CAPSTON PROJECT REPORT

ON

WORKING CAPITAL MANAGEMENT

OF

VARDHMAN

Submitted to Lovely Professional University

In partial fulfillment of the requirements for the award of degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by:NEHA VARUN

2020070362

Supervisor:Mrs. Anita soni

Lect. (LPU)

DEPARTMENT OF MANAGEMENTLOVELY PROFESSIONAL UNIVERSITY

PHAGWARA (2007-2009)

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LOVELY PROFESSIONAL UNIVERSITYDEPARTMENT OF MANAGEMENT

Certificate of Completion by the Faculty Advisor TO WHOMSOEVER IT MAY CONCERN

This is to certify that the project report titled

“________________________________________” carried out by

Mr._________________(student name), S/o or D/o____________(Father’s Name) has

been accomplished under my guidance & supervision as a duly registered MBA student

of the Lovely Professional University, Phagwara. This project is being submitted by

him/her in the partial fulfillment of the requirements for the award of the Master of

Business Administration from Lovely Professional University.

His dissertation represents his original work and is worthy of consideration for the award

of the degree of Master of Business Administration.

___________________________________(Name & Signature of the Faculty Advisor)

Title: ______________________________

Dare: ______________________________

Date:

2

LOVELY PROFESSIONAL UNIVERSITYDEPARTMENT OF MANAGEMENT

of Authenticity by Student DECLARATION

I, "________________________________(student's name)”, hereby declare that the

work presented herein is genuine work done originally by me and has not been published

or submitted elsewhere for the requirement of a degree programme. Any literature, data

or works done by others and cited within this dissertation has been given due

acknowledgement and listed in the reference section.

_______________________ (Student's name & Signature)

_______________________(Registration No.)

Date:__________________

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ACKNOWLEDGEMENT

“Accomplishment of a task with desired success calls for dedication towards

work and prompting guidance, co-operation and deliberation from seniors.”

This report is the outcome of the capstone project that I did in the Vardhman

Polytex Limited, Ludhiana.

It gives me immense pleasure to acknowledge my deep sense of gratitude

and sincere thanks to Mr. M.S.Arora C.M. (A&C) and to Mr. Rajiender Pal (Executive

HRD) for agreeing for the training and to my revered guide Mr. Sanjeev Wadhawan for

extending the courtesy and for his guidance, support and affection throughout the course

of this work.

I am extremely grateful to Mr. Vijay Arora and other faculty members for

their valuable guidance and glorious teaching.

In last, I express my profound gratefulness and indebtedness to the

esteemed organization for granting me the grand privilege of working on a project under

team of experts and professionals in the field of finance.

NEHA VARUN

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TABLE OF CONTENTS (Part A)

1. Introduction to Vardhman………………………………………………….7

1.1 History………………………………………………………………………...9 1.2 Profile of the company……………………………………………………….10 1.3 Company structure………………………………………………………......10 1.4 Current setup…………………………………………………………………11

1.5 Present capacities……………………………………………………………..12

1.6 Computerisation………………………………………………………………12

1.7 ISO certification………………………………………………………………13

1.8 Production…………………………………………………………………….13

1.9 Marketing……………………………………………………………………..13

2. Organization structure………………………………………………………14

2.1 Manufacturing process………………………………………………………16

3. Objectives of the study……………………………………………………….17

3.1 Scope of the study…………………………………………………………….17

4.Review of literature……………………………………………………….........18

5. Research methodology……………………………………………………….21 5.1 Sources of information………………………………………………………21 5.2 Report writing……………………………………………………………….21

6. Limitations of the study………………………………………………………22

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Part B

1. Theoretical background of working capital management……………………23

1.1 Meaning…………………………………………………………………………23

1.2 Concept………………………………………………………………………….24

1.3 Type of working capital………………………………………………………...24

1.4 Need for working capital…………………………………………………….....26

1.5 Determinants of working capital………………………………………………28

2.Meaning and Nature of working capital………………………………………..32

2.1 Major decisions in working capital management……………………………32

3.Working capital analysis…………………………………………………………35

3.1 Operating cycle analysis……………………………………………………….35

3.2Ratio analysis…………………………………………………………………….39

4.Cash management………………………………………………………………..46

5.Recievables management…………………………………………………………50

6. Management of inventory……………………………………………………….59

7. Findings………………………………………………………………………….67

8. Recommendations………………………………………………………………..68

9. Conclusion………………………………………………………………………..69

10. References………………………………………………………………………70

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1.INTRODUCTION TO THE COMPANY

1.1 HISTORY OF THE INDIAN TEXTILE INDUSTRY

The human need is to eat well for to be alive and shelter to protect them from discomforts

of nature and a place to live in. Human beings also need something to cover their body to

protect from diverse climates and to add the appearance. Earlier there was a time when

the human being known nothing about the cloth to wear. The human beings first use

plant barks, leaves and animal skin to wrap around them. Then as the development of

brain took place, they started to explore other possibilities and invent more in this area.

There is constant search for clothing and it led to the knowledge of sources from

vegetation i.e. Cotton and from animals i.e. wool, which could be knitted and woven to

manufacture clothes to wear.

The commercial development of man-made fiber began late in the 19 th Century,

experienced much growth during the 1940’s, expanded rapidly after world War – II and

in the 1970’s was still the subject of extensive Research and Development.

Before Independence we talk of the political leaders like Mahatma Gandhi, who had

always insisted to use Khadi Clothes and even self-spinning and weaving. It is also

called as self-dependence for all needs. Such a good initiatives had come-up at India

level amongst the followers of the Leader – Mahatma Gandhi. On the other side too such

initiatives had been proved very good and had attracted many other western countries to

follow such practices and show their excitedness. Though in case we talk of the English

rule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but

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after the freedom these leaders had got very good appreciation particularly for the self

spinning and weaving and in an overall manner this sector of Spinning and Weaving was

industrialized even after the independence too on the basis of Indian cotton growers.

It is needless to mention here that through out India, cotton growers belts are available

and after independence even English people take their raw material from here and had

established themselves with the Spinning and Weaving industries. Overall In India no

such preferences for the Spinning and Weaving industries were made, however the

Library research reveals that the first Cotton mill had been established in India during

1854 named as Bombay Spinning and Weaving company This is just the example of the

development, that in India too the most modern machinery is being installed. However, it

is an evident that the Indian yarn is always running on the development trend since its

Inception of first unit in Bombay, but its position in the international market has not

appeared so good.

The invention and production of man made thirty three fibers that is synthetic fibers like

Nylon, Acrylic fibers, Polyester Fiber, Viscose, Filament yarns, Melange yarn, etc.,

which ultimately had given a good blow to grow for the Cotton Textile Industry and

know occupy a major part of consumer acceptance. About 50 countries have been

importing such material from India and the description of the Spinning and weaving

industry had remained incomplete without referring to the woolen industry.

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1.2 PROFILE OF THE GROUP AND UNIT

The industrial city- Ludhiana nestles the corporate Headquarters of the Oswal Group of

industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in

Ludhiana, Vardhman Polytex Limited situated in Bathinda, Vinayak Textile Mills

situated in Ludhiana. Oswal group is earning laurels by exporting yarn of international

quality to several countries and VPL Bathinda is an ISO 9001-2000 certified company.

BACK DROP:

M/s Vardhman Polytex Ltd., a public limited co. set up in the year 1980 is managed by

board of directors with Mr. Ashok Oswal as its Chairman cum Managing director since

1987. Over a period of time, the company has grown manifold under the guidance of Mr.

Oswal. In1987, when the Company was taken over from Mohtas, it had only 12000

spindles and at present, the capacity has moved up gradually to 108000 Spindles.

The group has very good potential and high presence in the textiles industry with well set

manufacturing set up for 100% cotton, Polyester cotton, Tyre cord, 100% Acrylic and

other blended yarns. All the group units have state of the art technology imported from

machinery giant in Europe, Japan, China and many other countries. To ensure quality

commitment to its valuable customers, the R&D department is well equipped with latest

R&D equipments. Continuous efforts are always being made to further improve the

quality and match the industry standard to meet the actual requirements of its quality

conscious customers.

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1.3 COMPANY STRUCTURE

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OSWAL GROUP

VPL BATHIND

A

ANSHUPATI

LUDHIANA

VTM LUDHIAN

A

Anshupati Textiles Limited, based at Ludhiana in Punjab, the worsted spinning units in

the Indian subcontinent with 8000 worsted spindles installed, manufactures the Machine

Knitting Yarn, Mink Yarn and Fancy yarn, with vast product range, to meet every sort of

count combination demand of its prospective customers. The quality yarn in this unit is

manufactured using state of art technology imported from Europe, which is fully backed

with ultra modern R&D equipment for consistent quality. The yarn manufactured from

this unit holds a very strong reputation and demand both in domestic and international

market. The present capacity in terms of production is approximately 6.5 ton/Day

Vardhman Polytex Limited, a unit based at Bathinda in Punjab with 74592 cotton

spindles installed, is manufacturing 100% cotton yarn, Polyster cotton yarn and Tyre cord

yarn with vast range of count selection varies from NE 10 to 40 both in carded and

combed varieties. To ensure quality to its customers the group has received the ISO-

9001-2000 certification. This unit is exporting its product to Mauritius, Hong Kong,

Singapore, Egypt, Turkey, Bangladesh, China, Taiwan etc. The company keeps on

receiving repeat orders, which shows the level of confidence, bestowed by its customers

into it. The company had been awarded the Export House status by the Government of

India. The present capacity in term of production is around 36500 Kg/day.

1.4 CURRENT SET UP:

Presently the Company has its corporate office situated at Chandigarh Road, village

Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are

looked after by qualified technocrats/professional at plant/work as well as at corporate

office having rich experience in their respective fields of management.

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Ashok Oswal himself a Law Graduate has been looking after the textile business in this

company since 1987. Uptill family settlement, he was actively associated with the

business management of Vardhman group.

1.5 PRESENT CAPACITIES

Presently the group has following production capacity and product range at its

different manufacturing facilities.

Location Installed

Capacity

(spindles)

Production

Capacity

Product Range

Bathinda (existing )-49248

(VPL) (under erection)-25344

74592 36500kg/Day

14000kg/day

Cotton, synthetic,

blended yarn

Ludhiana

(Anshupati Textile)

8000 6.50 MT/Day Acrylic Yarn

Ludhiana (VTM) 24288 14MT/Day

13-MT

dyeing/Day

100% Cotton yarn

1.6 COMPUTERISATION

Presently the unit is operating under “Tally system”. This system is well structured

keeping in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The

system is functioning to online to finance, raw material, stores and commercial. All the

stauratory returns are generated online from the system.

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1.7 I.S.O. CERTIFICATION

The unit had been awarded ISO-9002 certificate by bureau of India standards after the

final audit, which took place in the unit from 24th July, 1996. The ISO certification is an

assurance of good quality of the product. But at present unit had been awarded ISO-9001

– 2000 by bureau of India Standard.

1.8 PRODUCTION

The unit is producing difference types of yarn both for Domestic consumption and Export

purpose. The production department is headed by Assistant General Manager (A.G.M.).

The department has four units. The unit I is concerned with production of cotton yarn.

The unit – II is concerned with the production of cotton yarn & Tyre Cord yarn. The unit-

II expansion is concerned with Polyester, Cotton yarn, blended yarn & at last in unit – III

partially Polyester & 100% Cotton yarn is made.

1.9 MARKETING

For Marketing of different product, the unit is having a modern marketing department

headed by experienced team which covers all the activities for conversion of finished

goods into cash. It keeps vigil on the market feed-back on the level competition, market,

trend, changing customer needs and modifications. The marketing department deals with

domestic sales, while export department of the group manages export sales. The V.P.L.’s

having the export and domestic ratio is 26:74. The unit is having different channels for

distribution of its products.

1. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur.

2. Branches at Delhi and Ludhiana.,Direct Dispatches are also made by the units.

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2. ORGNISATION STRUCTURE

A chart showing the organizational structure of V.P.L. Bathinda is given on the next

page. It shows the various hierarchical levels of the organization. It is a department line

organization which is divided into various department headed by their respective

department heads. All departments operate under the ultimate control of Chief Executive

Sh. Ashok Goyal. The orders flow directly from unit head to different departmental heads

down the line to respective department subordinates.

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15

Issue of Cotton Bales

Laying Down

Blow Room

Card

Breaker Draw Frame

Finisher Draw Frame

Unilap

Comber

Speed Frame

Ring Frame

Winding

Cheese Winding

T.F.O

Conditioning

Packing for Double Yarn

Conditioning

Packing for Single Yarn

Storage & Dispatch

Manufacturing Process Flow Chart of VPL 100% COTTON CARDED/COMBED YARN

2.1 MANUFACTURING PROCESS IN VARDHMAN POLYTED LIMITED,

BATHINDA

Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.

1. MIXING

2. BLOW ROOM

3. CARDING

4. DRAW FRAME

5. LAP FORMER

6. COMBERS

7. SPEED FRAME

8. RING FRAME

.9. WINDING.

10. DOUBLING

11. PACKING

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3.OBJECTIVES OF THE STUDY

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

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

the working capital management in the running business organization and to help the

company in developing the efficient working capital management. So it helps in future

planning and control decisions.

The objectives of the study are as follows:

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

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

3.1 SCOPE OF THE STUDY

The study is conducted at “VPL – BATHINDA” for 6 weeks duration. The study of W.C.

management is purely based on secondary data and all the information is available within

the company itself in the form of records. To get proper understanding of this concept, I

have done the study of the balance sheets, profit and loss a/c’s, cash accounts, trial

balance, cost sheets. I have also conducted the interviews with employees of accounts and

finance department and stores department. So, scope of the study is limited up to the

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

supposed to be related to the period of last three year.

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4.REVIEW OF LITERATURE

Sushma Vishnani, Bhupesh Kr. Shah (1995) It is felt that there is the need to study the

role of working capital management policies on profitability of a company.

Conventionally, it has been seen that if a company desires to take a greater risk for bigger

profits and losses, it reduces the size of its working capital in relation to its sales. If it is

interested in improving its liquidity, it increases the level of its working capital. However,

this policy is likely to result in a reduction of the sales volume, therefore of profitability.

Hence, a company should strike a balance between liquidity and profitability. In this

paper an effort has been made to make an empirical study of Indian Consumer

Electronics Industry for assessing the impact of working capital policies & practices on

profitability during the period 1994–95 to 2004–05. The impact of working capital

policies on profitability has been examined by computing coefficient of correlation and

regression analysis between profitability ratio and some key working capital policy

indicator ratios.

Maynard E. Rafuse (1996) Argues that attempts to improve working capital by delaying

payment to creditors is counter-productive to individuals and to the economy as a whole.

Claims that altering debtor and creditor levels for individual tiers within a value system

will rarely produce any net benefit. Proposes that stock reduction generates system-wide

financial improvements and other important benefits. Urges those organizations seeking

concentrated working capital reduction strategies to focus on stock management

strategies based on “lean supply-chain” techniques.

Appuhami, B A Ranjith (2008) The purpose of this research is to investigate the impact

of firms' capital expenditure on their working capital management. The author used the

data colleted from listed companies in the Thailand Stock Exchange. The study used

Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a

proxy for working capital measurement and developed multiple regression models. The

empirical research found that firms' capital expenditure has a significant impact on

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working capital management. The study also found that the firms' operating cash flow,

which was recognized as a control variable, has a significant relationship with working

capital management.

Stephen Bush (2008) Commercial borrowers sometimes overlook short-term options for

commercial loans. In the current recessionary conditions, it is wise to explore all working

capital management options. This article will shed some light on shorter-term choices

such as short-term commercial mortgages and business cash advances.

Due to misunderstandings about long-term commercial financing, short-term commercial

loans are often not considered properly. Although long-term commercial real estate

financing options are often appropriate, there are practical short-term business financing

choices that will be more workable and profitable for commercial borrowers.

The most critical short-term commercial financing techniques typically include short-

term merchant cash advance and credit card processing programs and commercial real

estate loan programs. Both working capital funding approaches are frequently a source of

confusion for business owners.

Gopinathan Thachappilly (2009 ) Working capital is the cash needed to carry on

operations during the cash conversion cycle, i.e. the days from paying for raw materials

to collecting cash from customers.Raw materials and operating supplies must be bought

and stored to ensure uninterrupted production. Wages, salaries, utility charges and other

incidentals must be paid for converting the materials into finished products. Customers

must be allowed a credit period that is standard in the business. Only at the end of this

cycle does cash flow in again.

Allensius (2009) There will usually be only a few business financing sources that are

regularly successful at executing the credit card financing and processing. There are key

difficulties to avoid with a working capital advance, and selecting an effective funding

source is essential to an appropriate business cash advance program.

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A long-term commercial mortgage is appropriate for many businesses that own

commercial property. Commercial property should be financed with an appropriate

combination of short-term and long-term funding. It is wise to consider long-term

business financing of up to 30 years when a longer-term commercial real estate loan is

feasible.

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5. RESEARCH METHODOLOGY

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

working capital management.

Collection of data from various department of VPL to analyze the working capital

management of VPL.

For understanding the various reports, personal interviews are conducted.

With the help of various techniques like:

- Operating Cycle analysis

- Ratio Analysis

- Common size statement

The overall position of VPL is studied and analyzed

Suggestions are given on the basis of findings for better understanding of working

capital management.

5.1 SOURCES OF INFORMATION

Primary Data – The personal interview with senior officials and various members

of finance and accounts department and also with other departments and collected

the data.

Secondary Data – All the details necessary for the study was available within the

company itself.

5.2 REPORT WRITING

Report Encompasses – Charts, diagrams

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6. LIMITATIONS OF THE STUDY

As cotton purchase office purchase raw material and cotton marketing yarn make

sales. So more detailed information cannot be received about these.

Cash from debtors are collected by the corporate office through commission

agents. So efforts for collection of debtors cannot be clearly known from VPL

ludhiana.

Investment of funds are also made by corporate office, so it becomes difficult to

know that how much investment is made in different ways for continuous

availability of funds.

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1.THEORATICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT

1.1 Meaning of working capital:-

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

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

categories

Fixed capital

Working capital

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

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

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

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

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

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

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

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

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

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

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

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1.2 CONCEPT OF WORKING CAPITAL

1. Gross Working Capital

It is simply called working capital refers to the firm’s investment in current assets so

the total current assets of the firm are known as gross working capital.

2. Net Working Capital

It represents the difference between current assets and current liabilities. Net

working capital may be positive or negative. Positive net working capital is that when

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

more than current assets than it is negative working capital. Gross working capital

and net working capital of VPL for the last three years are as follows:

(In crores)

Particulars 2002-03 2003-04 2004-05

Gross Working Capital 78.99 93.38 71.36

Net Working Capital 74.04 89.06 65.69

In brief we can say that working capital is too much necessary for the smooth functioning

and proper utilization of fixed assets.

1.3TYPE OF WORKING CAPITAL

1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working capital also

arises continuously. But the magnitude of current assets needed is not asame; it

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increases and decreases over time. However there is always a minimum level of

current assets. This level is known as permanent or fixed working capital.

2. Temporary Working Capital:

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

activities, is called variable or functioning or temporary working capital. This can

be shown in the following diagram:-

Amount of Working

Capital Temporary capital

Permanent Capital

Time

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1.4NEED FOR WORKING CAPITAL

The need for working capital cannot be overemphasized. The need of working capital

arises due to the time gap between production and realization of cash from sales. So the

working capital or investment in current assets becomes necessary need for working

capital. It arises due to following reasons:-

OPERATING CYCLE

“Operating cycle is the time duration requires for converting sales into cash after the

conversion of resources into inventories.”

First of all a firm purchase Raw Material, then after some processing it is

converted into work–in–progress and after this further processing is done to convert

work–in–progress in finished goods. After the raw material is converted into finished

goods, sales are made. Sales are no always full cash sales; there are credit sales also.

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

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

includes:-

1. Raw Material conversion period (RMCP)

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

3. Finished goods conversion period (FCP)

4. Debtors Conversion period (DCP)

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So operating cycle can be known as following:-

Sales

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

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

Operating cycle may be of two types

1. Gross Operating cycle

2. Net operating cycle

1. Gross Operating cycle

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

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

GOC =RMCP + WIPCP + FCP + DCP

2. Net Operating Cycle

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

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

27

Raw Material

Work in Progress

Cash Collection from Debtors

Finished Goods

Credit Sales Cash Sales

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

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

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

NOC = GOC – CPP

A. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

NEEDS FOR FUTURE:-

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

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

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

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

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

these safeties stocks.

1.5DETERMINENTS OF WORKING CAPITAL

Followings are the main determinants of working capital.

1. Nature and Size of Business :

The working capital of a firm basically depends upon nature of its business for e.g.

Public utility undertakings like electricity; water supply needs very less working

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

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

capital.

28

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

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

requirement of working capital.

2. Manufacturing Cycle:

The manufacturing cycle also creates the need of working capital. Manufacturing cycle

starts with the purchase and use of Raw Material and completes with the production of

finished goods. If the manufacturing cycle will be longer more working capital will be

required or vice versa.

3. Seasonal variation:

In certain industries like VPL raw material is not available throughout the year. They

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

process them during the year. Generally, during the busy season, a firm requires large

working capital than in the slack season.

.

4. Production Policy:

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

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

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

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

period during a financial year. So the different productions policy arises different type

of need of working capital.

29

5. Firm’s Credit Policy:

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

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

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

operating cycle length increases and vice versa.

6. Sales Growth:

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

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

Material, Finished goods and credit sales.

7. Business Cycle:

Business cycle refers to alternate expansion and contraction in general business. In a

period of boom, larger amount of working capital is required where as in a period of

depression lesser amount of working capital is required.

8. Earning Capacity & Dividend Policy:

If the firm has enough earnings and it is not paying dividend then it will not be in need

of external borrowings. If firm wants to increase its earning power then more working

capital will be required also to pay more dividend more profits are needed which give

rise to more working capital.

30

9. Price Level Changes:

Changes in the price level also effects the working capital requirements. Generally, the

rising prices will require the firm to maintain larger amount of working capital as

more funds will be required to maintain the same current assets.

10. Condition of Supply:

The inventory of raw material, spares and stores depends on the condition of supply.

If the supply is prompt the firm can manage with small inventory. However if the

supply is unpredictable then the firm to ensure continuity of production, should

acquire stocks as and when they are available and have to carry larger inventory on an

average.

11. Other Factors:

Certain other factors such as operating efficiency, management ability, irregularities of

supply, import policy, asset structure, importance of labour, banking facilities, time

lag. etc. also influence the requirement of working capital.

So these are the main determinants of working capital. The importance of influence of

these determinants on working capital may differ from firm to firm.

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2.Meaning and Nature of Working Capital Management

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

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

asserts between them.

The basic goal is working capital management is to manage current assets and current

liabilities of a firm in such a way that a satisfactory of optimum level of working capital

is maintained i.e. it is neither inadequate nor excessive. This is so because both

inadequate as well as excessive working capital position is bad for business.

2.1 MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

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

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

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

financing for financing these current assets?

1. CURRENT ASSETS IN RELATION TO SALES:-

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

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

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

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

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

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

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

32

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

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

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

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

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

relation to sales as is evident from ratio analysis.

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

current assets:-

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

HEDGING APPROACH

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

matching of expected life of asset with the duration of fund. Usually, according to this

approach long-term sources are used for financing permanent current assets and fixed

assets & short-term sources are used for financing temporary current assets:

term financing

Fixed AssetsTime

CONSERVATIVE APPROACH

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Permanent current assets

Temporary current assetsShort term financing

Long term financing

ASSETS

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

term financing. Even some part of the temporary current comparison to finance from

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

Temporary Current Assets

Short-term financing

Permanent Current Assets Long-term financing

Fixed Assets

Time

AGGRESSIVE APPROACH

In this approach there is more reliance on short term financing and even a part of

permanent current assets is financed from short-term finance.

Temporary current assets Short term financing

Permanent current assets Long term financing

Fixed Assets Time

34

ASSETS

ASSETS

In VPL, the current assets are financed from short term sources as well as long term

sources, so they follow conservative approach.

3. WORKING CAPITAL ANALYSIS

3.1OPERATING CYCLE ANALYSIS

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

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

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

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

the operating cycle period, higher the working capital requirement. It comprises of raw

material conversion period, WIP conversion period, FG conversion period and debtors’

conversion period and creditors period. The basic reason for calculating operating cycle is

to find out the means for reducing the duration of operating cycle because if duration of

operating cycle will be less than working capital requirement will be less.

OC = R + W + F + D – C

Where,

R = raw material conversion period

W = work in process period

F = finished goods conversion period

D = debtor collection period

C = creditors payment period

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(1) Raw Material Conversion Period (RMCP)

= Average Raw Material Stock

Raw Materials consumed during the year

(In crores)

PARTICULARS 2002-03 2003-04 2004-05

Opening Stock of

Raw Material

18.00 32.48 47.95

Closing Stock of

Raw Material

32.48 47.95 38.41

Average Stock 25.24 40.21 43.18

Raw Materials

consumed

70.89 88.62 90.92

RMCP 128 163 171

(2) Work in Progress Conversion Period (WIPCP)

= Average stock in progress

Cost of Production

(In crores)

PARTICULARS 2002-03 2003-04 2004-05

Opening Stock of

WIP

0.75 0.87 1.05

Closing Stock of

WIP

0.87 1.05 0.99

Average Stock 0.81 0.96 1.02

Cost of Production 103.99 121.48 123.6

WIPCP 3 3 3

36

X 360

X 360

(3) Finished Goods Conversion Period (FGCP)

= Average Finished good inventory

Cost of goods sold

(In crores)

PARTICULARS 2002-03 2003-04 2004-05

Opening Stock of

FG

5.86 8.91 6.31

Closing Stock of FG 8.91 6.31 5.91

Average Stock 7.38 7.60 6.11

Cost of Goods Sold 108.25 127.62 128.27

FGCP 24 21 17

(4) Debtors’ Conversion Period (DCP)

= Average Debtors

Credit Sales

(In crores)

PARTICULARS 2002-03 2003-04 2004-05

Opening Debtors 19.72 23.97 25.81

Closing Debtors 23.97 25.81 18.54

Average Debtors 21.84 24.88 22.17

Credit Sales 130.58 157.94 144.48

DCP 60 57 55

(5) Credit Conversion Period (CCP)

37

X 360X 360X 360

X 360

= Average Creditors

Credit Purchases

(In crores)

PARTICULARS 2002-03 2003-04 2004-05

Opening Creditors 0.92 0.11 0.55

Closing Creditors 0.11 0.55 2.79

Average Creditors 0.51 0.33 1.67

Credit Purchases 83.95 103.76 80.92

CCP 2 1 7

GROSS OPERATING CYCLE

Year RMCP WIPCP FGCP DCP GOC

2002-03 128 3 24 60 215

2003-04 163 3 21 57 244

2004-05 171 3 17 55 246

NET OPERATING CYCLE

Year GOC CCP NOC

2002-03 215 2 213

2003-04 244 1 243

2004-05 246 7 239

ANALYSIS

38

X 360

It is claimed that gross operating cycle of VPL is increasing year by year. In 2002-03, it is

215 days then it increased to 244 days. In 2004-05, it is increased to 246 days. The main

reason of increasing gross operating cycle year by year is due to the more availability of

raw material in the stores.

ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS OF

THE HISTORICAL DATA

There are number of devices to analyze working capital like ratio analysis, common size

statement etc. We will discuss them one by one as follows:

3.2 RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is

the process of establishing and interpreting various ratios for helping in making decisions.

It only means of better understanding of financial strengths and weaknesses of a firm.

The main emphasis has been on calculating the ratios related to a working capital

management.

LIQUIDITY RATIOS

These are the ratios which measures the short term solvency or financial position of a

firm. In other words, it refers to the ability of a concern to meet its current obligations as

and when these become due. To measure the liquidity of a firm, the following ratios can

be calculated.

39

CURRENT RATIO – It may be defined as the relationship between current assets and

current liabilities. This ratio is also known as working capital ratio and measures the

ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and

has the ability to pay its current obligations in time as and when they become due.

A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current

liabilities is considered to be satisfactory.

Current Ratio = Current Assets

Current Liabilities

Current Ratio of VPL

Year Current Assets Current Liabilities Current Ratio

2002-03 78.99 4.92 16

2003-04 93.38 4.32 21.6

2004-05 71.36 5.66 12.6

ANALYSIS

The current ratio of the unit is above the standard and it guarantees the payment of dues

in time. The current ratio of the company has been considerably high because they had

made over investment in inventories which is the main reason for the high ratio of current

assets.

Inventories are high because of seasonal availability of raw material. But in 2004-05, the

ratio has decreased as compared to 2003-04. The reason is due to decrease in current

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assets, the main reduction in cost of raw material and increase in the current liabilities.

But overall position of current ratio is satisfactory.

LIQUID RATIO – This ratio is also known as quick ratio or acid test ratio. It is a more

rigorous test of liquidity than the current ratio. It is based on those current assets which

are highly liquid. Inventory and prepaid expenses are excluded because they are deemed

to be least liquid component of current assets. A high quick ratio is the indication that the

firm is liquid and has the ability to meet its current liabilities in time and on the other

hand low ratio represents liquidity position is not good.

Quick Ratio = Quick or Liquid Assets

Current Liabilities

Quick Assets = Current Assets – Inventory – Prepaid Expenses

Quick Ratio of VPL

Year Quick Assets Current Liabilities Quick Ratio

2002-03 35.62 4.92 7.22

2003-04 37.31 4.32 8.64

2004-05 25.36 5.66 4.48

ANALYSIS

According to rule of thumb, it should be 1:1. In all the above years it has been very high

than the rule of thumb.

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ABSOLUTE LIQUID RATIO – Although receivables are generally more liquid than

inventories yet there may be doubt regarding their realization into cash in time. Absolute

liquid ratio shows the relationship between liquid assets which include cash, bank and

marketable securities.

Absolute Liquid Ratio = Absolute Liquid Assets

Current Liabilities

Absolute Liquid Ratio of VPL

Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio

2002-03 1.58 4.93 0.32

2003-04 0.59 4.32 0.14

2004-05 0.93 5.66 0.16

ANALYSIS

The acceptable standard for this ratio is 0.5:1. Thus, we can say that in all the years, it is

below the standard due to very less cash and bank balance maintained because major cash

receipts and payments are handled by corporate office. It is very less in 2003-04, 2004-05

due to increased cost of production.

WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio

indicates the velocity of the utilization of net working capital. This ratio measures the

efficiency with which the working capital is being used by a firm.

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Working Capital Turnover Ratio = Sales

Net Working Capital

Working Capital Ratio of VPL

Year Sales Net Working Capital Working Capital Turnover Raito

2002-03 130.58 74.04 1.76

2003-04 157.99 89.06 1.77

2004-05 144.48 65.69 2.20

ANALYSIS

This ratio indicates the number of times the working capital is turned over in the course

of a year. A high working capital ratio indicates the effective utilization of working

capital and less working capital ratio indicates less utilization. In 2004-05, the working

capital is reduced due to reduction in stock as the raw material prices are decreased. But

the ratio has increased from 1.77 times in 2003-04 to 2.20 times in 2004-05 which shows

effective utilization of working capital.

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II COMMON SIZE STATEMENT ANALYSIS

This analysis is mainly to see the composition of working capital. Its purpose is to see the

%age of each asset to the total asset and %age of each liability to total liability.

COMMON SIZE STATEMENT

(In crores)

PARTICULARS 2002 – 03 2003 – 04 2004 – 05

AMT % AMT % AMT %

CURRENT ASSETS

Inventories 43.37 54.90 56.08 60.05 46.00 64.46

S. Debtors 23.97 30.35 25.81 27.64 18.54 25.98

Cash & Bank 1.58 2.00 0.59 0.63 0.93 1.30

Loan & Advances 10.07 12.75 10.90 11.67 5.89 8.25

TOTAL 78.99 100 93.38 100 71.36 100

CURRENT

LIABILITES

S. Creditors 1.15 23.37 0.55 12.76 2.79 49.29

Advances 0.74 15.04 0.79 18.33 0.63 11.13

Other Liabilities 3.01 61.18 2.95 68.45 2.22 39.22

Security Deposits 0.02 0.41 0.02 0.46 0.02 0.35

TOTAL 4.92 100 4.31 100 5.66 100

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ANALYSIS

As major part of current assets involve inventories. It covers more than 50% of total

current assets. The debtors also have significant part of current assets. It contributes

approximate 25% to 30% part of current assets. The least contribution is thus of cash and

bank balance.

On the other hand, current liabilities consist of mainly creditors and other liabilities. In

2004-05, current assets have decreased due to decrease in inventories and loans &

advances, whereas current liabilities have increased. So this year working capital is less

as compared to last year’s working capital.

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4. CASH MANAGEMENT

Cash management refers to management of cash balance and the bank balance and also

includes the short term deposits. The cash is important current asset for the operation of

the business. On the other hand extreme liquidity may take uneconomic investments. This

underlines the significance of cash management. A financial manager is required to

manage the cash flows (both inflows and outflows) arising out of the operations of the

firm. For this he will have to forecast the cash inflows from sales and outflows for costs

etc. This will enable the financial manager to identify the timings as well as amount of

future cash flows Cash is the basic input needed to keep the business running on

continuous basis. It is also the ultimate output expected to realize by selling the product

manufactured by the firm. Cash management is one of the key areas of working capital

management. A part from the fact that it is the most liquid current asset, cash is the

common denominator to which all the current assets can be reduced because the major

liquid asset i.e. receivables and inventory get eventually converted into cash. Cash

management is concerned with the managing of:

Cash inflows and outflows of the unit

Cash flows within the unit

Cash balance held by the unit at a point of time by financing deficit or investing

surplus cash

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

(1) Cash Planning

(2) Managing the cash flow

(3) Optimum cash level

(4) Investing surplus cash

1. CASH PLANNING

Cash planning is a technique to plan to control the use of cash. Cash planning can help to

anticipate future cash flows and the need of the form and reduces the possibility of idle

cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the

most significant device to plan for and control cash receipt and payments.

The unit under the study makes cash planning through following tools:

Cash Budget

Rolling cash flow statement

Daily cash flow statement

The cash budgets are prepared by the firm on monthly and yearly basis. Through cash

budget the unit can make estimates of cash receipts and disbursement during a future

period of time. There estimates show the requirement of cash in the unit.

Another device used for cash planning is six monthly rolling cash flow statement

prepared on monthly basis. This statement shows the projections of inflows and outflows

of cash during the next six months.

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This statement can help in taking various decisions, if the unit wants to make any capital

payment, these statements can tall when there is surplus of cash and payments can be

made during the month.

2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and

outflows without any loss to the unit and without impairing its goodwill in the market.

These are made at head office Ludhiana so the main source of cash inflows to VPL is the

cash credit limit, which is as follows:

Banks Main Limit

(in lakhs)

Sub-limit transfer to

BTI Unit (in lakhs)

Peak Normal

Canara Bank 1020 600 125

State Bank of India 625 420 150

State Bank of Patiala 130 160

Bank of Baroda 890 530 100

State Bank of Indore 425 205

UTI Bank Ltd. 90 90

TOTAL 3180 2005 375

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for

fulfilling day-to-day requirements of working capital. The daily bank-position of sub-

limits is faxed to H.O. for monitoring daily bank position. In case of drawn in sub-limits

48

the funds get transferred from main limits. The interest rate paid for this is near about

10%. The cash credit limits are sanctioned by the bank against the hypothecation stocks

and fluctuating assets as security.

The unit can withdraw from these limits as and when needed. The amount received from

the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash

management the surplus funds are transferred to other units if those units need cash thus

increasing the overall profitability.

Cash outflows also arise on account of purchase of stores, spares and all other material

normal credit for these products is mainly 30 to 60 days and full credit period is used.

3. DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the

optimum level i.e. neither it is too high that it remains idle and the firm losses interest on

it, nor it is too low that the firm is always in cash tight position. The unit always keep 1.5

lacs for the routine expenses, around the days of wages the amount is approx. 4 lacs per

day is kept in hand, thus the unit maintains the appropriate amount of cash balance and

meets the firms obligations as and when they due.

4. INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to

maintain high level of assets during cotton season, which falls between October to March.

During April to September the company gets its cash credit limits reduced in the

respective banks. The company has very good system of managing its current assets. The

49

current assets of the unit are managed at corporate level and the unit seeks funds

according to their requirements calculated on day-to-day basis. Hence there are no idle

funds at unit level.

As the funds are monitored / controlled at corporate level, therefore, it becomes the prime

responsibility of H.O. to have a good policy of investing idle funds in an appropriate

security keeping in view the requirement of funds in the future and liquidity of the

security in which the investment is being made.

5.RECEIVABLES MANAGEMENT

Accounts receivables are simply extension of credit to the firm’s customers, allowing

them a reasonable period of time in which to pay for the goods. Most firms treat accounts

receivables as a marketing tool to promote sales and profits. Receivables are a type of

loan extended by the seller to the buyer to facilitate the purchase process. As against the

ordinary type of loan the trade credit in the form of receivables is not a profit making

service but an inducement or facility to the buyer-customer of the firm.

Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up

the sale, which ultimately results in pushing up the profits earned by the firm. At some

time selling goods on credit result in blocking of funds in accounts receivables.

Additional funds are required for operating needs of business, which involves extra costs

in terms of interest. Moreover, increase in receivables also increase chances of bad debts.

The creation of accounts receivables is beneficial as well as dangerous. The finance

manager has to follow a policy which uses cash funds as economically as possible by

50

extending receivables without adversely affecting the chance of increasing sales and

making more profits. Receivables Management generally means what type of credit

policy a firm should adopt so that sales and profits can be promoted on the one hand and

funds can be economically utilized on the other hand.

So the receivables management must be attempted by adopting a systematic approach and

considering the following of receivables management:

(1) THE CREDIT POLICY

(2) CREDIT CONTROL

1. CREDIT POLICY

It may be defined as the set of parameters and principles that govern the extension

of credit to the customers. This requires the determination of

(i) The credit standard i.e. The conditions that the customers must meet

before being granted credit and

(ii) The credit terms i.e. the terms and conditions on which the credit is

extended to the customers.

These are discussed as follows:

The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of

the customers. Therefore, to be on a safer side, it must set credit standard which should be

applied in selecting customers for credit sales. The credit standards of a firm represent the

basic criteria for the extension of a credit to customer.

So the credit standard is the combination of three C’s

These are:

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(i) Character of a person

(ii) Capacity of a person

(iii) Condition of a person

(a) Credit Period – The credit period is an important aspect of the credit policy. It

refers to the length of time customers are allowed to pay for their purchases. It

may differ from one market to another market. The credit period generally varies

from 15 days to 60 days. In some cases the credit period may be zero and only

cash sales are made. It refers to the time duration in terms of net date e.g. if a

firm’s credit terms are “net 30”; it means the customers are expected to pay within

30 days from the date of sales. As much the credit period will be shorter, it will be

beneficial for a firm. But the firm has to lengthen its credit period to increase

sales. But one must compare the cost of extended credit with the incremental

profits. If this cost is less then it will be beneficial for company to increase the

credit period.

(b) Discount Terms – It is reduction in payment offer to customer to induce them to

repay credit obligation within a specified period of time. In practice credit terms

would include:

(i) The rate of cash discount

(ii) The cash discount period

(iii) The net credit period

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2. CREDIT CONTROL

The next important step in the management of receivables is the control of these

receivables. Following are the directions for controlling the receivables.

(1) The Collection Procedure – The overall 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 a firm has a lenient

credit policy, the customer with a natural tendency towards slow payments may

become slower to settle his accounts. One possible way of ensuring early

payments from customers may be to charge interest on over due balances.

(2) Monitoring of receivables – To control the level of receivables, the firm should

apply regular checks and there should be a continuous monitoring system. For

this, number of measures are available as follows:

(i) A common method to monitor the receivables is the collection period or number

of day’s outstanding receivables.

(ii) Another technique available for monitoring the receivables is known as ageing

schedule. Ageing schedule down book debts according to the length of time of

which they have been outstanding. The ageing schedule provides more

information about collection experience. It helps to shot out the slow paying

debtors. The Performa of the ageing schedule prepared by the VPL is as follows:

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AGEING SCHEDULE

Age Classification Amount % age of Total

0 – 15 days 124199099 67

15 – 30 days - 0

31 – 60 days 18537179 10

61 – 90 days 9268589 5

91 – 120 days 27805768 15

121 – 180 days 3707436 2

More than 180 days 1853718 1

Total O/S Amount 185371789 100

RECEIVABLES MANAGEMENT IN VPL

As earlier discussed, credit sales are too much necessary to increase the total sales. The

main reason behind this is cut-throat competition. There are also many competitors of

VPL in the market, s to compare with them; VPL has to make credit sales. 20% to 30% of

current assets of VPL are sundry debtors. VPL has a good receivable policy as it has large

amount of credit sales.

I. CREDIT POLICY OF VPL

VPL not directly make sales. Sales are made by corporate office directly. So the sales

process is centralized. As the sales process, debtors are also collected by the corporate

office directly. Corporate office just receives the amount from the debtors. But it does not

have any record of outstanding debtors. It sends the credit note to VPL after receiving

amount against any debtors. So record for outstanding debtors is maintained by VPL

54

itself. VPL sends fortnightly reports to corporate office which records the data about the

outstanding debtors for different periods. In these reports debtors outstanding for one

month or six months are shown separately. In this way, corporate office comes to know

about age segments of different customers. Corporate office may avoid selling goods to

those customers who have not paid for a long period.

CREDIT POLICY VARIABLES

1. Credit Standards – VPL provides credit to customers after getting information

about that customer. For this market research is done by marketing department

to know about reputation of customer in the market and financial position of

him. From the records of customers having VPL and from financial record of

those customers, the ability to pay is checked. Thus customer is only known

after getting information about him and then credit is provided.

2. Credit Terms

(a) Credit Period – For different products VPL provide different credit period.

These credit terms are according to the nature of product which are following:

For Tyre Cord - 45 days

To customer of cotton yarn - 15 days

Sale to agents - 10 days

(b) Cash Discount –

In case of cotton yarn

Advance payment - 1 % C.D. prior to material dispatch

After 48 hours - 0.85 %

Within Week - 0.50 %

55

15 days credit - Interest free

Afterwards - 18 % p.a. interest chargeable

In case of Tyre Cord Yarn

Payment within 48 hours - 3 % CD

Payment within week - 2 % CD

45 days credit period - Interest free

Interest @ 18 % p.a., if payment is not made within the prescribed limits.

II CREDIT CONTROL

Collection efforts made by VPL:

Due to cut-throat competition VPL has to make credit sales. To collect the funds Oswal

group has adopted a decentralized method. Oswal group has established its collection

centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from

the debtors and send it to corporate office. The number of collection centers in a

particular city depends upon the number of customers to minimize the bad debts and to

accelerate the collections.

1.5% commission is also paid to agents and 0.75 % in case of tyre cord to collect debtors.

This percentage is only on the basis of the realization amount.

56

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VPL

Debtors Turnover Ratio (DTR)

This ratio indicates the number of times average debtors are turned over during a year.

The higher the value of debtor turnover ratio the value of debtor turnover ratio the more

liquid is the debtors. Similarly low debtor turnover ratio implies less liquid debtors.

Debtors turnover ratio = Sales

Avg. Debtors

Year Sales Avg. Debtors DTR

2002-03 130.58 21.84 5.98

2003-04 157.99 24.88 6.35

2004-05 144.48 22.17 6.52

Debtor Conversion Period (DCP)

The average no. of days for which a firm has to wait before its receivables is converted

into cash.

DCP = 360

DTR

Year DTR DCP

2002-03 5.98 360/5.98 = 60

2003-04 6.35 360/6.35 = 57

2004-05 6.52 360/6.52 = 55

57

Analysis

The DTR ratio in 2002-03 was 5.98 times which has been increased to 6.35 in 2003-04

and 6.52 in 2004-05. And regarding DCP, it was 60 days in 2002-03 which has decreased

to 57 in 2003-04 and 55 in 2004-05.

Thus high DTR ratio indicates more efficient management of debtors because it means

less collection period of debtors. Debtor’s collection period has been decreasing from last

two years which shows management is taking step to collect the dues.

So we can conclude receivable management of VPL quiet sufficient.

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6. MANAGEMENT OF INVENTORY

Inventory is very important part of current assets. Approximately 60% part of current

assets is inventories. So the proper management of inventory is required for successful

working capital management. As the larger amount of funds is involved in the

inventories, so it must be carried with care for proper utilization of funds.

Nature of Inventories

In inventories we include:

(b) Raw Material: There are those basic inputs which are converted into work-in-

progress after the manufacturing process. Raw materials are purchased for

production and storage purpose.

(c) Work-in-Progress: These inventories are semi-manufactured products. These

products are those which are ready for sale.

(d) Finished Goods: These are completely manufactured products. These products

are those which are ready for sale.

Here is one another type of inventory also which is not directly related with

production but facilitate in production process. These inventories are known as

supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.

OBJECTIVES OF INVENTORY MANAGEMENT

There are so many objectives of inventory management. These objectives may differ

from firm to firm. The main objectives of inventory management are:

59

To make adequate investment in inventories so that funds can be best utilized.

Smooth production in present and future.

Time availability of inventories.

Smooth and uninterrupted sale processes.

Minimize the cost related with inventories.

To meet the future price change.

To get adequate return on investment.

INVENTORY MANAGEMENT TECHNIQUES

For inventories management the two questions must be answered. First, that how much

be ordered in one order so that excess or insufficient inventories can be avoided.

Secondly, when the order should be placed, so that timely availability of inventory is

there. To get answer of these two questions we use two techniques which are following:

1) ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to

know how much we must order in single time. So that all the cost related with inventory

are minimum. Determining an optimum inventory level involves two types of costs (a)

Ordering Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes

the total of ordering and carrying costs.

(a) Ordering Costs – All these costs which are incurred in placing one order. It

includes; requisition, transportation, receiving, inspecting, clerical and staff

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services. Ordering costs are fixed per order. Therefore they decline as the order

size increases.

(b) Carrying Costs – Cost incurred for maintaining a given level of inventory are

called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs

vary with inventory.

To calculate economic order quantity there is formula:

EOQ = 2AO/C

Where,

A = Annual requirement

O = Ordering cost per order

C = Carrying cost of inventory

2) REORDER POINT

Reorder point is that inventory level at which an order should be placed to replenish the

inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage

(c) EOQ

Lead Time is the time normally taken in replenishing inventory after the order has been

placed.

Average Usage is the inventory used on average daily basis or average weekly basis.

So, Reorder Point = Lead Time x Average Usage

If the firm also maintains safety stock then the reorder point will be:

Reorder Point = (Lead Time x Average Usage) + Safety Stock

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So when the inventory of reorder point will be in store then the order will be placed for

purchase of inventory. In this way, the production process will not stop because the

inventory will be available for that period.

INVENTORY MANAGEMENT IN VPL

Inventory Management of VPL is good. VPL has a different stores department. All the

inventories except raw material purchases are handled by stores department. Stores

department does its work very efficiently.

INVENTORY PLANNING

For the planning of inventory requirement, budgets are prepared by different departments

as per requirements. The material issued during the budget period will not be more than

the budget. This rule is strictly followed. For cotton, requirements are planned in

consultation with production department. Stores department have nothing to do with it.

PURCHASE OF RAW MATERIAL

As in VPL raw material is cotton. First of all the requirement for cotton are determined

by the production department than this requirement is sent to commercial departments.

Commercial departments send these requirements to corporate office in detail. Then

corporate office directs the cotton purchase office to purchase cotton in bulk not only for

VPL but also for the other units of Oswal Group. Cotton is generally received in lots so

one lot consists of 55 or 110 bales.

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As the cotton has seasonal availability, so the purchasing of cotton is made within the

period of October to march. For the other months, cotton is purchased within these

months. That is the reason VPL has high investment in cotton.

DAILY REQUIREMENT OF COTTON

For production daily requirement of cotton is 250 bales and when the full capacity of 3 rd

unit gets started then the average requirement of cotton bales will reach to 365 bales.

The total daily production is 36500kg/day.

STORAGE CAPACITY OF VPL

Regarding Raw Material Inventory, VPL has 10 godowns.The capacity of 10 godowns is

45000 bales approximately.

If capacity of store is exhausted in unit then it has private storage facility to store cotton.

Regarding Finished goods Inventory, VPL has four godowns. Two godowns are for unit –

I for domestic and export purpose, one godown is for unit – II and its expansion, at last

remaining one godown is with unit-III.

These godowns do not have electric fitting because cotton is highly inflammable.

ISSUING OF INVENTORY

When any department requires any inventory, it sends its requirement to stores

department. The maximum time within the requirement must be met is 72 hours.

Material is issued on the basis of monthly weighted average method.

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INSPECTION OF INVENTORIES

Inspection of inventory is made at the end of month randomly. The stock taking of all the

items is not possible keeping in view number of items.

SAFETY STOCK OF INVENTORIES

For the continuous production process, safety stock of inventories is maintained. In case

of cotton atleast 15 days requirements must be in hand every time. For other inventories

stock is maintained according to supply period and as per their requirement.

INVENTORY CONTROL

Inventory control is done by budgets. As the budgets are prepared for the planning

purpose. Total requirements for inventory during financial period are determined by

budget. When the material is issued to any department then the total amount of material

issue is deducted from the budget of that good and balance is calculated, only this balance

quantity of inventories will be issued during the remaining financial period. These

records are maintained on daily basis. For different units, the records are prepared

separately.

For inventory control not any ABC analysis or VED analysis is done. The company also

doesn’t follow standardized system of inventory like EOQ. In case of raw material as the

input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the

cotton season. In case of spares & stores, the inventory is easily available in market;

therefore, the same is procured on requirement basis. The company always maintains

stock of critical items, the failure / non-availability of which can cause less of production.

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As all the units of group are in spinning the stock of critical items, where the high value is

involved in financial terms, the inventory is maintained in single unit. This could save lot

of money which can be utilized in another area and it also helps to maintain inventory at

optimum level.

So we can say that overall inventory management of VPL is quite satisfactory.

ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VPL

INVENTORY TURNOVER RATIO

It indicates the number of times the stock has been turned over during the period and

evaluates the efficiency with which the firm is to manage inventory.

Inventory (Raw Material) Turnover Ratio = Cost of Production

Average Raw Material Stock

Year Cost of Production Avg. Stock of RM ITR

2002-03 103.99 25.24 4.12 times

2003-04 121.48 40.21 3.02 times

2004-05 123.6 43.18 2.86 times

ANALYSIS

The inventory turnover ratio has been deceased from 3.02 times in 2003-04 to 2.86 times.

It is not due to inefficient inventory management but because in 2004-05 the Cotton is

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also purchased for unit III but production is not yet started and also prices are Less as

compare to previous year.

INVENTORY TO WORKING CAPITAL RATIO

This ratio is usually calculated to study the liquid financial position of business

enterprises.

Inventory to working capital ratio = Inventory

Working Capital

Year Inventory Working Capital Ratio in %age

2002-03 43.37 78.97 54.92

2003-04 56.08 93.38 60.04

2004-05 46.00 71.36 64.46

ANALYSIS

Too high and too low investment in inventory is not good for company. In 2002-03 it is

54.92% of gross working capital which has been increased to 60.04% in 2003-04 and

64.46% in 2004-05. Overall inventory constitute a large part of gross working capital

because raw material is available seasonably only which shows more blockage of money.

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7. FINDINGS

Due to seasonal availability of raw material is purchased in bulk during the

months between March to Oct. so the most part of current assets is covered by

inventories.

Liquidity ratios of VPL are too high because of maintaining more inventory stock

of raw material.

Raw material is purchased by corporate office for all the units in bulk to get the

advantages of bulk purchasing.

The cost of raw material fluctuates depending upon the availability of crop in the

particular season, so it effect the finished product price.

The operating cycle of VPL is very high due to the high raw material conversion

period because raw material is a seasonal product.

Now VPL has increased its share in the domestic market by reducing the exports.

For filling its fund requirement VPL depends upon the Canara bank and State

bank of India.

It holds the cash only for transaction purpose. Corporate office holds the cash for

major receipts & payments.

EOQ technique is not followed by VPL for purchasing cotton because cotton is a

seasonal product. Also EOQ is not followed in stores.

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8. RECOMMENDATIONS

Management should make the proper use of inventory control techniques

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

blockage of money.

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

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

The EOQ can be followed in stores.

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

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

efficiency.

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

unit is not generally involved while taking decisions with regard to structure of

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

better ascertain the future requirements of funds and accordingly the investments

are made in different securities.

The company is loosing its overseas customers due to decrease in exports

so the sufficient amount of exports should the maintained.

Company’s average debtor collection period is 55 days. So company

should try to reduce it for improving the efficiency.

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9. CONCLUSION

By conducting the study about working capital management it is find out that working

capital management of VPL is too good. VPL has sufficient funds to meet its current

obligation every time which is due to sufficient profits and efficient management of

VPL.

Cash management and receivable management are too much good because of

centralized control on these. Raw material for the all units of OSWAL group is

purchased by corporate office in bulk which is the best way. Safety measures for

inventories are also quiet sufficient in VPL. Overall the working capital management

of VPL is very much efficient.

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10. REFERENCES

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd. 2nd Ed.New Delhi, pp.38-45.vol 12

Chandra Prasanna; Financial Management: Theory and Practice; TataMCgrill

Van Horne, Jame C; Fundamentals of Financial Management

Rustagi R.P.; Principles of Financial Management.

Kothari.k.c: wishwa prakashan, new delhi 2001 k.k gupta publisher ISBN

8173280363

http://www.investopedia.com/articles/fundamental/03/061803.asp

http://www.emeraldinsight.com/Insight/ viewContentItem.do;jsessionid=FF023E7701E36A384B9F5A1DD4ED25B2?contentType=Article&hdAction=lnkhtml&contentId=864829

http://gbr.sagepub.com/cgi/content/abstract/8/2/267

http://business-financial-planning.suite101.com/article.cfm/ working_capital_management_manages_flow_of_funds

http://www.articlealley.com/article_581878_19.html

http://www.articlearchives.com/banking-finance/financial-markets-investing- securities/2306728-1.html

http://www.caclubindia.com/_list_detail.asp?article_id=1086

http://www.docstoc.com/docs/2411542/An-Analysis-of-Working-Capital- Management-Results-Across-Industries

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