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FINAL REPORT
ON
MANAGEMENT THESIS
“A multi-dimensional analysis of working capital management, techniques, tools and changing patterns in a
manufacturing concern at vadodara”
BY
KEYUR A. PRAJAPATI
8NBVD062
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This is an accepted fact that each and every work has two aspects and this universal truth is also applicable so far as education is concerned, it also has two aspects one is theoretical and the other is practical. Theoretical knowledge with practical experience is must for every students of management. Thus practical experience plays a vital role in acquiring the real knowledge in management study.
After looking to the importance of the practical study, INC Baroda outlined the Management Thesis – I in III SEM which is helpful for me to explore my self and to understand the behavioral pattern of investors in allocation of funds towards Gold.
From this report I have learnt how to outline the best Thesis on time. How I draft a management thesis in way that it include objective of this thesis, limitations of this thesis, methodology of this thesis, schedule and reference of this thesis
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A well designed and implemented working capital management is expected to contribute positively to
the creation of a firm’s value.
Ø The main objective is to examine the trends in working capital management and its impact of
firms’ performance. Ø The trend in working capital needs and profitability of firms are to be examined to identify
the causes for any significant difference between the industries. Ø To study the key variables used in the analysis like inventories days, accounts receivables
days, accounts payable days and cash conversion cycle. Ø To analyze how the firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. Ø To study the success factors that contribute to success or failure of a particular firm for
example availability of attractive financing, economic conditions, competition, government
regulations, technology and environmental factors. Ø To analyze effective management of working capital as it may have a consequent impact on
small business survival and growth. Ø To study how the firm is meeting day-to-day cash flow needs. Ø To analyze how the firm pays wages and salaries when they fall due. Ø To know how the firm makes regular payments to creditors to ensure continued supplies of
goods and services. Ø To know how the firm is meeting with the payments of government taxes Ø To analyze long term survival of the business entity.
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The primary research of our study is to do multi-dimensional analysis of cash management using
different specified techniques and tools and also measure the changing patterns or trends in a present
scenario.
“An Analysis of Emerging corporate Cash Management Approaches and shift in the present scenario”
For the purpose of this study, profitability is measured by return on total assets, which is defined as
profit before interest and tax divided by total assets. The efficiency ratios, namely accounts
receivable, inventory and accounts payable will be computed using applicable formulas. The cash
conversion cycle will be used as a comprehensive measure of working capital.
In order to account for firm’s size and the other variables that may influence profits, the debt-equity ratio, the gross working capital turnover ratio and the ratio of current assets to total assets will be included in our study.
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Business Manufacturers of electric fans, highmasts, lattice closed towers and poles, etc. and marketing of electrical goods such as general lighting service lamps, special lamps, compact fluorescent lamps, fluorescent tubes, luminaries, fans and electrical & non-electrical appliances.
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The company has been effective in carrying working capital cycle with low working capital limits. It
may also be observed that the PBT in absolute terms has been increasing as a year to year basis as
could be seen from the above table although profit percentage turnover may be lower but in absolute
terms it is increasing. In order to further increase profit margins, SSL can increase their margins by
extending credit to good customers and also by paying the creditors in advance to get better rates.
The working capital has the following components, which are in several forms of current assets:
v Stock of Cash
v Stock of Raw Material
v Stock of Finished Goods
v Value of Debtors
v Miscellaneous current assets like short term investment loans & advances The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below:
i. Nature of Enterprise The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.
ii. Manufacturing/Production Policy Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them.
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The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.
iv. Market Condition If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.
v. Availability of Raw Material If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same.
vi. Growth and Expansion Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.
vii. Price Level Changes Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment.
viii. Manufacturing Cycle The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more.
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At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below:
Component of Working Capital Basis of Valuation Stock of raw material Purchase cost of raw materials Stock of work in process At cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses Each constituent of the working capital is valued on the basis of valuation enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.
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CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non-availability of the working capital. The business may fail to honor its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, over assessment of working capital also has its own dangers.
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CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency. Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit. Inventory Management Inventory includes all types of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs should also be minimized. Business, therefore, should fix the minimum safety stock level, re-order level and ordering quantity so that the inventory cost is reduced and its management becomes efficient. Receivables’ Management Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell their goods on credit. In certain circumstances, a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating a current asset in the form of ‘Debtors’ or ‘Accounts Receivable’. Investment in this type of current assets needs proper and effective management as it gives rise to costs such as: i. Cost of carrying receivable (payment of interest etc.) ii. Cost of bad debt losses
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Thus the objective of any management policy pertaining to accounts receivables would be to ensure that the benefits arising due to the receivables are more than the cost incurred for receivables and the gap between benefit and cost increases resulting in increased profits. An effective control of receivables helps a great deal in properly managing it. Each business should, therefore, try to find out average credit extended to its client using the below given formula:
Average credit Extended (in days) = Total amount of receivables Average credit sales per day
Each business should project expected sales and expected investment in receivables based on various
factors, which influence the working capital requirement. From this it would be possible to find out
the average credit days using the above given formula. A business should continuously try to monitor
the credit days and see that the average credit offered to clients is not crossing the budgeted period.
Otherwise, the requirement of investment in the working capital would increase and, as a result,
activities may get squeezed. This may lead to cash crisis.
Cash Management
Cash is the most liquid current asset. It is of vital importance to the daily operations of business.
While the proportion of assets held in the form of cash is very small, its efficient management is
crucial to the solvency of the business. Therefore, planning cash and controlling its use are very
important tasks. Cash budgeting is a useful device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and out flows of cash over a projected
short period of time which may usually be a year, a half or a quarter year. Effective cash management
is facilitated if the cash budget is further broken down into month, week or even on daily basis.
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WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES
Component of Working Capital Basis of Valuation
Stock of raw material Purchase cost of raw materials Stock of work in process At cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses Positive working capital means that the company is able to pay off its short-term liabilities. Negative
working capital means that a company currently is unable to meet its short-term liabilities with its
current assets (cash, accounts receivable, inventory). If a company's current assets do not exceed its
current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case
scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red
flag that warrants further analysis. Working capital also gives investors an idea of the company's
underlying operational efficiency. Money that is tied up in inventory or money that customers still
owe to the company cannot be used to pay off any of the company's obligations. So, even if a
company is not operating in the most efficient manner (slow collection), it will show up as an increase
in the working capital. This can be seen by comparing the working capital from one period to another;
slow collection may signal an underlying problem in the company's operations.
Working Capital Analysis The major components of gross working capital include stocks (raw materials, work-in-progress and
finished goods), debtors, cash and bank balances. The composition of working capital depends on a
multiple of factors, such as operating level, level of operational efficiency, inventory policies, book
debt policies, technology used and nature of the industry. While inter- industry variation is expected
to be high, the degree of variation is expected to be low for firms within the industry.
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Nature and Importance of Working Capital The working capital meets the short-term financial requirements of a business enterprise. It is a
trading capital, not retained in the business in a particular form for longer than a year. The money
invested in it changes form and substance during the normal course of business operations. If it
becomes weak, the business can hardly prosper and survive. The success of a firm depends ultimately,
on its ability to generate cash receipts in excess of disbursements. On the one hand, working capital is
always significant. This is especially true from the lender's or creditor's perspective, where the main
concern is defensiveness: can the company meet its short-term obligations, such as paying vendor
bills?
But from the perspective of equity valuation and the company's growth prospects, working capital is
more critical to some businesses than to others. At the risk of oversimplifying, we could say that the
models of these businesses are asset or capital intensive rather than service or people intensive.
The Importance of Good Working Capital Management Working capital constitutes part of the Crown’s investment in a department. Associated with this is an
opportunity cost to the Crown. (Money invested in one area may “cost” opportunities for investment
in other areas.) If a department is operating with more working capital than is necessary, this over-
investment represents an unnecessary cost to the Crown.
From a department’s point of view, excess working capital means operating inefficiencies. In
addition, unnecessary working capital increases the amount of the capital charges.
The Management of Working Capital The amounts invested in working capital are often high in proportion to the total assets employed and
so it is vital that these amounts are used in an efficient and effective way. A firm can be very
profitable, but if this is not translated into cash from operations within the same operating cycle,
the firm would need to borrow to support its continued working capital needs. Thus, the twin
objectives of profitability and liquidity must be synchronized and one should not impinge on the
other for long. Investments in current assets are inevitable to ensure delivery of goods or services to
the ultimate customers and a proper management of same should give the desired impact on either
profitability or liquidity. If resources are blocked at different stages of the supply chain, this will
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prolong the cash operating cycle. Although this might increase profitability (due to increase sales), it
may also adversely affect the profitability if the costs tied up in working capital exceed the benefits of
holding more inventory and/or granting more trade credit to customers. Another component of
working capital is accounts payable, but it is different in the sense that it does not consume resources;
instead it is often used as a short term source of finance. Thus it helps firms to reduce its cash
operating cycle, but it has an implicit cost where discount is offered for early settlement of invoices.
Approaches to Working Capital Management The objective of working capital management is to maintain the optimum balance of each of the
working capital components. This includes making sure that funds are held as cash in bank deposits
for as long as and in the largest amounts possible, thereby maximizing the interest earned. However,
such cash may more appropriately be “invested” in other assets or in reducing other liabilities.
Working capital management takes place on two levels:
§ Ratio analysis can be used to monitor overall trends in working capital and to identify areas
requiring closer management.
§ The individual components of working capital can be effectively managed by using various
Techniques and strategies.
When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory.
Furthermore, working capital management is not an end in itself. It is an integral part of the
department’s overall management. Working Capital Cycle Working capital cycle, also known as the asset conversion cycle, operating cycle, cash conversion
cycle or just cash cycle, is used in the financial analysis of a business. The higher the number, the
longer a firm's money is tied up in business operations and unavailable for other activities such as
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investing. The cash conversion cycle is the number of days between paying for raw materials and
receiving cash from selling goods made from that raw material.
Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables Processing Period (in days) - Average Payables Processing Period (in days) with: § Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases
§ Average Receivables Processing Period (in days) = Accounts Receivable / Average Daily Credit
Sales
§ Average Payable Processing Period (in days) = Accounts Payable / Average Daily Credit
Purchases.
A short cash conversion cycle indicates good working capital management. Conversely, a long cash
conversion cycle suggests that capital is tied up while the business waits for customers to pay. The
longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the
longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other
hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In
other words, accounts payable reduce net working capital.
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Balance Sheet (Rs. In Millions) (table 2) Particulars 2006-07 2007-08 2008-09 Total Current Liabilities 3181.22 4070.98 5703.47 Total Term Liabilities 2371.71 2366.99 2138.52
Total Net Worth 1168.24 1747.78 2450.14 Total Liabilities 6793.81 8227.00 10323.59 Total Current Assets 5656.30 7084.53 9037.24 Total Non-Current Assets 222.95 223.28 315.59
Net Block 908.61 916.20 946.00 Total Assets 6793.81 8227.00 10323.59
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Working Capital Cycle GWC CYCLE = (Inventory Period + Receivables Period) NWC CYCLE = (Inventory Period + Receivables Period - Payables Period) A Inventory Period A1. Raw Material Conversion Period
(Rs. In Millions)
Particulars 2006-07 2007-08 2008-09 Raw Material Consumption 1374.41 1348.60 1656.13
Raw Material Consumption per Day 3.77 3.69 4.54 Average Inventory 253.09 279.37 295.60
Raw Material Inventory Holding in Days 67.13 75.78 65.11 (table 3) A2. Work In Process Conversion Period
(Rs. In Millions)
Particulars 2006-07 2007-08 2008-09 Cost of Production 8412.35 10638.60 13339.39
Cost of Production per Day 23.05 29.15 36.55 Average Working Progress Inventory 63.63 88.27 149.38
Working Progress Inventory Holding Day 2.76 3.03 4.08 (Table 4) A3. Finished Goods Conversion Period (table 5) (Rs. In Millions)
Particulars 2006-07 2007-08 2008-09 Cost of Goods Sold 8354.60 10257.00 13324.10
Cost of Goods Sold per Day 22.89 28.10 36.50 Finish Goods Inventory 795.10 1014.77 1213.22
Finish Goods Inventory Holding Days 34.74 36.11 33.24
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Contribution to Current Assets (table 9) Particulars 2006-07 2007-08 2008-09 Raw Material to Current Assets 27.10 21.77 20.95 Work In Process to Current Assets 1.25 1.42 1.89
Finished Goods Inventory to Current Assets
15.68 16.38 15.34
Total Inventory to Current Assets 21.92 22.31 20.97 Debtors to Current Assets 65.00 63.22 62.26
Inference.
Ø Minor decrease in finished goods inventory over the years by 2.16%.
Ø Debtors have been highly reduced over the years by 4.23%. Ø The work in process inventory has been maintained more than required and this is one of the
cause of liquidity crunch., on the other hand finished goods inventory and receivables have been reduced, which is a positive sign for company.
Ø The debtors are managed efficiently as it has been decreased by 4.23%.
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Inference It highlights the amount of assets that the firm uses to generate its total sales. The ability to generate a
large volume of sales on small assets base is an important part of the firm’s profit pictures.
The asset turnover ratio has been increased by 14.94% during 2008-09 Liquidity (table 15) As on 2006-07 2007-08 2008-09 Current Ratio 1.58 1.61 1.54 Quick Ratio 1.26 1.29 1.25
Cash Ratio 0.08 0.10 0.09 Inference
The current ratio measures the ability of the enterprise to meet its current obligations, a current ratio
1.54:1 implies that the firm has the current assets which are 1.54 times the current liabilities. This
shows conservative approach or traditional approach followed by the management regarding working
capital.
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There is an increased by 12.5% in the cash ratio during the period. As per my analysis cash is
sufficiently managed by the company in order to meet day to day obligations. Growth (%) (table 16) As on 2006-07 2007-08 2008-09 Total Operating Income 30.56 27.54 27.40
EBITDA 72.39 25.01 65.69 EBIT 83.94 26.11 71.53
Inferences
The operating income has been decreased by 10.34% because of drastically increase in operating cost
as compared to previous years.
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The Earning Before Interest and Tax has been reduced by 14.78% due to increased in the operating cost, in that work in process inventory is the prime cause for the blockage of liquidity as compared to other current assets. Still as compared to the previous year i.e. 2007-08 the EBIT was 26.11%, and in the current year i.e., 2008-09 the EBIT has been 71.53%. So, I can point out that the company is improving well enough to increase the wealth of the shareholders.
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Highmast, Transmission Line Towers and Special Projects comprise the various Divisions of this
Business Unit (BU). BEL has been focusing on its high-Margin E&P BU to garner strong Sales
Volume. In FY2009, the BU recorded a robust 42% growth in Sales to more than Rs500cr
I believe that the BU is well-geared to achieve its Sales target of Rs700cr for FY2010 given its
healthy Order Book position and its excellent execution capabilities. This capital-intensive BU
generates lower ROE than the company's Consumer Durables business. However, it may be noted
here that on a standalone basis the BU has been registering high ROE of around 20%. Further, we
believe that the BU has substantial growth potential particularly with the Eleventh Five-year Plan
having earmarked Rs1, 40,000cr for the Transmission Systems development.
Appliances BU
This is the second largest BU of the company in terms of Sales. In FY2008 and FY2009 the BU
clocked 40% and 29% Sales growth, respectively. In comparison, peer Usha International grew its
Top-line by 19% and 15% in FY2008 and FY2009, respectively. BEL has a technical tie up with the
global premium brand, Morphy Richards, which clocked Sales of Rs57cr in FY2009. Management
has also been focusing on value-for-money products.
I believe that weak monsoons will have limited impact on sales of appliances. However, I expect sales to slow down marginally compared to the previous years. The Fans BU
The Fans BU has done exceptionally well for BEL. In the last two years, the BU increased its Sales
from 17.8 lakh units to 32 lakh units. In FY2009, when the Fans' market grew by less than 5%, the
BU clocked a strong growth of 20%. Comparatively, Usha clocked 8% growth. Peer Havells is still at
nascent stages of growth and registered 15% growth in FY2009
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I believe that Sales of this BU have been driven by the growth witnessed in the Real Estate Sector.
While the BU did exceedingly well in FY2009, going ahead, I expect growth to moderate to around
17% and be closer to industry growth levels.
Luminaires BU
Indoor fixture, Luminaires, is the main product marketed by this BU. The BU has been getting regular orders from both the government and private players. BEL has launched LED luminaires as well. The BU has also developed Photolux application design software to be used by lighting professionals. The BU registered 23% growth in FY2009. I believe that BEL is strengthening its all-round capabilities in this space to prepare for the projected change in industry dynamics. In the long term, BEL expects to leverage its key competency in lighting and we estimate this BU to be a key growth driver for the company going ahead.
Lighting BU
Lighting BU achieved 18% Sales growth in FY2009 on the back of expanding distributor network. At
the end of FY2007, the company had 165,000 retail outlets across the country, which has increased by
more than 50% to 250,000 units at the end of FY2009. Owing to this expansion, the company has
grown much faster than Surya and Havells. Surya's Revenues from the Lighting and Luminaries
business grew at a CAGR of 6% during the last two years, while Havells' Top-line grew by 2% in
FY2009.
I believe that this unit will benefit immensely from the company's rapid network rollout. Moreover, on
account of the company's focus on CFL lighting, its Sales and Profitability will also continue to grow.
Moreover, as size of the BU grows, especially in the CFL Segment,
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