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PROJECT REPORT

ON

Working Capital Management

IN

J.B.M.COMPONENT PRIVATE LIMITED

(FINANCE DEPARTMENT)

SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE

REQUIREMENT OF

MBA DEGREE

(2014)

ADVANCED COLLEGE

PALWAL M.D. Un!"#$%& R'%*

0

SUBMITTED BY:

KAVITA

ROLL:NO. MB13016

SUBMITTED TO:

MS. NEHA


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PREFACE

The Project entitled +W'#*n, C-% Mn,"/"n% % J.B.M. n BEST WA

STEEL -!%. L%. deals in this segment. The term of study was kept limited to make the

title true. The purpose of the report is to get the in depth understanding of the process of

working capital management. With the growing Indian economy and the liberal

government policies for infrastructure, the demand for MT!" services is increasing and

seeing this as an opportunity is under taking many new projects for e#pansion of the

production which are under implementation for increasing the capacity of the plants.

$bm.component and best way pvt. "td. world recognised MT!" company so the

management of working capital consist of different of new techni%ue which is not common

in Indian MT!" industry.

The main objective of my research that how $.&.M and &'T W!( pvt.ltd. maintain the

proper balance between the amount of current assets and the current liabilities in such a

way that the firm is always able to meet its financial obligations, whenever due. This will

ensure the smooth working of the unit without any production held ups due to paucity of

funds and also how $.&.M. and &'T W!( pvt. "td. manage the current assets in such a

way that the marginal return on investment in these assets is not less than the cost of capital

ac%uired to finance them. This will ensure the ma#imi)ation of the value of the business

unit.

Working capital management in $.&.M. and &'T W!( pvt. "td. is seem to be different

and also effective as comparison other metal firms in India. *eason for being different is

their nature of business and implementation of new techni%ue which help them to smooth

flow of the fund.

Performance of $.&.M. and &'T W!( pvt. "td. +orea and India both are affluent. Their

mi#ed corporate culture and the area of e#pertise in metal processing construction

contract help them to get succeed in every project

1


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ACNOW!ED"EMENT

The or!"#$!%#o" &ro'e% o *+h "!%+re or %h#* *+e**+, o-&,e%#o"

"ee* oo&er!%#o" !" *+&&or% o &eo&,e. I h!/e ee" or%+"!%e %o e%

o"*%!"% +#!"e e"o+r!e-e"% ro- -!"2 h#h he,&e -e ! ,o%

%o e *+e**+, #" !"2 e4or%*. Th#* or-!, !5"o,ee-e"% #,, h!r,2

e *+#e"% %o e7&re** o"e ee& *e"*e or r!%#%+e %o !,, o %he-.

A% %he o+%*e%8 I o+, ,#5e %o %h!"5 Mr# D$%&'ant Sing& (Training )

Pla*ement O+*er, !" o%her -e-er* o %he &,!e-e"% e,, or

#/#" -e !" o&&or%+"#%2 %o *+e**+,,2 o-&,e%e -2 *+--er

#"%er"*h#& #" %he#r e*%ee-e or!"#$!%#o".

A &ro'e% re&or% h!* "e/er ee" %he *!,e &ro+% o %he &er*o" ho*e

"!-e !&&e!r* o" %he o/er. There !re !,!2* *o-e &eo&,e ho*e

+#!"e &ro/e* %o e o #--e"*e he,& #" #/#" #%* 9"!, *h!&e. So #% #*

-2 9r*% +%2 %o e7&re** -2 r!%#%+e %o!r* !,, o %he-.


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DECLARAT ION

I am +avita ,lass M&! -rd 'M of !dvanced Institute of Technology and management

of Palwal ereby declare that the project entitled /P!*TI!" 01"0I""M2T 30 T

*41I*M2T /is an 3riginal Work and the same has not been submitted to any other

institute for the award of any other degree.

S,n%3#" ' Cn%"

3


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J.B.M. COMPONENT %.co ,which is incorporated as MT!" company in 1T "td is to provide high

%uality parts ,drawing ?technical services. The Indian company shall be used as

knowledge hub and MT!" centre for global needs for above activities.

The main object of $bm component and best way ltd. India is to carry on all or any of thebusiness to provide develops ,supply and render MT!" and technical services. !nd also

to carry on the business of providing MT!" ,procurement, maintenance and operation

service to industrial ,petrochemical ,environmental, gas, energy generation and refinery

projects.

A#" ' "?-"#%$" n /#*"%n, $%#%",&


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The area of e#pertise is MT!" processing construction contract especially for process

MT!", chemical MT!" ,piping MT!" and instrumental MT!".

With advent of new millennium, global as well as domestic MT!" a markets are faced

with uncertainties, creating a whole new environment where only a handful of market

leaders with global competitiveness can e#pect future.

$bm component and best way ltd. give priorities to health ,safety and environment.

Moreover ,under the business principle to provide an economical and optimised manner

within the fastest possible time, and also focused on building an effective knowledge

management system, improving corporate efficiencies through continued cost reductionand overall improvement efforts, and building a global standard management basis to

become a customer @ oriented ,total solution provider.

0urthermore, with people and technology the critical factors in the MT!" business, $bm

component and best way ltd. is setting out to establish long term training programs aimed

at nurturing professional with e#tensive e#periences in the environment and energy sector

facilitating the arrival of future.

$bm component and best way ltd. is committed to becoming the most reliable business

partner, catering the needs with best %uality and seamless services driven by the attitude of

genuinely caring customer.

$bm component and best way ltd. India Pvt . ltd will try to provide the best manpower and

technology for best product and service to customer.

$bm component and best way ltd. As no 5 mission is generating values to the customers and

shaping businesses for continuous fulfilment of the client


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$bm component and best way ltd. points clients to success. There numerous successes in

petrochemical, refinery, gas, industry, environmental plant and infrastructure businesses

worldwide have served as the basis for success and the power to overcome any difficulties

and e#plore new opportunities. 1ndisputed capabilities, strong potential and unrivalled

enthusiasm are the drivers that $bm component and best way ltd. relies on to bring a

genuine success to their clients.

R""n% n%"#n%'n -#'"%$

P"%#'"/ -#'"%

0or several decades $bm component and best way ltd. has been active in the petrochemical

industry, initially heading large scale petrochemical plant construction projects in +orea

for major companies such as 'amsung Petrochemical. 1sing these e#periences as a strong

foundation, $bm component and best way ltd. has fineBtuned its e#pertise and capabilities

to successfully e#ecute lump sum turnBkey projects including MT!", procurement,

construction and commissioning. 0rom the early 5CC7

R"n"#&

$bm component and best way ltd. has steelumulated e#tensive refinery e#perience across

the globe such as the I3" *efinery Plant in India, &'T 1nleaded =asoline !dditive Plant

in Thailand, and refinery plants in Thailand and Taiwan. In Me#ico, $bm.component and

best way ltd. was awarded both the Tula and 'alamanca *efinery from PMG, proving

the company


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way ltd. is constructing two entral and 'outh !merican projects. They are the PMG

Minatitlan *efinery Plant in Me#ico and PT*3T*I2 2T ? * Plat former *efinery

Plant in Trinidad ? Tobago.9776 marks the year $bm.component and best way ltd. was

awarded a 8T Plant from !*!M3, 'audi !rabia


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In3$%# Pn%$

#ploring overseas markets and pioneering new products, $bm.component and best way

ltd. implements a strong growth strategy. Through Industrial projects in the fields of IT,

energy, automobile, aerospace, food, and sports facilities, $bm.component and best way ltd.

is demonstrating technological leadership and %uality products through its turnBkey

services. In particular, $bm.component and best way ltd. is focused on highBtech sectors

such as display and semiconductors for the purpose of securing top technology. &ased on

its outstanding project e#ecution ac%uired from the +orean market, $bm.component and

best way ltd. has strived to focus on overseas markets in !sia, urope, I', the Middle

ast and "atin !merica. Through such efforts, $bm.component and best way ltd. haspioneered new products such as steel mill plants, power plants, renewable energy plants as

well as new 8P:8istinct ooling Plants; and logistics centers.

R""n% n3$%# -n%$ -#'"%

IT

IT is an important component in the industrial plant sector for $bm.component and best

way ltd.. With a great track record in IT projects and the steelumulation of the world


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&ased on its e#tensive e#perience in the food ? beverage industry as well as other

manufacturing sectors, $bm.component and best way ltd. has successfully completed a

number of large projects based in +orea, including the +T?= Tobsteelo manufacturing

Plant, +onkuk 8airy umsung 0acility, the !san, =umi and 2oksan 0acilities of 2ongs

him, 2amyang 8airy heonan 0acility, $inro ass &eer 0acility and ankook Tire

Plant.!t the same time, $bm.component and best way ltd. has served as a strategic partner

with domestic companies to help them enter overseas markets, taking part in 2ongshim

'hanghai 0acility and ankook Tire Plant in astern urope. $bm.component and best way

ltd. is also working on a number of fronts to e#pand its business portfolio to include

8P:8istrict ooling Plants;, and to secure new growth engines for the future.$bm.component and best way ltd. is strengthening its internal competencies through

constant research and development aimed at =MP:=ood Manufacturing Practices; for

medical and pharmaceutical devices.

.

S%""

In the steel sector, $bm.component and best way ltd. secured contracts representing a total

of 9F million 1'8 in9776 alone. These projects included sinter and &yBproduct =as

'upply 0acilities for yundai 'teel,P3'3 =" 1tility in Me#ico and a blast furnace

facility for the '!I" II'3 'teel Plant. Winning the bid for the yundai 'teel Plant was

particularly significant in that it showed how far $bm.component and best way ltd. has

progressed within an industry that is known for having high barriers for new contractors.

This achievement was made possible by $bm.component and best way ltd.


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ombined eat and Power Plant, Incheon 2onhyun 8istrict Integrated nergy Plant, and

the nergy *ationali)ation 0acility in Mongolia. It has set up a plan to transform overseas

IPP projects into strategic products for longBterm growth and has madevarious efforts to

speciali)e in IPP projects in 'outheast !sia. In Thailand, Philippines and Indonesia, it is

working hard to ac%uire power plant projects including those for PP. &y securing needed

technologies and e#pertise to undertake medium to large si)ed projects:-77 MW IPP or

larger;, it has become an important player in IPP overseas markets and is laying a

foundation for e#ploring new growth engines such as the renewable energy industry.

En!#'n/"n% 7 In#$%#3%3#"!spiring to become a specialist in environmental ? infrastructure through aggressive

technology development and business e#pansion. MT!" companys entered the

environmental sector in the 5C67s and has since been speciali)ing in the environmental and

infrastructure field. &ased on -L years of e#perience in the water business, it established a

comprehensive water management system that covers ultra pure water, wastewater reuse

and highly efficient wastewater treatment, and continues building upon its capabilities in

the design, construction and operation of related facilities overseas. $bm.component and

best way ltd. has secured core technologies in other environmentBrelated areas such as the

reduction of air pollution from IT facilities and municipal waste. 'imultaneously, the

company is actively engaged in '3:'ocial 3verhead apital; projects in the domestic

railway market and has successfully operated projects such as the railway depot and

deployment projects for integrated operation systems. "everaging its e#perience in

environmental ? infrastructure, MT!" company will continue its growth as a leading

water specialist and infrastructure construction company.

R""n% En!#'n/"n% 7 In#$%#3%3#" -#'"%

W%"# T#"%/"n%

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$bm.component and best way entered the sewage treatment sector in the 5CC7


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company secure necessary capabilities related to the deployment and trial operation of

integrated operation systems for urban railways. It plans to be more active in entering

overseas markets such as the Middle ast while diversifying its business portfolio to

include system integration of light rail transit ?M and railway ?M, and by nurturing

this business as a future growth engine.

In#$%#3%3#"

MT!" company entered the '3 sector in the 5CC7s, beginning with its construction of

the 'eogwipo 3utport &reakwater. It has since contributed to the e#pansion of +orea& '/-n&$ R"'#=#"*n, -"#'#/n"

In 9776, despite the dramatic escalation in oil prices and raw material prices, 'amsung

ngineering worked diligently to record an allBtime high. 2ew orders rose HF percent to

+*WJ.L trillion while net profit rose -5 percent to +*W 5FH billion on the back of sales

rising 59percent to a record +*W 9.9 trillion. The performance of the ydrocarbon Plant

8ivision was a stellar one, as MT!" companys continuously secured mega projects in

'audi !rabia, Thailand, and India on the strength of their trusted and respected reputation

developed through their successful business performance. ! notable milestone for MT!"

company includes securing 'audi !rabiaietnam meant another e#pansion into a new market and widening their client

base into the global IT sector. In addition, MT!" company


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in a buyback of a total of 5 million stocks worth +*WFJ.H billion to stabili)e their share

prices and enhance shareholder values, simultaneously and effectively maintaining

shareholderBoriented management for the best interest of their shareholders.

$bm.component and best way ltd.


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INTRODUCTION

orporate finance is an area of finance dealing with the financial decisions corporations

make and the tools and analysis used to make these decisions. The primary goal of

corporate finance is to ma#imi)e corporate value while managing the firms financial risks

!lthough it is in principle different from managerial finance which studies the financial

decisions of all firms, rather than corporations alone, the main concepts in the study of

corporate finance are applicable to the financial problems of all kinds of firms. The

discipline can be divided into longBterm and shortBterm decisions and techni%ues. apital

investment decisions are longBterm choices about which projects receive investment,

whether to finance that investment with e%uity or debt, and when or whether to pay

dividends to shareholders. 3n the other hand, the short term decisions can be grouped

under the heading Working capital management. This subject deals with the shortBterm

balance of current assets and current liabilities the focus here is on managing cash,

inventories, and shortBterm borrowing and lending.

D"n%'n ' >'#*n, -%

The word working capital is made of two words 1.Working and 2. apital. The word working

means day to day operation of the business, whereas the word capital means monetary value of

all assets of the business.

Working capital may be regarded as the life blood of business. Working capital is of major

importance to internal and e#ternal analysis because of its close relationship with the

current dayBtoBday operations of a business. very business needs funds for two purposes.

N "ong term funds are re%uired to create production facilities through purchase of fi#ed

assets such as plants, machineries, lands, buildings ? etc

N 'hort term funds are re%uired for the purchase of raw materials, payment of wages, and

other dayBtoBday e#penses.

. It is other wise known as revolving or circulating capital

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It is nothing but the difference between current assets and current liabilities. i.e.

Working apital O urrent !sset @ urrent "iability.

&usinesses use capital for construction, renovation, furniture, software, e%uipment, or

machinery. It is also commonly used to purchase inventory, or to make payroll. apital is

also used often by businesses to put a down payment down on a piece of commercial real

estate. Working capital is essential for any business to succeed. It is becoming increasingly

important to have steeless to more working capital when we need it.

Working capital typically means the firm


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working capital at a level higher than needed to meet its immediate needs. owever ,the

relationships among carrying costs , shortage costs , and procurement costs are such the

most firms will find that the economic level of working capital is no more than a few

month


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Working capital, also known as net working capital, is a financial metric which represents

operating li%uidity available to a business. !long with fi#ed assets such as plant and

e%uipment, working capital is considered a part of operating capital. It is calculated as

current assets minus current liabilities. If current assets are less than current liabilities, an

entity has a working capital deficiency, also called a working capital deficit. ! company

can be endowed with assets and profitability but short of li%uidity if its assets cannot

readily be converted into cash. Positive working capital is re%uired to ensure that a firm is

able to continue its operations and that it has sufficient funds to satisfy both maturing

shortBterm debt and upcoming operational e#penses. The management of working capital

involves managing inventories, steelounts receivable and payable and cash.

C'n"-% ' >'#*n, -%

=ross Working apital O Total of urrent !sset

2et Working apital O #cess of urrent !sset over urrent "iability

C3##"n% A$$"%$ C3##"n% L=%"$

ash in hand D at bank

&ills *eceivable

'undry 8ebtors

'hort term loans

InvestorsD stock

Temporary investment

Prepaid e#penses

'teelrued incomes

&ills Payable

'undry reditors

3utstanding e#penses

'teelrued e#penses

&ank 3ver draft

1>


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G#'$$ >'#*n, -%B refers to the firm


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of a business . in order to protect their interests, shortBterm creditors always like a company

to maintain current asset at a higher liability. it is a conventional rule to maintain the level

of current asset should be considered in determining the level of current asset vis- a- vis

current liabilities. ! weak li%uidity position poses a threat to the solvency of the

company and make it unsafe and unsound. ! negative working capital means a negative

li%uidity and prove to be harmful for the company As reputation. e#cessive li%uidity is

also bad . it may be due to mismanagement of current assets Therefore ,prompt and timely

action should be taken by management to prove and correct imbalances in li%uidity

position of the firm. 2et working capital concept also cover the %uestion of judicious mi#

long term demand short term fund for financing currents assets.

0or every firm there is a minimum amount of net working capital is permanent.

Therefore , a portion of the working capital should be financed through permanent sources

of fund such as e%uity share capital , debenture , long term, debt, preference share capital ,

or retained earnings. Management must therefore , decide the e#tent to which current asset

should be financed with the e%uity and Dor borrowed capital.

In summary , it may emphasised that both gross and net concepts of working capital are

e%ually important efficient management of working capital . there is no precise way to

determine the e#act amount of gross ,or net working capital for any firm . the data and

problems of each company should be analysed to determine the amount of working

capital . there is no specific rule as to how current asset should be financed . it is not

feasible in practise to finance current asset by short tern sources only. keeping view the

constraints of the individuals company, a judicious mi# long and short term financed

should be invested in current asset . since current involve cost funds , they should beinvested incurrent assets. 'ince current assets involve costs of funds, they should be put to

productive.

W'#*n, -% n %"#/$ ' !" '/-'n"n%$

C$ n "3!"n%$ B This most li%uid form of working capital re%uires constant

supervision. ! good cash budgeting and forecasting system provides answers to key

%uestions such as Is the cash level ade%uate to meet current e#penses as they come dueQWhat is the timing relationship between cash inflow and outflowQ When will peak cash

0


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needs occurQ When and how much bank borrowing will be needed to meet any cash

shortfallsQ When will repayment be e#pected and will the cash flow cover itQ

S%""'3n%$ #""!=" Many businesses e#tend credit to their customers. If you do, is the

amount of steelounts receivable reasonable relative to salesQ ow rapidly are receivables

being collectedQ Which customers are slow to pay and what should be done about themQ

In!"n%'#& Inventory is often as much as F7 percent of a firms current assets, so

naturally it re%uires continual scrutiny. Is the inventory level reasonable compared with

sales and the nature of your businessQ Whats the rate of inventory turnover compared with

other companies in your type of businessQ

S%""'3n%$ -&=" 0inancing by suppliers is common in small businessR it is one of the

major sources of funds for entrepreneurs. Is the amount of money owed suppliers

reasonable relative to what you purchaseQ What is your firms payment policy doing to

enhance or detract from your credit ratingQ

S%""#3" "?-"n$"$ n %?"$ -&=" These are obligations of your company at any

given time and represent a future outflow of cash.

C'n"-% ' >'#*n, -%

&alance sheet concept

3perating cycle concept

It goes without saying that the pattern of management will be very largely influenced

by the approach taken in defining it. Therefore the two concept are discussed

separately in a nutshell.

Bn" $""% 'n"-%B there are two interpretation of working capital under the balance

sheet concept. It is represented by the e#cess of current assets over current liabilities and is

the amount normally available to finance current operations. &ut some time working

capital is also synonym for gross or total current assets. In that case , the e#cess of current

asset over current liabilities is called the net working capital or net current assets. The

conventional definition of working capital in terms of the difference between the current

1


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assets and the current liabilities somewhat confusing. Working capital is really what a part

of long @term finance is locked in and used for supporting activities. It is difficult to say

whether this is right or wrong. !pparently are warned about tight working capital

situation , the logic of the above definition would perhaps indicate diversion of long term

finances for short term finances. 0or if shortB term bank loans were procured to bring in

cash , under the conventional method working capital evidently remain unchanged.

"i%uidation of debtor or inventory into cash would also keep the level unchanged.

O-"#%n, &" 'n"-%B a company operating cycle typically consists of three primary

activities purchasing resources , producing the product ,and distributing :selling; the

product. These activities create fund flows that are both unsynchronised and uncertain.

They are synchronised because cash disbursement :for e#ample ,payments for resources

purchases; usually take place before cash receipts :for e#ample, payments for resources;.

They are uncertain because future sales and costs, which generate the respective receipts

and disbursement ,cannot be forecasted with complete steeluracy. If the firm is to maintain

li%uidity and function properly, it has to invest funds in various shortBterm assets :working

capital; during this cycle. It has to maintain a cash balance to pay the bills they come due.

In addition the company must invest in inventories to fill customer orders promptly. !nd

finally ,the company invests in steelounts receivable to e#tend credit to its customer. The

firm /%"# 'n!"#$'n -"#'(RMCP; is the average time period taken to convert raw

material conversion period is the average time period taken to convert material in to

workBin @process *MP depends on raw material consumption per day ,and :b; raw

material inventory. *aw material consumption per day is given by the total raw material

consumption divided by the number of days in the year :say -H7.the raw ,material


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conversion period is obtained when raw material inventory is divided by raw material

inventory is divided by raw material consumption per day. 'imilar calculation can be made

for other inventories debtors and creditors. The following formula can be used

*aw material conversion period O*MI G -H7D*M

W'#* Kn-#'"$$ 'n!"#$'n -"#' (WIPCP; is the average time taken to

complete the semi @finished or work @inBprocess. It is given by the formula

Working @inB process conversion periodOWIPI G -H7D3P

Fn$" ,'' 'n!"#$'n -"#' (FGCP) is the average time taken to sell the

finished goods. 0=P can be calculated as follows

0inished goods conversion periodO0=I G -H7D='

D"=%'#$ 'n!"#$'n -"#'is the average time taken to convert debtors into cash .

8P represent the average collection period. It is calculated as follows

8ebtors conversion period:8P;O 8&T3*' G -H7D*8IT '!"'

C#"%'#$ ""## -"#' is the average time taken by the firm in paying

suppliers. It can be calculated are as follows

reditor deferral periodO creditors # -H7 Dcredit purchases

C$ 'n!"#$'n &" '# n"% '-"#%n, &"

2et operating cycle :23; is the difference between gross operating cycle and payables

deferral period.

2"% '-"#%n, &" (,#'$$ '-"#%n, &" #"%'#$ ""## -"#').

2et operating cycle is also referred to as cash conversion cycle. 'ome people argued that

depreciation and profit should be e#cluded in the computation of cash conversion cycle

since the firm


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to ultimetaly recover total costs and make profitsR therefore the calculation of operating

cycle should include depreciation and even the profits. !lso, in using the aboveB mentioned

formulae, average figures for the period may be used.

RA@ MATERIAL

@ORK IN

PRORESS

FINISH OODSSALES

DEBTORS

BILLS

RECEIVABLES

CASH

OPERATIN" CYC!E

;


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T&-"$ ' W'#*n, C-%


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SIGNIFICANCE OF WORING CAPITAL

F%'#$ #"3#n, 'n$"#%'n >" "$%/%n, >'#*n, -%.

The average credit period e#pected to be allowed by suppliers.

Total costs incurred on material, wages.

The length of time for which raw material are to remain in stores before they are

issued for production.

The length of the production cycle :or; work in process.

The length of sales cycle during which finished goods are to be kept waiting for

sales.

The average period of credit allowed to customers

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The amount of cash re%uired to make advance payment

I/-'#%n" ' W'#*n, C-% R%'$

R%' F'#/3" R"$3% In%"#-#"%%'n

'tock

Turnover

:in days;

!verage 'tock N

-HFD

ost of =oods

'old

O # days 3n average, you turn over the value of your entire

stock every # days. (ou may need to break this down

into product groups for effective stock management.

3bsolete stock, slow moving lines will e#tend overall

stock turnover days. 0aster production, fewer product

lines, just in time ordering will reduce average days.

*eceivables

*atio

:in days;

8ebtors N -HFD

'ales

O # days It takes you on average # days to collect monies due to

you. If your official credit terms are JF day and it takes

you HF days.

3ne or more large or slow debts can drag out the

average days. ffective debtor management will

minimi)e the days.Payables

*atio

:in days;

reditors N -HFD

ost of 'ales :or

Purchases;

O # days 3n average, you pay your suppliers every # days. If

you negotiate better credit terms this will increase. If

you pay earlier, say, to get a discount this will decline.

If you simply defer paying your suppliers :without

agreement; this will also increase B but your reputation,

the %uality of service and any fle#ibility provided by

your suppliers may suffer.

urrent

*atio

Total urrent

!ssetsD

Total urrent

"iabilities

O # times urrent !ssets are assets that you can readily turn in to

cash or will do so within 59 months in the course of

business. urrent "iabilities are amount you are due to

pay within the coming 59 months. 0or e#ample, 5.F

times means that you should be able to lay your hands

on 5.F7 for every 5.77 you owe. "ess than 5 times

e.g. 7.6F means that you could have li%uidity problems

and be under pressure to generate sufficient cash to

meet oncoming demands.

=


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4uick *atio :Total urrent

!ssets B

Inventory;D

Total urrent

"iabilities

O # times 'imilar to the urrent *atio but takes steelount of the

fact that it may take time to convert inventory into

cash.

Working

apital *atio

:Inventory S

*eceivables B

Payables;D

'ales

!s U

'ales

! high percentage means that working capital needs

are high relative to your sales.

*atio analysis can be used by financial e#ecutives to check upon the efficiency with whichworking capital is being used in the enterprise. The following are the important ratios to

measure the efficiency of working capital. The following, easily calculated, ratios are

important measures of working capital utili)ation.

Bn" >'#*n, -% -'$%'n

The firm should maintain a sound working capital position. It should have ade%uate

working capital working capital to run its business operations. &oth e#cessive as well as

inade%uate working capital positions are dangerous for the firm


30/75

Tendencies of steelumulation inventories tend to make speculative profits grow.

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

when firm is unable to make speculative profits.

In"3%" >'#*n, -% $ $' = n $ %" ''>n, n,"#$

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

projects for non availability of working capital working capital funds.

It becomes difficult to implement operating plans and achieve the firms profit

target.

3perating inefficiencies creep in when it becomes difficult even to meet dayBday

commitments.

0i#ed assets are not efficiently utilised for the lack of working capital funds. Thus

fir


31/75

D"%"#/nn%$ ' >'#*n, -%

There are no set rules or formulae to determine the working capital re%uirements of firms.

! large number of factors, each having different importance ,influence working capital

needs of firms. The importance of factors also changes for a firm over time. Therefore , an

analysis of relevant factors should made in order to determine total investment in working

capital. The following is the description of factors which generally influence the working

capital re%uirements of firms.

N%3#" ' =3$n"$$working capital re%uirements of a firms are basically influenced by

the nature of its business. Trading and financial firms have a very small investment infi#ed

assets, but re%uire a large sum of money to be invested in working capital. *etail stores, for

e#ample, must carry large stock like W!"BM!*T may carry, say 97,777 items. 'ome

manufacturing businesses, such a tobsteelo manufacturer and construction firms, also

have to invest substantially in working capital and a nominal amount in fi#ed asset. In

contrast ,public utilities may have limited need for working capital and have to

abundantly in fi#ed assets. Their working capital re%uirement are nominal because they

may have only cash sales and supply services, not products. Thus ,no funds will be tied up

in debtors and stock:inventories;. 0or the working capital re%uirements most of the

manufacturing companies will fall between two e#treme re%uirement s of trading firms and

public utilities. 'uch concerns have to make ade%uate investment in current assets

depending upon the total assets structure and other variables.

M#*"% n "/n 'n%'n the working capital needs of a firm are related to its

sales. owever ,it is difficult to precisely determine the relationship between volume of

sales and working capital needs. In practice current asset will have to employed before

takes place. It is, therefore, necessary to make advance planning of working capital for a

growing firm on a continuous basis.

=rowing firm may need to invest in fi#ed assets in order to sustain growing production and

sales. This will , in turn ,increase investment in current assets to support enlarged scale of

operations. =rowing firms need fund continuously. They use e#ternal sources as well as

internal sources to meet increasing needs of funds. These firms faces further problems

when they retain substantial portion of profit, as they will not be able to pay dividends to

30


32/75

shareholders. It is therefore imperative that such firms do proper planning to finance their

increasing needs for working capital.

'ales depend on demand conditions. "arge number of firms e#perience seasonal and

cyclical fluctuations in demand for their products and services. These business variation

affect the working capital re%uirement, specially the temporary working capital

re%uirement of the firm. When there is a upward swing in the economy , sales will

increase R correspondingly ,the firm


33/75

C#"% -'&the credit policy of the firm affects the working capital by influencing the

level of debtors. The credit terms to be granted to customers may depend upon the norms

of the industry to which the firm belongs. &ut a firm has the fle#ibility of shaping its credit

policy within the constraint of industry norms and practices. The firm should use direction

in granting credit terms to its customers. 8epending upon individual case, different terms

may be given to different customers. ! liberal credit policy without rating credit worthiness

of customers , will be detrimental to the firm and will create a problem of collection later

on. The firm should be prompt in making collections. ! high collection period will mean

tieBup of large funds in debtors. 'lack collection procedure can increase the chances of bad

debt. In order to ensure that unnecessary funds are not tied up in debtors, the firm shouldfollow a rationalised credit policy based on credit standing of customers and other relevant

factors. The should evaluate the credit standing of new customers and periodically review

the credit worthiness of the e#isting customers. The case of delayed payments should be

thoroughly investigated.

A!=%& ' #"% #'/ $3--"#$the working capital re%uirements of a firm are also

affected by credit terms granted by its suppliers. ! firm will needless working capital if

liberal credit terms are available to it from suppliers. 'upplier


34/75

capital re%uirements of the firm. =enerally rising price levels will re%uire a firm to

maintain higher amount of working capital. 'ame levels of current assets will need

increased investment when prices are increasing. owever companies that can

immediately revise their product prices with rising price levels will not face a severe

working capital problem. 0urther , firms will feel effects of increasing general price

level differently as prices of individual products move differently. Thus it is possible

that some companies may not be affected by rising prices while others may be badly

hit

P'"$ '# nnn, %" 3##"n% $$"%$

! firm can adopt different financing policies visBa vis current assets . three types of

financing may be distinguished

"ong term financing @ the sources of long term financing include ordinary share

capital, preference share capital , debenture , long term borrowings from financial

institution and reserved surplus :retained earning;.

'hort termB the short term financing is obtained for a period less than one year. It isarranged in advanced from banks and other supplier of short term finance in the

money market . short @term finances include working capital funds from banks ,

public deposits commercial paper factoring of receivable etc.

'pontaneous financingB spontaneous financing refers to the automatic sources of

short @term fund arising in the normal course of a business. Trade :supplier; credit

and outstanding e#penses are e#ample of spontaneous financing. There is no

e#plicit cost of spontaneous financing. ! firm is e#pected to utilise these sources of

finance to the fullest e#tent. The real choice of financing current asset ,once the

spontaneous sources of financing have been fully utilised , is between the longB

term and short sources of finance.

D"-"nn, 'n %" /? ' $'#% n 'n,%"#/ nnn, %" --#' ''>" =&

'/-n& /& =" #""##" %' $

Matching approachBthe firm can adopt a financial plan which matches the e#pected life of

assets with the e#pected life of the source of funds raised to finance assets with the

33


35/75

e#pected life of the sources of fund raised to finance a plant e#pected life of ten years R

stock of goods to be sold thirty days may be financed with a thirty @ day commercial paper

or a bank loan. The justification for the e#act matching is that since the purpose of

financing is to pay for assets, the sources of financing and the asset should relin%uished is

e#pensive as funds will not be utilised for the full period. 'imilarly , financing will have to

be made on a continuing basis.

When the firm follow matching approach :also known as hedging approach;,long term

financing will be used to finance fi#ed assets and permanent current asset increases, the

longBterm funds and as level of these assets are financed with long term financing level

also increases. The temporary or variable current asset are financed with short @term funds

as their level increases , the level of short term financing also increases. 1nder matching

plan ,no short term financing will be used if the firm has a fi#ed current assets need only.

onservative approachB a firm in practice may adopt a conservative approach when it

depends more on long term fund for financing needs. 1nder conservative plan the firm

finances its permanent assets and also a part of temporary current assets with long term

financing. In periods when the firm has no need for temporary current assets, the idle long

term funds can be invested in the tradeable securities to conserve li%uidity. The

conservative plan relies heavily on long term financing and therefore , the firm has less risk

of facing the problem of shortage of funds.

!ggressive approachB a firm may be aggressive in financing the current asset. !n

aggressive policy is said to be followed by the firm when it uses more short term financing

than warranted by the matching plan. 1nder an aggressive policy , the firm finance a part

of current asset with the short term financing. 'ome e#tremely aggressive firm may

even finance the a part of their fi#ed asset s with short term financing.

I$$3"$ n >'#*n, -% /n,"/"n%

Working capital management refers to administration of all components of working capital

@ cash , marketable securities, debtor :receivable; and stock :inventories; and creditors

:payables ;. The financial manager must determine level and composition of current assets.

It must see the right source tapped to finance current assets, and that current liabilities are

paid in time.

3;


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There are many aspect of working capital management which make it an important

function of the financial manager.

Time @working capital management re%uires much of the financial manager As

time.

Investment @working capital represents a large portion of the total investment in

asset.

ritically working capital management has great significance for all firms but it is

very critical for small firms.

=rowthB the need for working capital is directly related to firmn, "?/-"

:in crores;

MAHINDRA

TECH.

S.L.PVT.LTD. JMB

COMPONENT

OTHER

'ales 6HF5.5 5J6H.6, L6L9.F, 59-9.-

Total asset CH77.J 5CC5.C, 567CF.C, LH9.C

urrent

asset

LH75.7 LL9.C 55-CL.J, HFL.J

!DT! LC.H JJ.- HH.6, 6H.-

!D'!"' 559.J FC.L 59C.L, F-.J

MTH COMPONENTB is a large , well diversified ,private sector marketing @cumB

manufacturing organisation. In 977- the company


37/75

BEST WA TECHNOLOGis also a diversified company in the private sector.

In 977- ,its current assets are two thirds of total assets and about a third times of

sales. OTHERB is a joint sector:joint venture between state of =ujarat and private

sector; company manufacturing fertili)ers, industrial products:methanol, formic

acid, nitric acid, ammonium nitrate, li%uid nitrogen etc.; and e%uipment products.

Its current assets in the year 977- are less than half of total assets and H7 percent of

sales.

'.".2=I2*I2= '.". was started as a large public sector company. its share

have been partly divested now. It has a dominant position in the power sector. Its

manufacturing operations are spread into industrial and transportation sectors also.

! large number of its products are long productions cycle products. The company

As main customer are state electricity boards who fail to pay their due on time.

current asset s in 977F are C7 percent of total asset and 559 percent of sales.

mpirical observation show that the financial managers have to spend much of their

time to the daily internal operations, relating to current assets and current liabilities of

the firms. !s the largest portion of the financial manager


38/75

There is a direct relationship between a firm ' >'#*n, -% /n,"/"n% n J.B.M. n BEST WA -!%. L%.

The aim of working capital management is to strike off a balance between nn

$%=%& n -#'%=%&.$bm.component and best way pvt. "td. working capital

management maintaining both the factors they have financial stability as well as they

generate profit for the business. There working capital management %uite different from

the industry because of their business profile and for the strong financial assistance from

their parent company. !n e#amination of the components of working capital is helpful at

this point because of the preoccupation of management with the proper combination of

assets and ac%uired funds. 0irst , shortBterm ,or current ,liabilities constitute the portion of

funds which have planned and raised. 'ince there management must be concerned with

the proper financial structure, these and other funds must be raised judiciously , if we see

their past performance their deficiency of their fund is very low.

*ecently in their pani pat project they faced some hindrances because of the cyclone their

infrastructure has been destroyed but the losses has been adjusted in cost , although they

reinstall everything actually it is not a loss but cost has been double. &ecause of this

incident they had impact on their entire working capital management therefore

reinstallation make their initial cash outflow increased and also their profit margin from

this milestone has been decreased. In the same project they make a huge tower and

presume that this tower cannot be install in one process so they adjusted their cost in a such

manner, if the fail to do so they wont face any loss but beyond every one e#pectation they

3=


39/75

install it in one take and that adjusted cost add in the profit.business needs to invest in

current assets to sustain its business operations

MANA"IN" WORIN" CAPITA!

T#" #""!=" /n,"/"n%

*eceivable management refers to the decision a business makes regarding its overall credit

and collection politics and the evaluation of individual credit applicants. In formulating

an operational credit policy , finance manger must analyse the marginal benefits and costs

associated with change in credit terms ,collection efforts etc. receivable management

proves for a firm , both, an asset and a problem an asset because of the promise of a future

cash flow and a problem because of the need to obtain while waiting for the cash flow and

a problem because of need to obtain financing while waiting for the future cash flow. 0irst

a company must decide to sell good on credit. !n affirmative answer will necessitate an

evaluation of the credit . terms which will be consistent with the goal of ma#imi)ing the

value of the company to its shareholder. 3nce an optimum credit policy is determine , thefinancial manager must ascertain the effect it will have on sthe company As current asset

re%uirement s.

'teelount receivable are asset steelounts representing amounts owed to the firm as a result

of the sale of goods and services in the ordinary course of business . The value of these

claims is carried on the balance sheet under titles such as steelounts receivable , trade

receivables or customer receivables. The financial manager can add value to the company

As share by properly influencing three areas the company As aggregate invest receivables

its credit term and credit standard . over investment in receivable can costly because the

investment is typically financed by short term borrowing and because it may signal

steeleptance of late paying customers. If the credit term :cash discount and period allowed

for payment;are not competitive when compared to other seller in the same industry or are

misaligned with the product line profitability , they can also diminish shareholder value.

'etting credit standard for customer incorrectly can erode shareholder because of lost

sales:when too stringent;or uncollectible sales: when too lenient ;. When a firm makes an

ordinary sale of goods or services and does not receive payment the firms grants trade

3>


40/75

credit and creates steelounts receivable which is collected in the future . this steelount

receivable represent and e#tension of credit to customers, allowing them a reasonable

period of time in which to pay for the goods which they have received . receivable are

significant current assets that must be financed on a continuing basis.

T" #""!=" /n,"/"n% -#'"$$

C#"% -'& !#="$

While analysing the receivable management optimum credit policy is one of the important

aspect. In establishing the an optimum credit policy ,we should consider the important

decision variable which influence the level of receivables. !s stated in the preceding

section ,the major controllable decision variables include the following

redit standard analysis

redit terms

ollection policy and procedure

C#"% $%n# are the criteria which a firm follows in selecting customers for the

purpose of credit e#tension. The firm may have tight credit standards that is it may sales

mostly on cash basis and may e#tend credit only to the most reliable financial strong

customer .such standards will result in no bab debt losses, and less cost of credit

administration. &ut the firm may not able to e#pand sales. The profit sacrificed on lost

3?


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sales may be more than the costs saved by the firm. 3n the contrary if credit standard are

loose , the firm may have larger sales but the firm will have to carry larger receivable. The

costs of administering credit and bad debt losses will also increase, thus the choice of

optimum credit standard involves a trade off between incremental return and incremental

costs.

C#"% %"#/$the stipulation under which the firm sells on credit to customers are called

credit to customers are called credit terms. These stipulation include :a; credit period and

:b; the cash discount.

ollection policy is needed because all customer do not pay the firm


42/75

milestone they get payment, so that the over dues would not be their and smooth pattern

would be maintain .

While discussing about the credit standard they provide a general credit standard to their

client that is 5FB-7days in ground of major problem although the firm have tight credit

standard, such credit standard will no result bad debt losses and less cost of credit

administration, and also they don


43/75

'teelording to the j.b.m. and best way pvt. "td. regulation if the completion of project get

delayed ,means the failed to steelomplished their project with in the due date the li%uidity

damage has been deducted by their client.

If they steelomplish their project before time they would be awarded by the bonus from

their client. likewise they done in the petrochemical project of 'audi !rabia ,they got

*'5Fmillion bonus and most of them had been distributed among their employees and rest

they treated as retain earning :fi#ed deposit in bank;.while in case of their ongoing pani

pat project they covered C7U of their milestone means all the installation of machinery

have been completed only testing are going on and they are doing their working three

month advance , in this project they will get bonus .

B'n3$ 3$%/"n%

If j.b.m. component and best way ltd. got delayed for completion of project then , per week

.7FU li%uidity damage has been deducted by their client .9U per week has been given as a

bonus if they done their project in advance means before completion time, a minimum gap

would be their like in case of three year contract they have to complete minimum three

month advance. &onus is calculated over and above the contract value and also it is treated

as a income from other sources in the balance sheet.

Most of their transaction is transaction but in some special case like they re%uired a

immediate payment which is not scheduled earlier in such case they prefer to receive in

cash so that transaction would made more faster, while same thing happen when they are

making payment to their suppliers.

A,n, $"3"

The aging schedule removes one of the limitation of the average collection period. It

breaks down receivable steelording to the length of time for which they have been out

standing. While in case of j.b.m.component and best way ltd. they have tight credit

standard so their average collection period would strictly maintain ,means payment must

be receive within the 9F to -7 days. $bm.component and best way ltd. gets payment

L7Uon the same month and 97U in the ne#t month. This process of receiving payment is

possible because they do heavy and long run project. F!" #"$'n 6>& ' %" =/

'/-'n"n% n ="$% >& %. !" %,% #"% $%n#

;


44/75

ompetition B generally the higher degree of competition ,the more credit granted by

the firm. however the firm like jbm component and best way ltd. who very less

competitor not only in India but also in world they wouldn


45/75

unnecessary investment. ! firm neglecting the management of inventories will be

jeopardising its longBrun profitability and may fail ultimetaly . it is possible for a

company to reduce its level of inventories to a considerable degree ,e.g 57to 97 percent

,without any adverse effect on production and sales by using simple inventory planning

and control techni%ues. The reduction in e#cessive inventories carries a favourable impact

on a companyAs profitability.

Inventory Management and Inventory ontrol must be designed to meet the dictates of the

marketplace and support the companys strategic plan. The many changes in market

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

new manufacturing technology, means many companies need to change their Inventory

Management approach and change the process for Inventory ontrol.

O="%!" ' n!"n%'#"$ /n,"/"n%

To maintain a large si)e of inventories of raw material and workBinBprogress for

efficient and smooth production and of finished goods for uninterrupted sales

operations.

To maintain a minimum investment in inventories to ma#imise profitability.

In!"n%'#& 'n%#' $&$%"/$

! firm needs an inventory control system to effectively manage its inventory. There are

several inventory control systems in vogue in practice. They range from simple systems to

very complicated systems .the nature of the business and si)e dictate the choice of an

inventory control system. 0or e#ample , a small firm may operate a twoBbin system .under

this system , the company maintains two bins. 3nce inventory in one bin used, order is

placed, and mean while the firm uses inventory in the second bin. 0or a large departmental

store that sell hundreds of items, this system is %uite unsatisfactory. The departmental

store will have to maintain a self operating, automatic computer system for tracking the

inventory position of various items and placing order .

ABC n!"n%'#& 'n%#' $&$%"/Blarge numbers of firms have to maintain several

types of inventories. It is not desirable to keep the same degree of control on all the

items. The firms should pay ma#imum attention to those items whose value is the

highest. The firm should therefore , classify inventories to identify which items

;;


46/75

should receive the most effort in controlling. The firm should be selective in its

approach to control investment in various types of inventories. J3$%n K%/" (%)$&$%"/$B $apanese firms popularised the justBinBtime :jit;system

in the world. In a $IT system material or the manufactured components and parts

arrive to the manufacturing sites or stores just few hours before they are put to use.

The delivery of material is synchronised with the manufacturing cycle and speed.

$IT system eliminates the necessity of carrying large inventories, and thus saves

carrying and other related costs to the manufacturer. The system re%uires perfect

understanding and coordination between the manufacturer and supplier in terms of

the timing of delivery and %uality of the material. Poor %uality material or

components could halt the production. The $IT inventory system complements the

total %uality management. The success of the system depends on how well a

company manages its suppliers. The system put tremendous pressure on suppliers.

They will have to develop ade%uate system and procedure to satis factory meet the

needs of manufacturer. O3%$'3#n,is a system of buying parts and components from outside rather than

manufacturing internally. Many companies develop a single source of supply , and

many others help developing small si)e suppliers of components that they re%uire.

Tata motors has for e#ample developed number of ancillary units around its

manufacturing sites that supply parts and components to its manufacturing plants. C'/-3%"#$" n!"n%'#& 'n%#' $&$%"/$B a computerised inventory control

system enables a company to easily tracks large items of inventories. It is an

automatic system of counting inventories , recording withdrawals and revising the

balance. There is an inBbuilt system of placing order as a computer notices that the

reorder point has reached.

In!"n%'#& /n,"/"n% =& .=./. '/-'n"n% n ="$% >& %.

Inventory management is concerned with keeping enough product on hand to avoid

running out while at the same time maintaining a small enough inventory balance to allow

for a reasonable return on investment. Proper inventory management is important to the

financial health of the corporation. #cessive level of inventory, however ,results in large

inventory carrying costs, including the costs of the capital tied up in the inventory

warehouse fees , insurance etc. while after considering all this factor jbm component and

;


47/75

best way ltd. decide to follow justBinBtime techni%ue for managing their inventory. *eason

for choosing justBinBtime techni%ue are as follows

While j.b.m. component and best way ltd. usually work on heavy projects and all

the projects are different in nature so their re%uirements are different from each

other , that&

%.

$bm.component and best way ltd. provides industrial service to the refinery , gas ,

petrochemical plant though all this project are heavy project involvement of fund

is also very high, that


48/75

domestic procurement of raw material , for an e#ample there are three party jbm.

com and best way ltd.8"I,I3" P!2I P!T,?'!I" +3"+!T!, when sail

despatched the raw material they have to charge sales ta# , if 'amsung would

receive the raw material and put it in his own warehouse then send to the I3"

again 'amsung would have to charge sales ta# means same item ta# twice

automatically cost has been increase. 0or that reason 'amsung took delivery to the

sail in the middle 'amsung employee endorsed and despatched to the I3" paniB

pat ,'amsung would not posses any material in his own warehouse like this way

warehouse e#pense of $bm.component and best way ltd. have been save and also

they avoid double ta#ation. In case of imported raw material they follow H, S"S" T#n$%'n6 for an e#ample a &ra)ilian supplier in favouring the

representative of $bm.component and best way ltd. of high sea sale agreement with

the &ra)ilian company to transfer the ownership to I3". once the material landed

in Indian port all the ta#es paid by I3".

!n inventory monitoring cell has been constituted at the corporate offices.

The purchases were controlled by the materials management group reporting to the

director of finance .

Monthly review of total inventory at the level of chief e#ecutive of plants andcorporate management is introduced.

Inventory control is dovetailed with the budgeting system

Top 577 inventory items were identified for closer scrutiny and control.

In!"$%/"n% n n!"n%'#"$

In managing the inventories, the firmAs objective should be in consonance with

shareholders wealth ma#imisation principle. To achieve this , the firm should determine the

optimum level of inventory . fficiently controlled inventories make the firm fle#ible.

Inefficient inventory control result in unbalanced inventory and infle#ibility @ the firm may

sometimes run out of stock and sometimes may pile up necessary stock. This increases the

level of investment and make firm unprofitable.

To manage inventories efficiency ,answer should be sought to the following two

%uestions

;=


49/75

ow much should be orderedQ

When should it be orderedQ

While in case of $bm.component and best way ltd. when should it to be ordered considered

to be more important ,because of uncertainty and is a problem of determining the reBorder

point. 3ne of the major inventory management problems to be resolved is how much

inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it

has to be purchased on replenishment. If the firm is planning a production run , the issue is

how much production to schedule, these problems are called order %uantity problem.

8etermining an optimum inventory level involves two types of costs:a;ordering costs:b;

carrying cost.

O#"#n, '$% is includes the entire costs of ac%uiring raw material. They include cost

incurred in ordering , transporting, receiving, inspecting ? storing. In case of jbm.

omponent and bes tway ltd. ,their transporting costs would be adjusted in material cost

or they pay separately to their vendor. 3rdering costs increase with the number of ordersR

thus the more fre%uently inventory ac%uired ,the higher the firms ordering costs.

$bm.component and best way ltd. placed order steelording to their milestone so it is

difficult to identify their ordering costs.

C##&n, '$%$incurred for maintaining a given level of inventory. This include storage

,insurance ,ta#es. $bm component and best way ltd. used to paid ta# addition to their

material cost, they usually pay custom duty, 0&T, service ta#, e#cise duty, vat.

T#" -&=" /n,"/"n% =& =/. '/-'n"n% n ="$% >& %.

$bm component and best way ltd. payment system is based on 0I03 basis. !lthough they

have certain procedure for making payment ,they divide their vendor like international?

national basis.

F''>n, $%"- >'3 =" /n%n" =& %" >" /n,n, %#" -&=".

They familiari)e with their vendors, then they decide the time when actually

material has been utili)e steelording to that the time of delivery. &ased on material

re%uired they gave advance to their supplier ,advance would made 57Uto5FU.

;>


50/75

3nce the material is despatched to the site ,'amsung installed it and commission

the material after successful installation, they bill to the customer as per the term

money received by 'amsung that is generally -7to J7 days. In case of their imported material they pay through letter of credit procedure is

banker given assurance to the vendor then depend upon viability state bank would

allot letter of credit, it is not necessary that only state bank can issue letter of credit

but there would be mutual agreement while choosing bank , if they have large

amount in some bank that bank would gave more preference. In case of domestic

supplier all the payments would be done on cash.

While negotiating the prices to the vendors at the beginning the payment term

generally finali)ed .

! recent e#ample of there payment system ,they are making three watch tower in

pani pat project, they complete their work in scheduled time but they get payment

for second watch tower then they would make payment to those vendor only who

supply material to the second watch tower. If they failed to receive the payment for

first ?third watch tower then the raw material supplier have to wait till the

payment receive but within -7days $bm.component and best way ltd. have to make

payment to their supplier and if their client failed to make payment for this specific

task then they have to pay by their own.

C$ /n,"/"n%

ash is a important current asset for the operation of the business. ash is the basic input

needed to keep the business running on a continuos basis R it is also the ultimate output

e#pected to be realised by selling the service or product manufactured by the firm. The

firm should keep sufficient cash, neither more nor less. ash shortage will disrupt the

firm


51/75

items ,such as marketable securities or bank times deposits ,are also included in cash. The

basic characteristics of nearBcash assets is that they can readily be converted into cash.

=enerally , when a firm has e#cess cash ,it invests it in marketable securities. This kind of

investment contributes some marketable securities. This kind of investment contributes

some profit to the firm.

management is concerned with the managing of :5;cash flows into and out of the firms,

:9;cash balances held by the firm at a point of time by financing deficit or investing surplus

cash. It can be represented in the cash management cycle.

C$ Mn,"/"n% C&"

ash management is also important because it is difficult to predict cash flows steelurately

,particularly the inflows ,and there is no perfect coincidence between the inflows and

outflows of cash. during some periods, cash flow steelurately ,particularly the inflows and

outflows of cash. 8uring some period ,cash outflows will e#ceed cash inflows ,because

payment for ta#es ,dividend or seasonal inventory build up. !t other times , cash inflow

will be more than cash payment because there may be realised in large sums promptly.

0urther , cash management is significant because there may be large cash sales and


52/75

debtors may be realised in large sums promptly. 0urther , cash management is significant

because cash constitutes smallest portion of the total current assets , yet management As

considerable time is devoted in managing it. In recent past , a number of innovation have

been done in cash management techni%ues. !n obvious aim of the firm these days is to

manage its cash affairs in such a way as to keep cash balance at a minimum level and to

invest the surplus cash in profitable investment opportunities. In order to resolve the

uncertainty about cash flow prediction and lack of synchronisation between cash receipts

and payments, the firm should develop appropriate strategies for cash management. The

firm should evolve strategies regarding the following four facts of cash management.

C$ -nnn,@ cash inflows and outflows should be planned to project cash

surplus or deficit for each period of the planning period. ash budget should be

prepared for this purpose.

Mn,n, %" $ '>$B the flow of cash should properly managed. The cash

inflows should be steelelerated while as far as possible , the cash outflows should

be decelerated .

O-%/3/ $ "!"l @ the firm should decide about the appropriate level of cash

balances deficiency should be matched to determine the optimum level of cashbalances.

In!"$%/"n% ' $3#-3$ $@the surplus cash balances should be properly invested

to earn profits. The firm should decide about the division of such cash balance

between alternative short term investment opportunities such as bank deposits,

marketable securities, or interBcorporate leading.

C$ /n,"/"n% n J=/.'/-'n"n% n ="$% >& %.

ash is the lifeblood of a business firm, it is needed to ac%uire supplies, resources,

e%uipment, and other assets used in generating the product and service provided by the

firm. It is also needed to pay wages and salaries to workers and managers. Ta#es to

government , interest and 3bjectives to creditors and dividends to shareholders. More

fundamentally , cash is the medium of e#change which allows management to carry on the

various activities of the business firm from day to day. ash is a important aspect of


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business but more is managing it so every company have it own techni%ue . The $bm

component and best way ltd. strategies regarding the following four facts of cash

management.

ash planning B $bm component and best way ltd. makes cash planning steelording

to their projects, like in case of their pani pat project ,they considered it to be long

term project and cash flow is systematic. !nother project which I took as a

e#ample is considered to be a scattered project , because it is not a single long term

project. &asically head office +orea globally participating ,when they are biding

somewhere they gave order to 'amsung India for to make drawing ? proposal.

3nce $bm component and best way ltd. korea received order then they gave order

to the $bm component and best way ltd. India for making further industrial facility

as per the terms $bm component and best way ltd. India received payment from

$bm component and best way ltd. +orea. While for further clarity I made the cash

budgeting for these one project.

Managing the cash flowB the flow of cash should properly managed. The cash

inflows should be steelelerated while as far as possible , the cash outflows should

be decelerated , $bm component and best way ltd. cash flows are %uite fi#ed in

nature because they prefer to do heavy ?long term project , where payment are

received steelording to the completion of the work ,usually they divide their work

in several milestone and steelording to the completion of milestone they receive

payment from their client. !part from that they get full financial assistance from

their parent company $bm component and best way ltd. +orea , its help them to

make their cash flow more viable. In the same they maintain their cash outflow

,they prioritise their payment first is statutory payment, second is employeessalaries ,third is administrative e#penses and fourth one is vendors and others. In

this way the make balance in their outflow they never face cash deficiency because

of their viable strategies and full support from their parent company.

Investment of surplus cashB it


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government norms, and banks are free to take business decisions in granting finance for

working capital.

$bm component and best way ltd. follows several techni%ue to finance their working

capital

!lthough they have viable financial structure ,but when they start new project they

take initial advance from their customer percentage depend upon the contract value.

'amsung faced default risk in the situation of any steelident happened in the place

of work. It may be happen de to the natural calamities or technical fault. 0or that

particular situation they took loans ?advances from their head %uarter so the flow

of working capital would be maintain .

$bm component and best way ltd. take overdraft in rare cases ,when head %uater

failed to provide them and they re%uire fund in short notice then only take overdraft

and they never cross their overdraft limit.

Their fund flow has been planned in centrali)ed manner and that


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their nature of business and implementation of new techni%ue which help them to smooth

flow of the fund.

Performance of $.&.M. and &'T W!( pvt. "td. +orea and India both are affluent. Their

mi#ed corporate culture and the area of e#pertise in metal processing construction

contract help them to get succeed in every project.

Working capital objectives

$bm component and best way ltd. aims to maintain its position as a worldBclass company,

devoting their human resources and technology to create superior products and services,

while contributing to a greater society for everyone. To this end, they share and pursuecore values People, #cellence, hange, Integrity, and oBprosperity. !s part of an effort

to reali)e these values, they will also adhere to 'amsung


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O="%!"$ 4 $bm component and best way ltd. care for the environment, health and

safety. They engage in environmentally friendly management practices. They value

peoples health and safety.

O="%!"$ 8 $bm component and best way ltd. are a socially responsible corporate

citi)en. They actively perform their duties as a corporate citi)en. They respect the

characteristics of local customs, culture, and society, while striving to prosper alongside

local communities. They build winBwin relationships with business partners.

SCOPEworking capital management is very important aspect in running a business

house successfully ? smoothly on daily basis and on long term basis. 'o in depth

knowledge of working capital management give us idea how to utilise the funds so that

cash asset can be utilised in best manner without any obstacles on business operation.

The study of working capital enable us the recognise the need of future capital ? study

tells us how to utilise it in best manner. The purpose of the report is to get the in depth

understanding of the process of working capital management. With the growing Indian

economy and the liberal government policies for infrastructure, the demand for MT!"

services is increasing and seeing this as an opportunity is under taking many new projects

for e#pansion of the production which are under implementation for increasing the

capacity of the plants. $bm.component and best way pvt. "td. world recognised MT!"

company so the management of working capital consist of different of new techni%ue

which is not common in Indian MT!" industry.

"IMIT!TI32' 30 T 'T18(

B3$& S"3" ' C'n"#n" E?"3%!"$ The concerned e#ecutives were having very

busy schedule because of which they were reluctant to give appointment.

T/"The time duration could not provide ample opportunity to study every detail

of working capital management of the company.

Un>#"n"$$ #ecutives were unaware of many terms related to working capital

study while asking to them.


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C'n"n% In'#/%'n !s the company on steelount of confidential report has

not disclosed some figures. Moreover, in some cases separate steelounts of division

are not separately maintained thereby, leading to restrictions in study.

'econdary data used This project is completed by using secondary data.


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REVIEW OF LITERATURE

Working apital Management is very important aspect of financial management. Working

capital need on daily basis for smoothly running a business house. so, procurement ?

proper availability of working capital is very important in every business. >arious studies

and research has been on this industry by e#perts. ere are the lists of few books that have

been referred to for the purpose of the study.


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RESEARC- MET-ODO!O"Y

*esearch methodology consist of mode of data collection or generation and type of

analysis of data. 8ata collection methods consist of primary collection, secondary

collection, %ualitative data and %uantitative data. while primary data consist of 3riginal

data collected for a specific research goal like 4uestionnaire surveysR Interviews formal or

structured. Then secondary data consist of data originally collected for a different study,

used again for a new research %uestion like Published statistics , Published te#ts ,

documents, forms reports.

!nother part is 4ualitative data and 4uantitative data. While %ualitative 8ata involvingunderstandings of the comple#ity, detail and conte#t of the research subject, often

consisting of te#ts such as interview transcripts and field notes, but also audiovisual

material and %uantitative 8ata that can be described in terms of objects, variables and their

values

In regarding my research work I was strictly relied upon the primary and secondary

method of data collection. Primary research consist of collection the financial information

to the respective individuals of the company, through in depth interview and study of

different financial statement of the company. While my half of the thesis is relied on the

primary data collection as my internal guide is a general manager of finance in jbm.

omponent and best way pvt ltd. so through in depth interview of my guide is one of my

important source of data collection and in the same way he used to provide all the

relevant statement of the company which I can follow and make analysis of it.

While my secondary research consist of collection of data about the brief introduction of

the company ,their ranking in the market ,condition of their e#isting project from the

different website ,company brochure, yearly company maga)ine. !part from the

information about company , I collected information about working capital management,

how different companies managing their working capital , different aspects of working

capital management.


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R"$"# D"$,n

The research design used in this study is "$#-%!".

S/-n, P#'"3#" The sampling procedure consists of

P#'==%& '# #n'/ $/-n, mployees are selected for study using

probability sampling. It is one in which each and every unit of the population has

an e%ual chance of being selected into the sample.

N'n-#'==%& '# n'n#n'/ $/-n,Managers are selected for study using

2onBprobability sampling. In this the chance of including an elementary unit of

population in the sample cannot be determined and hence they do not lend

themselves to a statistical treatment and analysis.

60


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DATA COLLECTION AND ANALSIS

METHODS OF DATA COLLECTION

'econdary sources of data collection was used for the study of working capital

management at $bm component and best way pvt. "td.

THE PRIMAR SOURCES OF DATA COLLECTION

8ataobserved or collecteddirectlyfrom firstBhand e#perienceis called primary data.

'ources to collect Primary data are through

&y administering the %uestionnaireR

&y nonB participative observationR

&y face to face discussions R

THE SECONDAR SOURCE OF DATACOLLECTION

!vailable records

!nnual reports

ompany maga)ines, etcX.

THE SCOPE OF THE SURVE

The survey will be conducted at 'amsung limited 0aridabad. This survey is related to study the

working capital management 'amsung limited 0aridabad. The study is confined to only one

company so that, it has limited scope for getting more knowledge.

61
http://www.businessdictionary.com/definition/data.htmlhttp://www.investorwords.com/9454/directly.htmlhttp://www.businessdictionary.com/definition/experience.htmlhttp://www.businessdictionary.com/definition/data.htmlhttp://www.investorwords.com/9454/directly.htmlhttp://www.businessdictionary.com/definition/experience.html


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.#Amo$nt o/ 0orking *apital in 1i2erent 'ear%.

Year% 00=0> 00>0? 00?10 01011

3#4#m#*omponent(in

*rore%, 1=1 ;6

31> >>

Interpretation:

I o+" %h!% #" %he 2e!r 00=0> or5#" !%!, !* 1=1.=>

rore* h#,e #" 2e!r 01011 #% !* >>.33 rore*.

5# T'pe o/ 0orking *apital $%e1 in 34m#*omponent

an1 4e%t 0a' lt1#

Per-!"e"% Te-&or!r2

=; 6

6

00=0> 00>0? 00?10

01011>.


64/75

Interpretation:

O+% o %o%!, or5#" !%!, o %he o-&!"28 =; #*&er-!"e"% !" 6 #* %e-&or!r2 or5#" !%!,.

6# Met&o1 $%e /or Material 1i%pat*&:

Interpretation:

Re*+,% *ho* %h!% -o*% o %he %#-e* o-&!"2 !o&% LEFO

-e%ho %o #**+e #"/e"%or2. A" or o%her %2er* o-&!"2 !,*o

+*e FIFO -e%ho . +% *o-e%#-e* o-&!"2 !,*o !&&,2 HIFO

o%her -e%ho* %o- *+&&,2 #"/e"%or2

Met&o1 FIFO LIFO HIFO O%her

Re%pon1ent%

789

1< 0 10 " !" $3"n% >'#*n, -% n n& #/ 6% /*"$ ,'' #"%'n$- >%

$3--"#$ %#'3, %/"& -&/"n% %' %"/.

D#/#e" #*%r#+%e* re+,!r,2 e%ee" *h!reho,er*

#%h e"o+h or5#" !%!,.

Ie!, or5#" !%!, r!%#o he,&* #" e!*2 ,o!"* ro- !"5*.

6>


70/75


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completion they receive bonus from their client .&onus is calculated over and above the

contract value and also it is treated as a income from other sources in the balance sheet.

While their aging sechdule they gets payment L7 percent on the same month and 97U .

This process of receiving payment is possible because the do heavy and long run

project.There payment system is based on 0I03 basis. !lthough they have certain

procedure for making payment ,they divide their vendor like international? national basis.

&ased on material re%uired they gave advance to their supplier ,advance would made

57Uto5FU. They used letter of credit for international supplier? for national supplier they

placed bill as per terms of agreement.

They follow just @inBtime techni%ue for managing their inventory, and it help them to be

more cost effective. &ecause of this they have to purchase si)eable imported raw materials

and compulsory bulk purchases of items like steel and construction item !part from that

$bm.component and best way derive some new techni%ue under the heading of $IT, which

is E1 %#n$%'n7 H, $" $".

ash is a important aspect of business but more is managing it so every company have it

own techni%ue . The $bm.component and best way strategies regarding the following four

facts of cash management ash is a important aspect of business but more is managing it

so every company have it own techni%ue . $bm.component and best way makes cash

planning steelording to their projects, like in case of their pani pat project ,they considered

it to be long term project and cash flow is systematic. $bm.component and best way ltd.

cash flows are %uite fi#ed in nature because they prefer to do heavy ?long term project ,

where payment are received steelording to the completion of the work ,usually they

divide their work in several milestone and steelording to the completion of milestone they

receive payment from their client. while their investment of surplus cash ,they gave

financial assistance to their parent company and other one is In' -'' $&$%"/.

$bm.component and best way pvt. "td. finance their working capital by different sources

likewise when they start new project they take initial advance from their customer

percentage depend upon the contract value. In case of default risk they take loans and

advance from their head %uarter so the flow of working capital would be maintain. In rare

cases they use overdraft ,sometime they re%uire fund in very short notice.

=0


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If we see the trend year wise then their net working capital is increased in year 9755as

comparison to year 9757. Then there is continuous rise in the debtors for two years,where

as it considered to be as a good sign for the business.

Whereas their cash balance is decreasing because they e#pand their business . ompany is

utili)ing the fi#ed cash for e#ploding the projects that is good for growth.

They would not provide any loan and advances to outsider or any supplier. they only give

loan to their parent company .

There current liability is also decreasing "ower current liabilities indicate that company is

not using credit facilities by creditors. I

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