working capital management in large industries

8/6/2019 Working Capital Management in Large Industries

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Working Capital Management in

Large Industries

Presented by

Vishal Lanjekar

Rohit Shringarpure

Rameez Patel



Agenda

� Introduction to Working Capital Management (WCM)

� Need for Working Capital Management

� Concepts of Working Capital Management

� Working Capital Types

� Sources of Working Capital

� Adequate working capital

� Good Working Capital?

� Estimation of Working Capital Management

� Case Study SIEMENS India Ltd



Introduction to Working Capital Mgmt

� Working Capital is the excess of current assets over

current liabilities

� Core component of any business

� Adequate Working Capital key to company as the

objective is:

�Meet day to day cash flow needs.

�Pay wages and salaries when they fall due

�Pay creditors to ensure continued supplies of goods and

services.

�Pay government taxation and provider of capital

dividends and

�

Ensure the long term survival of the business entity.



Need for Working Capital Management

� Profit gaining is the primeobjective of any company

�

Profit depends of magnitude if sales

� The Gap - Sales does not convertinto magnitude instantaneously

� Hence adequate Working capitalrequired for uninterruptedbusiness operations.

Operation Cycle



Concepts of WCM

� Gross Working Capital - Sum of current assets

of a company

� Net Working Capital - Is difference of Current

assets and current liabilities

� Net Working Capital = Current Assets

Current Liabilities



Types of Working Capital

� Fixed or Permanent working capital

± Investment in current assets permanent locked in

business.

� Variable or Temporary working capital

± Any amount over and above the fixed working

capital.



Sources of Working Capital

� Long term sources (Permanent Working Capital)

± Issue of Shares

± Retained Earnings

± Issue of Debentures

± Long term Debt

� Short term sources (Temporary Working Capital)

± Commercial Banks

± Public deposits

± Various Credits

± Reserves and other Funds

� Combination of both



Adequate Working Capital (Advantages)

� Increase in debt capacity and goodwill

� Increase in production inefficiency

� Exploitation of favorable opportunities

� Meeting contingencies adverse changes

� Available cash discount

� Solvency and efficiency fixed assets

� Attractive dividend to shareholders

Disadvantages

Vice versa of

the

advantages if

Working

Capital isinadequate



Good Working Capital The Blueprint

� General Actions

± Planning standards for Stock days, Debtors days

and Creditors days

± Educate staff about working capital

� Action on Stocks

± Adequate Stock Management



Good Working Capital The BlueprintContd

� Action of Debtors and Customers

± Granular assessment of new customers

± Avoid poor paying customers

± Focus on Quality than Quantity

� Action on Creditors

± Do not pay invoices too early to take advantage of

credit offers

± Establish a register of creditors to ensure they are paidon a given date



Estimation of Working Capital

Percentage Sales Method

� Ratio is determined for estimating future working capitalrequirement

� Generally based on past history of management

� Varies from Industry to Industry

� Depends a lot on decision maker

� Hence not universally acceptable



Estimation of Working CapitalContd

Operation Cycle Approach The known gap

� Raw materials and stores storage space - R

� Work in process stage -W

� Finished goods inventory stage -F

� Debtors collection stage - D

Duration of Operation Cycle

� Sum of all the above less credit (C)

So in short OC = R+W+F+D -C



Case Study Siemens India Ltd



Introduction

� SIEMENS India is a 55% subsidiary of SIEMENS AG

Germany

� Leader in Electrical and Electronic Engineering

Sector

� Established in 1957

� In India it has 15 manufacturing plants and 16

Sales offices.

� More than 500,000 people worldwide and

presence in more than 190 countries



Objective of the Study

� To understand the working capital management

of SIEMENS India

� Analyze the Annual Reports of the company for

last 4 years

� Provide insight on observation and analysis of

the Annual Reports



Analysis

� The reports analyzed were from 2006 to 2009 for

period of 4 months

� The Analysis was based on

± Statement of Working Capital Requirement

± Statement of Changes in Working Capital



Particulars2005-06 2006-07 2007-08 2008-09

A) Current Assets: -

i) Inventories

ii) Sundry Debtors

iii) Cash & Bank Balance

iv) Other Current Assets

v) Loans & Advances

B) Current Liabilities:

i) Current Liabilities

ii) Provisions

Working Capital (A-B)

Add: Provision for Contingencies

Net Working Capital Requirement

4,842,246

11,097,716

9,394,447

3,597

4,164,082

29,502,088

24,275,052

3,415,310

27,690,362

1,811,726

--

1,811,726

7,490,509

23,810,524

4,636,219

-

4,754,188

40,691,440

30,003,464

5,283,371

35,286,835

5,404,605

--

5,404,605

7,621,143

34,327,991

9,130,895

-

6,173,220

57,253,249

41,868,243

7,272,047

49,140,290

8,112,959

--

8,112,959

9,721,971

34,583,115

14,449,022

-

10,457,640

69,211,748

40,585,370

12,695,145

53,280,515

15,931,233

--

15,931,233

Statement of Working Capital Requirement



Observation Statement of Working Capital

� Observed that current asset keeps on increasing over the

years

�This is due to the increase in inventories, increase in debtors,loans & advances.

� There is rise in current liabilities

� This means the requirement of working capital is more for all

the years.

�The rise in working capital shows the positive trend.



Statement of Changes in Working Capital

Particulars Previous Year Current Year Effect on Working Capital

ncrease Decrease

A) Current Assets: -

i) nventories

ii) Sundry Debtorsiii) Cash & Bank Balance

iv) Loans & Advances

Total Current Assets:

B) Current Liabilities:

i) Current Liabilities

ii) Provisions

Total Current Liabilities:

Working Capital (A-B)

Net ncrease Or Decrease n

Working Capital

7,621,143

34,327,9919,130,895

6,173,220

57,253,249

41,868,243

7,272,047

49,140,290

8,112,959

9,721,971

34,583,11514,449,022

10,457,640

69,211,748

40,585,370

12,695,145

51,280,515

17,931,233

9,818,274

2,100,828

255,1245,318,127

4,284,420

1,282,873

5,423,098

9,818,274

8,112,959 8,112,959 15,241,372 15,241,372



Observation- Changes in Working Capital

� An increase in current asset increases working capital

� A decrease in current assets decreases in working capital

� An increase in current liabilities decreases working

capital.

� A decrease in current liabilities increase working capital

� The company should look in to the proper current

liabilities.



Conclusion

� Working Capital Management is the one key

to any successful business

� It represents the direct relationship between

company sales and day to day operations

� Hence it is important to for every company to

focus on having an adequate working capital.



Bibliography

� Siemens India website http:// www.siemens.co.in

� Siemens annual reports -ww.siemens.co.in/en/index/investor/annual_report.htm

� Book of working capital management Dr.P.Periasamy

� Economic Times website http://

economictimes.indiatimes.com

� Money Control website http://www.moneycontrol.com



Thank You

working capital management in large industries

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