SUMMER TRAINING PROJECT REPORT

Undertaken at
CMI Limited Faridabad

Submitted In Partial Fulfilment of the Requirement

for the Award of the Degree Of

MASTERS OF BUSINESS ADMINISTRATION

By
Sandeep kumar
09MBA 52
09-6211

Under the supervision of

V. K. Gupta
Director marketing

CENTRE FOR MANAGEMENT STUDIES

Jamia Millia Islamia, New Delhi – 110025

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 DECLARATION

I Sandeep Kumar , a bonafide Student of MBA ( Full Time) programme at the Centre
for Management study jamia milia islamia, New Delhi, hereby declare that the I have
undergone the summer training project at CMI limited under the supervision of Mr.
V.K Gupta on and from 20th may 2010 to 20th July 2010

I also declare that the present project report is based on the above summer training and
is my original work. The content of this project report has not been submitted to any
other university or institute either in part or in full for the award of any degree or
fellowship.

Further, I assign the right to the university, subject to the permission from the
organization concerned, use the information content of this project to develop cases,
caselets, case leads and paper for publication and/or for use of teaching.

Place: New Delhi Sandeep Kumar

Date: 09 MBA 52

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 CERTIFICATE

This to certify that Sandeep Kumar has completed his Summer Training Project
under my direct supervision. He underwent the Summer Training on and from 20-05-
2010 to 20-07-2010, during which he was assigned the task of , “WORKING
CAPITAL MANAGEMENT”, which he has successfully completed and the same is
presented in the form the present Project Report.

It is further certified that the project report submitted by Sandeep kumar reflects his
original work and based on the work assigned to him for the Summer Training and
that the present project report has not been submitted elsewhere for award of any
degree, diploma or fellowship.

Signature of supervisor

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 PREFACE

Summer training is an essential part of any professional study. It introduces the students to
the real world in which he/she is going to step in after his/her professional studies.
Summer training introduces the student to the industry and tells him/her about the job
aspects in the near future when he/she is about to leave the college for a job.
My project titled WORKING CAPITAL MANAGEMENT
Working capital, or WC, is a financial metric which represents operating liquidity
available to a business. Along with fixed assets such as plant and equipment, working
capital is considered a part of operating capital. It is calculated as current assets minus
current liabilities. If current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit.

The need of working capital arises due to time gap between production and realization
of cash from sales. There is an operating cycle involved in the sales and realization of
cash. 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.

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 ACKNOWLEDGEMENT

I am indebted to my institute CMS, Jamia Millia Islamia to have given me this

wonderful opportunity of acquiring knowledge out of books and face real challenge in
the corporate world by the means of that project in the academic period.

I have a great pleasure in submitting my project report regarding “WORKING

CAPITAL MANGEMENT” in CMI Limited Faridabad.

First and foremost, I express my sincere gratitude towards B.K chopra for giving me
an opportunity to do my SUMMER TRAINING in CMI LIMITED and sparing his
valuable time for providing me guidance and feedback at regular intervals.

I would like to give my hearty regards to Arun singhal for their appreciable guidance
in completion of my project.

For the present observation and study I have concerned a number of persons and
information sources. I am obliged to all those who have provided me necessary and
valuable information.

I also pay special thanks to my friends, colleagues and all staff members of CMI LTD
for providing me required data to my project.

(SANDEEP KUMAR)

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 TABLE OF CONTENTS

Title Page……………………………….…………………………………………
Declaration..................................................................................................
Acknowledgement…………………….………………………………..
Preface…………………………………………………………………………
Objectives of Study…………………………………………………………………
Research methodology…………………………………………………………
Company profile……………………………………………………….
Introduction to Working capital…………………………………….....
Need and Determinants…….………………………………………......
Financial statements…………………………………………………....
Operating cycle ……………………………………………………..
Ratio Analysis………….……………………………………..………
Inventory Management………….……………………………………..
Cash Management………………………………………………….....
Financing of working Capital…………………………...……………..
Conclusion…………………………………………....………………
Suggestions…………………………………………………………...
Bibliography…………………………………………………………….
Questionnaire……………………………………………………………...

Limited (COMPANY PROFILE)

COMMUNICATION AND CABLING SOLUTION

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CMI was incorporated in 1967. CMI (originally known as chaudhary metal industries)
were engaged in copper metal trade and copper melting and rod casting. CMI’s
founding father is sh. Shantilal choudhary. From copper it diversifies to cables. The
company started to manufacturing PVC switch board cables control cables screened
cables FRLS cables and data transmission cables etc. since 1980. In addition to above
the company started manufacturing of polyethylene insulated jelly filled telephone
cables quad cables and aerial cables since 1986 and was supplying cable to various
customer including DoT, Defence railways and other project both in public and private
sectors. The jelly filled telephone cables were added in product range in 1993.
Now CMI limited has production facilities for high quality of JFTC and PVC cables
with all the infrastructure required for the measuring the quality parameters
CMI is an ISO 9001 company enjoying the goodwill of the market and customers. the
ISO certificate was awarded in year 1998-99

ORGANIZATION STRUCTURE

CHAIR PERSON

MANAGING
DIRECTOR
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 DIRECTORS

GENERAL
MANAGER

MANAGERS

EXECUTIVES

GENERAL STAFF

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 CUSTOMERS OF CMI LIMITED

 Telecom Industry
 BSNL
 Department of Telecommunication
 Himachal Futuristic Communication Ltd.
 Himachal Infotel
 Hutch Tel
 Indian Telephone Industries Ltd.
 MTNL
 Reliance Infocom
 Tata Teleservices Ltd.
 Telecommunication Corporation of India Ltd.

 Railways
 Delhi Metro Rail Corporation
 Indian Railways all units
 IRCON
 IRAN Railways
 RITES
 Konkan Railways
 MRVCL
 Locomotive works Chitranjan, Kapurthala
 Railway contractors like Kalindee Rail Nirman,
Durga Construction, ARTEK Enterprises, Bharat rail,
etc etc

 Space & Research

 ISRO
 LPSC
 Satish Dhawan Space Centre / SHAR
 Vikram Sarabhai Space Center

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 Petrochemicals & Fertilizers
 Cochin Refineries Ltd.
 Engineers India Ltd.
 Gas Authority of India Ltd.
 Gujrat State Fertilizers Ltd.
 Indian Oil Corporation Ltd.
 Indian Petrochemicals Ltd.
 Larsen & Toubro Ltd.
 Manali Petrochemicals Ltd.
 Reliance Petrochemicals
 Cochin Petrochemicals Ltd
 Bharat Oman Refinery
 MRPL
 HPCL
 IFFCO

 Power / Energy
 Bharat Heavy Electricals Ltd. Various units PEM
Noida, Ranipet, ISG Bangalore, EDN Bangalore,
Hardwar
 Electricity Boards of States
 National Thermal Power Corporation
 Nuclear Power Corporation
 Tata Electric Companies

 Steel Industry
 Lloyds Steel Industries Ltd.
 Steel Authority of India
 Tata Iron Steel Co. Ltd.
 Vishakapatnam Steel Ltd.

 Computer & High Frequency Transmission

 Bharat Electronics Ltd.
 Electronics Corporation Ltd.
 Instrumentation Ltd.
 Siemens Ltd.

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 EPCC Contractors
 Indian Oil Tanking Ltd.
 Technip KT India Ltd.
 Linde Technologist Vadodra
 Jacobs
 Lurgi
 UHDE
 Motorola
 Thales Securities
 G. S. Engineering
 Carrycon India
 Larsen & Tuobro Ltd various offices
 CHEMIN India Ltd

CMI has also supplied cables to various sectors under different financing
patterns, such as, IDA and IBRD funding, OECD financed projects and other
bilateral loan arrangements.
The demand for CMI cables is diversified. Right from Heavy vehicles to
underground metro rail systems, from telecommunication to satellite launching,
from heavy petrochemical plants and oil refineries to power stations, from
irrigation to ship building and oil rigs. There is hardly any sector left uncovered.

ON EXPORT FRONT

CMI has executed prestigious job of Railway Signaling 27 stations in Iran and
supplied all types of special Signalling cables in association with IRCON – INDIA.

CMI has already exported its products to USSR, Malaysia, Dubai, Middle East,
Europe, Bangladesh, Nepal, Tanzania, Zambia & Iran.

PRODUCTS

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12
13
PIJF Cables

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Railway Cables

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Instrumentation and Data Cables

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18
Power Cables

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Special Customized Cables

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21
 IN HOUSE PLANT & MACHINERY

 For Copper / Aluminium Drawing

 Complete wire drawing from Rod Break down to Fine

wire drawing
 Wire Tinning by Hot Dipp process for medium Gauge &
Fine wire

 PVC / PE Extrusion-
 Extruders of various sizes with complete Payoff / take up, cooling trough,
computerized control panel, Cable spark testers etc.etc.
 One 120 mm
 Five 65 mm
 One 65 mm along with one 45 mm bicolour extrusion
 One 45 mm
 One Tandom line equipped with annealed wire drawing from 2 mm &
computer controlled extruder of 65 mm having dual take up

 Pair / Triad Screening

 Number of machines for screening by Al/mylar or copper tape
 Screening by braiding process

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 For Cable laying & armouring
 24 / 36 / 48 wire cable laying cum wire / strip armouring with anti twisting &
anti torsion set up
 Four numbers of Double Steel tape armouring machines
 Four numbers of Quadding achines of Mallifer made
 Two Group Twinners for pair cables for PIJF telecom cables
 36” & 62” & 80” drum twisters for cable laying

 For Jelly Filling

 High Pressure jelly filling set up for filling Jelly in cables

 Other basic infra structure

 Water Chillers, Fork Lifts of various capacities, Over head Electric Cranes,
Diesel Generators of different capacities to generate 1400 KW electric power
besides HSEB power supply of equivalent capacity.
 Covered / Uncovered Storage capacity to store about 500 drums
 In house maintenance department

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 IN HOUSE TESTING FACILITY

 For Flame Characteristics :-

 Oxygen Index Test Setup

 Temp. Index Test Setup
 Smoke Density Rating Test Setup
 Acid Gas Generation Test setup
 Flammability Test Setup (for Bunched cable)
 Swedish Chimney Test Setup
 Flammability Test Setup (for Single Cable)
 Light Transmittance Test Setup

 For Electrical Characteristics :-

 Computer Test Setup for Electrical Properties.
 Capacitance Unbalance Test Equipment
 Impedance Test Equipment
 Attenuation Test Equipment
 Cross Talk Test Equipment
 Conductor Resistance Test Equipment
 High Voltage Test Setup for AC & DC
 Insulation Resistance Test Equipment
 Noise Rejection Test Equipment
 Reduction Factor Test Setup
 Inductance Test Setup
 Spark Test Setup

CMI Limited
 For Environment Characteristics :-
 Colour Fastness to water Test Setup
 Environmental Stress Cracking Resistance Test Setup
 Ultra Violet test Setup as per ASTM G53
 Colour Fastness to Day light Test Setup

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  Conditioning chamber
 Cold Bend Test Setup for testing up to -40P0P C.
 Cold Impact Test Setup

 For Mechanical/ Chemical Characteristics :-

 Digital Weighing Balance of least count 0.1mg
 Heating Oven
 Ageing Oven
 Tensile Tester
 Melt Flow Index Test Setup
 Oxygen Index Test Setup (OIT)
 Carbon Black Content Test Setup
 Carbon Black Dispersion Test Setup
 Thermal Stress Cracking Test Setup
 Bleeding Blooming Test Setup
 Hot Deformation Test Setup
 Shrinkage Test Setup
 Thermal Stability Test Setup
 Profile Projector
 Stability Test Setup of Jelly
 Flash Point Test Setup for Jelly
 Drop Point Test Setup for Jelly
 Drip Test Setup
 Absorption Test Setup
 Viscat Softening Point Test Setup
 Digital Micrometer
 Digital Varnier
 Dial Micrometer
 Annealing Test Setup
 Mass of Zinc Coating Test Setup
 Uniformity of Zinc Coating Test Setup
 Winding Test Setup

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 OBJECTIVES

The basic objective behind this project is to provide an analytical overview of

“Working Capital Management” at the CMI Limited by bringing into use various
theoretical tools & skills which have been studied. This include studying & analyzing
various financial data over a period of 3 years with the aim of gaining useful insight
into skill needed for the controlling the movement of working capital. It also includes
suggestions & comments to improve specific areas of weakness.

Specific Objective:

The broad areas that have been analyzed are as follows:

1. OPERATING CYCLE:

The operating cycle of the unit has been calculated for the past 3 years with the aim of
studying trends & commenting on the efficiencies achieved & the inefficiencies that
have developed.

2. RATIO ANALYSIS:

The ratios calculated & analyzed have been broadly divided under four parameters
a) Ratio to analyze the liquidity position.

b) Profitability ratios.

c) Ratio to calculate the efficiency of working capital management.

d) Ratios to analyze the structural health of the divisions’ working

capital Structure.

e) Dividend policy ratio.

3. CASH MANAGEMENT:

26
To study the cash management of CMI Limited regarding its collection, lead time like
in case of outstation cheques payments, facility of CMS and RTGS etc.

4. INVENTORY MANAGEMENT:

To study the Inventory management of CMI limited regarding its valuation model,
tools and techniques used to measure effectiveness of inventory, system of sourcing
etc.

5. FINANCING OF WORKING CAPITAL:

To study the financing of working capital, its components and other short term sources
of financing.

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 RESEARCH METHODOLOGY

Research in simple words can be defined as scientific and systematic search for
pertinent information on a particular topic or project. It is an endeavour to gain new
knowledge. Thus it is an original contribution to present stock of knowledge making
or its enhancement.

Research methodology is the procedure for conducting the research. Research

methodology should be carefully planned as the accuracy, reliability and adequacy of
results depend up on the research methodology should followed. It gives the
researcher a guideline by which he can decide which techniques and procedures will
be applicable to a given problem. More ever it also helps in evaluation of the research
by others also. So for the research to be purposeful and effective the researcher should
plan research methodology before proceeding to research study.

Objective of Research:
The Objective of research has been analyzed are as follows:
1. Operating Cycle
2. Ratio analysis
3. Cash Management
4. Financing of Working capital
5. Inventory Management

Data Collection:
Primary data
The data which are collected for the first time and happens to be original in nature.

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1. Secondary data
The data which are already been collected by someone else and which has
already passed through the statistical process.

My project work is totally based on the secondary data and I collect all the necessary
data from the company annual report 2008-09, 2007-08, 2006-07 and company
website.

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 INTRODUCTION OF WORKING CAPITAL MANAGEMENT

Management and control of working capital is important for any kind and size of an
organization because working capital makes the long-term assets operative. Number of
instances is there, where many firms met with failure due to inefficient management of
working capital. Amount of working capital must be in accordance with size of
business. Excessive levels of current assets can result in a firm realizing a substandard
return on investment. However, firm with too few current assets can result in
difficulties in smooth operations. There are two concepts of working capital:
“More business fails for lack of cash than for want of profit”.
Efficient Management of working capital is one of the pre-conditions for the success
of an enterprise. Efficient management of working capital means management of
various components of working capital in such a way that an adequate amount of
working capital is maintained for smooth running of a firm and for fulfilment of twin
objectives of liquidity and profitability. While inadequate amount of working capital
impairs the firm’s liquidity. Holding excess working capital results in the reduction of
the profitability. But the proper estimation of working capital actually required, is a
difficult task for the management because the amount of working capital varies across
firms over the periods depending upon the nature of business, production cycle, credit
policy, availability of raw material, etc.
Thus efficient management of working capital is an important indicator of sound
health of an organisation which requires reduction of unnecessary blocking of capital
in order to bring down the cost of financing.

Meaning of Working Capital:

Working capital is the amount of capital that a business has available to meet the day-
to-day cash requirements of its operations, or more specially, for financing the
conversion of raw material into finished goods, which the company sells for payment.
Funds are also needed for short-term purposes for the purpose of raw materials,
payment of wages and other day-to-day expenses, etc. These funds are known as
working capital. In simple words, working capital refers to that part of the firm’s

30
 capital, which is required for financing short-term or current assets such as cash,
marketable securities, debtors and inventories. Working capital is a valuation metric
that is calculated as current assets minus current liabilities

CLASSIFICATION OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF CONCEPT BASIS OF TIME

Gross Net Permanent Fluctuating

working working /fixed
capital
/variable
capital working working
capital
capital

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 ON THE BASIS OF CONCEPT

1. GROSS WORKING CAPITAL

Gross working capital is a financial concept. It refers to the firm’s investment in

current assets. Current assets are assets, which can be converted into cash within an
accounting year and include cash, debtors, bills receivables, loans and advances,
inventories, prepaid expenses etc. Current assets have short life span and these are
swiftly transformed into other assets form. Cash is used to buy raw material, raw
material is converted into finished goods, finished goods are converted into
receivables and finally, receivables are converted into cash. Hence, working capital is
also called circulating or revolving capital and its cycle is shown as shown on the
following page

Finished
Goods

Accounts
Receivable Work in
Process

Wages, salaries,
Factory
overheads

Raw
Materials

Cash Suppliers

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Gross working capital of in F.Y. 2008-2009-p:-

Current Assets Rs. Lacs

Inventories 2,194.64
Sundry Debtors 753.65
Cash & Bank Balance 740.31
Loan & Advance 878.28
Total 4,566.90

Gross Working Capital = Current Assets

Therefore, Gross working Capital of CMI LIMITED = 4,566.90 Lacs

2. NET WORKING CAPITAL

It is an accounting concept. It is the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills payable,
outstanding expenses, short term loans, bank overdraft, provisions etc.
Net working capital is = Current Assets - Current Liabilities
Current Assets
This is any cash or assets that can be quickly turned into cash. Current assets are
assets, which can be converted into cash within an accounting year.
Constituents of Current Assets

 cash in hand and bank balance

 bills receivables

 Sundry debtors (provision for bad debts)

 Short term loans and advances

 Inventories of stocks.

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  Raw material.

 Work in progress.

 Stores and spares.

 Finished goods.

 Prepaid expenses.

 Accrual incomes.etc

Current Liabilities
Current liabilities are those claims of outsiders, which are expected to mature for
payment within an accounting year.

Constituents of current Liabilities:

 Bills payable

 Sundry creditors or account payable

 Short term borrowings

 Dividend payable

 Bank overdraft

 Provisions

 Outstanding expenses

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Net working capital of CMI Limited: in finical year 2008-09

Current Assets Rs. Lacs Current Liabilities Rs. Lacs

& Provisions

Inventories 1,069.72 Sundry Creditors 849.95

Sundry Debtors 580.41 Acceptance 1,264.53

Cash & Bank 196.23 Interest accrued but 57.79

Balances not due

Loans & 653.05 Other Liabilities 220.29

Advances

Provisions 287.55

Total 2,499.43 Total 1,990.26

Therefore, Net Working Capital of the CMI LIMITED= 509.17 Lacs

The need for current assets is felt constantly. But the magnitude of current assets
needed is not always same; it decreases and increases over time. However, there is
always a minimum level of current assets, which is continuously required by a firm to
carry on its business operations. The minimum level of current assets is referred to as
permanent or fixed working capital. Depending upon changes in production and sales
the need for working capital, over and above permanent working capital, will fluctuate
for example, extra inventory of finished goods has to be maintained to support the
peak periods of sales. The extra working capital, needed to support the charging
production and sales activities is called variable or temporary working capital. Both
kinds of working capital permanent and temporary are necessary to facilitate
production and sale through the operating cycle, but temporary working capital is
created by the firm to meet liquidity requirement that will lost temporarily.

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 ON THE BASIS OF TIME
1. Permanent or Fixed Working Capital.

2. Temporary or Variable Working Capital.

1. FIXED WORKING CAPITAL

Fixed working capital is the minimum amount, which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets.
Every firm has to maintain a minimum level of raw materials, work-in-progress,
finished goods etc. This minimum level of current assets is called fixed working
capital. It can be regular and reserve.

Regular Working Capital:

It is the minimum amount of working capital required to ensure circulation of current

assets.

Reserve Working Capital:

It is the excess amount over the requirement for regular working capital, which may be
provided for contingencies that may arise at unstated periods such as strikes, rise in
price etc.

CMI LIMITED is having a steady production cycle of about three months which
is the regular working capital. CMI LIMITED has an open policy for stocking of
scraps. Its management determines the scraps holding period on regular basis
depending upon the scrap conditions, its prices, cost-benefit analysis of storage
cost and other factors.

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It hardly showed any requirement of reserve working capital and its production
has been stable during the period under study.

2. VARIABLE WORKING CAPITAL

It is the amount of working capital, which is required to meet the seasonal demands
and special exigencies.

Seasonal Working Capital:

It is the capital required to meet the seasonal needs of the enterprise.

This is not applicable in CMI Limited.

Special Working Capital

It is required to meet special exigencies such as launching of extensive marketing

campaigns for conducting research etc .

Variable

Fixed

The figure shows that fixed working capital is stable or fixed over time while the
variable working capital fluctuates.

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In CMI LIMITED permanent working capital is fixed while the variable or
seasonal working capital is not applicable.

NEEDS OF WORKING CAPITAL

The need of working capital arises due to time gap between production and realization
of cash from sales. There is an operating cycle involved in the sales and realization of
cash. Thus it is needed for following purposes:

 For the purchase of raw materials, components and spares.

 To pay wages and salaries.

 To incur day to day expense and overhead cost.

 To meet the selling costs.

 To provide credit facilities to customers.

 To maintain the inventories.

SOURCES OF ADDITIONAL WORKING CAPITAL

Sources of additional working capital include the following-

1. Existing cash reserves

2. Profits (when you secure it as cash)

3. Payables (credit from suppliers)

4. New equity or loans from shareholder

5. Bank overdrafts line of credit

6. Long term loans

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If we have insufficient working capital and try to increase sales, we can easily
overstretch the financial resources of the business. This is called overtrading. Early
warning signs include
1. Pressure on existing cash

2. Exceptional cash generating activities. Offering high discounts for clear cash
payment

3. Bank overdraft exceeds authorized limit

4. Seeking greater overdrafts or lines of credit

5. Part paying suppliers or there creditor.

6. Management pre occupation with surviving rather than managing.

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 EXCESS OR ADEQUATE WORKING CAPITAL

Every business concern should have adequate working capital to run its business
operations. It should not have either redundant / excess working capital or inadequate/
shortage of working capital. Both excess as well as shortage of working capital
situations are bad for any business. However, out of the two, inadequacy or shortage
of working capital is more dangerous from the point of view of the firm.

Disadvantages of Redundant or Excess Working Capital:

 Idle funds, non-profitable for business, poor ROI.

 Unnecessary purchasing & accumulation of inventories over required level.

 Excessive debtors and defective credit policy, higher incidence of B/D.

 Overall inefficiency in the organization.

 When there is excessive working capital, Credit worthiness suffers.

 Due to low rate of return on investments, the market value of shares may fall.

Disadvantages or Dangers of Inadequate or Short Working Capital:

1. Cannot pay off its short-term liabilities in time.

2. Economies of scale are not possible.

3. Difficult for the firm to exploit favourable market situations.

4. Day-to-day liquidity worsens.

Improper utilization the fixed assets and ROA/ROI falls sharply

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 DETERMINANTS OF WORKING CAPITAL

1. Nature and size of business.

Working capital requirement of a firm are basically influenced by nature of its
business. Trading and financial firms have a very small investment in fixed assets, but
require a large sum of money to be invested in working capital. In contrast, public
utilities have a very Limited need of working capital because they provide services on
cash basis. Hence no funds will be tied up in debtors and stocks. Working capital
needs of most manufacturing concerns fall between two extremes. The size of business
also has an important impact on its working capital needs. Size may be measured in
terms of scale of operations. A big firm will need more working capital than a small
firm will.

The size of the CMI LIMITED is large enough and generates about 5164.35 Lacs
of sales in 2008-2009. It has undertaken expansion projects which call for
increase in requirements of working capital.

2. Manufacturing cycle

The manufacturing cycle comprises of purchase and use of raw materials and the
production of finished goods. Longer the manufacturing cycle, larger will be the firm’s
working capital requirements.

Since CMI Limited is a fully integrated plant with using Scraps, Alloys, Gases as
a raw material and producing S.S. Plates, S.S.coil (Strips) and Coin Blank, its
manufacturing cycle is longer.

3. Sales growth

The working capital need of a firm increases as the sale grows. It is difficult to
precisely determine the relationship between the volume of sales and working capital

41
needs. As sales grow, the firm needs to invest more in inventories and debtors. These
needs become very frequent and fast when sales grow continuously.

The firm’s sales are growing in the past few years which require increased need
of working capital. It has nearly 62% growth, 2008-2009 from 2007-08 i.e. Rs.
5,164.35 lacs from Rs. 3,183.13 lacs.

4. Price level change

Generally, rising prices will require a firm to maintain higher amount of working
capital. However, companies, which can immediately revise their product prices with
rising price levels, will not face a severe working capital problem. Effect of rising
prices will be different for different companies. Some will face no working capital
problem, while working capital problems of other may be aggravated.

Increase in scraps costs and other manufacturing inputs has obviously increase
the working capital needs of CMI Limited. CMI Limited has use various type of
scrap as a raw material and its avg. price is keeps changing every day

5. Operating efficiency and performance

The operating efficiency of a firm relates to the optimum utilization of resources at

minimum cost. Better utilization of resources improves profitability and thus helps in
releasing the pressure on working capital. Firms differ in their capacity to generate
profit from business operations. Some firms enjoy a dominant position due to quality
product or good marketing management or monopoly in the market and earn a high
profit margin and vice-versa can be there.
A high net profit margin contributes towards working capital pool.
Since CMI LIMITED is operating at high capacity utilization, it has been able to
reduce its unutilized capacity and thereby increasing its production which
reduces its operating cycle.

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6. Market condition

The degree of competition prevailing in the market place has an important bearing on
working capital needs. When competition is keen, a large inventory of finished goods
is required to promptly meet the needs of customers. Also lenient terms of credit are to
be given to attract the customers.

Since CMI LIMITED sells it’s all cables both cash basis & credit bases, the
debtor’s collection period is very minimal. Major chunk of cash sales reduces its
working capital cycle

7. Production policy

In certain industries the demand is subject to wide fluctuations due to seasonal

variations. The requirements of working capital, in such cases, depend upon the
production policy. The production could be kept either steady by accumulating
inventories during slack periods with a view to meet high demand during the peak
season or the production could be curtailed during the slack season and increased
during peak season. If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
CMI LIMITED keeps normally one month of production in stock and WIP cycle
is about 15 days thereby keeping its production cycle to about 3 months.

43
 FINANCIAL STATEMENT OF THE COMPANY YEAR
2008-20
09
DESCRIPTION (Rs. In Lacs) (Rs. In Lacs)
31.03.2009 31.03.2008
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share Capital- Equity 30.91 2,7.64
Equity share Warrants 52.60 15.14
Reserves and Surplus 1,757.14 1,374.12
1,840.66 1,416.91

LOAN FUNDS
Secured Loans 3,820.34 2,228.95
Unsecured Loans 4,85.74 443.37
4,306.09 2,672.32
Deferred Tax Liability (Net) 487.70 391.57
TOTAL 6,634.45 4480.81

APPLICATION OF FUNDS
FIXED ASSETS
Gross Block 4,209.09 3,325.96
Less: Depreciation / Amortisation 797.11 602.27
Net Block 3,411.97 2,723.68
Add: Capital Work in Progress 1,373.77 1,057.08
4,785.74 3,780.77
INVESTMENT 93.28 188.55
CURRENT ASSETS,
LOANS&ADVANCES 2,194.64 1,069.72
Inventries 753.65 580.41
Sundry Debtors 740.31 196.23
Cash and Bank Balance 878.28 653.05
Loan and Advances 4,566.90 2,499.43

LESS: CURRENT LIABILITIES &

PROVISIONS 2,539.80 1,778.93
Liabilities 287.55 211.33
Provisions 2,827.35 1,990.26
1,739.55 509.17
NET CURRENT ASSETS 15.87 2.30
MISCELLANEOUS EXPENDITURE
TOTAL 6,634.45 4,480.81

44
 DESCRIPTION (Rs. In Lacs) (Rs. In Lacs)
31.03.2009 31.03.2008
INCOME
Gross Sales and Operational Income 5,695.20 5,267.80
Less : Excise Duty 533.84 390.30
Net Sales and Operational Income 5,164.35 4,877.49
Other Income 29.11 18.93
5,193.47 4,896.43
EXPENDITURE
Material Expenditure and Others 4,049.12 3,730.69
Personnel 103.61 73.51
Administrative and Selling 231.96 247.57
Interest and Bank Charges 149.34 70.35
Miscellaneous Expenditure Written off .38 .46
Depreciation / Amortisation 252.38 216.09
4,786.81 4,338.70
NET PROFIT 406.65 557.72
Less:- Loss on transfer of divisons 36.13
under the scheme of Arrangement
NET PROFIT BEFORE TAXATION 370.52 557.72
Less:
Provision fox Taxation 42.77 85.21
MAT Credit Entitlement (10.65)
Provision for Fringe Benefit Tax 1.11 .91
Provision for Deferred Tax 96.12 113.27
Provision Year Taxation Adjustment (0.5) 5.31
PROFIT AFTER TAXATION 241.16 353.00
ADD/(LESS)
Amount Brought Forward 48.35 33.14
Debenture Redemption reserve Written 16.33 .44
back
PROFIT AVAILABLE FOR 305.85 386.59
APPROPRIATION
Proposed Dividend on Equity Shares 32.42 5.52
Dividend on Equity Shares for Previous 19 13
Year - 22.11
Interim Dividend on Equity Shares 5.54 4.06
Corporate Dividend Tax 25.18 31.04
Debenture Redemption Reserve 180.00 275.00
General Reserve 62.50 48.35
Balance carried to Balance Sheet 305.85 386.59

Earnings Per Share ( in Rs.)

Before Extraordinary Items
- Basic 19.21 26.76
- Diluted 17.24 23.35

45
After Extraordinary Items
-Basic 16.70 26.76
-Diluted 14.98 23.35
Notes forming parts of accounts

MANAGEMENT OF WORKING CAPITAL

Working capital, in general practice, refers to the excess of current assets over current
liabilities. Management of working capital therefore, is concerned with the problems
that arise in attempting to manage the current assets, the current liabilities and the inter
relationship that exists between them. In other words, it refers to all aspects of
administration of both current assets and current liabilities. The basic goal of working
capital management is to manage the current assets and current liabilities of a firm in
such a way that a satisfactory level of working capital is maintained, i.e., it is neither
inadequate nor excessive. This is so because both inadequate as well as excessive
working capital positions are bad for any business. Inadequacy of working capital may
lead a firm to insolvency and excessive working capital implies idle funds, which earn
no profits for the business. Working capital management policies of a firm have a
great effect on its profitability, liquidity and structural health of the organization.

In this context, working capital management is three dimensional in nature:

 Dimension I is concerned with the formulation of the policies with regard to

profitability, risk and liquidity.

 Dimension II is concerned with the decisions regarding the composition and

level of current assets.

 Dimension III is concerned with the decisions about the composition and level
of current liabilities

46
 Profitability,
Risk &
Liquidity

Working
Capital
Management

Composition Composition
& Level &Level
of CA of CL

There is a definite inverse relationship between the degree of risk and profitability. A
conservative management prefers to minimize risk by maintaining a higher level of
current assets while a liberal management assumes greater risk by reducing working
capital. However, the goal of the management should be to establish a suitable trade
off between profitability and risk.

47
Steps involved in working capital management
1. Forecasting the Amount of Working Capital

2. Determining the Sources of Working

Objectives of Working Capital Management

I. Deciding Optimum Level of Investment in various WC Assets

II. Decide Optimal Mix of Short Term and Long Term Capital

III. Decide Appropriate means of Short Term Financing

Forecasting /Estimation of Working Capital Management

Requirement
Factors to be considered:

 Total costs incurred on materials, wages and overheads. The length of time for
which raw materials remain in stores before they are issued to production.

 The length of the production cycle or WIP, i.e., the time taken for conversion
of raw material into finished goods.

 The length of the sales cycle during which finished goods are to be kept
waiting for sales.

 The average period of credit allowed to customers.

 The amount of cash required to pay day to day expenses of the business.

 The amount of cash required for advance payments if any.

 The average period of credit to be allowed by suppliers.

 Time – lag in the payment of wages and other overheads

48
Working Capital Cycle

The working capital requirement of a firm depends, to a great extent upon the
operating cycle of the firm. The operating cycle may be defined as the time duration
starting from the procurement of goods or raw material and ending with the sales of
realization. The length and nature of the operating cycle may differ from one firm to
another depending upon the size and nature of the firm. In a trading concern, there is a
series of activities starting from procurement of goods (saleable goods) and ending
with the realization of sales revenue (at the time of sale itself in the case of cash sales
and at the time of debtors realization in case of credit sales).similarly in case of
manufacturing concern, this series starts from the procurement of raw materials and
ending with the sales realization of finished goods. In both the cases, however, there is
a time gap between the happening of the first event and the happening of the last
event. This time gap is called the operating cycle.
Thus, the operating cycle of a firm consists of the time required for the completion of
the chronological sequences of some or all of the following:

 Procurement of raw material and services.

 Conversion of raw material into work-in-progress.

 Conversion of work-in-progress into finished good

 Sale of finished goods(cash or credit)

 .Conversion of receivable into cash.

49
 Raw
WIP
Material

Finished
Goods
Cash

Sales
Accounts
Receivable

50
 I OPERATING CYCLE

Operating cycle is the time duration required to convert sales, after the conversion of
resources, into cash. Cash inflows are not certain because sales & collection which
give rise to cash inflows are difficult to forecast accurately. Cash outflows, on other
hand are relatively certain. The firm is, therefore, required to invest in current assets
for smooth, uninterrupted functioning. It needs to maintain liquidity to purchase raw
materials & pay expenses such as wages & taxes as there is hardly a matching between
cash inflows and cash outflows.

Cash is hold to meet any future exigencies. Stocks of raw material and work-in-
progress are kept to ensure smooth production and to guard against non-availability of
raw material and other components. The firm holds stock of finished goods to meet
the demand of customers on continuous basis and sudden demand from some
customers. Thus, a firm makes adequate investment in inventories, for smooth,
uninterrupted production and sale.

OPERATING CYCLE ANALYSIS

In order to understand the length of time which reports are committed to various
components of working capital, operating cycle analysis has been done. The operating
cycle of a firm begins with the acquisition of raw material and ends with the collection
of receivable. There are four aspects of operating cycle, which involves commitment
of resources, a material stage, and accounts finished stage.

But here in CMI LIMITED, the operating cycle involves the period of conversion
of raw material into work in process; work in process into finished goods and
finished goods into sale.

51
OPERATING CYCLE OF CMI LIMITED

Operating cycle 2007 2008 2009

Raw Material Conversion 39.6 62.5 78.7

Period

Work In Progress conversion 12.9 13.8 24.2

Period

Finished Goods Conversion 38.1 29.8 53.8

Period

Debtors 37.8 43.4 53.2

Operating Cycle 128.4 149.5 209.2

The operating cycle of CMI LIMITED is increasing year by year, as it is clear

from the above table. It is important to note here is that it is the raw material
conversion period which has increased from 2007 to 2009, forcing the overall
operating cycle of CMI LIMITED to increase.

WORKING OF OPERATING CYCLE:-

A) INVENTORY CONVERSION PERIOD

B) DEBTOR CONVERSION PERIOD

A) INVENTORY CONVERSION PERIOD :-

1) RAW MATERIAL CONVERSION PERIOD=

52
 Average raw material * 365
Total cost of raw material consumed
Total cost of raw material consumed = (Raw material consumed +Stores
and spares consumed)

2) WORK IN PROGRESS =

Average work in progress *365

Cost of production

3) FINISHED GOODS CONVERSION PERIOD=

Average stock of finished goods * 365

COGS
COGS (cost of good sold) = { Purchases + opening inventory –
closing Inventory}

B) DEBTOR CONVERSION PERIOD:-

Average book debts * 365

Credit sales
Credit sales = Net sales (Assumed)

53
 ANALYSIS OF WORKING CAPITAL FROM DIFFERENT
ASPECTS

1. COMMON SIZE STATEMENT OF THE UNIT

(Rs. Lacs)
Particulars 2009 %age 2008 %age

Current Assets:
Inventories 219,464 48.05 106,972.99 42.79

Sundry Debtors 753.65 16.50 580.41 23.22

Cash & Bank balance 740.31 16.21 196.23 7.85

Loan & Advances 878.28 19.23 653.05 26.12

Total Current Assets 4,566.90 100.00 2,499.43 100.00

Current Liabilities
Sundry Creditors 849.95 30.06 820.33 41.21

Acceptance 1,264.53 44.72 689.31 34.63

Interest accrued but not due 57.79 2.04 48.98 2.46

Other Liabilities 321.22 11.36 220.29 11.06

Provisions 287.55 10.17 211.33 10.61

Total 2,827.35 100.00 1,990.26 100.00

Thus we see from the common size statement that main components of current assets
are Inventories and Loans & advances. The share of inventories in 2007 was 42.79%

54
 but now it increased to 48.05% in 2008, which shows large sum of money has been
blocked in inventories.

2. SCHEDULE OF CHANGES IN WORKING CAPITAL

(Rs. Lacs)

Increase/ Increase/
PARTICULARS 2009 2008 Decrease Decrease
(in Rs.) (in %)

Current assets
Inventories 2,194.64 1,069.72 1,124.91 105.16%
Sundry debtors 753.65 580.41 173.24 29.84%
sCash & Bank 740.31 196.23 544.07 277.25%
Loan & Advances 878.28 653.05 225.22 34.48
Total Current Assets 4,566.90 2,499.43 2,067.47 82.71
(A)

Current Liabilities .

Sundry Creditors 849.95 820.33 29.62 3.61%

Acceptance 1,264.53 689.31 575.22 83.44%
Interest accrued but not 57.79 48.98 8.80 17.98
due
Other Liabilities 321.22 152.40 168.82 110.77%
Provisions 287.55 211.33 76.22 36.06
Total Current 2,827.35 1,990.26 837.09 42.05%
Liabilities (B)
Working Capital 1,739.55 509.17 1,230.37 214.64%
(A-B)

55
Thus we see from the above table that the inventory has increased by 105.16% in year
2008 from year 2007. And further we know that, as discussed earlier, major portion of
total inventory is comprise of raw materials. But net working capital is to be decrease
by 13.01% in year 2007 is comparison to the year 2006 due to the Because of
increase in sundry creditors up to 65.72% in year 2007 is comparison to the year 2006
which means financing of working capital was done through increase in sundry
creditors.

56
3. WORKING CAPITAL

working capital

2000

1500
585.38 2007
17.39
Rs in1000 2008
509.17
lacs
2009
500

0
2007 2008 2009

It is clear from the above graph that net working capital of CMI LIMITED is
increasing in year 2006 is comparison to the year 2005 but it is to be decrease in year
2007 due to the the Because of increase in sundry creditors up to 65.72% in year 2007
is comparison to the year 2006 which means financing of working capital was done
through increase in sundry creditors. In 2008 it has increased 214.67% because of
increase in inventory and increase in cash and bank balances.

57
II RATIO ANALYSIS

A ratio is an arithmetical relationship between two figures. Financial ratio

analysis is a study of ratios between various items or group of items in
financial statement, turnover ratios have been used for analysis. Ratio analysis
is the powerful tool of financial analysis of accounting data. The relationship
of the figures should be meaningful. Financial analysis & ratio is used as an
index or yardstick for measuring performance of the firm.

Working capital is that part of total capital which is important in current assets,
to get better insights about the working capital position of the CMI LIMITED,
it is better to utilize ratio analysis. To analyze the working capital position I
shall here interpret the following ratios of CMI LIMITED for two consecutive
financial years 2007-08 and 2008-2009.

1. Liquidity Ratio
a) Current ratio
b) Quick ratio

2. Activity Ratios
a) Current asset turnover ratio
b) Working capital turnover ratio

3. Inventory turnover ratio

4. Inventory to working capital ratio

58
1. LIQUIDITY RATIOS: The liquidity aspect is essential for both the creditors
as well as management of a business enterprise. These ratios are used to judge a firm’s
ability to meet short term obligations. From them much insight can be obtained to
present cash solvency of the firm and its ability to remain solvent in the event of
adversities. We wish to compare short-term obligations with the short-term sources
available to meet these obligations.

a) Current ratio: - The current ratio is very popular financial ratio measure as
the ability of the firm to meet current liabilities. Current assets are converted into cash
for the payment of current liabilities. Apparently higher the current ratio the greater
the short term solvency, Current ratio of CMI LIMITED can be shown as under: -

Current assets
Current Liabilities

Table showing the Current Ratio

(Rs Lacs)
Particulars 2007 2008 2009

Current assets 2644.65 2,499.43 4,566.90

Current Liabilities 2046.37 1,990.26 2,827.35

Current ratio 1.30 1.25 1.61

59
 1.8

1.6

1.4

1.2

1 2007
2008
0.8
2009
0.6

0.4

0.2

0
2007 2008 2009

A current ratio of 1.33:1 is generally considered satisfactory. The current ratio of the
unit is much above the recommended and it ensures the payment of dues in time.

b) Quick ratio: - Although current ratio is a valuable indicator of liquidity yet it

may lead to misleading conclusion, in case of inventories forms a major component of
current assets, the quick ratio is a fairly stringent measure of liquidity. It is based on
those current assets which are the highly liquid or which are easily converted into
cash. Inventories and prepaid expenses are excluded from this category, because these
are the best liquid component of and has the ability to pay its current liabilities in time
when these are due, the ratio may be expressed as:-

Quick assets
Current liabilities

60
 Table showing the Quick ratio
(Rs. Lacs)
Particulars 2007 2008 2009

Quick assets 1527.60 1,429.70 2,372.25

Current Liabilities 2046.37 1,990.26 2,827.35

Quick ratio 0.74 0.71 0.84

0.9

0.8

0.7

0.6

0.5 2009
0.4 2008

0.3 2007

0.2

0.1

0
2007 2008 2009

The standard for quick ratio is 1:1. The ratio of the company is less than standards. It
shows risk on part of creditors to get the return. The ratio is falling considerably in
2007 and again fall in 2008 but it is now show increasing trend in 2009.

61
2. ACTIVITY RATIOS:
The funds of creditors and owner are invested in various kinds of assets to generate
sales and profits. Activity ratios measure how efficiently the firm employs the assets.
These ratios are based on the relationship between the level of activity, represented by
sales and level of various assets. The important turnover ratios are:

a) Current assets turnover ratio: The idea of the current assets turnover is to
ascertain the contribution of the current assets to sales. The relationship indicates
efficiency or otherwise of the utilization of current assets to attain the maximum sales.
It is a relative measure as it is compared with previous year. Lower ratio tells us that
the company is employing more current assets for a given level of sales and vice-
versa, the ratio may be expressed as:-

Sales
Current Assets

Table showing current assets turnover ratio

(Rs. Lacs)
Particulars 2007 2008 2009

Sales 4462.80 487,7.49 516,4.35

Current assets 2644.65 249,9.43 4566.90

Turnover ratio 1.68 1.95 1.13

62
 2.5

1.5
2007
2008
1
2009

0.5

0
2007 2008 2009

Thus current assets are contributing 1.13 times to sales in 2009 as compared to 1.95 in
2008 and 1.68 in 2007, which shows the firm adopts the policy of high current assets.

b) Working capital turnover ratio: Net working capital turnover ratio indicates
the velocity of the utilization of working capital. A higher ratio indicates the effective
utilization of working capital and a low ratio indicates otherwise, the ratio may be
expressed as:-

Sales
Net Working Capital

In the CMI LIMITED, working capital turnover ratio can be made through following
table: -

63
 Table showing working capital
(Rs. Lacs)
Particulars 2007 2008 2009

Sales 4462.80 4,877.49 5,164.35

Net working capital 585.38 509.17 1,739.55

Working capital turnover ratio 7.62 9.57 2.96

Working capital turnover ratio

12

10

2007
6
2008
4 2009

0
2007 2008 2009

The above table shows that the net working capital turnover ratio of the unit is
decreasing which means no proper utilization of funds by the company this year than
the previous year.

64
 3. Inventory turnover ratio is calculated earlier in operating cycle.
Sales
Inventory

4. Inventory to working capital ratio: It may be defined as the relationship

between inventory and working capital. Here working capital is taken as Net working
capital.

Inventory to working capital ratio:

Inventory
Working capital

Table showing inventory to working capital ratio

(Rs. Lacs)
Particulars 2007 2008 2009

Inventories 1,147.82 1,069.72 2,194.64

Working capital 585.38 509.17 1,739.55

Inventory to working capital ratio 1.96 2.10 1.26

65
 2.5

1.5
2007
1 2008
2009
0.5 2009
0 2008

2007 2007
2008
2009

The Above table shows that with the increase in Inventories as compares to year 2008
and also increase in working capital, As the ratio is more than 1:1, this implies that
there is insufficient working capital available to finance inventories.

66
 III INVENTORY MANAGEMENT

Inventories form a link between production and sales of a product. Inventories

consisting of raw materials, work-in-progress, and finished goods represent a
significant portion of total assets. 40-50% of the total current assets in CMI LIMITED
are constituted by inventories. Because of the substantial investment in inventory, the
inventory management of the firm is highly crucial for the successful management of
its working capital.

Finished goods inventories are completely manufactured products that are ready for
sale. Stock of raw materials, work in progress facilitates production, while stock of
finished goods is required for smooth marketing operations. Thus, inventories serve as
a link between the production and consumption of goods. The levels of three of these
inventories depend upon the nature of the business. A manufacturing firm will have
substantially high level of all the three kinds of inventories.

A fourth kind of inventory, company also maintains is Stores and spares. It include
office and plant cleaning materials, oil, fuel, light bulb and the like. These materials do
not directly enter production but are necessary for production process.

Usually, these Stores and spares are small part of the total inventory and do not
involve significant investment. Therefore, a sophisticated system of inventory control
may be maintained for them

The advantages of increased inventory are several but it has a side i.e. a large amount
of funds might be blocked in inventory and would also require holding. Handling
charges other risks, which the finance manager has to look into, are price fluctuations
and consumer rates. In dynamic industries the finance manager also must take the
threat of obsolescence into consideration.

67
Inventories should be increased as long as resulting savings exceed the total cost of
holding the additional inventory. This balance requires coordination between
production, marketing and finance areas of them.
Nature of Inventory:
The common type of inventories for most of the business firms may be classified as
raw-material, work-in-progress, finished goods.

• Raw material: it is basic inputs that are converted into finished products through the
manufacturing process. Raw materials inventories are those units which have been
purchased and stored for future productions.

• Work–in–process: Work-in-process is semi-manufactured products. They represent

products that need more work before they become finished products for sale.

• Finished goods: These are completely manufactured products which are ready for
sale.
Stocks of raw materials and work-in-process facilitate production, while stock of
finished goods is required for smooth marketing operations. Thus inventories serve as
a link between the production and consumption of goods. The levels of three kinds of
inventories for a firm depend on nthe nature of business. A manufacturing firm will
have substantially high levels of all the three kinds of inventories. While retail or
wholesale firm will have a very high level of finished goods inventories and no raw
material and work-in-process inventories.

Need to hold inventories

Maintaining inventories involves trying up of the company’s funds and incurrence of
storage and holding costs. There are three general motives for holding inventories:

Transactions Motive: IT emphasizes the need to maintain inventories to facilitate

smooth production and sales operation.

Precautionary Motive: It necessitates holding of inventories to guard against the risk

of unpredictable changes in demand and supply forces and other factors.

Speculative Motive: It influences the decision to increase or reduce inventory levels

to take advantage of price fluctuations.

Objectives of inventory management

The aim of inventory management should be to avoid excessive and inadequate levels
of inventories and to maintain sufficient inventory for smooth production and sales
operations.
An effective inventory management should:

 To ensure a continuous supply of raw material to facilitate uninterrupted

production.

68
  To maintain sufficient stocks of raw materials in the periods of short supply
and anticipate price changes.

 To maintain sufficient finished goods inventory for smooth sales operation,

and efficient customers service.

 To Minimize the carrying cost and time, and

 To Control investment in inventories and keep it at an optimum level.

Effect of Excess or Inadequate inventory

If too much inventory is held, the organization wastes money through a variety of
factors.

 Money is held up in stock when it could be put to better use

.
 There are superfluous warehousing and storage costs.

 Inventory may deteriorate

.
 There is potentially greater risk of theft.

On the other hand, too little inventory can lead to stock-out which can:

Halt activity.

Lose income.

Cause discomfort or distress to Clint.

69
 VALUATION OF INVENTORY

The value of material has a direct bearing on the income of a concern, so it is

necessary that a method of pricing materials should be such that it gives a realistic
value of stock.

There are various methods which are followed by financial management for the
valuation of raw material like FIFO, LIFO, average price method, weighted average
method, standard price method, market price method.

In CMI Limited Faridabad, they use the FIFO Method for valuation and pricing
of inventory.

TOOLS & TECHNIQUES OF INVENTORY MANAGEMENT

A proper inventory control not only helps in solving the acute problem of liquidity but
also increase profits and causes substantial reduction in the working capital of
concern.
To manage inventories efficiently, the following two questions should be kept in
mind:

1. How much should be ordered?

2. When should be ordered?

To answer the above two questions, we must calculate Economic

Order Quantity and Re-Order Point

70
Economic Order Quantity (EOQ)

The Economic Order Quantity model attempts to determine the order size that will
minimize the total inventory cost. It assumes that total inventory cost =total carry cost
+total ordering cost.
The EOQ model as a technique of inventory management defines three parameters for
any inventory:
 Minimum level of inventory of that item depending upon the usage rate of that
item, time leg in procuring that item and unforeseen circumstances, if any.

 The re-order level of that item ,at which next order for that item must be placed
to avoid any chance of a stock –out ,and
 The re-order quantity for which each order must be placed.

Assumptions: The EOQ model is based on the following assumptions:

1. The total usage of a particular item for a given period (usually 1 year) is known
with certainty and that the usage rate is even throughout the period.

2. That there is no time gap between placing an order and getting its supply.

3. The cost per order of an item is constant and the cost of carrying inventory is
also fixed and is given as % of average value of inventory.

4. That there are only two costs associated with the inventory, and these are the
cost of ordering and the cost of carrying the inventory.

EOQ may be presented as follows

EOQ = 2AO
C
Where,

EOQ =Economic quantity per order.

A =Total annual requirement for the item

O =Ordering cost per order of that item

C =Carrying cost per unit per annum.

CMI LIMITED uses empirical analysis mode as inventory analysis technique.

CMI LIMITED does its production on the basis of demand i.e. they produce up to the
demand of its customers. So they store inventory on the basis of production cycle i.e.

71
they are very well conversant with the level of inventory to be stored for the given
level of production.

RE-ORDER LEVEL
The re-order level is the level of inventory at which the fresh order for the item must
be placed to procure fresh supply. The re-order point depend son Lead time, Average
usage, Economic Order Quantity.

Reorder point = Lead time× Average usage

Lead time is the time normally taken between the placements of an order and
receiving the supply
.
Average usage is the rate at which the inventory is being used up.

Re order level is fixed between minimum level and maximum level. In CMI Limited
Faridabad re-order level is maintained in three ways.

If the raw material is ordered within the state then generally the lead time is of two
days, if from out of the state then lead time is of seven days,
BUFFER STOCK

As CMI Limited Faridabad does its production on the base of demand i.e. job
production so, they maintain its buffer stock at a lower level.

72
 IV CASH MANAGEMENT

Cash management is related to the inflows and outflows of the cash of firm, cash
balance held by the firm, receipt and payment system of firm, cash budget, cash
forecasting techniques.

RECEIPT SYSTEM

1. The firm uses CMS (Cash Management Service) offered by its bankers for
collections within the country.
2. Firm has its tie-up with five banks for its collections. These banks are SBI,
SBOP, PNB, Standard Chartered Bank, Canara Bank and ICICI.
3. These banks do not charge anything for this service from CMI Limited
Faridabad.
4. Due to credit of outstation cheques in two or three days clearing, it reduces its
financial cost significantly.

The customers also feel easy to make advance payments through CMS facility as they
have to arrange for the payment at their site only instead of sending it to head office of
CMI LIMITED.

PAYMENT SYSTEM

a) CMI Limited Faridabad has a multi city cheque book system for its payment system.
It has at par facility for all out station creditors. Creditors are also happy to get
prompt credit of payments done by CMI LIMITED. With at par facility cheques for all
outstation payments, better rates are negotiated with the suppliers.

b) With the Real Time Gross Settlement (RTGS), payment system has further
facilitated. RTGS facility is now being offered by almost all the member banks

73
All these banks offers RTGS facility to CMI Limited Faridabad free of cost. With
RTGS, funds are electronically transferred by one bank to another bank (irrespective
of its location in India) on the very same day.

CMI LIMITED is required to make payments to various raw material suppliers which
are not covered under at par locations. Since SBI has branches at such remote areas.
RTGS is used to make payments where the supplier gets the credit on same day.

CASH BUDGET AND CASH FORECASTING TECHNIQUES

a) CMI Limited Faridabad prepares its budget on daily monthly and yearly
basis.
b) Firm’s forecasting techniques are based upon its experience and previous
budget.
c) Daily and weekly cash flow report is also maintained in the firm.
d) At least 10 lakh floating cash is maintained in the firm for daily transactions.

74
V. FINANCING OF WORKING CAPITAL
After a firm has decided upon the level of working capital to be maintained it has to
decide the mode of financing. Financing of working capital:

The sources of finance and forms of credit.

a. Sale realization
b. Bank credit
c. Trade credit
d. Ss current provision of non bank short term borrowing.
e. Long term sources comprising equity capital and long term borrowings.

At CMI Limited Faridabad there is primarily two sources for financing of working
capital

a) Bank credit (including working capital loan), and

b) Long term sources comprising shareholders fund and long term
borrowings.

The first source i.e. Bank credit represent the Working Capital Loan given by
bank to CMI Limited Faridabad and also has an overdraft arrangement with its
banks so that it can withdraw up to a specified amount of money according to its
requirements.CMI limited has some consortium of some banks for financing it
working capital management.

Secondly, CMI Limited Faridabad also finances its working capital

requirement from Long term sources comprising shareholders fund and long
term borrowings.SBI plays a role of lead bank.

75
 CONCLUSION

CMI LIMITED has opted for a moderate overall working capital policy. This
suggests that it is risk averse. It wants a reasonable profit with a reasonable
amount of risk. If it goes in for an aggressive policy the profits generated
could be high but accompanied with the high level of profits will come high
level of risk, which they feel is not appropriate. Since with this policy the
profits being generated are substantially high a change in the working capital
policy is not called for.

On analyzing the operating cycle it has been found that the operating cycle
has decreased by approx. 13% as that of previous year. In year 2008 it was
209 days while in 2007 it was 128 days. The operating cycle can be reduced
to a greater degree by trying to get a reduction in the raw material conversion
period.

Since CMI LIMITED produces only on orders therefore the inventory

requirements for the following months can be accurately forecasted. Since,
the raw material, it should be stored for following months by analyzing the
benefit of storing it, the storage cost associated with it, scrap prices, its
availability and also further requirements of the company as per its orders.
Every month if forecast is made accordingly and order is placed, it would
help in bringing down the time required in the raw material storage period.

Company doing well by efficiently employing funding of creditors.

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 SUGGESTIONS

1. CMI LIMITED should finance all its requirement of working capital

through short term sources of finance as they are cheaper than the long term
sources. It is financing a part of its working capital from long term sources of
finance as it is clear from the fixed assets to total long term fund ratio.

2. The Company is not adopting proper inventory systems like A.B.C.

analysis, V.E.D. analysis etc. this inventory system can make the inventory
management more result oriented. Since, inventory covers the major potion of
CMI LIMITED’s current assets, it should be given prime attention.

3. The company should do proper Cost-to-Benefit analysis before

purchasing the raw material i.e. scraps for following months in light of its
storage cost, current prices, estimated future prices, further demand etc. along
with the opportunity cost of holding such inventory.

4. The short term liquidity of the firm is not satisfactory as it is clear

from the quick ratio which is 0.71 for 2007. The company should take
immediate steps towards its improvement.

5. The surplus fund of the unit should be invested in some short

marketable securities, rather than providing it to its overseas subsidiary free
of cost, to improve profitability along with liquidity.

6. The company should reduce its Reduction in debtors cycle and finished
good Cycle.

77
 BIBLIOGRAPHY

 Financial Management by M.Y.Khan and P.K. Jain

 Financial Management by R.K.Mittal

 CMI Limited Annual Report on 2008-09 2007-08,

2006-07,

 www.cmilimited.in

 www.workingcapital.com

 www.investopedia.com

78
 QUESTIONNAIRE

A Survey of the satisfaction of applicant regarding knowledge of co. and its product to
Management Students.

GENERAL INFORMATION

I. Applicant Name :
II. Age :
III. Address :
IV. Education Qualification :

SPECIFIC INFORMATION

v) Do you know about CMI LIMIT.?

a) Yes
b) No

vi) Do you know all manufacturing plants of CMI LIMITED?

a) Yes
b) No

vii) Do you know all products of CMI LIMITED which they manufactured?

a) Yes
b) No

viii) Have you associated with CMI LIMITED by any means?

a) Yes
b) No

ix) Do you know all competitors of CMI LIMITED in the India?

a) Yes
b) No

x) Do u know which countries are its customer?

79
a) Yes
b) No

xi) If yes, then name of countries:-

a)_______________________

b)_______________________

80
 Annexure

DESCRIPTION (Rs. In Lacs) (Rs. In Lacs)

31.03.2009 31.03.2008
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share Capital- Equity 30.91 2,7.64
Equity share Warrants 52.60 15.14
Reserves and Surplus 1,757.14 1,374.12
1,840.66 1,416.91

LOAN FUNDS
Secured Loans 3,820.34 2,228.95
Unsecured Loans 4,85.74 443.37
4,306.09 2,672.32
Deferred Tax Liability (Net) 487.70 391.57
TOTAL 6,634.45 4480.81

APPLICATION OF FUNDS
FIXED ASSETS
Gross Block 4,209.09 3,325.96
Less: Depreciation / Amortisation 797.11 602.27
Net Block 3,411.97 2,723.68
Add: Capital Work in Progress 1,373.77 1,057.08
4,785.74 3,780.77
INVESTMENT 93.28 188.55
CURRENT ASSETS,
LOANS&ADVANCES 2,194.64 1,069.72
Inventries 753.65 580.41
Sundry Debtors 740.31 196.23
Cash and Bank Balance 878.28 653.05
Loan and Advances 4,566.90 2,499.43

LESS: CURRENT LIABILITIES &

PROVISIONS 2,539.80 1,778.93
Liabilities 287.55 211.33
Provisions 2,827.35 1,990.26
1,739.55 509.17
NET CURRENT ASSETS 15.87 2.30
MISCELLANEOUS EXPENDITURE
TOTAL 6,634.45 4,480.81

81
 DESCRIPTION (Rs. In Lacs) (Rs. In Lacs)
31.03.2009 31.03.2008
INCOME
Gross Sales and Operational Income 5,695.20 5,267.80
Less : Excise Duty 533.84 390.30
Net Sales and Operational Income 5,164.35 4,877.49
Other Income 29.11 18.93
5,193.47 4,896.43
EXPENDITURE
Material Expenditure and Others 4,049.12 3,730.69
Personnel 103.61 73.51
Administrative and Selling 231.96 247.57
Interest and Bank Charges 149.34 70.35
Miscellaneous Expenditure Written off .38 .46
Depreciation / Amortisation 252.38 216.09
4,786.81 4,338.70
NET PROFIT 406.65 557.72
Less:- Loss on transfer of divisons 36.13
under the scheme of Arrangement
NET PROFIT BEFORE TAXATION 370.52 557.72
Less:
Provision fox Taxation 42.77 85.21
MAT Credit Entitlement (10.65)
Provision for Fringe Benefit Tax 1.11 .91
Provision for Deferred Tax 96.12 113.27
Provision Year Taxation Adjustment (0.5) 5.31
PROFIT AFTER TAXATION 241.16 353.00
ADD/(LESS)
Amount Brought Forward 48.35 33.14
Debenture Redemption reserve Written 16.33 .44
back
PROFIT AVAILABLE FOR 305.85 386.59
APPROPRIATION
Proposed Dividend on Equity Shares 32.42 5.52
Dividend on Equity Shares for Previous 19 13
Year - 22.11
Interim Dividend on Equity Shares 5.54 4.06
Corporate Dividend Tax 25.18 31.04
Debenture Redemption Reserve 180.00 275.00
General Reserve 62.50 48.35
Balance carried to Balance Sheet 305.85 386.59

Earnings Per Share ( in Rs.)

Before Extraordinary Items
- Basic 19.21 26.76
- Diluted 17.24 23.35

82
After Extraordinary Items
-Basic 16.70 26.76
-Diluted 14.98 23.35
Notes forming parts of accounts

83