Study on Working Capital Management @ Beardsell

A PROJECT REPORT ON STUDY ON WORKING CAPITAL MANAGEMENT

ATBEARDSELL LTD

CHENNAI

SUMMER PROJECT REPORT

Submitted by

RANJITH. J

REGISTER NO: 10p35f0945

Under the guidance of

Prof.P.S.Venkataraman - M.Com,MSc,MBA,MPhil

in partial fulfillment for the award of the degree

Of

MASTERS OF BUSINESS ADMINISTRATION

INDIAN INSTITUTE OF KNOWLEDGE MANAGEMENT

17-A, Muthuramalingar Street, Rajaji Colony,

Saligramam, Chennai - Pin: 600 093.

Tamilnadu, India.

ACKNOWLEDGEMENT

It is a matter of great satisfaction and pleasure to present this report

on Working Capital Management of BEARDSELL LTD, Chennai I take this opportunity

to owe my thanks to all those involved in my training.

My deepest thanks to Dean, Prof.P.S.Venkataraman - M.Com, MSc, MBA,

MPhil the Guide of the project for guiding and correcting various documents of mine

with attention and care. He has taken pain to go through the project and make necessary

correction as and when needed.

I express my thanks to the Director of, IIKM Business School, Chennai, for extending

his support.

My deep sense of gratitude to Y. MUKTHAR BASHA (Deputy General

Manager – finance), BEARDSELL LTD support and guidance. And D. KUMAR (Senior

Manager- Accounts for their encouragement and able guidance at every stage of my training

work. Thanks and appreciation to the helpful people at BEARDSELL LTD, for their

support.

I would also thank my Institution and my faculty members without whom this

project would have been a distant reality. I also extend my heartfelt thanks to my family

and Friends.

I owe a great many thanks to a great many people who helped and supported me

during the writing of this book.

Executive Summary

Beardsell Incorporated in 1936 currently it has 7 manufacturing units across India and

branches in all the major cities. There are multi-disciplinary teams consisting of

experienced professional managers, project engineers, production technologists and R&D

personnel at its various branches. The corporate institution committed to customer

satisfaction. Our motto is: “Excellence through Innovation”.

In seven decades since inception, we have strived to achieve:

Greater Customer Satisfaction

Enhanced Returns to Shareholders

The Trust of Consultants

Long term Relationships with Associates & Vendors

The values governing our business philosophy are:

Quality

Service

Trust

Beardsell Limited, has steered itself successfully in the EPS industry.

The company has grown multifold and has always met the growing

needs of the consumer. This has helped the company to reach the

forefront. The rapid growth reflects the team's professional excellence

and committed service in providing quality products. The company's

profit figures have risen over the years and now the company holds a

major market share of the EPS industry in India. These milestones sum

up the prudent managerial skills.

Beardsell Limited established in Chennai, India, are a prominent

manufacturer and supplier of premium quality Polystyrene Products

that have wide industry applications. Our products include Polystyrene

Granules, Expanded Polystyrene, Extruded Polystyrene, Polystyrene

Film Capacitor and Polystyrene Gap Fills. Our products are available in

various quantities. We undertake customization as per specific

requirements. Manufactured using premium raw materials, we assure

reliable quality and durable performance.

My Project is the study of working capital management.

The study was conducted at the Chennai office of BEARDSELL LIMITED

The project was of 45 days duration. During the project I interviewed the executives & staff

to collect the data, & also made use of Company records & annual reports. The data

collected were then compiled, tabulated and analyzed.

Working Capital Management is a very important facet of financial

management due to:

Investments in current assets represent a substantial portion of total investment.

Investment in current assets & the level of current liabilities have to be geared

quickly to change sales.

Some the points to be studied under this topic are:

How much cash should a firm hold?

What should be the firm’s credit policy?

How to & when to pay the creditors of the firm?

How much to invest in inventories?

Over view of BEARDSELL

Fact Sheet

Year of

Establishment

: 1937

Nature of Business : Manufacturer, Exporter, Service Provider

Major Markets : Indian Subcontinent, East Asia, Central America, Middle East,

South America, South East Asia and North America

The birth of the company W.A.Beardsell dates back to 1914. The

company's successive growth was spearheaded by its strength and the

will to excel in the ever competitive industry. Traditionally a trading

company, in 1937, it transformed its attention towards textiles and

promoted a textile manufacturing unit. W.A.Beardsell then

amalgamated with Mettur Industries Ltd. in 1967 and became Mettur

Beardsell Limited. The company then spread its wings to venture into

exports, textiles, insulation & contracting, packaging, technical

consultancy services and agency lines. In 1983 the company

transformed into Beardsell Ltd. and in 1985 the controlling interest in

the company was acquired from Totals U.K. by Nava Bharat Ferro

Alloys LtdHyderabad.

A Corporate Insight

Beardsell Limited, has steered itself successfully in the EPS industry.

The company has grown multifold and has always met the growing

needs of the consumer. This has helped the company to reach the

forefront. The rapid growth reflects the team's professional excellence

and committed service in providing quality products. The company's

profit figures have risen over the years and now the company holds a

major market share of the EPS industry in India. These milestones sum

up the prudent managerial skills.

The Focus

Beardsell Ltd pioneered the manufacturing of Expanded Poly Styrene products (EPS) in

1963 now known as "THERMOFROST". Innovation has always been a part of the

company, which led to the manufacture of shape mouldings under the name

"METOPLAST". Its impeccable quality has been well recognised and no wonder, they

have been awarded the "INDIA STAR" for excellence in packaging for successive years

since 1974. These products impart valuable support to industrial packaging. The

company has conceived and created consumer products "IGLOO" for storing items fresh.

Channelising along the changing trends, in 1990, the company developed manufacturing

facilities to produce "HANDIPAK" disposable cups besides expanding processing

locations at Mumbai, Bangalore, Kovai, Chennai, Pondy, Hyderabad, Calcutta and New

Delhi. However, the company's core area of work centres around EPS and hence holds

the credit of being the single largest manufacturer of EPS in India. Beardsell is also

engaged in the manufacture of allied products like Bitumen and Bituminous emulsions,

mastics, waterproofing compounds, sealing compounds, anti-corrosive coatings,

expansion joint boards, etc.

Aim / Vision / Mission

Mission

Beardsell Ltd is committed to:

Deliver quality products and services to the satisfaction of our

customers

Innovate and adapt new process and products

Create wealth for employees and shareholders.

Beardsell Limited established in Chennai, India, are a prominent

manufacturer and supplier of premium quality Polystyrene Products

that have wide industry applications. Our products include Polystyrene

Granules, Expanded Polystyrene, Extruded Polystyrene, Polystyrene

Film Capacitor and Polystyrene Gap Fills. Our products are available in

various quantities. We undertake customization as per specific

requirements. Manufactured using premium raw materials, we assure

reliable quality and durable performance.

They have an integrated infrastructural facility that caters to all our

requirements and offer our clients a flawless range suitable for vast

industry applications. Our manufacturing unit equipped with

sophisticated tools and machines, runs on full capacity to meet the

large scale market demand. Our research unit is the hub of all new

ideas and product innovations. Quality is our defining feature and our

team strives hard to elevate our status to glitch-free standards. Our

spacious warehouse and packaging unit is the perfect repository for

our manufactured consignment that is ready to be delivered to our end

customers.

The organization has progressed impressively under the mentorship of

our CEO, Mr. P. Punnaiah, whose vast experience has

positioned us among the top leagues in the domain. His constructive

leadership has led us to a progressive step and our product range

commands highest response from our clients in the polystyrene

industry. We strictly follow transparent business transactions and a

personalized customer care. Our pricing is very reasonable and we

assure delivery within the estimated period.

Company Unique Selling Proposition (USP)

Primary Competitive Advantage:

Good Financial Position & TQM

Large Product Line

Large Production Capacity

Product Portfolio

Our organization is one of the eminent manufacturers and suppliers of

a comprehensive range of Polystyrene Products. This product range

caters to extensive industry applications. The advanced technology

that we apply in the manufacturing process results in outstanding

performance.

Our products caters to the requirements of clients in the various sector

of polystyrene such as packaging materials, plastic cutleries, foam

cups & glasses and insulation materials. Our wide array includes

Polystyrene Granules, Expanded Polystyrene, Extruded Polystyrene,

Polystyrene Film Capacitor and Polystyrene Gap Fills. Some of the

features that make our range special are as follows:

Available in various quantities

Customized as per requirement

Premium quality raw materials

Tested for durability

Efficient performance

Offered in bulk.

Manufacturing Facility

In order to manufacture a glitch-free variety of Polystyrene products,

we have invested substantially on a cutting-edge manufacturing

facility. This unit is fitted with multiple machines and tools that are

advanced in nature. The multi-featured machines fabricate our

qualitative range exactly according to the laid down formula. Some of

our machinery includes:

Scooping machine

Slotting machine

Shaping machine

Cutting machine

These machines also have the capability to execute the modifications

and amendments that we incorporate in our standard procedure for

product customization. The manufacturing unit is managed by our

product engineers who regularly upgrade and overhaul the systems to

streamline and make the unit productive.

Customization

Since our product range has wide industry application, a standard

variety may not respond to the typically unique requirement of our

clients. For example client in packaging unit will require a modified

version of the product from the one belonging to insulation or plastic

cutlery or crockery segment. It is in keeping with the application

differentials that we offer customization facility to our clients across

broad industry spectrum.

Customize the products in different shapes, sizes, petroleum jelly

content, internal components and various other factors. The

customization facility that we offer greatly leverages the productivity

and efficiency of our clients’ organizations and gives them an edge

over our competitors.

Team

BEARDSELL team offers us with the capability to carry out all our

business liabilities in an efficient and timely manner. The outstanding

success that we have achieved in such a short spell is largely due to

the commitment and dedication of our employees. Our team comprises

the following members:

Engineers

Procuring agents

R&D professionals

Quality analysts

Inventory managers

Sales & marketing executives

The vast knowledge of the team about the dynamics of Polystyrene

industry offers us invaluable support in our manufacturing process.

Their understanding on the background of our clients and their typical

requirements assist our R&D unit in product development and

customization. The team works in harmony and strives hard to achieve

complete client satisfaction.

Quality Assessment

Our benchmark quality has created an example for others to follow.

Polystyrene industry is a fast-paced domain where there are too many

players to compete with each other. We have made a mark for

ourselves on the basis of the standards that we follow. Some of the

parameters that ascertain our quality include:

Quality of raw materials

Durability

Performance

Usability

Malleability

The company high quality parameters start with sourcing the raw

materials from trusted vendors in the market. This is followed by our

quality control measurement where every production process is

monitored with hawk-eyed inspection. The finished products are then

stored in our spacious warehouse and protected until delivery.

Warehousing and Packaging

BEARDSELL having a well-integrated warehouse and packaging unit that stores our

product range in most protected manner. The warehouse is a spacious unit where bulk

consignment is stored in neatly arranged and segregated units duly labeled for easy

retrieval. Our warehouse is managed by a convenient inventory management system that

ensures product storage and movement in minute detail, so that no discrepancy takes

place in the final count.

The unit is electronically protected against fire. It also has temperature

control mechanism to maintain a balanced temperature. Our

packaging division has all the facilities for packaging our consignment

according to specifications offered by clients. Our logistics team offer

hassle-free shipping policies and assure on-time delivery.

Client Satisfaction

For every business organization client satisfaction is the ultimate goal.

From our very inception we believed that to garner maximum client

satisfaction, the clincher should be to offer clients with high quality

product range. Our quality control unit is the hub of activities where

our employees work round-the-clock to scale up and maintain quality

standards. Customization is another factor that creates a sense of trust

among our clients.

Besides product quality and customization, we also lay fundamental

attention to on-time delivery, and industry leading price structure. All

our business operations are geared towards offering our clients

optimum service that not only saves precious man hours but leverages

their productive capabilities as well. This approach has created a sense

of trust and goodwill among our clients.

PRODUCTS:

Clean Rooms

1. Clean Rooms For Pharma

2. Clean Rooms For Lab

3. Clean Rooms For Specialty

Pre - Fabricated Insulated Sandwich Panels

1. Cold Storages

2. Site Offices

3. Affordable Housing

4. Modular Housing

5. Doors & Insulated Partitions

6. Roof-Top Structures

Insulation

1. Process Insulation

2. Building Insulation

3. Specialty & Defense

4. Fish Boxes

Packaging

1. EPS Packaging

2. Anti-Static Packaging

3. Composite Packaging

CLEAN ROOM:

They offer clean rooms which are developed as per the specification of

clients. These clean rooms and pharmaceutical clean rooms are widely

used for laboratory work and also for the production of precision parts

for aerospace or any other kind of electronic equipment. The clean

room is fabricated using quality raw material.

Clean Rooms for Pharma

BEARDSELL are the leading turnkey solution provider of pharma clean rooms in India.

Our execution capabilities have given our clients the confidence to give us multi-crore

implementations. We count all the leading pharma companies in India in our client list.

With our specialized panels and accessories, we are able to maintain the quality expected

by our clients. HVAC partners work closely with us to design the appropriate air-filtering

and air-conditioning systems to maintain the right levels of humidity and temperature.

Isobuild panel system offer the following advantages for clean rooms:

They have the structural strength to resist the positive air pressure maintained

inside the rooms

Return air riser ducts are built into the panels

Thermal insulation is maintained

Air-tight joints between panels

Walkable ceiling panels possible

High-quality covings reduce particle deposition by eliminating projections

Pass-boxes, view-panels, doors are fit flush with the panels to eliminate

dust accumulation

Clean Rooms for Lab

Electronics and semiconductor clean room facilities require very strict control of

particulate count, humidity and temperature. These specialized clean room enclosures are

critical to the operation of the semiconductor facility. Clean rooms built with Isobuild

panels minimize the introduction, generation and retention of particulate matter. It is

possible to maintain the exact temperature, humidity, air flow pattern, fresh air inflow

and particulate outflow through various mechanisms including inbuilt risers inside the

panels and by maintaining positive pressure inside the enclosure.

They offer a wide range of semiconductor-compatible accessories such as worktables etc.

HVAC partners work closely with us to design the appropriate air-filtering and air-

conditioning systems to maintain the right levels of humidity and temperature.

Isobuild panel system offer the following advantages for clean rooms:

They have the structural strength to resist the positive air pressure maintained

inside the rooms

Return air riser ducts are built into the panels

Thermal insulation is maintained

Air-tight joints between panels

Walkable ceiling panels possible

High-quality covings reduce particle deposition by eliminating projections

Pass-boxes, view-panels, doors are fit flush with the panels to eliminate dust

accumulation

Clean Rooms for Specialty

Chemical processing and other specialty clean rooms require an inert and corrosion-

resistant enclosure. Our graphite-reinforced plastic (GRP) laminated panels provide the

ideal building block for such a requirement. GRP is completely chemically inert even

with highly corrosive chemicals. At the same time, it retains its structural strength and

fire-retardant properties. The air-tight joints prevent any noxious gases or chemicals from

seeping out of the enclosure.

Pre - Fabricated Insulated Sandwich Panels

The Pre - Fabricated Insulated Sandwich Panels are custom designed

based on your requirements and are built with our long-lasting and

aesthetic insulated panels.

Cold Storages

Beardsell are the pioneering supplier of panel-based cold storages in India. Our insulated

sandwich panels provide superior insulation, are fire-resistant, very lightweight and

extremely durable. With hundreds of installations across India, our extensive and

growing customer list is proof of our success in the cold storage arena.

Our sandwich-panel based cold storage offers the following advantages:

Superior insulation property

Fire resistance

Quicker construction (and quicker loan payback)

Easier to get subsidy

More hygienic

Faster start-up cooling time

They ave implemented cold storages for the following applications:

Marine (frozen sea food products)

Fruits (apples & other fruits)

Fruit pulp

Potatoes, tamarind and chillies

Pharmaceuticals

If you have a constructed civil structure, they offer our semi-panel

products that offer all the benefits of the panel products for a lower

price. Company panel are made with an insulating core, pre-coated

galvanized steel sheet on one side and aluminum foil on the other side.

Site Offices

They have dozens of site office installations in India and abroad. Company includes most

of the top corporate institutions in the country.

Site offices have the following characteristics:

Easy to construct

Can be dismantled and re-used in a different location if needed

Are durable

Look good inside and outside

Are superior in quality to civil construction

Are more energy efficient

Can be constructed in remote areas

Interior space can be reconfigured easily

Our site offices are constructed from our insulated, lightweight, high-

strength panels made from steel and expanded polystyrene. These are

cut to length at our factory and assembled on site.

Affordable Housing

Affordable housing requires a value-oriented design philosophy. They have optimized

panel products so that they can be used to construct affordable housing for the weaker

sections of society.

Products have the following advantages:

Pleasing look inside and outside

Low cost

Entire structure is insulated, thereby improving energy efficiency

Easy to construct

Is suitable for earthquake prone areas, because materials used are lightweight

Very durable and long-lasting.

Modular Housing

If you have a requirement for a housing structure that can be expanded incrementally, our

modular housing products would be suitable for you.

Modular housing can be used for:

Student housing

Worker housing

Emergency accommodation

Refugee housing

Housing for military personnel

Modular housing systems can be custom designed for your needs. With multiple floor

levels possible, they can make efficient use of land area. They can be provided with

integrated bathrooms, lighting and kitchens. In other words, you will be provided a one-

stop solution for your requirements. Modular housing systems are fully insulated,

structurally strong, and can be dismantled and re-used in a different location.

Doors & Insulated Partitions

High-quality, fire-resistant, insulated doors are suitable for a wide

variety of applications.

Door specifications are as follows:

  DoorDoor w/ View

Panel

Height 1.9m 1.9m

Width 0.9m 0.9m

Weight 12kg 12.5kg

Hinges Dorma Dorma

Lock

(optional)Dorma Dorma

View panel

widthN/A 15cm

View panel

heightN/A 25cm

Roof-Top Structures

Panel building system can be used to build roof-top structures that are durable and easy to

construct. These temporary structures allow you to maximize your constructed floor area

without violating floor space index regulations, as the roof-top structures are considered

to be temporary.

The roof-top structures are custom designed based on your

requirements and are built with our long-lasting and aesthetic

insulated panels.

Insulation:

They supply a wide range of Insulation. These are designed using quality approved basic

material which makes these suitable for varied applications at both high and low service

temperature. These are also used on flat or slightly curved surfaces where thermal and

acoustic insulation are required.

Process Insulation

Reduce your costs and conserve energy by properly insulating your industrial processing

establishments with our high quality insulation material.

Products and services include: 

EPS Pipe sections

PUF Pipe sections

PUF Pipe supports

In-situ PUF insulation

Building Insulation

While the majority of insulation in buildings is for thermal purposes, the

term also applies to acoustic insulation, fire insulation, and impact

insulation.

EPS slabs, semi-panels and full panels can be used for:

Under-deck Insulation

Above-deck Insulation

False Ceilings

Inner-Wall Insulation

Insulated Partitions.

Specialty & Defense

Our innovation team has designed products for use in specialized

environments.

These products include:

Acoustic absorption panels

High Density PUF slabs.

Fish Boxes

Beardsell have specilized boxes for packing Lobster/ Crab/ Chilled fish/ Prawns etc., with

various capacities between 3 liters to 150 liters.  We can also supply as per customer’s

requirement.

Packaging

Beardsell has been spearheading the innovations in packaging design and development

and has successfully developed cost effective packaging. They design the right sized

buffer so that your product is adequately protected from shock and vibration.

EPS Packaging

Beardsell has been spearheading the innovations in packaging design and development

and has successfully developed cost effective EPS packaging. They design the right sized

buffer so that your product is adequately protected from shock and vibration. Our

factories with state of the art machinery are capable of producing high-quality product in

large volumes to meet your delivery schedules. Company offers an integrated solution

wherein they design and manufacture the mould also.

Anti-Static Packaging

We are the pioneers in India in designing an anti-static packaging solution for our

customers. If you have an electronic item, ordinance item, explosive goods or other items

that have to be protected from static electricity, our hi-tech anti-static packaging offers a

viable solution. The anti-static protection is in addition to thermal, shock and vibration

protection.

Composite Packaging

Beardsell composite packaging offers our customers a one-vendor solution to their

packaging needs. Company can potentially integrate materials/items such as wooden

pallets, corrugated board, EPE/EPS and air bubble sheets. With our composite packaging,

the customer only needs to take their product and put it into our packaging before

dispatching. There is no packaging assembly required at the customer's site.

Specialty

Specialty Shelters

They mini-shelters can be used by the police or private guards to protect themselves

during inclement weather. Our shelters are portable and are fabricated in the factory and

installed directly at site without any further assembly.

Trading Activities

Beardsell is a leading exporter of industrial equipment to various countries. For the past

several decades, they have exported many items, manufactured by us and also other

companies, to Asian and African countries.

Beardsell past exports include:

Textiles to Nigeria

Site offices to Sudan

Clean rooms to Botswana

Hatchery Equipment to Ghana

Software products & IT equipment to Tanzania

Incinerator equipment to Kenya

Classroom Laboratory to Ethiopia

“WORKING CAPITAL MANAGEMENT”

Management is an art of anticipating and preparing for risks, uncertainties and overcoming

obstacles. An essential precondition for sound and consistent assets management is

establishing the sound and consistent assets management policies covering fixed as well as

current assets. In modern financial management, efficient allocation of funds has a great

scope, in finance and profit planning, for the most effective utilization of enterprise

resources, the fixed and current assets have to be combined in optimum proportions.

Working capital in simple terms means the amount of funds that a company requires for

financing its day-to-day operations. Finance manager should develop sound techniques of

managing current assets

Introduction of Working Capital

The net working capital of business is its current assets less its current liabilities.

Current Assets include:

Stock of Raw Material

Work in Progress

Finished Goods

Trade Debtors

Prepayments

Cash Balances

Current Liabilities include:

Trade Creditors

Accruals

Taxation Payable

Dividends Payable

Short term Loans

Every business needs adequate liquid resources in order to maintain day to day cash

flows. It needs enough cash to by wages and salaries as they fall due and to pay

creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate

working capital; is not just important in the short term.

Sufficient liquidity must be maintained in order to ensure the survival of business in the

long term as well. Even a profitable business may fail if it does not have adequate cash

flows to meet its liabilities as they fall a due. Therefore when business make investment

decisions they must not only consider the financial outlay involved with acquiring the

new machine or the new building etc, but must also take account of the additional

current assets that are usually involved with any expansion of activity .

Increase production tends to engender a need to hold additional stocks of raw material

& work in progress.

Increased sales usually mean that the level of debtor will increase. A general increase in

the firm’s scales of operation tends to imply a need for greater level of cash.

What is working capital?

Working capital refers to the investment by the company in short terms assets such as cash,

marketable securities. Net current assets or net working capital refers to the current assets

less current liabilities.

Symbolically, it means,

Net Current Assets = Current Assets-Current Liabilities.

Definitions of working capital:

The following are the most important definitions of Working capital:

1) Working capital is the difference between the inflow and outflow of funds. In other

words it is the net cash inflow.

2) Working capital represents the total of all current assets. In other words it is the Gross

working capital, it is also known as Circulating capital or Current capital for current assets

are rotating in their nature.

3) Working capital is defined as the excess of current assets over current liabilities and

provisions. In other words it is the Net Current Assets or Net Working Capital.

Importance of Working Capital

Working capital may be regarded as the lifeblood of the business. Without insufficient

working capital, any business organization cannot run smoothly or successfully.

In the business the Working capital is comparable to the blood of the Human body.

Therefore the study of working capital is of major importance to the internal and external

analysis because of its close relationship with the current day to day operations of a

business. The inadequacy or mismanagement of working capital is the leading cause of

business failures.

To meet the current requirements of a business enterprise such as the purchases of

services, raw materials etc. Working capital is essential. It is also pointed out that

working capital is nothing but one segment of the capital structure of a business.

In short, the cash and credit in the business, is comparable to the blood in the human body

like finances life and strength i.e. profit of solvency to the business enterprise. Financial

management is called upon to maintain always the right cash balance so that flow of fund is

maintained at a desirable speed not allowing slow down. Thus enterprise can have a balance

between liquidity and profitability. Therefore the management of working capital is

essential in each and every activity.

Working Capital Management

Working Capital is the key difference between the long term financial management and

short term financial management in terms of the timing of cash.

Long term finance involves the cash flow over the extended period of time i.e. 5 to 15

years, while short term financial decisions involve cash flow within a year or within

operating cycle. Working capital management is a short term financial management.

Working capital management is concerned with the problems that arise in attempting to

manage the current assets, the current liabilities & the inter relationship that exists between

them. The current assets refer to those assets which can be easily converted into cash in

ordinary course of business, without disrupting the operations of the firm.

Composition of working capital:

Major Current Assets;

1) Cash

2) Accounts Receivables

3) Inventory

4) Marketable Securities

Major Current Liabilities;

1) Bank Overdraft

2) Outstanding Expenses

3) Accounts Payable

4) Bills Payable

The Goal of Capital Management is to manage the firm s current assets & liabilities, so

that the satisfactory level of working capital is maintained. If the firm can not maintain

the satisfactory level of working capital, it is likely to become insolvent & may be forced

into bankruptcy. To maintain the margin of safety current asset should be large enough to

cover its current assets. Main theme of the theory of working capital management is

interaction between the current assets & current liabilities.

CONCEPT OF WORKING CAPITAL:

There are 2 concepts:

Gross Working Capital

Net Working Capital

Gross working capital: - It is referred as total current assets. Focuses on,

Optimum investment in current assets:

An excessive investment impairs firm s profitability, as idle investment earns nothing.

Inadequate working capital can threaten solvency of the firm. Because of its inability to

meet its current obligations. Therefore there should be adequate investment in current

assets.

Financing of current assets:

Whenever the need for working capital funds arises, agreement should be made quickly. If

surplus funds are available they should be invested in short term securities.

Net working capital (NWC)-defined by 2 ways,

Difference between current assets and current liabilities

Net working capital is that portion of current assets which is financed with long

term funds.

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

If the working capital is efficiently managed then liquidity and profitability both will

improve. They are not components of working capital but outcome of working capital.

Working capital is basically related with the question of profitability versus liquidity &

related aspects of risk.

Implications of Net Working Capital:

Net working capital is necessary because the cash outflows and inflows do not coincide. In

general the cash outflows resulting from payments of current liability are relatively

predictable. The cash inflows are however difficult to predict. More predictable the cash

inflows are, the less NWC will be required. But where the cash inflows are uncertain, it

will be necessary to maintain current assets at level adequate to cover current liabilities that

are there must be NWC.

For evaluating NWC position, an important consideration is trade off between probability

and risk.

The term profitability is measured by profits after expenses. The term risk is defined is the

profitability that a firm will become technically insolvent so that it will not be able to meet

its obligations when they become due for payment. The risk of becoming technically

insolvent is measured by NWC.

If the firm wants to increase profitability, the risk will definitely increase. If firm wants to

reduce the risk, the profitability will decrease.

Planning of working capital:

Working capital is required to run day to day business operations. Firms differ in their

requirement of working capital (WC). Firm s aim is to maximize the wealth of share

holders and to earn sufficient return from its operations.

WCM is a significant facet of financial management. Its importance stems from two

reasons:

Investment in current asset represents a substantial portion of total investment.

Investment in current assets and level of current liability has to be geared quickly to

change in sales.

Business undertaking required funds for two purposes:

To create productive capacity through purchase of fixed assets.

To finance current assets required for running of the business.

The importance of WCM is reflected in the fact that financial managers spend a great deal

of time in managing current assets and current liabilities.

The extent to which profit can be earned is dependent upon the magnitude of sales. Sales

are necessary for earning profits. However, sales do not convert into cash instantly; there is

invariably a time lag between sale of goods and the receipt of cash. WC management affect

the profitability and liquidity of the firm which are inversely proportional to each other,

hence proper balance should be maintained between two. To convert the sale of goods into

cash, there is need for WC in the form of current asset to deal with the problem arising out

of immediate realization of cash against good sold. Sufficient WC is necessary to sustain

sales activity. This is referred to as the operating or cash cycle.

Factors determining the working capital requirements

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. Seasonal 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.

                            DEBTORS

CASH                                   FINISHED GOODS

RAW MATERIAL                          WORK IN PROGRESS

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 sales are affected. A firm having

a high rate of stock turnover will needs lower amt. of working capital as compared to a

firm having a low rate of turnover.

8. Credit Policy: A concern that purchases its requirements on credit and sales its

product / services on cash requires lesser amt. of working capital and vice-versa.

9.  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.

10. Rate of Growth Of Business: In faster growing concern, we shall require large amt.

of working capital.

11. Earning 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.

12. Price Level Changes: Changes in the price level also affect the working capital

requirements. Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

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.

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.

Working Capital Cycle:

A firm requires many years to recover initial investment in fixed assets. On

contrary the investment in current asset is turned over many times a year.

Investment in such current assets is realized during the operating cycle of the firm.

Each component of working capital (namely inventory, Receivables and Payables)

has two dimensions... TIMES………………MONEY. When it comes to managing

working capital - TIME IS MONEY. If you can get money to

move faster around the cycle (e.g. collect dues from debtors more quickly)

or reduce the amount of money tied up (e.g. reduce inventory levels relative

to sales), the business will generate more cash or it will need to borrow less

money to fund working capital. As a consequence, you could reduce the

cost of bank interest or you'll have additional free money available to

support additional sales growth or investment. Similarly, if you can

negotiate improved terms with suppliers e.g. get longer credit or an

increased credit limit; you effectively create free finance to help fund future

sales.

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,

vehicles etc. If you do pay cash, remember that this is now longer available for

working capital. Therefore, if cash is tight, consider other ways of financing capital

investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase

drawings, these are cash outflows and, like water flowing downs a plughole, they

remove liquidity from the business.

If you ... Then…….

Collect receivables (debtors) faster.cycle.

You release cash from the cycle.

Collect receivables (debtors) slower.cash.

Your receivables soak up cash.

Get better credit (in terms of duration or amount) from suppliers.

You increase your cash resources.

Shift inventory (stocks) faster.

You free up cash.

Move inventory (stocks) slower.

You consume more.

Operating cycle:

The working capital cycle refers to the length of time between the firms paying the cash for

materials, etc., entering into production process/stock & the inflow of cash from debtors

(sales), suppose a company has certain amount of cash it will need raw materials. Some raw

materials will be available on credit but, cash will be paid out for the other part

immediately. Then it has to pay labour costs & incurs factory overheads. These three

combined together will constitute work in progress. After the production cycle is complete,

work in progress will get converted into sundry debtors. Sundry debtors will be realized in

cash after the expiry of the credit period. This cash can be again used for financing raw

material, work in progress etc. thus there is complete cycle from cash to cash wherein cash

gets converted into raw material, work in progress, finished goods and finally into cash

again. Short term funds are required to meet the requirements of funds during this time

period. This time period is dependent upon the length of time within which the original

cash gets converted into cash again. The cycle is also known as operating cycle or cash

cycle.

Working capital cycle can be determined by adding the number of days required for each

stage in the cycle. For example, company holds raw material on average for 60 days, it

gets credit from the supplier for 15 days, finished goods are held for 30 days & 30 days

credit is extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days

is the total of working capital.

Thus the working capital cycle helps in the forecast, control & management of

working capital. It indicates the total time lag & the relative significance of its constituent

parts. The duration may vary depending upon the business policies. In light of the facts

discusses above we can broadly classify the operating cycle of a firm into three phases viz.

1 Acquisition of resources.

2 Manufacture of the product and

3 Sales of the product (cash / credit).

First and second phase of the operating cycle result in cash outflows, and be predicted

with reliability once the production targets and cost of inputs are known. However, the

third phase results in cash inflows which are not certain because sales and collection

which give rise to cash inflows are difficult to Forecast accurately.

Operating cycle consists of the following:

Conversion of cash into raw-materials;

Conversion of raw-material into work-in-progress;

Conversion of work-in-progress into finished stock;

Conversion of finished stock into accounts receivable through sales; and

Conversion of accounts receivable into cash.

In the form of an equation, the operating cycle process can be expressed as follows:

Operating Cycle = R + W + F + D - C

R = Raw material storage period W = Work in progress holding period F = Finished goods storage period D = Debtors collection period C = credit period availed

Operating cycle for manufacturing firm:

The firm is therefore, required to invest in current assets for smooth and uninterrupted

functioning.

RMCP Raw Material Conversion PeriodWIPCP Work in Progress conversion Period FGCP Finished Goods Conversion periodICP Inventory Conversion Period RCP Receivables Conversion Period PDP Payables Deferral Period NOC Net Operating CycleGOC Gross Operating Cycle

Here, the length of GOC is the sum of ICP and RCP.

ICP is the total time needed for producing and selling the products. Hence it is the sum

total of RMCP, WIPCP and FGCP. On the other hand, RCP is the total time required to

collect the outstanding amount from customers.

Usually, firm acquires resources on credit basis. PDP is the result of such an incidence

and it represents the length of time the firm is able to defer payments on various

resources purchased.

The difference between GOC and PDP is know as Net Operating cycle and if

Depreciation is excluded from the expenses in computation of operating cycle, the

NOC also represents the cash collection from sale and cash payments for resources

acquired by the firm and during such time interval between cash collection from sale and

cash payments for resources acquired by the firm and during such time interval over

which additional funds called working capital should be obtained in order to carry

out the firms operations. In short, the working capital position is directly proportional to

the Net Operating Cycle.

Types of working capital:

1) PERMANENT AND

2) VARIABLE WORKING CAPITAL

The need for current assets arises because of the operating cycle. The

operating cycle is a continuous process and, therefore, the need for current

assets is felt constantly. But the magnitude of current assets needed is not

always a minimum level of current assets which is continuously required by

the firm to carry on its business operations. This minimum level of current

assets is referred to as permanent, or fixed, working capital. It is permanent in the same

way as the firms fixed assets are. Depending upon the changes in production and sales,

the need for working capital, over and above permanent working capital, will

fluctuate. For example, extra inventory of finished goods will have to be maintained to

support the peak periods of sales, and investment in receivable may also increase during

such periods. On the other hand, investment in raw material, work-in-process and finished

goods will fall if the market is slack.

The extra working capital, needed to support the changing production and sales activities

is called FLUCTUATING, or VARIABLE, or TEMPORARY working capital. Both

kinds of working capital PERMANENT and TEMPORARY - are necessary to facilitate

production and sale through the operating cycle, but temporary-working capital is created

by the firm to meet liquidity requirements that will last only temporary working

capital. It is shown that permanent working capital is stable over time.

While temporary working capital is fluctuating- sometimes increasing and sometimes

decreasing. However, the permanent capital is difference between permanent and temporary

working capital can be depicted through figure.

Balanced working capital position

The firm should maintain a sound working capital position. It should have adequate

working capital to run its business operations. Both excessive as well as inadequate

working capital positions are dangerous from the firm’s point of view. Excessive

working capital not only impairs the firm’s profitability but also result in production

interruptions and inefficiencies.

The dangers of excessive working capital are as follows:

It results in unnecessary accumulation of inventories. Thus, chances of inventory

mishandling, waste, theft and losses increase.

It is an indication of defective credit policy slack collections period.

Consequently, higher incidence of bad debts results, which adversely affects

profits.

Excessive working capital makes management complacent which degenerates into

managerial inefficiency.

Tendencies of accumulating inventories tend to make speculative profits grow.

This may tend to make dividend policy liberal and difficult to cope with in future

when the firm is unable to make speculative profits.

Inadequate working capital is also bad and has the following dangers:

It stagnates growth. It becomes difficult for the firm to undertake profitable projects for

non- availability of working capital funds.

It becomes difficult to implement operating plans and achieve the firm s profit target.

Operating inefficiencies creep in when it becomes difficult even to meet day

commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds. Thus, the

firm s profitability would deteriorate.

Paucity of working capital funds render the firm unable to avail attractive credit

opportunities etc.

The firm loses its reputation when it is not in a position to honour its short-term

obligations.

As a result, the firm faces tight credit terms.

An enlightened management should, therefore, maintain the right amount of working

capital on a continuous basis. Only then a proper functioning of business operations

will be ensured. Sound financial and statistical techniques, supported by judgment,

should be used to predict the quantum of working capital needed at different time

periods.

A firm s net working capital position is not only important as an index of liquidity

but it is also used as a measure of the firm s risk.

Risk in this regard means chances of the firm being unable to meet its obligations

on due date. The lender considers a positive net working as a measure of safety. All

other things being equal, the more the net working capital a firm has, the less

likely that it will default in meeting its current financial obligations. Lenders such

as commercial banks insist that the firm should maintain a minimum net working

capital position.

Requirements of Funds

Funds Requirements of company

Fixed Capital Working Capital

Preliminary Expenses Raw materials

Purchase of Fixed Assets Inventories

Establishment work exp. Goods in Progress

Fixed working capital Others

Every company requires funds for investing in two types of capital i.e. fixed capital, which

requires long-term funds, and working capital, which requires short-term funds.

Sources of Working Capital

Long-term source Short-term source

(Fixed working capital) (Temporary working capital)

a) Loan from financial institution a) Factoring

b) Floating of Debentures b) Bill discounting

c) Accepting public deposits c) Bank overdraft

d) Issue of shares d) Trade credit

e) Cash credit

f) Commercial paper

Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash!)

Payables (credit from suppliers)

New equity or loans from

shareholders

Bank overdrafts or lines of credit

Term loans

If you have insufficient working capital and try to increase sales, you can easily over-

stretch the financial resources of the business. This is called overtrading. Early warning

signs include:

Pressure on existing cash

Exceptional cash generating activities e.g. offering high discounts for early cash payment

Bank overdraft exceeds authorized limit

Seeking greater overdrafts or lines of credit

Part-paying suppliers or other creditors

Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing

Frequent short-term emergency requests to the bank (to help

pay wages, pending receipt of a cheque).

Long Term Sources

Issue of Shares

Ordinary shares are also known as equity shares and they are the most common form of

share in the UK. An ordinary share gives the right to its owner to share in the profits of

the company (dividends) and to vote at general meetings of the company.

Since the profits of companies can vary wildly from year to year, so can the dividends

paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good

years they may be substantial.

The nominal value of a share is the issue value of the share - it is the value written on

the share certificate that all shareholders will be given by the company in which they

own shares.

The market value of a share is the amount at which a share is being sold on the stock

exchange and may be radically different from the nominal value.When they are issued,

shares are usually sold for cash, at par and/or at a premium. Shares sold at par are sold

for their nominal value only - so if Rs.10 share is sold at par, the company selling the

share will receive Rs. 10 for every share it issues. If a share is sold at a premium, as

many shares are these days, then the issue price will be the par value plus an additional

premium.

Debentures

Debentures are loans that are usually secured and are said to have either fixed or

floating charges with them.

A secured debenture is one that is specifically tied to the financing of a particular asset

such as a building or a machine. Then, just like a mortgage for a private house, the

debenture holder has a legal interest in that asset and the company cannot dispose of it

unless the debenture holder agrees. If the debenture is for land and/or buildings it can

be called a mortgage debenture.

Debenture holders have the right to receive their interest payments before any dividend

is payable to shareholders and, most importantly, even if a company makes a loss, it

still has to pay its interest charges.

If the business fails, the debenture holders will be preferential creditors and will be

entitled to the repayment of some or all of their money before the shareholders receives

anything.

Loans from Other Financial Institutions

The term debenture is a strictly legal term but there are other forms of loan or loan

stock. A loan is for a fixed amount with a fixed repayment schedule and may appear on

a balance sheet with a specific name telling the reader exactly what the loan is and its

main details.

Short term sources

Factoring

Factoring allows you to raise finance based on the value of your outstanding invoices.

Factoring also gives you the opportunity to outsource your sales ledger operations and to

use more sophisticated credit rating systems. Once you have set up a factoring arrangement

with a Factor, it works this way:

Once you make a sale, you invoice your customer and send a copy of the invoice to the

factor and most factoring arrangements require you to factor all your sales. The factor pays

you a set proportion of the invoice value within a pre-arranged time - typically; most

factors offer you 80-85% of an invoice's value within 24 hours.

The major advantage of factoring is that you receive the majority of the cash from debtors

within 24 hours rather than a week, three weeks or even longer.

Invoice Discounting

Invoice discounting enables you to retain the control and confidentiality of your own sales

ledger operations.

The client company collects its own debts. 'Confidential invoice discounting' ensures that

customers do not know you are using invoice discounting as the client company sends out

invoices and statements as usual. The invoice discounter makes a proportion of the invoice

available to you once it receives a copy of an invoice sent.

Once the client receives payment, it must deposit the funds in a bank account controlled by

the invoice discounter. The invoice discounter will then pay the remainder of the invoice,

less any charges.

The requirements are more stringent than for factoring. Different invoice discounters will

impose different requirements

Overdraft Facilities

Many companies have the need for external finance but not necessarily on a long-term

basis. A company might have small cash flow problems from time to time but such

problems don't call for the need for a formal long-term loan. Under these circumstances, a

company will often go to its bank and arrange an overdraft. Bank overdrafts are given on

current accounts and the good point is that the interest payable on them is calculated on a

daily basis. So if the company borrows only a small amount, it only pays a little bit of

interest. Contrast the effects of an overdraft with the effects of a loan.

Trade Credit

This source of finance really belongs under the heading of working capital management

since it refers to short-term credit. By a 'line of credit' they mean that a creditor, such as a

supplier of raw materials, will allow us to buy goods now and pay for them later. Why do

they include lines of credit as a source of finance? They ll, if they manage their creditors

carefully they can use the line of credit they provide for us to finance other parts of their

business.

Take a look at any company's balance sheet and see how much they have under the heading

of Creditors falling due within one year' - let's imagine it is Rs. 25,000 for a company. If

that company is allowed an average of 30 days to pay its creditors then they can see that

effectively it has a short term loan of Rs. 25,000 for 30 days and it can do whatever it likes

with that money as long as it pays the creditor on time.

Cash management:

Cash management:

Cash management is one of the key areas of WCM. Apart from the fact that it is the most

liquid asset, cash is the common denominator to which all current assets, that is,

receivables & inventory get eventually converted into cash.

Cash is oil of lubricate the ever-turning wheels of business: without it the process grinds to

a shop.

Motives for holding cash

Cash with reference to cash management is used in two senses:

It is used broadly to cover currency and generally accepted equivalents of cash,

such as cheques, drafts and demand deposits in banks.

It includes near-cash assets, such as marketable securities & time deposits in banks.

The main characteristic of these is that they can be readily sold & converted into cash.

They serve as a reserve pool of liquidity that provides cash quickly when needed. They

provide short term investment outlet to excess cash and are also useful for meeting planned

outflow of funds.

Cash is maintained for three motives:

A. Transaction motive:

Transaction motive refer to the holding of cash to meet routine cash requirements to finance

the transactions which a firm carries on in a variety of transactions to accomplish its

objectives which have to be paid for in the form of cash. E.g. payment for purchases,

wages, operating expenses, financial charges like interest, taxes, dividends etc. Thus

requirement of cash balances to meet routine need is known as the transaction motive and

such motive refers to the holding of cash to meet anticipated obligations whose timing is

not perfectly synchronized with cash receipts.

B. Precautionary motive:

A firm has to pay cash for the purposes which can not be predicted or anticipated. The

unexpected cash needs at the short notice may be due to: Floods, strikes & failure of

customer Slow down in collection of current receivables Increase in cost of raw material

Collection of some order of goods as customer is not satisfied The cash balance held in

reserves for such random and unforeseen fluctuations in cash flows are called as

precautionary balance. Thus, precautionary cash provides a cushion to meet unexpected

contingencies. The more unpredictable are the cash flows, the larger is the need for such

balance.

C. Speculative motive:

It refers to the desire of the firm to take advantage of opportunities which present

themselves at unexpected moment & which are typically outside the normal course of

business. If the precautionary motive is defensive in nature, in that firms must make

provisions to tide over unexpected contingencies, the speculative motive represents a

positive and aggressive approach. The speculative motive helps to take advantages of:

An opportunity to purchase raw material at reduced price on payment of immediate

cash.

A chance to speculate on interest rate movements by buying securities when interest

rates are expected to decline.

Make purchases at favorable price.

Delay purchase of raw material on the anticipation of decline in prices.

Objectives of cash management:

I. To meet the cash disbursement needs In the normal course of business firms have to

make payment of cash on a continuous and regular basis to the supplier of goods, employees

and so son. Also the collection is done from the de4btorw. Basic objective is to meet

payment schedule that is to have sufficient cash to meet the cash disbursement needs of the

firm.

II. To minimize the funds committed to cash balances First of all if we keep high cash

balance, it will ensure prompt payment together with all the advantages. But it also implied

that the large funds will remain idle, as cash is the non-earning asset and firm will have to

forego profits. On the other hand, low cash balance mean failure to meet payment schedule.

Therefore we should have optimum level of cash balance.

Factors determinining cash needs:

1) Synchronization of cash - need for the cash balances arise from the non-synchronization

of the inflows & outflows of cash. First need in determining cash needs is, the extent of non-

synchronization of cash receipts & disbursements. For this purpose cash budget is to be

prepared. Cash budget point out when the firm will have excess or shortage of cash.

2) Short cash - Cash period reveals the period of cash hortages. Every shortage of cash

whether expected or unexpected involves a cost depending upon the security, duration &

frequency of shortfall & how the shortage is covered. Expenses incurred as a shortfall are

called short costs.

There are following costs included in the short cash

Transaction cost: this is usually the brokerage incurred in relation to the some

short-term near-cash assets like marketable securities.

Borrowing costs: these include interest on loan, commitment charges & other

expenses relating to loan.

Loss of cash discount: that s a loss because of temporary shortage of cash.

Cost associated with deterioration of credit rating.

Penalty rates: By a bank to meet a shortfall in compensating balances

1) Excess cash balance - cost associated with excessively large cash balances is known as

excess cash balance cost. If large funds are idle the implication is that the firm has missed

the opportunity to invest those funds and has thereby lost interest. This loss of interest is

primarily the excess cost.

2) Procurement & Management cost - cost associated with establishing and operating

cash management staff and activities. They are generally fixed and accounted for by

salary, handling of securities etc.

3) Uncertainty the first requirement in cash management is Precautionary cushion to cope

with irregularities in cash flows, unexpected delays in collection &disbursements, defaults

and unexpected cash needs.

Impact can be reduced through:

Improved forecasting of tax payments, capital expenditure, dividends etc.

Increased ability to borrow through overdraft facility.

Determining the cash needs:

Cash needs can be determined though preparing cash budget, for year, month, week etc.

Cash reports, providing a comparison of actual development with forecast figures, are

helpful in controlling and revising cash forecasts on a continual basis.

The important cash reports are

The daily cash reports

Daily treasury reports

The monthly cash report

Monitoring collection and receivables:

The Finance Manager must control the levels of cash balance at various points in the

organization. This task assumes special importance on account of the fact that there is

generally tendency amongst divisional manager to keep cash balance in excess of their

needs. Hence a finance manager must devise a system whereby each division of

organization retains enough cash to meet its day-to-day requirements without having surplus

balance on hand. For this methods have to be employed to: Speed up the mailing time of

payment from customers Reduce the time during which payments received by the firm

remain uncollected and speed up the movement funds to disbursement banks.

For this purpose following can be helpful:

1) Prompt billing- often there is time lag between the dispatch of goods or provision of

service and the sending of bills. By preparing and sending the bills promptly, a firm cans

ensure earlier remittance. It should be realized that it is in the area of billing that the

company control is high and there is a sizeable opportunity to free up cash.

For this treasure should work with controller and others in:

Accelerating invoice data

Mailing bills promptly

Identifying payment locations

2) Expeditious collection of cheques - expediting collection of cheques is important and

there are to methods

Concentration banking,

Lock box method

Concentration banking: (decentralized collection) key elements are, the major bank

account of the company is wet up with a concentration bank, generally situated in the same

place where the company is head quartered. Customers are advised to mail their remittances

to collection centre close too them. Payments collected in different collection centres are

deposited in local banks which in turn transfer them to the concentration banks

Lock box method: Silent features are as follows:

A number of post office boxes are rented by the company in different locations

Customers are advised to mail there remittances to the lock boxes.

Banks are authorized to pick up the cheques from the lock boxes and deposit them in

the companies account.

Controlling payables/disbursements: by proper control of payables company can manage

cash resources. This involves -

Payment should be made as and when it fall due.

Centralized disbursement payables and their disbursements may be centralized.

This helps in consolidating the funds at head office scheduling payments, reducing

unproductive bank balance and investing surplus funds more effectively.

Proper synchronization of inflows and outflows helps a company to get greater mileage

from cash resources.

Float: when firm issues cheques they reduce the balance in their books, but balance in

banks book is not reduced till the payment is made by bank. This amount of cheques issued

by the firm but not paid for by the bank is referred to as payment float. When the cheques

are deposited with bank the firm increases the balance in its books. The balance in the banks

book however is cleared. The amount of cheques deposited by the firm in the bank but not

cleared is referred to as collection float. Difference between payment float and collection

float is called as net float. When the net float is positive the balance in the books of bank is

higher than the balance in the books of firm. When the firm enjoys the positive

float (net) it may issue cheques even if it has an overdrawn bank account in its books. Such

an action is referred to as playing the float it is considered risky.

Accruals: accruals can be defined as current liabilities that represent a service or goods

received by a firm but not yet paid for. For example remuneration to employee s that render

services in advance and receive payment later. In a way, they extend credit to the firm for a

period at the end of which they are paid. Weekly is more important as compared to monthly.

Other examples, rent to lessors, taxes to government.

Optimal Cash Balance

It a firm maintains a small cash balance, it has to sell its marketable securities more

frequently than if it holds a large cash balance. Hence trading or transaction costs will tend

to diminish if cash balance becomes larger. However, the opportunity costs of maintaining

cash rise as the cash

From the figure, the total costs of holding cash are at a minimum when the size of the cash

balance is C. This represents optimal cash balance.

Deployment of surplus funds:

Company’s often has surplus funds for short period of time before they are required for

capital expenditure, loan repayment or some other purposes. At the one end they are

invested in term deposit in bank and on other end are invested in equity shares. They can be

invested in several options like -

Units of the unit 1964 scheme: This is the most important mutual fund scheme in India. It

has the following features-

It is a open ended scheme as it accepts funds from investors & also permits to

withdraw their investments.

The units have face value of Rs. 10.00/- The sale & purchase price of units are not

squarely based on the net asset per unit, as should be the case for a truly open ended

scheme.

Debtor’s Management.

Assessing the credit worthiness of customers

Before extending credit to a customer, a supplier should analyze the five C’s of credit

worthiness, which will provoke a series of questions. These are:

Capacity: will the customer be able to pay the amount agreed within the allowable credit

period? What is their past payment record? How large is the customer's business capital.

What is the financial health of the customer? Is it a liquid and profitable concern, able to

make payments on time?

Character: Does the customer’s management appear to be committed to prompt payment?

Are they of high integrity? What are their personalities like?

Collateral: what is the scope for including appropriate security in return for extending credit

to the customer?

Conditions: what are the prevailing economic conditions? How are these likely to impact

on the customer’s ability to pay promptly?

Capital: is the money you personally have invested in the business and is an indication of

how much you have at risk should the business fail. Prospective lenders and investors

will expect you to have contributed from your own assets and to have undertaken

personal financial risk to establish the business before asking them to commit any

funding. How well is your business currently faring? What will the loan be used for? Is it

for equipment, expansion, or just for financial security? Things such as the economy,

competition, and customer base are noted.

Whilst the materiality of the amount will dictate the degree of analysis

involved, the major sources of information available to companies in

assessing customer’s credit worthiness are:

Bank references: These may be provided by the customer’s bank to indicate their financial

standing. However, the law and practice of banking secrecy determines the way in which

banks respond to credit enquiries, which can render such references uninformative,

particularly when the customer is encountering financial difficulties.

Trade references: Companies already trading with the customer may be willing to provide

a reference for the customer. This can be extremely useful, providing that the companies

approached are a representative sample of all the clients’ suppliers. Such references can be

misleading, as they are usually based on direct credit experience and contain no knowledge

of the underlying financial strength of the customer.

Financial accounts: The most recent accounts of the customer can be obtained either direct

from the business, or for limited companies, from Companies House. While subject to

certain limitations past accounts can be useful in vetting customers. Where the credit risk

appears high or where substantial levels of credit are required, the supplier may ask to see

evidence of the ability to pay on time. This demands access to internal future budget data.

Personal contact: Through visiting the premises and interviewing senior management, staff

should gain an impression of the efficiency and financial resources of customers and the

integrity of its management.

Credit agencies: Obtaining information from a range of sources such as financial accounts,

bank and newspaper reports, court judgments, payment records with other suppliers, in

return for a fee, credit agencies can prove a mine of information. They will provide a credit

rating for different companies. The use of such agencies has grown dramatically in recent

years.

Past experience: For existing customers, the supplier will have access to their past payment

record. However, credit managers should be aware that many failing companies preserve

solid payment records with key suppliers in order to maintain supplies, but they only do so

at the expense of other creditors. Indeed, many companies go into liquidation with flawless

payment records with key suppliers.

General sources of information: Credit managers should scout trade journals, business

magazines and the columns of the business press to keep abreast of the key factors

influencing customers' businesses and their sector generally. Sales staffs that have their ears

to the ground can also prove an invaluable source of information.

Credit terms granted to customers

Although sales representatives work under the premise that all sales are good (particularly,

one may add, where commission is involved!), the credit manager must take a more

dispassionate view. They must balance the sales representative's desire to extend generous

credit terms, please customers and boost sales, with a cost/benefit analysis of the impact of

such sales, incorporating the likelihood of payment on time and the possibility of bad debts.

Where a customer does survive the credit checking process, the specific credit terms

Offered to them will depend upon a range of factors. These include:

Order size and frequency: companies placing large and/or frequent orders will be in a

better position to negotiate terms than firms ordering on a one-off basis.

Market position: the relative market strengths of the customer and supplier can be influential.

For example, a supplier with a strong market share may be able to impose strict credit terms

on a weak, fragmented customer base.

Profitability: the size of the profit margin on the goods sold will influence the generosity of

credit facilities offered by the supplier. If margins are tight, credit advanced will be on a

much stricter basis than where margins are wider.

Financial resources of the respective businesses: from the supplier's perspective, it must

have sufficient resources to be able to offer credit and ensure that the level of credit granted

represents an efficient use of funds. For the customer, trade credit may represent an

important source of finance, particularly where finance is constrained. If credit is not made

available, the customer may switch to an alternative, more understanding supplier.

Industry norms: unless a company can differentiate itself in some manner (e.g., unrivalled

after sales service), its credit policy will generally be guided by the terms offered by its

competitors. Suppliers will have to get a feel for the sensitivity of demand to changes in the

credit terms offered to customers.

Business objectives: where growth in market share is an objective,

trade credit may be used as a marketing device (i.e., liberalized to boost sales volumes).

The main elements of a trade policy are:

Terms of trade: the supplier must address the following questions: which customers should

receive credit? How much credit should be advanced to particular customers and what

length of credit period should be allowed?

Cash discounts: suppliers must ponder on whether to provide incentives to encourage

customers to pay promptly. A number of companies have abandoned the expensive practice

of offering discounts as customers frequently accepted discounts without paying in the

stipulated period.

Collection policy: an efficient system of debt collection is essential. A good accounting

system should invoice customers promptly, follow up disputed invoices speedily, issue

statements and reminders at appropriate intervals, and generate management reports such as

an aged analysis of debtors. A clear policy must be devised for overdue accounts, and

followed up consistently, with appropriate procedures (such as withdrawing future credit

and charging interest on overdue amounts). Materiality is important. Whilst it may appear

nonsensical to spend time chasing a small debt, by doing so, a company may send a

powerful signal to its customers that it is serious about the application of its credit and

collection policies. Ultimately, a balance must be struck between the cost of implementing a

strict collection policy (i.e., the risk of alienating otherwise good customers) and the tangible

benefits resulting from good credit management.

Problems in collecting debts Despite the best efforts of companies to research the companies to whom they extend credit,

problems can, and frequently do, arise. These include disputes over invoices, late payment,

deduction of discounts where payment is late, and the troublesome issue of bad debts. Space

precludes a detailed examination of debtor finance, so this next section concentrates solely on

the frequently examined method of factoring

Factoring an evaluation

Key elements:

Factoring involves raising funds against the security of a company's trade debts; so that

cash is received earlier than if the company waited for its credit customers to pay. Three

basic services are offered, frequently through subsidiaries of major clearing banks:

Sales ledger accounting, involving invoicing and the collecting of debts;

Credit insurance, which guarantees against bad debts;

Provision of finance, whereby the factor immediately advances

about 80% of the value of debts being collected.

There are two types of factoring service:

Non-recourse factoring is where the factoring company purchases the

debts without recourse to the client. This means that if the client’s debtors

do not pay what they owe, the factor will not ask for his money back from the client.

Recourse factoring, on the other hand, is where the business takes the bad debt risk. With

80% of the value of debtors paid up front (usually electronically into the clients bank

account, by the next working day), the remaining 20% is paid over when either the

debtors pay the factor (in the case of recourse factoring), or, when the debt becomes due

(non-recourse factoring). Factors usually charge for their services in two ways:

administration fees and finance charges. Service fees typically range from 0.5 - 3% of

annual turnover. For the finance made available, factors levy a separate charge, similar to

that of a bank overdraft.

Advantages

provides faster and more predictable cash flows;

finance provided is linked to sales, in contrast to overdraft limits, which tend to be determined by historical balance sheets;

growth can be financed through sales, rather than having to resort to external funds;

the business can pay its suppliers promptly (perhaps benefiting from discounts) and because they have sufficient cash to pay for stocks, the firm can maintain optimal stock levels;

management can concentrate on managing, rather than chasing debts;

the cost of running a sales ledger department is saved and the company benefits from the expertise (and economies of scale) of the factor in credit control

Disadvantages The interest charge usually costs more than other forms of short-term

debt;

The administration fee can be quite high depending on the number of debtors, the

volume of business and the complexity of the accounts; by paying the factor directly,

customers will lose some contact with the supplier. Moreover, where disputes over

an invoice arise, having the factor in the middle can lead to a confused three-way

communication system, which hinders the debt collection process;

Traditionally the involvement of a factor was perceived in a negative light

(indicating that a company was in financial difficulties), though attitudes are rapidly

changing

Conclusion:

Working capital management is of critical importance to all companies. Ensuring that

sufficient liquid resources are available to the company is a pre-requisite for corporate

survival. Companies must strike a balance between minimizing the risk of insolvency (by

having sufficient working capital) with the need to maximize the return on assets, which

demands a far less conservative outlook.

Creditor’s Management

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, and reduce dependence on a

single supplier.

How many of your suppliers have a returns 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!).

Inventory Management

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the

cash resources of a business. Insufficient stocks can result in lost sales, delays for customers

etc.

The key is to know how quickly your overall stock is moving or, put another way, how

long each item of stock sit on shelves before being sold. Obviously, average stock-holding

periods will be influenced by the nature of the business. For example, a fresh vegetable

shop might turn over its entire stock every few days while a motor factor would be much

slower as it may carry a wide range of rarely-used spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a Just-In-Time (JIT) basis whereby all the

components to be assembled on a particular today, 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 risks of obsolete or damaged

stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve

substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent

stock management.

The key issue for a business is to identify the fast and slow stock movers with the

objectives of establishing optimum stock levels for each category and, thereby, minimize

the cash tied up in stocks.

Inventory management is the active control program which allows the

management of sales, purchases and payments.

Inventory management software helps create invoices, purchase

orders, receiving lists, payment receipts and can print bar coded

labels. An inventory management software system configured to your

warehouse, retail or product line will help to create revenue for your

company. The Inventory Management will control operating costs and

provide better understanding. We are your source for inventory

management information, inventory management software and tools.

A complete Inventory Management Control system contains the

following components:

Inventory Management Definition

Inventory Management Terms

Inventory Management Purposes

Definition and Objectives for Inventory Management

Organizational Hierarchy of Inventory Management

Inventory Management Planning

Inventory Management Controls for Inventory

Inventory Management must tie together the following objectives,

to ensure that there is continuity between functions:

• Company’s Strategic Goals

• Sales Forecasting

• Sales & Operations Planning

• Production & Materials Requirement Planning.

Inventory Management must be designed to meet the dictates of market place and support

the company’s Strategic Plan. The many changes in the market demand, new

opportunities due to worldwide marketing, global sourcing of materials and new

manufacturing technology means many companies need to change their Inventory

Management approach and change the process for Inventory Control.

Inventory Management system provides information to efficiently manage the flow of

materials, effectively utilize people and equipment, coordinate internal activities and

communicate with customers. Inventory Management does not make decisions or

manage operations; they provide the information to managers who make more accurate

and timely decisions to manage their operations.

Inventory is defined as the blocked Working Capital of an organization in the form of

materials. As this is the blocked Working Capital of organization, ideally it should be

zero. But we are maintaining Inventory. This Inventory is maintained to take care of

fluctuations in demand and lead time. In some cases it is maintained to take care of

increasing price tendency of commodities or rebate in bulk buying.

Traditional Supply Chain solutions such as Materials Requirement Planning, Inventory

Control, typically focuses on implementing more rapid and efficient systems to reduce

the cost of communicating information between and across the Inventory links in the

SCM.COM focuses in optimizing the total investment of materials cost and workload for

every Inventory item throughout the chain from procurement of raw materials to finished

goods Inventory. Optimization means providing a balance of supply to meet the demand

at a minimum total cost , Inventory level and workload to meet customers service goal for

each items in the link of Inventory Chain .

Inventory management refers to the process of managing the stocks of

finished products, semi-finished products and raw materials by a firm.

Inventory management, if done properly, can bring down costs and

increase the revenue of a firm.

How much one should invest in inventory management? The answer to

this question depends on the volume and value of inventory as a

percentage of the total assets of a firm. The importance of inventory

management varies according to industries. For example, an

automobile dealer has very high inventories, sometimes as high as 50

per cent of the total assets, whereas in the hotel industry it may be as

low as 2 to 5 per cent.

The process of inventory management is a continuous one and there

are various kinds of solutions available. It is advisable to employ

specialized staff for inventory management.

The inventory management process begins as soon as one has started

production and ordered raw materials, semi-finished products or any

other thing from a supplier. If you are a retailer, then this process

begins as soon you have placed your first order with the wholesaler.

Once orders have been placed, there is generally a short period of time

available to a firm to put an inventory management plan in place

before the supplies are delivered. Inventory management helps a firm

to decide in advance where these supplies should be stored. If a firm is

getting supplies of small-sized goods, it may not be much of a problem

to store them, but in the case of large goods, one has to be careful so

that the warehousing space is optimally utilized.

From invoices to purchase orders, there is lot of paperwork and

documentation involved in inventory management. Several software

programs are available in market, which help in inventory

management.

Factors to be considered when determining optimum stock levels include:

What are the projected sales of each product?

How widely available are raw materials, components etc.?

How long does it take for delivery by suppliers?

Can you remove slow movers from your product range without compromising best

sellers?

Remember that stock sitting on shelves for long periods of time ties up money, which is not

working for you. For better stock control, try the following:

Review the effectiveness of existing purchasing and inventory systems.

Know the stock turn for all major items of inventory.

Apply tight controls to the significant few items and simplify controls for the trivial

many.

Sell off outdated or slow moving merchandise - it gets more difficult to sell the

longer you keep it.

Consider having part of your product outsourced to another manufacturer rather than

make it yourself.

Review your security procedures to ensure that no stock "is going out the back door!"

Higher than necessary stock levels tie up cash and cost more in insurance, accommodation

costs and interest charges.

The Advantages of an Inventory Management System

Inventory is necessary for many businesses including retail and manufacturing facilities.

Maintaining appropriate inventory levels is crucial, as too much inventory can be costly.

An inventory management system helps to control and balance the flow of incoming and

outgoing merchandise. For most businesses, a strong inventory management system is

advantageous for several reasons.

Supply and Demand: Having an adequate supply of a particular product to meet

customer demand is crucial to both sales increases and customer service. If a customer

comes to a business to purchase a product and it is out of stock, the sale is lost forever

and the customer will probably go to a competitor to find what they need. A good

inventory management system, whether computerized or manual, will identify sales

trends and prepare for customer needs.

Streamline Operations: Manufacturing facilities should always maintain proper

inventory of the supplies necessary to produce their products. If one component is

missing from the inventory, the whole production process is interrupted. Streamlined

operations are an important benefit of an effective inventory management system.

Lead Time Adjustments: Inventory management systems are important for determining

when to order certain items, especially for products with varying lead times. Some

products take longer to receive from the manufacturer than others, and it’s important to

have an inventory management system that accounts for lead time. If for example, a

grocery store was going to have a sale on hotdogs, relish and mustard, but the hotdogs

took longer than three days to receive while the condiments took five days; the inventory

management system would need to ensure that all items were in stock in time for the sale.

Reduce Liabilities: Another significant advantage to an inventory management system is

it reduces the liabilities and loss created by overstock. Similar to monitoring supply and

demand, a good inventory management system will notice declines in sales or identify

one-time occurrences to prevent over-ordering certain products. For instance, if a

clothing store was having a sale on a certain style of jeans, it may order additional stock

to meet customer demands. The inventory management system should take the sale into

account before ordering more of the jeans based on the spike in sales. Otherwise, they

store may have to offer even deeper discounts to get rid of the excess inventory.

Research Methodology

Statement of Project

1. Evaluation, analysis & interpretation of working capital management of United

Engineering Services.

2. Suggesting ways to improve its working capital utilization.

Objective of Research

Estimation of working capital requirement

Evaluation of working capital management

Evaluation of Liquidity position & working capital utilization

Analysis of relationship between working capital and profitability

Analysis & sources of working capital

Analyzing the level of current assets with relation to current liabilities.

Collection of Data:

Data has been collected from various sources like:

Annual reports of last three years

Manual of concerned departments

Internet sites like www.google.com,

Methods of Quantitative Analysis

Calculation of net working capital requirements.

Ratio analysis

Operating cycle & cash cycle

Cash flow analysis

Determining the Financing mix

Statistical tools like graphical presentation

Limitations

The data is mostly secondary in nature

Data has been recalculated & regrouped wherever necessary

In the absence of sufficient data personnel judgment have been taken on

reasonable assumption.

In the absence of sufficient data in-depth study of scash, Receivables and

inventory management was not possible.

Assumption: Year is taken of 365 days

All purchases have been taken as credit purchases.

All sales have been taken as credit sales.

In the absence of relevant data the data from internet site is taken as the

relevant information’s.

2007 2008 2009 2010 20110

5

10

15

20

25

Gross profit ratio

years

%

Chart 1

Interpretation:

In Gross profit ratio, it has been calculated by gross profit to sales for the particular years.

From 2007 to 2010 ratio is increasing. For Fy 2007 gross profit ratio is 13.98 times like

wise for 2008 is 15.45, 2009 is 18.82 times. But in 2010-2011(21.01) compare to

previous year 2009-2010(21.08) gross profit ratio is same (no major changes like Py). So

the company gross profit ratio is upward directions i.e., ratio are increasing.

(Rs in Lakhs)Table 1

2007 2008 2009 2010 2011

Sales 5302.04 6260.8 5428.58 5605.61 8209.59

Gross profit 741.73 967.31 1022.17 1181.95 1725.02

Gross profit ratio

13.98% 15.45% 18.82% 21.08% 21.01%

2007 2008 2009 2010 20110

1

2

3

4

5

6

Net profit ratio

years

%

Chart 2

Interpretation:

In the year 2009 net profit ratio for the company is very low when compare with previous

year. And comparing 2007 and 2008 net profit ratio is decrease in 2008. But net profit in

2010 is higher than previous years (2007, 2008, and 2009). In 2011 net profit is decrease

from 5.7 to 4 times. Hence the company net profit is not stable.net profit ratio is

calculated on sales basic to net profit after tax, interest and depreciations.

(Rs in Lakhs)

Table 2

2007 2008 2009 2010 2011

Sales 5302.04 6260.8 5428.58 5605.61 8209.59

Net profit 254.66 235.26 31 320.03 329.12

Net profit ratio 4.80% 3.75% 0.57% 5.70% 4.00%

2007 2008 2009 2010 201113.6

13.8

14

14.2

14.4

14.6

14.8

15

15.2

15.4

Stock turnover ratio

years

tim

es

Chart 3

Interpretation:

This ration indicates the effectiveness and efficiency of inventory management. This ratio

is calculated as cost of goods sold: average inventory shows how speedily the inventory

is turned into accounts receivables through sales. The higher the inventory turnover ratio

(also called stock velocity) the more the efficient inventory management.

The stock velocity is decreasing subsequently from 14.43 (FY 06-07) to 14.27 (FY 08-

09) which shows inefficiency on the part of inventory management. Partly the reason for

the fall can be attributed to stocking up of inventory for the trail run & using them in

testing the expansion mode machinery. But in Fy 2009-2010 its has been increase to

15.32 but in 2010-2011 its decrease to 14.29 times.

(Rs in lakhs)

Table 3

2007 2008 2009 2010 2011

Cost of

goods sold

4560.31 5293.49 4406.41 4423.66 6484.57

Avg Stock 315.94 370.14 308.78 288.63 435.56

Stock

turnover

ratio

14.43 14.30 14.27 15.32 14.29

Stock turnover ratio is in times

2007 2008 2009 2010 20110

1

2

3

4

5

6

Debtors turnover ratio

year

tim

es

Chart 4

Interpretation:

If we analyze the debtors as compared to the net sales of the last 5 years the debtors of

our company are continuously changing as a percentage of sales, which is a good sign

that we are not blocking our capital. In Fy year 2007-08 debtors turnover ratio is 5.21

times which is increased from py 2006-07(4.16 times). In 2009 ratio is increased.There is

an increase in both debtors and sales, so avg. collection period is decreasing year by year.

That shows that recovery from debtors is improving in last two years compare to 2008-09.

Here average debtors took as closing debtors only.

(Rs in lakhs)

Table 4

2007 2008 2009 2010 2011-10-12

Credit sales 5302.04 6260.8 5428.58 5605.61 8209.59

Avg debtors 1272.52 1200.86 993.62 1176.54 1699.83

Debtors turnover ratio

4.16 5.21 5.46 4.76 4.82

Debtor’s turnover ratio is in times

2007 2008 2009 2010 20110

10

20

30

40

50

60

70

80

90

100

Debtors collection period

years

day

s

Chart 5

Interpretation:

The average collection period is the period within which our debtors make the

payments to us. A Company always tries to have the lowest possible average

collection period so that its cash does not get blocked and thus the working capital

required will be low. There is an increase in both debtors and sales, so avg. collection

period is decreasing year by year. That shows that recovery from debtors is improving.

But here from 2007 to 2009 is collection period from debtors is improving after that it

was increased for the year 2010 and 2011. No of days 365.

(Rs in lakhs)

Table 5

2007 2008 2009 2010 2011

Debtors 1272.52 1200.86 993.62 1176.54 1699.83

Credit sales 5302.04 6260.8 5428.58 5605.61 8209.59

Debtors collection periods

87 70 66 76 75

Debtor’s collection period in days

2007 2008 2009 2010 20110

1

2

3

4

5

6

Creditors turnover ratio

years

tim

es

Chart 6

Interpretation:

The creditors as a percentage of sales show the sales we are generating are from credit

purchases up to what extent. If more sales are there from credit then the working capital

required will be less. In the above table the creditors as a percentage of sales have

increased in the year 2010-11 but in py it has been decreased in the year from 2007 to

2010. We should try to increase this percentage so that more sales will not require more

working capital, as the raw material can be availed on credit. Here avg creditors are

closing debtors only and all purchases are credit only.

Notes:

In the figures of creditors only the creditors relating to purchases are taken

Other payments relating to tax, outstanding expenses or any other liability are not

taken under it.

(Rs in lakhs)Table 6

2007 2008 2009 2010 2011

Credit purchase

4332.17 4844.37 3851.22 4247.31 6080.16

Creditors 882.4 1071.15 1036.26 1185.98 1193.34

Credit turnover ratio

4.90 4.52 3.71 3.58 5.09

Creditor’s turnover ratio is in times

2007 2008 2009 2010 20110

20

40

60

80

100

120

Creditors payment periods

years

da

ys

Chart 7

Interpretations:The average period provided by the creditors or we can say that the period we take to

make payments to our creditors is known as the average payment period. If the average

payment period will be longer the working capital required will be low. The trend of

the average payment period can be studied from the graphs given below and the

attached workings. The decrease in the average payment period in the year

2010-11 shows the good credibility of the company in the market but on the other

side it also points out that the working capital requirements of the company are

increasing due to this trend. So such a policy of the payment should be adopted which

will maintain the working capital as well as the credibility of the company.

(Rs in lakhs)Table 7

2007 2008 2009 2010 2011

Creditors 882.4 1071.15 1036.26 1185.98 1193.34

Credit purchase

4332.17 4844.37 3851.22 4247.31 6080.16

Creditors payment period

74 40 98 101 71

Creditors payment period are in days.

2007 2008 2009 2010 20110

2

4

6

8

10

12

14

16

Fixed assets turnover ratio

years

tim

es

Chart 8

Interpretations:

In fixed assets turnover ratio, here we have seen there has been a continuous increase in

sales. In the year 2007-08, there was an increase in average fixed assets as well as in sales

but the growth rate of average fixed assets was higher, so ratio decreased from 15.68 to

10.54 in next year. In the year 20010 and 2011 there was a decrease in average fixed

assets and an increase in sales, so ratio decreased from 15.68 to 10.54. And from 10.54 to

6.67 respectively. But it is major decreasing in 2010-11.

(Rs in lakhs)Table 8

2007 2008 2009 2010 2011

Sales 5302.04 6260.8 5428.58 5605.61 8209.59

Fixed assets 399.60 399.13 514.80 840.26 2341.64

Fixed assets turnover ratio

13.26 15.68 10.54 6.67 3.50

Fixed assets turnover ratio is in times

2007 2008 2009 2010 20110

2

4

6

8

10

12

14

Fixed assets turn over ratio

years

tim

es

Chart 9

Interpretation:

In this fixed assets turnover ratio, it was compare with the cost of good basic. In 2007

year it was 11.41.and in 2008 it was increased to 13.36 times. From 2009 to 2011 fixed

assets ratio on the basic of cost of goods sold is started to decrease from 13.26 to 2.76

rapidly.

(Rs in lakhs)

Table 9

2007 2008 2009 2010 2011

Cost of goods sold

4560.31 5293.49 4406.41 4423.66 6484.57

Fixed assets 399.60 399.13 514.80 840.26 2341.64

Fixed assets turnover ratio

13.26 15.68 10.54 6.67 3.50

Fixed assets turnover ratio is in times

2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

Current ratio

years

tim

es

Chart 10

Interpretations:

The current ratio is a financial ratio that measures whether or not a firm has enough

resources to pay its debts over the next 12 months. It compares a firm's current assets to

its current liabilities. The Current ratio is calculated by dividing current assets by current

liabilities: from the chart, in the year 2007, 2008, 2009 it shoe the decrease position in

the current ratio. But in 2010 it’s increased and next year 2011 is was fall down from

1.91 to 1.59.

(Rs in lakhs)Table 10

2007 2008 2009 2010 2011

Current assets

2532.39 2849.98 2363.22 2888.03 3336.92

Current liabilities

1174.98 1387.21 1376.50 1509.87 2088.75

Current ratio 2.15 2.05 1.71 1.91 1.59

Current ratio is in times

2007 2008 2009 2010 20110

0.05

0.1

0.15

0.2

0.25

0.3

Absolute liquid ratio

years

tim

es

Chart 11

Interpretation:

An Absolute liquid ratio is calculated on the absolute liquid assets are cash, bank and

marketable securities. It is to be observed that receivables (debtors/accounts receivables

and bills receivables). In this, year 2010 and 2009 are higher position when compare with

other financial and previous years. It was increased from 0.11 times to 0.30 from 2007 to

2010 and in 2011 it was decrease to 0.17 times.

(Rs in lakhs)Table 11

207 2008 2009 2010 2011Absolute liquid assets (cash& cash at bank)

286.04 549.37 681.36 869.26 594.6

Current assets

2532.39 2849.98 2363.22 2888.03 3336.92

Absolute liquid ratio

0.11 0.19 0.28 0.30 0.17

An Absolute liquid ratio is in times

2007 2008 2009 2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Acid test ratio

years

tim

es

Chart 12

Interpretation:

A quick ratio/ Acid test ratio of 1:1 or more is considered as satisfactory or of sound

liquidity position. Liquid assets normally include cash, bank, sundry debtors, bills

receivable and marketable securities or temporary investments. In other words they are

current assets minus inventories (stock) and prepaid expenses. In the year 2007 acid test

ratio is 1.85 times but in 2008 it was decrease to 1.78 times and in 2009 also decrease to

1.55 times. After 2009, in 2010 compare to 2009 there is a slight increase in acid test

ratio from 1.55 to 1.68 times. In 2011, there is decreased from 1.68 to 1.35 times.

(Rs in lakhs)

Table 12

2007 2008 2009 2010 2011

liquid assets 2179.56 2462.53 2133.11 2540.88 2812.94

current

liabilities

1174.98 1387.21 1376.50 1509.87 2088.75

Acid test

ratio

1.85 1.78 1.55 1.68 1.35

Acid test ratio is in times

2007 2008 2009 2010 20110

0.1

0.2

0.3

0.4

0.5

0.6

Cash ratio

years

times

Chart 13

Interpretation:

In this cash ratio, it was calculated on cash and cash equivalents with current liabilities.

So that it tells about the correct point about cash position of the company. From 2007 to

2010 cash ratio is increased from 0.24 to 0.57 times (i.e., 0.24, 0.39, 0.49 and 0.57). But

in the year 2011 it was decreased to 0.28 from 0.57 times. So that cash position of the

company should concern to take more important for the company.

(Rs in lakhs)Table 13

2007 2008 2009 2010 2011

cash and cash equivalents

286.04 549.37 681.36 869.26 594.6

current liabilities

1174.98 1387.21 1376.50 1509.87 2088.75

cash ratio 0.24 0.39 0.49 0.57 0.28

Cash ratio is in times

2007 2008 2009 2010 20110

1

2

3

4

5

6

working capital turnover ratio

years

tim

es

Chart 14

Interpretation:

A high working capital turnover ratio indicates efficiency in utilization of resources and

in the ratio has improved from3.2 in 2010 to 5.19 in 2011. Hence we can see the

component of working capital is consistently reducing which is considered as a positive

sign from the point of the finance. But in the py 2007 and 2008 it is decreased with in the

year 2009. It was calculated on cost of sales and net working capital.

(Rs in lakhs)

Table 14

2007 2008 2009 2010 2011

Cost of

goods sold

4560.31 5293.49 4406.41 4423.66 6484.57

Net working

capital

1357.41 1462.77 986.72 1378.16 1248.17

Working

capital

turnover

ratio

3.35 3.61 4.46 3.20 5.19

Working capital turnover ratio is in times

2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

current assets turnover ratio

years

tim

es

Chart 15

Interpretation:

A better current assets turnover ratio is always good for a firm and in case of our

organization, the turnover ratio is moving positively during the years 2007, 2008 and 2009..

Current assets turnover ratio had decreased in 2009-10 and increased in 2010-11 from 1.94

to 2.46 times , but as the growth rate of sales is higher when compared to decreased rate of

current assets so the ratio has decreased from 2.30 in 2008-09 to 1.94 times in 2009-10.

Further it has increased to 2.46 times 2010-11.

(Rs in lakhs)Table 15

2007 2008 2009 2010 2011Sales 5302.04 6260.8 5428.58 5605.61 8209.59Current assets

2532.39 2849.98 2363.22 2888.03 3336.92

Current assets turnover ratio

2.09 2.19 2.30 1.94 2.46

Current assets turnover ratio is in times

Schedule of changes in Working Capital for the year 2006-2007(Rs in lakhs)

Table 16

  Statement changes in working capital 2006/07

      working capital

particulars 2006 2007 increase decrease

current assets        

  Stock 279.05 352.83 73.78  

  sundry Debtors 1065.37 1272.52 207.15  

  Cash & Bank balance 270.58 286.04 15.46  

  Loans & Advances 517.34 621 103.66  total

A 2132.34 2532.39    

Current liabilities        

  acceptances 20.06 22.54   2.48

  sundry creditors 670.56 882.4   211.84

  other liabilities        

  advance received from customers 311.49 262.76 48.73  

  due to Director 1.55 0 1.55  

  unpaid dividends        

 interest accrued but not due on fixed deposits 0 7.28   7.28

total B 1003.66 1174.98    

Net Working Capital (A-B) 1128.68 1357.41    

Increase in Working Capital 228.73     228.73

    1357.41 1357.41 450.33 450.33

Interpretation: This schedule of working capital is result in increasing in working capital by increased in all the current assets and in current liabilities is increased in sundry creditors and decreased in advances from customers.

Schedule of changes in Working Capital for the year 2007-2008(Rs in lakhs)

Table 17

  Statement changes in working capital 2007/08

      working capital

particulars 2007 2008 increase decrease

current assets        

  Stock 352.83 387.45 34.62  

  sundry Debtors 1272.52 1200.86   71.66

  Cash & Bank balance 286.04 549.37 263.33  

  Loans & Advances 621 712.3 91.3  total

A 2532.39 2849.98    

Current liabilities        

  acceptances 22.54 33.62   11.08

  sundry creditors 882.4 1071.15   188.75

  other liabilities 0 0    

  advance received from customers 262.76 275.17   12.41

  due to Director 0 0    

  unpaid dividends 0 1.7   1.7

 interest accrued but not due on fixed deposits 7.28 5.57 1.71  

total B 1174.98 1387.21    

Net Working Capital (A-B) 1357.41 1462.77    

Increase in Working Capital 105.36     105.36

    1462.77 1462.77 390.96 390.96

Interpretation: This schedule of working capital is result in increasing in working capital by increased in all the current assets expect sundry debtors because its decreased and in current liabilities is increased in sundry creditors and advances from customers.

Schedule of changes in Working Capital for the year 2008-2009(Rs in lakhs)

Table 18

  Statement changes in working capital 2008-09

      working capitalparticulars 2008 2009 increase Decrease

current assets        

  Stock 387.45 230.11   157.34

  sundry Debtors 1200.86 993.62   207.24

  Cash & Bank balance 549.37 681.36 131.99  

  Loans & Advances 712.3 458.13   254.17total

A 2849.98 2363.22    

Current liabilities        

  acceptances 33.62 25.13 8.49  

  sundry creditors 1071.15 1036.26 34.89  

  other liabilities 0 0    

  advance received from customers 275.17 309.45   34.28

  due to Director 0 0    

  unpaid dividends 1.7 4.15   2.45

 interest accrued but not due on fixed deposits 5.57 1.51 4.06  

total B 1387.21 1376.50    

Net Working Capital (A-B) 1462.77 986.72    

Decrease in Working Capital   476.05 476.05  

    1462.77 1462.77 655.48 655.48

Interpretation: This schedule of working capital is result in decreased in working capital by decreased in all the current assets like stock, sundry debtors and loans and advances and in liabilities is decreased in sundry creditors and increased in advances from customers.

Schedule of changes in Working Capital for the year 2009-2010(Rs in lakhs)

Table 19

  Statement changes in working capital 2009-10

   2009

 2010

working capital

particulars increase decrease

current assets        

  Stock 230.11 347.15 117.04  

  sundry Debtors 993.62 1176.54 182.92  

  Cash & Bank balance 681.36 869.26 187.9  

  Loans & Advances 458.13 495.08 36.95  total

A 2363.22 2888.03    

Current liabilities        

  acceptances 25.13 78.55   53.42

  sundry creditors 1036.26 1185.98   149.72

  other liabilities 0      

  advance received from customers 309.45 240.25 69.2  

  due to Director 0      

  unpaid dividends 4.15 4.06 0.09  

 interest accrued but not due on fixed deposits 1.51 1.03 0.48  

total B 1376.5 1509.87    

Net Working Capital (A-B) 986.72 1378.16    

Increase in Working Capital 391.44     391.44

    1378.16 1378.16 594.58 594.58

Interpretation: This schedule of working capital is result in increasing in working capital by increased in all the current assets and in current liabilities is increased in sundry creditors and decreased in advances from customers.

Schedule of changes in Working Capital for the year 2010-2011(Rs in lakhs)

Table 20

  Statement changes in working capital 2010-11

2010 2011

working capital

particulars increase decrease

current assets        

  Stock 347.15 523.98 176.83  

  sundry Debtors 1176.54 1699.83 523.29  

  Cash & Bank balance 869.26 594.6   274.66

  Loans & Advances 495.08 518.51 23.43  total

A 2888.03 3336.92    

Current liabilities        

  acceptances 78.55 361.86   283.31

  sundry creditors 1185.98 1193.34   7.36

  other liabilities   310.06   310.06

  advance received from customers 240.25 212.08 28.17  

  due to Director        

  unpaid dividends 4.06 4.02 0.04  

 interest accrued but not due on fixed deposits 1.03 7.39   6.36

total B 1509.87 2088.75    

Net Working Capital (A-B) 1378.16 1248.17    

Decrease in Working Capital   129.99 129.99  

    1378.16 1378.16 881.75 881.75

Interpretation:This schedule of working capital is result in decreased in working capital by increased in

all the current assets like stock, sundry debtors and loans and advances and in liabilities

is increased in sundry creditors and decreased in advances from customers.

2007 2008 2009 2010 20110

1000

2000

3000

4000

5000

6000

7000

8000

Last Five Years Records

income

pbit

pat

years

Rs

in L

ak

hs

Chart 16Interpretation:

This graph shows the last five years income, profit before depreciations and taxes and

profit after tax.

Findings:

Working capital turnover ratio is continuously increasing that shows increasing needs

of working capital. But in 2010 its show decreased value compare with other years.

Cash ratio is increased from 2007 to 2010, but in 2011 it was decreased to 0.28 from

0.57 times.

Standard current ratio is 2:1 and for industry it is 1.59:1. The ratios satisfactory.

Debtors of the company were high; they were increasing year by year, so more funds

were blocked in debtors. But now recovery is becoming faster.

Acid test ratio is more than one but it does not mean that company has excessive

liquidity.

Sales in 2011 is increased when compare with 2007. Its shows the growth of the

company.

Debtor’s collection periods should be stable but here it’s not stable.

Current assets turnover ratio is increased in past but in 2010 its decreased and again

increased in 2011.

In 2009-09 and 2010-11, shows decreased in working capital.

Creditor’s payment period is decreased in 2011.

Production capacity is not utilized to the full extent.

Net profit in the year 2009 is so decreased when compare with other years.

Suggestions:

It can be said that overall financial position of the company is normal but it is

required to be improved from the point of view of profitability.

Company should stretch the credit period given by the suppliers.

Company should try to increase Volume based sales so as to stand in the

competition.

Making available just adequate quantum of working capital. Some of the existing

machinery is new with absolute equipments requiring modernization and

rebuilding.

The company should administrate their credit on the basis of certain well

recognized and established principle of credit administration.

The company should maintain an optimum level of cash in the business in order

to maintain a proper liquidity in the business.

Bibliography:

http://www.indiamart.com/beardsell-limited/clean-rooms.html

http://www.beardsell.co.in/

http://www.accountingformanagement.com/liquid_ratio.htm

http://simplestudies.com/liquidity-working-capital-analysis.html/page/3

Financial Management -Prassanna Chandra.

Google.

Financial Management -Satish Inamdar.

Annual report of BEARDSELL Ltd.