himson-working capital managemant

7/30/2019 Himson-Working Capital Managemant

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A STUDY

OF

WORKING CAPITAL MANAGEMENT

AT

HIMSON TEXTILE ENGINEERING INDUSTRIES PVT. LTD.

[From 15th January 2004 to 15th March 2004]

A Project Report submitted in partial fulfillment of the requirements

For the awards of the degree of

BACHELOR OF BUSINESS ADMINISTRATIONTO

SOUTH GUJARAT UNIVERSITY, SURAT

Submitted By:

VEKARIYA NARENDRA D.

T.Y.B.B.A (Sem VI) Roll No. 101

Under the guidance of

Prof. Parita Bangali

Submitted To:

THE CO ORDINATOR

PROF. V.B. SHAH INSTITUTE OF MANAGEMENT

& R.V. PATEL COLLEGE OF COMMERCE

AMROLI (SURAT)

March 2004


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& R.V. PATEL COLLEGE OF COMMERCE, AMROLI

CERTIFICATE OF THE FACULTY GUIDE

This is to certify that the Project Report entitled A STUDY OF

WORKING CAPITAL MANAGEMENT at Himson Textile Eng. Ind. Pvt.

Ltd. submitted in partial fulfillment of the requirements for the awards of thedegree of BACHELOR OF BUSINESS ADMINISTRATION to SOUTH

GUJARAT UNIVERSITY, SURAT is a record of bonafide research work

carried out by Vekariya Narendra D. under my supervision and guidance.

Signature Signature

Prof. Parita Bangali Co-ordinator

(Project Guide)


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DECLARATION

I Vekariya Narendra D., here by declare that the project report

entitled A Study of Working Capital Management under the guidance

ofProf. Parita Bangali submitted in partial fulfillment of the requirements

for the award of the degree of Bachelor of Business Administration to

South Gujarat University, Surat is my original work research study

carried out during 15th January, 2004 to 15th March, 2004 and not

submitted for the award of any other degree/diploma/fellowship of other

similar titles of prizes to any other institute/organization of university by any

other person.

Signature

Place: - Surat Vekariya Narendra D.

Date: T.Y.B.B.A. (Sem-VI)Roll No. : - 101


& R.V. PATEL COLLEGE OF COMMERCE, AMROLI


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ACKNOWLEDGEMENT

My debts are many and I acknowledge them with much pride and

delight. I am very much thankful to Mr. Mahesh L. Abale, Co-ordinator of

Prof. V.B. Shah Instituted of Management & R.V. Patel College of

Commerce for extending to me in all consideration and cooperation, which a

student can wish.

I am extremely greatful to Mrs. Parita Bangali for her invaluable help

and guidance through out my work. She kindly evinced keen interest in my

work and furnished some useful comments, which could enrich the work

substantially.

I would also like to thank Mr. Keyur Bhatt, the HRD Manager of

Company, who gives me Permission for this invaluable training. I am very

happy to express heartful gratitude to Mr. Abdul Jariwala and Mr. Pankaj

Savalia for their guidance and co-operation throughout study.In fact it is very difficult to acknowledge all the names and nature of

help and encouragement. I never forget the help and facility provide directly

or indirectly to me by all.

Last but not least, I would like to thank all my friends and staff

members at company.

Vekariya Narendra D.

March 2004


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INDEX

Chapter No. Subject Page No

1 Introduction of Company

2 Working Capital Management -

(Theory)

3 Problem Definition

4 Objective of Study

5 Limitation of Study

6 Analysis of Working Capital Mgt.

7 Finding & Suggestion

8 Bibliography

9 Annexure

10 Approved Synopsis


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LIST OF TABLE

Table No. Table Name Page No

1 Financing working capital of Co.

2 Working Capital Assembly

3 Growth in Gross working capital

4 Net W.C. to Net Assets Ratio

5 Operating Cycle of Ratio

6 Inventory Management in Co.

7 Receivable Management in Co.

8 Cash Management in Co.

9 Current Ratio

10 Quick Ratio

11 Composition of Gross W.C.

12 Circulation of Gross W.C.

13 Circulation of Net W.C.

14 Cash Position Ratio

15 Long term depth to Net W.C. Ratio

16 Current Liability to Total Asset Ratio

17 Current Assets to Total Assets Ratio

18 Working Capital Ratios


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LIST OF FIGURES & GRAPHS

Table No. Table Name Page No

FIGURES

1 Operating Cycle of Mfg. Firm

2 Permanent & Temporary W.C.

GRAPHS

1 Growth in Gross Working Capital

2 Net W. C. to New Asset Ratio

3 Operating Cycle of Company

4 Inventory Turn over

5 Inventory conversation period

6 Debtors Turn over

7 Debt Collection period

8 Cash Turn over

9 Average age of cash


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CHAPTER 1

INTRODUCTION OF COMPANY


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HISTORY AND DEVELOPMENT OF COMPANY

HIMSON TEXTILE ENGINEERING INDUSTRIES LTD. is the

flagship company of the HIMSON group. Himson started its activities about

57 years ago with only few looms to manufacture quality fabrics. Since then

the activities lave group from strength to strength. Himson first concentrated

on expansion in the looms shed. Dyeing and finishing were added further.

Further laces and embroidery units were established as a move toward

complementary diversification.

In seventies the company was towards the high growth. At this timethe company show the opportunity for manufacturing synthetic yarn

processing machinery in the market for which was large that unlapped for

this were first own with the commencement of manufacturing twisting and

rewinding machines and HIMSON TEXTILE ENGINEERING

INDUSTRIES LTD. come in to the eyes of the competitors. Since them

there has been no turning back and company come on the fast track. The

turnover of the group which was few millions when it commenced

operations has increased to Rs.3 millions in 1994-95 and turnover of this

company has increased from Rs.6 millions in 1974 to Rs.2.5 billions in

1994-95.

The fast growth has been sustained by installing modern CNC

machining centers where it is possible to get accuracy of IT class setting up

fully equipped research and development center. The company has also

helped develop about 250 ancillary units owned by qualified Engineers. This

has helped the company easily absorb latest technology and adopt the same

to suit local requirements.


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The company has well developed sales network with branch office at

Bombay, Delhi, Ahmedabad, Kolkata and Coimbtore. Plans are about to

open in Allahabad & Hydarabad. This will give the company network

throughout India. After establishing itself in India the company had turned

its eyes towards the export market. Participating in numerous international

exhibitions in India and also in abroad. The company has secured orders

against global competition.

The company caters to synthetic yarn industry in India and abroad,

manufacturing a complete range of machinery from polyester poy to

weaving and knitting. This product range makes it leading supplier of

machinery for the synthetic filament industry M/S Himson Textile Eng. Ltd.

Was incorporated in January 1979 for the manufacture of sophisticated

textile machineries and its spare parts. The company has been having

collaboration with world famous manufacturers of different textile machines.

Presently the company is having collaboration with TEIJIN SEKI

COMPANY LTD.JAPAN, CAMBER INTERNATIONAL LTD. UK AND

M.T.S., and S.P.A. ITALY.

In the decade of early 80`s, the synthetic textile industry witnessed a

rapid spurt of activities. The synthetic textile industry had undergone a

dramatic Sea of changes in the area of Man fabrics in India as well as across

the globe.

The turnover of group which was few millions when it commenced

operation has increased to USA $ 150 millions in 1997-98 and turnover of

HTEPL has increased from USA $ 1 million in 1987 to USA $ 90 million in

1997-98. The company is managed by board of directors belonging to a

technocrat family having proven knowledge and experience in the polyester

industry.


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The company manufactures wide range of yarn processing machinery

from Draw Texturising machine to draw twisting machine, from several

twisting and winding machine to Ceramic Thread guides. The

comprehensive list of products along with respective collaborator is given in

product range.

The company has achieved ISO 9002 certificate for quality product.

The fast growth has been sustained by installing modern computerized

numerical controlled machining centers where it is possible to get accuracy

of IT6 class, setting fully equipped Research and development Center.

Further it has set a high-tech, state of art STANDARD ROOM for

verification and calibration of measuring tools. The STANDARD ROOM

equipped with 3D CNC Coordinate measuring machine along with other

latest state of art machines and equipments. Besides the company has about

1500 employees on its roll, of which about 300(20%) is management /

executive staff and 200(13%) is technical staff. The company has also

helped develop about 150 ancillary units owned by qualified Engineers. This

has helped the company easily absorb latest technology and adopt the same

to suit local requirements.


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CHAPTER 2

WORKING CAPITAL MANAGEMENT

(THEORETICAL BACKGROUND)

2.1 OVERVIEWOF FINANCIAL MANAGEMENT

2.2 WORKING CAPITALMANAGEMENT WHATFOR?

2.3 WORKING CAPITAL MEANING, DEFINATIONAND CONCEPT

2.4 NEEDFORWORKING CAPITAL

2.5 OPERATING CYCLE

2.6 TYPESOF WORKING CAPITAL

2.7 DETERMINANTSOF WORKING CAPITAL

2.8 WORKING CAPITAL FINANCING

2.9 EXCESSIVEORINADEQUATE WORKING CAPITAL-THE DANGEROUS


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2.1 OVERVIEWOF FINANCIAL MANAGEMENT: -

Finance is regarded as the lifeblood of any business organization.

The Financial management study of about the process of procuring of

financial resources and its judicious utilization with a view to maximizing

the shareholders wealth. Efficient management of every business

enterprise is largely dependent on the efficient management of its

finance.

Financial Management is concerned with the efficient use of an

important economic resource, namely capital funds. From the starting and

registration to winding up of a unit, finance play dominate role in each andevery business unit.

In short financial management is managerial activity, which is

concerned with planning and controlling of the firms financial resources.

Modern approach of financial management requires four broad

decision areas of financial management viz.,

Investment Decision

Financing Decision

The dividend policy Decision

Working Capital Management

This report covers analysis of the last decision i.e., Working Capital

Management. It is very important for short-term survival, which is must for

long-term success. It is concerned with the management of current assets.


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2.2 WORKING CAPITAL MANAGEMENT WHAT FOR

Management of working capital is an extremely important area of

financial management as current assets represent more than half of the total

assets of a business. Fixed assets through essential for a business

organization, does not by itself produce revenue or income. Fixed assets act

with current assets to generate revenue or income. Therefore, working

capital is necessary for utilizing the productive capacity of fixed capital. For

shortage of working capital, the enterprise would suffer reduction in

earnings due to productive capacity remain unutilized. While, excess

working capital leads to extra cost for want of productive capacity. Thus, theamount of working capital in every enterprise, whether manufacturing or

non-manufacturing, should be neither more or less than what is actually

required.

Working capital in business is just live blood in human body.

Optimum and appropriate movement of blood through the body is extremely

necessary to continue life. Like human blood, the proper circulation of funds

(working/circulating capital) is utmost necessary to continue business. If the

circulation of working capital becomes weak, the businesses can hardly

prosper and service. An enterprise should maintain optimum amount of

working capital so as to carry on the productive and distributive activities

smoothly. While, the determination of optimum level of working capital

involves fundamental decisions to an organizations liquidity, which in turn

are influenced by a trade off between profitability and liquidity.

Thus, goal of working capital management is to manage the firms

current assets and liabilities in such a way that satisfactory level of working

capital minted.


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2.3 WORKING CAPITAL MEANING, DEFINATIONAND CONCEPT

In accounting Working capital is the difference between the inflow

and out flow of funds. It other words it is the net cash inflow.

Working capital is defined as excess of current assets over current

liabilities and provision. In other word, it is net current assets or net

working capital.

Working capital can be defined broadly in two different ways i.e.

gross working capital and Net working capital.

Gross working capital refers to organizations investment in total

current assets. Current assets are the assets, which can be, convert in to cash

with in an accounting year and include cash, marketable securities, intently

etc. it is also known as circulating capital.

Net working capital refers to the different between current assets and

current liabilities are those claims of outsiders, which are accepted to mature

for payment within an accounting year and include creditors, bills payable

and outstanding expenses.

Symbolically:

NWC = CA CL.

Where, NWC = Net working Capital

CA = Current Assets

CL = Current Liabilities

Net working capital can also be defined as that portion of firms

current assets, which is financed by long-term funds.


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2.4 NEEDFORWORKING CAPITAL

The need for working capital to run the day-to-day business activities

cannot over emphasize. We will hardly find a business firm, which doesnt

require any amount of working capital. Indeed, firms differ in their

requirement of working capital.

We known that firm should aimed at maximizing the wealth of its

shareholders. In its endeavor to do so, firm should earn sufficient return

from its operation. Earning a study amount of profit require successful sales

activity. But there is always time gap between the day of sales & its

realization from debtors realization from debtors will take time but firm hasarrange money for purchase of raw material, to pay for salary, wages and

other expenses. Therefore sufficient working capital in needed. The

operating cycle can be said to be reason for the need for working capital.

2.5 OPERATING CYCLE

The operating cycle is the length of time required to complete the

following stages of the cycle.

Operating cycle consists of five Phases: -

I. Conversion of cash in to Raw materials.

II. Conversation of raw material in to work-in-process.

III. Conversion work in process in to finished goods.

IV. Conversion of finished goods in to receivables.

V. Conversion of Receivables in to cash


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Symbolically: -

O = R + W + F + D - C.

Where, O= Length of operating cycle.

R= Raw Material storage period.

W= work in progress period.

F= Finished stock storage period.

D= Debtors collection period.

C= Creditors payment period.

(Figure 1: -OPERATING CYCLE OF MANUFACTURING FIRM.)

2.6 TYPESOF WORKING CAPITAL

There are mainly two types of working capital.

a) Permanent Working Capital

b) Temporary Working Capital

Phase-V Phase-IV

Cash

Raw Material

Finished

Work in Progress

Phase-I

Phase-IIIPhase-II

Account Receivable


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a) Permanent Working Capital: -

The need for current assets arises because of operating cycle. The

operating cycle is continuous process and therefore the need for current

assets is felt constantly. But the magnitude of current assets needed is not

always the same. It increases and decreases over time. However there is

always a minimum level of current assets, which are continuously required,

by firm to carry or its business operations is called permanent or fixed

working capital. This minimum level of working capital is necessary on the

regular basis even if the management of working capital is done efficiently

in the organization.

As this type of working capital is minimum necessary for the business

at all points of time, it is financed by the long-term sources.

b) Temporary Working Capital: -

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

temporary, fluctuating or variable working capital. The need for such type of

working arises because of fluctuations in production and sales. The

additional requirement may be during more active season when the volume

of production and sales more goes up necessitating extra blockage of funds

temporarily in current assets like Bank Balance, inventory, debtors, etc.

The temporary working capital is the additional funds required.

Whose volume is different at different points of time and hence it is financed

by short-term sources.


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Both concepts are depicted in the following figure: -

Time

(Figure 2a)

However when the business is growing, the level of permanent

working capital also grows. The working capital graph will be rising one as

given in figure below:

Time

(Figure 2b)

A

M

OU

N

T

O

F

W.

C.Permanent working Capital

Temporary Working Capital

A

M

O

U

N

T

O

F

W.

C.Permanent Working Capital

Temporary Working Capital


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2.7 DETERMINANTSOF WORKING CAPITAL

There are no set formulates to determine the working capital

requirements of firms. A large no. of factors each having a different

importance, influence working capital needs of firms. However, the factors

may vary from organization to organization. Therefore, an analysis or

relevant factors should be made inorder to determine total investment in

working capital.

The following is the description of factors, which generally influence

the working capital requirement of firms.

1. Nature of Business: -Business firm can be dividend in to three categories given below: -

I. Service organization or public utilities

II. Trading or financial organization

III. Manufacturing organization

Service organizations dont normally hold any inventory or the level

inventory may be very low. Again major sale of such services are on cash

basis. Hence they require very less amount of working capital.

Trading or financial organization have to maintain sufficient amount

of cash and inventory.

Hence working capital requirement of such organization are relatively

very high.

Working capital requirement of manufacturing organization normally

falls between the above two extremes.

2. Volume of sales: -

The higher the sales on credit basis, the higher is the requirement of

working capital, as more and more amount is getting blocked in debtors.


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3. Manufacturing Cycle: -

The manufacturing cycle refers to the time spent by a product right

from the stage of purchase of its raw material to the stage of completion of

finished goods. Obviously the larger the manufacturing cycle of a company

the higher is the volume of working capital needed to finance blockage of

money in raw material, work in progress and finished good.

4. Business Cycle: -

No business can remain study for all the time. It passes through the

stages of prosperity and depression. During Prosperity, the volume of sales

increases necessitating higher level of inventories and debtors, i.e. more

Amount of working capital is required to sustain higher levels of activity

during prosperity. Depression has exactly an opposite effect on the level of

working capital requirement.

5. Credit Policy: -

If the organization is following a liberal credit p[policy for its

customers, it will result in higher debtors leading to requirement of more

working capital.

However, if the organization is availing liberal credit term from its

suppliers, the need for working capital is reduced.

6. Tax Structure: -

The entire profit generated may not be available to the organization

because of a simplest fact. The organization has to pay its taxes in time. Tax

rates vary in different forms of organization and accordingly working capital

requirement of different organization will be different.


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7. Dividend Pay out ratio: -

If dividend payout ratio is high, the organization may have earned

profit but-the profits available only after payment of dividends is available

for financing working capital. Hence, higher working capital will be

required if Dividend payout ratio is high.

8. Availability of Funds: -

If the credit worthiness of an organization is good, it may manage the

business with less Working Capital. The reason may be that the organization

may procure the funds whenever it needs the funds.

9. Change in Technology: -

Change in technology affect the requirement for working Capital. If

the firm decides to go for automation, this would reduce the requirements of

Working Capital. If the firm adopts a labor-intensive process, the

requirement of working capital will be larger.

10.Size of the Firm: -

Bigger firms may require lesser working capital as compared to their

total sales or assets. Of course the absolute amount of working capital will

be higher in bigger firms.

The level of Working Capital is determined by a wide variety of

factors that are partly internal to the firm and partly external to it. Efficient

working capital management requires efficient planning and a constant

review of the needs for an appropriate working capital strategy.


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2.8 WORKING CAPITAL FINANCING

A firm must tap the right sources in financing its current assets

requirements. Figure given below shows the financing-mix or sources-mix

or working capital.

(1) Trade Credit (1) BOD/Cash Credit (1) Share Capital

(2) Outstanding (2) Public Deposit (2) Retained

Expenses (3) Short-loans Earnings

(3) Bills payable etc. (4) Bill Discounting (3) Debentures

(5) Commercial Paper (4) Other Long-

(6) Factory etc. term funds.

A source is said to be spontaneous when its use is automatic or arise

in the normal course of business activities.

A source is said to be negotiated when its use depends on prior

deliberations between the borrower and the lender.

Financing Mix

Spontaneous Negotiated Sources

Short-term Long-term


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(1) Long-term Financing: -

Long-term working capital should be provided in such a manner that

the enterprise might have its uninterrupted use for a long time. It can be

conveniently financed by shares, debentures, loans from financial Institution

term loans from banks, reserve surplus etc.

(2) Short-term financing: -

The category of funds covers the need of working capital for

financing day-to-day business requirements. It includes Bank Credit,

Commercial papers, Certificate of deposit, Commercial Bills Market, and

Factoring.

(3) Spontaneous Financing: -

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

normal course of business.

The major sources of such financing are trade credit (creditors and bill

payable) and outstanding expenses. Spontaneous sources of finances are cost

free. Therefore a firm would like o finance its curre3nt assets with

spontaneous sources as much as possible.

Working capital Financing of HIMSON TEX. ENGG. Pvt. Ltd.

The company used both long and short-term sources for financing

working capital requirements. The proportion can be shown in following

table: (Table 1)

SourcesProportion of W.C.

Financing (in %)

A) Equity Share 80%

B) Short-term Loan From BOB. 20%


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2.9 EXCESSIVE OR INADEQUATE WORKING CAPITAL-

THE DANGEROUS

The firm should maintain a sound working capital position. It should

have adequate working capital to run its business operations. Both excessive

as well as inadequate working capital positions are dangerous from the

firms point of view. Excessive Working capital means idle funds, which

earn no profit for the firm paucity of working capital not only impairs firms

profitability but also results in production interruptions and inefficiencies.

The dangers of excessive Working Capital are as follows:

1) A firm may be tempted to over trade and lose heavily.2) The situation may lead to unnecessary purchases and accumulation of

inventories. This cause more chances of theft, waste, losses, etc.

3) These arise an imbalance between liquidity and profitability.

4) It means funds are idle when funds are idle, no profit is earned when it

is so, the rate of return on its investments goes down.

5) The situation leads to greater production, which may not have

matching demand.

6) The excess of working capital may lead to carelessness about cost of

production.

In adequate working capital is also bad and has the following dangers:

1) It stagnates growth. It becomes difficult for the firm to undertake

profitable projects for non-availability of working capital funds.

2) It may fail to pay its dividend because of non-availability of funds.


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3) Operating inefficiencies creep in when it becomes difficult even to

meet day-to-day commitment.

4) Fixed assets arent efficiently utilized for the lack of working capital

funds thus the profitability would deteriorate.

5) It may not be able to take advantage of cash discount

6) The firm loses its reputation when it is not in position to honor its

short-term obligation. As a result, the firm faces tight credit terms.

An enlightened management should, therefore maintain a right

amount of Working Capital on continuous basis only them a proper

functioning if business operations will be ensured.


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CHAPTER 3

PROBLEM DEFINITION

The problem related to whether efficient management of working

capital is necessary or not?

Working Capital is necessary for business but excessive working

capital result in block of funds on the contrary inadequate working capital

disturbed the day-to-day operation of business. So, satisfactory level of

working capital is necessary for business for this purpose management of

working capital can be necessary.


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CHAPTER 4

OBJECTIVE OF STUDY

This studies a part of my BBA; aim at analyzing the working capital

management of HIMSON TEXTILE ENGINEARING IND. PVT. LTD.

The following are the main objective of study: -

To know how to manage current assets and current liabilities so that

satisfactory level of working capital is maintained.

To know how to manage receivable, inventory and cash.

To study the different sources of financing working capital.

To study the operating cycle of company.

To study the liquidity position of company.

To look at possible remedial measures if any on the basis of which

tied-up funds in working capital could be used effectively and

efficiently.

To suggest, if possible on the basis of conclusion some modification

to meet the situation.


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CHAPTER 5

LIMITATION OF STUDY

Following are limitation of the study: -

The study fully depends on financial data collected from the

published financial statement (Annual Report) of company. The data

collected from above the sources are not of detailed nature. Thus

study incorporates all the limitations that are inherent in the

considered financial statement.

There are controversies related to correctness of current assets and

current liabilities that enters in to the domain of working capitalmanagement.


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CHAPTER 6

ANALYSIS OF WORKING CAPITAL

MANAGEMENT


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Introduction: -

It has already been discussed that working capital acts as lifeblood to

an organization. The Himson group of Industry mainly producing textile

machineries at lowest possible cost so that they are enable to sale it in

profitable manner. As major sale is on credit basis and not on cash mode,

working capital is of immense significance for efficiently carried out its day-

to-day operation. In the absence of proper and effective management of

working capital, it would be difficult to achieve the basic objective of its

operational efficiency.

For the efficient management of Working Capital, analyses ofworking capital of company through:

Inventory management

Receivable management

Cash management

Ratio analysis

All these are analyzed subsequently in this part.


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I. WORKING CAPITAL ASSEMBLY: -

(Figures in thousands)

YEARS

Particulars 2000-01 2001-02 2002-03

Current Assets1) Inventories 339,596 350,615 504,596

2) Sundry Debtors 300,586 369,429 321,324

3) Cash & Bank Balance 68,193 124,547 231,670

4) Loans & Advances 192,942 224,777 232,705

5) Other current Assets 27,872 17,358 37,502Total Current Assets (A) 929,189 1,086,726 1,327,797

Current Liabilities

1) Current Liabilities 408,440 455,039 528,285

2) Provision 1,025 4413 28,413

Total Current Liabilities (B) 409,465 459,452 556,698

Net Working Capital (A-B) 627,274 519,724 771,099

(Table-2)


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II. GROSS WORKING CAPITAL: -

The amount of gross working capital during last three years is given in

following table.

(Rs. in thousands)Year Gross W.C. (Rs.) Growth (%)

2000-01 929,189 0.11

2001-02 1,086,726 16.94

2002-03 1,327,797 22.18

(Here year 1999-00 taken as 100%)

(Table-3 Growth in Gross W.C. )

Growth in Gross W.C.

0.11

16.94

22.18

0

5

10

15

20

25

2000-01 2001-02 2002-03

Year

Growth

(% 2000-01

2001-02

2002-03

(Graph-1 Growth in Gross Working Capital)


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III. NET WORKING CAPITAL TO NET ASSETS RATIO: -

Net Working Capital is difference between current assets and current

liabilities. This ration measure firms potential reservoir funds relate to net

assets.

(Rs. in thousands)

Year Net W.C. (Rs.) Net Assets (Rs.) Ratio (in times)

2000-01 627,274 11,84,161 0.53

2001-02 519,724 11,34,542 0.46

2002-03 771,099 11,22,410 0.69

(Table-4)

0.53

0.46

0.69

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000-01 2001-02 2002-03

Year

R

atio

2000-01

2001-02

2002-03

(Graph 2: -Net working capital to Net asset Ratio)


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IV. CALCULATION OF OPERATING CYCLE OF COMPANY: -

Operating cycle of a company computed with the help of following

formula: -

O = R + W + F + D - C

R= Raw material storage period

Average Stock of Raw material= ------------------------------------------------------

Average raw material consumption per day

Year 2000-01

124833= ------------

1927.60

= 65 days.

Year 2001-02

120933.5= ---------------

2349.31

= 52 days.

Year 2002-03

275028= ------------

4044.83

= 68 days.

W= Work-in-progress period

Average Work-in-progress inventory= -----------------------------------------------

Average cost of production per day


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Year 2000-01

49819= ------------

2305.96

= 22 days.

Year 2001-02

191456= ---------------

2807.08

= 68 days.

Year 2002-03

125521= ------------

4658.33

= 27 days.

F= Finished Stock Storage period

Average finished stock inventory= -----------------------------------------------

Average cost of goods sold per day

Year 2000-01

17823.5= ------------

4316.95

= 5 days.Year 2001-02

13283= ---------------

2294.75

= 6 days.


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Year 2002-03

12514.5= ------------

3350.13

= 4 days.

D= Debtors collection period

Average debtors= ----------------------------------

Average credit sales per day

Year 2000-01

287156

= ------------2898.23

= 99 days.

Year 2001-02

335007.5= ---------------

3465.99

= 97 days.

Year 2002-03

345376.5= ------------

6150.48

= 56 days.

C= Creditors payment periodAverage creditors

= -------------------------------------------Average credit purchase per day


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Year 2000-01

327468= ------------

1924.33

= 170 days.

Year 2001-02

301568= ---------------

2147.15

= 140 days.

Year 2002-03

371553= ------------

3441.96

= 108 days.

Operating Cycle

(Figure in Days)

YEARSParticulars 2000-01 2001-02 2002-03

Inventory Storage period

Raw material 65 52 68

Work-in-progress 22 68 27

Finished Stock 05 06 04

Debtor Collection Period 99 97 56

Total (A) 191 223 155

Creditors Payment Period (B) 170 140 108

Operating Cycle Period (A-B) 21 83 47

(Table-5a)

Operating Cycle Period

Year Operating Cycle Period

2000-01 21


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2001-02 83

2002-03 47

(Table-5b)

21

83

47

0

10

20

30

40

50

60

70

80

90

2000-01 2001-02 2002-03

Year

Days

2000-01

2001-02

2002-03

(Graph-3 Operating Cycle of Company)


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V. MANAGEMENT OF INVENTORY: -

Inventory constitute major portion of current asset of public Ltd.

Companies in India .The manufacturing companies hold inventories in the

form of Raw material, work-in-process and finish good,

There are at least three motives for holding inventories.

(1) To facilitate smooth production and sales operation

(Transaction motive)

(2) To guard against the risk of unpredictable changes in usage

rate and delivery time (Precautionary Motive)

(3) To take advantage of price fluctuations. (Speculative Motive)

Inventories represent investment of a firms funds and that is why

management of inventory is necessary for the maximization of the value of

the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk

Factors in establishing its inventory policy.

EVALUATIONOFINVENTORYMANAGEMENTPERFORMANCE: -

Ratio analysis has been used for making evaluation of Inventory

management performance. As the raw material used in the company is pig

iron, proper planning and handling is required for the purpose of achieving

the right quality of output.

The ratios for last three years have been worked out and compared.

The various figures are given in the table.


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INVENTORY MANAGEMENT IN HIMSON PVT LTD.

(Rs. in thousand)

ITEM 2000-01 2001-02 2002-03(1) Average Inventory 329550.5 331822.5 414866

(2) Total Current Assets 929189 1086729 1327797

(3) Cost of Good Sold 760872 891349 15207147Ratio (%)

a) Inventory to Gross

Working Capital (1/2)0.35 0.30 0.31

b) Inventory Turnover (3/1) 2.31 2.69 3.67

c) Inventory Conversion

Period (365/b) days158 136 99

(Table 6)

Inventory Turnover

2.31

2.69

3.67

0

0.5

1

1.5

2

2.5

3

3.5

4

2000-01 2001-02 2002-03

Year

InventoryTurnover

2000-01 2001-02 2002-03

Inventory Conversion Period (days)

158

136

99

0

20

40

60

80

100

120

140

160

180

2000-01 2001-02 2002-03

Year

InventoryTurnover

2000-01 2001-02 2002-03

(Graph 4) (Graph 5)


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VI. MANAGEMENT OF RECEIVABLE: -

When firm sell goods for cash, payments are received immediately

and therefore no receivables are created. However when a firm sells goods

or services on credit, payments are received only at a future date and

receivables are created. It is an essential marketing tool in modern

business trade. Credit creates receivables, which the firm is expected to

collect in near future. A firm grants credit to its customers so that its sales

are its customers so that its sales are not lost to competitors.

Account receivable constitutes a significant portion of the total current

assets of the business after inventories. The receivables arising out of credit

has three characteristics.

I. It involves an element of risk, which should be carefully analyzed.

II. It is based on economic value. To the buyer, the economic value

goods or services pass immediately at the time of sale, white the

seller expects an equivalent value to be received later on.

III. It implies futurity. The customers from whom receivables have to

collected in future are called debtors and represents the firms claim

or asset.

DEBTORS TURN-OVERRATIO: -

This is also called Debtors velocity or Receivable Turnover. A

firm sells goods on credit and cash basis. When firm extends credit to its

customers, book debts are created in firms A/c debtors expected to converted

in to cash over short period and thus included in current assets. It is used to

measure liquidity of the receivables or to find out period over, which

receivables remain uncollected.


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Receivable turnover Ratio

Total Sales= -----------------------

Average Debtors

Debt collection period

365= ------------------------------------

Receivable turnover ratio

Receivable Management in Company

Year Sales Avg. Debtors Ratio Collection Period

2000-01 1042284 287156 3.63 100

2001-02 1247759 335007.5 3.72 982002-03 2214174 345376.5 6.41 57

(Table 7)

Debtors Turnover Ratio

3.63 3.72

6.41

0

1

2

3

4

5

6

7

2000-01 2001-02 2002-03

Year

DebtorsTurnove

rRatio

2000-01 2001-02 2002-03

Debt Collection Period

100 98

57

0

20

40

60

80

100

120

2000-01 2001-02 2002-03

Year

DebtorsTurnove

rRatio

2000-01 2001-02 2002-03

(Graph 6) (Graph 7)


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VII. MANAGEMENT OF CASH: -

Cash in the important current assets for the operations of the business.

Cash is the basic input needed to keep the business running on continuos

basis, it is also the ultimate output expected to be realized by selling the

service or product manufactured by the firm. The firm should keep sufficient

cash, neither more or less. Cash shortage will disrupt the firms

manufacturing operation while excessive cash will simply remain idle,

without contributing anything towards firms profitability. Thus, a major

function of the financial managers is to maintain a sound financial position.

Cash management involves following four factors: -

I. Ascertainment of the minimum cash balance and controlling the levels

of cash.

II. Controlling cash in flows

III. Controlling cash outflows

IV. Optimum interment of surplus cash.

Cash is required to meet a firms transactions and precautionary needs.

A firm needs cash to make payment for acquisition of resources and services

for the normal conduct of business. It keeps additional funds to meet any

emergency situation. Some firms maintain cash for taking advantages of

speculative changes in price of input and output.

EVALUATIONOFCASHMANAGEMENTPERFORMANCE: -

The following ratios have been used to evaluate different aspects of

cash management.

(1) Cash to Current Assets Ratio.

(2) Cash turnover Ration.

(3) Average age of Cash.


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The figures of cash and Bank Balance, total current assets and current

liabilities for the year 2000-01to 2002-03 are given in the table.

Cash Management in Himson Pvt. Ltd.

(Rs. In 000s)

ITEM 2000-01 2001-02 2002-03

(1) Cash & Bank Balance 68193 124547 231670

(2) Total Current Assets 929189 1086729 1327797

(3) Total Current Liabilities 408440 455039 528285

Ratio (%)

a) Cash to Current Asset

Ratio (1/2)7.34 11.46 17.45

b) Cash Turnover Ratio (3/1) 5.99 3.65 2.28c) Average age of cash

(365/b) days61 100 160

(Table 8)

Cash Turnover Ratio

5.99

3.65

2.28

0

1

2

3

4

5

6

7

2000-01 2001-02 2002-03

Year

Cashturnov

er(%)

2000-01 2001-02 2002-03

Avg. Age of Cash

61

100

160

0

20

40

60

80100

120

140

160

180

2000-01 2001-02 2002-03

Year

Avg.

AgeofCa

sh(days)

2000-01 2001-02 2002-03

(Graph 8) (Graph 9)


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VIII. ANALYSIS THROUGH WORKING CAPITAL RATIOS: -

A study of the causes of changes in uses and sources of Working

Capital is necessary to observe that whether working capital is serving the

purpose for which it has been created or not. In this technique, for each

aspect of analysis certain ratios are computed and then results are compared

with standard ratio or industry average.

The ratio analysis provides guides and clues especially in sporting

trends towards better or poorer performance and in finding out significant

deviation for any average or relatively applicable standards.

The following are the important ratios to measure the efficiency of

working capital: -

1. Ratios relating to liquidity of working capital: -

Liquidity ratios are used to measure the ability of firm to pay its

maturing obligation in time. This ratio helpful for both short-term creditors

and internal management of the firm. The following are types of ratios

relating to liquidity of working capital.

A. Current Ratio: -

It is most common measure for measuring liquidity. It is also called

Working Capital Ratio. It expresses relationship between current assets &

current liabilities.

Current AssetsCurrent Ratio = ----------------------

Current Liabilities


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(Rs. in 000s)

Year Current Assets Current Liabilities Ratio (times)

2000-01 929,189 408,440 2.27:1

2001-02 1,086,726 455,039 2.39:1

2002-03 1,327,797 528,285 2.51:1(Table 9)

The acceptable norms for this ratio is 2:1 considering this it can be

said that company has maintained sound ratio over three year

B. Quick Ratio: -

It is also known as liquid ratio or acid test ration. It is a relation

between quick assets and quick liabilities. It more useful in knowing the

liquidity of firm than current ratio.

Quick AssetsQuick Ratio = ----------------------

Current LiabilitiesA quick asset means current assets excluding stock and prepaid

expenses.(Rs. in 000s)

Year Quick Assets Current Liabilities Ratio (times)

2000-01 589,593 408,440 1.44

2001-02 736,111 455,039 1.62

2002-03 823,201 528,285 1.56

(Table 10)

The acceptable norms for this ratio is 1:1 but the company as already

maintained it above the norms, which indicate sound financial position.

2. Composition of Gross working capital: -

The structure of gross working capital is evaluated by finding out the

ratio of each component of current assets with the total current assets. These


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ratios indicate in which components of current assets, excess funds have

been invested to that extent.

Component 2000-01 2001-02 2002-03Inventories 0.37 0.32 0.38

Sundry Debtors 0.32 0.34 0.24

Cash & Bank Balance 0.07 0.11 0.17

Loans & Advances 0.22 0.21 0.17

Other Current Assets 0.02 0.02 0.03

Total 100 100 100

(Table 11)

3. Ratios relating to Circulation or Productivity of Working

Capital: -

This ratio highlighted the efficiency with which working capital is

being utilized. It is commonly used to know turnover of working capital and

the turnover of its components to indicate the efficiency of working capital

management.

A. Circulation of Gross Working Capital: -

The method is used to examine the effectiveness of gross working

capital. It is circulated as:

Net Sales= -----------------------------

Total Gross W. C.

(Rs. in 000s)

Year Net Sales Total Gross W.C. Ratio (times)

2000-01 1,042,284 929,189 1.12

2001-02 1,247,759 1,086,726 1.15

2002-03 2,214,174 1,327,797 1.67

(Table 12)


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This ratio tells us the relative efficiency with which the business

organization utilizes the short-term resources to generate output.

B. Circulation of Net Working Capital: -

The method used to measure the effectiveness of net working capital

is to divide net sales by net working capital. The ratio is computed as

follows: -

Net Sales= ------------

Net W.C.

(Rs. in 000s)

Year Sales Net Working Capital Ratio (times)

2000-01 1,042,284 627,274 1.66

2001-02 1,247,759 519,724 2.40

2002-03 2,214,174 771,099 2.87

(Table 13)

This ratio tells whether three is an improvement in the utilization of

net working capital or not.

4. Other Ratio: -

A. Cash Position Ratio: -

This ratio is variation of quick ratio. It measures the relationship

between cash and near cash its on the one had, and immediately maturingobligations on the other. The inventory and debtors are excluded from

current assets, to calculate this ratio.

Cash + Marketable Securities


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Cash Position Raito = -----------------------------------Current Liabilities

(Rs. in 000s)

Year Cash Current Liabilities Ratio (times)

2000-01 68,193 408,440 0.17

2001-02 124,547 455,039 0.28

2002-03 231,670 528,285 0.44

(Table 14)

Generally 0.25:1 ratio is recommended to ensure liquidity.

B. Return on Fixed Assets : -

This ratio indicates a return on fixed assets. It can be calculated as

Net profit after tax

= ------------------------ 100Net fixed assets

(Rs. in 000s)

Year Net profit after

tax

Net Fixed Assets Ratio (%)

2000-01 31,347 5,59,820 5.60

2001-02 59,310 4,85,507 12.22

2002-03 84,152 4,44,600 18.92

(Table 15)

From the above calculation it is cleared that return on fixed assets

increasing year by year, it means that company is able to earn higher return

on investment in business than the investment made in the outside deposit.


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C. Current Liabilities to Total Assets Ratio: -

This ratio shows the relationship between current liability and total

assets [Net Fixed Assets + Investment + Current Assets]

It is calculated as: -

Current Liabilities= ----------------------

Total Assets

(Rs. in 000s)

Year Current Liabilities Total Assets Ratio (times)

2000-01 408,440 1,703,885 0.24

2001-02 455,039 1,761,816 0.26

2002-03 528,285 1,893,509 0.29

(Table 16)

D. Current Assets to Total Assets Ratio: -

The ratio brings out the percentage of current assets to total net assetsof the business. This ratio indicates the extent of liquidity nature of assets

required in comparison with total net assets. The formal for ratio is given

below.

Current Assets= ----------------------

Total Assets

(Rs. in 000s)

Year Current Assets Total Assets Ratio (times)

2000-01 929,189 1,703,885 0.55

2001-02 1,086,726 1,761,816 0.62


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2002-03 1,327,797 1,893,509 0.70

(Table 17)

CHAPTER 6

FINDINGS


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&

SUGGESTIONS


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(A) Findings: -

Working Capital Ratios

Ratio 2000-01 2001-02 2002-03 Avg. of Ratio1) Net W. C. to Net Assets 0.53 0.46 0.69 0.56

2) Inventory to Gross W.C. 0.35 0.30 0.31 0.32

3) Inventory Turnover 2.31 2.69 3.67 2.89

4) Inventory Conversion

period (days)

158 136 99 131

5) Debtors Turnover 3.63 3.72 6.41 4.59

6) Debt collection Period

(days)

100 98 57 85

7) Cash to Current Assets. 7.34 11.46 17.45 12.08

8) Cash Turnover Ratio 5.99 3.65 2.28 11.929) Avg. Age of Cash (days) 61 100 160 107

10) Current ratio 2.27 2.39 2.51 2.39

11) Quick Ratio 1.44 1.62 1.56 1.54

12) Circulation of Gross

Working Capital

1.12 1.15 1.67 1.31

13) Circulation of Net

Working Capital

1.66 2.40 2.87 2.31

14) Cash Position 0.17 0.28 0.44 0.30

15) Return on fixed Assets 5.60 12.22 18.92 12.25

16) Current liabilities to

Total Assets

0.24 0.26 0.29 0.26

17) Current Assets to Total

Assets

0.55 0.62 0.70 0.62

(Table 18)

The following are the findings of the analysis: -

(a) Gross working capital: -

Gross working capitals of company i.e. current asset are increasing

over a period of study. It was 0.11% in 2000-01 and increased to 22.18 in

2002-03 so there is increased of 22.07%


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(b) Operating cycle: -

The period for conversion of material in to finished & finished good

in to sales &sales in cash for a period of study are respectively 21.83 and 47

days on average there is 50 days required to collect money and again repeat

cycle.

(1) Net working capital to Net asset Ratio: -

The average ratio is 0.56 for period under study. It means there is a

reserve of Rs.56 on an average from net asset of Rs.100

(2) Inventory to Gross Working Capital Ratio: -

This ratio is decreasing as compared to year 2000-01 from 0.35 to

0.31 in 2002-03. It shows that firm has not improved its inventory

management.

(3) Inventory Turnover: -

This ratio has been increased over the three years from 2.31 in 2000-

01 to 3.67 in 2002-03. So it can be said that company has take steps to

increase the inventory-turn over ratio.

(4) Inventory Conversion Period: -

It refers to the period when manufacturing unit takes to clear a lot of

stock. There has been a continuous decreasing in conversion period. This

will help in reducing accumulation of inventories.

(5) Debtors Turnover Ratio: -

This ratio shows the period of which receivable remain uncollective.

The ratio is doubled in 2002-03 as compared to 2000-01. So serious steps

should be taken to reduce the collection period though sales increase.

(6) Debt Collection Period: -


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It is the time period required by company to recollect its payment.

Company has made speedy collection in 2003 as compared 2000-01 by

collecting in nearly half period i.e. 57 days compared to 100 days in 2000-

01. Average collection period over 3 years is 85 days

(7) Cash to Current Asset Ratio: -

This ratio indicates the extent to which the current assets are

represented by cash&bank balance. There is an increase in the ratio over the

three years. It was increased by 10% in 2002-03 compared to 2000-01.This

increase will lower the profitability of the company.

(8)Cash Turnover: -

It indicates no. of times cash is flowed out for payment to creditors.

The ratio is continuously decreasing indicating there is ideal cash balance.

(9) Average age of cash: -

It indicates the period for which the cash remains unused. There is

continuous increased in period. It means there is lack of cash management.

(10) Current Ratio: -

It is a quick measure of the firms liquidity, which remained between

2.27 to 2.51 through out the period understudy. It is over the acceptable

norm i.e.2:1 so company has sufficient liquidity to meet short-term

obligation.

(11) Quick Ratio: -

This ratio is above the standard norm of 1:1 through out study period

so it can be said that it has satisfactory liquidity position.

(12) Circulation of Gross Working Capital: -


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The ratio shows upward trend over the three-year period. It means

there is lower investment in current asset as compared to sales. Some say

that there is an improvement in working capital utilization.

(13) Circulation of Net Working Capital: -

The ratio shows an increasing trend over 3 years, which means there

is an improvement in utilization of Net Working Capital during the period.

(B) SUGGESTIONS: -

From the analysis of working capital ratios, I have some suggestion

for company, which might help them in improving management of working

capital:

The Gross working capital is increasing over three years but the

major proportion of current assets comprise of inventories in each

year. The company should try to reduce investment in inventory.

The company should give more importance to inventory

management and try to reduce inventory to gross working capital

ratio. This will help in reducing inventory costs.

There is an increase in debt collection period over three years and

at present (2002-03) it is near by two months which as per the

textile industry norm but this is possible due to increase in debtors

turn over ratio. So the company should try to increase this ratio as

much as possible.

The company should additional funds in business rather than

investing in fixed deposit because company able to earn higher rate

of return on investment in fixed assets as compare to fixed deposit.


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BIBLIOGRAPHY

Name of Book Author Publisher

Working Capital Management P. Mohanrao Deep &

& Alok K. Pramanik Deep

Working Capital Management Hrishikes Bhattacharya PrenticeHall

Financial Management I. M. Pandy Vikash

Publication

Financial Management Khan & Jain Tata

McGrawhill

Financial Management T. J. Rana & B. S. Shah

Naresh Jain

Management Accounting Bhagwati & Pillai Himalaya

Annual Reports of Company

himson-working capital managemant

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