ASUMMER TRAINING

REPORT

ONANALYSIS OF WORKING CAPITAL MANAGEMENT

CONDUCTED ATCEASE FIRE INDUSTRY LTD

IN PARTIAL FULFILMENT FOR THE DEGREE OFBACHELOR OF BUSINESS ADMINISTRATION (B.B.A.)

(SESSION 2006-2009)

SUBMITTED TO: SUBMITTED BY: Controller of Examination Rahul Singhal Maharishi Dayanand BBA IVth Sem. University, Rohtak Regn. No.

KLP College RewariAffiliated to MDU Rohtak

BRIEF HISTORYBRIEF HISTORY

Company Profile

ACKNOWLEDGEMENTS

I would like to take this opportunity to thank all the people who helped me in completion of my management training and in the compilation of this report.

I would sincere thanks to Mr. (Manager- Finance and Accounts Department) for providing me guidance at each and every step of the training. I would always be obliged to him because he shared his real-life experiences with me.

I am thankful to the other members of the finance department who explained me finance work, solving queries and being there to help me whenever required.

Table of Contents

i. Abstractii. Introduction

1. Working Capital Management 1.1 Introduction 1.2 The operating Cycle and Working Capital Needs 1.3 Operating Cycle of CEASE FIRE 1.4 Factors Affecting Working Capital Requirement 1.5 Liquidity Vs. Profitability- A Risk Return Trade Off 1.6 Working Capital Policy

2. Receivables Management 2.1 Need of Receivables 2.2 Objective of Receivable Management 2.3 Cost of Receivables 2.4 Trade off on Receivables 2.5 Determinants of Receivables 2.5.1 Credit Policy 2.5.2 Credit Control 2.6 Channel Financing

3. Payable Management 3.1 Discounting of Bills

4. Inventory Management 4.1 Types of Inventory 4.2 Need for Inventory 4.3 Objectives of Inventory Management 4.4 Cost of holding Inventory 4.5 Techniques for Inventory Management 4.5.1 Perpetual Inventory Verification 4.5.2 ABC Analysis 4.5.3 Economic Order Quantity 4.5.4 Reorder Point 4.5.5 Safety Stock 4.5.6 Lean manufacturing

a. Just In Time (JIT)b. Kanban Systemc. Kaizend. Single Piece Flow Systeme. Gemba Walkingf. Virtual Storage

5. Cash management 5.1 Need of Cash 5.2 Objectives of Cash management 5.3 Cost of Holding Cash 5.5 Benefits of Cash management 5.6 Cash Budget 5.7 Techniques of managing Cash in CEASE FIRE

6. Conclusion

7. Refrences

ABSTRACT

The project titled ‘Analysis Of Woking Capital Management’ aims at understanding

and analyzing the Working Capital Structure of the plant, Faridabad Switchgear

Works (FSW), a manufacturing unit of Cease fire industry ltd. Working capital

management comprises of four major parts – Inventory management, Receivables

management, Payable Management and Cash management. There are a number of tools

available for a proper working capital management. Most of them are studied as a part of

the project.

As a part of inventory management, various inventory management techniques are

studied. Most of these are being implemented in the plant (like PIV, ABC Analysis, JIT,

Single Piece Flow System etc). Even those tools, which are not practically implemented

(like Reorder Point, Safety Stock etc) are studied. These methods, along with their

working and importance, are studied in detail.

As far as receivables management is concerned, Credit Terms, Credit Policy, and

Collection Policy and Procedure are understood, giving special focus on how they are

being implemented practically. Also, there is an innovative technique being used by

CEASE FIRE for managing its receivables efficiently. This technique, known as

Channel Financing makes sure that the receivables are collected almost instantly. Just

like any other firm, even CEASE FIRE is trying to minimize its debtors, as far as

possible. Collections are tried to be made as fast as they can, and all these tools are very

much focused and effective in doing so.

Apart from this, I did Discounting of Bills as a part of Payable management technique.

It’s an easy way to check the savings a firm can make by paying its suppliers early.

Another prominent tool being implemented at CEASE FIRE is Sweeping Facility for

Cash Management . It makes sure that the cash is not lying idle, and is being used

efficiently, and moreover, is invested wisely, in case opportunities are there.

INTRODUCTION

PURPOSE:

The purpose of the report, ‘Analysis of Working Capital Management’, is to

understand and analyze the working capital structure of the manufacturing unit of

CEASE FIRE Limited, that is, in Faridabad .

The objective was also to check the the real life situations in an industry as differing from

theories. The project will throw a light on how to link theory with the business world.

Working Capital Management is a part of Corporate Finance, and to understand it, one

has to get involved with it. Working with professionals gives us a feeling of how our

future life would be, and how we are supposed to behave in the business world.

LIMITATIONS:

The report covers the practices followed at one plant of the company, so the study that is

being carried, may be useful for just one factory, and not for others, as there may be

difference in the business module from one factory to another. Therefore, a generalization

of this report, to judge the efficiency of CEASE FIRE Limited as a whole, cannot be

done.

In addition, the project -span of 9-weeks, was insufficient for understanding, and

analyzing the working capital structure of a plant completely. Apart from this, the

suggestions being made in this report may or may not be practically applicable in the all

types of industries.

SCOPE:

The report comprises of various suggestions, regarding the proper management of the

working capital, at each and every step of the processes that are taking place at the FSW

factory. Suggestions for improving the overall efficiency of the plant, by improving the

working capital structure of the plant, have been provided. This is be done by suggesting

ideas to improve inventory management, receivables management and cash management

processes; separately, as well as collectively.

METHODS OF COLLECTING DATA AND THEIR SOURCES:

In most of the cases, the data is collected on the spot from the persons involved in the

different processes. As far as possible, I have tried to collect data by myself. I also tried

to get involved with people from various departments, right from Accounts & Finance

Department to Planning & Purchase Department, Stores Department, Marketing

Department, Fabrication Department and Personnel Department.

Apart from self-experimenting and observing, I constantly interacted with various

employees of the Company and gathered useful information on related matters, which

were used in the report as well as for my personal knowledge.

Various books and internet sites, including that of CEASE FIRE itself, have also helped

me a lot in collecting data and understanding concepts.

Working Capital Management

Every business needs investment to procure fixed assets, which remain in use for a longer

period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’.

Business also needs funds for short-term purposes to finance current operations.

Investment in short term assets like cash, inventories, debtors etc., is called ‘Short-term

Funds’ or ‘Working Capital’. The ‘Working Capital’ can be categorized, as funds

needed for carrying out day-to-day operations of the business smoothly. The

management of the working capital is equally important as the management of long-term

financial investment.

Every running business needs working capital. Even a business which is fully equipped

with all types of fixed assets required is likely to collapse, if it does not have;

a) Adequate supply of raw materials for processing;

b) Cash to pay for wages, power and other costs;

c) Creating a stock of finished goods to feed the market demand regularly; and,

d) The ability to grant credit to its customers.

Working capital is thus like the lifeblood of a business. The business will not be able

to carry on day-to-day activities without the availability of adequate working capital.

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

manage the current assets, the current liabilities and the relationship that exists between

them.

The current assets refers to those assets which in the ordinary course of business can be,

or will be converted into cash within one year without undergoing diminution in the value

and without disrupting the operations of firm. The major current assets are:-

Cash

Marketable Securities

Accounts Receivables

Inventory

The Current Liabilities are those liabilities which are intended, at their inception, to be

paid in the ordinary course of business, within a year, out of current assets or earnings of

the concern. The basic current liabilities are:-

Accounts Payable

Bills Payable

Bank Overdraft

Outstanding Expenses

The term Working Capital may be used in two different ways.

Gross Working Capital (or total Working Capital): The gross working capital

refers to the firm’s investment in all the current assets taken together. For

example, if a firm has a cash balance of Rs. 50000, debtors of Rs. 70000 and

inventory of raw material and finished goods has been assessed at Rs. 100000,

then the gross working capital of the firm is Rs. 220000.

Net Working Capital: The term net working capital may be defined as the

excess of total current assets over total current liabilities. The extent, to which

these current liabilities are delayed, the firm gets availability of funds for that

period.

Gross Working Capital= Sum Total of Current Assets

= RM + WIP + FG + Debtors + Cash and Bank Balance

Net Working Capital= Difference between current assets and current

Liabilities

RM + WIP + FG + Debtors + Cash and Bank Balance

- Creditors – Direct wages - Overheads

The Operating Cycle and Working Capital Needs

The working Capital requirement of firm depends, to a great extent upon the operating

cycle of the firm. The operating cycle may be defined as the time duration starting

from the procurement of goods or raw materials and ending with the sales

realization. The length and nature of the operating cycle may differ from one firm to

another depending upon the size and nature of the firm.

In case of manufacturing concern, this series starts from procurement of raw materials

and ending with the sales realization of finished goods. There is a time gap between

happening of the first event and happening of the last event. This time gap is called the

operating cycle.

Thus, the operating cycle of a firm consists of the time required for the completion of the

chronological sequence of some or all of the following:

i. Procurement of raw materials and services.

ii. Conversion of raw materials into work-in-progress.

iii. Conversion of work-in-progress into finished goods.

iv. Sale of finished goods (cash or credit).

v. Conversion of receivables into cash.

Figure:1 – Working capital Cycle

Explanation of diagram

Working capital cycle involves conversions and rotation of various

constituents/components of the working capital. Initially ‘cash’ is converted into raw

materials. Subsequently, with the usage of fixed assets resulting in value additions, the

raw materials get converted into work in process and then into finished goods. When sold

on credit, the finished goods assume the form of debtors who give the business cash on

due date. Thus ‘cash’ assumes its original form again at the end of one such working

capital cycle but in the course it passes through various other forms of current assets too.

This is how various components of current assets keep on changing their forms due to

value addition. As a result, they rotate and business operations continue. Thus, the

working capital cycle involves rotation of various constituents of the working capital.

Finished Goods

Debtors Raw material

Cash

Working Expenses

Creditors

Value Addition

Value Addition

Work in Process

CEASE FIRE ’s Operating Cycle

The operating cycle of CEASE FIRE is as follows:-

Procurement of raw material

The operating cycle for a company primarily begins with the purchase of raw materials,

which are paid for after a delay representing the creditor's payable period. CEASE FIRE

is a capital goods manufacturer. Some raw materials are procured from outside, some

manufactured by its own.

Sometimes it may happen that company needs product in the form of raw material

manufactured by its own SBU’s. In this case stock is transferred within the company but

it won’t be considered as actual sale and no sale tax levied but it is liable to pay excise

duty since excise duty is paid on production and it is the liability of manufacturer.

Conversion of Raw material into finished goods

These purchased raw materials are then converted by the production unit into finished

goods and then sold. The time lag between the purchase of raw materials and the sale

of finished goods is known as the inventory period.

Labor

Labor is vital for conversion of inputs into finished goods.

There are three types of labour here

Skilled Labor

Here a lob our hour rate is fixed and the number of hours required to perform that

work is determined and on the basis of this labor expenses are determined. This is

treated as fixed overheads.

Casual labor

This is not permanent labor. They are paid on daily basis to perform work of a

non-recurrent nature. They are sourced from the Contractors of the Company.

Vendoring

When there is a capacity constraint then a part of the work is done by vendors and

the parts manufactured by these vendors are assembled. This is also called job

work

Conversion of Work-in-progress into finished goods

Sale of Finished Goods

Goods are sold either on cash basis or credit basis. Upon sale of finished goods on

credit terms, there exists a time lag between the sale of finished goods and the

collection of cash on sale. This period is known as the accounts receivables period

Conversion of Receivables into Cash

There are basically two ways available to vendors to pay their dues to CEASE

FIRE . These are:-

Cash Payment method

In this a vendor is supposed to clear his dues within a limited amount of time and

mode of payment must be highly liquid. The vendors can pay by demand drafts,

pay orders, or cheques of party which are subject to realization.

Channel Financing

Channel financing is used to receive fast money from debtors. Most of the firms

generally sells goods or services on credit and it takes a little time to realize.

Hence, receivables form an important part of working capital management.

Liquidity versus Profitability- A Risk-Return Trade off

Net Working Capital has bearing on Profitability as well as risk. The term

Profitability used in this context is measured by profits after expenses. The term Risk

is defined as the probability that a firm will become technically insolvent so that it

will not be able to meet its obligations when they become due for payment.

It is said that greater the amount of working capital the less risk prone the firm is

The decision on how much working capital be maintained involves a trade-off because

having a large working capital may reduce the liquidity risk faced by the firm, but it can

have a negative effect on the cash flows. Therefore, the net effect on the value of the firm

should be used to determine the optimal amount of working capital.

The goal of Working Capital Management is to manage current assets and liabilities

in such a way that a satisfactory level of working Capital is maintained.

The assessment of the working capital should be accurate even in the case

of small and micro enterprises where business operation is not very large. We know that

working capital has a very close relationship with day-to-day operations of a business.

Negligence in proper assessment of the working capital, therefore, can affect the

day-to-day operations severely. It may lead to cash crisis and ultimately to

liquidation. An inaccurate assessment of the working capital may cause either

under-assessment or over-assessment of the working capital and both of them are

dangerous.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING

CAPITAL

Growth may be stunted. It may become difficult for the enterprise to undertake

profitable projects due to non-availability of working Capital.

Implementation of operating plans may become difficult and consequently the

profit goals may not be achieved.

Cash crisis may emerge due to paucity of working funds.

Optimum capacity utilisation of fixed assets may not be achieved due to non-

availability of the working capital.

The business may fail to honour its commitment in time, thereby adversely

affecting its credibility. This situation may lead to business closure.

The business may be compelled to buy raw materials on credit and sell finished

goods on cash. In the process it may end up with increasing cost of purchases and

reducing selling prices by offering discounts. Both these situations would affect

profitability adversely.

Non-availability of stocks due to non-availability of funds may result in

production stoppage.

While underassessment of working capital has disastrous implications on business,

over assessment of working capital also has its own dangers.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING

CAPITAL

Excess of working capital may result in unnecessary accumulation of

inventories.

It may lead to offer too liberal credit terms to buyers and very poor

recovery system and cash management.

It may make management complacent leading to its inefficiency.

Over-investment in working capital makes capital less productive and

may reduce return on investment.

Working Capital: Policy

There is an inevitable relationship, between the sales and current assets. The actual and

forecasted sales have major impact on the amount of current assets which the firm must

maintain. So, depending upon the sales forecast, the financial manager should also

estimate the requirement of current assets.

There are three types of working capital policies which a firm may adopt i.e. moderate

working capital policy, conservative working capital policy, and aggressive working

capital policy. These policies describe the relationship between sales level and the level

of current assets.

Figure 2 : Different types of working Capital

Policies

In case of moderate working capital policy, the increase in sales level will be

coupled with proportionate increase in level of current assets also e.g. if the

sales increase or expected to increase by 10%, then the level of current assets will

also be increased by 10%.

In case of conservative working capital policy, the firm does not like to take risk.

For every increase in sales, the level of current assets will be increased more

than proportionately. Such a policy tends to

reduce the risk of shortage of working capital by increasing the safety component

of current assets. The conservative working capital policy also reduces the risk of

non payment to liabilities.

In case of aggressive working capital policy the increase in sales does not result

in proportionate increase in current asset. For example, for 10% increase in

sales the level of current asset is increased by 7% only.

This aggressive policy has many implications-

The risk of insolvency of the firm increases as the firm maintains low liquidity.

Current assets

Sales level

Conservative

Moderate

Aggresive

The firm is exposed to greater risk as it may not be able to face unexpected

change, in the market

Reduced investment in current assets will result in increase in profitability of the

firm

CEASE FIRE and its Working Capital policy

CEASE FIRE follows conservative working capital policy i.e. for every

increase in sales level the level of current assets will be increased more than

proportionately. Such a policy tends to reduce the risk of shortage of working

capital by increasing the safety component of current assets. This policy also

reduces the risk of non payment of liabilities.

RECEIVABLES MANAGEMENT

The term Receivables is defined as debt owed to the firm by customers arising from the

sale of goods and services in the ordinary course of business. Receivables are a type of

loan extended by the seller to the buyer to facilitate purchase process. When companies

sell their products they sometimes demand cash on delivery, but in most cases they sell

goods on credit and allow a delay in payment. The customers’ promise to pay for their

purchases constitutes valuable assets; therefore accountants enter these promises in their

balance sheet as accounts receivables. Most of the businesses today sell goods and

services on credit and it takes times for the receivables to realize. Hence Receivables

management forms an important part of working capital management.

Need of Receivables

The sale of goods on credit is an essential part of working capital management. Credit

sale are treated as marketing tool to aid sale of goods. As a marketing tool, they are

intended to promote sales and increase profits. Hence Receivables management assumes

significance in the context of overall working capital management.

Objective of Receivables management

In a competitive environment, sometimes the firms are compelled and sometimes the

firms desire to adopt liberal credit policies for pushing up the sales. Higher credit sales at

more liberal terms will no doubt increase the profits of the firm, but simultaneously also

increases the risk of bad debts as well as result in more and more funds blocking in the

receivables. Thus, the objective of receivables management is matching the cost of

increasing sales with the benefits arising out of increases sales with the objective of

maximizing the return on investments of the firm.

Cost of Receivables

i) Cost of Financing: The credit sales delays the time of sales realization and therefore

the time gap between incurring the cost and the sales realization is extended. The firm on

the other hand, has to arrange funds to meet its own obligation towards payment to

supplier, employees, etc. these funds are to be procured at some explicit or implicit cost.

This is known as the cost of financing the receivables.

ii) Administrative Cost: A firm will be required to incur various costs in order to

maintain the record of credit customers before the credit sales as well as after the credit

sales.

iii) Delinquency Cost: This is the cost incurred if there is any delay in payment by a

customer.

iv) Cost of default by Customers: If there is default by customers and the receivables

becomes, partly or wholly unrealizable, then this amount, known as bad debt also

becomes a cost to the firms.

Trade off on receivables

The trade off on receivables can be applied to find out whether to liberalize credit

terms or not. More liberal credit terms may be expected to generate higher sales revenue

and higher profits; but they increases the potential costs also as the chances of bad debts

increases and there will be decrease in liquidity of firms. On the other hand a stringent

credit policy reduces the profitability but may increase the liquidity of the firms. Thus, a

firm should try to frame its credit policy in such a way as to attain the best possible

combination of profitability and liquidity.

Costs

Administrative Costs

Delinquency costs

Default cost

Total cost of receivables

Cost of financing

Credit period (days)

Normal (20 days) Default (40 days)

Figure 4 : Credit Policy, Profitability and Liquidity of a firm

Determinants of Receivables

In any firm the quantum of receivables is determined by several factors.

1. The percentage of credit sales to total sales. Higher the sales higher will be the

receivables. But this is not under the control of financial manager.

2. The terms of sale i.e. the credit and collection policies. These also determine the

quantum of receivables. These are under the control of financial manager.

So, the receivable management must be attempted by adopting a systematic

approach and considering the following aspects of receivables management:

The Credit Policy

The Credit Control

Credit Policy

A firm makes significant investment by extending credit to its customers and thus

requires a suitable and effective credit policy to control the level of total investment in

the receivables. The basic decision to be made regarding receivables is to decide how

much credit be extended to a customer and on what terms. This is what is known as credit

policy. The credit policy may be defined as set of parameters and principles that govern

the extension of credit to its customers. This requires the determination of

i) Credit standard

ii) Credit terms

The Credit Standards: when a firm sells on credit, it takes a risk about the paying

capacity of the customers. Therefore to be on safer side, it must set credit standards

which should be applied in selecting customers for credit sales. The following points

should be noted while setting the credit standard for a firm:

Effect of particular standard on sales volume.

Effect of a particular standard on the total bad debts of the firm

Effect of a particular standard on the total collection cost.

Credit Terms: It refers to set of stipulations under which the credit is extended to the

customers. The credit terms specify how the credit will be offered, including the

length of the period for which the credit will be offered, the interest rate on the credit

and the cost of default.

Credit period: It refers to the length of time over which the customers are allowed to

delay payments.

Lengthening the credit period increases the sales by attracting more and more customers,

whereas squeezing the credit period has the distracting effect. The firm must consider the

cost involved in increasing the credit period which will result in increase in the

investment in receivables.

Discount terms: The customers are generally offered cash discount to induce them to

make prompt payments. Different discount rates may be offered for different periods e.g.

3% discount if payment made within 10 days; 2% discount if payment made within 20

days. Both the discount rate and the period within which it is available are reflected in the

credit terms e.g.

3/10, 2/10, net 30 means

that a 3% cash discount if payment made within 10 days ; 2% discount if payment made

within 20 days; otherwise full payment by the end of 30 days from the date of sale.

Practical Implementation

CREDIT TERMS:

Credit Period- The credit period at CEASE FIRE is not constant. For some vendors, it is

30

days, for others, it may be 45 days or 60 days. This depends entirely on company’s

policies. It can be different for different vendors.

Cash discount- The cash discount offered by CEASE FIRE is 2% to 1.75%, depending

upon

cash discount period.

Cash discount period- The cash discount period allowed by CEASE FIRE is 1 to 3 days.

This can be summarized as follows:

Credit Discount Period

(days)

Credit Discount

(%)

1 2

3 1.75

30/45/60 0

There are basically two ways available to vendors to pay their dues to CEASE FIRE .

These

are:

Cash:

In cash payment method, a vendor is supposed to clear his dues within a limited

amount of time. And the mode of payment must be highly liquid (Cheque or Demand

Draft).

There are three options available with the vendors:

i) Blank Cheque Arrangement: In Blank Cheque arrangement, the vendors provide

CEASE FIRE blank Cheques drawn on the name of CEASE FIRE . As soon as the

material is received and invoice is generated, CEASE FIRE is allowed to fill the relevant

amount pertaining to the transaction that took place between CEASE FIRE and its

vendor. This Cheque can be

cleared on the same day the invoice is generated.

ii) Cheque Arrangement: In simple Cheque arrangement, on

generation of invoice, a cheque is issued by the vendor drawn on

the name of CEASE FIRE .

iii) Demand Draft (D.D.): Here, a demand draft is drawn on the name

of CEASE FIRE , by the vendor, as soon as invoice is generated.

Control of Receivables

Once the credit has been extended to a customer as per credit policy, the next important

step in the management of receivables is the control of receivables. The things to be taken

into consideration are:-

1. The collection Procedure: The firm should have a built in system under which

customer may be reminded a few days in advance about the bill becoming due.

The collection procedure of the firm should neither be too lenient nor too strict. A strict

collection policy can affect the goodwill and damage the growth prospects of the sales. If

the firm has a lenient credit policy, the customers with a natural tendency towards slow

payment may become even slower to settle his accounts. Thus, the objective of collection

procedure and policies should be to speed up the slow paying customers and reduce the

incidents of bad debts.

2. Monitoring of Receivables:-

The financial mangers should keep a watch on the credit worthiness of all the individual

customers as well as the total credit policy of the firm.

A common method to monitor receivables is the collection Period or number of

day’s outstanding receivables.

Average collection period= Average Receivables

Credit sales per day

Another technique for monitoring the Receivables is known as aging schedule. The

quality of the receivables of a firm can be measured by looking at the age of receivables.

The older the receivables, the lower is the quality and greater the likelihood of a default.

In the aging schedule, the total outstanding receivables on particular days are classified

into different age groups together with percentage of total receivables that fall in each age

group.

For example, the receivables of a firm, having a normal credit period of 30 days may be

classified as follows:

Age Group %of total outstanding

(Number of Days) Receivables

Less than 30 days 60%

31-45 days 20%

46-60 days 10%

61 and above 10%

Here the firm has a credit period of 30 days and 60% of the total receivables are less than

30 days old. 20% of the receivables are over due by 15 days, 10% of the receivables are

overdue but 30 days and 10% are over due by more than 30 days.

This type of aging schedule can provide a kind of an early warning suggesting

i) Deterioration of receivables quality

ii) Where to emphasize the appropriate corrective actions

3. Lines of Credit: It is the maximum amount a particular customer may have as due to

the firm at any time. Different lines of credit may be allowed to different customers. As

long as the customer’s unpaid balance remains within this maximum limit, the account

may be routinely handled. However if new order is going to increase the indebtedness of

a customer beyond his line of credit, then the case must be taken for an approval for a

temporary increase in the line of credit.

4.Accounting Ratios: Two accounting ratios may be calculated in particular may be

calculated to find out the changing pattern of receivables. These are

i) Receivables Turnover Ratio

ii) Average collection Period

Both the ratio should be calculated on a continuous basis to monitor the receivables. The

ratios so calculated for the firm must then be compared with the standard for that industry

or with past ratios of the same firm.

Channel Financing

Channel financing is different from the conventional lending since, in conventional

lending, the financing banks are generally not concerned as to how the suppliers of the

firm and dealers of the products of firm, are financing their activity. The weak financials

of the supplier (leading to delay in supply and non-availability of market credit) or the

dealers of the products (delay in receipt in payment leading to higher book debts) could

adversely impact the top-line(sales) as well as bottom-line(profits) of the financed firm.

In the channel financing the financing bank may have to find ways and means as to how

the suppliers and buyers (dealers of the product) can be financed through various

instruments/facilities. Hence, the channel financing adds value to the transaction for all

the parties concerned, be it the manufacturer/trader, the supplier of the inputs or the

dealer/buyer or the financing bank.

Through channel financing, the business firms can out-source a major part of their

working capital needs thereby reducing their dependence on bank finance. For

instance, it need not avail of credit from its bank to pay off the supplier if the supplier

gets the finance in his own name from the bank for the raw materials supplied on credit in

the form of say, drawee bills financing. The bank can also allow loan to the dealer for the

credit term that has been fixed between the firm and the dealer in the form of receivable

finance or finance against book debts or factoring of the receivables. This enables the

manufacturing firm to get cash immediately for the finished goods supplied. . Thereafter,

the bank makes a due diligence assessment of the suppliers’/dealers’ standing and

credit worthiness and decides to provide finance on merit.

A simplified channel finance solution is as follows:-

Figure:-5

Step1: Supply of goods from Corporate to Channel Partner.

Step2: Advice to ABN AMRO to make payment for the purchase.

Step3: Payment by ABN AMRO for goods purchased by Channel Partner.

Step4: Repayment by Channel Partner to ABN AMRO Bank as per facility term.

Channel Finance Benefits to Corporate:

Assured availability of finance to their Channel Partner's at lower than current

cost.

Corporate can use this as a Marketing tool and strengthen their relationship /

reward loyalty of the Channel Partners

Release of funds from the balance sheet resulting in improvement in financial

ratios.

Conversion of balance sheet item to an off balance sheet liability.

Greater efficiencies in the Corporate's receivable management and cash

management process.

Ability to introduce payment discipline with their Channel Partners

Channel Finance Benefits to Channel Partners:

Steady and cheaper source of working capital financing.

Channel Partners can increase sales through higher purchasing power.

Simplicity of documentation and approval procedures.

High service and delivery standards compared to current neighborhood banker.

Channel Partners may be able to increase profitability by availing of Cash

discounts from Corporate.

Channel finance benefits to banks:

Increased customer base

Since, the risk is diversified through finance to supplier, manufacturer and the

dealers, the credit exposure norms are better observe

Practical Implementation

The practice of channel financing is followed in CEASE FIRE to a great extent and

the company is benefiting a lot through this system of collection of debtors.

The banks which provide Channel Financing facility to CEASE FIRE are:-

ICICI bank

Deustche bank

Payable Management

As the firm sells goods on credit it may also procure/purchase raw material and finished

goods on credit basis. The payment for these purchases may be postponed for the period

of credit allowed by suppliers. So, the supplier of the firm in fact provides working

capital to the firm for the credit period.

For example, a firm makes a credit purchase of Rs. 60000 per month and the credit

allowed by supplier is two month, then the working capital supplied by creditors is Rs.

120000 (i.e. Rs. 60000*2months). It means the firm would be getting the supplies

without however, making the payment for two months. The postponement of payment to

the creditors makes the firm to utilize this money elsewhere or help the firm to sell on

credit without blocking its own funds.

Since, Working Capital is the difference between current assets and current

liabilities and creditors form an important part of current liabilities. So, a firm can

save a considerable amount if these creditors are managed. The extent, to which the

payment to these current liabilities is delayed, the firm gets the availability of funds for

that period. So, a part of the funds required to maintain current assets is provided by

current liabilities and the firm will be required to invest the funds in only those current

assets which are not financed by current liabilities. So, the aim of the firms is to realize

its debtors as fast as possible but too pay its creditors as late as possible.

Creditors can be managed by discounting of bills.

Bill Discounting is a relatively new concept in India. When a firm buys goods on credit

the supplier will state a final payment date . To encourage firm to pay before final

payment date , the supplier will offer a cash discount for prompt settlement. Now it’s the

decision of firm whether to avail or not that discount facility provided by supplier. For

that they should see whether it is profitable for them or not.

By using discounting of bills technique huge sums of money can be saved, by just paying

the discounted amount in time. Big firms, ( like CEASE FIRE ), which have huge cash

reserves, generally, get into a contract with financial institutuions or banks( like ICICI

bank or CEASE FIRE finance Ltd.). These financial institutions pay the suppliers the

requisite amount on behalf of these firms and they charge some interest on the amount

paid by them to the suppliers from these firms.

Benefits of Discounting of Bills

Discounting of Bills make it easy to decide whether the discount being allowed by

the supplier is worth taking or not.

Also, it make possible to calculate savings being received on account of availing

discount, in monetary terms

It also helps in improving relationship between vendors/suppliers.

It’s an indirect cash inflow , because the company is going to pay less than what it

was supposed to pay initially

The cash thus saved can be invested elsewhere.

It’s a win-win situation for both-the company as well as suppliers as the suppliers

will be getting money much before the stipulated time and the company is able to

enjoy the benefits of discount offered by the suppliers.

Inventory Management

The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense, inventory can be defined as an idle resource which has an economic value. It is however, commonly used to indicate various items of stores kept in stock in order to meet future demands.

Inventory is assets to the firm and requires investment and hence involves the

commitment of firm’s resources. The inventories need not be viewed as an idle asset

rather these are an integral part of firm’s operations.

Inventory refers to stockpile of products that a firm is offering for sale and the

component that makes up the product. We can also say that inventory is composed of

assets that will be sold in the future in the normal course of business. But the question

arises how much inventory be maintained? If the inventories are too big, they become

strain on the resources; however, if they are too small, the firm may loose sales.

In any organization, there may be following four types of inventory:

(a) Raw materials & parts-- These may include all raw materials,

components and assemblies used in the manufacture of a product;

(b) Consumables & Spares -- These may include materials required

for maintenance and day-to-day operation;

(c) Work in progress -- These are items under various stages of

production not yet converted as finished goods;

(d) Finished Products -- Finished goods not yet sold or put into use.

Need For Inventory

Every organization needs to maintain a minimum amount of inventory so as to fulfill its

customer’s demands. Also, the organizations foresee future demand and they plan their

inventory levels accordingly. These reasons can be classified as:

Transactionary motive: to meet the day to day requirements of sales, production

process, customer demand etc.

Precautionary motive: A firm should keep some inventory for unforeseen circumstances

also.

Speculative Motive: The firm keep some inventory in order to capitalize opportunity to

make profit.

Objectives of Inventory management

a. To ensure a continuous supply of raw materials to facilitate uninterrupted

production.

b. To maintain sufficient stock of raw materials in periods of short supply and

anticipate price changes.

c. To control inventory investment by maintaining optimum Inventory.

d. To minimize investment in inventory and to ensure maximum turnover of

inventory in an accounting period.

e. To ensure stocking of relevant materials in adequate quantities and to ensure that

unwanted or slow- moving items and/or non-moving items do not pile up.

f. To minimize inventory carrying costs in business- both ordering cost and carrying

cost.

g. To eliminate waste and delays in the process of manufacturing at all stages so as

to reduce inventory pile up.

h. To ensure adequate and timely supply of finished goods to the market through

proper distribution.

Cost of holding Inventory

Every firm maintains some stock of raw materials, work-in-progress and finished goods

depending upon the requirement and other features of the firm. It is benefited, by holding

inventory but there is cost involved with it. had these cost not there, there would not have

been any problem of inventory management and every firm would have maintained

higher and higher level of inventories. The cost of holding inventory includes the

following:-

Ordering Cost- The cost associated with the acquisition or ordering of inventory

is known as ordering cost. Firms have to place order with suppliers to replenish

inventory of raw materials. Such expenses involved are referred to as ordering

cost. The ordering cost may have fixed component which is not affected by the

order size; and a variable component which changes with the order size. It

includes:

o Carriage Inward

o Insurance Inward

o Communication cost

o Stationary Cost

o Demurrage Charges

Ordering Cost= (A*O)/Q

where, A= Annual Requirement of a particular material in units or numbers

or kgs.

O= Ordering cost per order

Q= Lot size, in units

Carrying Cost:

The very fact that the items are required to be kept in stock means additional expenditure

to the organization. The different elements of costs involved in holding inventory are as

follows:

(a) Interest on capital / cost of capital / opportunity costs

(b) Obsolescence and depreciation

(c) The cost of storage, handling and stock verification

(d) Insurance Costs

The average inventory carrying costs can, therefore, be as follows:

Interest/costs of capital/opportunity cost 15 to 25%

Obsolescence and depreciation cost          2 to 5%

Storage, handling etc.                      3 to 5%

Insurance costs                             1 to 2%

Total                                        21 to 37%

Carrying Cost is calculated by:

Carrying Cost= ( C*O)/Q

where, C is carrying cost

Stock-out Cost (A Hidden Cost):

A stock out is a situation when the firm is not having units of an item in store but there is

demand for that either from the customers or production department. There is always a

cost of stock out in the sense that the firm faces a situation of lost sales or back orders.

Some examples are:

o Non availability/ small amount available with vendors

o Non availability of substitutes

o Quality desired not matching with the supplied ones

o Updated or improved product not available.

Total Cost

The total cost associated with inventory is the sum of ordering and carrying cost i.e.

Total cost= Carrying Cost+ Ordering Cost

= C*O/Q + A*O/Q

One Underlying principle should be kept in time that ordering cost and carrying cost are

inversely related to each other. Suppose the ordering cost increases because more number

of times the order is repeated, a direct consequence would be reduction in inventory held

and hence carrying cost would be less. Conversely, if the number of order is less, this

means that average value of inventory held is higher with the consequence of higher

inventory carrying cost.

Techniques used for inventory management

The finance department of every organization aims at maintaining an optimum level of

inventory on the basis of the trade-off between cost and benefit to maximize the owners

wealth. There are various tools for effective inventory management. The tool depends

upon the type of inventory, namely materials, work-in-progress or finished goods. some

of these tools have an impact not only on inventory but on whole structure of the

organization. They help in reducing cost and improving the efficiency of organization as

a whole.

Perpetual Inventory Verification

This is done to check out actual inventory level and is done on a continuous basis. In

PIV method, the amount of inventory is checked both in documents as well as stores.

Here, some items are checked randomly and while checking those items issues and

receipt of those items is stopped we can say that these items are brought to freezing state.

The database which, ideally, should be refreshed simultaneously whenever there is a

change in inventory and it should match with physical inventory level. Practically, these

two numbers rarely match. This happens because of various reasons, which may or may

not be under the control of management.

Some of the reasons for mismatch are:

Delay in entering data

Technical Errors (intranet or SAP not working)

Documentation Error (document not submitted)

Posting Error

Material issued but document not processed

Document processed but material not issued

Material send for job work but not received effectively

Pilferage

Material waiting for quality check

Benefits Of Perpetual Inventory Verification

a. The exact amount of inventory present in the plant can be checked.

b. Checking it against the database of the stores can give us a fair idea about

how efficiently the system is working

c. Any faults in the system, regarding the errors associated with updating of

database of stores department can be traced.

Recommendations

PIV should be done as frequently as possible.

It should be made sure that data is updated from time to time that is as soon as

material is issued or received, corresponding data should be updated on the plant

database.

Unless or until data is entered no material should be issued or received.

ABC Analysis

This is done to solve classification problem. The most important thing in inventory

control management is classification of different types of inventories to determine the

type and control required for each. The ABC analysis is based on the assumption that

same degree of control should not be exercised on all items of inventory. The ABC

analysis classifies various inventory items into three sets of groups of priority and

allocates managerial efforts in proportion of the priority. The most important items are

classified as class ‘A’ , those of intermediate importance are classified as class ‘B’ and

the remaining items are classified as class ‘C’.

The financial Manager should monitor different items belonging to different groups in

that order of priority. Utmost attention is required for class ‘A’ items, followed by

items in class ‘B’ and then items in class ‘C’.

This is done based on the experience

That 10% of items in the inventory accounts for 70% of consumption in value so they are

classified as ‘A’ class items

20% of items in the inventory account for 20% of consumption in value so they are

classified as ‘B” class items

70% of the items in the inventory accounts for 10% of consumption in value so they are

classified as ‘C’ class items.

Table :- ABC Analysis Benefits Of ABC analysis

It serves as a tool for classification for inventory.

Each item can be given appropriate attention as per classification.

Limitations of ABC analysis

This system suffers from major drawback. An item of inventory may not be very

expensive, but may be very critical to production process and/ or may not be easily

available; still it will be classified under group ‘C’. It would require serious attention but

due to this classification, it will receive less attention. Similarly a not very important

component may receive extra attention then it deserves . In either case it is detrimental to

the growth of the company. This is a serious limitation of ABC analysis.

Practical Implementation

ABC analysis is strictly followed in CEASE FIRE . It keeps an eye ion those items which

are more crucial for production process than others, such items are given due attention so

that there is neither an excess nor deficit of such materials. On the other hand there is not

much to worry about class B and class C items. There are around 7000 items which are

categorized as A, B, and C items.

Class No Of

Items (%)

Inventory

Value (%)

A 10 70

B 20 20

C 70 10

Total 100 100

Economic Order Quantity Model:

This is to solve order quantity problem.

After ABC analysis we get to know which item deserves how much attention. The next

Problem is to determine the lot size in which a particular item of inventory will be

required. The importance of effective inventory management is directly related to size of

the inventory. A firm should neither place too large or too small orders. The inventory

management basically focuses on maintaining an optimum level of inventory in order to

minimize the cost attached with different inventory levels.

The optimum level of inventory is known as Economic Order Quantity (EOQ) or

Economic lot size. This refers to that quantity per order, which ensures that total of

carrying and ordering cost is minimum.

The approach to determine EOQ is based on the following assumptions:-

The total usage of particular item for a given period (usually a year) is known

with certainty and the usage rate is even throughout the year.

There is no time gap between placing an order and getting its supply

The cost per order of an item is constant and the cost of carrying inventory is also

fixed and is given as a percentage of average value of inventory.

There are only two costs associated with the inventory, and these are the cost of

ordering and the cost of carrying the inventory.

EOQ is generally used to determine the order quantities of class ‘C’ items and

sometimes for class ‘B’ items also. This method is rarely used for class ‘A’ items because

class ‘A’ items are ordered only when requirement arises, there is no need to keep

inventory of class ‘A’ items.

The formula for estimating EOQ is:

EOQ= √ (2A*O)/C

Where, A = annual requirement of a particular material in units or numbers

Or Kgs

O = Ordering cost per order

C = carrying cost per unit

Figure 7 :- Graphical Presentation Of EOQ Model

Explanation

The figure shows that the total ordering cost for any particular item is decreasing as the

size per order is increasing. This will happen because with the increase in the size of

order, the total number of order for a particular item will decrease resulting in decrease in

the order cost. The total annual carrying cost is increasing with the increase in order size.

This will happen because the firm would be keeping more and more items in the stores.

However, the total cost of inventory (i.e. the total carrying cost + the total ordering cost)

initially reduces with the increase in size of order. The trade-off of these two costs is

attained at the level at which the total amount of cost is least. At this particular level the

order size is designated as the economic order quantity. If the firm places the orders for

that item of this economic order quantity, then the total annual cost of inventory of that

item will be minimized.

Benefits of EOQ

It makes sure that there is neither an excess nor deficit of inventory.

It saves cost as it saves carrying and ordering cost.

It also results in strong relationship with vendors.

It results in saving of time.

Practical Implication

EOQ is a relatively old technique for assessing the lot size of the order. Moreover, it

suffers from the disadvantage that the order cost is assumed to be uniform during a

particular period. The main point of problem in calculating EOQ is regarding the

estimation of ordering and carrying costs. Because there are no set rules to find exact

storage cost, maintenance cost etc. Since the production unit of CEASE FIRE is involved

in manufacturing of tailor-made products, assessment of EOQ is not very relevant for this

kind of business line. However, the general usage items like nuts, bolts, crimps, wires,

batons, nails, lubricants, gaskets etc. are common for all types of items. Hence, it may

have restricted application in the FSW plant.

EOQ is estimated on the basis of prior experience and future requirements. This happens

so because it is very difficult to classify to calculate storage and maintenance costs. They

have to be estimated because there are no provisions available to calculate them. To

prove the usefulness of this method, some arbitrary costs (ordering cost and carrying

cost) are assumed. Accordingly, EOQ is calculated to show how this model works and

how it can be useful in maintaining proper inventory levels.

I

ITEM EOQ

SL98354BOOOS 219

CS94314KOOOS 237

SL97299OMOOS 327

SH97609OOKOS 245

SH97608OOMOS 258

Table – Economic Order Quantity

RECOMMENDATIONS:

Provisions to calculate EOQ must be made because a guess work may

prove to be wrong.

At first, the total cost involved in ordering, transporting, procurement,

storage and maintenance must be calculated. Than, a part of this

(say 20%) should be taken as carrying cost and rest as ordering cost.

Reorder point (under certainty conditions): To solve order point

problem:

Reorder point is that level of inventory at which an order should be placed for

replenishing the current stock of inventory. It may be defined as level of inventory

when fresh order should be placed for procuring additional inventory equal to the

economic order quantity. It is the inventory level which is equal to consumption during

the lead time.

Reorder point is calculated as:

Rρс = L*U

Where, L = Lead time (in days)

U = Average daily usage of inventory

Benefits of reorder point

It makes sure that plant does not run out of stock in any given day.

It makes it easier to keep track of inventory and to know when exactly next lot of

material is needed.

PRACTICAL IMPLEMENTATION:

Practically, reorder point is not calculated at CEASE FIRE . Trends of requirements of

various items are observed and accordingly order point is estimated for different items.

Here the problem is in estimating exact lead times and average daily usage of inventory.

The difficulty in estimating lead time is that it is never fixed and also, it depends not only

on the material, but also on the supplies and his geographical location. A material which

can be ordered from different suppliers may have different lead times. As far as average

daily usage of inventory is concerned, the fact is that CEASE FIRE follows engineered-

to-order business, i.e. it manufactures according to immediate demands. So, it becomes

difficult to estimate average daily usage of inventory. The demands keep fluctuating day-

by-day.

To emphasize on the importance of reorder point, a calculation based on assumed lead

times and average daily usage of inventory is done. This can prove to be helpful in

implementing reorder point at CEASE FIRE .

ITEM Rc

SL98354BOOOS 100

CS94314KOOOS 180

SL97299OMOOS 150

SH97609OOKOS 144

SH97608OOMOS 120

RECOMMENDATIONS:

Reorder point is a useful tool and hence, should be implemented. It will make sure

that the plant does not run short of inventory for even a single day.

Lead times should be estimated based on both – the type of material and the

supplier.

Safety stock: To overcome unexpected situations

The EOQ and the reorder point have some assumptions, which are not possible

practically. For instance, the demand for inventory is like to fluctuate from time to time.

The demand may exceed the anticipated level.

Similarly, the receipt of inventory from the suppliers may be delayed beyond the

expected lead time. The delay may be due to strikes, floods, transportation, and other

bottlenecks. To avoid such undesirable situations safety stock is maintained.

Safety Stock may be defined as the minimum additional inventory to serve as a

safety margin or buffer or cushion to meet an unexpected increase in usage resulting

from an unusually high demand and/or an uncontrollable late receipt of incoming

inventory.

Benefits of Safety Stock

It is useful as it makes sure that even after reorder point is passed, the plant is able

to maintain its immediate demand.

It acts as a buffer.

It is an effective tool to minimize shortage cost.

PRACTICAL IMPLEMENTATION:

The determination of the optimum safety stock involves dealing with uncertain demand.

The first step, therefore, is to estimate the probability of being out of stock as well as the

size of stock-out in terms of the shortage of inventory at different levels of safety stock.

To give an overview of the whole process, I calculated safety stock of a few items based

on certain assumptions regarding the stock-out acceptance factor, average number of

units per order, average daily usage of inventory and lead time.

ITEM Ss

SL98354BOOOS 156

CS94314KOOOS 256

SL97299OMOOS 213

SH97609OOKOS 187

SH97608OOMOS 209

Table – Safety Stock

Lean Manufacturing

There are many hidden wastes in any organisation . To get rid of these hidden wastes we

need to first unhide them. The best way to do this is to have a VISUAL FACTORY

where there is nothing hidden . Lean Manufacturing is a tool to enable us to achieve this

objective

Fundamentals of Lean Manufacturing :

1. Smooth flow of Material & Information to meet on demand service to customers

but without having to hold high inventories .

2. Elimination of hidden wastes .These wastes fall into seven basic categories :

a. Over Production

b. Defects/Rework

c. Motion

d. Transportation

e. High Inventory

f. Over processing &

g. Waiting

3. To achieve waste elimination , workplace organization using the 5 S System is

necessary:

a. Sort ... Remove unneeded items

b. Set –in – order... A place for everything and everything in its place (PEEP)

c. Shine ... Clean enough to inspect and expose any defect .

d. Standardize.. Create instructions and Standard Operating procedures

e. Sustain... Maintain the above through support and encouragement

4. Reducing Lead Time at every stage of every process through

a. Visual Controls using Kanban cards

b. Receiving material just in time (JIT).

c. Line Balancing to avoid up piling up of material at any stage.

d. Studying the flow of material or Value Stream Mapping.

e. Total Productive Maintenance to improve overall operation of the

equipment.

f. Set up time reduction using SMED (single minute exchange of dies ).

Lean manufacturing is a management philosophy focuses on reduction of the seven

wastes to improve overall customer value. Lean management (also known as Big JIT)

is a philosophy of operations management that seeks to eliminate waste in all aspects of

aspects of firm’s production activities: human relations, vendor relations, technology and

management of materials and inventory.

BY eliminating waste quality is improved, and automatically, production time and cost

are reduced. To solve the problem of waste lean manufacturing has several tools at its

disposal. All of these tools aim at reducing wastes, of one of several types, as far as

possible.

Some of the tools of lean manufacturing which helps in inventory management and

control are:-

Just In time ( right amount in the right place at right time)

Kaizen ( continuous improvement process)

Kanban (pull production)

Single Piece Flow System

Gemba Walking

Virtual Storage

Lean Manufacturing can be achieved by implementing following tools:

Just in Time Concept:

The basic philosophy behind JIT is that the firm should keep minimum level of inventory

on hand relying on suppliers to furnish ‘stock’ ‘just in time’ as and when required. This is

in direct contrast to the traditional inventory philosophy which emphasizes keeping

sufficient levels of safety stocks to ensure that production will not be interrupted.

Thus JIT system benefits in two ways:-

By reducing the ordering cost. This is attempted by locating inventories supplies in

convenient locations.

By reducing the safety stock . This is attempted by developing a strong relationship

with suppliers and setting up restocking strategies that cut time.

Practical Implementation

Just-in-time is implemented, nearly, at each and every stage of manufacturing/production

in the plant. Stores Department and Fabrication Departments are the main users of this

technique.

While manufacturing switchboards, earlier, for an order of say 1000 items in three

months period, one part of the whole manufacturing was done and than other steps took

place. So, inventory of material used to pile up. Also, the different parts used to lie

scattered here and there.

After implementation of JIT, the process is done such that all the steps are taken

simultaneously. So, material keeps moving. Moreover, provisions are made so that all the

parts of a product are kept together.

Procurement of packing cases is another good example of implementation of JIT

concept in CEASE FIRE . All the finished goods need to be packed in wooden packing

cases (also known as crate packing cases).

There are certain issues related to wooden packing cases:

They are bulky and over-sized.

They have storing constraints.

Dryness of wood up to a specific point is allowed (if the wood gets drier, it

becomes very difficult to pierce nails in it).

So, in order to avoid all these problems, what best can be done is – as soon as the

material is about to complete, the Final Assembly Department informs it to Packing and

Purchase Department. Now, packing and Purchase Department gets ready with their

wooden packing materials, just-in-time as the finished goods are received by them.

RECOMMENDATIONS:

All the workers, especially those who are working in Fabrication

Department, Stores Department and Purchase Department, must be

given proper training regarding the practical implementation of JIT.

Any sort of delay between any two processes should be minimized as far as

possible. Any kind of idle time should not be allowed.

Another point that must be kept in mind is that, right amount of material should

pass from one stage to the other. There is no need to pile-up materials, which are

not going to be used immediately.

Kanban System

The Japanese refer to Kanban as a simple parts-movement system that depends on cards

and boxes/containers to take parts from one work station to another on a production line.

Kanban stands for Kan- card, Ban- signal. The essence of the Kanban concept is that a

supplier or the warehouse should only deliver components to the production line as and

when they are needed, so that there is no storage in the production area. Within this

system, workstations located along production lines only produce/deliver desired

components when they receive a card and an empty container, indicating that more parts

will be needed in production. In case of line interruptions, each work-station will only

produce enough components to fill the container and then stop. In addition, Kanban limits

the amount of inventory in the process by acting as an authorization to produce more

inventory. Since Kanban is a chain process in which orders flow from one process to

another, the production or delivery of components are pulled to the production line. In

contrast to the traditional forecast oriented method where parts are pushed to the line.

The Kanban method described here appears to be very simple. However, this is a "visual

record" procedure.

Figure 8 :- Kanban System

Advantages of Kanban Process

A simple and understandable process

Provides quick and precise information

Low costs associated with the transfer of information

Provides quick response to changes

Limit of over-capacity in processes

Avoids overproduction

Is minimizing waste

Control can be maintained

Delegates responsibility to line workers

"Kanban represents an efficient tool to continuously rationalize the production process

and find the source of problems". Since the circulation of Kanban will stop if there is a

production problem on line, it is easy to both spot and correct the problem

instantaneously.

PRACTICAL IMPLEMENTATION:

Kanban is implemented in Stores Department at CEASE FIRE Faridabad. For this, a

Kanban card is attached with each and every item present in the Stores Department. Each

Kanban carries all the relevant information about the item, which is useful in estimating

its requirements. A typical Kanban card bears following information:

CAT NO.:.........................................................................................

DESCRIPTION:..............................................................................

INITIATOR:....................................................................................

BUYER:...........................................................................................

CONSUMPTION:...........................................................................

MAXIMUM LEVEL:......................................................................

MINIMUM LEVEL:........................................................................

REORDER LEVEL:........................................................................

Figure 4 – Kanban Card

RECOMMENDATIONS:

CAT numbers should be different, that is no two CAT numbers should be

same.

To make it more effective, no one should be permitted to take material out of or to

put back the material in the bin unless and until he has updated the entries on the

Kanban card.

The data mentioned on the card attached with each bin should be updated as soon

as some material is issued from that bin.

Reorder level should always be kept in mind so that as soon as that point is

reached, the bin should again be filled with the same material up to its optimum

capacity.

KaiZen

KAIZEN: For continuous improvement:

Kaizen literally stands for ‘Kai’-change and ‘Zen’-to become good. The Kaizen

philosophy lies behind many Japanese management concepts such as Total Quality

Control, Quality Control Circles, small group activities, labor relations, etc.

Kaizen is based on a Five-S framework:

a. Seiri - Tidiness

b. Seiton - Orderliness

c. Seiso - Cleanliness

d. Seiketsu - Standardized clean-up

e. Shitsuke - Discipline

Key elements of Kaizen are:

Quality - Quality circles

Effort - Suggestion for improvement

Teamwork - Involvement of all employees

Willingness - To change

Communication

Improved morale

Personal discipline

The Kaizen method of continuous incremental improvements is an originally Japanese

management concept for incremental change.

The Kaizen cycle has four steps:

Establishing a plan to change whatever needs to be improved

Carrying out changes on a small scale

Observing the results

Evaluating both the results and the process and determining what has been learned

BENEFITS OF KAIZEN:

a. It improves safety.

b. It improves efficiency of workers as well as the whole plant.

c. It improves the dedication of the employees as it keeps them safe from any kind of

mishap.

d. It makes the plant well-organized.

PRACTICAL IMPLEMENTATION:

There is a Gang Punching Machine in the fabrication department. Earlier, it had a

manual system for moving the sheet, to be punched, inside the machine and

simultaneously moving a knob. Once, a worker accidentally cut his fingers in the process

of Gang Punching.

To avoid any further mishaps, a wooden block was placed in the machine which could be

pushed to move sheets inside the machine and the need for pushing the sheet inside the

machine by hand was avoided. This ensured the safety of the employees working at the

machine.

Apart from this, there are many big and small changes made, like inclusion of stools to

help workers in cutting sheets, pathways, separate parking bays for keeping trolleys,

posters to provide information to employees regarding their safety, etc.

RECOMMENDATIONS:

It should be checked that all the Kaizen principles followed are being

implemented properly.

Employees should be asked to implement Kaizen principle on their own

and their valuable suggestions should be kept in mind, and as far as

possible, should be implemented.

Another point that must be kept in mind is that Kaizen need not be a big change;

it can be as small as keeping a chart of most frequently used telephone numbers

near your desk, to big changes like replacing a number of old machines with a

multi-tasking/many-in-one machine

Single piece flow system

To become lean, companies have to create continuous flow wherever applicable.

Shortening the elapsed time from raw materials to finished goods leads to the best

quality, lowest cost, and shortest delivery time. Creating flow exposes inefficiencies

that demand immediate solutions. Everyone concerned is motivated to fix the problems

and inefficiencies because the plant will shut down if they don't.

Flow means that a customer order triggers the process of obtaining the raw materials

needed just for that customer's order. The raw materials then flow immediately to

supplier plants, where workers immediately fill the order with components, which flow

immediately to a plant, where workers assemble the order, and then the completed order

flows immediately to the customer. The whole process should take a few hours or days,

rather than a few weeks or months.

There are, Various steps involved in production of any item at CEASE FIRE FSW plant.

Every second step acts as a customer to the previous step. Each step depends on its

immediate predecessor for performing its function.

A problem/delay at any one or more of the steps will lead to a halt in the production

process. So, each and every employee involved at different stages of the production

process is thoroughly trained, and is held responsible for his part in the production

process.

The production process starts with planning, where it is decided what is to be

produced in the next one month or so. After this, a blue-print of the products is made in

the programming stage. A computerized design is made by using various kinds of

programming softwares available with the plant. Now, the punching process on metal

sheets and other items starts followed by bending and drilling/tapping. To make the

product attractive and easy-to-use, powder coating is done. After that, painting of

different parts takes place. Finally, different parts are assembled together to get

theproduct as desired by the customer.

Thus, the layout of company should be such that all these processes should be done in a

continuous manner

Advantages of single piece flow system

Quality. It is much easier to build in quality in one-piece flow. Every operator is an

inspector and works to fix any problems in station before passing them on. But if defects

do get missed and passed on, they will be detected very quickly and the problem can be

immediately diagnosed and corrected.

Higher Productivity. In a one-piece-flow cell, we can quickly see who is too busy and

who is idle. It is easy to calculate the value-added work and then figure out how many

people are needed to reach a certain production rate.

Gemba Walking

Gemba means Actual Place. Instead of relying on reports to run a plant or company, the

manager should put on some walking shoes and "go and see" at the "actual place",

whether its a factory or a store. This Practice is also followed in CEASE FIRE .

Virtual Storage

This is another technique of effective inventory management. Here the supplier is asked

to open their stores or warehouses within the premises of company and as and when the

material is required an order is placed to the supplier and the suppliers of the godown

deliver the goods to the company with the copy of invoice.

So, virtual storage helps to receive timely delivery of inventory as the goods are lying in

the godown and are issued as and when required.

However, this practice is not followed in CEASE FIRE .

CASH MANAGEMENT

Cash is the most liquid current asset. It is the common denominator to which all current

assets can be reduced because the other major liquid assets, i.e. inventory and receivables

get eventually converted into cash. This clearly underlines the significance and essence of

cash management.

Cash can be defined in many ways, it’s not only the money in hand or bank, it is much

more than that.

Cash includes:

Currency

Cheques

Drafts

Demand deposits

Marketable securities

Time deposits

NEED OF CASH:

Cash, of all types, acts as a reserve pool of liquidity that provides cash quickly, as and

when needed. They also provide a short-term investment outlet for excess cash and are

also useful for meeting planned outflows of funds.

The major reasons of keeping cash are:

Transaction motive – this refers to the holding of cash to meet routine cash

requirements

Precautionary motive – these refer to the cash balances held in reserve for

random and unforeseen fluctuations in cash flows

Speculative motive – it refers to the desire of a firm to take advantage of

opportunities which present themselves at unexpected moments

Compensating motive – usually banks ask clients to maintain a minimum

balance of cash with them (bank). Since this balance can not be utilized by the

firms for transaction purposes, the banks themselves can use the amount to earn a

return. Such balances are compensating balances.

OBJECTIVES OF CASH MANAGEMENT:

The basic objectives of cash management can be classified majorly in the following three

types:

a. To meet the cash disbursement needs (payment schedule) – these include payments

to vendors as well as salaries to employees etc.

b. To minimize funds committed to cash balances – this is important as cash which is

lying idle is of no use to the firm

c. To synchronize inflows and outflows of cash – an excess of either inflow or outflow

may be detrimental to the growth of the company.

COST OF HOLDING CASH:

Cash management has some costs associated with it.

No earning power - Irrespective of the form in which cash is held as an

asset, it has no earning power. That is, cash does not earn any return.

Depreciation cost - Cash keeps lying idle, without earning anything; in

fact it keeps depreciating with time.

BENEFITS OF CASH MANAGEMENT:

Some of the major benefits of cash management are:

a. To prevent insolvency or bankruptcy arising out of inability of a firm to

meet its obligations.

b. The relationship with bank is not strained.

c. It helps in fostering good relations with trade creditors and suppliers of

raw materials, as prompt payment may help their own cash management.

d. A cash discount can be availed if payment is made within the due date

e. It leads to a strong credit rating

f. To take advantage of favorable business opportunities that may be

available periodically

g. The firm can meet unanticipated cash expenditure within a minimum of

strain during emergencies (strikes, fire, new market strategy by competitor

etc.)

Cash is the most liquid current asset. It is of vital importance to the daily operations of

business. While the proportion of assets held in the form of cash is very small, its

efficient management is crucial to the solvency of the business. Therefore, planning

cash and controlling its use are very important tasks.

Cash budgeting is a useful device for this purpose.

Cash Budget

 Cash budget basically incorporates estimates of future inflows and outflows f cash

over a projected short period of time which may usually be a year ,half or a quarter

year. Effective cash management is facilitated if he cash budget is further broken down

into month, week or even on daily basis.

There are two components of cash budget

(i) cash inflows and

(ii) cash outflows.

The main sources for these flows are given hereunder:

Cash Inflows

(a) Cash sales

(b) Cash received from debtors

(c) Cash received from loans, deposits, etc

(d) Cash receipt of other revenue income

(e) Cash received from sale of investments or assets.

Cash Outflows

(a) Cash purchases

(b) Cash payment to creditors

(c) Cash payment for other revenue expenditure

(d) Cash payment for assets creation

(e) Cash payment for withdrawals, taxes

(f) Repayment of loans, etc.

A suggestive format for ‘Cash Budget’ is given below:

Cash Budget of M/s…

Particulars Months

January Feburary

March

Estimated cash inflows

------------

-----------

I. Total cash inflows

Estimated cash outflows

------------

-----------

II. Total cash outflows

III. Opening cash balance

IV. Add/Deduct surplus/Deficit

during the month (I–II)

V. Closing cash balance (III–IV)

VI. Minimum level of cash

Balance

VII. Estimated excesses or shortfall ofcash (V–VI)

How CEASE FIRE Manages its cash?

Managing cash is very essential for the business since it is crucial for solvency of

business. CEASE FIRE uses various techniques to manage its cash operations.

Sweeping Facility

Rather than keeping cash at different locations, the collections and disbursals of all the

locations are recorded and the cash is kept at one central location as it is quite

cumbersome for an organization to maintain records of collection and disbursals of cash

of its different offices. It also involves a number of extra personnel, and is certainly a

waste of work force, time and money. Also, the money lying scattered with various

offices is of no use as such, because it is simply lying idle. A better option will be to

deposit this cash into a bank, having central banking facility, where it can be invested to

earn some profit. For this a suitable multi-locational bank is selected, preferably the one,

which has branches in all the locations where the different offices of the company are

located.

Moreover, if all the money is kept at one place, it will definitely amount to a huge sum.

This huge sum will make it easier for the company to negotiate with the bank regarding

the interest rate which CEASE FIRE is supposed to pay for availing such facility.

BENEFITS OF SWEEPING FACILITY:

It’s a win-win situation for both – the company and the bank. Both of the parties are

benefited by this technique.

Benefits for the company:

a. Gets a chance to negotiate with the bank over the interest rate which CEASE FIRE

is supposed to pay to the bank.

b. This huge sum can be invested in business also, which will again prove to

be profitable.

Benefits for the bank:

a. Bank charges the company according to the services rendered by it.

b. Bank can use these funds for its daily business purposes.

PRACTICAL IMPLEMENTATION:

Sweeping Facility service is a prominent tool used for proper cash management at

CEASE FIRE . For this purpose CEASE FIRE has selected Standard Chartered Bank

because of its intensive reach in nearly each and every corner of the country, especially in

Delhi, Mumbai, Powai and all other places where CEASE FIRE offices are located and

also because it has the facility of Central Banking, which is a prerequisite for a bank to

offer such service.

What happens is – all the money is deposited in one account. Now, as and when a center

in any particular region requires some money, it withdraws the same with the bank .

Later, the bank receives the same amount from the central account of CEASE FIRE .

All the financial decisions regarding the selection of bank, its location and interest rate

etc are made at the Head Office of CEASE FIRE – Treasury Department, CEASE FIRE

Mumbai.

All the offices are allowed to make cash collection and disbursals through a common

bank account of CEASE FIRE at Standard chartered Bank, Mumbai.

Day Light Limit

Every Branch of CEASE FIRE maintains two accounts one having the sweeping facility

and one not having. This day light limit is used where sweeping facility is not available.

Here, based on the past experience or on the basis of current business transactions daily

cash flows are estimated i.e. how much cash inflow will be there and how much cash

outflow will be there and based on this estimation that much amount is maintained in the

account.

RECOMMENDATIONS:

Now-a-days most of the banks provide central banking facility, so the

main criterion of selection of bank should be the interest rate it is charging

for rendering such services (it should be as low as possible.

Conclusion

The objective of working capital management is to maintain the optimum balance of each

of the working capital components. This includes making sure that funds are held as cash

in bank deposits for as long as and in the largest amounts possible, thereby maximising

the interest earned. However, such cash may more appropriately be "invested" in other

assets or in reducing other liabilities.

When considering these techniques and strategies of Working capital, departments need

to recognise that each department has a unique mix of working capital components. The

emphasis that needs to be placed on each component varies according to department. For

example, some departments have significant inventory levels; others have little if any

inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of

the department's overall management. The needs of efficient working capital

management must be considered in relation to other aspects of the department's financial

and non-financial performance.

Refrences

i. Khan, M. Y., and Jain P. K., ‘Financial Management’, Tata McGraw Hill,

New Delhi, 2004.

ii. Pandey I. M., ‘Financial Management’, Vikas Publishing House Pvt Ltd, New

Delhi, 2005.

iii. Rustogi, R. P. , ‘Financial Management’, Galgotia Publishing House, New

Delhi,2006

iv. www.Cease fire .com

v. www.google.com.

Costs