1 Working Capital Management. SUMMER TRAINING REPORT ON “WORKING CAPITAL MANAGEMENT OF FCI” SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION (Banking and Insurance) UNDER THE GUIDANCE OF SUBMITTED BY Mr.Inderpal Singh Vishal Singh (Assistant Professor) 00914701813 BBA(B&I)5 rd Semester MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT STUDIES
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1 Working Capital Management.
SUMMER TRAINING REPORT
ON
“WORKING CAPITAL MANAGEMENT OF FCI”
SUBMITTED IN PARTIAL FULFILLMENT FOR
THE AWARD OF THE DEGREE OF
BACHELOR OF BUSINESS ADMINISTRATION(Banking and Insurance)
UNDER THE GUIDANCE OF SUBMITTED BY
Mr.Inderpal Singh Vishal Singh
(Assistant Professor) 00914701813
BBA(B&I)5rdSemester
MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT STUDIES
Affiliated to Guru Gobind Singh Indraprastha University, Delhi
less working capital. For all businesses though they need to plan how much cash they are going to
have.
Process flow of “Cash planning & Budgeting”
No
Yes
Explanation of above:
Cash is the lifeblood of every business organization. Every organization needs to have
adequate flow of cash to meet its all requirement whether short term or long term. In any organizations
before starting any business activity proper planning of cash inflow & outflow is required to be made.
Input information received from all units- firm for the first week & tentative for the 2nd, 3rd, 4th week for raw material, sales, manufacturing exp. Etc. on the basis
of debtors & inventory aging reports etc.
Plan firmed up after discussion and modified with reference to inflows & outflows on unit basis.
Plan met
Monitored & reviewed on daily basis including follow-up collection /funds-in-transit.
Carried to next month
Month closed
47 Working Capital Management.
So, on the basis of receivable period cash inflow is planned for the beginning of each month and
accordingly outflow that is to be made is also planned as to when payment is to be made.
Purpose of preparing cash flow
Cash flow is concerned with the movement of money in and out of a business. More
importantly, it is concerned with the time at which the movement of the money takes place. You might
even say the concept of cash flow is more in line with reality.
It is being identified in which unit the outflow is greater than the inflow, & where there is
discrepancy between the Budgeted & Actual inflow & outflow.
In this format on daily basis cash inflow & outflow is entered under respective heads. This is
done in all the units of Food Corporation of India then at the end of the day cash balance remaining
with all banks are also added & it is found whether the cash balance reduced between two consecutive
days are equivalent to the net of cash flow or not? If not, then any discrepancy is there & that is tried
to found out. It also helps in finding out the item wise expenditure of the firm & help in knowing the
surplus/deficit generated in each unit & also helps in finding out the reason for difference between the
inflow & outflow of various units.
48 Working Capital Management.
Working Capital Management
Components of Working Capital:-
Receivable Management
Inventory Management
Payable Management
Cash Management
Receivables Management
The term receivable is defined as “debt owed to the firm by customers arising from sale of
goods in the ordinary course of business”. The credit sales are generally made on open account in the
sense that there are no formal obligations through a financial instrument. However extension of credit
involves risk and cost. Management should weigh the benefits as well as the cost to determine the goal
of receivable management.
The benefits from receivables are the increased sales and profits anticipated because of a
more liberal policy. When firms extend their trade credit, i.e. invest in receivables; they intend to
increase the sales level. The motive of liberal credit policy can be either growth oriented or sales
retention. The extension of credit has a major impact on sales, costs and profitability. Other things
being equal, a relatively liberal policy and therefore higher investment in receivables will produce
larger sales. However cost will be higher with the liberal policies than with more stringent measures.
Therefore accounts receivables management should aim at a trade-off between profit (benefits) and
risk (cost).
The cost associated with the extension of credit and accounts receivables are:
1. Collection cost
2. Interest cost
3. Delinquency cost and
4. Default cost.
49 Working Capital Management.
Receivable Management in Food Corporation of India
These sales are made against invoice. Receivable management is beyond credit control.
In Food Corporation of India Sales ledger debtors’ day collection is prepared to calculate on
a consistent basis throughout the corporation and for each unit, the number of day’s sales represented
by customer debts.
Department involved in receivable management
1. Accounts & Finance department
2. Sales & marketing department
Credit terms followed
All sales made are credit sales.
1. It has different payment terms with different customers and it is mutually agreed which is
shown on the PO (purchase order) made with each customer.
2. In general credit offer to most of the customers is for 30-45 days, and to few customers it is
60 days.
3. Advance payment is received in case of foreign customer & the customer who are one time
purchaser or whose credit worthiness is not checked.
Credit policy: -
In credit policy as credit standards & credit analysis is done. But in Food Corporation of
India there is no written credit policy as such. No credit analysis is done before selling goods to them.
No documents are being filled by the customer & their financial performance is also not judged.
Sometime they just refer to their balance sheet. No information is collected either internally or
externally.
Collection policy: -
50 Working Capital Management.
There is distinct credit collection policy in Food Corporation of India because no credit sales are
allowed in FCI and that is FCI not having any uniform collection policy.
Inventory management
Inventories are stock of the product, a corporation is manufacturing for sale. Inventories can exist in
the form of raw material, work-in-progress, finished goods, components and supplies, whereas motive
for holding inventories can be transaction motive, precautionary motive and speculative motive.
But many companies can’t operate under this model. Those that sell time-sensitive items have to have
materials, if not finished products, on hand to satisfy the expectations of the customer who needs an
order right away. Now-a-days many large manufacturers operate on a just-in-time (JIT) basis whereby
all the components to be assembled on a particular day, arrive at the factory early that morning, no
earlier no later. This helps to minimize manufacturing costs as JIT stocks take up little space,
minimize stock holding and virtually eliminate the risk of obsolete or damaged stock, because JIT
manufacturers hold stock for a very short time, they are able to conserve substantial cash.
Inventory Management – Objective
The basic objective of inventory management is twofold. First is the avoidance of over or under
investment in inventories and second is to provide the right quantity of material to the production
department at right time. The key issue for a business is to identify the fast and slow stock movers
with the objective of establishing optimum stock levels for each category and, thereby, minimize the
cash tied up in stocks. Factors to be considered when determining optimum stock levels are:
The projected sales of each product.
Availability of raw materials, components etc.
Delivery time by the suppliers
Can one remove slow movers from one’s product range without compromising best sellers?
Inventory Management Techniques
An inventory management technique includes the following: -
• Effective and efficient purchasing, storage and issuing procedures.
• Settings of various levels like maximum, minimum, recorder level etc.
51 Working Capital Management.
• Fixation of economic order quantity.
• Establishment of inventory budgets.
• Use of perpetual inventory system.
• Min-max plan.
• Order cycling system.
• ABC analysis.
• VED analysis.
• XYZ analysis.
• Use of inventory ratios.
• Aging schedule of inventories.
INVENTORY MANAGEMENT OF FCI In Food Corporation of India inventory management is done as various types of inventory are required
to be kept & valuation of inventory is done.
Types of Inventory
1. RAW MATERIAL
BOP (Brought out part): - It is the inventory of main raw material. It is kept for continued
production.
Development material : - It is the inventory that is being developed for new order until the
sample is being finalized.
Key material : - It is the raw material of keys
Plastic material : - It is the inventory of plastic material that is used for covering the keys.
Job Work (3 rd party RM ): - It is the inventory that is being used by third party for producing
our goods. This stock is in a way the stock of Food Corporation of India only.
2. Work-in-progress : - It is the inventory of semi-finished goods.
52 Working Capital Management.
Key section : - It includes following:-
Key blank : - It is the inventory of plain key material.
Key bitted : - It is the inventory of key that is being cut as per the requirement of locks of
different vehicles.
Key molded : - It is the inventory of key that is being molded to suit the requirement of vehicle.
3. Rejection: - It is the inventory of item that has been out of use.
The material that can be used from rejected inventory is taken out & rest is the scrap
Technique of Inventory Management used
Effective and efficient purchasing, storage and issuing procedures are being followed. On the basis of
schedules received from the customer forecasting of material requirement for the full lead period is
done.
Procedure of purchase, stock & issue are as follows:
53 Working Capital Management.
Process flow of purchase, stock & issue
When supply is received then check is done at the gate of the wherehouse & it is checked whether the
material is supplied as per the invoice. If satisfied then MRR (material received receipt) is issued at the
gate. Material is then sent to the receiving department, there the quantity of material is checked to
know whether it is as per the order or not? After checking it is then passed on to the quality store for
Schedule is received from customers i.e. Central Govt. or State Govt.
MRP (material requirement planning) is done
Material received is stored (one day inventory is maintained)
Bill of material is prepared
Availability of stock is checked
Production schedule is checked
Accordingly Order is placed with suppliers/vendors
Material is issued for production using FIFO method
54 Working Capital Management.
the quality check i.e. whether the quality is as per the order requirement or not? Then the material is
finally stored in the store from where it is issued to the production department through the issue slip.
Material is issued using FIFO (first in first out) method, where the material that comes first is issued
first for the production. They use the practice in which material is kept in racks in such a way that
material coming first will be used first.
JIT method: -
In Food Corporation of India JIT system of inventory management is used. It is the method
in which inventory is ordered only when demand comes. As in Food Corporation of India the
production schedule is followed. When & how much quantity of purchase & sale is to be made is
know beforehand. That’s why no excess inventory is maintained.
Aging schedule of inventories: -
Inventory aging is done where on the basis of period of stock holding inventory is divided
into four categories: -
• 30-60days :- Fast Moving
• 60-90 days Slow Moving
• 90-120 days
• 120 above :- Non-Moving
Continued Inventory aging is done to know the status of inventory. Analysis is done so as to control &
reduce the slow moving inventory.
Non-moving inventory are removed either by selling it as scrap or by making some modification in it
through job work and then using it again, if possible.
Which type of inventory is higher in different months? Remedial action can be taken against the
inventory. With the help of chart comparison becomes easy.
Payable Management
55 Working Capital Management.
Creditors are a vital part of effective cash a 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. Ironically, some companies looking to take working capital off the balance
sheet nurture slow, inefficient or even obstructive A/P processes. It’s one case where negligence can
improve financial performance. But squeezing the vendors is a shortsighted policy. A better strategy is
to shrink the vendor base radically, then use one’s clout to negotiate longer terms with the vendors.
Vendor rationalization is a process that can pay off in a big way. Apart from the question that who
should authorize purchasing in the corporation- should it be tightly managed or spread among a
number of (junior) people? The following comes under good payable management.
1. Purchase quantities should be geared to demand forecasts
2. Order quantities should be used which takes account of stock holding and purchasing costs.
3. The cost to the corporation of carrying stock should be clearly defined.
4. A corporation should have alternative sources of supply. It should get quotes from major
suppliers and shop around for the best discounts, credit terms, and reduce dependence on a
single supplier.
Payable Management in Food Corporation of India
56 Working Capital Management.
In Food Corporation of India it is being ensured that timely payment is made to the supplier/vendors.
The payment schedule is so designed that it will be made when the payment is received from the
debtors/customers & they have tried to delay the payment as much as they can so that the excess cash
balance is not required from the bank& their WCDL (working capital draw down limit) is not used.
Payment terms: -
1. Payment terms with the various vendors is decided on the basis of their PO i.e. purchase
order. The unit to be purchased cost of each unit, period of credit, when & how payment is to
be made. Everything is stated in the PO.
2. Payment is made to the vendors twice in a month in all the units of Food Corporation of
India. First installment is made in between 8th-10th & second installment is made in between
25th–29th.
3. Payment is made to the vendors through RTGS, NEFT only if all the required bank detail
(like IFSC code, Bank name, its branch, a/c no.) of the respective vendor is available, if not
then the payment is made through a/c payee cheque.
Methodology of payment
In Food Corporation of India the complete data base of the vendors is made in which each & every
information & bank detail of the suppliers is available.
1. For making the payment every time it become due, the suppliers’ liability is checked on the basis
of their credit period and amount that is due for the respective period is found out and it is being
tallied with the ledger of that supplier.
2. If the amount in ledger doesn’t tally with the ledger of supplier then balance confirmation is asked
from the respective supplier to know the due amount.
3. Then the amount due is recorded in the database & it is checked that through which medium
payment is to be made. If amount is more than “one lack” then payment is made through RTGS
otherwise through NEFT, and if bank detail is not available or the supplier whose bank is not
registered with RBI then in that case payment is made through account payee cheque.
57 Working Capital Management.
4. Food Corporation of India has recently started the service of outsourcing cheque payment from
HSBC bank, whereby, now only the details of supplier & the amount to be paid will be sent to the
bank & bank will make the cheque & payment on its behalf this will save the time & efforts of the
employees & the process will also get fastened.
CASH MANAGEMENT
Cash is an important part of any business organization; therefore it should be manage properly so as to
ensure smooth functioning of the organization. It is the
maintaining of liquidity of a firm to minimize the risk of insolvency? (An insolvent corporation is one
where it is unable to meet its maturing liabilities on time because it has inadequate liquidity to meet its
debt obligation). Cash Management is also about the proper balancing of keeping cash without letting
it idling around. Profit is not equating to cash flow. A highly profitable corporation might collapse if
without adequate cash flow due to the tying up of corporation’s funds with the accounts receivable and
worsen by the needs to make regular payments like wages, rent & utilities, taxes
Motives/Reasons of Holding Cash
Three (3) motives advocated by British economist, John Maynard Keynes namely for:
1. Transaction motive
2. Precautionary motive and
3. Speculative motive
58 Working Capital Management.
Cash Management in Food Corporation of India:Cash is the lifeblood of every business organization. Every organization needs to have
adequate flow of cash to meet its entire requirement, whether short term or long term. In any
manufacturing organizations before starting any business activity proper planning of cash inflow &
outflow is required to be made. So, on the basis of receivable period cash inflow is planned for the
beginning of each month and accordingly outflow that is to be made is also planned, as to when
payment is to be made.
On daily basis unit wise cash flow is prepared as discussed above & the position is
monitored. It is being identified in which unit the outflow is greater than the inflow, & where there is
discrepancy between the Budgeted & Actual inflow & outflow.
Payment is received on 2nd, 8th, 18th- 22nd of each month, accordingly payment is made on 2nd, 8th, &
22nd of each month.
Receivable & payable of the organization are so managed that the cash limit available with
the Banks are minimally used.
Food Corporation of India has maintained the accounts with many banks but major ones are
SBI BANK, IDBI BANK and AXIS BANK.
Bank provides the facility of WCDL (working capital draw down limit).it is the limit
available with the bank for meeting the short term cash requirement of the firm.
Different bank charges differed rate of interest for the service. As WCDL is the zero balance schemes
where firm can use the credit limit of the bank up to certain extent as agreed upon by them.
WCDL (working capital draw down limit) is of two types: -
Short-term loan: - It is the short-term loan facility that the firm can avail with the bank it is having 15
days roll over period i.e. after using for 15 days this facility gets rolled for next 15 days.
CC (Cash Credit) limit: -It is the facility similar to credit card facility available with the bank. The
organization can avail up to certain extent the credit facility of bank. In case of standard chartered
bank it is 500 Crores.
To know the position of WCDL used with the banks daily bank statements are checked of all the three
banks, this is done because there is always difference between the our bank book & books maintain by
bank, so to get an accurate picture of cash bank statements are checked. It is identified on daily basis
59 Working Capital Management.
that whether the firm is having fund with bank or it is using bank’s fund i.e. Bank’s CC limit. This is
done to know the cash position of firm at the end of each day so that decision could be taken on time
regarding Sweep to other unit or regarding investing the surplus fund.
Chart is prepared to show the WCDL utilization position. In the next page WCDL Average chart is
shown in which average utilization of the WCDL is shown.