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PREFACE Business plays a very important role in economic development. To keep pace with gigantic business powers. India has to produce competent business administrators who need to have a balanced training in field of business administration. MBA plays an important role in this field. MBA is a combination of both Theoretical and Practical aspects of business and summer training gives an opportunity to work in real corporate business environment. The concept of summer training which is there in curriculum of business management school serves two purposes; Firstly - It gives the student a fair amount of insight of problems faced by them. Secondly - This type of project helps business management students to get a first hand experience of actual working condition, which otherwise is possible only when a student enters the job. In the preparation of this report, both the above purposes are kept in mind to make the report more meaningful.
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Page 1: Working Cap of Nahar

PREFACE

Business plays a very important role in economic development. To keep pace with

gigantic business powers. India has to produce competent business administrators who

need to have a balanced training in field of business administration. MBA plays an

important role in this field. MBA is a combination of both Theoretical and Practical

aspects of business and summer training gives an opportunity to work in real corporate

business environment.

The concept of summer training which is there in curriculum of business

management school serves two purposes;

Firstly- It gives the student a fair amount of insight of problems faced by them.

Secondly- This type of project helps business management students to get a first hand

experience of actual working condition, which otherwise is possible only when a student

enters the job.

In the preparation of this report, both the above purposes are kept in mind to make the

report more meaningful.

I undertook my training in NAHAR SPINING MILLS, LUDHIANA. During my

training, I studied about “WORKING CAPITAL OF MANAGEMENT” of NAHAR

SPINNING MILLS LIMITED LUDHIANA. I gained a good experience and in depth

knowledge during the surveys. This summer training report consists of my findings,

collection of data and then analyzed conclusions were drawn.

Page 2: Working Cap of Nahar

ACKNOWLEDGEMENT

Heartily thanks to all those who supported me ………

Acknowledging any one in mere words is a very difficult job. I would like to pay my

sincere thanks to all those people who helped me during this project work with their

guidance and invaluable advice.

The process of preparing this report on “Working capital of organization”, was a learning

experience for me. During the course of my preparation of this report I had to delve

deeply into many details and thus was able to enlighten myself.

Foremost of all, I express my sincere indebt ness to the Almighty for bestowing me with

favorable circumstances and keeping me in the high spirits. This project is the end

product of valuable contribution of the many persons to whom, I remain indebted.

I am thankful to Sh.HANS RAJ KAPOOR, GENERAL MANAGER (FINANCE) OF

NAHAR SPINNINGS MILLS who gave me an opportunity to take up my project in

organization. I would like to thank MR. ANIL GARG & SH.P.K. VASHISTH, MR

SANJEEV MITTAL (FINANCE CONTROLLER) for his support and encouragement

throughout the completion of my project. I am thankful for his active co-operation and

his keen involvement in my project. I am indebted to his for understanding and

appreciating my problems, which emerged during the course of my project

I am highly privileged to all the people, related directly or indirectly and the respondents

for being cooperative and sparing a few moments from their busy schedule; without their

help this project wouldn’t have proven meaningful.

SURABHI PURI

Page 3: Working Cap of Nahar

TABLE OF CONTENT

CERTIFICATE

ACKNOWLEDGEMENT

PART –I

INTRODUCTION

ORGANIZATIONAL PROFILE

PART- II

RATIONALE OF STUDY

OBJECTIVES OF STUDY

SCOPE OF STUDY

RESEARCH METHODOLOGY

THEORETICAL BACKGROUND OF WORKING CAPITAL

CONCEPT OF WORKING CAPITAL

TYPES OF WORKING CAPITAL

OPERATING CYCLE OF WORKING CAPITAL

DETERMINANTS OF WORKING CAPITAL

MEANING AND NATURE OF WORKING CAPITAL

REQUIREMENT OF WORKING CAPITAL

ANALYSIS OF WORKING CAPITAL

SWOT ANALYSIS

CONCLUSION

BIBLIOGRAPHY

Page 4: Working Cap of Nahar

INDIAN COTTON TEXTILE INDUSTRY

Indian textile industry is once of the largest segment of Indian economy for over 1/5 th of

industrial production. The winds of change have transformed a traditional art to a modern

industry, employing state of our technology and providing employment to over 15million

people.

The combination of traditional art and contemporary design has produced a variety of

yarn, fabric, home textile and other textile products. With over 9million hectares under

cotton cultivation & an annual crop of around 300 million kgs. India is amongst the

world’s largest reservoirs of this popular fiber. In addition to so odd varieties of different

description being grown in India, enables the industry to produce over almost every

conceivable count & construction of fabrics in a width of choice.

The process of economic liberalization begun in last decade has seen industry become

globally competitive not only in terms of price but also in quality. Modernization has not

been restricted to installation of sophisticated processing machinery wide width looms,

auto corners electronic clearers, spicer etc but also to adaptation of quality system

confirming to ISO-9000 stds. The recent euphoria created the European markets eco

friendly textiles has sent Indian industry into a flurry of activities to adapt it self to

market requirements.

Today with over 1300 spinning over 275 composite mills & around 1.49 million

registered loom, Indian cotton textile is a force to reckon with.

Page 5: Working Cap of Nahar

INTRODUCTION

The flagship company of nahar group- OSWAL WOOLEN MILLS LTD. Was

established in 1947 for spinning worsted yarns and knitted garments. Today it is a giant

Textile group of northern Indian with turnover of more than rs.1800 crore, producing all

types of yarns, fabrics and branded garments in addition to steel, sugar and vegitable oils .

The thrust of the group is in the Textile field aiming mainly at EXPORTS. There

are NINE important companies in the group

Nahar group of a vertically integrated well established & reputed conglomerate with a

wide range of portfolio from spinning knitting, weaving, processing, hosiery and

garmenting having latest art of technology units. The group has out sanding performance

in national textiles industry.

0.45million spindles & 5000 motors in multi- location units all over country

places. Nahar is in the top rank of spinners of country.

India’s one of the largest hosiery knitwear manufactures & exporters having

prestigious buyer like a old navy, gap, Perry Ellis, a shworth, cag and Philips,

van- heusen etc.

Holding hi profiled operated brands “Monte carto”, “Canterbury” and “Cotton

country” for wide range of garments.

Page 6: Working Cap of Nahar

Recognized “Golden trading house status” awarded by government of india.

NAHAR GROUP OF COMPANIES

“ONE OF THE PREMIER RECOGNISED GOLDEN

TRADING HOUSE OF INDIA”

“LALA VIDYA SAGAR OSWAL”

“FOUNDER NAHAR GROUP”

NAHAR SAGA

Nahar has busted into textile scenario through its flagship company woolen mills in 1949.

It has started from 800 spindles to modern day textile giant having varied Interest in

spinning, knitting, dying, weaving and garment.

Nahar group, promoted by Oswal family has grown leaps and bounds and

established itself as one of top business houses in india.

Nahar has seen very robust growth since its inception, having top international textile

brands like IEOD, OLD NAVY, GAP, QUICK SILVER, PERRY ELLIS, CAG,

PHILIPS, and VAN- HEUSEN in its kitty and exporting to market in

USA,

Europe,

Far East and

Middle East.

Nahar group has emerged as a reliable, trusted and committed global patner.

Following the retail boom nahar is making its foray in retail sector through its exclusive

outlets of its Brands.

“MONTE CARTO”

Page 7: Working Cap of Nahar

“CANTERBURRY” AND

“COTTON COUNTY”

PHILOSOPHY OF NAHAR

VISION

“BUILDING WORLD CLASS BRANDS & PRODUCT”.

Nahar is continuously working to provide best quality products at most competitive

prices. Customers are of utmost importance and it strives to achieve higher customer

satisfaction. Its business model is based on employing “BEST MINDS” & “BEST

HANDS” in industry to provide value added products and implementing cost cutting

tools.

VALUES

“WE VALUE OUR VALUES”.

Performance and teamwork are two attributes which they envisage in their employees and

are fully devoted to provide greater employee satisfaction and excellent working

environment. They abide by high ethical standards which is a key to their solid success.

They enhance their productivity by adapting to best technical capabilities and system. In

this way, they achieve and sustain their stupendous growth. They tend to became best by

making commitment to strive relentlessly to improve their products and team.

CORPORATE SOCIAL RESPONSIBILITY

“OUR MOTTO- PAYBACK TO SOCIETY”.

Page 8: Working Cap of Nahar

Their objective is to fulfill their social responsibility by encouraging and

supporting educational instructions and running health facilities

They also abide by their commitment to confirm to various enviromromental

norms and standards.

QUALITY POLICY & QUALITY OBJECTIVE

QUALITY POLICY

To provide the required support and assistance to manufacture group companies in

meeting the customer requirement of quality and delivery, especially in the area of

procurement of material and marketing of products. This will be achieved through

continuous improvement in effectiveness of well designed quality management

system.

QUALITY OBJECTIVES

Enhance customer

Enhance timely procurement of material.

Page 9: Working Cap of Nahar

BOARD OF DIRECTORS

SH. Jawaharlal oswal CHAIRMAN.

SH. Dinesh oswal MANAGING DIRECTOR.

SH. Kamal oswal DIRECTOR.

DR (Mrs.) H.K. BAL DIRECTOR.

SH. Amarjeet Singh DIRECTOR.

DR O P Sahni DIRECTOR.

Prof K.S. Maini DIRECTOR.

SH S.K Sharma ADDITIONAL DIRECTOR.

GENERAL MANAGER (FINANCE)

SH. HANS RAJ KAPOOR.

Page 10: Working Cap of Nahar

FINANCE CONTROLLERS

SH. ANIL GARG.

&

SH. P.K. VASHISTH

COMPANY SECRETORY

SH. BRIJ SHARMA.

AUDITORS

M/S GUPTA VIGG & CO.

(CHARTED ACCOUNTANT)

101, Kismat complex

G.T Road miller ganj ldh-141003.

BANKERS

PUNJAB NATIONAL BANK,

STATE BANK OF INDIA &

ICICI BANK LTD.

REGD OFFICE

Page 11: Working Cap of Nahar

373, Industrial area –‘A’ ldh-141003.

WORKS

Industrial Area-‘A’, Ludhiana (Punjab)

Dhandari kalan, G. T. ROAD, Ludhiana (Punjab)

Village Simrai, Mandideep, Distt. Raisen (M.P.)

Village Lalru, Distt. Patiala (Punjab)

Village Jalalpur, Distt. Patiala, (Punjab)

Rishab Spinning Mills, Village Jodhan, Distt. Ludhiana

NSML Unit 3, 100% EOU, Village Lehli/Lalru, Distt. Patiala

Nahar Fibres, Jitwal Kalan, Malerkotla.

Page 12: Working Cap of Nahar

PERFOMANCE REVIEW

OPERATING INCOME :

YEARS OPERATING INCOME

2002-03 46068

2003-04 38903

2004-05 44937

2005-06 48657

2006-07 91331

Page 13: Working Cap of Nahar

PERFOMANCE REVIEW OF EXPORTS

YEARS EXPORTS

2002-03 23839

2003-04 21026

2004-05 27148

2005-06 30178

2006-07 59980

Page 14: Working Cap of Nahar

PERFOMANCE REVIEW OF GROSS PROFIT & PROFIT AFTER TAX:

YEARS GROSS PROFIT PROFIT AFTER TAX

2002-03 8039 2485

2003-04 7612 2640

2004-05 6555 1604

2005-06 7807 2824

2006-07 18645 6429

Page 15: Working Cap of Nahar

PRODUCT MIX

100% Cotton Raw Material and Dyed Yarns

These yarns are available in single, double and multi-fold on cones.

RAW MATERIAL COMBED YARNS:

Count range NE 10 to NE 120.

Available from indigenous and foreign growth of cotton.

Specially yarns made from ELS cotton turn as PIMA & GIZA.

RAW WHITE EARNED YARNS :

Count range NE 10 to NE 32.

Available from indigenous and foreign growth of cotton.

Page 16: Working Cap of Nahar

DYED YARNS :

Count range NE 10 to NE 40.

Available from 100% Cotton & also Blended with Polyster, Acrylic & Viscose

staple fibres.

MELAGE YARNS :

Count range NE 10 to NE 40.

Available from 100% cotton & also blended with polysters acrylic

&Visorse staple fibres.

100% GRASSED/ MERCERISED YARNS :

Count range NE 20/2 to NE 120/2.

Available from indigenous and foreign growth of cotton in Raw White & Dyed

form

COMPACT SPIN YARNS:

Count range NE 20 to NE 60.

Page 17: Working Cap of Nahar

ORGANIC COTTON YARNS

100% Organic Cotton & Blends of organic cotton with normal cotton.

OPEAL AND YARN ON RIETER R 40 FULLY AUTOMATED ROTORS.

BLENDED YARNS:

Cotton: Viscose- Count range NE 10 to NE 40.

Cotton: Wool- Count range NE 10 to NE 10.

Cotton: Polyststers- Count range NE 10 to NE 60.

Cotton: Acrylic-Count range NE 10 to NE 40.

Polyster: Viscose- Count range NE 10 to NE 60.

SPECILISED BLENDED YARNS :

Cotton: Dralon- Count range NE 10 to NE 40 available from Drab Lon Acrylic

fibre.

Cotton: Coolmax- Count range NE 10 to NE 40 available from Dacron Polyster

fibre v(cool max)

Cotton: Nylon- Count range NE 10 to NE 60.

SYNTHETIC/ MAN MADE FIBRE YARNS :

100% Polyster yarns- Count range NE 10 to NE 40.

100% Cool max yarns- Count range NE 20 to NE 40.

100% Viscose yarns- Count range NE 10 to NE 40.

Page 18: Working Cap of Nahar

SPECIALIZED YARNS :

Grindle yarn.

Space dyed yarn.

Slub yarn.

Core spun yarn.

High twist yarn.

Reverse yarn.

FABRICS

KNITTED.

WOOVEN.

KNITTED:

In house capacity to knit world class fabrics on circular knitting & flat bed machines &

can manufacture single- Jersey, Jacquard auto stripers s/j striples, Flerce, Veleury

interlock stripes & pique knits with large fleet of world’s latest machines and have

facility of both compaction fabrics.

WOOVEN:

Nahar is manufacturing world class woven fabrics such as

Dooby, Twills, Choinos, Gabardines, Canvas, Tussers, Cavallery, Twills, Satins, Broker

twills, Ottoman, Bed ford cord & Rib stop etc.

Page 19: Working Cap of Nahar

Nahar also expertise in 100% cotton & cotton blended fabrics such as

Cotton polysters,

Polyster Cotton,

Cotton: Tencel,

Cotton: Nylon,

Cotton: Lycra &

Cotton: Lenin.

GARMENTING

KNITTED

WOOVEN

WOOLEN

KNITTED

Nahar has capacity to produce on switch track & assembly line system to ensures quality

& efficiency their garments range include

T-shirt,

Polo shirts,

Sweat shirts,

Sports wear,

Rug by shirts,

Crew/ V- neck tops,

Flerce hooded tops,

Jackets & Plants on world class garments machines.

WOOVEN

Page 20: Working Cap of Nahar

Nahar manufacture Trousers, Shirt under brand. “COTTON- COUNTRY” for

domestic market in India and brand is very well established across the country.

WOOLEN

Nahar has a leadership in woolen garments: Sweaters & Cardigans with leading brands

“MONTE- CARLO” & “CANTERBURY” in India.

“MONTE- CARLO” has been awarded SUPER BRAND Indian council.

ACHIVEMENTS OF NAHAR

The group has also achieved excellence in exports which has also been recognized by the

Export Council as well as the Govt. of India by bestowing several export awards and

trophies such as:-

First Gold Trophy in GLOBAL EXPORTS in 1989.

First Silver Trophy in HOSIERY EXPORTS in 1990.

Export Award consecutively for five years (1989-1999 to 1993-1994) for EXPORT

of WOOLEN GARMENTS.

International Award of EXCELLENCE PERFORMANCE in EXPORTS in 1993.

Silver Trophy for Second Highest EXPORT PERFORMANCE in 1989-99.

Nahar is a licensed producer for following yarns:-

Supima cotton yarn: with supima tags.

Egyptian cotton yarn: with Giza cotton.

US cotton yarn: from cotton of us origins.

Cotton Dacron (cool max) yarn- with tags.

Organic cotton yarn- certified from skal.

International for outsainable textile and blended yarn.

ISO 9002

Page 21: Working Cap of Nahar

For Quality System Management (from BIS & DNV (Nether lands).

ISO 14002

Environment certification (from BIS & DNV (Nether lands).

OCKO- TAX CERTRIFICATION

FOR HUMAN ECOLOGICAL (From BTTG UK).

RATIONALE OF THE STUDY

Working capital is the life blood and nerve centre of a business. Just as circulation of

blood is essential in the human body for maintaining life, working capital is very

essential to maintain the smooth running of a business. No business can run successfully

without an adequate amount of working capital.

The management of working capital is very important. It involves the study of day to day

affairs of the company. The motive behind the study of the project is to develop an

understanding about the working capital management in the running of business

organization and to help the company in developing the efficient working capital

management.

Cash is one of the current assets of a business. It is needed at all times to keep the

business going. A business concern should always keep sufficient cash for meeting its

obligations. Any shortage of cash will hamper the operations of a concern and any excess

of it will be unproductive. Cash management forms an important part of working capital

management.

Receivables constitute a significant portion of current assets of a firm. It is necessary to

have a proper control and management of receivables, as, for investment in receivables, a

firm has to incur certain costs and there is a risk of bed debts also.

The investment in inventory constitutes a major portion of current assets, so there should

be proper inventory management. Because of the large size of inventories maintained by

the firms, a considerable amount of funds is required to be committed to them. It is,

therefore absolutely imperative to manage inventories efficiently and effectively in order

Page 22: Working Cap of Nahar

to avoid unnecessary investment. An undertaking, neglecting the management of

inventories will be jeopardizing its long- run profitability and fail ultimately. The

management is to see that the quantity of working capital is neither too low to affect the

production adversely nor too high to block the funds unnecessarily.

OBJECTIVES OF THE STUDY

This study is being carried out keeping in mind the following objectives:

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

To determine the future need of working capital in the running organization.

To examine that the investment in the working capital is optimum.

SCOPE OF THE STUDY

The study is conducted at “NAHAR SPINNING MILLS LIMITED LUDHIANA”,

Corporate Office, and Ludhiana for 7 weeks duration. The scope of the study is limited to

the Working capital management of NAHAR SPINNIG MILLS A SMALL UNIT OF

OSWAL. The reliability of the study is restricted to the personal perception of the people

interviewed and the data provided by the company.

To get proper understanding of this concept, I have done the study of the Balance sheets,

Profit and loss accounts, Cash accounts etc. So, scope of the study is limited up to the

availability of official records and information provided by the employees. The study is

supposed to be related to the period of last five years.

Page 23: Working Cap of Nahar

RESEARCH METHODOLOGY

Research in a common parlance refers to a search for knowledge. One can also define

research as a scientific and systematic search for pertinent information on a specific topic.

In fact, research is an art of scientific investigation.

PURPOSE OF RESEARCH

To recognize the various type of information which are necessary for the study of

working capital management.

Collection of data from various departments of Nahar Spinning Mills Limited

Ludhiana to analyze the working capital management.

For understanding the various reports, personal interviews are conducted.

With the help of various techniques like:

- Operating Cycle analysis

- Ratio Analysis

- Common size statement

The overall position of Nahar spinning mills is studied and analyzed.

Page 24: Working Cap of Nahar

STEP I: STUDYING THE POLICIES AND PROCEDURES FOLLOWED BY

NAHAR SPINNING MILLS IMITED:

The first and foremost step was to study the policies and procedures followed for

the working capital management.

STEP II: DATA COLLECTION:

Data can be classified into

a) Primary Data b) Secondary Data

Primary Data

Depending upon the nature of the problem, primary data can be collected through

various methods. In this study, personal interviews with senior officials of different

departments of Corporate Office, NSM and various members of finance and accounts

department of NAHAR will be conducted.

Secondary Data

Data provided by

The company manuals.

Annual reports.

Page 25: Working Cap of Nahar

Balance sheets etc.

Data collected through internet.

Report Writing & Presentation.

Report Encompasses – Charts, diagrams

THEORETICAL BACKGROUND

OF

WORKING CAPITAL

MANAGEMENT.

Meaning of working capital:-

In simple words working capital means that which is issued to carry out the day to day

operations of a business. Capital required for a business can be classified under two main

categories

Fixed capital

Working capital

Every business needs funds for two purposes, for its Establishment and to carry on its day

to day operations. Long term funds are required to create production facilities through

purchase of fixed assets such as plant and machinery, land, building, furniture etc.

Investment in these assets represents that part of firm capital, which is blocked on a

permanent or fixed basis called fixed capital. Funds are also needed for Short term

purposes i.e. for the purchase of raw material, payment of wages and other day to day

operations of business. These funds are known as working capital. In other words,

working capital refers to that firm’s Capital, which is required for short – term assets or

current assets. Funds thus invested in current assets keep revolving last and being

constantly converted into cash and this cash flow is again converted into other current

assts. Hence it is known as circulating or short – term capital.

Page 26: Working Cap of Nahar

In the words of Shubin, “Working capital is the amount of funds necessary to cover the

cost of operating the enterprise.”

CONCEPT OF WORKING CAPITAL

GROSS WRKING CAPITAL.

NET WORKING CAPITAL

GROSS WORKING CAPITAL:

In the broad sense, the term working capital refers to the gross working capital and

represents the amount of funds invested in current assets. Thus, the gross working

CONCEPT OF WORKING CAPITAL

GROSS WRKING CAPITAL NET WORKING CAPITAL

Page 27: Working Cap of Nahar

capital is the capital invested in total current assets of the enterprise. Current assets

are those assets which in the ordinary course of business can be converted into cash

within a short period of normally one accounting year.

NET WORKING CAPITAL:

In narrow sense, the term working capital refers to the net working capital. Net working

capital is the excess of current assets over current liabilities, or it represents the

difference between current assets and current liabilities. Net working capital may be

positive or negative. Positive net working capital is that when current assets are more

than current liabilities. But when current liabilities become more than current assets then

the working capital is negative. Current liabilities are those liabilities which are intended

to be paid in the ordinary course of business within a short period of normally one

accounting year out of the current assets or the income of the business.

Both Gross working capital and net working capital have increased over the past two

years. As seen before, there is increase in sales, and increase in production, therefore

more working capital is needed to assist the increase in production. There is very less

difference in the Gross working capital and Net working capital because of less amount

of current liabilities of Nahar.

Page 28: Working Cap of Nahar

TYPES OF WORKING CAPITAL

PERMANENT WORKING CAPITAL.

TEMPORARY WORKING CAPITAL.

Permanent Working Capital:

Permanent or fixed working capital is the minimum amount which is required to

ensure effective utilization of fixed facilities and for maintaining the circulation of

current assets. There is always a minimum level of current assets which is

continuously required by the enterprise to carry out its normal business

TYPES OF WORKING CAPITAL

PERMANENT WORKING CAPITAL TEMPORARY WORKING CAPITAL

Page 29: Working Cap of Nahar

operations. For example, NSM has to maintain some minimum level of raw

materials, work-in-process, finished goods and cash balance.

This minimum level of current assets is called permanent or fixed working capital

as this part of capital is permanently blocked in current assets.

Temporary Working Capital:

The extra working capital needed to support the changing production and

sales activities, is called variable or functioning or temporary working

capital.

It is the amount of working capital which is required to meet the seasonal

demands and some special exigencies. This can be shown in the following

diagram:

Amount of Working

Capital Temporary capital

Permanent capital

Time

Page 30: Working Cap of Nahar

OPERATING CYCLE or CIRCULAR FLOW CONCEPT

“Operating cycle is the Time Duration required for converting sales into cash after

the conversion of resources into inventories.”

Funds invested in current assets keep revolving fast and are being constantly

converted into cash and this cash flow out again in exchange for other current assets.

Hence, it is also known as revolving or circulating capital. The circular flow concept of

working capital is based upon this operating or working capital cycle of a firm.

The Cycle starts with the purchase of raw material and other resources and Ends with the

realization of cash from the sale of finished goods. It involves purchase of raw material,

its conversion into stock of finished goods through work-in-progress, conversion of

finished stock into sales, debtors and receivables and ultimately realization of cash and

this cycle continues again from cash to purchase of raw material and so on.

Sales of the finished stocks are not always full cash sales; there are credit sales also.

These credit sales after some period are converted into cash. So the whole process takes

the time. This time taken is known as the length of operating cycle. So operating cycles

includes:-

1. Raw Material conversion period (RMCP)

2. Work–in – progress conversion period (WIPCP)

3. Finished goods conversion period (FCP)

4. Debtors Conversion period (DCP)

Page 31: Working Cap of Nahar

So operating cycle can be known as following:-

Sales

If the length of the operating cycle has short length period then less working capital is

required. So working capital requirement is directly related with operating cycle.

OPERATING CYCLE OF TWO TYPES:

1. Gross Operating cycle

2. Net operating cycle

Raw Material

Work in Progress

Cash Collection from Debtors

Finished Goods

Credit Sales Cash Sales

Page 32: Working Cap of Nahar

GROSS OPERATING CYCLE:

Gross Operating cycle is the total time period from the conversion of Raw Material

into finished goods and finished goods into sales and then sales into cash.

GOC =RMCP + WIPCP + FCP + DCP

NET OPERATING CYCLE:

As we provide period to debtors for the payments, our creditors also provide period to

us for payment to them. So this reduces our requirement of working capital. This also

affects the operating cycle. Operating cycle’s length reduces with so many days as

provided by the creditors to us. The difference between gross operating cycle and

period allowed by the creditors for payment is known as net operating cycle.

NOC = GOC – CPP

Page 33: Working Cap of Nahar

WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS

FOR FUTURE:-

These needs may be of Raw Material or Finished Goods. Sometimes because of non-

availability of Raw Material or due to seasonal availability of Raw Material some

advances stock of Raw Material becomes necessary for company. In the similar way due

to sudden arise of demand of finished goods in future more finished goods are kept in

stock. For both reasons more working capital is required because funds will be involved

in these safeties stocks.

NEED OF WORKING CAPITAL

The need for working capital arises due to the time gap between production and

realization of cash from sales. Thus,working capital is needed for the following purposes:

For the purchase of raw materials, components and spares.

To pay wages and salaries.

To incur day-to-day expenses and overhead costs such as fuel, power and office

expenses, etc.

To meet the selling costs as packing, advertising, etc

To provide credit facilities to the customers.

To maintain the inventories of raw material, work-in-progress, stores and spares

and finished stock.

DETERMINANTS OF WORKING CAPITAL

Following are the main determinants of working capital:

Nature and Size of Business :

The working capital of a firm basically depends upon nature of its business For

example: Public utility undertakings like electricity; water supply needs very less

working capital because offer only cash sales whereas trading & financial firms have a

very less investment in fixed assets but require a large sum of money invested in

working capital. NAHAR SPINNING MILLS Limited, which is a manufacturing

company, requires considerable investment in both fixed assets and working capital.

Page 34: Working Cap of Nahar

The size of business also determines working capital requirement and it may be

measured in terms of scale of operations. Greater the size of operation, larger will be

requirement of working capital. As NSM is growing, its requirement of working

capital is also increasing.

Manufacturing Cycle:

Longer the process period of manufacture, larger is the amount of working capital

required. The operating cycle of is NAHAR SPINNING MILLS 144 days for the

financial year 2006-07. It has decreased from the previous year. Consequently,

amount of working capital required has also decreased as compared to the last year.

Seasonal variation: In certain industries like NSM, raw material (cotton) is not available

throughout the year.

They have to buy raw material in bulk during the season to ensure an uninterrupted

flow and process them during the year.

Generally, during the busy season, a firm requires large working capital than in the

slack season.

Production Policy:

Production policy also determines the working capital level of a firm. If the firm has

steady production policy, it may require need of continuous working capital. But if

the firms adopt a fluctuating production policy means to produce more during the

lead demand season then the more working capital may require at that time but not in

other period during a financial year. So the different productions policy arise different

type of need of working capital.

In NSM Limited, the production is kept steady by accumulating inventories during

slack period with a view to meet high demand during the peak season. Now, since, the

production of Spinning yarn is kept steady throughout the year, therefore, the unit

requires higher working capital.

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Firm’s Credit Policy:

The firm’s credit policy directly affects the working capital requirement. If the firm

has liberal credit policy, hence the more credit period will be provided to the debtors

so this will lead to more working capital requirement. With the liberal credit policy

operating cycle length increases and vice versa.

In NAHAR, the bulk of purchase of raw material and sale of finished goods is done on

credit. Therefore, credit policy is an important criterion to be taken into consideration.

Sales Growth:

Working capital requirement is directly related with sales growth. If the sales are

growing, more working capital will be needed due to arises need of more Raw

Material, Finished goods and credit sales.

Rate of Growth of Business:

The working capital requirements of a concern increase with the growth and

expansion of its business activities. As NSM is growing its business with

DEMERGERS AS NAHAR SPINNING MILLS WITH NAHAR EXPORTS,

therefore its working capital requirement is also increasing.

MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT

The management of working capital is concerned with two problems that arise in

attempting to manage the current assets, current liabilities and the inter relationship that

exists between them. A satisfactory level of working capital should be maintained,

i.e., it is neither inadequate nor excessive. Both excess as well as short working capital

positions are bad for any business. However, out of the two, it is the inadequacy of

working capital which is more dangerous from the point of view of the firm.

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Disadvantages or Dangers of Inadequate Working Capital:

A concern which has inadequate working capital cannot pay its short-term

liabilities in time. Thus, it will lose its reputation.

It cannot buy its requirements in bulk and cannot avail of discounts, etc.

The firm cannot pay day-to-day expenses of its operations and it creates

inefficiencies, increases costs and reduces the profits of the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability

of liquid funds.

Disadvantages of Redundant or Excessive Working Capital:

Excessive Working Capital means idle funds which earn no profits for the

business and hence the business cannot earn a proper rate of return on its

investments.

It may lead to unnecessary purchasing and accumulation of inventories causing

more chances of theft, waste and losses.

Excessive working capital implies excessive debtors and defective credit policy

which may cause higher incidence of bad debts.

When there is excessive working capital, relations with banks and other financial

institutions may not be maintained.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-

1. What should be ratio of current assets to sales?

2. What should be the appropriate mix of short term financing and long term

financing for financing these current assets?

1. CURRENT ASSETS IN RELATION TO SALES:-

If the firm can forecast accurately the factors, which affect the working capital,

the investment in current assets, can be designed uniquely. When uncertainty affects the

above factors, as it usually does, the investment in current assets cannot be specified

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uniquely. In case of uncertainty, the outlay on current assets should consist of base

component meant to meet normal requirement and a safety component meant to cope

with unusual requirement. The Safety component depends upon low conservative or

aggressive in the current assets policy of a firm. If the firm adopts a very conservative

current asset policy it would carry a high level of current assets in relation to sales. If a

firm adopts a moderate current assets policy it would carry moderate level of current

assets in relation to sales, finally if a firm follows a highly aggressive current assets

policy, it would carry a low level of current assets in relation to sales.

NSM is following current assets policy showing moderate level of current assets in

relation to sales as is evident from ratio analysis.

1. Determining a Short Term and Long Term Financing Mix for Financing of

current assets:-

Aggressive policy

Moderate policy

COST OF ASSETSCOST OF ASSETS

Conservative

SALES

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There are Three approaches in this regard, which are discussed below:

HEDGING APPROACH.

CONSERVATIVE APPROACH.

AGGRESSIVE APPROACH.

HEDGING APPROACH

This approach is also called matching approach. In this approach there is a proper

matching of expected life of asset with the duration of fund. The hedging approach

suggests that the permanent working capital requirements should be financed with funds

from long term sources while the temporary or seasonal working capital requirements

should be financed with short term funds.

term financing

Fixed Assets

Time

Permanent current assets

Temporary current assetsShort term financing

Long term financing

ASSETS

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CONSERVATIVE APPROACH:

In this approach there is more reliance on long-term financing in comparison to short-

term financing. Even some part of the temporary current assets is financed from long-

term sources because long-term sources are less risky in comparison to short-term. This

approach suggests that the entire estimated investments in current assets should be

financed from long-term sources and the short term sources should be used only for

emergency requirements.

Temporary Current Assets short

Term financing

Permanent Current Assets Long-term

financing

Fixed Assets

Time

ASSETS

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AGGRESSIVE APPROACH

In this approach there is more reliance on short term financing. This approach suggests

that the entire estimated requirements of current assets should be financed from short-

term sources and even a part of fixed assets investments be financed from short-term

sources. This approach makes the finance-mix more risky, less costly and more

profitable.

Temporary current assets Short term

Financing

Permanent current assets Long term

Financing

Fixed Assets

Time

In NSM, the current assets are financed from short term sources mainly. Only in the time

of some special exigencies or need, current assets are financed from long term sources.

ASSETS

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WORKING CAPITAL ANALYSIS

OPERATING CYCLE ANALYSIS

Operating cycle refers to the time period which starts from the raw material purchases

and ends with realization of receivable. So it is total time gap between raw material

purchases to total debtors’ collection. This is also known as working capital cycle.

Operating cycle is therefore expressed in terms of months or weeks or days.

Higher the operating cycle period, higher is the working capital requirement.

It comprises of raw material conversion period, WIP conversion period, FG

conversion period and debtors’ conversion period and creditors period.

The basic reason for calculating operating cycle is to find out the means for

reducing the duration of operating cycle because if duration of operating cycle

will be less than working capital requirement will be less.

OC = R + W + F + D – C

Where,

R = raw material conversion period

W = work in process period

F = finished goods conversion period

D = debtor collection period

C = creditors payment period

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SWOT ANALYSIS OF NAHAR SPINNING MILLS

STRENGTHS

a) This is a professionally managed company and all the departments are being

headed by professionals.

b) The company was a follower of new management concepts like Kaizen, Quality

Circles, and Five Ss etc. and as such is continuously upgrading the skill level of

the workers for better product quality.

c) The company is already in the line of spinning Yarn and as such is having the

requisite technology / personals / labour.

d) The Technology used by the company is comparable to its peer and as such is

capable of supplying quality products.

e) The expansion projects will improve the productivity and profitability of the

company and consequently competitiveness.

f) The existing units will add to the cash generation of the company resulting into

improved repayment capacity of the unit.

g) The company is better equipped to face the world competition in view of the

State of the art machinery and improved productivity.

h) The companys’ Nahar unit is ISO 9000 certified, whereby its quality

manufacturing is at par with its competitors.

i) The Companys’ Spinning Facility has been certified, which is top certification.

j) The company has been awarded status of Star Trading House.

k) The Ludhiana is the hub for Spinning Procurement, as the unit is located in

Ludhiana itself the company has the advantage of First information &

procurement.

l) The Company has raised the Term Funds at the best interest rates, which are

either lower then then its peers or at par with its peers.

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WEAKNESSES

a) The basic raw material of the company is cotton, which is an agriculture produce.

The cotton prices are thus dependent on the production of cotton (demand /

supply) in the country/international market.

b) The company is also in yarn segment where the margins are thin.

c) The company is manufacturing Grey Cotton Yarn (70%), while the

diversification / entry to other cotton yarns like mélanges, higher counts is still to

be made.

OPPORTUNITIES

a) The company can import cotton at competitive rates and better quality at any

time in case of need due to the appreciated rupee.

b) The company can explore International segment thoroughly as potential in the

international market is high.

c) With the closing down of Textile industry in Europe, the advantage of foreign

acquisition would can be explored.

THREATS

a) The company is operating in international markets and is facing competition

from China, Pakistan, Portugal, Turkey and Brazil.

b) The competition being faced by the company has increased after the quota

restrictions are lifted in tune with WTO.

c) The appreciated rupee has reduced the margins in the Exports.

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d) The new spinning capacities have also come up, where by increased the supply

of cotton yarn.

e) The talent pool is shrinking, with new units being come up.

FINDINGS & SUGGESTIONS

The project was based on Working Capital Management of Spinning mills business of

NAHAR GROUP Limited. Acrylic yarn forms 8-10% of the whole NSM business. It is

the product of manmade fibre. Working capital management is very important part of any

business. It involves the study of day to day affairs of the company. The motive behind

the study of the project is to develop an understanding about the working capital

management in the running of business organization and to help the company in

developing the efficient working capital management.

OBJECTIVES OF THE STUDY

This study has been carried out keeping in mind the following objectives:

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

To determine the future need of working capital in the running organization.

To examine that the investment in the working capital is optimum.

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FINDINGS:

Ludhiana Unit of Spinning Mills Limited gives it the maximum sales as it is the

biggest unit.

Cotton yarn forms the major part of Spinning Mills Limited. Yarn is only 8-10%

of the total NSM business.

Gross and net working capital has increased due to increase in production of

Yarn.

Net working capital is INCREASED. It has INCREASED from the previous year

because of INCREASE in finished goods conversion period.

Liquidity ratios of NAHAR SPINNING MILLS are too high because of

maintaining more inventory stock of raw material.

The share of inventories in the total current assets is more than 60%.

The total limit provided to NAHAR SPINNING MILLS Limited by various banks

is Rs 6026599728.8.

Most of the cash of all the units is managed at corporate office. It holds the cash

for major receipts & payments.

For filling its fund requirement, NAHAR GROUP depends upon the STATE

BANK OF INDIA.

Due to increase in production capacity of NAHAR SPINNING, there has been

increase in the raw material stock.

The raw material (Fibre) is not seasonal, but its time of purchase is dependent on

the rate at which it is available in the market.

A merger is going to be there of AmKryons International Pvt Ltd into Vardhman

Polytex Limited.

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SUGGESTIONS:

Due to competition, prices are market driven and for earning more margin

company should give the more concentration on cost reduction by improving its

efficiency.

The unit should also adopt proper inventory control like ABC analysis etc. This

inventory system can make the inventory management more result oriented. The

EOQ can be followed in stores. Proper inventory management technique will help

the unit to decide upon the quantity of inventory to be kept. With its help the unit

can also decide upon the no. of days the inventory is to be kept. It will help in

reducing the inventory conversion period.

The investments of surplus funds are made by the corporate office and the unit is

not generally involved while taking decisions with regard to structure of

investment of surplus funds. The corporate office should involve the units so as to

better ascertain the future requirements of funds and accordingly the investments

are made in different securities.

Management should make the proper use of inventory control techniques like

fixation of minimum, maximum and ordering levels for all the items for less

blockage of money.

Company’s average debtor collection period is 48 days. So company should try to

reduce it for improving the efficiency.

As the margin in Acrylic yarn is less, therefore the company should try to

decrease the various manufacturing and other expenses incurred. It should also

increase the export sales.

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CONCLUSION

Dur ing t he pe r i od o f s even weeks I have t r i ed t o go t h rough t he i n

dep th s t udy o f work ing cap i t a l managemen t o f NAHAR GROUP o f

NSM.

To conc lude t h i s t op i c , I wou ld l i ke t o s ay t ha t t hough NAHAR

SPINNING fo rms a sma l l g roup o f t he NAHAR, bu t t he managemen t

o f i t s work ing cap i t a l i s ve ry impor t an t , a s t he r e a r e t h in ma rg in s i n

s a l e o f F IBRE & YARN. The GROUP o f NSM which i s i n to t he

manufac tu r i ng o f F IBRE

& YARN i s e f f ec t i ve ly u t i l i z i ng t he work ing cap i t a l a l l ove r t he

p r ev ious yea r s . The s t a f f he r e i s good and fu l l o f young b lood ,

wh ich pe r fo rms t he i r du t i e s ve ry we l l .

Cash managemen t and r ece ivab l e managemen t a r e a l so good because

o f c en t r a l i z ed con t ro l on t he se . Raw ma te r i a l f o r t he a l l un i t s o f

NAHAR SPINNING MILLS LIMITED i s pu rchased by co rpo ra t e

o f f i c e i n bu lk wh ich i s t he be s t way . Sa fe ty measu re s fo r i nven to r i e s

a r e a l so qu i e t su f f i c i en t i n NSM. Ove ra l l t he work ing cap i t a l

managemen t o f NSM i s ve ry much e f f i c i en t .

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BIBLIOGRAPHY.

Gupta Shashi K; Sharma R.K.; Financial Management; Kalyani

Publishers; 2006-07

Pandey,I.M.; Financial Management; Vikas Publishing House Private

Ltd.;2003-2004

Jain,S.P.; Narang,K.L.; Cost Accounting; Kalyani Publishers;2002-2003

Manuals, brochure, Balance sheet, Profit & Loss account & annual reports

for different years of the company.

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