final report hcl 1[1].doc

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A REPORT

ON

WORKING CAPITAL MANAGEMENTWORKING CAPITAL MANAGEMENT

IN HCL INFOSYSTEMS LIMITEDIN HCL INFOSYSTEMS LIMITED

BY:

RITIKA SHARMA

(Trainee, Finance Division)

HCL INFOSYSTEMS LTD.


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A REPORT

ON

WORKING CAPITAL MANAGEMENT INWORKING CAPITAL MANAGEMENT IN

HCL INFOSYSTEMS LIMITEDHCL INFOSYSTEMS LIMITED

BY

(RITIKA SHARMA)

(Submitted in partial fulfillment of the requirements ofMBA program at

ICFAI Business School, Chandigarh)

Distribution List:

Company Guide: Faculty Guide:

Mr. Alok Sahu Mr. Ghansham Mishra


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ACKOWLEDGEMENT

Achievement is finding out what you would be then doing, what you have to

do. The higher the summit, the harder is the climb. The goal was fixed and we

began with a determined resolved and put in ceaseless sustained hard work.

Greater challenge, greater was our effort to overcome it.

This project work, which is my first step in the field of professionalization, has

been successfully accomplished only because of my timely support of well-

wishers. I would like to pay my sincere regards and thanks to those, who

directed me at every step in my project work.

I would like to thank my respected Company Guide, Mr. Alok Sahu, who

allowed me to undertake this project and provided his valuable guidance in

doing it.

I extended my sincere thanks and gratitude towards Prof. Ghansham Mishra

internal faculty, IBS, Chandigarh for his help and valuable support throughout

the term of the project. It was a learning experience to work under his

guidelines.

I would also like to thank the faculty members and the staff members of HCL

Infosystems Ltd. for their kind support and help during the project.

(RITIKA SHARMA)


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TABLE OF CONTENTS

Page No.

Acknowledgement

Abstract

1. Introduction

The problems

Purpose of study

Research methodology

Scope of the study

Data sources

Limitations

2. Hindustan Computers Limited

3. HCL Infosystems An Overview

Companys history

HCL at a glance


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Alliances and partnerships

Management team

Corporate information

4. Conceptual Framework

Introduction to Working Capital Management

Significance of working capital management

Liquidity vs Profitability: Risk Return trade off

Classification of working capital

Types of working capital needs

Financing of working capital

Factors determining working capital requirements

Working capital cycle

Sources of working capital

HCL financials

Working capital position

Inventory management

Cash management

Receivables management


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Managing payables (Creditors)

Financing current assets

Working capital & short-term financing

5. Analysis

Industry analysis

Financial graphs

Concluding analysis

Suggestions and recommendations

Bibliography

6. Appendices

ABSTRACT


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This project is based on the study of working capital management in HCL

Infoystems. An insight view of the project will encompass what it is all

about, what it aims to achieve, what is its purpose and scope, the various

methods used for collecting data and their sources, including literature survey

done, further specifying the limitations of our study and in the last, drawing

inferences from the learning so far.

HCL Infosystems Limited (HCL), is a leading domestic computer hardware

and hardware services company. HCL is engaged in selling manufactured ( like

PCs, servers, monitors and peripherals) and traded hardware ( like notebooks,

peripherals) to institutional clients as well as in retail segment. It also offers

hardware support services to existing clients through annual maintenance

contracts, network consulting and facilities management.

The working capital management refers to the management of working capital,

or precisely to the management of current assets. A firms working capitalconsists of its investments in current assets, which includes short-term assets

cash and bank balance, inventories, receivable and marketable securities.

This project tries to evaluate how the management of working capital is done in

HCL Infosystems through inventory ratios, working capital ratios, trends,

computation of cash, inventory and working capital, and short term financing.


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INTRODUCTION


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The problems

Purpose of study

Research methodology

Scope of the study

Data sources

Limitations


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INTRODUCTION:

The project undertaken is on WORKING CAPITAL MANAGEMENT IN

HCL INFOSYSTEMS LIMITED.

It describes about how the company manages its working capital and the

various steps that are required in the management of working capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the

company's ability to fund operations, reinvest and meet capital requirements

and payments. Understanding a company's cash flow health is essential to

making investment decisions. A good way to judge a company's cash flow

prospects is to look at its working capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations

or, more specifically, for financing the conversion of raw materials into

finished goods, which the company sells for payment. Among the most

important items of working capital are levels of inventory, accounts receivable,

and accounts payable. Analysts look at these items for signs of a company's

efficiency and financial strength.

The working capital is an important yardstick to measure the companys

operational and financial efficiency. Any company should have a right amount

of cash and lines of credit for its business needs at all times.

This project describes how the management of working capital takes place at


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PURPOSE OF STUDY

The objectives of this project were mainly to study the inventory, cash and

receivable at HCL Infosystems Ltd., but there are some more and they are -

The main purpose of our study is to render a better understanding of

the concept Working Capital Management.

To understand the planning and management of working capital at HCL

Infosystems Ltd.

To measure the financial soundness of the company by analyzing various

ratios.

To suggest ways for better management and control of working capital at

the concern.


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RESEARCH METHODOLOGY

This project requires a detailed understanding of the

concept Working Capital Management. Therefore,

firstly we need to have a clear idea of what is working

capital, how it is managed in HCL Infosystems, what are

the different ways in which the financing of working

capital is done in the company.

The management of working capital involves managing inventories,

accounts receivable and payable and cash. Therefore one also needs to

have a sound knowledge about cash management, inventory management

and receivables management.

Then comes the financing of working capital requirement, i.e. how the

working capital is financed, what are the various sources through which

it is done.

And, in the end, suggestions and recommendations on ways for better

management and control of working capital are provided.


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SCOPE OF THE STUDY

This project is vital to me in a significant way. It does have some

importance for the company too. These are as follows

This project will be a learning device for the finance student.

Through this project I would study the various methods of the working

capital management.

The project will be a learning of planning and financing working capital.

The project would also be an effective tool for credit policies of the

companies.

This will show different methods of holding inventory and dealing with

cash and receivables.

This will show the liquidity position of the company and also how do theymaintain a particular liquidity position.


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DATA SOURCES:

The following sources have been sought for the prep of this report:

Primary sources such as business magazines, current annual reports,

book on Financial Management by various authors and internet websites

the imp amongst them being : www.hcl.com, www.indiainfoline.com,

www.studyfinance.com .

Secondary sources like previous years annual reports, reports on working

capital for research, analysis and comparison of the data gathered.

While doing this project, the data relating to working capital, cash

management, receivables management, inventory management and short

term financing was required.

This data was gathered through the companys websites, its corporate

intranet, HCLs annual reports of the last five years.

A detailed study on the actual working processes of the company is also

done through direct interaction with the employees and by timely

studying the happenings at the company.

Also, various text books on financial management like ICFAIs book,

Khan & Jain, Prasanna Chandra and I.M.Pandey were consulted to equip

ourselves with the topic.
http://www.hcl.com/http://www.indiainfoline.com/http://www.studyfinance.com/http://www.hcl.com/http://www.indiainfoline.com/http://www.studyfinance.com/


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LIMITATIONS OF THE STUDY:

We cannot do comparisons with other companies unless and until

we have the data of other companies on the same subject.

Only the printed data about the company will be available and not

the backend details.

Future plans of the company will not be disclosed to the trainees.

Lastly, due to shortage of time it is not possible to cover all the

factors and details regarding the subject of study.

The latest financial data could not be reported as the companys

websites have not been updated.


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HINDUSTAN COMPUTERS LIMITED:

Type Public

(BSE: 500179,BSE: 532281)

Founded 11th August 1976

Headquarters Noida, India

(Delhi metropolitan area),India

Key People Shiv Nadar, Founder, Chairman & CEOSanjay Kumar Choudhary , Vineet Nayar

Industry Information Technology Services

Revenue4.7 billion USD

Employees ~53,000 (as on 31st Dec 2007)

Website www.hcl.in

Hindustan Computers Limited, also known as HCL Enterprise, is one of

India's largest electronics, computing and information technology company.
http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=500179http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=532281http://en.wikipedia.org/wiki/New_Okhla_Industrial_Development_Authorityhttp://en.wikipedia.org/wiki/New_Okhla_Industrial_Development_Authorityhttp://en.wikipedia.org/wiki/Delhi_metropolitan_areahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/wiki/USDhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Electronicshttp://en.wikipedia.org/wiki/Computinghttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=500179http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=532281http://en.wikipedia.org/wiki/New_Okhla_Industrial_Development_Authorityhttp://en.wikipedia.org/wiki/Delhi_metropolitan_areahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/wiki/USDhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Electronicshttp://en.wikipedia.org/wiki/Computinghttp://en.wikipedia.org/wiki/Information_technology


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Based inNoida, nearDelhi, the company comprises two publicly listed Indian

companies, HCL Technologies and HCL Infosystems.

HCL was founded in 1976 by Shiv Nadar, Ajai Chowdhry and four of their

colleagues. HCL was focused on addressing the IT hardware market in India

for the first two decades of its existence with some sporadic activity in the

global

market. In 1981, HCL seeded a company focused on addressing the computer

training industry,NIIT, though it has currently divested its stake in the

company. In 1991, HP took minority stake in the company (26%) and the

company was known as HCL HP for the five years of the joint venture. On

termination of the joint venture in 1996, HCL became an enterprise which

comprises HCL Technologies (to address the global IT services market) andHCL Infosystems (to address the Indian and APAC IT hardware market). HCL

has since then operated as a holding company.
http://en.wikipedia.org/wiki/Noidahttp://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/HCL_Technologieshttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/w/index.php?title=Ajai_Chowdhry&action=edit&redlink=1http://en.wikipedia.org/wiki/1981http://en.wikipedia.org/wiki/NIIThttp://en.wikipedia.org/wiki/1991http://en.wikipedia.org/wiki/1996http://en.wikipedia.org/wiki/Noidahttp://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/HCL_Technologieshttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/w/index.php?title=Ajai_Chowdhry&action=edit&redlink=1http://en.wikipedia.org/wiki/1981http://en.wikipedia.org/wiki/NIIThttp://en.wikipedia.org/wiki/1991http://en.wikipedia.org/wiki/1996


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HCL INFOSYSTEMS AN OVERVIEW


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Companys history

HCL at a glance

Alliances and partnerships

Management team

Corporate information


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HCL INFOSYSTEMS LIMITED

AN OVERVIEW ABOUT THE COMPANY

HCL Infosystems is no flash in the Information Technology pan. Founded in

1976, the firm has climbed into pantheon of India's corporate giants on the

strength of its IT products and services. HCL Infosystems specializes in IT

hardware (PC's and servers, as well as networking, imaging and

communications products), and system integration services serving the

domestic Indian market. In addition to its consumer products, the company

provides commercial IT products, facilities management, network services, andIT security services for clients in such industries as government, financial

services, and education. HCL Corporation owns significant stakes in HCL

Infosystems (about 44%) and sister company HCL Technologies.

HCL Infosystems Ltd, a listed subsidiary of HCL, is an India-based hardware

and systems integrator. It claims a presence in 170 locations and 300 service

centres. Its manufacturing facilities are based in Chennai, Pondicherry and

Uttarakhand .Its headquarters is inNoida.

HCL Peripherals (A Unit of HCL Infosystems Limited) Founded in the year

1983, has established itself as a leading manufacturer of computer peripherals

in India, encompassing Display Products, Thin Client solutions, Information

and Interactive Kiosks. HCL Peripherals has two Manufacturing facilities, one
http://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Pondicherryhttp://en.wikipedia.org/wiki/Uttarakhandhttp://en.wikipedia.org/wiki/Noidahttp://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Pondicherryhttp://en.wikipedia.org/wiki/Uttarakhandhttp://en.wikipedia.org/wiki/Noida


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in Pondicherry (Electronics) and the other in Chennai (Mechanical) .The

Company has been accredited with ISO 9001:2000, ISO 14001, TS 16949 and

ISO 13485.

HISTORY

HCL Infosystems Ltd is one of the pioneers in the Indian ITmarket, with its origins in 1976. For over quarter of a century,we have developed and implemented solutions for multiplemarket segments, across a range of technologies in India. Wehave been in the forefront in introducing new technologies andsolutions. The highlights of the HCL saga are summarized

below:

Y E AR H I G H L I G H T S

1976

- Foundation of the Company laid- Introduces microcomputer-based programmable calculators with wideacceptance in the scientific / education community

1977

- Launch of the first microcomputer-based commercial computer with a ROM-based Basic interpreter- Unavailability of programming skills with customers results in HCL developing

bespoke applications for their customers

1980- Formation of Far East Computers Ltd., a pioneer in the Singapore IT market, forSI (System Integration) solutions

1983

- HCL launches an aggressive advertisement campaign with the theme ' even atypist can operate' to make the usage of computers popular in the SME (Small &Medium Enterprises) segment. This proposition involved menu-basedapplications for the first time, to increase ease of operations. The response to theadvertisement was phenomenal.-HCL develops special program generators to speed up the development ofapplications


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1986

- Zonal offices of banks and general insurance companies adopt computerization- Purchase specifications demand the availability of RDBMS products on thesupplied solution (Unify, Oracle). HCL arranges for such products to be ported toits platform.- HCL assists customers to migrate from flat-file based systems to RDBMS

1991

- HCL enters into a joint venture with Hewlett Packard- HP assists HCL to introduce new services: Systems Integration, IT consulting,

packaged support services ( basic line, team line )

1994- HCL acquires and executes the first offshore project from IBM Thailand- HCL sets up core group to define software development methodologies

1995

- Starts execution of Information System Planning projects

- Execution projects for Germany and Australia- Begins Help desk services

1996

- Sets up the STP ( Software Technology Park ) at Chennai to execute softwareprojects for international customers- Becomes national integration partner for SAP

1997- Kolkata and Noida STPs set up- HCL buys back HP stake in HCL Hewlett Packard

1998 - Chennai and Coimbatore development facilities get ISO 9001 certification

1999

- Acquires and sets up fully owned subsidiaries in USA and UK- Sets up fully owned subsidiary in Australia- HCL ties up with Broadvision as an integration partner

2000

- Sets up fully owned subsidiary in Australia- Chennai and Coimbatore development facilities get SEI Level 4 certification- Bags Award for Top PC Vendor In India- Becomes the 1st IT Company to be recommended for latest version of ISO 9001: 2000- Bags MAIT's Award for Business Excellence- Rated as No. 1 IT Group in India

2001-Launched Pentium IV PCs at below Rs 40,000-IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001

2002

-Declared as Top PC Vendor by Dataquest-HCL Infosystems & Sun Microsystems enters into a Enterprise DistributionAgreement- Realigns businesses, increasing focus on domestic IT, Communications &Imaging products, solutions & related services


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2003

- Became the first vendor to register sales of 50,000 PCs in a quarter- First Indian company to be numero uno in the commercial PC market

- Enters into partnership with AMD- Launched Home PC for Rs 19,999

2004

- 1st to announce PC price cut in India, post duty reduction, offers Ezeebee at Rs.17990- Maintains No.1 position in the Desktop PC segment for year 2003- Becomes the 1st company to cross 1 lac unit milestone in the Indian Desktop PCmarket- Partners with Union Bank to make PCs more affordable, introduces lowest everEMI for PC in India- Registers a market share of 13.7% to become No.1 Desktop PC company for

year 2004- Crosses the landmark of $ 1 billion in revenue in just nine months

2005

- Launch of HCL PC for India, a fully functional PC priced at Rs.9,990/-

- Rated as the No.1 Desktop PC company by IDC India -Dataquest

- 'Best Employer 2005' with five star ratings by IDC India -Dataquest.

- 'The Most Customer Responsive Company 2005'

-IT Hardware Category by The Economic Times -Avaya Global Connect.

-Top 50 fastest growing Technology Companies in India' & 'Top 500 fastest

Growing Technology Companies in Asia Pacific' by 'Deloitte & Touche'. by

'Deloitte & Touche'

-'7th IETE -Corporate Award 2005' for performance excellence in the field of

Computers & Telecommunication Systems by IETE.

-India 's 'No.1 vendor' for sales of A3 size Toshiba Multi Functional Devices for

the year '04 -'05 by IDC.

-Toshiba 'Super Award 2005 towards business excellence in distribution of

Toshiba Multifunctional products,

-Strategic Partners in Excellence' Award by In focus Corporation for projectors.

-'Most valued Business Partner' Award for projectors by In focus Corporation in

2005

2006

(till

June)

- 75, 000+ machines produced in a single month- HCL Infosystems in partnership with Toshiba expands its retail presence inIndia by unveiling 'shop Toshiba'- HCL Infosystems & Nokia announce a long term distribution strategy- HCL the leader in Desktops PCs unveils India's first segment specific range ofnotebooks brand - 'HCL Laptops'- IDBI selects HCL as SI partner for 100 branches ICT infrastructure rollout- HCL Infosystems showcases Computer Solutions for the Rural Markets in India- HCL Support wins the DQ Channels-2006 GOLD Award for Best After Sales


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Service on a nationwide customer satisfaction survey conducted by IDC- HCL Infosystems First in India to Launch the New Generation of HighPerformance Server Platforms Powered by Intel Dual - Core Xeon 5000Processor- HCL Forms a Strategic Partnership with APPLE to provide Sales & ServiceSupport for iPods in India

VISION STATEMENT:

"Together we create the Enterprises of Tomorrow"

MISSION STATEMENT:

"To provide world-class Information Technology solutions and services

in order to enable our customers to serve their customers better"

CORE VALUES:

Nothing transforms life like education.

We shall honor all commitments

We shall be committed to Quality, Innovation and Growth in every

endeavor

We shall be responsible corporate citizens


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QUALITY POLICY:

"We shall deliver defect-free products, services and solutions to meet the

requirements of our external and internal customers, the first time, every time."

OBJECTIVES:

MANAGEMENT OBJECTIVES

To fuel initiative and foster activity by allowing individuals, freedom

of action and innovation in attaining defined objectives.

PEOPLE OBJECTIVES

To help people in HCL Infosystems Ltd., share companys success,

which they make possible; to provide job security based on their

performance; to

recognize their individual achievements; and help them gain a sense of

satisfaction and accomplishment from their work.


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ALLIANCES and PARTNERSHIPS:

To provide world-class solutions and services to all our customers, HCL

Infosystems have formed Alliances and Partnerships with leading IT companies

worldwide.

HCL Infosystems has alliances with global technology leaders like Intel, AMD,

Microsoft, Bull, Toshiba, Nokia, Sun Microsystems, Ericsson, nVIDIA,

SAP, Scansoft, SCO, EMC, Veritas, Citrix, CISCO, Oracle, Computer

Associates, RedHat, Infocus, Duplo, Samsung and Novell.

These alliances on one hand give us access to best technology & products as

well as enhancing our understanding of the latest in technology. On the other

hand they enhance our product portfolio, and enable us to be one stop shop for

our customers.


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MANAGEMENT TEAM:

Ajai ChowdhryCo-Founder HCL, Chairman and CEO - HCL Infosystems.An engineer by training, Ajai Chowdhry is one of the six co-founder members of HCL, India 's premier IT conglomerate.

J V Ramamurthy

Chief Operating Officer HCL Infosystems Ltd.J V Ramamurthy has an engineering degree in Electronics &Communications, from Guindy Engineering College, and a Masters'


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degree in Applied Electronics from the Madras Institute ofTechnology, both in Chennai.

Rajendra Kumar

Executive Vice President - Frontline Division HCL Infosystems Ltd.Mr. Rajendra Kumar has been with HCL for over 30 years and hasseen HCL grow from a startup company to a gigantic conglomeratethat it is today.

CORPORATE INFORMATION:

BOARD OF DIRECTORS Chairman & Chief Executive OfficerAjai Chowdhry

Whole-time Director

J.V. Ramamurthy

Directors

S. BhattacharyaD.S. Puri

R.P. Khosla


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E.A. KshirsagarAnita RamachandranT.S. PurushothamanNarasimhan JegadeeshV.N. Koura

COMPANY SECRETARY Sushil Kumar Jain

AUDITORS Price Waterhouse, New Delhi

BANKERS State Bank of IndiaCanara Bank

HDFC Bank Ltd.ICICI Bank Ltd.Societe GeneraleStandard Chartered BankState Bank of PatialaState Bank of Saurashtra

REGISTERED OFFICE 806, Siddharth,96, Nehru Place, New Delhi - 110 019.

CORPORATE OFFICE E - 4, 5, 6, Sector XI, Noida - 201 301 (U.P.)

WORKS R.S. Nos: 34/4 to 34/7 and part of 34/1,Sedarapet, Puducherry - 605 111.

R.S. Nos: 107/5, 6 & 7, Main Road,Sedarapet, Puducherry - 605 111.

Plot No 78, South Phase, AmbatturIndustrial

Estate,Chennai - 600 058. Plot No SPL. A2, Thattanchavadi,

IndustrialArea, Puducherry - 605 009.

Plot Nos. 1, 2, 27 & 28, Sector 5, 11E,Rudrapur, Distt. - Udham Singh Nagar,Uttarakhand - 263 145.


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WORKING CAPITAL MANAGEMENT

CONCEPTUAL FRAMEWORK

Introduction

Significance of working capital management

Liquidity Vs profitability: Risk Return trade off

Classification of working capital

Types of working capital needs

Financing of working capital

Factors determining working capital requirements

Working capital cycle

Sources of working capital

HCL financials

Working capital position

Inventory management

Cash management

Receivables management

Managing payables (Creditors)

Financing current assets

Working capital & short-term financing

Financing Current Assets


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INTRODUCTION TO WORKING CAPITAL

Working Capital is the Life-Blood and Controlling Nerve Center of a

business

The working capital management precisely refers to management of

current assets. A firms working capital consists of its investment in

current assets, which include short-term assets such as:

Cash and bank balance,

Inventories,

Receivables (including debtors and bills),

Marketable securities.

Working capital is commonly defined as the difference between current assets

and current liabilities.

WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES

There are two major concepts of working capital:

Gross working capital

Net working capital


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Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets,

which can be converted into cash with in a financial year. The gross working

capital points to the need of arranging funds to finance current assets.

Net working capital:

It refers to the difference between current assets and current liabilities. Net

working capital can be positive or negative. A positive net working capital

will arise when current assets exceed current liabilities. And vice-versa for

negative net working capital. Net working capital is a qualitative concept. It

indicates the liquidity position of the firm and suggests the extent to which

working capital needs may be financed by permanent sources of funds. Net

working capital also covers the question of judicious mix of long-term and

short-term funds for financing current assets.


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Significance Of Working Capital

Management

The management of working capital is important for several reasons:

For one thing, the current assets of a typical manufacturing firm account

for half of its total assets. For a distribution company, they account for

even more.

Working capital requires continuous day to day supervision. Working

capital has the effect on company's risk, return and share prices,

There is an inevitable relationship between sales growth and the level of

current assets. The target sales level can be achieved only if supported by

adequate working capital Inefficient working capital management may

lead to insolvency of the firm if it is not in a position to meet its liabilities

and commitments.


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LIQUIDITY VS PROFITABILITY: RISK - RETURN TRADEOFF

Another important aspect of a working capital policy is to maintain and

provide sufficient liquidity to the firm. Like the most corporate financial

decisions, the decision on how much working capital be maintained involves a

trade off- having a large net working capital may reduce the liquidity risk

faced by a firm, but it can have a negative effect on the cash flows. Therefore,

the net effect on the value of the firm should be used to determine the optimal

amount of working capital.

Sound working capital involves two fundamental decisions for the firm. They

are the determination of:

The optimal level of investments in current assets.

The appropriate mix of short-term and long-term financing used to support

this investment in current assets, a firm should decide whether or not it

should use short-term financing. If short-term financing has to be used, the

firm must determine its portion in total financing. Short-term financing

may be preferred over long-term financing for two reasons:

The cost advantage

Flexibility

But short-term financing is more risky than long-term financing. Following

table will summarize our discussion of short-term versus long-term financing.


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Maintaining a policy of short term financing for short term or temporary

assets needs (Box 1) and long- term financing for long term or permanent

assets needs (Box 3) would comprise a set of moderate risk profitability

strategies. But what one gains by following alternative strategies (like by box

2 or box 4) needs to weighed against what you give up.


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CLASSIFICATION OF WORKING CAPITAL

Working capital can be classified as follows:

On the basis of time

On the basis of concept


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TYPES OF WORKING CAPITAL NEEDS

Another important aspect of working capital management is to analyze the

total working capital needs of the firm in order to find out the permanent and

temporary working capital. Working capital is required because of existence

of operating cycle. The lengthier the operating cycle, greater would be the

need for working capital. The operating cycle is a continuous process and

therefore, the working capital is needed constantly and regularly. However,

the magnitude and quantum of working capital required will not be same all

the times, rather it will fluctuate.

The need for current assets tends to shift over time. Some of these changesreflect permanent changes in the firm as is the case when the inventory and

receivables increases as the firm grows and the sales become higher and

higher. Other changes are seasonal, as is the case with increased inventory

required for a particular festival season. Still others are random reflecting the

uncertainty associated with growth in sales due to firm's specific or general

economic factors.

The working capital needs can be bifurcated as:

Permanent working capital

Temporary working capital


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Permanent working capital:

There is always a minimum level of working capital, which is continuously

required by a firm in order to maintain its activities. Every firm must have a

minimum of cash, stock and other current assets, this minimum level of

current assets, which must be maintained by any firm all the times, is known

as permanent working capital for that firm. This amount of working capital is

constantly and regularly required in the same way as fixed assets are required.

So, it may also be called fixed working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is

temporary, fluctuating or variable working capital. The position of the

required working capital is needed to meet fluctuations in demand consequent

upon changes in production and sales as a result of seasonal changes.


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The permanent level is constant while the temporary working capital is

fluctuating increasing and decreasing in accordance with seasonal demands as

shown in the figure.

In the case of an expanding firm, the permanent working capital line may not

be horizontal. This is because the demand for permanent current assets might

be increasing (or decreasing) to support a rising level of activity. In that case

line would be rising.


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FINANCING OF WORKING CAPITAL

There are two types of working capital requirements as discussed above. They

are:

Permanent or Fixed Working Capital requirements

Temporary or Variable Working Capital requirements

Therefore, to finance either of these two working capital requirements, we

have long-term as well as short-term sources. These sources are:

Shares

Commercial Banks

Debentures

Indigenous Banks

LONG-TERM

SOURCES

SHORT-TERM

SOURCES

SOURCE

S


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Public Deposits

Commercial Paper

Ploughing backLoans & Advances

of profits

received

Loans from

Accounts Payable

Financial InstitutionsAccrued Expenses

FACTORS DETERMINING WORKING CAPITAL

REQUIREMENTS

There are many factors that determine working capital needs of an enterprise.

Some of these factors are explained below:

Nature or Character of Business.

The working capital requirement of a firm is closely related to thenature of its business. A service firm, like an electricity undertaking or

a transport corporation, which has a short operating cycle and which

sells predominantly on cash basis, has a modest working capital

requirement. Oh the other hand, a manufacturing concern like a

machine tools unit, which has a long operating cycle and which sells

largely on credit, has a very substantial working capital requirement.


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HCL Infosystems carry on activities related to computer systems.

Though they are primarily an assembling firm they also have

manufacturing facilities in Chennai and Pondicherry. This requires

them to keep a very sizeable amount in working capital.

Size of Business/Scale of Operations.

HCL is the leader in its segment in both consumer as well as

commercial market share. They have increased their share in the

consumer segment notably in the last four years. This they have

achieved through retail expansion. The scale of operations and the size

it

holds in the Indian IT market makes it a must for them to hold their

inventory and current asset at a huge level.


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Rate of Growth of Business.

The rate of growth of sales indicates a need for increase in the working

capital requirements of the firm. As the firm is projected to increase


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their sales by 80% from what it was in 2006, it is required to guard

them against the increasing requirements of the net current asset by way

of efficient working capital management. The sales and projected sales

level determine the investment in inventories and receivables.

HCL Infosystems

Limited

2008 2007 2006 2005 2004

PROJECTE

D

Gross Sales/Income

from Operations

3400 2833 2381 1967.3

7

1522.03

Price Level Changes.

Changes in the price level also affect the working capital requirements.

It was the reduced margins in the price of the raw materials that had

prompted them to go for bulk purchases thus making on additions to

their net current assets. They might have gone for this large-scale

procurement for availing discounts and anticipating a rise in prices,

which would have meant that more funds are required to maintain the

same current assets.


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WORKING CAPITAL CYCLE


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The upper portion of the diagram above shows in a simplified form the chain of

events in a manufacturing firm. Each of the boxes in the upper part of the

diagram can be seen as a tank through which funds flow. These tanks, which

are concerned with day-to-day activities, have funds constantly flowing into

and out of them.

The chain starts with the firm buying raw materials on credit.

In due course this stock will be used in production, work will be carried

out on the stock, and it will become part of the firms work-in-progress.

Work will continue on the WIP until it eventually emerges as the

finished product.

As production progresses, labor costs and overheads need have to be

met.

Of course at some stage trade creditors will need to be paid.

When the finished goods are sold on credit, debtors are increased.

They will eventually pay, so that cash will be injected into the firm.


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Each of the areas- Stock (raw materials, WIP, and finished goods), trade

debtors, cash (positive or negative) and trade creditors can be viewed as tanks

into and from which funds flow.

Working capital is clearly not the only aspect of a business that affects the

amount of cash.

The business will have to make payments to government for taxation.

Fixed assets will be purchased and sold

Lessors of fixed assets will be paid their rent

Shareholders (existing or new) may provide new funds in the form of

cash

Some shares may be redeemed for cash

Dividends may be paid

Long-term loan creditors (existing or new) may provide loan finance,

loans will need to be repaid from time-to-time, and

Interest obligations will have to be met by the business

Unlike, movements in the working capital items, most of these non-working

capital cash transactions are not every day events. Some of them are annual

events (e.g. tax payments, lease payments, dividends, interest and, possibly,

fixed asset purchases and sales). Others (e.g. new equity and loan finance and

redemption of old equity and loan finance) would typically be rarer events.


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SOURCES OF WORKING CAPITAL

HCL Infosystems has the following sources available for the fulfillment of its

working capital requirements in order to carry on its operations smoothly:

Banks:

These include the following banks

State Bank of India

Canara Bank HDFC Bank Ltd.

ICICI Bank Ltd.

Societe Generale

Standard Chartered Bank

State Bank of Patiala

State Bank of Saurashtra


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WORKING CAPITAL POSITION :

CURRENT ASSET TOTAL ASSET


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PARTICULARS 2006 2005 2004 2003 2002CURRENT

ASSETS

100970 81533 54091 45042 55985

NET BLOCK 7970 5329 4925 4954 5552

TOTAL ASSETS 122479 99139 87076 71285 75205

CA/TA 82.44 82.24 62.12 63.18 74.43

The current asset percentage on total asset is the highest over the years. This

increasing percentage of current assets to the total assets at first might indicate

a preference for liquidity in place of profitability, but a look into the nature of

the business carried on by HCL Infosystems reveal the reason behind it. How

far their preference to current assets has affected the sales is shown below.

NET CURRENT ASSET SALES

PARTICULARS 2006 2005 2004 2003 2002

NET CURRENTASSETS

40343 34742 14301 18752 27065

SALES 238136 199886 154295 166604 127003

WORKING 16.12 142.93 -23.736 -30.7 -0.46


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CAPITAL %INCREASE

SALES %

INCREASE

19.14 29.54 -7.38 31.18 8.7

The sales has increased and the profits risen despite the 16.12% increase in

working capital. But what is noteworthy here is that the firm has managed to

maintain the trend of an increase in net current assets. Whether the change has

worked for the company has to be analysed in the context of the growth in

sales as compared to the previous year. There has been a 19.14% rise in the

sales or revenue generated. This would automatically suggest towards a very

efficient working capital management where the assets of the firm which are

short-term in nature have been utilized optimally in connection to their fixed

assets. The firm has gone towards such a dramatic shift in their working

capital position might be because of the tremendous growth witnessed in the

domestic IT market.

CURRENT ASSET FIXED ASSET

PARTICULARS 2006 2005 2004 2003 2002

NET CA/NET BLOCK 5.062:1 6.519:1 2.903:1 3.785:1 4.875:1


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The ratio of the net current asset to the fixed ones is an indicator as to the

liquidity position of the firm. This ratio has declined for the firm compared to

the previous year. There could be an argument as to whether the increased ratio

of working capital to net block is a conservative policy and whether it would be

detrimental to the interest of the company. Or, whether it would have been

proper if the company invested more into the capital expenditure in the form of

plant and machinery or invested in any other form that would have got them an

internal rate of return. What has to be kept in mind before coming to a

conclusion as to the policy of the company, is the fact that the firm being

primarily into assembling, its investment in the fixed asset segment need not be

high. A look into the capacity utilization of the plant would reaffirm this point.

It would be ideal for the firm to continue in the same line and not have

excessive investment in the fixed asset as they can easily add onto this part.

COMPUTER and MICRO PROCESSOR BASED SYSTEMS

YEAR INSTALLEDCAPACITY ACTUALPRODUCTION % CAPACITYUTILIZATION

2006 1150000 581805 50.59

2005 600000 448121 74.69

2004 525000 295192 56.23

DATA GRAPHIC/DISPLAY MONITOR/TERMINALS/HUBS

YEAR INSTALLED

CAPACITY

ACTUAL

PRODUCTION

% CAPACITY

UTILIZATION

2006 250000 267326 106.93


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2005 250000 259617 103.85

2004 350000 297991 85.14

That the fixed assets of the firm are being put to efficient use and the firm is

trying for optimum capacity utilization is something that can be easily deduced.

Whether the current assets or the working capital of the firm has anything to do

with it is for us to see. An increased production in normal circumstances means

better raw material to finished goods conversion rate, i.e. the firm is taking less

of time in the production process and this happens when the current asset

employed in relation with the fixed ones are at optimum. The other notable

feature here is that though the firm has added on to its installed capacity in all

three years, they were still able to increase the capacity utilization. That they

have been able to do it shows that the more current assets, especially inventory

used in relation to the fixed assets, i.e., plant and machinery and their

management has only helped in increasing their utilization to the maximum.

CURRENT ASSET CURRENT LIABILITY

PARTICULARS 2006 2005 2004 2003 2002

CURRENT ASSETS 100970 81533 54091 45042 55985

CURRENT LIABILITES 60627 46791 39790 26290 28920

% CURRENT ASSETSINCREASE

23.84 50.7 20.09 -19.54 8.9

%CURRENT LIABILITES

INCREASE

29.57 17.6 51.35 -9.1 19.45

The 16.12% increase in Net Current assets despite of the fact that there has

been an increase in the Current Assets by 23.84% and increase in Current

Liability has been by 29.57% over that of the previous year has to be attributed

to the fact that in 2005, the company showed such a high increase in CA, that it

is still being offset. This is an indication as to the expanding operations of the


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firm. HCL has increased its current assets in order to meet the increasing sales.

The firms level of liquidity being high, we need a check on whether it affects

the return on assets.

INVENTORY MANAGEMENT


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Inventories

Inventories constitute the most important part of the current assets of large

majority of companies. On an average the inventories are approximately 60%of the current assets in public limited companies in India. Because of the large

size of inventories maintained by the firms, a considerable amount of funds is

committed to them. It is therefore, imperative to manage the inventories

efficiently and effectively in order to avoid unnecessary investment.

Nature of Inventories

Inventories are stock of the product of the company is manufacturing for sale

and components make up of the product. The various forms of the inventories

in the manufacturing companies are:

Raw Material: It is the basic input that is converted into the finished

product through the manufacturing process. Raw materials are those

units which have been purchased and stored for future production.

Work-in-progress: Inventories are semi-manufactured products. Theyrepresent product that need more work they become finished products for

sale.

Finished Goods: Inventories are those completely manufactured

products which are ready for sale. Stocks of raw materials and work-in-

progress facilitate production, while stock of finished goods is required

for smooth marketing operations. Thus, inventories serve as a link

between the production and consumption of goods.

Inventory Management Techniques


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In managing inventories, the firms objective should be to be in consonance

with the shareholder wealth maximization principle. To achieve this, the firm

should determine the optimum level of inventory. Efficiently controlled

inventories make the firm flexible. Inefficient inventory control results in

unbalanced inventory and inflexibility-the firm may sometimes run out of stock

and sometimes pile up unnecessary stocks.

Economic Order Quantity (EOQ): The major problem to be resolved

is how much the inventory should be added when inventory is

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

which it has to purchase on replenishment. If the firm is planning a

production run, the issue is how much production to schedule. Theseproblems are called order quantity problems, and the task of the firm is

to determine the optimum or economic lot size. Determine an optimum

level involves two types of costs:-

Ordering Costs: This term is used in case of raw material and

includes all the cost of acquiring raw material. They include the

costs incurred in the following activities:

Requisition

Purchase Ordering

Transporting

Receiving

Inspecting

Storing

Ordering cost increase with the number of orders placed; thus the

more frequently inventory is acquired, the higher the firms

ordering costs. On the other hand, if the firm maintains large

inventorys level, there will be few orders placed and ordering

costs will be relatively small. Thus, ordering costs decrease with

the increasing size of inventory.


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Carrying Costs : Costs are incurred for maintaining a given level

of inventory are called carrying costs. These include the followingactivities:

Warehousing Cost

Handling

Administrative cost

Insurance

Deterioration and obsolescence

Carrying costs are varying with inventory size. This behavior is

contrary to that of ordering costs which decline with increase in

inventory size. The economic size of inventory would thus depend

on trade-off between carrying costs and ordering cost.

Composition 2006 2005 2004

Raw Material 6349 7749 6127

Stores and Spares 3713 2987 2622

Finished Goods 13374 7245 6506

Work-in-progress 595 784 871

The increasing component of raw materials in inventory is due to the factthat the company has gone for bulk purchases and has increased

consumption due to a fall in prices and reduced margins for the year.

Another reason might be the increasing sales, which might have induced

them to purchase more in anticipation of a further increase in demand of

the product. And the low composition of work-in-progress is

understandable as because of the nature of the business firm is involved

in.


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To the question as to whether the increasing costs in inventory are

justified by the returns from it the answer could be found in the HCL

retail expansion. HCL caters to the need of the two separate segments:

a) Institutions for which they manufacture against orders and,

b) Retail segment of the market.

They are more into retail than earlier and at present more than 650 retail

outlets branded with HCL sign ages and more are in the pipeline

The company in order to meet its raw materials requirements could havegone for frequent purchases, which would have resulted in lesser cash

flows for the firm rather than the high expenditure involved when

procuring in at bulk. The reason why the firm has gone for these bulk

purchases because of the lower margins and the discounts it availed

because of procuring in bulk quantities.

A negative growth in WIP could be because:

a) The time taken to convert raw materials to finished goods is veryminimal

b) This is also due to capacity being not utilized at the optimum.

ABC System: ABC system of inventory keeping is followed in the

factories. Various items are categorized into three different levels in the

order of their importance. For e.g. items such as memory, high capacityprocessors and royalty are placed in the A category. Large number of

firms has to maintain several types of inventories. It is not desirable the

same degree of control all the items. The firm should pay maximum

attention to those items whose value is highest. The firm should

therefore, classify inventories to identify which items should receive the

most effort in controlling. The firm should be selective in approach to

control investment in various types of inventories. This analytical

approach is called ABC Analysis. The high-value items are classified


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as A items and would be under tightest control. C items represent

relatively least value and would require simple control. B items fall in

between the two categories and require reasonable attention of

management.

JIT: The relevance of JIT in HCL Info system can be questioned. Thisis because they procure materials on the basis of projections made at

least two or three months before. Even at the time of procurement they

ensure that they procure much more than what actually is required by

the firm that is they hold significant amount of inventory as safety stock.

This is done to counter the threat involved in default and accidental

breakdowns. The levels of safety stock usually vary according to the

usage.


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Conversion Periods

Raw Material

Particulars 2006 2005 2004


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Raw Material Consumption 121077 97971.31 57775.14

Raw Material Consumption/day 332 268.41 158.28

Raw Material Inventory 7072 6960.275 4364.735

Raw Material Holding Days 21 25.93 27.57

The raw material conversion period or the raw material holding cost has

reduced from 26 to 21. This is despite an increase in its consumption. This

indicates that the firm is able to convert the raw material at its disposal to the

work-in-progress at a lesser time as compared to the last year. It would be to

the benefit of the firm to reduce the production process and increase the

conversion rate still as the firm is required to meet the increasing demand.

Work-in-progress


Cost of Production 191911 159651.19 113500.33

Cost of Production/day 525.78 437.4 310.95Work in progress inventory 689.5 827.52 679.455

WIP Holding days 1.31 1.89 2.19

The work-in-progress holding time is important for a firm in the sense that it

determines the rate of time at which the production process will be complete or

the finished goods will be ready for disposal by the firm. The firm as it is in the

process of assembling should take the least possible time in conversion to

finished goods unlike a hard core manufacturing firm, as any firm would like to

have its inventory in the work-in-progress at the minimum. There would also

be less of stock out costs as due to better conversion rates the firm is able to

meet the rise in demand situations. More the time it spends lesser its efficiency

would be in the market. Here the firm has been able to bring down its WIP

conversion periods.


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Finished Goods


Cost of goods sold 228177 178438.85

124768.92

Cost of goods sold/day 625 488.87 341.832

Finished goods inventory 10310 6875.725 5026.505

Finished goods inventory Holding days 16 14.06 14.8

The time taken for the firm to realize its finished goods as sales has increasedas compared to last year. This growth in sales could be traced back to the

growing domestic IT market for the commercial as consumer segment in India.

HCL has around 15% of the market in desktop and it is the market leader in

this segment. So it is only natural that they are able to better their conversion

rate of finished goods to sales.

Operating Cycle


Inventory conversion period 38 42 45

Average collection period 70 63 66

Gross operating cycle 108 105 111

Average payment period 22 23 17

Operating cycle 86 82 94

The operating cycle of the firm reveals the days within which the inventory

procured gets converted to sales or revenue for the firm. This time period is of

importance to the firm as a lag here could significantly affect the profitability,

liquidity, credit terms, and the policies of the firm. All the firms would like to

reduce it to such extend that their cash inflows are timely enough to meet their

obligations and support the operations. That the firm has been able to reduce


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the ratio is in itself an achievement as they were having huge stocks of

inventory. But the reduction in the cycle could also be attributed to the boom in

the market and the growth it is expected to reach. This boom automatically

ensures the demand for the finished goods and thus helping in it to garner sales

for the firm.

Raw Material Consumption

Particulars 2006 2005 2004Imported 92007 70784.27

42129.63

Indigenous 29070 27187.04

15645.51

% Imports 75.99 72.25 72.92

A major chunk of the imports come from Korea and Taiwan and is purchased

in US$. The value of imported and indigenous raw material consumed give aclear picture that if there is a change in the EXIM policy of the government it is

bound to affect the company adversely as more than 70% of their consumption

is from imports. But this is the scenario witnessed in the industry as a whole

and though HCL is into expanding its operation to Uttaranchal it in the present

state is would be affected by a change in the import duty structure.

A major chunk of their current assets are in the form of inventory and the

change in technology will invariably be a threat faced by the firm. The question

of technology applying here like says a certain device going say out of fashion

or outdated. For e.g. TFT monitors being in demand more than CRT.

CASH MANAGEMENT


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SOURCES OF CASH:

Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash!)

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit.

Long-term loans

If you have insufficient working capital and try to increase sales, you can

easily over-stretch the financial resources of the business. This is called

overtrading.

Early warning signs include:

Pressure on existing cash

Exceptional cash generating activities e.g. offering high discounts for

early cash payment

Bank overdraft exceeds authorized limit.

Seeking greater overdrafts or lines of credit

Part-paying suppliers or other creditors

Paying bills in cash to secure additional supplies

Management pre-occupation withsurvivingrather than managing

Frequent short-term emergency requests to the bank (to help pay wages,

pending receipt of a cheque).


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CASH MANAGEMENT IN HCL INFOSYSTEMS:

The cash management system followed by the HCL Infosystems is mainly

lock box system.

Cash Management System involves the following steps:

1. The branch offices of the company at various locations hold the

collection of cheques of the customers.

2. Those cheques are either handed over to the CMS agencies or bank of

the particular location take charge of whole collection.

3. These CMS agencies or bank send those cheques to the clearing house to

make them realized. These cheques can be local or outstation.

4. The CMS agencies or bank send information to the central hub of the

company regarding realization/cheque bounced.

5. The central hub passes on the realized funds to the company as per the

agreed agreements.

6. The CMS agencies or concerned bank provides the necessary MIS to thecompany as per requirement.

In cash management the collect float taken for the cheques to be realized into

cash is irrelevant and non-interfering because banks such as Standard

Chartered, HDFC and CitiBank who give credit on the basis of these cheques

after charging a very small amount. These credits are given to immediately and

the maximum time taken might be just a day. The amount they charge is very

low and this might cover the threat of the cheque sent in by two or three

customers bouncing. Even otherwise the time taken for the cheques to be

processed is instantaneous. Their Cash Management System is quite efficient.


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Cash-Current Liability


Absolute Liquid Ratio 0.24:1 0.31:1 0.11:1

The absolute liquid ratio is the best for three years and the cash balances as to

the current liability has improved for the firm. Firm has large resources in cash

and bank balances. While large resources in cash and bank balances may seem

to affect the revenue the firm could have earned by investing it elsewhere as

maintenance of current assets as cash and in near cash assets and marketable

securities may increase the liquidity position but not the revenue or profit

earning capacity of the firm.

Dividend Policy-Cash


Dividend Policy% 210 310 400

Shift in Sales 154295 199886 238136

Cash Balance 4463.43 14582.65 14529.29

Cash in Hand 118.33 128.97 128.97


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The other notable feature in HCL statements has been the growing dividend

policy of the firm. The payment of dividend means a cash outflow. Thus cash

position is an important criterion at the time of paying dividends. There is a

theory that greater the cash position and ability to pay dividends. The firm has

adopted a policy of disbursing the revenue earned as profits to the shareholders

as dividends as could be seen from the increasing % of dividends declared.


PBIDT 14284 15634 14523

Equity Dividend% 400 310 210

This could mean two things for the firm the amount of cash retained in the

business for capital expenditure purposes are minimal or nil. But rather than

investing more in plant and machine which they can at any point in time by

adding on a additional line if need they would like to optimize their utilization

in fixed assets at present. This also means that the percentage of cash in hand

maintained by the firm as a source of liquidity could be reduced, i.e. the


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amount of idle cash in the business could be made to a level which the firm

feels optimum.

The firm feels that they should retain cash and it would be in the interest of thefirm as well as the shareholders. This would automatically mean as decrease in

Earning/share (EPS)(Basic EPS declined from 8 in 2005 to 6.74 in 2006). It

would prompt more of investors being interested in the shares of the company,

which would boost the purchase of the securities and increase the market

price/share thus being beneficial for the firm.

Cash Flows

Cash Flows 2006 2005 2004

Net Cash from Operating activities 6924 2675.57 13706.34

Net Cash from Investing activities -3515 15661.29 -2169.16

Net Cash from Financing activities -3512 -8217.68 -11412.1

The firm has disposed of investments worth around 655 Crores to meet its

growing needs. The other notable feature is decline is the firms inflows from

operations primarily due to the reason that the cash generated from the

operations is the lowest in three years. And the firms growing dividend policy

has contributed to the outflows in financing activities.

Cash Flow in Operating Activities

Working Capital Changes

Working Capital Changes 2006 2005 2004

Trade and other receivables -14166 -14510.69 -7106.68

Inventories -5221 -2683.92 -7221.11

Trade Payables and other Liabilities 13026 6419.13 14311.5


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The cash from the operation has been subject to considerable change due to the

changes that could be adjusted towards trade receivables and trade payables.The outflows in inventory have become as low as 37% of what it was last year

despite an increase in the inventory consumption by 16.64%. The resulting

reduction in the cash outflows might be because of the inventories being

procured more on credit. That the cash from operations has declined has

affected the current liability index of the firm.

Cash Flow in Investing Activities

Investments in Mutual Funds 2006 2005 2004

Investments (year end) 13539 12277.44 28059.88

Purchase of Investment -65992 -53075.99 -59249.81

Disposal/Redemption of Investment 65312 65489.84 52087.36

The investments have reduced from the last year due to the redemption of

investments taken place to meet various needs such as increasing demand in

stock or inventory and to ensure better credit and receivables policy. We can

see that the firm has in these three years increased their cash inflow from the

investing activities by way of disposal of investments when in need. That is the

firm has redeemed to realize cash as to meet its expanding operations, fund the

inventory procurement and meet the obligations.

The investments in mutual funds are beneficial to the firm in the context that

they contain interest bearing securities which add up as a source of revenue forthe firm unlike cash which remains idle and unproductive when not in use. This

reduction of dividend could be attributed to disposal of investments in mutual

funds and subsidiary. This disposal creates a fund, which can be used by the

company as and when the need arises.


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Cash vs. Marketable Securities

The investment in marketable securities rather than having large cash balances

in something that has been given thought for by the firm. This is because while

a firm gets revenue in the form of interests by investments, it actually has to

pays certain amount money to the banks for maintaining current accounts and

fixed deposits usually have a longer maturity period. That is, the problem with

high investments is that the opportunity to earn is lost, thus a firm has to

maintain an optimal cash balance. But the investment in mutual funds or other

marketable securities might create a problem of investment, as they might not

be readily realizable as say liquid cash or the amount deposited in the current

account. The investments in say fixed assets say may earn a fixed rate of

interest but they have a maturity period attached to them.

In HCL, Standard Chartered is the concentration bank in which all the inflows

from the deposit banks are concentrated and passed on to the disbursement

banks for further disbursement.

Liquid Cash Balance

The liquid cash maintained in the business is only that much as is required to

satisfy the daily requirements of the firm and not more. The rest of the cash is

invested into mutual funds and also held in fixed deposits and current accounts.

Instruments Used

The instrument used here are primarily cheques comprising of around 97% of

what is used in. The rest 2-3% comprise of the letters of credit.

Thus working capital is the lifeline for every business. The main advantages of

sufficient working capital are:

It helps in prompt payment


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Ensures high solvency in the company and good credit standing.

Regular supply of material and continuous production.

Ensures regular payment of salaries and wages and day to day

commitments.


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RECEIVABLES MANAGEMENT

Cash flow can be significantly enhanced if the amounts owing to a business

are collected faster. Every business needs to know.... who owes them

money.... how much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business; in particular on smallbusinesses whom can least afford it. If you don't manage debtors, they will

begin to manage your business as you will gradually lose control due to

reduced cash flow and, of course, you could experience an increased

incidence of bad debt.

The following measures will help manage your debtors:

1.Have the right mental attitude to the control of credit and make sure that it

gets the priority it deserves.

2.Establish clear credit practices as a matter of company policy.

3.Make sure that these practices are clearly understood by staff, suppliers

and customers.


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4.Be professional when accepting new accounts, and especially larger ones.

5.Check out each customer thoroughly before you offer credit. Use credit

agencies, bank references, industry sources etc.

6.Establish credit limits for each customer and stick to them.

7.Continuously review these limits when you suspect tough times are

coming or if operating in a volatile sector.

8.Keep very close to your larger customers.

9.Invoice promptly and clearly.

10.Consider charging penalties on overdue accounts.

11.Consider accepting credit /debit cards as a payment option.

12.Monitor your debtor balances and aging schedules, and don't let any debts

get too old.

Recognize that the longer someone owes you, the greater the chance you will

never get paid. If the average age of your debtors is getting longer, or is

already very long, you may need to look for the following possible defects.

Poor collection procedures.

Lax enforcement of credit terms.

Slow issue of invoices or statements.

Errors in invoices or statements.

Customer dissatisfaction.

Weak credit judgement.


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Debtors due over 90 days (unless within agreed credit terms) should generally

demand immediate attention. Look for the warning signs of a future bad debt.

For example..

1. Longer credit terms taken with approval, particularly for smaller orders.

2. Use of post-dated checks by debtors who normally settle within agreed terms.

3. Evidence of customers switching to additional suppliers for the same goods.

4. New customers who are reluctant to give credit references.

5. Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many reasons

and therefore put on the long finger because they convince themselves that there

is something more urgent or important that demand their attention now. There is

nothing more important than getting paid for your product or service. A customer

who does not pay is not a customer.

HERE ARE FEW WAYS IN COLLECTING MONEY FROM DEBTORS: -

Develop appropriate procedures for handling late payments.

Track and pursue late payers

Get external help if you own efforts fail.


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Dont feel guilty asking for money .. its yours and you are entitled to it.

Make that call now. And keep asking until you get some satisfaction.

In difficult circumstances, take what you can now and agree terms for the

remainder, it lessens the problem.

When asking for your money, be hard on the issue but soft on the person.

Dont give the debtor any excuses for not paying.

Make that your objective is to get the money, not to score points or get even.

RECEIVABLES MANAGEMENT IN HCL INFOSYSTEMS:

PARTICULARS 2006 2005 2004 2003

DEBTORS TURNOVER RATIO 5.21 5.80 5.53 6.62

AVERAGE COLLECTION PERIOD 70 63 66 55

A better turnover ratio implies for the firm, more efficiency in converting the

accounts receivable to cash. A firm with very high turnover ratio can take the

freedom of holding very little balances in cash, as their debtors are easily

realizable. In case of HCL, the collection period for the firm is 70 days.

PARTICULARS 2006 2005 2004

PROVISION FOR DOUBTFUL DEBTS(CASH FLOW) 3 49.85 25

DEBTS DOUBTFUL(EXCEEDING 6 MONTHS) 47 134.09 69.8


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The debts doubtful have doubled but their percentage on the debts has almost

become half. This implies a sales and collection policy that get along with the

receivables management of the firm.

COLLECTION POLICIES:

It refers to the collection procedures such as letters, phone calls and other follow

up mechanism to recover the amount due from the customers. It is obvious that

costs are incurred towards the collection efforts, but bad debts as well as average

collection period would decrease. Further, a strict collection policy of the firm is

expensive for the firm because of the high cost is required to be incurred by the

firm and it may also result in loss of goodwill. But at the same time it minimizesthe loss on account of bad debts. Therefore, a firm has to strike a balance between

the cost and benefits associated with collection policies.

The steps usually followed in collection efforts are:

Sending repeated letters and reminders to the customers

Personal visits

Using agencies involved in collection process

Making telephonic reminders

Initiating legal actions

Real Time Gross Settlement (RTGS)

Real Time Gross Settlement as such is a concept new in nature and though the

firm uses the system with all the members of the consortium, it is still in its primal

stage and will take time before all of the clients of the firm are willing to accept it.

The firm has made a proposal to the consortium of the banks during appraisal for

faster implementation of internet based banking facility by all the banks and

adoption of RTGS payment system through net.


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The debtors turnover ratio is completely dependent upon the credit policy

followed by the firm. The credit policy followed by the firm should be such that

the threat of bad debts and the default rate involved should be terminated.

PARTICULARS 2006 2005 2004 2003

CREDITORS TURNOVER RATIO 16.44 15.68 21.29 21.14

PAYMENT PERIOD 22 23 17 16

That the creditors turnover ratio has declined and payment period has increased

indicate that the company has got a leeway in making the payment to the creditors

by way of increased time.

With creditors they are having pre-agreements and have undertaken arrangements

with them, which they believe to be the best in the business and these are fixed.

(NOTE: Acceptances are not included in the computation of creditors turnover)


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MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should bemanaged carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing function can

create liquidity problems.

Consider the following: -

Who authorizes purchasing in your company - is it tightly managed or spread

among a number of (junior) people?

Are purchase quantities geared to demand forecasts?

Do you use order quantities, which take account of stock holding and

purchasing costs?

Do you know the cost to the company of carrying stock?

Do you have alternative sources of supply? If not, get quotes from major

suppliers and shop around for the best discounts, credit terms as it reduces

dependence on a single supplier.


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How many of your suppliers have a return policy?

Are you in a position to pass on cost increases quickly through price increases

to your customers?

If a supplier of goods or services lets you down can you charge back the cost

of the delay?

Can you arrange (with confidence!) to have delivery of supplies staggered or

on a just-in-time basis?

There is an old adage in business that "if you can buy well then you can sell

well". Management of your creditors and suppliers is just as important as the

management of your debtors. It is important to look after your creditors- slow

payment by you may create ill feeling and can signal that your company is

inefficient (or in trouble!).

Remember that a good supplier is someone who will work with you to enhance the

future viability and profitability of your company.


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Financing Current Assets

The firm has to decide about the sources of funds, which can be availed to makeinvestment in current assets.

Long term financing:

It includes ordinary share capital, preference share capital, debentures, long term

borrowings from financial institutions and reserves and surplus.

Short term financing:

It is for a period less than one year and includes working capital funds from

banks, public deposits, commercial paper etc.

Spontaneous financing:

It refers to automatic sources of short-term funds arising in normal course of

business. There is no explicit cost associated with it. For example, Trade Creditand Outstanding Expenses etc.


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Depending on the mix of short and long term financing, the company can

follow any of the following approaches.

Matching Approach

In this, the firm follows a financial plan, which matches the expected life of

assets with the expected life of source of funds raised to finance assets. When the

firm

follows this approach, long term financing will be used to finance fixed assets

and permanent current assets and short term financing to finance temporary or

variable current assets.

Conservative Approach

In this, the firm finances its permanent assets and also a part of temporary current

assets with long term financing. In the periods when the firm has no need for

temporary current assets, the long-term funds can be invested in tradable securities

to conserve liquidity. In this the firm has less risk of facing the problem of

shortage of funds.

Aggressive Approach

In this, the firm uses more short term financing than warranted by the matching

plan. Under an aggressive plan, the firm finances a part of its current assets with

short term financing.

Relatively more use of short term financing makes the firm more risky.


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Current asset to fixed asset ratio:

The financial manager should determine the optimum level of current assets so

that the wealth of shareholders is maximized. A firm needs fixed and current

assets to support a particular level of output.

The level of current assets can be measured by relating current assets. Dividing

current assets by fixed assets gives CA/FA ratio. Assuming a constant level of

fixed assets, a higher CA/FA ratio indicates a conservative current assets policy

and a lower CA/FA ratio means an aggressive current assets policy assuming

other factors to be constant. A conservative policy i.e. higher CA/FA ratio

implies greater liquidity and lower risk; while an aggressive policy i.e. lower

CA/FA ratio indicates higher risk and poor liquidity. The current assets policy of

the most firms may fall between these two extreme policies. The alternative

current assets policies may be shown with the help of the following figure.


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In this figure the most conservative policy is indicated by alternative A, where as

CA/FA ratio is greatest at every level of output. Alternative C is the most

aggressive policy, as CA/FA ratio is lowest at all levels of output. Alternative B

lies between the conservative and aggressive policies and is an average policy.

WORKING CAPITAL & SHORT-TERM FINANCING

CONSORTIUM BASED FINANCING

Current Working Capital Limits

NAME OF THE BANK FUND BASED NON-FUND BASEDSTATE BANK OF INDIA 3600 46000ICICI BANK 1282 19000HDFC BANK 1200 10000STANDARD CHARTERED BANK 1200 19000STATE BANK OF SAURASHTRA 715 7500STATE BANK OF PATIALA 1300 7700CANARA BANK 1203 6000SOCIETE GENERALE 1000 4000HSBC BANK 1000 18300TOTAL 12500 137500

In order to finance the working capital needs of the firm in the form of Working

Capital Demand Loan, there is a consortium of nine banks. The consortium if


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banks provide a fund based limit of 125 Crores which comprises of cash credit and

working capital demand loans and non-fund based limits which has bank gurantee

and letter of credit subject to a limit of 1375 Crores. The Lead Bankin this

consortium of banks is State Bank of India and the second lead bank is ICICI.It is SBI, which fixes the limit on the basis of consortium. They, in consultation of

the company decide the allocation of limit to various member banks. The

allocation cannot be higher than the limits fixed by it. SBI is the biggest

contributor in the consortium for both fund and non-fund based limits with about

31.30 in funds and 34.02 in non-fund limits. The ratio of both limits for the year2006 is 0.23:0.77

It is on the basis of the accounts receivable that the banks come to an agreement

with regards to the limits imposed. Though it is the fund based limits that finance

the working capital requirements, the non-fund based limits are important for the

management of the working capital as there might be clients who are not willing

to sell on open credit and might be demanding letters of credit before anyadvances.

RENEWAL OF LIMITS

LIMITS 2006 2005 2004

FUND BASED 11500 11500 11500

NON FUND BASED 48500 38500 28500

TOTAL 60000 50000 40000

All banks sanction the limits for a period of one year. Thereafter it is to be

renewed every year. SBI appraises the limit on the basis of consortium. The

individual banks appraise for their own individual limit. The non fund based limits

of the firm in consortium financing has been subjected to change for the past two


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years as per the requirements of the firm and the consent of the lead bank to its

proposal. It was around 385 Crores in 2005 and had been risen to around 485

Crores in 2006.

A proposal has been made by the firm to furtherappraise the limits by 100Crores to 585 Crores in view of the growing operations of the firm with full

interchangeability between letter of credit and bank guarantee limits for

operational flexibility. Allocation of the fund based and non based limits among

the banks based on operational convenience rather than allocating the fund based

and non fund based on the same ratio is also among the proposals made by the

firm.

The company needs to provide the following information to bank for appraisals:

Credit Monitoring Appraisal

Write Up on company

Share holding pattern

List of the directors

CONSORTIUM MEETING :

All the members of the consortium are required to meet to discuss various issues

relating to the working facilities. As per RBI guidelines, the lead bank, i.e., SBI

should ensure that one consortium meeting is held every quarter snd this meeting

has to be arranged by HCL.

DOCUMENTATION and JOINT DOCUMENTATION:

There are various documents that need to be signed at the time of renewal or

inducting any bank to the consortium. The various documents are as follows:


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Loan agreement

Hypothecation agreement for movable machinery

Hypothecation agreement for movables and book debts

Counter Indemnity

The above are the standard agreements asked for by the banks. The common seal

has to be witnessed by the company secretary and on

final report hcl 1[1].doc

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