A REPORT

ON

“WORKING CAPITAL MANAGEMENT IN“WORKING CAPITAL MANAGEMENT IN

HCL INFOSYSTEMS LIMITED”HCL INFOSYSTEMS LIMITED”

BY

(Submitted in partial fulfillment of the requirements of

MBA program at

Jagan Institute Of Management Studies , Rohini)

SUBMITTED TO :

Mr. J.C Joshi Ms .Deepti Kakkar

Accounts Manager (PF), Faculty Guide,

HCL Infosystems Ltd. JIMS

BHAVANSHU JOSHI

FC09130

1

CERTIFICATE

This is to certify that the project work done on “Working Capital Management at

HCL Infosystems” is an original work carried out by Ms. Bhavanshu Joshi under my

supervision and guidance. The project report is submitted towards the partial

fulfillment of two – year, full time Post Graduate Diploma in Management.

This work has not been submitted anywhere else for any other degree/diploma. The

work was carried out from 03-06-2010 to 28-06-2010 in HCL Infosystems.

Mr.J.C.Joshi Ms Deepti Kakkar

(Industrial Guide) Faculty Guide

Date:

Bhavanshu Joshi

Roll No. FC09130

2

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

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

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DECLARATION

I hereby declare that this project report titled “working capital management at HCL

INFOSYSTEMS is true to my knowledge and is result of my own efforts. This

project has not been submitted anywhere and I am solely responsible for the accuracy

of this project.

Bhavanshu Joshi

FC09130

JIMS

4

PREFACE

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 firm’s working capital consists 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.

5

TABLE OF CONTENTS

Acknowledgement

Declaration

Preface

Executive summary

1. INTRODUCTION

Introduction about the organisation

Company’s history

HCL at a glance

Alliances and partnerships

Management team

Corporate information

Objectives

Hypothesis

2. LIETRATURE REVIEW

3. RESEARCH METHODOLOGY

Scope of study

Data source

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

6

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

Comparing the working capital efficiency with other competitor firms

4. FINDING AND ANALYSIS

Industry analysis

Financial graphs

Concluding analysis

5. SUGGESTIONS AND RECOMMENDATIONS

6. LIMITATION

BIBLOGRAPHY

APPENDIX

7

LIST OF TABLES AND FIGURES

Table No. Name Page.

No

1.1 Highlight of HCL 11

3.2 Current assets-total asset 35

3.3 Sales-current asset 35

3.4 Current assets-fixed assets 36

3.5 Current assets-current liability 36

3.6 Inventory composition 40

3.7 Raw material composition 42

3.8 Work in progress composition 42

3.9 Finished goods composition 43

3.10 Inventory turnover ratio 44

3.11 Quick ratio 49

3.12 Cash flow 51

3.13 Working capital ratio 51

3.14 Cash flow from investing activity 52

3.15 Debtor turnover ratio & average collection period ratio 56

3.16 Secured loan 61

3.17 Unsecured loan 62

3.18 Year end commercial papers 62

4.1 Comparison between ratios of competitor companies 69

4.2 Analysis of the ratio in comparison with competitor 70

8

Figure No. Name Page No.

1.1 HCL’s area of work

2.1 Operating cycle 17

3.1 Short term-long term financing 24

3.2 Kinds of working capital 25

3.3 Permanent and temporary financing 27

3.4 Graph showing temporary and permanent financing 27

3.5 Working capital cycle 33

3.6 Inventory turnover ratio 44

3.7 Average inventory holding period 44

3.8 Quick ratio 49

3.9 Dividend 49

3.10 Cash balance 49

3.11 Average collection period 56

3.12 Debtor turnover ratio 56

3.13 Level of current assets Vs output 59

4.1 Revenue graph 65

4.2 PBT graph 66

4.3 PAT graph 66

4.4 EPS graph 67

4.5 Dividend 67

4.6 Book value 68

4.7 PE ratio graph 68

9

EXECUTIVE SUMMARY:

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 company’s 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

HCL Infosystems.

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Chapter 1:INTRODUCTION

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 and Chief

Strategy Officer, HCLTechnologies

Roshni Nadar, CEO HCL Corp

Ajai Chowdhry - Founder-Chairman and CEO,

HCL Infosystems , Vineet Nayar - CEO, HCL

Technologies. Jagadeshwar Gattu- Vise

President of HCL.

Industry Information Technology Services

Revenue US$5.0 billion (2009)

Employees 62,000+ (2010

Website www.hcl.in

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

largest electronics, computing and information technology company. Based in Noida,

near Delhi, 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

11

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) and HCL Infosystems (to address the Indian and APAC IT hardware

market). HCL has since then operated as a holding company.

HCL INFOSYSTEMS – AN OVERVIEW

An Overview About The Company

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 in Noida.

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 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.

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HISTORY

HCL Infosystems Ltd is one of the pioneers in the Indian IT market, with its origins

in 1976. For over quarter of a century, we have developed and implemented

solutions for multiple market segments, across a range of technologies in India. We

have been in the forefront in introducing new technologies and solutions. The

highlights of the HCL saga are summarized below:

Table 1.1

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

1976 - Foundation of the Company laid

1977- Launch of the first microcomputer-based commercial computer with a

ROM -based Basic interpreter

1980- Formation of Far East Computers Ltd., a pioneer in the Singapore IT

market, for SI (System Integration) solutions

1986- Purchase specifications demand the availability of RDBMS products on

the supplied solution (Unify, Oracle).

1991 - HCL enters into a joint venture with Hewlett Packard

1994- HCL acquires and executes the first offshore project from IBM

Thailand

1996 - Becomes national integration partner for SAP

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

2000 - Bags Award for Top PC Vendor In India

- Becomes the 1st IT Company to be recommended for latest version of

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ISO 9001 : 2000

- Rated as No. 1 IT Group in India

2001 -IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001

2002-HCL Infosystems & Sun Microsystems enters into a Enterprise

Distribution Agreement

2003 - Enters into partnership with AMD

2004

- Maintains No.1 position in the Desktop PC segment for year 2003

- Partners with Union Bank to make PCs more affordable, introduces

lowest ever EMI for PC in India

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

2006

- HCL Infosystems & Nokia announce a long term distribution strategy

- HCL Infosystems showcases Computer Solutions for the Rural Markets

in India

- HCL Forms a Strategic Partnership with APPLE to provide Sales &

Service Support for iPods in India

2007

-HCL Infosystems wins CNBC Awaaz consumer award for personal

computers

-HCL announces ‘HCL ecoSafe’ program

2008

-HCL unveils the future of personal computing – unveils next generation,

ultra portable, sub Rs.14000/- laptops for the first time in India

-for security & surveillance Launch of HCLTouch - a pioneering

initiative in the Indian ICT sector for customer care services.

2009

-Largest selling enterprise desktop brand for the seventh consecutive year

-HCL ranks No.1 Company in IT services as per DQ CSA 2009

AREA OF WORK

Figure 1.1

14

The fast-pace of growth in the Indian economy has transformed the way systems and

technologies are deployed. It is seen across verticals and sectors, that organisations

are looking for efficiencies of operations through the use of technology. The more

complex systems and technologies become, the more urgent is the need to ensure their

flawless integration to deliver exceptional value to the users. To address this growing

demand HCL has reoriented its operations to focus increasingly on system integration

solutions to our customers. Our System Integration capabilities span across a diverse

range of services ranging from Consultancy, Solution Design, Selection of technology

components, Project roll outs and Operation & Maintenance services. HCL have also

developed a range of Hardware & Software products, Processes & Project

management methodologies for various customer verticals including Banking,

Financial Services and Insurance (BFSI) to e-Governance,

Power ,Telecom ,Railways, Defence, Security, Education, Infrastructure, Healthcare,

Retail, and Media & Entertainment . HCL have built a model that leverages our

strengths with that of leading technology partners including -Microsoft,

Oracle ,SAP ,IBM, HP ,Symantec ,Cisco ,Sun, CA and Hitachi - to roll out solutions

that incorporate the best of breed technology to meet the requirement of the consumer

i HCL ANNUAL REPORT 2008-09

OBJECTIVE OF STUDY

15

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 objective of this project is to understand the concept of “ Working

Capital Management”.

To understand the planning and management of working capital at HCL

Infosystems Ltd.

To determine and analyze various ratios and hence measure the financial

soundness of the company

To compare the working capital management of HCL Infosystems with other

competitor companies.

CHAPTER 2:LITERATURE REVIEW

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In general, it is possible to discuss finance theory under three main threads as capital

budgeting, capital structure and working capital management. The first two of them

are mostly related with financing and managing long-term investments. However,

financial decisions about working capital are mostly related with financing and

managing short-term investments and undertake both current assets and current

liabilities simultaneously (Mueller, 1953; Scherr, 1989; Moyer et al., 1992; Pinches,

1992; Brealey and Myers, 1996; Brigham and Gapenski, 1996; Damodaran, 2002;

Aksoy, 2005). So, most of the time, it is reasonable to term short-term financial

management as working capital management (Ross et al., 2003).

Efficiency in working capital management is so vital for especially production- firms

whose assets are mostly composed of current assets (Horne and Wachowitz, 1998) as

it directly affects liquidity and profitability of any firm (Raheman and Nasr, 2007).

According to Kargar and Bluementhal (1994) bankruptcy may also be likely for firms

that put inaccurate working capital management procedures into practice, even though

their profitability is constantly positive. Hence, it must be avoided to recede from

optimal working capital level by bringing the aim of profit maximization in the

foreground, or just in direct contradiction, to focus only on liquidity and consequently

pass over profitability. While excessive levels of working capital can easily result in a

substandard return on assets; inconsiderable amount of it may incur shortages and

difficulties in maintaining day-to-day operations.

Working capital is also a major external source of capital for especially small and

medium sized and high-growth firms. These firms have relatively limited access to

capital markets and tend to overcome this complication by short-term borrowing.

Working capital position of such firms is not only an internal firm-specific matter, but

also an important indicator of risk for creditors (Moyer et al., 1992). Higher amount

of working capital enables a firm to meet its short-term obligations easier. This results

increase in borrowing capability and decrease in default risk (and consequential

decrease in cost of capital and increase in firm value). So, it is possible to state that

efficiency in working capital management affects not only short-term financial

performance (profitability), but also long-term financial performance (firm value

maximization).

17

Liquidity, as a function of current assets and current liabilities, is an important factor

in determining working capital policies and indicates firm ’s capability of generating

cash in case of need. Current, acid-test and cash ratios as traditional measures of

liquidity are incompetent and static balance sheet based measures that can not provide

detailed and accurate information about working capital management effectiveness

(Finnerty, 1993; Jose et al., 1996). Formulas used for calculating them consider both

liquid and operating assets in common. However, considering operating assets like

receivables and inventories with cash and cash-equivalent assets is illogical for basic

principles of cash management. Besides, mentioned traditional ratios are also not

meaningful in terms of cash flows (Richards and Laughlin, 1980).

Drawing attention to limitations of traditional liquidity ratios, Hager (1976), Richards

and Laughlin (1980), Emery (1984a), Kamath (1989), Gentry et al. (1990), Schilling

(1996) and Boer (1999) have insisted on using ongoing liquidity measures in working

capital management. Ongoing liquidity refers to the inflows and outflows of cash

through the firm as the product acquisition, production, sales, payment and collection

process takes place over time. As the firm ’s ongoing liquidity is a function of its cash

(conversion) cycle (Pinches, 1992), it will be more appropriate and accurate to

evaluate effectiveness of working capital management by cash conversion cycle,

rather than traditional liquidity measures.

Cash conversion cycle as a part of operating cycle (Fig. 1) is an ongoing liquidity

measure developed by Gitman (1974). Closely related with operating cycle, cash

conversion cycle is, in brief, the part of operating cycle financed by the firm itself

(McLaney, 1997) and is simply calculated by adding inventory period to accounts

receivables period and then subtracting accounts payables period from it. It focuses on

the length of time between the acquisition of raw materials and other inputs and the

inflow of cash from the sale of goods (Arnold, 1998). The shorter this cycle, the fewer

resources the firm needs to tie up.

Traditional approach to interaction between cash conversion cycle and profitability

posits that relatively long cash conversion periods tend to decrease profitability. Trade

activities of a firm can be considered as a process in circulation where cash is

converted into assets and assets into cash. Cash available for trade activities of the

18

firm has an important multiplier effect due to its turnover ratio. Higher cash turnover

ratios enable managers to minimize short-term investments whose rates of return are

relatively lower compared to long-term investments and consequently increase

profitability.

Studies regarding working capital are mostly related with improving models to

determine optimal liquidity and cash balance, rather than analyzing underlying

reasons of relationships between liquidity, working capital management practices and

profitability.

Fig.

2.1:

Operating and cash conversion

cycles. Fundamentals of corporate

finance (Ross et al., 2003)

Pioneer studies of Baumol (1952) about an inventory management model and of

Miller (1966) about a cash management model may be considered as the best-known

studies in this field. Though foundations and assumptions of these models are not

well-established in terms of applicability, they inform managers about problems

related with working capital management practices. Later on, Johnson and Aggarwal

(1998), similarly, have developed a cash management model focusing on cash flows

and argued that cash collection and cash payment processes should have to be handled

independently.

As mentioned before, traditional measures of liquidity are in lack of expressing the

effects of cash flows; hence, the effectiveness (and quality) of working capital

19

management practices in terms of firm profitability should be revised by components

of cash conversion cycle. Literature review consisting some of previous studies -

though limited in scope and outnumbered-regarding with the relationship between

profitability and working capital management practices is given below.

In a study by Kamath (1989) about working capital management practices in retailing

firms, it has been concluded that there is a reverse relationship between cash

conversion cycle and profitability. The results of a more detailed study by Soenen

(1993) have shown that, in case of overlooking industrial differences, there does not

exist any statistically constant relationship between cash conversion cycle and

profitability. However, in case of considering industrial differences, the relationship

between the mentioned variables has shown dissimilarities across industries as

positive in some industries and negative in others. In another study of Shin and

Soenen (1998), a sample consisting of American manufacturing firms for the period

of 1974-1995 has been analysed and a statistically negative relationship between cash

conversion cycle and profitability has been confirmed. In a similar study to our study,

Deloof (2003) has discussed possible relationships between cash conversion cycle and

profitability by dividing cash conversion cycle into its components (inventory,

accounts receivables and accounts payables periods). Results of the study have

concluded that increases in all of these periods affect profitability negatively.

Empirical findings of Lazaridis and Tryfonidis (2006) ’s study have been similar to

Deloof (2003) ’s. According to the results of their study based on a sample of 131

Athens Stock Exchange listed companies for the period of 2001-2004, cash

conversion cycle affects profitability negatively. According to the findings of another

study from a different perspective, it has been concluded that the effect of cash

conversion cycle on profitability is stronger than the effect of current ratio on it

(Eljelly, 2004).

This study aims to analyze the effect of working capital management on firm

profitability, an indicator of short-term financial performance.

ii http://scialert.net/fulltext/?doi=ijaef.2008.44.50&org=11

CHAPTER 3: RESEARCH METHODOLOGY

20

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.

SCOPE OF THE STUDY

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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 they

maintain a particular liquidity position.

DATA SOURCES

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

22

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 ,www.moneycontrol.com.

Secondary sources like previous years annual reports, reports on working

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

This data was gathered through the company’s websites, its corporate

intranet, HCL’s 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, financial management

by RP Rustagi Khan & Jain, Prasanna Chandra and I.M.Pandey were

consulted to equip ourselves with the topic.

INTRODUCTION TO WORKING CAPITAL

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

23

The working capital management precisely refers to management of current

assets. A firm’s 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

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

24

covers the question of judicious mix of long-term and short-term funds for

financing current assets

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 commitment

25

LIQUIDITY VS PROFITABILITY: RISK - RETURN TRADE

OFF

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:

Fig.3.1

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.

26

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.

CLASSIFICATION OF WORKING CAPITAL

Working capital can be classified as follows:

On the basis of time

On the basis of concept

Fig.3.2

27

KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT

GROSS WORKING CAPITAL

NET WORKING CAPITAL

ON THE BASIS OF TIME

PERMANENT/FIXED WORKING CAPITAL

REGULAR WORKING CAPITAL

RESERVE WORKING CAPITAL

TEMPORARY/VARIABLE WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIAL WORKING CAPITAL

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 changes reflect

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.

Permanent working capital

Temporary working capital

28

Fig 3.3

The permanent level is constant while the temporary working capital is fluctuating

increasing and decreasing in accordance with seasonal demands as shown in the

fig.3.4

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.

29

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.

PERMANENT 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

TEMPORARY WORKING CAPITAL

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING

CAPITAL

  Solvency Of The Business: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of

production.

Goodwill: Sufficient amount of working capital enables a firm to make

prompt payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit

standing can arrange loans from banks and other on easy and favorable

terms.

Cash Discounts: Adequate working capital also enables a concern to avail

cash discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures

regular supply of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Day

Commitments: It leads to the satisfaction of the employees and raises the

morale of its employees, increases their efficiency, reduces wastage and

costs and enhances production and profits.

Exploitation Of Favorable Market     Conditions: If a firm is having adequate

working capital then it can exploit the favorable market conditions such as

purchasing its requirements in bulk when the prices are lower and holdings

its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during the

depression.

Quick And Regular Return On Investments: Sufficient working capital

enables a concern to pay quick and regular of dividends to its investors and

gains confidence of the investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of

securities, confidence, high morale which results in overall efficiency in a

business.

30

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its

business operations. It should have neither redundant or excess working capital

nor inadequate nor shortages of working capital. Both excess as well as short

working capital positions are bad for any business. However, it is the inadequate

working capital which is more dangerous from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE

WORKING CAPITAL

1.     Excessive working capital means ideal funds which earn no profit for the

firm and business cannot earn the required rate of return on its

investments.

2.     Redundant working capital leads to unnecessary purchasing and

accumulation of inventories.

3.     Excessive working capital implies excessive debtors and defective credit

policy which causes higher incidence of bad debts.

4.     It may reduce the overall efficiency of the business.

5.     If a firm is having excessive working capital then the relations with banks

and other financial institution may not be maintained.

6.     Due to lower rate of return n investments, the values of shares may also

fall.

7.     The redundant working capital gives rise to speculative transactions

31

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital

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

There is an operating cycle involved in sales and realization of cash. There are time

gaps in purchase of raw material and production; production and sales; and realization

of cash.

Thus working capital is needed for the following purposes:

·       For the purpose of raw material, components and spares.

·       To pay wages and salaries

·       To incur day-to-day expenses and overload costs such as office expenses.

·       To meet the selling costs as packing, advertising, etc.

·       To provide credit facilities to the customer.

·       To maintain the inventories of the raw material, work-in-progress, stores and

spares and finished stock.

For studying the need of working capital in a business, one has to study the

business under varying circumstances such as a new concern requires a lot of

funds to meet its initial requirements such as promotion and formation etc. These

expenses are called preliminary expenses and are capitalized. The amount needed

for working capital depends upon the size of the company and ambitions of its

promoters. Greater the size of the business unit, generally larger will be the

requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and

expensing of the business till it gains maturity. At maturity the amount of working

capital required is called normal working capital.

There are others factors also influence the need of working capital in a business

32

FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS

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

of these factors are explained below:

1.  Nature Of Business: The requirements of working is very limited in

public utility undertakings such as electricity, water supply and railways

because they offer cash sale only and supply services not products, and no

funds are tied up in inventories and receivables. On the other hand the

trading and financial firms requires less investment in fixed assets but have

to invest large amt. of working capital along with fixed investments.

2.  Size Of The Business: Greater the size of the business, greater is the

requirement of working capital.

3.  Production Policy: If the policy is to keep production steady by

accumulating inventories it will require higher working capital.

4.  Length of Production Cycle: The longer the manufacturing time the raw

material and other supplies have to be carried for a longer in the process

with progressive increment of labor and service costs before the final

product is obtained. So working capital is directly proportional to the

length of the manufacturing process.

5.  Seasonals Variations: Generally, during the busy season, a firm requires

larger working capital than in slack season.

6.  Working Capital Cycle: The speed with which the working cycle

completes one cycle determines the requirements of working capital.

Longer the cycle larger is the requirement of working capital.

7.     Rate of Stock Turnover: There is an inverse co-relationship between

the question of working capital and the velocity or speed with which the

33

sales are affected. A firm having a high rate of stock turnover wuill needs

lower amt. of working capital as compared to a firm having a low rate of

turnover.

8.   Business Cycle: In period of boom, when the business is prosperous, there

is need for larger amt. of working capital due to rise in sales, rise in prices,

optimistic expansion of business, etc. On the contrary in time of

depression, the business contracts, sales decline, difficulties are faced in

collection from debtor and the firm may have a large amt. of working

capital.

9. Rate of Growth of Business: In faster growing concern, we shall require

large amt. of working capital.

10. 1Earning Capacity And Dividend Policy: Some firms have more earning

capacity than other due to quality of their products, monopoly conditions,

etc. Such firms may generate cash profits from operations and contribute

to their working capital. The dividend policy also affects the requirement

of working capital. A firm maintaining a steady high rate of cash dividend

irrespective of its profits needs working capital than the firm that retains

larger part of its profits and does not pay so high rate of cash dividend.

11. Price Level Changes: Changes in the price level also affect the working

capital requirements. Generally rise in prices leads to increase in working

capitaliii

1 http://www.allprojectreports.com/working_capital_analysis/working_capital_analysis.htm

34

WORKING CAPITAL CYCLE

Fig.3.5 working capital cycle

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 firm’s 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.

35

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.

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

36

WORKING CAPITAL POSITION :

CURRENT ASSET – TOTAL ASSET

Table 3.2

PARTICULARS 2005 2006 2007 2008 2009

CURRENT ASSETS 631.16 839.21 1973.58 2456.7

4

2585.19

NET BLOCK 52.58 63.32 98.48 138.57 150.63

TOTAL ASSETS 704.34 896.86 1988.18 2457.1

9

2589.51

CA/TA 89.60% 93.57% 97.45% 99.98% 99.83%

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, 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.

SALES-CURRENT ASSET

Table.3.3

PARTICULARS 2005 2006 2007 2008 2009CURRENT ASSETS

631.16 839.21 1973.58 2456.74 2585.19

SALES 1970.94 2294.70 11818.25 12208.77 12336.81

SALE/CURRENT ASSET(%)

2.17 2.07 20.0 23.9 21.87

SALES % INCREASE

29 16.4 415 5.2 1.1

37

The Sales to Current Assets ratio measures how well a company is making use of it

assets in generating sales.  This ratio is most valid in industries where companies

hold the majority of their own inventories in-house, which is very much relevant to

HCL’s business. Here the ratio is in increasing trend this shows that the company

using more and more current asset ,and maintaining large inventory ,it is prevalent

that the ratio has increased sharply after 2007 it is because of high level of sale.

CURRENT ASSET – FIXED ASSET

Table 3.4

PARTICULARS 2005 2006 2007 2008 2009

NET CA/NET BLOCK 6.5:1 6.2:1 6.9:1 7.1:1 6.1:1

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

position of the firm. 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.

38

CURRENT ASSET – CURRENT LIABILITY

Table 3.5

PARTICULARS 2005 2006 2007 2008 2009CURRENT ASSETS 631.16 839.21 1973.58 2456.74 2585.19

CURRENT LIABILITES 417.22 556.66 1376.78 1620.25 1882.97

% CURRENT ASSETS INCREASE

9.7 33 135.17 99.90 5.2

%CURRENT LIABILITES INCREASE

16.2 33.42 147.34 17.6 16.21

CURRENT RATIO /WORKING CAPITAL RATIO

1.5 1.50 1.43 1.5 1.37

The current asset, current liability level is fluctuating over the period of 5 year there is

a sharp increase in level of CA and CL this is because of increase in sale. The current

ratio is useful in telling us whether the business can support itself with its current

assets despite its current liabilities. The current ratio can give a sense of the efficiency

of a company's operating cycle or its ability to turn its product into cash. Companies

that have trouble getting paid on their receivables or have long inventory turnover can

run into liquidity problems because they are unable to alleviate their obligations.

Because business operations differ in each industry, it is always more

useful to compare companies within the same industry .The ideal current ratio is

between 1.2 and 2.0. In the HCL’s case, the working capital ratio shows a healthy

liquidity position. The working capital ratio above 2.0 indicates underutilized assets

or bad asset investment. In the case that the working capital ratio is less than 1, the

business is in jeopardy and cannot meet its current liabilities. In this case, the

company will have to work on their negative working capital ratio with working

capital management.

39

INVENTORY MANAGEMENT

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. They

represent 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.

40

Inventory Management Techniques

In managing inventories, the firm’s 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. These problems 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 firm’s ordering costs.

41

On the other hand, if the firm maintains large inventory’s level, there

will be few orders placed and ordering costs will be relatively small.

Thus, ordering costs decrease with the increasing size of inventory.

Carrying Costs : Costs are incurred for maintaining a given level of

inventory are called carrying costs. These include the following activities:

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.

Table 3.6

Composition 2005 2006 2007 2008 2009

Raw Material 77.94 63.49 110.89 89.25 119.67

Stores and Spares 43.16 52.55 56.18 64.23 66.64

Finished Goods 220.46 347.62 623.58 712.79 731.21

Work-in-progress 7.84 5.92 1.23 1.68 1.16

The increasing component of raw materials in inventory is due to the fact that 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.

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,

42

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 have gone 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 very

minimal

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 capacity processors 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 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.

43

JIT: The relevance of JIT in HCL Info system can be questioned. This is

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.

CONVERSION PERIODS

Raw Material

Table 3.7

Particulars 2005 2006 2007 2008 2009

Raw Material Consumption 979.71 1210.77 1097.52 1753.81 1860.34

Raw Material Inventory 77.93 63.49 110.89 119.65 89.25

Raw Material Holding Days 29.0 19.20 40.0 25.0 17.26

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

29 to 17. 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

Table3.8

Particulars 2005 2006 2007 2008 2009

Cost of Production 1596.5

2

1919.11 10781.8 11166.95 11128.5

Work in progress

inventory

7.84 5.94 1.23 1.68 1.16

WIP Holding days 1.8 1.3 0.04 0.05 0.04

44

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 period. Here we can see the inventory

holding have decreased to the level of less than 1 day which is sign of effective

inventory management.

Finished Goods (Average Finished Goods Held)

Table 3.9

Particulars 2005 2006 2007 2008 2009

Cost of Production 1596.52 1919.11 10781.8 11166.95 11128.5

finished good held 196.39 284.035 485.6 766.38 722

Average finished good

inventory held

14.65 22.57 20.09 21.60 22.43

The time taken for the firm to realize its finished goods as sales has increased as

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.

INVENTORY TURNOVER RATIO

45

Table 3.10

Particulars 2005 2006 2007 2008 2009

Sales turnover 1970.94 2381.36 11818.25 12569.44 12336.82

Inventory 188.10 240.31 791.73 893.37 888.26

Inventory turnover ratio 10.48 9.91 14.93 14.06 13.89

Average inventory holding

period

34.83 36.83 24.45 30 26.27

2005 2006 2007 2008 200902468

10121416

INVENTORY TURNOVER RATIO

2005 2006 2007 2008 200905

10152025303540

AVERAGE INVENTORY HOLDING PERIOD

Fig.3.6 Fig.3.7

A high inventory turnover ratio indicates efficient management of inventory because

the stocks are sold more frequently and lesser amount of money is required to finance

the inventory. A low inventory turnover ratio indicates an inefficient management of

inventory. But a high turnover of Inventory may not necessarily always imply a

favorable situation. A high inventory turnover may be the result of very low level of

inventory which results in shortage of goods in relation to demand and a position of

stock out or the turnover may be high due to a conservative method of valuing

inventories at lower values or the policy of the firm to buy frequently in small lots.

Here in case of HCL the inventor turnover ratio is satisfactory as the main working

model of the company is assembly not manufacturing so maintain low inventory is

advisable. Also the level of average inventory is in decreasing trend that is shows

good inventory holding policy of management.

CASH MANAGEMENT

46

Cash is money that is easily accessible either in the bank or in the business. It is not

inventory, it is not accounts receivable, and it is not property. These might be

converted to cash at some point in time, but it takes cash on hand or in the bank to pay

suppliers, to pay the rent, and to meet the payroll. Profit growth does not always mean

more cash.

Profit is the amount of money you expect to make if all customers paid on time and if

your expenses were spread out evenly over the time period being measured. However,

it is not your day-to-day reality. Cash is what you must have to keep the doors of your

business open. Over time, a company's profits are of little value if they are not

accompanied by positive net cash flow. You can't spend profit; you can only spend

cash.

Cash Flow refers to the flow of cash into and out of a business over a period of time.

The outflow of cash is measured by the money you pay every month to salaries,

suppliers, and creditors. The inflows are the cash you receive from customers, lenders,

and investors.

Positive Cash Flow

If the cash coming into the business is more than the cash going out of the

business, the company has a positive cash flow. A positive cash flow is very

good and the only concern here is managing the excess cash prudently.

Negative Cash Flow

If the cash going out of the business is more than the cash coming into the

business, the company has a negative cash flow. A negative cash flow can be

caused by a number of problems that result in a shortage of cash, such as too

much or obsolete inventory, or poor collections on accounts receivable. If the

company doesn't have money in the bank or can't borrow additional cash at

this point, it may be in serious trouble.

A Cash Flow Statement is typically divided into three components so that you can see

and understand both the internal and external sources and uses of cash.

47

1. Operating Cash Flow (Internal)

Operating cash flow, often referred to as working capital, is the cash flow

generated from internal operations. It is the cash generated from sales of the

product or service of your business. Because it is generated internally, it is

under your control.

2. Investing Cash Flow (Internal)

Investing cash flow is generated internally from non-operating activities. This

component would include investments in plant and equipment or other fixed

assets, nonrecurring gains or losses, or other sources and uses of cash outside

of normal operations.

3. Financing Cash Flow (External)

Financing cash flow is the cash to and from external sources, such as lenders,

investors and shareholders. A new loan, the repayment of a loan, the issuance

of stock and the payment of dividend are some of the activities that would be

included in this section of the cash flow statement.

Good cash management means:

Knowing when, where, and how your cash needs will occur,

Knowing what the best sources are for meeting additional cash needs; and,

Being prepared to meet these needs when they occur, by keeping good

relationships with bankers and other creditors.

The starting point for avoiding a cash crisis is to develop a cash flow projection.

Smart business owners know how to develop both short-term (weekly, monthly) cash

flow projections to help them manage daily cash, and long-term (annual, 3-5 year)

cash flow projections to help them develop the necessary capital strategy to meet their

business needs. They also prepare and use historical cash flow statements to gain an

understanding about where all the money went.

SOURCES OF CASH :

Sources of additional working capital include the following:

48

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 with surviving rather than managing2Frequent short-term emergency requests to the bank (to help pay wages,

pending receipt of a cheque).

CASH MANAGEMENT IN HCL INFOSYSTEMS:

2 http://www.smallbusinessnotes.com/operating/finmgmt/cashmanagement.html

49

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 the

company 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.

CASH-CURRENT LIABILITY

Table 3.11

50

Particulars 2005 2006 2007 2008 2009

Absolute Liquid Ratio(quick ratio) 1.04:1 1.08:1 1.04:1 1.28:1 1.3:1

2005 2006 2007 2008 20090

0.2

0.4

0.6

0.8

1

1.2

1.4

Quick Ratio

Fig .3.8

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

Table 3.13

Particulars 2005 2006 2007 2008 2009

Dividend policy% 310 400 400 400 325

EPS 7.94 6.91 18.79 17.81 16.21

Cash Balance 0.26 0.26 0.42 0.42 0.29

Cash in Hand 32.63 24.02 35.13 99.84 57.75

51

2005 2006 2007 2008 20090

50100150200250300350400450

DIVIDEND

2005 2006 2007 2008 20090

20

40

60

80

100

120

CASH BALANCE

Cash BalnceCash in hand

Fig 3.9 Fig.3.10

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

the firm except the last year. 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.

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 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 the firm 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. But after 2007 there is a

sharp increase in demand due to which the liquid cash requirement increased and

which we can very well find out from the graph. as liquid cash increases this leads to

increase in EPS. Also the dividend distributed among the shareholder is constant

throughout the year except of the last year, this is because the comparative revenue in

year 2009

52

CASH FLOWS

Table 3.12

Cash Flows 2005 2006 2007 2008 2009

Net Cash from Operating

activities

26.76 69.24 18.68 160.26 267.55

Net Cash from Investing

activities

156.61 -35.15 -17,26 36.40 -73.62

Net Cash from Financing

activities

-81.68 -35.12 -20.55 -73.34 -309.08

CASH FLOW IN OPERATING ACTIVITIES

Working Capital Changes

Table.3.13

Working Capital Changes 2005 2006 2007 2008 2009

Trade and other receivables -145.12 -141.66 -318.08 -313.08 -355.13

Inventories -2683.92 -5221 -322.03 -106.65 10.11

Trade Payables and other

Liabilities

64.19 130.26 301.21 235.49 251.52

The cash flows from operating activities section comes first and tells how much cash

the company generated from its core business, as opposed to peripheral activities such

as investing or borrowing. Here we can see the sharp increase in the cash flow from

operating activity which is a positive sign.

53

Cash Flow in Investing Activities

Table 3.14

Investments in Mutual

Funds

2005 2006 2007 2008 2009

Investments (year end) 122.77 135.39 279.79 215.20 276.10

Purchase of Investment -530.75 -659.92 -1813.98 -3553.34 -2034.38

Disposal/Redemption of

Investment

654.90 653.12 1813.98 3611.32 1980.11

Net cash from investing activities shows the amount of cash firms spend on

investments. Here we can see that some year its positive and some year its negative it

does not signifies wrong investment policy of firm but it shows that heavy investment

during that particular year.

The investments have increased from the last year due to the continuous increase in

sales revenue. 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 for the 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.

54

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 small businesses

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.

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.

55

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.

56

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.

Don’t 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. Don’t

give the debtor any excuses for not paying.

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

57

RECEIVABLES MANAGEMENT IN HCL INFOSYSTEMS:

Table 3.15

PARTICULARS 2005 2006 2007 2008 2009

DEBTORS TURNOVER RATIO 5.80 5.21 13.39 11.06 8.91

AVERAGE COLLECTION

PERIOD

63 84 31 36 46

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 decreasing trend which is good for the firm.

2005 2006 2007 2008 20090

10

20

30

40

50

60

70

80

90

AVERAGE COLLECTION PERIOD

225 2006 2007 2008 20090

2

4

6

8

10

12

14

16

DEBTOR TURNOVER RATIO

Fig 3.11 Fig .3.12

58

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 minimizes the 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.

The debtor’s 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.

59

MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should be managed

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.

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!).

60

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

viability and profitability of your company.

Financing Current Assets

The firm has to decide about the sources of funds, which can be availed to make

investment 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 Credit and Outstanding

Expenses etc.

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

61

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.

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

62

ratio means an aggressive current assets policy assuming other factors to be constant. A

fig 3.11

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.

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.

SHORT TERM FINANCING

Other than the investment in current assets, the firm also has to be concerned with short-

term to long-term debt as this plays a very important role in determining the amount of

risk undertaken by the firm. That is , the firm not only has to be concerned about current

assets but also the sources through which they are financed. A firm before financing in

either of the two, has to take into consideration various aspects. While short term might

seem the ideal way to finance your assets than the long term due to shorter maturity

period and also less of costs are involved, there is an inherent risk in short term financing

due to fluctuating interest rates and due to the reason that the firm might be unable to

reay the amount in a shorter span of time.

Table 3.16

SECURED LOANS 2005 2006 2007 2008 2009

SHORT TERM 50.21 31.0 6.02 0 0

LONG TERM 5.54 13.49 6.0 0 101.85

TOTAL 55.75 44.49 12.02 0 101.85

%SHORT TERM 90.0 70 50 0 100

63

Under secured loan cash credit, along with non fund based facilities, foreign currency

term loan from banks are secured by way of hypothecation of stock-in-trade, book debts

as first charge and by way of second chanrge on all the immovable and movable assets of

the parent company. Term loan in Indian rupees from a bank is subject to a prior charge

in favour of company’s bankers on book debts and stock in trade for working capital

facilities.

Table 3.17

UNSECURED LOANS 2005 2006 2007 2008 2009

SHORT TERM 26.10 151.0 223.87 352.66 226.85

LONG TERM --- 0.11 -- -- --

TOTAL 26.10 151.15 223.87 352.66 226.85

Here HCL has a major portion of their financing done through short term financing than

long term financing. The preference of short term financing to long term as such is not

the part of any policy employed by the firm but it was due to the reason that the interest

rates in short term were more investor friendly and the cost involved in them were also

low. At present, we can see that the firm is moving more towards long term financing as

the interest terms in the long term has reduced compared to the short term.

YEAR- END COMMERCIAL PAPERS

Table 3.19

PARTICULARS 2005 2006 2007 2008 2009

COMMERCIAL

PAPERS

25.00 40.00 70.0 145.0 105.0

The credit rating by ICRA continued at ‘A1+’indicating highest safety to company’s

commercial paper program of Rs. 75 Crores. It acts as an effective tool in reducing the

interst cost and is used for financing inventories and other receivables. As and when the

firm issues commercial papers, it sends a letter to the leader of the consortium, i.e., SBI

to reduce from the fund based limits the amount it has issued in the form of the

commercial papers. Suppose the firm issues 30 Crores as commercial papers and the fund

64

based limits are say 115 Crores. Then firm sends a letter to SBI to reduce the existing

fund based limits from 115 to 85 Crores.

In terms of desirability, the commercial papers are cheaper and advantageous to the firm

compared to the consortium financing. The main advantage being the interest rate which

is lower than the bank rates existing under consortium financing. But the firm depends on

both and for working capital financing, it is dependent on the banks for funds sich as

working capital demand loans and cash credits. There is no point in the firm not making

use of the fund based limits in the consortium banking as their commercial papers are

restricted to 75 Crores.

MERITS OF COMMERCIAL PAPERS:

It is an alternative source of raising short-term finance, and proves to be handy

during periods of tight bank credit.

It is a cheaper source of finance in comparison to the bank credit.

DEMERITS OF COMMERCIAL PAPERS:

It is an impersonal method of financing.

It is always available to the financially sound and highest rated companies.

The amount of lonable funds available in the commercial paper market is limited

to the amount of excess liquidity of the various purchasers of commercial paper.

65

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

Commercial Papers:

Commercial Papers have become an important tool for financing working

capital requirements of a company.

Commercial Paper is an unsecured promissory note issued by the company

to raise short-term funds. The buyers of the commercial paper include

banks, insurance companies, unit trusts, and companies with surplus funds

to invest for a short period with minimum risk.

CHAPTER 4: FINDING AND CONCLUSION

INDUSTRY ANALYSIS

66

Over the past decade, the Information Technology (IT) industry has become one of the

fastest growing industries in India, propelled by exports (the industry accounted for more

than a quarter of India’s services exports in 2004-05). The key segments that have

contributed significantly (96 percent of total) to the industry’s exports include – Software

and services (IT services) and IT enabled services (ITES) i.e. business services. Over a

period of time, India has established itself

as a preferred global sourcing base in these segments and they are expected to continue to

fuel growth in the future.

FINANCIAL GRAPHS(CONSOLIDATED OPERATION)

Gross Business Income:

Consolidated Revenue for the year is Rs. 12378 crores a against Rs. 12403 crores

in the previous year Services revenue grew by 43% from Rs. 458 crores to Rs.

654 crores in the current year

Fig .4.1

Profit before Tax:

67

Profit before tax for Parent Standalone in FY 2009 is Rs. 374 crores as against Rs.

434 crores in the previous year. Excluding exchange fluctuations, PBT for Parent

Standalone is Rs. 400 crores as against Rs. 432 crores in the previous year.

Fig.4.2

Profit after Tax: Profit after Tax for FY 2009 is Rs. 240 crores as against . 300 crores in FY

2008.Basic EPS for FY 2009 is Rs. 14.0.

Fig 4.3Earnings Per Share:

Basic EPS grew from Rs. 16.7 in the previous year to Rs. 18.7 in the current year. Diluted EPS grew from Rs. 16.5 in the previous year to Rs. 18.6 in the current year.

68

2005 2006 2007 2008 20090

5

10

15

20

EPS

Fig 4.4

Dividend:The Board recommends a final dividend of Rs. 1.50 per share (75% per fully paid

up equity share) to shareholders. This will be paid, subject to shareholder

approval on October 23, 2009. The total dividend proposed and paid for FY 2009

(including interim dividend of Rs. 5.00 per share) is Rs. 6.50 per share (325% per

fully paid up equity share), amounting to Rs. 130 crores including dividend

distribution tax.

Fig 4.5

Net worth/ Shareholders Fund:Net Worth grew to Rs. 1122 crores as at June 30, 2009 from Rs. 1016 crores as at

the close of the previous year. Paid up capital as at June 30, 2009 is Rs. 34.2

crores, comprising 17.1 crores equity shares of Rs. 2/- each Reserves & Surplus

are Rs. 1088 crores at year-end after appropriating Rs. 130 crores for dividend

and dividend distribution tax.

69

Fig 4.6

Borrowings

During the year, the Company raised Rs. 80 crores by issue of 800 Redeemable,

Non-Convertible Debentures (NCDs) of Rs. 10 lacs each to LIC of India on private

placement basis. Fitch has assigned ‘stable’ outlook rating for the NCD

programme. These NCDs are listed on the National Stock Exchange of India

Limited. The company also repaid borrowings to the extent of Rs. 208 crores

during the year. Loan Funds, therefore, decreased to Rs. 227 crores as at June 30,

2009 from Rs. 355 crores as on June 30, 2008. The Debt/ (Debt + equity) ratio

reduced to 17%.

Fig 4.7

70

COMPARING THE EFFCIENCY OF WORKING CAPITAL MANAGEMENT OF HCL INFOSYSTEM WITH ITS COMPITITOR

Table 4.1

2005 2006 2007 2008 2009

HCL

INFOSYSTEM

Current ratio 1.5 1.5 1.43 1.5 1.37

Inventory turnover ratio 10.48 9.90 14.93 14.06 13.89

Quick ratio 1.04 1.08 1.04 1.28 1.30

Debtor turnover ratio 5.80 5.21 13.39 11.06 8.91

TVS ELECTRONICS

Current ratio 1.37 1.71 1.422 2.11 1.62

Inventory turnover ratio 7.46 9.22 9.61 15.27 11.70

Quick ratio 0.87 1.83 1.93 2.28 1.94

Debtor turnover ratio 6.22 3.95 3.38 3.31 4.20

MOSER BAER Current ratio 1.18 1.14 0.98 1.25 0.85

Inventory turnover ratio 3.86 3.84 3.73 3.84 4.36

Quick ratio 2.18 3.14 1.62 2.69 1.77

Debtor turnover ratio 4.02 4.68 5.59 5.90 6.55

ZENITH COMPUTERS

Current ratio 0.79 0.93 3.85 3.52 3.69

Inventory turnover ratio 9.63 14.27 12.61 8.25 5.08

Quick ratio 2.74 4.83 2.82 2.27 2.19

Debtor turnover ratio 5.43 4.44 5.09 5.18 4.55

MRO-TEK Current ratio 2.24 2.63 2.02 2.06 3.84

Inventory turnover ratio 1.46 2.01 2.02 2.06 2.90

Quick ratio 4.17 5.12 - 4.15 4.17

Debtor turnover ratio 5.50 4.53 4.52 4.74 3.88

71

ANALYSIS OF THE IMPORTANT RATIO WITH RESPECT TO ITS COMPETITORS

Table 4.2

TVS MOSER BAER

ZENITH MRO-TEK

CURRENT RATIO

Compare to HCL the ratio is bit choppy and in 2008 its on higher side which is not ideal, rest of the years the ratio is consistent

The ratio is less then the ideal ratio which is not good for any firm.

The ratio was less in earlier year and is vey high in recent year which shows inconsistent policy of management

The ratio is always higher then ideal ratio which is not a good sign

INVENTORY TURNOVER RATIO

The ratio is lesser then HCL but its increase which is positive sign

The ratio is less then HCL.

The ratio is decreasing which is not a good sign

The ratio is very less compare to hcl but as the company ‘s size is less then HCL the ratios are acceptable

QUICK RATIO

The quick ratio is very inconsistent throughout the year also its way higher than the ideal limit. Compare to HCL its not properly managed

The ratio is very higher than ideal limit hence the management is not properly done

The ratio is very higher than the ideal ratio

The ratio is far higher than the ideal ratio

DEBTOR TURNOVER RATIO

The ratio is less then HCL also its in decreasing trend which is not good for a firm.

The ratio is less then HCL also its in increasing trend which is good for firm.

The ratio is less then HCL and have decreased in recent years

The ratio is less then HCL also its in decreasing trend which is not good for a firm.

72

CONCLUDING ANAYSIS

The working capital position of the company is managed very aptly also the

various sources through which it is financed are optimal.

The company has used its dividend policy, purchasing, financing and investment

decisions to good effect can be seen from the inferences made earlier in the

project.

Sales and collection policy that get along with the receivables management of the

firm.

The various ratios calculated are an indicator as to the fact that the profitability of

the firm and sales are on a rise and also the deletion of the inefficiencies in the

working capital management.

The firm has not compromised on profitability despite the high liquidity is

commendable.

HCL Infosystems has reached a position where the default costs are as low as

negligible and where they can readily factor their accounts receivables for

availing finance is noteworthy.

Compare to its competition the working capital management is very sound.

73

CHAPTER 5: SUGGESTIONS AND RECOMMENDATIONS

The management of working capital plays a vital role in running of a successful

business. So, things should go with a proper understanding for managing cash,

receivables and inventory.

HCL Infosystems is managing its working capital in a good manner, but still there is

some scope for improvement in its management. This can help the company in raising

its profit level by making less investment in accounts receivables and stocks etc. This

will ultimately improve the efficiency of its operations. Following are few

recommendations given to the company in achieving its desired objectives:

The business runs successfully with adequate amount of the working capital but

the company should see to it that the cash should not be tied up in excessive

amount of working capital.

Though the present collection system is near perfect, the company as due to the

increasing sales should adopt more effective measures so as to counter the threat

of bad debts.

The over purchasing function should be avoided as it could lead to liquidity

problems.

The investment of cash in marketable securities should be increased, as it is very

profitable for the company.

Holding of excessive and insufficient stock must be avoided as it creates a

burden on the cash resources of a business and results in lost sales, delays for

customers, etc respectively.

74

CHAPTER 6: LIMITATIONS OF THE STUDY

Only the printed data about the company will be available and not the back–end

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 company’s websites have not

been updated.

75

BIBLIOGRAPHY

Following sources have been sought for the preparation of this report:

Corporate Intranet

Financial Statements (Annual Reports)

Direct interaction with the employees of the company

Internet ----www.hclinfosystems.in

http://en.wikipedia.org/wiki/HCL_Enterprise

http://www.allprojectreports.com/working_capital_analysis/

working_capital_analysis.htm

http://www.google.co.in/imgres?imgurl=http://tutor2u.net/business/images/

working_capital_cycle.gif&imgrefurl=http://tutor2u.net/business/finance/

workingcapital_cycle.htm&usg=__MsniopozJAEt6dmNXSR7qWPAJas=&h=

376&w=501&sz=10&hl=en&start=5&sig2=Y12LfxuDRxoYlwxOuXIZDw&u

m=1&itbs=1&tbnid=dsbmtNs8A-lJpM:&tbnh=98&tbnw=130&prev=/images

%3Fq%3Dworking%2Bcapital%2Bmanagement%26um%3D1%26hl%3Den

%26tbs%3Disch:1&ei=4a0wTMc307asB6X_0PMF

http://scialert.net/fulltext/?doi=ijaef.2008.44.50&org=11

Textbooks on financial management -

I.M.Pandey

Khan and Jain

Prasanna Chandra

APPENDICES

76

Balance Sheet of HCL Infosystems

------------------- in Rs. Cr. -------------------

Jun '05

Jun '06 Jun '07 Jun '08 Jun '09

12 mths

12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 33.44 33.75 33.83 34.23 34.24

Equity Share Capital 33.44 33.75 33.83 34.23 34.24

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 398.90

374.63 808.46 968.83 1,098.12

Revaluation Reserves 3.01 2.96 2.92 3.20 0.00

Networth 435.35

411.34 845.21 1,006.26 1,132.36

Secured Loans 55.75 44.49 12.02 0.00 101.85

Unsecured Loans 26.10 151.15 223.87 352.66 125.00

Total Debt 81.85 195.64 235.89 352.66 226.85

Total Liabilities 517.20

606.98 1,081.10 1,358.92 1,359.21

Jun '05

Jun '06 Jun '07 Jun '08 Jun '09

12 mths

12 mths 12 mths 12 mths 12 mths

Application Of Funds

Gross Block 95.27 111.09 162.31 216.68 234.10

77

Less: Accum. Depreciation 42.89 47.77 63.83 78.11 83.47

Net Block 52.38 63.32 98.48 138.57 150.63

Capital Work in Progress 0.91 16.38 21.36 13.89 9.50

Investments 122.77

135.39 279.78 215.02 276.10

Inventories 188.10

240.31 791.73 898.37 888.26

Sundry Debtors 369.92

511.26 1,002.51 1,241.46 1,498.26

Cash and Bank Balance 73.14 87.64 179.34 316.91 198.67

Total Current Assets 631.16

839.21 1,973.58 2,456.74 2,585.19

Loans and Advances 115.22

117.28 170.28 244.48 315.17

Fixed Deposits 73.18 57.65 14.60 0.45 4.32

Total CA, Loans & Advances 819.56

1,014.14 2,158.46 2,701.67 2,904.68

Deffered Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities 427.75

572.64 1,395.88 1,639.38 1,899.81

Provisions 50.67 49.61 81.10 70.85 81.89

Total CL & Provisions 478.42

622.25 1,476.98 1,710.23 1,981.70

Net Current Assets 341.14

391.89 681.48 991.44 922.98

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00

Total Assets 517.20

606.98 1,081.10 1,358.92 1,359.21

Contingent Liabilities 284.60

334.55 349.75 49.73 57.18

Book Value (Rs) 25.86 24.20 49.79 58.61 66.14

78

Profit & Loss account of HCL Infosystems

------------------- in Rs. Cr. -------------------

Jun '05 Jun '06 Jun '07 Jun '08 Jun '09

12 mths 12 mths 12 mths 12 mths 12 mths

Income

Sales Turnover 1,970.94 2,381.36 11,818.25 12,569.44 12,336.81

Excise Duty 39.28 86.66 170.13 158.00 126.08

Net Sales 1,931.66 2,294.70 11,648.12 12,411.44 12,210.73

Other Income 31.93 9.80 52.81 32.37 -8.84

Stock Adjustments

6.52 59.40 270.99 89.81 17.90

Total Income 1,970.11 2,363.90 11,971.92 12,533.62 12,219.79

Raw Materials 1,511.87 1,868.94 10,929.68 11,347.82 11,040.53

Power & Fuel Cost

1.22 1.41 1.64 1.60 1.72

Employee Cost 106.99 130.22 217.73 292.96 325.98

Other Manufacturing

91.84 108.40 121.76 110.47 104.75

79

Expenses

Selling and Admin Expenses

79.82 89.11 197.09 255.37 270.40

Miscellaneous Expenses

20.06 18.10 36.29 31.46 44.51

Preoperative Exp Capitalised

-5.61 -5.70 0.00 -0.55 -0.49

Total Expenses 1,806.19 2,210.48 11,504.19 12,039.13 11,787.40

Jun '05 Jun '06 Jun '07 Jun '08 Jun '09

12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 131.99 143.62 414.92 462.12 441.23

PBDIT 163.92 153.42 467.73 494.49 432.39

Interest 14.32 21.46 31.59 58.84 56.73

PBDT 149.60 131.96 436.14 435.65 375.66

Depreciation 6.50 6.75 12.55 16.35 17.27

Other Written Off 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 143.10 125.21 423.59 419.30 358.39

Extra-ordinary items 5.82 6.31 6.40 15.17 15.59

PBT (Post Extra-ord Items)

148.92 131.52 429.99 434.47 373.98

Tax 16.10 18.30 112.14 129.72 113.42

Reported Net Profit 132.77 113.22 317.85 304.75 260.44

Total Value Addition 294.32 341.54 574.51 691.31 746.87

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 103.22 134.68 135.30 136.84 111.27

Corporate Dividend Tax

14.08 18.89 20.98 23.26 18.91

Shares in issue (lakhs) 1,671.82 1,687.29 1,691.53 1,711.50 1,712.12

80

Earning Per Share (Rs) 7.94 6.71 18.79 17.81 15.21

Equity Dividend (%) 310.00 400.00 400.00 400.00 325.00

Book Value (Rs) 25.86 24.20 49.79 58.61 66.14

Cash Flow of HCL Infosystems

------------------- in Rs. Cr. -------------------

Jun '05

Jun '06 Jun '07 Jun '08 Jun '09

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 148.87 131.52 429.99 434.47 373.86

Net Cash From Operating Activities

26.76 69.24 18.68 160.26 267.55

Net Cash (used in)/fromInvesting Activities

156.61 -35.15 -17.26 36.46 -73.62

Net Cash (used in)/from Financing Activities

-81.68 -35.12 -20.55 -73.34 -309.08

Net (decrease)/increase In 101.69 -1.03 -19.13 123.38 -115.15

81

Cash and Cash Equivalents

Opening Cash & Cash Equivalents

44.63 146.32 213.07 193.98 318.14

Closing Cash & Cash Equivalents

146.32 145.29 193.94 317.36 202.99

82

i

ii

iii

RATIO USED:

1) Current asset Total asset

2) Sales Current asset

3) Current asset Fixed asset

4) Current ratio= Current Asset Current Liabilities

5) Raw material conversion ratio= Raw Material Inventory*365 Raw material consumption

6) Work in progress = WIP Inventory*365 Cost of production

7) Finished goods held = Finished Goods Inventory*365 Cost of production

8) Inventory turnover ratio= Sales Inventory

9) Quick ratio = Current Assets – Inventory Current Liabilities

10) Debtors turnover ratio = Total Sales Debtors

11) Average collection period= Trade Debtor*No Of Working Days  Net Credit Sales