A REPORT ON “WORKING CAPITAL MANAGEMENT IN HCL “WORKING CAPITAL MANAGEMENT IN HCL INFOSYSTEMS LIMITED” INFOSYSTEMS LIMITED” BY (Submitted in partial fulfillment of the requirements of MBA program at Jagan Institute Of Management Studies , Rohini) SUBMITTED TO : Mr. J.C Joshi Ms .Deepti Kakkar Accounts Manager (PF), Faculty Guide, 1
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A REPORT
ON
“WORKING CAPITAL MANAGEMENT IN“WORKING CAPITAL MANAGEMENT IN
HCL INFOSYSTEMS LIMITED”HCL INFOSYSTEMS LIMITED”
BY
(Submitted in partial fulfillment of the requirements of
MBA program at
Jagan Institute Of Management Studies , Rohini)
SUBMITTED TO :
Mr. J.C Joshi Ms .Deepti Kakkar
Accounts Manager (PF), Faculty Guide,
HCL Infosystems Ltd. JIMS
BHAVANSHU JOSHI
FC09130
1
CERTIFICATE
This is to certify that the project work done on “Working Capital Management at
HCL Infosystems” is an original work carried out by Ms. Bhavanshu Joshi under my
supervision and guidance. The project report is submitted towards the partial
fulfillment of two – year, full time Post Graduate Diploma in Management.
This work has not been submitted anywhere else for any other degree/diploma. The
work was carried out from 03-06-2010 to 28-06-2010 in HCL Infosystems.
Mr.J.C.Joshi Ms Deepti Kakkar
(Industrial Guide) Faculty Guide
Date:
Bhavanshu Joshi
Roll No. FC09130
2
ACKOWLEDGEMENT
Achievement is finding out what you would be then doing, what you have to do. The
higher the summit, the harder is the climb. The goal was fixed and we began with a
determined resolved and put in ceaseless sustained hard work. Greater challenge,
greater was our effort to overcome it.
This project work, which is my first step in the field of professionalization, has been
successfully accomplished only because of my timely support of well-wishers. I
would like to pay my sincere regards and thanks to those, who directed me at every
step in my project work.
I would also like to thank the faculty members and the staff members of HCL
Infosystems Ltd. for their kind support and help during the project.
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DECLARATION
I hereby declare that this project report titled “working capital management at HCL
INFOSYSTEMS is true to my knowledge and is result of my own efforts. This
project has not been submitted anywhere and I am solely responsible for the accuracy
of this project.
Bhavanshu Joshi
FC09130
JIMS
4
PREFACE
This project is based on the study of working capital management in HCL Infoystems.
An insight view of the project will encompass – what it is all about, what it aims to
achieve, what is its purpose and scope, the various methods used for collecting data
and their sources, including literature survey done, further specifying the limitations
of our study and in the last, drawing inferences from the learning so far.
HCL Infosystems Limited (HCL), is a leading domestic computer hardware and
hardware services company. HCL is engaged in selling manufactured ( like PCs,
servers, monitors and peripherals) and traded hardware ( like notebooks, peripherals)
to institutional clients as well as in retail segment. It also offers hardware support
services to existing clients through annual maintenance contracts, network consulting
and facilities management.
The working capital management refers to the management of working capital, or
precisely to the management of current assets. A firm’s working capital consists of its
investments in current assets, which includes short-term assets—cash and bank
balance, inventories, receivable and marketable securities.
This project tries to evaluate how the management of working capital is done in HCL
Infosystems through inventory ratios, working capital ratios, trends, computation of
cash, inventory and working capital, and short term financing.
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TABLE OF CONTENTS
Acknowledgement
Declaration
Preface
Executive summary
1. INTRODUCTION
Introduction about the organisation
Company’s history
HCL at a glance
Alliances and partnerships
Management team
Corporate information
Objectives
Hypothesis
2. LIETRATURE REVIEW
3. RESEARCH METHODOLOGY
Scope of study
Data source
Conceptual Framework
Introduction to Working Capital Management
Significance of working capital management
Liquidity vs Profitability: Risk – Return trade off
Classification of working capital
Types of working capital needs
Financing of working capital
Factors determining working capital requirements
6
Working capital cycle
Sources of working capital
HCL financials
Working capital position
Inventory management
Cash management
Receivables management
Managing payables (Creditors)
Financing current assets
Working capital & short-term financing
Comparing the working capital efficiency with other competitor firms
4. FINDING AND ANALYSIS
Industry analysis
Financial graphs
Concluding analysis
5. SUGGESTIONS AND RECOMMENDATIONS
6. LIMITATION
BIBLOGRAPHY
APPENDIX
7
LIST OF TABLES AND FIGURES
Table No. Name Page.
No
1.1 Highlight of HCL 11
3.2 Current assets-total asset 35
3.3 Sales-current asset 35
3.4 Current assets-fixed assets 36
3.5 Current assets-current liability 36
3.6 Inventory composition 40
3.7 Raw material composition 42
3.8 Work in progress composition 42
3.9 Finished goods composition 43
3.10 Inventory turnover ratio 44
3.11 Quick ratio 49
3.12 Cash flow 51
3.13 Working capital ratio 51
3.14 Cash flow from investing activity 52
3.15 Debtor turnover ratio & average collection period ratio 56
3.16 Secured loan 61
3.17 Unsecured loan 62
3.18 Year end commercial papers 62
4.1 Comparison between ratios of competitor companies 69
4.2 Analysis of the ratio in comparison with competitor 70
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Figure No. Name Page No.
1.1 HCL’s area of work
2.1 Operating cycle 17
3.1 Short term-long term financing 24
3.2 Kinds of working capital 25
3.3 Permanent and temporary financing 27
3.4 Graph showing temporary and permanent financing 27
3.5 Working capital cycle 33
3.6 Inventory turnover ratio 44
3.7 Average inventory holding period 44
3.8 Quick ratio 49
3.9 Dividend 49
3.10 Cash balance 49
3.11 Average collection period 56
3.12 Debtor turnover ratio 56
3.13 Level of current assets Vs output 59
4.1 Revenue graph 65
4.2 PBT graph 66
4.3 PAT graph 66
4.4 EPS graph 67
4.5 Dividend 67
4.6 Book value 68
4.7 PE ratio graph 68
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EXECUTIVE SUMMARY:
The project undertaken is on “WORKING CAPITAL MANAGEMENT IN HCL
INFOSYSTEMS LIMITED”.
It describes about how the company manages its working capital and the various steps
that are required in the management of working capital.
Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and payments.
Understanding a company's cash flow health is essential to making investment
decisions. A good way to judge a company's cash flow prospects is to look at its
working capital management (WCM).
Working capital refers to the cash a business requires for day-to-day operations or,
more specifically, for financing the conversion of raw materials into finished goods,
which the company sells for payment. Among the most important items of working
capital are levels of inventory, accounts receivable, and accounts payable. Analysts
look at these items for signs of a company's efficiency and financial strength.
The working capital is an important yardstick to measure the company’s operational
and financial efficiency. Any company should have a right amount of cash and lines
of credit for its business needs at all times.
This project describes how the management of working capital takes place at
HCL Infosystems.
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Chapter 1:INTRODUCTION
HINDUSTAN COMPUTERS LIMITED:
Type Public
(BSE: 500179,BSE: 532281)
Founded 11th August 1976
Headquarters Noida, India
(Delhi metropolitan area), India
Key People Shiv Nadar, Founder-Chairman and Chief
Strategy Officer, HCLTechnologies
Roshni Nadar, CEO HCL Corp
Ajai Chowdhry - Founder-Chairman and CEO,
HCL Infosystems , Vineet Nayar - CEO, HCL
Technologies. Jagadeshwar Gattu- Vise
President of HCL.
Industry Information Technology Services
Revenue US$5.0 billion (2009)
Employees 62,000+ (2010
Website www.hcl.in
Hindustan Computers Limited, also known as HCL Enterprise, is one of India's
largest electronics, computing and information technology company. Based in Noida,
near Delhi, the company comprises two publicly listed Indian companies, HCL
Technologies and HCL Infosystems.
HCL was founded in 1976 by Shiv Nadar, Ajai Chowdhry and four of their
colleagues. HCL was focused on addressing the IT hardware market in India for the
first two decades of its existence with some sporadic activity in the global market. In
1981, HCL seeded a company focused on addressing the computer training industry,
NIIT, though it has currently divested its stake in the company. In 1991, HP took
The working capital management precisely refers to management of current
assets. A firm’s working capital consists of its investment in current assets, which
include short-term assets such as:
Cash and bank balance,
Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets and
current liabilities.
WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES
There are two major concepts of working capital:
Gross working capital
Net working capital
Gross Working Capital:
It refers to firm's investment in current assets. Current assets are the assets, which
can be converted into cash with in a financial year. The gross working capital points
to the need of arranging funds to finance current assets.
Net Working Capital :
It refers to the difference between current assets and current liabilities. Net
working capital can be positive or negative. A positive net working capital will
arise when current assets exceed current liabilities. And vice-versa for negative net
working capital. Net working capital is a qualitative concept. It indicates the
liquidity position of the firm and suggests the extent to which working capital
needs may be financed by permanent sources of funds. Net working capital also
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covers the question of judicious mix of long-term and short-term funds for
financing current assets
Significance Of Working Capital Management
The management of working capital is important for several reasons:
For one thing, the current assets of a typical manufacturing firm account for half
of its total assets. For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has
the effect on company's risk, return and share prices.
There is an inevitable relationship between sales growth and the level of current
assets. The target sales level can be achieved only if supported by adequate
working capital Inefficient working capital management may lead to insolvency
of the firm if it is not in a position to meet its liabilities and commitment
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LIQUIDITY VS PROFITABILITY: RISK - RETURN TRADE
OFF
Another important aspect of a working capital policy is to maintain and provide
sufficient liquidity to the firm. Like the most corporate financial decisions, the
decision on how much working capital be maintained involves a trade off- having a
large net working capital may reduce the liquidity risk faced by a firm, but it can
have a negative effect on the cash flows. Therefore, the net effect on the value of the
firm should be used to determine the optimal amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They are
the determination of:
The optimal level of investments in current assets.
The appropriate mix of short-term and long-term financing used to support this
investment in current assets, a firm should decide whether or not it should use
short-term financing. If short-term financing has to be used, the firm must
determine its portion in total financing. Short-term financing may be preferred
over long-term financing for two reasons:
Fig.3.1
The cost advantage
Flexibility
But short-term financing is more risky than long-term financing. Following table
will summarize our discussion of short-term versus long-term financing.
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Maintaining a policy of short term financing for short term or temporary assets
needs (Box 1) and long- term financing for long term or permanent assets needs
(Box 3) would comprise a set of moderate risk –profitability strategies. But what one
gains by following alternative strategies (like by box 2 or box 4) needs to weighed
against what you give up.
CLASSIFICATION OF WORKING CAPITAL
Working capital can be classified as follows:
On the basis of time
On the basis of concept
Fig.3.2
27
KINDS OF WORKING CAPITAL
ON THE BASIS OF CONCEPT
GROSS WORKING CAPITAL
NET WORKING CAPITAL
ON THE BASIS OF TIME
PERMANENT/FIXED WORKING CAPITAL
REGULAR WORKING CAPITAL
RESERVE WORKING CAPITAL
TEMPORARY/VARIABLE WORKING CAPITAL
SEASONAL WORKING CAPITAL
SPECIAL WORKING CAPITAL
TYPES OF WORKING CAPITAL NEEDS
Another important aspect of working capital management is to analyze the total
working capital needs of the firm in order to find out the permanent and temporary
working capital. Working capital is required because of existence of operating cycle.
The lengthier the operating cycle, greater would be the need for working capital.
The operating cycle is a continuous process and therefore, the working capital is
needed constantly and regularly. However, the magnitude and quantum of working
capital required will not be same all the times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changes reflect
permanent changes in the firm as is the case when the inventory and receivables
increases as the firm grows and the sales become higher and higher. Other changes
are seasonal, as is the case with increased inventory required for a particular festival
season. Still others are random reflecting the uncertainty associated with growth in
sales due to firm's specific or general economic factors.
Permanent working capital
Temporary working capital
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Fig 3.3
The permanent level is constant while the temporary working capital is fluctuating
increasing and decreasing in accordance with seasonal demands as shown in the
fig.3.4
In the case of an expanding firm, the permanent working capital line may not be
horizontal. This is because the demand for permanent current assets might be
increasing (or decreasing) to support a rising level of activity. In that case line would
be rising.
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There is always a minimum level of working capital, which is continuously required by a firm in order to maintain its activities. Every firm must have a minimum of cash, stock and other current assets, this minimum level of current assets, which must be maintained by any firm all the times, is known as permanent working capital for that firm. This amount of working capital is constantly and regularly required in the same way as fixed assets are required. So, it may also be called fixed working capital.
PERMANENT WORKING CAPITAL
Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The position of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes
TEMPORARY WORKING CAPITAL
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL
Solvency Of The Business: Adequate working capital helps in
maintaining the solvency of the business by providing uninterrupted of
production.
Goodwill: Sufficient amount of working capital enables a firm to make
prompt payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit
standing can arrange loans from banks and other on easy and favorable
terms.
Cash Discounts: Adequate working capital also enables a concern to avail
cash discounts on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures
regular supply of raw material and continuous production.
Regular Payment Of Salaries, Wages And Other Day TO Day
Commitments: It leads to the satisfaction of the employees and raises the
morale of its employees, increases their efficiency, reduces wastage and
costs and enhances production and profits.
Exploitation Of Favorable Market Conditions: If a firm is having adequate
working capital then it can exploit the favorable market conditions such as
purchasing its requirements in bulk when the prices are lower and holdings
its inventories for higher prices.
Ability To Face Crises: A concern can face the situation during the
depression.
Quick And Regular Return On Investments: Sufficient working capital
enables a concern to pay quick and regular of dividends to its investors and
gains confidence of the investors and can raise more funds in future.
High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in a
business.
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EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its
business operations. It should have neither redundant or excess working capital
nor inadequate nor shortages of working capital. Both excess as well as short
working capital positions are bad for any business. However, it is the inadequate
working capital which is more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE
WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the
firm and business cannot earn the required rate of return on its
investments.
2. Redundant working capital leads to unnecessary purchasing and
accumulation of inventories.
3. Excessive working capital implies excessive debtors and defective credit
policy which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks
and other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also
fall.
7. The redundant working capital gives rise to speculative transactions
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DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital
arises due to the time gap between production and realization of cash from sales.
There is an operating cycle involved in sales and realization of cash. There are time
gaps in purchase of raw material and production; production and sales; and realization
of cash.
Thus working capital is needed for the following purposes:
· For the purpose of raw material, components and spares.
· To pay wages and salaries
· To incur day-to-day expenses and overload costs such as office expenses.
· To meet the selling costs as packing, advertising, etc.
· To provide credit facilities to the customer.
· To maintain the inventories of the raw material, work-in-progress, stores and
spares and finished stock.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc. These
expenses are called preliminary expenses and are capitalized. The amount needed
for working capital depends upon the size of the company and ambitions of its
promoters. Greater the size of the business unit, generally larger will be the
requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.
There are others factors also influence the need of working capital in a business
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FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS
There are many factors that determine working capital needs of an enterprise. Some
of these factors are explained below:
1. Nature Of Business: The requirements of working is very limited in
public utility undertakings such as electricity, water supply and railways
because they offer cash sale only and supply services not products, and no
funds are tied up in inventories and receivables. On the other hand the
trading and financial firms requires less investment in fixed assets but have
to invest large amt. of working capital along with fixed investments.
2. Size Of The Business: Greater the size of the business, greater is the
requirement of working capital.
3. Production Policy: If the policy is to keep production steady by
accumulating inventories it will require higher working capital.
4. Length of Production Cycle: The longer the manufacturing time the raw
material and other supplies have to be carried for a longer in the process
with progressive increment of labor and service costs before the final
product is obtained. So working capital is directly proportional to the
length of the manufacturing process.
5. Seasonals Variations: Generally, during the busy season, a firm requires
larger working capital than in slack season.
6. Working Capital Cycle: The speed with which the working cycle
completes one cycle determines the requirements of working capital.
Longer the cycle larger is the requirement of working capital.
7. Rate of Stock Turnover: There is an inverse co-relationship between
the question of working capital and the velocity or speed with which the
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sales are affected. A firm having a high rate of stock turnover wuill needs
lower amt. of working capital as compared to a firm having a low rate of
turnover.
8. Business Cycle: In period of boom, when the business is prosperous, there
is need for larger amt. of working capital due to rise in sales, rise in prices,
optimistic expansion of business, etc. On the contrary in time of
depression, the business contracts, sales decline, difficulties are faced in
collection from debtor and the firm may have a large amt. of working
capital.
9. Rate of Growth of Business: In faster growing concern, we shall require
large amt. of working capital.
10. 1Earning Capacity And Dividend Policy: Some firms have more earning
capacity than other due to quality of their products, monopoly conditions,
etc. Such firms may generate cash profits from operations and contribute
to their working capital. The dividend policy also affects the requirement
of working capital. A firm maintaining a steady high rate of cash dividend
irrespective of its profits needs working capital than the firm that retains
larger part of its profits and does not pay so high rate of cash dividend.
11. Price Level Changes: Changes in the price level also affect the working
capital requirements. Generally rise in prices leads to increase in working
Purchase of Investment -530.75 -659.92 -1813.98 -3553.34 -2034.38
Disposal/Redemption of
Investment
654.90 653.12 1813.98 3611.32 1980.11
Net cash from investing activities shows the amount of cash firms spend on
investments. Here we can see that some year its positive and some year its negative it
does not signifies wrong investment policy of firm but it shows that heavy investment
during that particular year.
The investments have increased from the last year due to the continuous increase in
sales revenue. We can see that the firm has in these three years increased their cash
inflow from the investing activities by way of disposal of investments when in need.
That is the firm has redeemed to realize cash as to meet its expanding operations, fund
the inventory procurement and meet the obligations.
The investments in mutual funds are beneficial to the firm in the context that they
contain interest bearing securities which add up as a source of revenue for the firm
unlike cash which remains idle and unproductive when not in use. This reduction of
dividend could be attributed to disposal of investments in mutual funds and
subsidiary. This disposal creates a fund, which can be used by the company as and
when the need arises.
54
RECEIVABLES MANAGEMENT
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 erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small businesses
whom can least afford it. 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:
1. Have the right mental attitude to the control of credit and make sure that it gets
the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and
customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
6. Establish credit limits for each customer and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and aging schedules, and don't let any debts get
too old.
55
Recognize that the longer someone owes you, the greater the chance you will never
get paid. If the average age of your debtors is getting longer, or is already very long,
you may need to look for the following possible defects.
Poor collection procedures.
Lax enforcement of credit terms.
Slow issue of invoices or statements.
Errors in invoices or statements.
Customer dissatisfaction.
Weak credit judgement.
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Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention. Look for the warning signs of a future bad debt. For example…..
1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed terms.
3. Evidence of customers switching to additional suppliers for the same goods.
4. New customers who are reluctant to give credit references.
5. 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 that there is
something more urgent or important that demand 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.
Here are few ways in collecting money from debtors: -
Develop appropriate procedures for handling late payments.
Track and pursue late payers
Get external help if you 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 that your objective is to get the money, not to score points or get even.
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RECEIVABLES MANAGEMENT IN HCL INFOSYSTEMS:
Table 3.15
PARTICULARS 2005 2006 2007 2008 2009
DEBTORS TURNOVER RATIO 5.80 5.21 13.39 11.06 8.91
AVERAGE COLLECTION
PERIOD
63 84 31 36 46
A better turnover ratio implies for the firm, more efficiency in converting the accounts
receivable to cash. A firm with very high turnover ratio can take the freedom of holding
very little balances in cash, as their debtors are easily realizable. In case of HCL, the
collection period for the firm is decreasing trend which is good for the firm.
2005 2006 2007 2008 20090
10
20
30
40
50
60
70
80
90
AVERAGE COLLECTION PERIOD
225 2006 2007 2008 20090
2
4
6
8
10
12
14
16
DEBTOR TURNOVER RATIO
Fig 3.11 Fig .3.12
58
COLLECTION POLICIES:
It refers to the collection procedures such as letters, phone calls and other follow up
mechanism to recover the amount due from the customers. It is obvious that costs are
incurred towards the collection efforts, but bad debts as well as average collection period
would decrease. Further, a strict collection policy of the firm is expensive for the firm
because of the high cost is required to be incurred by the firm and it may also result in
loss of goodwill. But at the same time it minimizes the loss on account of bad debts.
Therefore, a firm has to strike a balance between the cost and benefits associated with
collection policies.
The steps usually followed in collection efforts are:
Sending repeated letters and reminders to the customers
Personal visits
Using agencies involved in collection process
Making telephonic reminders
Initiating legal actions
Real Time Gross Settlement (RTGS)
Real Time Gross Settlement as such is a concept new in nature and though the firm uses
the system with all the members of the consortium, it is still in its primal stage and will
take time before all of the clients of the firm are willing to accept it. The firm has made a
proposal to the consortium of the banks during appraisal for faster implementation of
internet based banking facility by all the banks and adoption of RTGS payment system
through net.
The debtor’s turnover ratio is completely dependent upon the credit policy followed by
the firm. The credit policy followed by the firm should be such that the threat of bad
debts and the default rate involved should be terminated.
59
MANAGING PAYABLES (Creditors)
Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create
liquidity problems.
Consider the following: -
Who authorizes purchasing in your company - is it tightly managed or spread
among a number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities, which take account of stock holding and purchasing
costs?
Do you know the cost to the company of carrying stock?
Do you have alternative sources of supply? If not, get quotes from major suppliers
and shop around for the best discounts, credit terms as it reduces dependence on a
single supplier.
How many of your suppliers have a return policy?
Are you in a position to pass on cost increases quickly through price increases to
your customers?
If a supplier of goods or services lets you down can you charge back the cost of the
delay?
Can you arrange (with confidence!) to have delivery of supplies staggered or on a
just-in-time basis?
There is an old adage in business that "if you can buy well then you can sell well".
Management of your creditors and suppliers is just as important as the management of
your debtors. It is important to look after your creditors- slow payment by you may
create ill feeling and can signal that your company is inefficient (or in trouble!).
60
Remember that a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.
Financing Current Assets
The firm has to decide about the sources of funds, which can be availed to make
investment in current assets.
Long term financing:
It includes ordinary share capital, preference share capital, debentures, long term
borrowings from financial institutions and reserves and surplus.
Short term financing:
It is for a period less than one year and includes working capital funds from banks,
public deposits, commercial paper etc.
Spontaneous financing:
It refers to automatic sources of short-term funds arising in normal course of business.
There is no explicit cost associated with it. For example, Trade Credit and Outstanding
Expenses etc.
Depending on the mix of short and long term financing, the company can follow
any of the following approaches.
Matching Approach
In this, the firm follows a financial plan, which matches the expected life of assets with
the expected life of source of funds raised to finance assets. When the firm follows this
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approach, long term financing will be used to finance fixed assets and permanent
current assets and short term financing to finance temporary or variable current assets.
Conservative Approach
In this, the firm finances its permanent assets and also a part of temporary current assets
with long term financing. In the periods when the firm has no need for temporary current
assets, the long-term funds can be invested in tradable securities to conserve liquidity. In
this the firm has less risk of facing the problem of shortage of funds.
Aggressive Approach
In this, the firm uses more short term financing than warranted by the matching plan.
Under an aggressive plan, the firm finances a part of its current assets with short term
financing.
Relatively more use of short term financing makes the firm more risky.
Current asset to fixed asset ratio:
The financial manager should determine the optimum level of current assets so that the
wealth of shareholders is maximized. A firm needs fixed and current assets to support a
particular level of output.
The level of current assets can be measured by relating current assets. Dividing current
assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets, a
higher CA/FA ratio indicates a conservative current assets policy and a lower CA/FA
62
ratio means an aggressive current assets policy assuming other factors to be constant. A
fig 3.11
conservative policy i.e. higher CA/FA ratio implies greater liquidity and lower risk;
while an aggressive policy i.e. lower CA/FA ratio indicates higher risk and poor
liquidity. The current assets policy of the most firms may fall between these two
extreme policies. The alternative current assets policies may be shown with the help of
the following figure.
In this figure the most conservative policy is indicated by alternative A, where as CA/FA
ratio is greatest at every level of output. Alternative C is the most aggressive policy, as
CA/FA ratio is lowest at all levels of output. Alternative B lies between the conservative
and aggressive policies and is an average policy.
SHORT TERM FINANCING
Other than the investment in current assets, the firm also has to be concerned with short-
term to long-term debt as this plays a very important role in determining the amount of
risk undertaken by the firm. That is , the firm not only has to be concerned about current
assets but also the sources through which they are financed. A firm before financing in
either of the two, has to take into consideration various aspects. While short term might
seem the ideal way to finance your assets than the long term due to shorter maturity
period and also less of costs are involved, there is an inherent risk in short term financing
due to fluctuating interest rates and due to the reason that the firm might be unable to
reay the amount in a shorter span of time.
Table 3.16
SECURED LOANS 2005 2006 2007 2008 2009
SHORT TERM 50.21 31.0 6.02 0 0
LONG TERM 5.54 13.49 6.0 0 101.85
TOTAL 55.75 44.49 12.02 0 101.85
%SHORT TERM 90.0 70 50 0 100
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Under secured loan cash credit, along with non fund based facilities, foreign currency
term loan from banks are secured by way of hypothecation of stock-in-trade, book debts
as first charge and by way of second chanrge on all the immovable and movable assets of
the parent company. Term loan in Indian rupees from a bank is subject to a prior charge
in favour of company’s bankers on book debts and stock in trade for working capital
facilities.
Table 3.17
UNSECURED LOANS 2005 2006 2007 2008 2009
SHORT TERM 26.10 151.0 223.87 352.66 226.85
LONG TERM --- 0.11 -- -- --
TOTAL 26.10 151.15 223.87 352.66 226.85
Here HCL has a major portion of their financing done through short term financing than
long term financing. The preference of short term financing to long term as such is not
the part of any policy employed by the firm but it was due to the reason that the interest
rates in short term were more investor friendly and the cost involved in them were also
low. At present, we can see that the firm is moving more towards long term financing as
the interest terms in the long term has reduced compared to the short term.
YEAR- END COMMERCIAL PAPERS
Table 3.19
PARTICULARS 2005 2006 2007 2008 2009
COMMERCIAL
PAPERS
25.00 40.00 70.0 145.0 105.0
The credit rating by ICRA continued at ‘A1+’indicating highest safety to company’s
commercial paper program of Rs. 75 Crores. It acts as an effective tool in reducing the
interst cost and is used for financing inventories and other receivables. As and when the
firm issues commercial papers, it sends a letter to the leader of the consortium, i.e., SBI
to reduce from the fund based limits the amount it has issued in the form of the
commercial papers. Suppose the firm issues 30 Crores as commercial papers and the fund
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based limits are say 115 Crores. Then firm sends a letter to SBI to reduce the existing
fund based limits from 115 to 85 Crores.
In terms of desirability, the commercial papers are cheaper and advantageous to the firm
compared to the consortium financing. The main advantage being the interest rate which
is lower than the bank rates existing under consortium financing. But the firm depends on
both and for working capital financing, it is dependent on the banks for funds sich as
working capital demand loans and cash credits. There is no point in the firm not making
use of the fund based limits in the consortium banking as their commercial papers are
restricted to 75 Crores.
MERITS OF COMMERCIAL PAPERS:
It is an alternative source of raising short-term finance, and proves to be handy
during periods of tight bank credit.
It is a cheaper source of finance in comparison to the bank credit.
DEMERITS OF COMMERCIAL PAPERS:
It is an impersonal method of financing.
It is always available to the financially sound and highest rated companies.
The amount of lonable funds available in the commercial paper market is limited
to the amount of excess liquidity of the various purchasers of commercial paper.
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SOURCES OF WORKING CAPITAL
HCL Infosystems has the following sources available for the fulfillment of its working
capital requirements in order to carry on its operations smoothly:
Banks:
These include the following banks –
State Bank of India
Canara Bank
HDFC Bank Ltd.
ICICI Bank Ltd.
Societe Generale
Standard Chartered Bank
State Bank of Patiala
State Bank of Saurashtra
Commercial Papers:
Commercial Papers have become an important tool for financing working
capital requirements of a company.
Commercial Paper is an unsecured promissory note issued by the company
to raise short-term funds. The buyers of the commercial paper include
banks, insurance companies, unit trusts, and companies with surplus funds
to invest for a short period with minimum risk.
CHAPTER 4: FINDING AND CONCLUSION
INDUSTRY ANALYSIS
66
Over the past decade, the Information Technology (IT) industry has become one of the
fastest growing industries in India, propelled by exports (the industry accounted for more
than a quarter of India’s services exports in 2004-05). The key segments that have
contributed significantly (96 percent of total) to the industry’s exports include – Software
and services (IT services) and IT enabled services (ITES) i.e. business services. Over a
period of time, India has established itself
as a preferred global sourcing base in these segments and they are expected to continue to
fuel growth in the future.
FINANCIAL GRAPHS(CONSOLIDATED OPERATION)
Gross Business Income:
Consolidated Revenue for the year is Rs. 12378 crores a against Rs. 12403 crores
in the previous year Services revenue grew by 43% from Rs. 458 crores to Rs.
654 crores in the current year
Fig .4.1
Profit before Tax:
67
Profit before tax for Parent Standalone in FY 2009 is Rs. 374 crores as against Rs.
434 crores in the previous year. Excluding exchange fluctuations, PBT for Parent
Standalone is Rs. 400 crores as against Rs. 432 crores in the previous year.
Fig.4.2
Profit after Tax: Profit after Tax for FY 2009 is Rs. 240 crores as against . 300 crores in FY
2008.Basic EPS for FY 2009 is Rs. 14.0.
Fig 4.3Earnings Per Share:
Basic EPS grew from Rs. 16.7 in the previous year to Rs. 18.7 in the current year. Diluted EPS grew from Rs. 16.5 in the previous year to Rs. 18.6 in the current year.
68
2005 2006 2007 2008 20090
5
10
15
20
EPS
Fig 4.4
Dividend:The Board recommends a final dividend of Rs. 1.50 per share (75% per fully paid
up equity share) to shareholders. This will be paid, subject to shareholder
approval on October 23, 2009. The total dividend proposed and paid for FY 2009
(including interim dividend of Rs. 5.00 per share) is Rs. 6.50 per share (325% per
fully paid up equity share), amounting to Rs. 130 crores including dividend
distribution tax.
Fig 4.5
Net worth/ Shareholders Fund:Net Worth grew to Rs. 1122 crores as at June 30, 2009 from Rs. 1016 crores as at
the close of the previous year. Paid up capital as at June 30, 2009 is Rs. 34.2
crores, comprising 17.1 crores equity shares of Rs. 2/- each Reserves & Surplus
are Rs. 1088 crores at year-end after appropriating Rs. 130 crores for dividend
and dividend distribution tax.
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Fig 4.6
Borrowings
During the year, the Company raised Rs. 80 crores by issue of 800 Redeemable,
Non-Convertible Debentures (NCDs) of Rs. 10 lacs each to LIC of India on private
placement basis. Fitch has assigned ‘stable’ outlook rating for the NCD
programme. These NCDs are listed on the National Stock Exchange of India
Limited. The company also repaid borrowings to the extent of Rs. 208 crores
during the year. Loan Funds, therefore, decreased to Rs. 227 crores as at June 30,
2009 from Rs. 355 crores as on June 30, 2008. The Debt/ (Debt + equity) ratio
reduced to 17%.
Fig 4.7
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COMPARING THE EFFCIENCY OF WORKING CAPITAL MANAGEMENT OF HCL INFOSYSTEM WITH ITS COMPITITOR
Table 4.1
2005 2006 2007 2008 2009
HCL
INFOSYSTEM
Current ratio 1.5 1.5 1.43 1.5 1.37
Inventory turnover ratio 10.48 9.90 14.93 14.06 13.89
Quick ratio 1.04 1.08 1.04 1.28 1.30
Debtor turnover ratio 5.80 5.21 13.39 11.06 8.91
TVS ELECTRONICS
Current ratio 1.37 1.71 1.422 2.11 1.62
Inventory turnover ratio 7.46 9.22 9.61 15.27 11.70
Quick ratio 0.87 1.83 1.93 2.28 1.94
Debtor turnover ratio 6.22 3.95 3.38 3.31 4.20
MOSER BAER Current ratio 1.18 1.14 0.98 1.25 0.85
Inventory turnover ratio 3.86 3.84 3.73 3.84 4.36
Quick ratio 2.18 3.14 1.62 2.69 1.77
Debtor turnover ratio 4.02 4.68 5.59 5.90 6.55
ZENITH COMPUTERS
Current ratio 0.79 0.93 3.85 3.52 3.69
Inventory turnover ratio 9.63 14.27 12.61 8.25 5.08
Quick ratio 2.74 4.83 2.82 2.27 2.19
Debtor turnover ratio 5.43 4.44 5.09 5.18 4.55
MRO-TEK Current ratio 2.24 2.63 2.02 2.06 3.84
Inventory turnover ratio 1.46 2.01 2.02 2.06 2.90
Quick ratio 4.17 5.12 - 4.15 4.17
Debtor turnover ratio 5.50 4.53 4.52 4.74 3.88
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ANALYSIS OF THE IMPORTANT RATIO WITH RESPECT TO ITS COMPETITORS
Table 4.2
TVS MOSER BAER
ZENITH MRO-TEK
CURRENT RATIO
Compare to HCL the ratio is bit choppy and in 2008 its on higher side which is not ideal, rest of the years the ratio is consistent
The ratio is less then the ideal ratio which is not good for any firm.
The ratio was less in earlier year and is vey high in recent year which shows inconsistent policy of management
The ratio is always higher then ideal ratio which is not a good sign
INVENTORY TURNOVER RATIO
The ratio is lesser then HCL but its increase which is positive sign
The ratio is less then HCL.
The ratio is decreasing which is not a good sign
The ratio is very less compare to hcl but as the company ‘s size is less then HCL the ratios are acceptable
QUICK RATIO
The quick ratio is very inconsistent throughout the year also its way higher than the ideal limit. Compare to HCL its not properly managed
The ratio is very higher than ideal limit hence the management is not properly done
The ratio is very higher than the ideal ratio
The ratio is far higher than the ideal ratio
DEBTOR TURNOVER RATIO
The ratio is less then HCL also its in decreasing trend which is not good for a firm.
The ratio is less then HCL also its in increasing trend which is good for firm.
The ratio is less then HCL and have decreased in recent years
The ratio is less then HCL also its in decreasing trend which is not good for a firm.
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CONCLUDING ANAYSIS
The working capital position of the company is managed very aptly also the
various sources through which it is financed are optimal.
The company has used its dividend policy, purchasing, financing and investment
decisions to good effect can be seen from the inferences made earlier in the
project.
Sales and collection policy that get along with the receivables management of the
firm.
The various ratios calculated are an indicator as to the fact that the profitability of
the firm and sales are on a rise and also the deletion of the inefficiencies in the
working capital management.
The firm has not compromised on profitability despite the high liquidity is
commendable.
HCL Infosystems has reached a position where the default costs are as low as
negligible and where they can readily factor their accounts receivables for
availing finance is noteworthy.
Compare to its competition the working capital management is very sound.
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CHAPTER 5: SUGGESTIONS AND RECOMMENDATIONS
The management of working capital plays a vital role in running of a successful
business. So, things should go with a proper understanding for managing cash,
receivables and inventory.
HCL Infosystems is managing its working capital in a good manner, but still there is
some scope for improvement in its management. This can help the company in raising
its profit level by making less investment in accounts receivables and stocks etc. This
will ultimately improve the efficiency of its operations. Following are few
recommendations given to the company in achieving its desired objectives:
The business runs successfully with adequate amount of the working capital but
the company should see to it that the cash should not be tied up in excessive
amount of working capital.
Though the present collection system is near perfect, the company as due to the
increasing sales should adopt more effective measures so as to counter the threat
of bad debts.
The over purchasing function should be avoided as it could lead to liquidity
problems.
The investment of cash in marketable securities should be increased, as it is very
profitable for the company.
Holding of excessive and insufficient stock must be avoided as it creates a
burden on the cash resources of a business and results in lost sales, delays for
customers, etc respectively.
74
CHAPTER 6: LIMITATIONS OF THE STUDY
Only the printed data about the company will be available and not the back–end
details.
Future plans of the company will not be disclosed to the trainees.
Lastly, due to shortage of time it is not possible to cover all the factors and details
regarding the subject of study.
The latest financial data could not be reported as the company’s websites have not
been updated.
75
BIBLIOGRAPHY
Following sources have been sought for the preparation of this report:
Corporate Intranet
Financial Statements (Annual Reports)
Direct interaction with the employees of the company