PROJECT REPORT

SUMMER TRAINING
ON
WORKING CAPITAL MANAGEMENT AT RAYMOND LTD.
MANGALAYATAN UNIVERSITY
FOR PARTIAL FULLFILLMENT OF THE REQUIREMENT
FOR THE AWARD OF

MASTER OF BUSINESS ADMINISTRATION

UNDER THE SUPERVISION OF

UNDER THE SUPERVISIONOF

Dr. SANDEEP SHANDILYA

Mr. ASHOK KUMAR

SUBMITTED BY
KAUSHAL SINGH

MBA INT. B.COM(HONS.)

20120417

INSTITUTE OF BUSINESS MANAGEMENT MANGALAYAT

UNIVERSITY 33rd KM STONE, ALIGARH-MATHURA
HIGHWAY,
BESWAN, ALIGARH

DECLARATION
I hereby certify that the work which is being presented in the project entitled WORKING
CAPITAL MANAGEMENT AT RAYMOND LTD..
Fulfillment of the requirements for the award degree of Master of Business Administration ,
Mangalayatan University, Aligarh, is an authentic record if my own work.
The matter presented in this summer internship report has not been submitted by me for the
award of any other degree of this or any other university.

KAUSHAL SINGH
MBA 3th SEM

STUDENT CERTIFICATE
Certified that this report is undertaken by me under the guidance of Professor Dr. Sandeep
Shandilya in partial fulfillment of the requirement for award of Degree of Master of Business
Administration (MBA) from Mangalayatan University, Aligarh, Uttar Pradesh.
Date:Signature
Kaushal Singh
Student

Signature
Dr. Sandeep Shandilya
Faculty

Signature
Dr.Abhay Kumar
Director, IBM

CERTIFICATE OF THE SUPERVISOR

This is to certify that the work entitled WORKING CAPITAL MANAGEMENT AT
RAYMOND LTD. submitted by KAUSHAL SINGH enrollment no 20120417 student of
MBA 3th Semester and was successfully conducted at Raymond, Aligarh from 31May to 15th
July 2015, for thepartial fulfillment for the award of MBA int B.com (h).To the best of my
knowledge this is an original piece of work.
I wish him all the very best in his career endeavors.

Dr. Sandeep Shandilya

Faculty, IBM
Mangalayatan University
Aligarh

ACKNOWLEGEMENT
Summer internship report is the most vital part of management programme, both as a link
between theory and actual practices. However this opportunity could only be utilized with the
support and guidance of my mentors and other individuals who indirectly helped me in
completing my project.
I consider my proud privilege to express deep sense of gratitude to Dr. Sandeep Shandilya for
his admirable and valuable guidance, keen interest, encouragement and constructive suggestions
during the course of the project.
I would like to thank the internal guide for providing me the valuable advice and endless supply
of new ideas and support for this project.

MBA 3thSem

KAUSHAL SINGH

CONTENTS
TOPICPAGE NO.
1. INTRODUCTION

8-10

. COMPANY PROFILE -

11-20

. OBJECTIVES AND SCOP OF REPORT -

21

6. RESEARCH METHODOLOGY -

22

7. WORKING CAPITAL -

23-37

Management of Working Capital

Need for adequate Working Capital
Factors determining Working Capital requirement
Sources of Working Capital
Working Capital Classification

8. STATEMENT OF WORKING CAPITAL

38-39

9. INVENTORY MANAGEMENT

40-50

10. CASH MANAGEMENT -

51-56

11. RECEIVABLES MANAGEMENT (DEBTORS) -

57-64

12.FINDING.
12. CONCLUSION -

65-66

13. RECOMMENDATION -

67-72

14. REFERENCES -

73

. EXECUTIVE SUMMARY
The term working capital has several meanings in business and economic
development finance. Working capital means a businesss investment in
short-term assets needed to operate over a normal business cycle.
Current assets and current liabilities include three accounts which are of
special importance. These accounts represent the areas of the business
where managers have the most direct impact: accounts receivable (current
asset) ,inventory (current assets), accounts payable (current liability).
Use of working capital is providing the ongoing investment in short-term
assets that a company needs to operate. A second purpose of working
capital is addressing seasonal or cyclical financing needs.
Working capital is also needed to sustain a firms growth, to provide liquidity
and to undertake activities to improve business operations and remain
competitive, such as product development, ongoing product and process
improvements, and cultivating new markets.
Raymond Limited was incorporated in 1925 and is now a Rs.1, 400 crore plus
conglomerate having varied businesses like Textiles, Readymade Garments,
Denims, Engineering Files & Tools, Aviation and Designer Wear. The company
is one of the largest players in the core worsted fabric business with over
60% domestic market shares.
Objectives of the Project are to study working capital management process,
to study receivable management of the company and to study the process of
cash

and

inventory

management.

Working

capital

management

is

management for the short-term current assets and current liabilities, which is
of critical importance to a firm.Cash management is to identify the cash
balance which allows the business to meet day to day expenses, but reduces
cash holding costs.

1. INTRODUCTION
7

Meanings of Working Capital:

The term working capital has several meanings in business and economic
development finance. In accounting and financial statement analysis,
working capital is defined as the firms short-term or current assets and
current liabilities. Net working capital represents the excess of current assets
over current liabilities and is an indicator of the firms ability to meet its
short-term financial obligations.
From a financing perspective, working capital refers to the firms investment
in two types of assets. In one instance, working capital means a businesss
investment in short-term assets needed to operate over a normal business
cycle. This meaning corresponds to the required investment in cash,
accounts receivable, inventory, and other items listed as current assets on
the firms balance sheet. In this context, working capital financing concerns
how a firm finances its current assets.
A second broader meaning of working capital is the companys overall
nonfixed asset investments. Businesses often need to finance activities that
do not involve assets measured on the balance sheet. For example, a firm
may need funds to redesign its products or formulate a new marketing
strategy, activities that require funds to hire personnel rather than acquiring
accounting assets.
When the returns for these soft costs investments are not immediate but
rather are reaped over time through increased sales or profits, then the
company needs to finance them. Thus, working capital can represent a
broader view of a firms capital needs that includes both current assets and
other nonfixed asset investments related to its operations.
Working capital is a valuation metric that is calculated as current assets
minus current liabilities. Also known as operating capital, it represents the
amount of day-by-day operating liquidity available to a business. A company

can be endowed with assets and profitability, but short of liquidity, if these
assets cannot readily be converted into cash.
Current assets and current liabilities include three accounts which are of
special importance. These accounts represent the areas of the business
where managers have the most direct impact:
accounts receivable (current asset)
inventory (current assets), and
accounts payable (current liability)
In addition, the current (payable within 12 months) portion of debt is critical,
because it represents a short-term claim to current assets. Common types of
short-term debt are bank loans and lines of credit.Any change in the working
capital will have an effect on a business's cash flows. A positive change in
working capital indicates that the business has paid out cash, for example in
purchasing or converting inventory, paying creditors etc.
Hence, an increase in working capital will have a negative effect on the
business's cash holding. However, a negative change in working capital
indicates lower funds to pay off short term liabilities (current liabilities),
which may have bad repercussions to the future of the company.
Working Capital plays a vital role in all the organizations. It is a capital for
short-term current assets and current liabilities, which is of critical
importance to a firm. Lack of working capital leads to low rate of return on
capital employed. It is a cash function management, which checks the
liquidity of the business. It tests managerial efficiency.
Thus, working capital can be referred to as the lifeblood of the organization
as it reflects the companys profitability, checks stability, and it is a path for
short term and long-term success.

Business Uses of Working Capital:

Just as working capital has several meanings, firms use it in many ways. Most
fundamentally, working capital investment is the lifeblood of a company.
Without it, a firm cannot stay in business. Thus, the first, and most critical,
use of working capital is providing the ongoing investment in short-term
assets that a company needs to operate.
A business requires a minimum cash balance to meet basic day-to-day
expenses and to provide a reserve for unexpected costs. It also needs
working capital for prepaid business costs, such as licenses, insurance
policies, or security deposits. Furthermore, all businesses invest in some
amount of inventory, from a law firms stock of office supplies to the large
inventories needed by retail and wholesale enterprises. Without some
amount of working capital finance, businesses could not open and operate.
A second purpose of working capital is addressing seasonal or cyclical
financing needs. Here, working capital finance supports the buildup of shortterm assets needed to generate revenue, but which comes before the receipt
of cash. For example, a toy manufacturer must produce and ship its products
for the holiday shopping season several months before it receives cash
payment from stores. Since most businesses do not receive prepayment for
goods and services, they need to finance these purchases, production, sales,
and collection costs prior to receiving payment from customers.
Another way to view this function of working capital is providing liquidity.
Adequate and appropriate working capital financing ensures that a firm has
sufficient cash flow to pay its bills as it awaits the full collection of revenue.
When working capital is not sufficiently or appropriately financed, a firm can
run out of cash and face bankruptcy. A profitable firm with competitive goods
or services can still be forced into bankruptcy if it has not adequately
financed its working capital needs and runs out of cash.

10

Working capital is also needed to sustain a firms growth. As a business

grows, it needs larger investments in inventory, accounts receivable,
personnel, and other items to realize increased sales. New facilities and
equipment are not the only assets required for growth; firms also must
finance the working capital needed to support sales growth.

3. COMPANY PROFILE
Raymond Limited was incorporated in 1925 and is now a Rs.1, 400
crore plus conglomerate having varied businesses like Textiles,
Readymade Garments, Denims, Engineering Files & Tools, Aviation
and Designer Wear. The company is one of the largest players in the core
worsted fabric business with over 60% domestic market share.
The denim division has an installed capacity of 30 million meters and
produces high quality ring denims. The company currently ranks among the
top 3 producers in India. The engineering files & tools division constitutes
around 12% of the total revenues and is comparatively a smaller division.
However, Raymonds is the largest manufacturer of engineering files & tools
in the country. The company has entered into global tie-ups and this is
expected to add additional revenues to Raymond Limited over the next two
years. Recognized as the most respected Textile Company of India, Raymond
Limited is amongst the first three fully integrated manufacturers of Worsted
Suiting in the world.
As the flag-bearer of the multi-product, multi-divisional Raymond Group, it
enjoys over 60% share of Indian Worsted Suiting Market. It produces 25
million meters of high-value pure-wool, wool blended and premium polyester
viscose suiting in addition to half a million blankets and shawls, all marketed
under the flagship brand "Raymond" - a worldwide trusted name since
1925.

11

It also produces and markets plush-velvet furnishing fabric in wide array of

designs and colors including carpeting for the niche markets of India and
Middle East. Manufacturing facilities include three world-class fully integrated
plants in India, employing state-of-the-art technology from wool scouring to
finishing stage and modern quality management (ISO 9001) as well as
Environment Control Systems (ISO 14001). All the plants are self-sufficient in
terms of providing educational, housing, recreation and spiritual support
system for the employees and connected townships.
Products are distributed through about 300 exclusive retail shops in India and
surrounding countries, 30,000 multi-brand retail outlets and over 100
wholesale distributors. In addition to Middle East and SAARC countries, its
products are sold to discerning customers in over 60 countries including
premium fashion labels all over the world.
Today the mill has turned into a Rs. 1400 crores conglomerate and is Indias
leading producer of worsted suiting fabric with 60% market share. It is also
the largest exporter of worsted fabrics and readymade garments to 54
countries including Australia, Canada, USA, the European Union and Japan.
The Raymond group is also the leader among ready-mades in India with a
turnover of Rs. 2000 million with its three brands Park Avenue, Parx and
Manzoni.
Customers today the world over, are looking at one-stop shops that can fulfill
all their needs. At Raymond, they offer fully finished products that span
various garment categories that has been made possible by a seamless
horizontal and vertical integration across divisions. Their textile solutions
encompass everything - from worsted suiting to denim and shirting.
Its not just range but volume and quality that make them the textile major
that they are today. Their plants have a capacity of 31 million meters in
producing the finest worsted fabrics and wool blends. The blends comprise of
exotic fibres like cashmere, Mohair or Angora or blends of wool with casein
and bamboo or the ultimate in fine pure wool Super 230s.

12

The denim division has a capacity of 80 million meters of specialty denims;

not to mention their capabilities in producing shirting and carded woolen
fabrics. Their joint ventures with global leaders ensure the customers that
they have access to world-class products.
Six state- of- the- art textile plants and four garmenting factories in India and
Europe support their design Studios in India and Italy. Being integrated
suppliers of fabrics as well as garments, they offer their customers total
textile solutions.

Raymond continues to achieve enhanced customer satisfaction through

ongoing innovation. Internationally renowned menswear designers today,
style their latest collections from Raymond- the fabric in fashion.

13

About the company:

Raymond is the worlds largest producer of worsted suiting fabrics,
commanding an over 60% market share in India. With a capacity of 31
million meters, they are among the few companies in the world, fully
integrated to manufacture worsted fabrics, wool & wool blended fabrics.
They also convert these fabrics into suits, trousers and apparels that are
exported to over 55 countries in the world; including European Union, USA,
Canada, Japan and Australia amongst others.
A trendsetter and an innovator in the Indian textile market, their expertise
has been brought to bear by their in-house research & development team.
Their innovations have become milestones in the worsted suitings industry.
They mastered the craft of producing the finest suiting in the world using
super fine wool count (from 80s to 230s) and blending the same with
superfine polyester and other specialty fibres, like Cashmere, Angora,
Alpaca, Pure wool and Linen.
Raymond is amongst the few companies in the world with the expertise to
manufacture even finer worsted suiting fabric- the Super 230s. Today they
are recognized as a pioneer in manufacturing worsted sittings in India,
producing nearly 20,000 designs and colors of suiting fabrics, which are
retailed through 30,000 stores in over 400 towns across India. From fabric to

14

fine tailored clothing, Silver Spark Apparel Ltd. marks the Group's foray into
the global apparel market.

World-class facilities:
Raymonds manufacturing facilities include three worldclass fully integrated plants in India, deploying state-ofthe-art
systems

technology
like

ISO

modern
9001

and

quality

management

Environment

Control

Systems (ISO 14001). All their plants are self-sufficient and provide staff
welfare measures such as education, housing, recreation and support
systems their employee.
Raymond plants are located in India at the following locations: Thane, near
Mumbai, Chhindwara in Central India and Vapi in Gujarat, near Mumbai.
Thane Plant:
This is the mother plant and is the center of competence for world-class
manufacturing and design facilities. With decades and expertise and finely
honed skills, this plant is a treasure house of knowledge for producing
superfine worsted suiting fabrics.
Chhindwara Plant:
The Raymond Chhindwara plant, set up in 1991, is a state-of-the-art
integrated manufacturing facility located 57 kms away from Nagpur in
Central India. Built on 100 acres of land, the plant produces premium pure
15

wool, wool blended and polyester viscose suiting. This plant has achieved a
record production capacity of 14.65 million meters, giving it the distinction of
being the single largest integrated worsted-suiting unit in the world.
Vapi Plant:
Raymond has increased its worsted suiting capacity by 3 million meters, as
part of the second developmental phase of the Vapi plant. After this
expansion, Raymond will have a total capacity for manufacturing 31 million
meters of worsted suiting per annum. Modeled to meet international
standards, the Vapi plant has been set up on 112 acres of lush green land
with Hi-tech machinery such as warping equipment from Switzerland,
weaving machines from Belgium, finishing machines, automatic drawing-in
and other machines from Italy.
Investment Rationale Core business to add growth:
The worsted fabric business registered single digit growth over the last twothree years. This business is likely to take off in the near future and improved
product mix and volume growth will drive growth for the main business of
the company. The company is expanding the capacity of its worsted fabric
business by 3 million meters to 28 million meters through expansion at Vapi
plant. This would yield significant improvement in the operational margins on
back of reduced labor cost. The company is also expected to benefit from the
increased outsourcing opportunity in the worsted fabric segment.
Performance of subsidiaries to fuel profitability:
Raymond has formed many subsidiaries like Raymond Apparel Limited,
Colourplus Fashions Ltd, and Hindustan Files Limited etc. The double-digit
growth rate in these companies would significantly improve the consolidated
revenues of Raymond resulting in healthy consolidated numbers. They
expect these subsidiaries to register 12-14 % CAGR over the next two years
thereby contributing to the improved profitability of the company.

16

Advantage of integrated business:

Raymond has an opportunity to take advantage of the post quota regime
through its increased scalability and ability to move up the value chain right
from yarn to retailing, through its vertically integrated business model. The
company has made capacity additions at opportune time to take advantage
of promising business situation.
Global Tie-ups to establish international presence:
Raymond has entered into joint ventures with Gruppo Zambiati of Italy for
manufacturing high value cotton shirts and cotton linen shirting fabric. It has
also entered into a joint venture with Lanificio Fedora Italy for manufacture of
blankets, shawls, and will transfer its Jalgaon unit to the venture for its 50%
stake. These tie-ups would lead to international branding and a unique
growth opportunity for Raymond.
Strong retail penetration & prime real estate value:
Raymond has one of the largest retail penetrations through its 300 odd
stores in prime locations, in 150 cities in India. It also has around 25 shops in
15 plus cities of Middle East, Sri Lanka, Bangladesh and Nepal. The Raymond

17

Shop retail chain occupies a space of 1 million square feet built-up area. This
is apart from around 160 acres of land at Thane a suburb of Mumbai. The
current buoyancy in the real estate rates is likely to give significant value to
Raymond for its property, which is estimated around Rs.100 crore.
Foray in the Chinese market:
The company is planning entry into Chinese market, which impacts the
global textile business; this is a step ahead towards establishing Raymonds
presence in the global market. The Chinese venture could help Raymond
through sourcing of raw material and intermediate products for the
companies manufacturing facilities in India and marketing its products in
Chinese market.
Details of all Raymond products are enlisted below:
Raymond Limited
Incorporated in 1925, Raymond Limited has five divisions comprising of
Textiles, Denim, Engineering Files & Tools, Aviation and Designer Wear.
Raymond Textile is India's leading producer of
worsted suiting fabric with over 60% market share.
Raymond

Textiles

is

the

worlds

third

largest

integrated manufacturer. Raymond Textile has developed strong in-house

skills for research & development and is thus, perceived as pioneer and
innovator.
Furnishings:
The company is known in the market for trend
designs in furnishings (home & office) and product
innovations.

Product portfolio:

18

setting

 Plain - Hotels & Auditoriums in India.

Shadow Velvet - shadow effect in the plain fabric for elegant
appearance -leading hotels in India.
Stencil Sole producer. Shades of Plain Velvet.
Dobby - Back-coated plush fabrics that improves the binding strength
of pile to the base fabric. Targeted at the automotive upholstery
market. Also used in office chairs and panels.
Full Pile Jacquard - The entire fabric range is treated with Flurogard
to make it stain resistant.
Fire resistance treatment on Raymond velvet:
To cater to the specific requirements of auditoriums, theatres & automobile
industry, the facility to treat the entire product range is available. The fabric
is treated with special chemicals to impart fire resistant property to the
fabric.
Raymond

Denim, set up in 1996 produces 20 million meters of

differentiated

Ringspun

denim

per

annum.

The

company currently ranks among the top 3 producers

in

India. Raymond Denim enjoys a substantial market

share in all parts of the world.
The company exports 55% of its production to around 20 countries around
the world and to leading denim wear brands like Levi's, Pepe, Lee Cooper and
retail brands like Zara, H&M, Gap, Tommy Hilfiger, etc. Raymond UCO Denim
is a Joint Venture between Raymond Ltd, Indias largest textile and apparel

19

major and UCO NV of Belgium. We produce and market specialty ring color
and stretch denim.

With a combined capacity of 80 million and manufacturing facilities across 3

continents US, Europe and Asia, Raymond UCO is in a best position to
develop an optimal and flexible service to meet global requirements of large
international brands.
Be: The Designer Wear division: is an exclusive pret-a-porter range that
houses designs by some of the finest Indian
designers. It offers an eclectic mix of formal; office
and evening wear for men and women, in western,
ethnic

and

fusion

accessories. Affordability,

styles
Accessibility

with
and

Acceptability are the three attributes that characterizes Be.

The fabric ranges from knits to woven and cottons & linens to silk, with a
spectrum of colors starting from earthy and aqua tones to bright colors. The
price range is equally exciting that starts as low as Rs. 600/- to a maximum
of Rs. 6000/-. Presently the Be: collection consists of designer bags for
women, belts inspired by traditional Indian artistry, designer shoes by
Rinaldi.
Million Air: The Aviation division - launched in 1996. Known for high quality
and reliable services, Million Air has a fleet of
three helicopters and one executive jet. Million
Airs has the distinction of achieving overall
technical reliability of 99%. Million Airs is also a
member

of

HAI

(Helicopter

Association

20

International) & NBAA (National Business Aviation Association), USA and has
been awarded safety Awards by both the organizations.

J K Files & Tools, the Engineering Files & Tools division:

J.K. Files & Tools is the worlds largest producer

of

steel files with 90% market share in India and

about

30% market share in the world. J.K. Files & Tools

is

also the largest producer of HSS Ground Flute

Twist

Drills in India.

4. OBJECTIVES AND SCOPE OF THE PROJECT

Objectives of the Project:
To study working capital management process.
To study receivable management of the company.
To study the process of cash and inventory management.
Scope of the project:
The scope of the project includes elaborate discussion on:
Statement of working capital.
Inventory management
Cash management.

21

 Debtors management.
The above-mentioned topics form the core part of working capital
management.

RESEARCH METHODOLOGY
Research methodology simply means the various methods, techniques and procedures
adopted to carry out a research.
There are many types of research methods available in this world. Most of the researches
are done under them and very rare type researches are carried out by innovative research
types which the general public have no idea. Here we have some commonly heard
research methods

Exploratory research, which structures and identifies new problems

Constructive research, which develops solutions to a problem

Empirical research, which tests the feasibility of a solution using empirical

evidence Research can also fall into two distinct types.

Primary research (collection of data that does not already exist)

Secondary research (summary, collation and/or synthesis of existing research)

22

In social sciences and later in other disciplines, the following two research methods can
be applied, depending on the properties of the subject matter and on the objective of the
research:

Qualitative research (understanding of human behavior and the reasons that

govern such behavior)

Quantitative research (systematic empirical investigation of quantitative properties

and phenomena and their relationships)

23

SELECTION OF UNITS
I have Chosen secondary data to complete my research.

SAMPLING TECHNIQUES

DATA COLLECTION

To complete any research we need data.

Data is a collection of information for one stage, and the collection of information makes
data at other stage hence the cycle goes on.
For research data is treated as raw material from which the researcher extracts relevant
facts and figures & completes report.
Types of data.
1. Primary data- the very fresh data collected by researcher from the sample size of
targetted peoples himself to avoid any mistakes and maintaining the current
records. It is expensive and time consuming means of data collection but provides
accurate results.
2. Secondary data- As the name suggests, secondary data means previously
collected or available by other researcher before. This type of data is helpful in
making comparisons but if used highly in research then results will have errors
and mistakes. It is not that expensive too and easily available through magazines,
newspaper, internet, annual reports etc
A good research is carried out by using both the means of data in suitable ratios.
I have collected only Secondary means of data for the completion of this study.

24

.FINDING
.The Raymond2 Ltd. Has higher current and quick ratio are i.e. 2. 87 and 2.30 respectively, so
company liquidity position is good. It show that it is able to meet its current obligations.
.Working capital of Raymond Ltd. Was increasing and showing positive working capital per year.

. CONCLUDING
The study on working capital management conducted in Raymond Ltd. To analyze the financial
position of the company. The company financial position is analyzed by using the tool of annual
report from 2010-12 to 2013-14.
The financial status of Raymond Ltd is good . in the last year the inventory turnover has
increased, turnover has increased, this is good sign for the company.
On the whole, the company is moving forward with excellent management.

25

7. WORKING CAPITAL
Working capital management is management for the short-term current
assets and current liabilities, which is of critical importance to a firm. Lack of
efficient and effective utilization of working capital leads to earn low rate of
return on capital employed. The requirement of working capital varies from
firm to firm depending upon the nature of business, production policy,
market conditions, seasonality of operations, conditions of supply, etc.
Working capital management entails short term decisions - generally,
relating to the next one year period - which are "reversible". These decisions
are therefore not taken on the same basis as Capital Investment Decisions
(NPV or related, as above) rather they will be based on cash flows and / or
profitability.
One measure of cash flow is provided by the cash conversion cycle - the net
number of days from the outlay of cash for raw material to receiving
payment from the customer. As a management tool, this metric makes
explicit the inter-relatedness of decisions relating to inventories, accounts
receivable and payable, and cash. Because this number effectively
corresponds to the time that the firm's cash is tied up in operations and
unavailable for other activities, management generally aims at a low net
count.
In this context, the most useful measure of profitability is Return on capital
(ROC). The result is shown as a percentage, determined by dividing relevant
income for the 12 months by capital employed; Return on equity (ROE)
shows this result for the firm's shareholders. Firm value is enhanced when,
and if, the return on capital, which results from working capital management,
exceeds the cost of capital, which results from capital investment decisions
as above. ROC measures are therefore useful as a management tool, in that
they link short-term policy with long-term decision making.

26

Management of working capital:

Guided by the above criteria, management will use a combination of policies
and techniques for the management of working capital. These policies aim at
managing the current assets (generally cash and cash equivalents,
inventories and debtors) and the short term financing, such that cash flows
and returns are acceptable. It simply refers to management of the working
capital, or in more precise terms, the management of current assets. A firms
working capital consist of its investment in current asset which include short
term asset such as cash and bank balance, inventories, receivables, and
marketable securities.
Cash management: Identify the cash balance which allows for the business
to meet day to day expenses, but reduces cash holding costs.
Inventory management: Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow, supply chain
management ; Just In Time (JIT); Economic order quantity (EOQ); Economic
production quantity (EPQ).
Debtors management: Identify the appropriate credit policy, i.e. credit
terms which will attract customers, such that any impact on cash flows and
the cash conversion cycle will be offset by increased revenue and hence
Return on Capital (or vice versa); Discounts and allowances.
Short term financing: Identify the appropriate source of financing, given
the cash conversion cycle: the inventory is ideally financed by credit granted

27

by the supplier; however, it may be necessary to utilize a bank loan (or

overdraft), or to "convert debtors to cash" through "factoring".
The term working capital may be used in two different ways:
1. Gross working capital: The gross working capital refers to the firms
investment in all current assets taken together.
2. Net working capital: The term net working capital may be defined as
the excess of total current assets over total current liabilities.
A firm should maintain an optimum level of gross working capital. This will
help avoiding the unnecessarily stoppage of work or liquidation due to
insufficient working capital. Effect on profitability because over flowing
working capital implies cost. Therefore, a firm should have just adequate
level of total current assets. The gross working capital also gives an idea of
total funds required for maintaining current assets.
On other hand, net working capital refers to amount of funds that must be
invested by the firm, more or less regularly in current assets. The net
working capital also denotes the net liquidity being maintained by the firm.
This also gives an idea of buffer available to the current liability.

28

Need for adequate working capital:

Every firm must maintain a sound working capital position otherwise; its
business activities may be adversely affected.
The excess working capital, i.e. when the investment in working capital is
more than the required level, it may result in unnecessary accumulation of
inventories resulting in waste, theft, damage etc. Delay in collection of
receivables resulting in more liberal credit terms to customers than
warranted by the market conditions. Adverse influence on the performance
of the management.
On the other hand, inadequate working capital is not good for the firm. It
may result in the following:
The fixed asset may not be optimally used.
Firm growth may stagnate.
Interruptions in production schedule may occur ultimately resulting in
lowering of the profit of the firm.
The firm may not be able to take benefit of an opportunity.
Firm goodwill in the market is affected if it is not in a position to meet
its liabilities on time.
Working Capital Needs:
A business need for working capital can come as a result of several reasons
that include the following:
Increasing sales growth or seasonal growth.
Customers paying slower.
Need to increase inventory to support sales growth and/or adding
product lines.
29

 Desire to take discounts on purchases from vendors.

Recent operating losses have reduced your cash reserves.

Factors determining working capital requirement:

Though there is no set of universally applicable rules to ascertain working
capital needs, the following factors may be considered:
Nature of business:
The Working capital requirement depends upon the nature of business
carried on by the organization. In a manufacturing firm the requirement is
generally high, but it also depends on the type and nature of the product.
The proportion of current asset to total assets measures the relative
requirements of working capital of various industries.
Manufacturing cycle:
Time span required for the conversion of raw materials into finished goods is
a block period. The period in reality extends a little before and after the
work-in-progress. The manufacturing cycle and the fund requirements vary in
direct proportion. The funds blocked in manufacturing cycle vary from
industry to industry. Further, even within the same group of industries, the
operating cycle may be different due to technological considerations.
Business cycle:
Business fluctuations lead to cyclical and seasonal changes, which, in turn,
cause a shift in working capital position particularly for working capital
requirement. The variations in business conditions may be in two directions:
Upward phase when boom conditions prevail, and Downswing phase
when economic activity is marked by a decline. During the upswing of
business activity, the need for working capital is likely to grow and during the
downswing phase the working capital requirement is likely to be less. The
decline in economy is associated with a fall in the volume of sales, which, in
turn, leads to a fall in the level of inventories and book debts.
Seasonal variation:

30

Variation apart, seasonally factor creates production or even shortage

problem. This is the reason as to why manufacturing concerns producing
seasonal products purchase their raw material throughout the year and carry
on the manufacturing activity. For example woolen garments have a demand
during winter.
Production policy:
While working capital requirements vary because of seasonal factors, the
impact can be minimized by suitably gearing the production schedule. There
are two choices- either the production is periodically adjusted to meet the
seasonal requirements or a steady level of production is maintained
throughout, consequently allowing the inventories to build up in the offseason.
Scale of operations:
Operational level determines the working capital demand during a
particular period. Higher the scale, higher will be the need for
working capital. However, pace of sales turnover is another factor.
Quick turnover calls for lesser investment for inventory while low
turnover rate necessitates larger investments.
Credit policy:
The credit policy influences the requirement of working capital in two ways:
Through credit terms granted by the firm to its customers/buyers of
goods.
Credit terms available to the firm from its creditors.

Growth and expansion:

It is, of course difficult to determine precisely the relationship
between the growth and volume of business and the increase in
working capital. The composition of working capital also shifts with
economic circumstances and corporate practices. However, it is to
31

be noted that the need for increased working capital funds does not
follow the growth in business activity but precedes it.

Dividend policy:
The payment of dividend consumes cash resources and, thereby, effects
working capital to that extent. However, if the firm does not pay dividend but
retains the profit, working capital increases. There are wide variations in
industry practices as regards the inter relationship between working capital
requirement and dividend payment. In some cases, shortage of working
capital is sometimes a powerful reason for reducing or even skipping
dividends in cash (resolved by payment of bonus shares).
Depreciation policy:
There is an indirect effect of depreciation policy on working capital.
Enhanced rates of depreciation lower the profits and tax liability and, thus,
more cash profits. Higher depreciation means lower disposable profits and a
smaller dividend payment. Thus cash is preserved. If the current capital
expenditure falls short of the depreciation provision, the working capital
position is strengthened and there may be no need for short-term borrowing.
If the current capital expenditure exceeds the depreciation provision, either
outside borrowing will have to be resorted to or a restriction on dividend
payment coupled with retention of profits will have to be adopted to prevent
working capital position from being adversely affected.
Price level changes:
Rising prices necessitate the use of more funds for maintaining an existing
level of activity. However, the implications of rising price levels on working
capital position may vary from company to company depending on the
nature of its operation, its standing in the market and other relevant
considerations.

32

Operating efficiency:
The efficient utilization of resources by eliminating waste, improved
coordination and full utilization of existing resources would increase the
operating efficiency.

Sources of working capital finance:

Working Capital Finance - Gives your business the money it needs to
grow.
Working capital finance makes it possible for the business to obtain capital if
the business has been denied for a bank loan, or if it has little cash flow.
Traditional funding through a standard bank can be difficult to obtain, but
they also don't satisfy the needs of expanding companies. Without capital a
business will have to slow down their growth, which can hurt a business.
Working capital finance makes it possible for any business to have access to
the cash it needs, when it needs it.
Working capital finance allows a company to turn their income streams into
instant capital. They can turn their accounts receivables into cash by selling
them to a lender who specializes in accounts receivable factoring. Another
method for obtaining working capital is to lease equipment or to obtain credit
from a company (for eg. Companies like Office Depot or Lowes in US) that
sells items that the business needs. Obtaining lines of credit from a company
are easier than going after a bank loan. If at all possible obtain a line of
credit from a company that will report your business credit scores to the
major business credit bureaus. This will help build your business credit
scores, so it is easier to qualify for large bank loans.
Another popular method of working capital finance is utilizing asset-based
financing. That means that the company would use assets from their own
business to secure loans. They could pledge any commercial real estate their
business owns, business vehicles, equipment, etc. Lending institutions

33

approve asset-based loans quicker because the risk isn't as high. Small
companies often can obtain more cash with an asset-based loan.
Commercial banks are the largest financing source for external business debt
including working capital loans, and they offer a large range of debt
products. With banking consolidation, commercial banks are multistate
institutions that increasingly focus on lending to small business with large
borrowing needs that pose limited risks.

Commercial finance companies are important working capital lenders since,

as non -regulated financial institutions, they can make higher risk loans.
Some finance companies specialize in serving specific industries, which
allows them to better assess risk and creditworthiness, and extend loans that
more general lenders would not make.
Another approach used by finance companies is asset-based lending in
which a lender carefully evaluates and lends against asset collateral value,
placing less emphasis on the firms overall balance sheet and financial ratios.
An asset-based lending approach can improve loan availability and terms for
small firms with good quality assets but weaker overall credit. Commercial
finance companies also are more likely to offer factoring than banks.
Trade credit extended by vendors is a fourth alternative for small firms. While
trade credit does not finance permanent or long-term working capital, it
helps address short-term borrowing needs. Extending payment periods and
increasing credit limits with major suppliers is a fast and cost-effective way
to finance some working capital needs that can be part of a firms overall
plan to manage seasonal borrowing needs.
Other working capital finance options exist beyond these three conventional
credit sources. Business development corporations (BDCs) are a second
34

alternative source for working capital loans. BDCs are high-risk lending arms
of the banking industry that exist in almost every state. They borrow funds
from a large base of member banks and specialize in providing subordinate
debt and lending to higher-risk businesses. While BDCs rely heavily on bank
loan officers for referrals, economic development practitioners need to
understand their debt products and build good working relationships with
their staffs.
Venture capital firms also finance working capital, especially permanent
working capital to support rapid growth. While venture capitalists typically
provide equity financing, some also provide debt capital. A growing set of
mezzanine funds,7 often managed by venture capitalists, supply mediumterm subordinate debt and take warrants that increase their potential
returns. This type of financing is appropriate to finance long-term working
capital needs and is a lower-cost alternative to raising equity.
However, the availability of venture capital and mezzanine debt is limited to
fast-growing firms, often in industries and markets viewed as offering the
potential for high returns. Government and nonprofit revolving loan funds
also supply working capital loans. While small in total capital, these funds
help firms access conventional bank debt by providing subordinate loans,
offering smaller loans, and serving firms that do not qualify for conventional
working capital credit.
Many entrepreneurs and small firms also rely on personal credit sources to
finance working capital, especially credit cards and second mortgage loans
on the business owners home. These sources are easy to come by and
involve few transaction costs, but they have certain limits. First, they provide
only modest amounts of capital. Second, credit card debt is expensive with
interest rates of 18% or higher, which reduces cash flow for other business
purposes.
35

Third, personal credit links the business owners personal assets to the
firms success, putting important household assets, such as the owners
home, at risk. Finally, credit cards and second mortgage loans are not viable
for entrepreneurs who do not own a home or lack a formal credit history.
Immigrant or low-income business owners, in particular, are least able to use
personal credit to finance a business. Given these many limitations, it is
desirable to move entrepreneurs from informal and personal credit sources
into formal business working capital loans that are structured to address the
credit needs of their firms.

Working

capital

finance

may

be

classified

into

the

following:
Spontaneous source of finance:
Finance that naturally arises in the course of business is called as
spontaneous financing. For example: Trade creditors, credit from employees,
credit from suppliers of services etc.
Negotiated financing:
Financing which has to be negotiated with lenders (commercial banks,
financial institutions, and general public) is called as negotiated financing.
This kind of financing may short term or long term in nature.

36

Between spontaneous and negotiated sources of finance, the latter is more

expensive and inconvenient to raise. Spontaneous source of finance reduces
the amount of negotiated financing.
The working capital may be financed in either of the following ways,
keeping in view of accessibility to different sources as well as the cost factor-

Hedging Approach to Working Capital Financing:

Under hedging approach to financing working capital requirements
of a firm

each asset in the balance sheet asset side would be off

set with a financing instrument of the same approximate maturity.

The basic approach of this method of financing is that the
permanent component of current assets and fixed assets would be
met with long-term funds and the short term or seasonal variation
in current assets would be financed with short-term debt. If the
long-term funds are used for short-term needs of the firm, it can
identify and take steps to correct the mismatch in financing.
Trade credit:
Trade credit refers to the credit extended by suppliers of goods and services
in the normal course of transaction/ business/ sales.

It is an informal

spontaneous source of finance. Not requiring negotiation and formal

agreement trade credit is free from the restrictions associated with
formal/negotiated source of finance/ credit. It does not involve any explicit
interest charge, however there is an implicit cost of trade credit. As, the cost
of trade credit is generally very high beyond the discount period; the firms
should avail of the discount on prompt payment.
Bank Credit:

37

It is the primary institutional source of working capital finance in India. Banks

in five ways provide working capital finance:
Cash credit/ Overdraft:
Under cash credit/ overdraft form the banks specify, a predetermined borrowing/ credit limit. The borrower can draw/ borrow
upto the stipulated credit/ overdraft limit. This form of bank
financing of working capital is highly attractive to the borrowers
because, firstly, it is flexible in that although the borrowed funds
are repayable on demand, banks usually do not recall cash
advances/ roll them over and, secondly the borrower has the
freedom to draw the amount in advance as and when required,
while

the

interest

liability

is

only

on

the

amount

actually

outstanding. With the emergence of new banking since the mid

nineties, cash credit cannot, at present exceed 20 % of maximum
permissible bank finance/ credit limit to any borrower.
Loans:
Under this arrangement the entire amount of borrowing is credited to the
current account of the borrower or released in cash. The borrower has to pay
interest on the total amount. The loans are repayable on demand or in
periodic installments. They can also be renewed form time to time. As a form
of financing, loans imply a financial discipline on the part of the borrowers.
From the modest beginning in the early nineties, at least 80 % of MPBF/
credit limit must be in the form of loans in India.
Bills purchased/ discounted:
Under this arrangement, a bill arises out of a trade sale-purchase transaction
on credit. The seller of goods draws the bill on the purchaser of goods,
payable on demand or after a usance period, not exceeding 90 days. On
acceptance of bill by the purchaser, the seller offers it to the bank for
38

discount/ purchase. On discounting the bill, the bank releases the funds to
the seller. The bill is presented by the bank to the purchaser / acceptor of the
bill on due date for payment. The bills can also be rediscounted with the
other banks / RBI.
Term loans:
Under this arrangement the banks advance loans for three to seven years
repayable in yearly or half yearly installments.
Letter of credit:
It is an indirect form of working capital financing and banks assume
only the risk, the credit being provided by the supplier himself. The
purchaser of goods on credit obtains a letter of credit from a bank.
The bank undertakes the responsibility to make the payment to the
supplier in case the buyer fails to meet his obligation.
Commercial paper:
Commercial paper is a debt instrument used for short term financing that
enables highly rated corporate borrowers to diversify their sources of shortterm borrowings and provide an additional financial instrument to investors
to a freely negotiable interest rate. The maturity period ranges from three
months to one year. Since it is short-term debt, the issuing company is
required to meet dealers fees, rating agency fees, and any other relevant
charges. It is a short term unsecured promissory note issued by corporations
with high credit ratings.
Inter corporate loans and deposits:
In the present corporate world, it is a common practice that the
company with surplus cash will lend other period for short period
normally ranging from 60 to 180 days. The rate of interest will be
higher than the bank rate of interest and depending on the financial
soundness of the Borrower Company. This source of finance reduces
the intermediation of funds in financing.

39

Public Deposits:
The period of public deposits is usually restricted to a maximum of 5 years at
a time. Thus, this source can provide finance only for short term to medium
term, which could be useful for meeting working capital needs of the
company. It is therefore advisable to use the amounts of public deposits for
acquiring assets of long-term nature unless its pay back period is very short.
Funds generated from operations:
Funds generated from operations during an accounting period increase
working capital by an equivalent amount. The two main components of funds
generated from operations are profits and depreciation. Working capital will
increase by the extent of funds generated from operations.
Deferred tax payment:
Under this arrangement the tax authorities supply the credit. This is created
by the interval that elapses between the earning of the profits of the
company and the payment of the taxes due on them.

Accrued Expenses:
For most firms accrued expenses act as a spontaneous source of short-term
finance. One such example would be that of employees accrued wages. For
large firms, the accrued wages held by the firm constitute an important
source of financing. In case of Raymond Limited, this would amount to wages
and salaries of about 6000 employees and workers.

40

8. STATEMENT OF WORKING CAPITAL

Changes In W-cap
For the year ended

PARTICUL
ARS

Increase

2011

2012

2013

29490.66

28756.59

31904.1
6

24614.52

22627.67

2675.92

1324.83

2011-12

Decrease

2012-13 2011-12

Current
Assets

Inventories

Sundry
Debtors
Cash and
Bank

24846.74
2503.17

41

3147.57

734.07

2219.07

1986.85

1178.34

1351.09

2011-12

Other Current
Assets
Loans and
Advances
Total Current
Assets

1887.79

2277.72

12122.14

12206.35

70791.03

67193.16

89.75

42.17

10491.99

11009.37

449.05

459.52

137.82

207.25

4874.25

5134.95

186.60

484.16

1491.91

1689.99

3315.06
14442.06

389.93

1037.34

84.21

2235.71

77011.19

9818.03

3597.87

2.92

47.58

Current
Liabilities

Acceptances
Sundry
Creditors
Advances
against sales
Due to
Subsidiary

45.09
16427.41
560.35

177.84

517.38

5418.04

10.47

100.83

69.43

29.41

Cos
Deposits
from Dealers

5318.21

260.7

183.26

297.56

641.61

198.08

354.73

and Agents
Overdrawn
Bank
Balances
Other
liabilities
Interest
accrued but

2044.72

528.05
315.87

477.20

Provisions

8373.15

5605.17

Total Current
Liabilities

26410.39

25109.78

Net Working Capital

44380.64

42083.38

not due

1125.67

161.33

6770.84
26227.34
50783.85

50.85

1165.67

2767.98

1117.56

1300.61

8700.47

(CA CL)

42

2297.26

. INVENTORY MANAGEMENT
Inventory refers to the stock of products a firm is offering for sale
and the components that make up the product. It includes raw
materials;

work

in

process

(semi-finished

goods).

Managing

inventory is a juggling act. Excessive stocks can place a heavy

burden on the cash resources of a business. Insufficient stocks can
result in lost sales, delays for customers etc. The key is to know how
quickly the overall stock is moving or, put another way, how long
each item of stock sit on shelves before being sold. Obviously,
average stock-holding periods will be influenced by the nature of
the business.

Inventory Financing:
As with accounts receivable loans, inventory financing is a secured loan, in
this case with inventory as collateral. However, inventory financing is more
difficult to secure since inventory is riskier collateral than accounts
receivable. Some inventory becomes obsolete and looses value quickly, and
other types of inventory, like partially manufactured goods, have little or no
resale value.

43

Firms with an inventory of standardized goods with predictable prices, such

as automobiles or appliances, will be more successful at securing inventory
financing than businesses with a large amount of work in process or highly
seasonal or perishable goods. Loan amounts also vary with the quality of the
inventory pledged as collateral, usually ranging from 50% to 80%. For most
businesses, inventory loans yield loan proceeds at a lower share of pledged
assets than accounts receivable financing. When inventory is a large share of
a firms current assets, however, inventory financing is a critical option to
finance working capital.

Lenders need to control the inventory pledged as collateral to ensure that it

is not sold before their loan is repaid. Two primary methods are used to
obtain this control: (1) warehouse storage; and (2) direct assignment by
product serial or identification numbers. Under one warehouse arrangement
pledged inventory is stored in a public warehouse and controlled by an
independent party (the warehouse operator).
A warehouse receipt is issued when the inventory is stored, and the goods
are released only upon the instructions of the receipt-holder. When the
inventory is pledged, the lender has control of the receipt and can prevent
release of the goods until the loan is repaid. Since public warehouse storage
is inconvenient for firms that need on-site access to their inventory, an
alternative arrangement, known as a field warehouse, can be established.
Here, an independent public warehouse company assumes control over the
pledged inventory at the firms site. In effect, the firm leases space to the
warehouse operator rather than transferring goods to an off-site location. As
with a public warehouse, the lender controls the warehouse receipt and will
not release the inventory until the loan is repaid.

44

Direct assignment by serial number is a simpler method to control inventory

used for manufactured goods that are tagged with a unique serial number.
The lender receives an assignment or trust receipt for the pledged inventory
that lists all serial numbers for the collateral. The company houses and
controls its inventory and can arrange for product sales. However, a release
of the assignment or return of the trust receipt is required before the
collateral is delivered and ownership transferred to the buyer.
This release occurs with partial or full loan repayment. While inventory
financing involves higher transaction and administrative costs than other
loan instruments, it is an important financing tool for companies with large
inventory assets.
When a company has limited accounts receivable and lacks the financial
position to obtain a line of credit, inventory financing may be the only
available type of working capital debt. Moreover, this form of financing can
be cost effective when inventory quality is high and yields a good loan-tovalue ratio and interest rate.
Factors to be considered when determining optimum stock levels
include:
What are the projected sales of each product?
How widely available are raw materials, components etc.?
How long does it take for delivery by suppliers?
Can the company remove slow movers from their product range
without compromising best sellers?
It should be noted that stock sitting on shelves for long periods of time ties
up money, which is not working.
For better stock control, the following may be considered:

45

 Review the effectiveness of existing purchasing and inventory systems.

Know the stock turn for all major items of inventory.
Apply tight controls to the significant few items and simplify controls
for the trivial many.
Sell off outdated or slow moving merchandise - it gets more difficult to
sell the longer the company keeps it.
Consider having part of the companys product outsourced to another
manufacturer rather than make it yourself.

The inventory of a manufacturing concern usually includes:

Raw material
Work-in-Progress
Finished goods

Inventory management at Raymond India Ltd.:

The inventory of Raymond ltd. includes the following:
Raw material
Work-in-Progress
Stores and Spares
Finished goods.

46

The table below gives a brief description of all the types of inventory, the
components included, the valuation methods Followed and other relevant
details:
Particulars

Raw Material

Component
s

i. Wool (Australia)
(Fine micron, coarse)

WIP

Finished Goods

__

Fabric

ii. Polyester
(Reliance Ltd.)

Stores
& Spares

Oils,
Lubricants
etc.

iii. Viscose (Locally)

iv. Yarn (RSM)
(Rajasthan)
v. Camel hair
(Locally)

At its peak

Valuation
Method

Value as in
March 2013
(Rs.Crores)

Managed by

vi. Soya bean fiber

(Locally)
Fine micron-July
and
Stored for the entire
year

Specific Identification

Weighted
Average

20

68-70

Production
&
Planning dept.

Production
&
Planning
dept.

47

Wedding and festive

Seasons.
Stable: AprilAugust
And Dec-Jan.
Weighted Average
Cost or market
value
Whichever is less.
110
(In accordance with
AS-2
Including Excise
duty)
Production and
Planning
Dept, Warehouse
dept & Marketing
dept.

Weighted
Average

8-9

Raw material:
Wool: Tops of around 19microns and less are seasonally imported and of
around 21, 22,and 24 microns are imported throughout the year. The
ordering of the raw materials depends on the landing cost, which is the
product of the following: Price, availability, and exchange rate fluctuations.
The company gets 0.5 to 2.5% cash discount while purchasing the raw
material.
The maximum demand is during the festive and wedding season, i.e. from
the month of October onwards. The production time being 2-2.5 months, the
lead-time (the time from when the order is placed to when the material stock
is actually received) being 2 months, the inventory is accordingly ordered in
the months of June July and stored for the entire year.
It is expected that the company should maintain 100% raw material
inventory as it accounts for only 27%(approx.) Of the ex-mill price which
turns out to be around Rs. 18-20 crores. The company maintained safety
stock costing Rs. 27 crores for the year ended March 2006. For example, for
wool it was 35 days and for polyester it was 40 days.
The pricing policy of the raw materials

is done by specific

identification method, in which the raw material stock is imported,

consignment wise and the stock identification is done in the form of
lots. There are no standards or norms followed by the company in
specific, as fluctuations dominate the market.

48

Work-in-progress:
The work-in process inventory for the company is fairly stable throughout the
year at Rs. 68-70 crores with a minor fluctuation of around Rs. 2-3 crores.
This is mainly as the following mentioned factors are more or less constant
throughout the year:
Machine efficiency
Loading
Flow
Finished goods:
The finished goods inventory at the company is very volatile. The production
is more or less in stock during the period April August and starts depleting
somewhere in the months of September / October, it again starts picking up
in the months of December / January (which is the peak). Exports are more or
less constant, though there the predominant exports are in the months of
April July.

49

Ratios:
Ratio used for
evaluation

Inventory
Turnover
ratio
(Times)

Formula used

Ratio for the financial year

ended
2013

2012

1.34

3.43

2011

COGS
Average Inventory

Inventory
Period
(Days)

365
Inventory Turnover Ratio

272

106

Current Ratio

Current assets, loans and advances

Current liabilities and provisions

2.33

2.68

2.84

129

2.68

Interpretation:

Inventory Turnover ratio:

This ratio measures the number of times a companys inventory is
turned over in a year. A high turnover ratio is considered good. From
working capital point of view, a company with a high turnover requires a
smaller investment in inventory than one producing the same sales with a
low turnover.

50

This ratio indicates managements efficiency in turning over the companys

inventory, which can be compared with other companies in the same field. It
also suggests how adequate a companys inventory is for its business
volume.
There is no standard yardstick for this ratio since inventory turnover
rates, vary from industry to industry. If a company has an inventory
turnover rate thats above average for its industry, it will generally
mean that a better balance is being maintained between inventory
and sales volume. So there will be less risk of
Being caught with a top-heavy inventory position in the event of a
decline in the price of raw materials, or in the market demand for end
products, and
Wastage through materials and products standing unused for longer
periods than anticipated with consequent possible deterioration in
quality and/or marketability.
On the other hand, if inventory turnover is too high compared to
industry norms, problems could arise from shortages in inventory,
resulting in lost sales. Since much of a companys working capital is
usually tied up in inventory, how the inventory position is managed
has an important and direct effect on earnings.
For Raymond Ltd. the inventory turnover ratio has increased from 2.84 times
(2004) to 3.43 times (2005), but showed a major decline in the year 2005-06
indicating that inventory management has to be taken due attention. But the
decline in the inventory turnover ratio could be attributed to many reasons
and not just poor inventory management.

51

Inventory Period had shown a downward trend from 129 days (2004) and 106
days (2005) corresponding to then increase in the inventory turnover period
in the same period. But there is major variation to the earlier years. In the
year 2006 the inventory period has increased tremendously from 106 days in
2005 to 272 days in 2006. This is also supported by the decline in the
inventory turnover ratio to a meager of 1.34 times in 2006. Since the
company is a textile industry therefore the inventory varies according to
seasonal and festive demands.
Current ratio:
The current ratio is a reflection of financial strength. The current ratio
measures the ability of the firm to meets its current liabilities- current assets
get converted into cash and provide the funds needed to pay current
liabilities. A current ratio can be improved by increasing current assets or by
decreasing current liabilities. Steps to accomplish an improvement include:
Paying down debt.
Acquiring a long-term loan (payable in more than 1 year's time).
Selling a fixed asset.
Ploughing back profits into the business.
A high current ratio may mean that cash is not being utilized in an optimal
way. For example, the excess cash might be better invested in equipment.
The higher the current ratio, the greater the margin of safety, the larger the
amount of current assets in relation to current liabilities, the more the firms
ability to meet its current obligations.
The current ratio for Raymond Ltd. was 2.68:1 in 2004. The current
ratio stood at 2.68:1 for the year ended 2005.If we compare current
ratio of 2005 with 2004,we can see that the percentage of the ratio
remains same for both years but here cash bank balance has
52

decreased by 51%. Other current assets have increased by 20.6%

compared with 2004. And provisions has decreased by 33.05%,
current liabilities so the current ratio for both the years has
remained constant i.e. 2.68:1.
When one sees the changes in assets, cash and bank balance has
increased tremendously by 79.07 %. This is because company has
received prompt payments from debtors. Other current assets have
decreased by 25%. This is because company received less interest
and dividend in the year 2004 than in the year 2003.
The overall decrease in earning of interest and dividend was 70%. The
Current Liabilities, provisions have increased by 22.42 %. This is because the
provision made by the company such as proposed dividend, tax on
dividends, retirement benefits and excise duties has increased by 22%.
But the current ratio has decreased from 2.68:1 (2005) to 2.33:1 in
the year 2006.
This is the result of the changes in current assets and current liabilities or
changes in the working capital. Current assets comprises of Inventory,
Debtors, Cash & Bank balances, Other Current Assets and Loans & Advances.
The percentage of inventory held by Raymond ltd. Increased by 10%, which
is evident form the decline in the inventory turnover ratio and the increase in
the inventory period. Debtors have increased by 7% compared to the
previous year. That means sales and marketing efforts needs a push because
inventory is pilling up. Inventory has increased and so has the debtors.
Cash and bank balances have increased drastically by 88% in 2006 as in the
year 2005. Attention has to be paid to the increase in the amount of cash
balances. Other current assets have also increased by 45.54%. Loans and
53

advances have also increased by 37.35%. Thus the overall current assets
have increased by 17.57%. Dividend and interest subsidy receivable has
increased as compared to the last year.

10. CASH MANAGEMENT

There are four primary motives for maintaining cash balances.
Transactions Motive - to meet payments arising in the ordinary course of
business.
Speculative Motive

- to take advantage of temporary opportunities

Precautionary Motive - to maintain a cushion or buffer to meet

Unexpected cash needs
Compensating motive - Hold cash balances to compensate banks for
providing certain services and loans.
The basic objectives of cash management are:
To meet the cash disbursement needs.
To minimize funds committed to cash balances.
These are conflicting and mutually contradictory and the task of cash
management is to reconcile them.
Cash Management Techniques:
The strategic aspects of efficient cash management are:
Efficient inventory management
Speedy collection of accounts receivables
Delaying payments on accounts payable.

54

There are some specific techniques and processes for speedy collection of
receivables from customers and slowing disbursements.

55

Speedy Cash Collections:

Expedite preparing and mailing the invoice
Accelerate the mailing of payments from customers
Reduce the time during which payments received by the firm remain
uncollected
Prompt payment by customers
Early conversion of payments into cash.
Concentration Banking
Lock Box System
Slowing disbursements:
Avoidance of early payments
Centralized disbursements
Float
Paying from a distant bank
Cheque encashment analysis
Accruals (goods and services accrued but not paid for)

Cash Management At Raymond Ltd:

For early conversion of its receivables into cash, some of the
incentives offered by Raymond Ltd for early payment are as under:
Cash discounts for payment made within the due period.
Bonuses given to the party vary with the volume as well as value of
sales.
One-third of advertising expenses of retailers and franchisees are
borne by the company.

56

Raymond ltd. has invested about Rs. 600 crores (approx.), which stands as
their core investment. In order to diversify its risk the company has
invested this amount in various instruments including Mutual funds, debt
instruments, corporate deposits, equity markets, etc.
Amongst others alternatives the company prefers to invest an amount of
Rs.2-5

crores

(or

the

adjusted

amount

after

considering

the

daily

requirements) in mutual funds on a daily basis (temporary investment) and

play safe with their core investment amount. Another reason for this decision
is the tax-free dividend income (5%-6%) earned by investing in Mutual
funds.
Raymond Ltd. generally experiences surplus profits. Om Kotak Mahindra
ltd., DSP Meryll Lynch are the chief corporate advisors for the
company. However the Board of Directors takes the final decision. One such
decision taken by the B.O.D includes that the companys investment in the
equity market should not exceed Rs.50 crores (keeping the volatility of the
stock markets in mind).
Finally, it can be seen that the Average Rate of Return on Investment is
5%-6%. All the decisions regarding investments and cash management are
looked after by the Finance Department (Corporate division).

57

Ratios:
Ratio used for
evaluation

Formula used

Ratio for the financial year

ended
2011

Cash Ratio

Cash & Book Balances + Current

Investments
Current Liabilities

Sales to Cash
Ratio

Sales_

1.73

2012
2.46

2013
2.35

51.34

84.19

37.15

17.72

18.68

22.75

Cash
Cash Profit
Ratio

Cash Profit
Sales

* 100

Notes:
In all the calculations involving Net Sales, the amount is taken net of excise
duties paid.
Net sales = Net sales Excise duty

(Rs. In lakhs)
Particulars

2011

2012

2013

Net sales
(Net of
excise)

132275.
51

111534.4
4

99431.64

58

Cash Profit:
Cash

Profit

Profit

available

for

appropriation

Depreciation

Miscellaneous Expenditure written off

Interpretation:
Cash Ratio:
The cash ratio measures the extent to which a corporation or other entity
can quickly liquidate assets and cover short-term liabilities, and therefore is
of interest to short-term creditors. It is also called liquidity ratio or cash asset
ratio. This ratio is the most stringent measure of liquidity. However, it
can be argued that lack of immediate cash may not matter if the firm
can stretch payments or borrow money at short notice.
Cash ratio for Raymond Ltd. increased from 2.35:1(2011) to 2.46:1
(2012). The major reason for this burst in the increase in the current
investments and sales amount by 12% in the year 2012 as compared
to 2012, though there was a decline in the cash and bank balances.
The other reason being the decrease in the current liabilities.
For the year ended 2012, the cash ratio is 2.46 and in 2011 it was 2.35 so
net result is slight increased by 17.45%. This sudden jump in the ratio
occurred because of the slight increase in the current investments (increased
by 1.58%). Another reason for this may be attributed to a certain extent to
the decrease in the current liabilities (15.44 % decline).
For the year ended 2012-2013, the cash ratio has fallen from
2.46:1(2012) to 1.73:1 in 2013. Current investments have not
fluctuated as compared to the earlier year.

59

Increase in the current liabilities by 1117.56 lakhs can also be attributed to

the fall in the cash ratio. Sales have registered an increase of 15%. The
increase in the current liabilities is much more than the increase in the
current assets, hence there is a decline in the cash ratio.
Sales to cash ratio:
This ratio indicates efficient utilization of cash input in achieving the
sales generated.

Sales to cash ratio increased during the period

2011-12 due to decrease in cash and bank balance by 51%, thereby

increasing the overall ratio from 37.15% (2011) to 84.19% (2012).
But it has shown a downward decline in 2013 to 51.34%.
The cash and bank balances have increased by 88% as compared to the year
2012. Sales have increased by 15%. Hence as the increase in the sales is not
at par with the increase in the cash and bank balances the ratio has been
negatively affected. Hence better cash management is needed at Raymond
ltd. The extra money could be utilized to push sales and to pay the increase
in the current liabilities.
Cash Profit ratio:
Cash profit ratio measures the cash generation in the business as a
result of the operations expressed in terms of sale. The cash profit
ratio is a more reliable indicator of performance, where there are
sharp fluctuations in the profit before tax and net profit from year
to year owing to difference in depreciation charged. This ratio
evaluates the efficiency of operations in terms of cash generation
and is not affected by the method of depreciation charged. It also
facilitates inter-firm comparison of performance since different
companies may adopt different methods of depreciation.

60

11. RECEIVABLES MANAGEMENT (DEBTORS)

Cash flow can be significantly enhanced if the amounts owing to a
business are collected faster. Every business needs to know.... who
owes them money.... how much is owed.... how long it is owing....
for what it is owed.

Late payments can erode profits and lead to bad debts

Slow payment has a crippling effect on business. If you don't
manage debtors, they will begin to manage your business as you
will gradually lose control due to reduced cash flow and, of course,
you could experience an increased incidence of bad debt.
The following measures will help manage your debtors:
Have the right mental attitude to the control of credit and
make sure that it gets the priority it deserves.
Establish clear credit practices as a matter of company policy.
Make sure that these practices are clearly understood by staff,
suppliers and customers.
Be professional when accepting new accounts, and especially larger
ones.
Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
61

 Establish credit limits for each customer... and stick to them.

Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
Keep very close to your larger customers.
Invoice promptly and clearly.
Consider charging penalties on overdue accounts.
Consider accepting credit /debit cards as a payment option.
Monitor your debtor balances and ageing schedules, and don't let any
debts get too large or too old
For example.........
Longer credit terms taken with approval, particularly for smaller orders.
Use of post-dated cheques by debtors who normally settle within
agreed terms.
Evidence of customers switching to additional suppliers for the same
goods.
New customers who are reluctant to give credit references.
Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many
reasons and therefore put on the long finger because they convince
themselves there is something more urgent or important that demands their
attention now. There is nothing more important than getting paid for your
product or service. A customer who does not pay is not a customer.

62

Here are a few ideas that may help you in collecting money from
debtors:
Develop appropriate procedures for handling late payments.
Track and pursue late payers.
Get external help if your own efforts fail.

Don't feel guilty asking for money.... its yours and you are entitled to
it.

Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for
the remainder. It lessens the problem.
When asking for your money, be hard on the issue - but soft on the
person. Don't give the debtor any excuses for not paying.
Make it your objective is to get the money - not to score points or get
even.

Accounts Receivable Financing:

Some businesses lack the credit quality to borrow on an unsecured basis and
must pledge collateral to obtain a loan. Loans secured by accounts
receivable are a common form of debt used to finance working capital. Under
accounts receivable debt, the maximum loan amount is tied to a percentage
of the borrowers accounts receivable. When accounts receivable increase,
the allowable loan principal also rises. However, the firm must use customer
payments on these receivables to reduce the loan balance. The borrowing
ratio depends on the credit quality of the firms customers and the age of the
accounts receivable.
A firm with financially strong customers should be able to obtain a loan equal
to 80% of its accounts receivable. With weaker credit customers, the loan
may be limited to 50% to 60% of accounts receivable. Additionally, a lender

63

may exclude receivables beyond a certain age (e.g., 60 or 90 days) in the

base used to calculate the loan limit.

Receivables (Debtors) Management At Raymond:

At Raymond Ltd. the sales process is as follows:

Raym

AGENT (ONE)

DEALERS

WHOLESELLER
S
(180)

RETAILERS
(1200)

FRANCHISEES

(300)

ond has one agent for each area (state). These agents are the delcredere
agents, and receive commission of up to 2.5 % to 4% (approx). The amount
of commission however varies according to the quality as well as the
quantity of the goods. Under these agents are the various dealers,
wholesalers, retailers and franchisees.
The amount invested by the wholesalers is 4 crores and above,
therefore they are given more credit. Whereas, franchisees invest 1
to 3 crores. Retailers on the other hand invest less as compared to
wholesalers and franchisees. Retailers pay to the company either

64

directly or through the bank dealers (250 in number). In case of

direct payments the company keeps 12.5% as advance deposits. In
case of payment through bank dealers factoring service is being
used.
The bills would be earlier discounted with the various banks. These banks
included amongst others, a few Nationalized Banks, UTI, Standard Chartered,
Bank Of India, etc. The payments are usually in the form of demand drafts or
cheques. Almost 50 % of these payments are received through CMS (Cheque
Management Services), and as this facility is obtained free of cost from UTI
bank the company is availing it to its maximum possible benefit. This
definitely very much in favors of the company as it reduces the delay in
collections, as it would otherwise take at least 10 days for the transactions
without the facility.
The company has now started using the factoring service.
The main factoring agents with which the company deals include:
HSBC Bank
Standard Chartered Bank
UTI Bank.
Kotak Mahindra Bank
At present Raymond is using the factoring services for its 15
parties, which are as follows:
B.R. Textiles
Motilal Vijaysain
Pokarna Fabrics Pvt. Limited
R.S. Textiles
Woollen Collections
Shyam Brothers
Kamdev
Pushpak
Rahul Textiles

65

 Varun Textiles
Shantilal Raichand
Sha Shantilal Manshalal

The services without recourse (single channel financing) are availed

from the following banks:
ABN AMRO Bank,
CENTURION Bank,
HSBC Bank,
ICICI Bank.
The credit period given by Raymond Ltd. [(as not due)- for MIS
purpose]:
Retailers

- 16 days

Franchisees
Collections
Wholesalers

- 45 to 60 to 90 days.

Disbursements
- 60 to 90 dayThe provision regarding bad debts is not thought as very

essential as the company as never had any bad debts till date; this is attributed to the credit policy
as well as the collection policy of the company.

Marketable securities
Investment

CONTROL THROUGH INFORMATION

REPORTING
= Funds Flow

= Information Flow
66

Ratios:
Ratio used
for
evaluation

Debtors
Turnover
Ratio
(times)
Credit
Period

Ratio for the financial

year ended

Formula used

Net Sales
Avg. Debtors

365

2011

2012

2013

5.50

4.72

3.70

66

77

99

Debtors Turnover Ratio

Interpretation:
Debtors Turnover Ratio:
The debtors turnover ratio has been gradually increasing over the years
from 2011 to 2012, from 3.70 to 4.72 respectively. This indicates that the
credit period has declined from 99 days (2011) to 77 days (2012). This
implies that for the year ended 2012 debtors on an average are collected in
a period of 77 days. A turnover ratio of 4.72 (2012) signifies that debtors get
converted into cash (4.72) approximately 5 times in a year.

67

Raymond Ltd. is a cash rich company. The liberal policy is adopted

to augment its sales thereby not losing its key customers. It is
suggested that the company should adopt stringent credit practices
for its debtors thereby, having more funds at its disposal for
investments as well as for daily operating requirements and thus
saving on the interest costs. In order to keep up with the industry
credit standards Raymond Ltd. has been gradually reducing its
credit period.
For the previous year the debtors turnover ratio has increased by almost 28
% from 3.70 to 4.72 thereby reducing the collection period to a meager 77
days. The debtors turnover ratio has improved further in 2013 as it has
increased to 5.50 times. Hence as an effect of the increase in the debtors
turnover ratio, there is a significant improvement in the credit period as it
has reduced to 66 days from 77 days.

68

. SUGGESTIONS
.Working capital of the company has increasing every year. Profit also increasing every year this
good for the company. It has to maintain it further, to the business long term.
.The current and quick ratio are almost up to the standard requirement. So the working capital
management. Raymond Ltd. Is satisfactory and it has to maintain it further.

.RECOMMENDATION

The goal of working capital management is to ensure that a firm is able to

continue its operations and that it has sufficient ability to satisfy both
maturing short-term debt and upcoming operational expenses.
Cash management:
Approaches to Working Capital Management:
.
Working capital management takes place on two levels:
Ratio analysis can be used to monitor overall trends in working capital
and to identify areas requiring closer management.
The individual components of working capital can be effectively
managed by using various techniques and strategies.

69

The main purposes of working capital ratio analysis are:

To indicate working capital management performance; and
To assist in identifying areas requiring closer management.
Three key points need to be taken into account when analyzing
financial ratios:
The

results

are

based

on

highly

summarized

information.

Consequently, situations, which require control, might not be apparent,

or situations, which do not warrant significant effort, might be
unnecessarily highlighted.
Different departments face very different situations. Comparisons
between them, or with global "ideal" ratio values, can be misleading.
Ratio analysis is somewhat one-sided; favorable results mean little,
whereas unfavorable results are usually significant.

70

.LIMITATION
.Department heads were busy so time for interaction was less.
.The entire financial of the company cannot be disclosed.
.Company provides only secondary data, so certain type of bias is in study.
.Majority of the raw materials is purchased by the main head office, so more detailed
information cannot be received about these.

71

14.BIBLIOGRAPHY

Annual report of Raymond Limited for 2012-13

Financial Management, Tata McGraw-Hill

Publishing Company

Limited, Third Edition.

Paper on working capital finance by Seidman.
Financial Management- Theory and Practice, Tata McGraw-Hill
Publishing Company Limited, Fifth Edition.

Working Capital management-by Hrishikesh Bhattacharya.

www.bseindia.com
www.economictimes.com
www.financemaster.com
www.indiainfoline.com
www.moneycontrol.com
www.raymondindia.com

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73