio Operating Cycle of Company Inventory Turn over Inventory conversation period Debtors Turn over Debt Collection period Cash Turn over Average age of cash Page No

CHAPTER 1 INTRODUCTION OF COMPANY

HISTORY AND DEVELOPMENT OF COMPANY

HIMSON TEXTILE ENGINEERING INDUSTRIES LTD. is the flagship company of the HIMSON group. Himson started its activities about 57 years ago with only few looms to manufacture quality fabrics. Since then the activities lave group from strength to strength. Himson first concentrated on expansion in the looms shed. Dyeing and finishing were added further. Further laces and embroidery units were established as a move toward complementary diversification. In seventies the company was towards the high growth. At this time the company show the opportunity for manufacturing synthetic yarn processing machinery in the market for which was large that unlapped for this were first own with the commencement of manufacturing twisting and rewinding machines and HIMSON TEXTILE ENGINEERING INDUSTRIES LTD. come in to the eyes of the competitors. Since them there has been no turning back and company come on the fast track. The turnover of the group which was few millions when it commenced operations has increased to Rs.3 millions in 1994-95 and turnover of this company has increased from Rs.6 millions in 1974 to Rs.2.5 billions in 1994-95. The fast growth has been sustained by installing modern CNC machining centers where it is possible to get accuracy of IT class setting up fully equipped research and development center. The company has also helped develop about 250 ancillary units owned by qualified Engineers. This has helped the company easily absorb latest technology and adopt the same to suit local requirements.

The company has well developed sales network with branch office at Bombay, Delhi, Ahmedabad, Kolkata and Coimbtore. Plans are about to open in Allahabad & Hydarabad. This will give the company network throughout India. After establishing itself in India the company had turned its eyes towards the export market. Participating in numerous international exhibitions in India and also in abroad. The company has secured orders against global competition. The company caters to synthetic yarn industry in India and abroad, manufacturing a complete range of machinery from polyester poy to weaving and knitting. This product range makes it leading supplier of machinery for the synthetic filament industry M/S Himson Textile Eng. Ltd. Was incorporated in January 1979 for the manufacture of sophisticated textile machineries and its spare parts. The company has been having collaboration with world famous manufacturers of different textile machines. Presently the company is having collaboration with TEIJIN SEKI COMPANY LTD.JAPAN, CAMBER INTERNATIONAL LTD. UK AND M.T.S., and S.P.A. ITALY. In the decade of early 80`s, the synthetic textile industry witnessed a rapid spurt of activities. The synthetic textile industry had undergone a dramatic Sea of changes in the area of Man fabrics in India as well as across the globe. The turnover of group which was few millions when it commenced operation has increased to USA $ 150 millions in 1997-98 and turnover of HTEPL has increased from USA $ 1 million in 1987 to USA $ 90 million in 1997-98. The company is managed by board of directors belonging to a technocrat family having proven knowledge and experience in the polyester industry.

The company manufactures wide range of yarn processing machinery from Draw Texturising machine to draw twisting machine, from several twisting and winding machine to Ceramic Thread guides. The comprehensive list of products along with respective collaborator is given in product range. The company has achieved ISO 9002 certificate for quality product. The fast growth has been sustained by installing modern computerized numerical controlled machining centers where it is possible to get accuracy of IT6 class, setting fully equipped Research and development Center. Further it has set a high-tech, state of art STANDARD ROOM for verification and calibration of measuring tools. The STANDARD ROOM equipped with 3D CNC Coordinate measuring machine along with other latest state of art machines and equipments. Besides the company has about 1500 employees on its roll, of which about 300(20%) is management / executive staff and 200(13%) is technical staff. The company has also helped develop about 150 ancillary units owned by qualified Engineers. This has helped the company easily absorb latest technology and adopt the same to suit local requirements.

CHAPTER 2 WORKING CAPITAL MANAGEMENT

(THEORETICAL BACKGROUND) 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 OVERVIEW OF FINANCIAL MANAGEMENT WORKING CAPITAL MANAGEMENT WHAT FOR? WORKING CAPITAL MEANING, DEFINATION AND CONCEPT NEED FOR WORKING CAPITAL OPERATING CYCLE TYPES OF WORKING CAPITAL DETERMINANTS OF WORKING CAPITAL WORKING CAPITAL FINANCING EXCESSIVE OR INADEQUATE WORKING CAPITAL-THE DANGEROUS

2.1

OVERVIEW OF FINANCIAL MANAGEMENT: Finance is regarded as the lifeblood of any business organization.

The Financial management study of about the process of procuring of financial resources and its judicious utilization with a view to maximizing the shareholders wealth. Efficient management of every business enterprise is largely dependent on the efficient management of its finance. Financial Management is concerned with the efficient use of an important economic resource, namely capital funds. From the starting and registration to winding up of a unit, finance play dominate role in each and every business unit. In short financial management is managerial activity, which is concerned with planning and controlling of the firms financial resources. Modern approach of financial management requires four broad decision areas of financial management viz., Investment Decision Financing Decision The dividend policy Decision Working Capital Management This report covers analysis of the last decision i.e., Working Capital Management. It is very important for short-term survival, which is must for long-term success. It is concerned with the management of current assets.

2.2

WORKING CAPITAL MANAGEMENT WHAT FOR

Management of working capital is an extremely important area of

financial management as current assets represent more than half of the total assets of a business. Fixed assets through essential for a business organization, does not by itself produce revenue or income. Fixed assets act with current assets to generate revenue or income. Therefore, working capital is necessary for utilizing the productive capacity of fixed capital. For shortage of working capital, the enterprise would suffer reduction in earnings due to productive capacity remain unutilized. While, excess working capital leads to extra cost for want of productive capacity. Thus, the amount of working capital in every enterprise, whether manufacturing or non-manufacturing, should be neither more or less than what is actually required. Working capital in business is just live blood in human body. Optimum and appropriate movement of blood through the body is extremely necessary to continue life. Like human blood, the proper circulation of funds (working/circulating capital) is utmost necessary to continue business. If the circulation of working capital becomes weak, the businesses can hardly prosper and service. An enterprise should maintain optimum amount of working capital so as to carry on the productive and distributive activities smoothly. While, the determination of optimum level of working capital involves fundamental decisions to an organizations liquidity, which in turn are influenced by a trade off between profitability and liquidity. Thus, goal of working capital management is to manage the firms current assets and liabilities in such a way that satisfactory level of working capital minted.

2.3

WORKING CAPITAL MEANING, DEFINATION AND CONCEPT In accounting Working capital is the difference between the inflow

and out flow of funds. It other words it is the net cash inflow. Working capital is defined as excess of current assets over current liabilities and provision. In other word, it is net current assets or net working capital. Working capital can be defined broadly in two different ways i.e. gross working capital and Net working capital. Gross working capital refers to organizations investment in total current assets. Current assets are the assets, which can be, convert in to cash with in an accounting year and include cash, marketable securities, intently etc. it is also known as circulating capital. Net working capital refers to the different between current assets and current liabilities are those claims of outsiders, which are accepted to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Symbolically: NWC = CA CL. Where, NWC = Net working Capital CA = Current Assets CL = Current Liabilities Net working capital can also be defined as that portion of firms current assets, which is financed by long-term funds.

2.4

NEED FOR WORKING CAPITAL

The need for working capital to run the day-to-day business activities

cannot over emphasize. We will hardly find a business firm, which doesnt require any amount of working capital. Indeed, firms differ in their requirement of working capital. We known that firm should aimed at maximizing the wealth of its shareholders. In its endeavor to do so, firm should earn sufficient return from its operation. Earning a study amount of profit require successful sales activity. But there is always time gap between the day of sales & its realization from debtors realization from debtors will take time but firm has arrange money for purchase of raw material, to pay for salary, wages and other expenses. Therefore sufficient working capital in needed. The operating cycle can be said to be reason for the need for working capital.

2.5

OPERATING CYCLE
The operating cycle is the length of time required to complete the

following stages of the cycle. Operating cycle consists of five Phases: I. II. III. IV. V. Conversion of cash in to Raw materials. Conversation of raw material in to work-in-process. Conversion work in process in to finished goods. Conversion of finished goods in to receivables. Conversion of Receivables in to cash

Symbolically: O = R + W + F + D - C. Where, O= Length of operating cycle. R= Raw Material storage period. W= work in progress period. F= Finished stock storage period. D= Debtors collection period. C= Creditors payment period. Account Receivable Phase-V Cash Phase-I Raw Material Finished Good Phase-IV

Phase-II Work in Progress

Phase-III

(Figure 1: -OPERATING CYCLE OF MANUFACTURING FIRM.)

2.6

TYPES OF WORKING CAPITAL

There are mainly two types of working capital. a) Permanent Working Capital b) Temporary Working Capital

a)

Permanent Working Capital: The need for current assets arises because of operating cycle. The

operating cycle is continuous process and therefore the need for current assets is felt constantly. But the magnitude of current assets needed is not always the same. It increases and decreases over time. However there is always a minimum level of current assets, which are continuously required, by firm to carry or its business operations is called permanent or fixed working capital. This minimum level of working capital is necessary on the regular basis even if the management of working capital is done efficiently in the organization. As this type of working capital is minimum necessary for the business at all points of time, it is financed by the long-term sources. b) Temporary Working Capital: The amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The need for such type of working arises because of fluctuations in production and sales. The additional requirement may be during more active season when the volume of production and sales more goes up necessitating extra blockage of funds temporarily in current assets like Bank Balance, inventory, debtors, etc. The temporary working capital is the additional funds required. Whose volume is different at different points of time and hence it is financed by short-term sources.

Both concepts are depicted in the following figure: A M O U N T O F W. C.

Temporary Working Capital

Permanent working Capital

Time (Figure 2a)

However when the business is growing, the level of permanent working capital also grows. The working capital graph will be rising one as given in figure below:

A M O U N T O F W. C.

Temporary Working Capital

Permanent Working Capital

Time (Figure 2b)

2.7

DETERMINANTS OF WORKING CAPITAL

There are no set formulates to determine the working capital

requirements of firms. A large no. of factors each having a different importance, influence working capital needs of firms. However, the factors may vary from organization to organization. Therefore, an analysis or relevant factors should be made inorder to determine total investment in working capital. The following is the description of factors, which generally influence the working capital requirement of firms. 1. Nature of Business: Business firm can be dividend in to three categories given below: I. II. III. Service organization or public utilities Trading or financial organization Manufacturing organization

Service organizations dont normally hold any inventory or the level inventory may be very low. Again major sale of such services are on cash basis. Hence they require very less amount of working capital. Trading or financial organization have to maintain sufficient amount of cash and inventory. Hence working capital requirement of such organization are relatively very high. Working capital requirement of manufacturing organization normally falls between the above two extremes. 2. Volume of sales: The higher the sales on credit basis, the higher is the requirement of working capital, as more and more amount is getting blocked in debtors.

3. Manufacturing Cycle: The manufacturing cycle refers to the time spent by a product right from the stage of purchase of its raw material to the stage of completion of finished goods. Obviously the larger the manufacturing cycle of a company the higher is the volume of working capital needed to finance blockage of money in raw material, work in progress and finished good. 4. Business Cycle: No business can remain study for all the time. It passes through the stages of prosperity and depression. During Prosperity, the volume of sales increases necessitating higher level of inventories and debtors, i.e. more Amount of working capital is required to sustain higher levels of activity during prosperity. Depression has exactly an opposite effect on the level of working capital requirement. 5. Credit Policy: If the organization is following a liberal credit p[policy for its customers, it will result in higher debtors leading to requirement of more working capital. However, if the organization is availing liberal credit term from its suppliers, the need for working capital is reduced. 6. Tax Structure: The entire profit generated may not be available to the organization because of a simplest fact. The organization has to pay its taxes in time. Tax rates vary in different forms of organization and accordingly working capital requirement of different organization will be different.

7. Dividend Pay out ratio: If dividend payout ratio is high, the organization may have earned profit but-the profits available only after payment of dividends is available for financing working capital. Hence, higher working capital will be required if Dividend payout ratio is high. 8. Availability of Funds: If the credit worthiness of an organization is good, it may manage the business with less Working Capital. The reason may be that the organization may procure the funds whenever it needs the funds. 9. Change in Technology: Change in technology affect the requirement for working Capital. If the firm decides to go for automation, this would reduce the requirements of Working Capital. If the firm adopts a labor-intensive process, the requirement of working capital will be larger. 10.Size of the Firm: Bigger firms may require lesser working capital as compared to their total sales or assets. Of course the absolute amount of working capital will be higher in bigger firms.

The level of Working Capital is determined by a wide variety of factors that are partly internal to the firm and partly external to it. Efficient working capital management requires efficient planning and a constant review of the needs for an appropriate working capital strategy.

2.8

WORKING CAPITAL FINANCING

A firm must tap the right sources in financing its current assets

requirements. Figure given below shows the financing-mix or sources-mix or working capital. Financing Mix Spontaneous Sources Negotiated Sources

Short-term Sources

Long-term Sources

(1) Trade Credit (2) Outstanding Expenses (3) Bills payable etc.

(1) BOD/Cash Credit (2) Public Deposit (3) Short-loans (4) Bill Discounting (5) Commercial Paper (6) Factory etc.

(1) Share Capital (2) Retained Earnings (3) Debentures (4) Other Longterm funds.

A source is said to be spontaneous when its use is automatic or arise in the normal course of business activities. A source is said to be negotiated when its use depends on prior deliberations between the borrower and the lender.

(1)

Long-term Financing: Long-term working capital should be provided in such a manner that

the enterprise might have its uninterrupted use for a long time. It can be conveniently financed by shares, debentures, loans from financial Institution term loans from banks, reserve surplus etc. (2) Short-term financing: The category of funds covers the need of working capital for financing day-to-day business requirements. It includes Bank Credit, Commercial papers, Certificate of deposit, Commercial Bills Market, and Factoring. (3) Spontaneous Financing: It refers to the automatic sources of short-term funds arising in the normal course of business. The major sources of such financing are trade credit (creditors and bill payable) and outstanding expenses. Spontaneous sources of finances are cost free. Therefore a firm would like o finance its curre3nt assets with spontaneous sources as much as possible. Working capital Financing of HIMSON TEX. ENGG. Pvt. Ltd. The company used both long and short-term sources for financing working capital requirements. The proportion can be shown in following table: Sources A) B) Equity Share Short-term Loan From BOB. (Table 1) Proportion of W.C. Financing (in %) 80% 20%

2.9

EXCESSIVE OR INADEQUATE WORKING CAPITALThe firm should maintain a sound working capital position. It should

THE DANGEROUS
have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from the firms point of view. Excessive Working capital means idle funds, which earn no profit for the firm paucity of working capital not only impairs firms profitability but also results in production interruptions and inefficiencies. The dangers of excessive Working Capital are as follows: 1) A firm may be tempted to over trade and lose heavily. 2) The situation may lead to unnecessary purchases and accumulation of inventories. This cause more chances of theft, waste, losses, etc. 3) These arise an imbalance between liquidity and profitability. 4) It means funds are idle when funds are idle, no profit is earned when it is so, the rate of return on its investments goes down. 5) The situation leads to greater production, which may not have matching demand. 6) The excess of working capital may lead to carelessness about cost of production. In adequate working capital is also bad and has the following dangers: 1) It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. 2) It may fail to pay its dividend because of non-availability of funds.

3) Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitment. 4) Fixed assets arent efficiently utilized for the lack of working capital funds thus the profitability would deteriorate. 5) It may not be able to take advantage of cash discount 6) The firm loses its reputation when it is not in position to honor its short-term obligation. As a result, the firm faces tight credit terms. An enlightened management should, therefore maintain a right amount of Working Capital on continuous basis only them a proper functioning if business operations will be ensured.

CHAPTER 3 PROBLEM DEFINITION

The problem related to whether efficient management of working capital is necessary or not? Working Capital is necessary for business but excessive working capital result in block of funds on the contrary inadequate working capital disturbed the day-to-day operation of business. So, satisfactory level of working capital is necessary for business for this purpose management of working capital can be necessary.

CHAPTER 4 OBJECTIVE OF STUDY

This studies a part of my BBA; aim at analyzing the working capital management of HIMSON TEXTILE ENGINEARING IND. PVT. LTD. The following are the main objective of study: To know how to manage current assets and current liabilities so that satisfactory level of working capital is maintained. To know how to manage receivable, inventory and cash. To study the different sources of financing working capital. To study the operating cycle of company. To study the liquidity position of company. To look at possible remedial measures if any on the basis of which tied-up funds in working capital could be used effectively and efficiently. To suggest, if possible on the basis of conclusion some modification to meet the situation.

CHAPTER 5 LIMITATION OF STUDY

Following are limitation of the study: The study fully depends on financial data collected from the published financial statement (Annual Report) of company. The data collected from above the sources are not of detailed nature. Thus study incorporates all the limitations that are inherent in the considered financial statement. There are controversies related to correctness of current assets and current liabilities that enters in to the domain of working capital management.

CHAPTER 6 ANALYSIS OF WORKING CAPITAL MANAGEMENT

Introduction: It has already been discussed that working capital acts as lifeblood to an organization. The Himson group of Industry mainly producing textile machineries at lowest possible cost so that they are enable to sale it in profitable manner. As major sale is on credit basis and not on cash mode, working capital is of immense significance for efficiently carried out its dayto-day operation. In the absence of proper and effective management of working capital, it would be difficult to achieve the basic objective of its operational efficiency. For the efficient management of Working Capital, analyses of working capital of company through: Inventory management Receivable management Cash management Ratio analysis All these are analyzed subsequently in this part.

I.

WORKING CAPITAL ASSEMBLY: (Figures in thousands) YEARS 2001-02 2002-03 350,615 369,429 124,547 224,777 17,358 1,086,726 455,039 4413 459,452 519,724 504,596 321,324 231,670 232,705 37,502 1,327,797 528,285 28,413 556,698 771,099

Particulars Current Assets 1) Inventories 2) Sundry Debtors 3) Cash & Bank Balance 4) Loans & Advances 5) Other current Assets Total Current Assets (A) Current Liabilities 1) Current Liabilities 2) Provision Total Current Liabilities (B) Net Working Capital (A-B)

2000-01 339,596 300,586 68,193 192,942 27,872 929,189 408,440 1,025 409,465 627,274 (Table-2)

II.

GROSS WORKING CAPITAL: The amount of gross working capital during last three years is given in

following table. Year 2000-01 2001-02 2002-03 (Rs. in thousands) Gross W.C. (Rs.) Growth (%) 929,189 0.11 1,086,726 16.94 1,327,797 22.18 (Here year 1999-00 taken as 100%)

(Table-3 Growth in Gross W.C. )

Growth in Gross W.C.

25
Growth (% )

22.18 16.94

20 15 10 5 0 0.11 2000-01

2000-01 2001-02 2002-03

2001-02
Year

2002-03

(Graph-1 Growth in Gross Working Capital)

III.

NET WORKING CAPITAL TO NET ASSETS RATIO: Net Working Capital is difference between current assets and current

liabilities. This ration measure firms potential reservoir funds relate to net assets. Year 2000-01 2001-02 2002-03 Net W.C. (Rs.) 627,274 519,724 771,099 (Rs. in thousands) Net Assets (Rs.) Ratio (in times) 11,84,161 0.53 11,34,542 0.46 11,22,410 0.69

(Table-4)

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2000-01 2001-02 Year
0.53 0.46

0.69

2000-01 2001-02 2002-03

Ratio

2002-03

(Graph 2: -Net working capital to Net asset Ratio)

IV.

CALCULATION OF OPERATING CYCLE OF COMPANY: Operating cycle of a company computed with the help of following

formula: -

O=R+W+F+D-C
R= Raw material storage period = Average Stock of Raw material -----------------------------------------------------Average raw material consumption per day 124833 -----------1927.60 65 days. 120933.5 --------------2349.31 52 days. 275028 -----------4044.83 68 days.

Year 2000-01 = =

Year 2001-02 = =

Year 2002-03 = =

W= Work-in-progress period = Average Work-in-progress inventory ----------------------------------------------Average cost of production per day

Year 2000-01 = = 49819 -----------2305.96 22 days. 191456 --------------2807.08 68 days. 125521 -----------4658.33 27 days.

Year 2001-02 = =

Year 2002-03 = =

F= Finished Stock Storage period = Average finished stock inventory ----------------------------------------------Average cost of goods sold per day 17823.5 -----------4316.95 5 days. 13283 --------------2294.75 6 days.

Year 2000-01 = =

Year 2001-02 = =

Year 2002-03 = = 12514.5 -----------3350.13 4 days. Average debtors ---------------------------------Average credit sales per day 287156 -----------2898.23 99 days. 335007.5 --------------3465.99 97 days. 345376.5 -----------6150.48 56 days.

D= Debtors collection period =

Year 2000-01 = =

Year 2001-02 = =

Year 2002-03 = =

C= Creditors payment period = Average creditors ------------------------------------------Average credit purchase per day

Year 2000-01 = = 327468 -----------1924.33 170 days. 301568 --------------2147.15 140 days. 371553 -----------3441.96 108 days. Operating Cycle (Figure in Days)
Particulars Inventory Storage period Raw material Work-in-progress Finished Stock Debtor Collection Period Total (A) Creditors Payment Period (B) Operating Cycle Period (A-B) 2000-01 65 22 05 99 191 170 21 YEARS 2001-02 52 68 06 97 223 140 83 2002-03 68 27 04 56 155 108 47

Year 2001-02 = =

Year 2002-03 = =

(Table-5a) Operating Cycle Period Year 2000-01 Operating Cycle Period 21

2001-02 2002-03 (Table-5b)

83 47

90 80 70 60 50 40 30 20 10 0

83

Days

47 21

2000-01 2001-02 2002-03

2000-01

2001-02 Year

2002-03

(Graph-3 Operating Cycle of Company)

V.

MANAGEMENT OF INVENTORY: Inventory constitute major portion of current asset of public Ltd.

Companies in India .The manufacturing companies hold inventories in the form of Raw material, work-in-process and finish good, There are at least three motives for holding inventories. (1) To facilitate smooth production and sales operation (Transaction motive) (2) To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary Motive) (3) To take advantage of price fluctuations. (Speculative Motive) Inventories represent investment of a firms funds and that is why management of inventory is necessary for the maximization of the value of the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk Factors in establishing its inventory policy.

EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE: Ratio analysis has been used for making evaluation of Inventory management performance. As the raw material used in the company is pig iron, proper planning and handling is required for the purpose of achieving the right quality of output. The ratios for last three years have been worked out and compared. The various figures are given in the table.

INVENTORY MANAGEMENT IN HIMSON PVT LTD. (Rs. in thousand) ITEM (1) Average Inventory (2) Total Current Assets (3) Cost of Good Sold a) Inventory to Gross Working Capital (1/2) b) Inventory Turnover (3/1) c) Inventory Conversion Period (365/b) days 2000-01 329550.5 929189 760872 Ratio (%) 0.35 2.31 158 (Table 6)
Inventory Turnover 4 3.5 Inventory Turnover 3 2.5 2 1.5 1 0.5 0 2000-01 2001-02 Year 2000-01 2001-02 2002-03 2000-01 2002-03 2.69 2.31 Inventory Turnover 3.67 Inventory Conversion Period (days) 180 160 140 120 100 80 60 40 20 0

2001-02 331822.5 1086729 891349 0.30 2.69 136

2002-03 414866 1327797 15207147 0.31 3.67 99

158 136 99

2000-01

2001-02 Year 2001-02

2002-03

2002-03

(Graph 4)

(Graph 5)

VI.

MANAGEMENT OF RECEIVABLE: When firm sell goods for cash, payments are received immediately

and therefore no receivables are created. However when a firm sells goods or services on credit, payments are received only at a future date and receivables are created. It is an essential marketing tool in modern business trade. Credit creates receivables, which the firm is expected to collect in near future. A firm grants credit to its customers so that its sales are its customers so that its sales are not lost to competitors. Account receivable constitutes a significant portion of the total current assets of the business after inventories. The receivables arising out of credit has three characteristics. I. II. It involves an element of risk, which should be carefully analyzed. It is based on economic value. To the buyer, the economic value goods or services pass immediately at the time of sale, white the seller expects an equivalent value to be received later on. III. It implies futurity. The customers from whom receivables have to collected in future are called debtors and represents the firms claim or asset.

DEBTORS TURN-OVER RATIO: This is also called Debtors velocity or Receivable Turnover. A firm sells goods on credit and cash basis. When firm extends credit to its customers, book debts are created in firms A/c debtors expected to converted in to cash over short period and thus included in current assets. It is used to measure liquidity of the receivables or to find out period over, which receivables remain uncollected.

Receivable turnover Ratio = Debt collection period = 365 -----------------------------------Receivable turnover ratio Total Sales ----------------------Average Debtors

Receivable Management in Company

Year 2000-01 2001-02 2002-03 Sales 1042284 1247759 2214174 Avg. Debtors 287156 335007.5 345376.5 (Table 7) Ratio 3.63 3.72 6.41 Collection Period 100 98 57

Debtors Turnover Ratio 7 Debtors Turnover Ratio 6 5 4 3 2 1 0 2000-01 2001-02 Year 2000-01 2001-02 2002-03 2002-03 3.63 3.72 6.41 Debtors Turnover Ratio 120 100 80 60 40 20 0

Debt Collection Period

100

98

57

2000-01

2001-02 Year

2002-03

2000-01

2001-02

2002-03

(Graph 6)

(Graph 7)

VII.

MANAGEMENT OF CASH: Cash in the important current assets for the operations of the business.

Cash is the basic input needed to keep the business running on continuos basis, it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more or less. Cash shortage will disrupt the firms manufacturing operation while excessive cash will simply remain idle, without contributing anything towards firms profitability. Thus, a major function of the financial managers is to maintain a sound financial position. Cash management involves following four factors: I. II. III. IV. Ascertainment of the minimum cash balance and controlling the levels of cash. Controlling cash in flows Controlling cash outflows Optimum interment of surplus cash. Cash is required to meet a firms transactions and precautionary needs. A firm needs cash to make payment for acquisition of resources and services for the normal conduct of business. It keeps additional funds to meet any emergency situation. Some firms maintain cash for taking advantages of speculative changes in price of input and output.

EVALUATION OF CASH MANAGEMENT PERFORMANCE: The following ratios have been used to evaluate different aspects of cash management. (1) (2) (3) Cash to Current Assets Ratio. Cash turnover Ration. Average age of Cash.

The figures of cash and Bank Balance, total current assets and current liabilities for the year 2000-01to 2002-03 are given in the table. Cash Management in Himson Pvt. Ltd. (Rs. In 000s) ITEM (1) Cash & Bank Balance (2) Total Current Assets (3) Total Current Liabilities a) Cash to Current Asset Ratio (1/2) b) Cash Turnover Ratio (3/1) c) Average age of cash (365/b) days
Cash Turnover Ratio 7 Cash turnover (%) 6 5 4 3 2 1 0 2000-01 2001-02 Year 2000-01 2001-02 2002-03 2000-01 2002-03 3.65 2.28 180 160 140 120 100 80 60 40 20 0

2000-01 68193 929189 408440 Ratio (%) 7.34 5.99 61 (Table 8)

2001-02 124547 1086729 455039 11.46 3.65 100

2002-03 231670 1327797 528285 17.45 2.28 160

Avg. Age of Cash

Avg. Age of Cash (days)

5.99

160

100 61

2000-01

2001-02 Year 2001-02

2002-03

2002-03

(Graph 8)

(Graph 9)

VIII.

ANALYSIS THROUGH WORKING CAPITAL RATIOS: -

A study of the causes of changes in uses and sources of Working Capital is necessary to observe that whether working capital is serving the purpose for which it has been created or not. In this technique, for each aspect of analysis certain ratios are computed and then results are compared with standard ratio or industry average. The ratio analysis provides guides and clues especially in sporting trends towards better or poorer performance and in finding out significant deviation for any average or relatively applicable standards. The following are the important ratios to measure the efficiency of working capital: -

1. Ratios relating to liquidity of working capital: Liquidity ratios are used to measure the ability of firm to pay its maturing obligation in time. This ratio helpful for both short-term creditors and internal management of the firm. The following are types of ratios relating to liquidity of working capital. A. Current Ratio: -

It is most common measure for measuring liquidity. It is also called Working Capital Ratio. It expresses relationship between current assets & current liabilities. Current Assets ---------------------Current Liabilities

Current Ratio

(Rs. in 000s) Year 2000-01 2001-02 2002-03 Current Assets 929,189 1,086,726 1,327,797 Current Liabilities 408,440 455,039 528,285 (Table 9) Ratio (times) 2.27:1 2.39:1 2.51:1

The acceptable norms for this ratio is 2:1 considering this it can be said that company has maintained sound ratio over three year B. Quick Ratio: -

It is also known as liquid ratio or acid test ration. It is a relation between quick assets and quick liabilities. It more useful in knowing the liquidity of firm than current ratio. Quick Assets Quick Ratio = ---------------------Current Liabilities A quick asset means current assets excluding stock and prepaid expenses. (Rs. in 000s) Year 2000-01 2001-02 2002-03 Quick Assets 589,593 736,111 823,201 Current Liabilities 408,440 455,039 528,285 (Table 10) Ratio (times) 1.44 1.62 1.56

The acceptable norms for this ratio is 1:1 but the company as already maintained it above the norms, which indicate sound financial position.

2. Composition of Gross working capital: The structure of gross working capital is evaluated by finding out the ratio of each component of current assets with the total current assets. These

ratios indicate in which components of current assets, excess funds have been invested to that extent. Component Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Other Current Assets Total 2000-01 0.37 0.32 0.07 0.22 0.02 100 (Table 11) 2001-02 0.32 0.34 0.11 0.21 0.02 100 2002-03 0.38 0.24 0.17 0.17 0.03 100

3. Ratios relating to Circulation or Productivity of Working Capital: This ratio highlighted the efficiency with which working capital is being utilized. It is commonly used to know turnover of working capital and the turnover of its components to indicate the efficiency of working capital management. A. Circulation of Gross Working Capital: The method is used to examine the effectiveness of gross working capital. It is circulated as: = Net Sales ----------------------------Total Gross W. C. (Rs. in 000s) Year 2000-01 2001-02 2002-03 Net Sales 1,042,284 1,247,759 2,214,174 Total Gross W.C. 929,189 1,086,726 1,327,797 (Table 12) Ratio (times) 1.12 1.15 1.67

This ratio tells us the relative efficiency with which the business organization utilizes the short-term resources to generate output. B. Circulation of Net Working Capital: The method used to measure the effectiveness of net working capital is to divide net sales by net working capital. The ratio is computed as follows: = Net Sales -----------Net W.C. (Rs. in 000s) Year 2000-01 2001-02 2002-03 Sales 1,042,284 1,247,759 2,214,174 Net Working Capital 627,274 519,724 771,099 (Table 13) Ratio (times) 1.66 2.40 2.87

This ratio tells whether three is an improvement in the utilization of net working capital or not.

4. Other Ratio: A. Cash Position Ratio: -

This ratio is variation of quick ratio. It measures the relationship between cash and near cash its on the one had, and immediately maturing obligations on the other. The inventory and debtors are excluded from current assets, to calculate this ratio. Cash + Marketable Securities

Cash Position Raito

----------------------------------Current Liabilities (Rs. in 000s)

Year 2000-01 2001-02 2002-03

Cash 68,193 124,547 231,670

Current Liabilities 408,440 455,039 528,285 (Table 14)

Ratio (times) 0.17 0.28 0.44

Generally 0.25:1 ratio is recommended to ensure liquidity.

B.

Return on Fixed Assets : -

This ratio indicates a return on fixed assets. It can be calculated as Net profit after tax -----------------------Net fixed assets

100

(Rs. in 000s) Year 2000-01 2001-02 2002-03 Net profit after tax 31,347 59,310 84,152 Net Fixed Assets 5,59,820 4,85,507 4,44,600 (Table 15) Ratio (%) 5.60 12.22 18.92

From the above calculation it is cleared that return on fixed assets increasing year by year, it means that company is able to earn higher return on investment in business than the investment made in the outside deposit.

C.

Current Liabilities to Total Assets Ratio: -

This ratio shows the relationship between current liability and total assets [Net Fixed Assets + Investment + Current Assets] It is calculated as: = Current Liabilities ---------------------Total Assets (Rs. in 000s) Year 2000-01 2001-02 2002-03 Current Liabilities Total Assets 408,440 1,703,885 455,039 1,761,816 528,285 1,893,509 (Table 16) Current Assets to Total Assets Ratio: Ratio (times) 0.24 0.26 0.29

D.

The ratio brings out the percentage of current assets to total net assets of the business. This ratio indicates the extent of liquidity nature of assets required in comparison with total net assets. The formal for ratio is given below. = Current Assets ---------------------Total Assets

(Rs. in 000s) Year 2000-01 2001-02 Current Assets 929,189 1,086,726 Total Assets 1,703,885 1,761,816 Ratio (times) 0.55 0.62

2002-03

1,327,797

1,893,509 (Table 17)

0.70

CHAPTER 6 FINDINGS

& SUGGESTIONS

(A) Findings: Working Capital Ratios 2000-01 2001-02 2002-03 0.53 0.46 0.69 0.35 0.30 0.31 2.31 2.69 3.67 158 136 99 3.63 100 7.34 5.99 61 2.27 1.44 1.12 1.66 0.17 5.60 0.24 0.55 3.72 98 11.46 3.65 100 2.39 1.62 1.15 2.40 0.28 12.22 0.26 0.62 (Table 18) 6.41 57 17.45 2.28 160 2.51 1.56 1.67 2.87 0.44 18.92 0.29 0.70

Ratio 1) Net W. C. to Net Assets 2) Inventory to Gross W.C. 3) Inventory Turnover 4) Inventory Conversion period (days) 5) Debtors Turnover 6) Debt collection Period (days) 7) Cash to Current Assets. 8) Cash Turnover Ratio 9) Avg. Age of Cash (days) 10) Current ratio 11) Quick Ratio 12) Circulation of Gross Working Capital 13) Circulation of Net

Avg. of Ratio 0.56 0.32 2.89 131 4.59 85 12.08 11.92 107 2.39 1.54 1.31 2.31 0.30 12.25 0.26 0.62

Working Capital 14) Cash Position 15) Return on fixed Assets 16) Current liabilities to Total Assets 17) Current Assets to Total Assets

The following are the findings of the analysis: (a) Gross working capital: Gross working capitals of company i.e. current asset are increasing over a period of study. It was 0.11% in 2000-01 and increased to 22.18 in 2002-03 so there is increased of 22.07%

(b) Operating cycle: The period for conversion of material in to finished & finished good in to sales &sales in cash for a period of study are respectively 21.83 and 47 days on average there is 50 days required to collect money and again repeat cycle. (1) Net working capital to Net asset Ratio: The average ratio is 0.56 for period under study. It means there is a reserve of Rs.56 on an average from net asset of Rs.100 (2) Inventory to Gross Working Capital Ratio: This ratio is decreasing as compared to year 2000-01 from 0.35 to 0.31 in 2002-03. It shows that firm has not improved its inventory management. (3) Inventory Turnover: This ratio has been increased over the three years from 2.31 in 200001 to 3.67 in 2002-03. So it can be said that company has take steps to increase the inventory-turn over ratio. (4) Inventory Conversion Period: It refers to the period when manufacturing unit takes to clear a lot of stock. There has been a continuous decreasing in conversion period. This will help in reducing accumulation of inventories. (5) Debtors Turnover Ratio: This ratio shows the period of which receivable remain uncollective. The ratio is doubled in 2002-03 as compared to 2000-01. So serious steps should be taken to reduce the collection period though sales increase. (6) Debt Collection Period: -

It is the time period required by company to recollect its payment. Company has made speedy collection in 2003 as compared 2000-01 by collecting in nearly half period i.e. 57 days compared to 100 days in 200001. Average collection period over 3 years is 85 days (7) Cash to Current Asset Ratio: This ratio indicates the extent to which the current assets are represented by cash&bank balance. There is an increase in the ratio over the three years. It was increased by 10% in 2002-03 compared to 2000-01.This increase will lower the profitability of the company. (8)Cash Turnover: It indicates no. of times cash is flowed out for payment to creditors. The ratio is continuously decreasing indicating there is ideal cash balance. (9) Average age of cash: It indicates the period for which the cash remains unused. There is continuous increased in period. It means there is lack of cash management. (10) Current Ratio: It is a quick measure of the firms liquidity, which remained between 2.27 to 2.51 through out the period understudy. It is over the acceptable norm i.e.2:1 so company has sufficient liquidity to meet short-term obligation.

(11) Quick Ratio: This ratio is above the standard norm of 1:1 through out study period so it can be said that it has satisfactory liquidity position. (12) Circulation of Gross Working Capital: -

The ratio shows upward trend over the three-year period. It means there is lower investment in current asset as compared to sales. Some say that there is an improvement in working capital utilization. (13) Circulation of Net Working Capital: The ratio shows an increasing trend over 3 years, which means there is an improvement in utilization of Net Working Capital during the period. (B) SUGGESTIONS: From the analysis of working capital ratios, I have some suggestion for company, which might help them in improving management of working capital:
The Gross working capital is increasing over three years but the

major proportion of current assets comprise of inventories in each year. The company should try to reduce investment in inventory.
The

company should give more importance to inventory

management and try to reduce inventory to gross working capital ratio. This will help in reducing inventory costs. There is an increase in debt collection period over three years and at present (2002-03) it is near by two months which as per the textile industry norm but this is possible due to increase in debtors turn over ratio. So the company should try to increase this ratio as much as possible. The company should additional funds in business rather than investing in fixed deposit because company able to earn higher rate of return on investment in fixed assets as compare to fixed deposit.

BIBLIOGRAPHY
Name of Book

Author P. Mohanrao

Publisher Deep & Deep

Working Capital Management

& Alok K. Pramanik Working Capital Management Financial Management Publication Financial Management McGrawhill Financial Management T. J. Rana & Naresh Jain Management Accounting Annual Reports of Company Bhagwati & Pillai Khan & Jain Tata

Hrishikes Bhattacharya PrenticeHall I. M. Pandy Vikash

B. S. Shah

Himalaya