SUMMER TRAINING PROJECT REPORT ON WORKING CAPITAL MANAGEMENT SUBMITTED TO:KURUKSHETRA UNIVERSITY KURUKSHETRA

In partial fulfillment for the degree of M.B.A. Session 2009-2011

UNDER THE GUIDANCE OF: Ms. Anika Gupta

SUBMITTED BY:Name: Pankaj kumar

Swami Devi Dayal Institute Of Management Studies

Barwala, Panchkula(Haryana)

ACKNOWLEDGEMENT
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This project report prepared by me is a result of several helping hands of the Marketing Department of Friends Engineering Works. The knowledge of our management studies is absolutely incomplete without its proper implementation and application in diversified corporate world of today. An under of the study like this is never and outcome of efforts put in by single person, rather it imprints of numbers of persons who directly or indirectly help me in completing the study. First of all I would like to thank Mr. Rajeev Chuhan as their knowledge and experience has been a guiding light during my project. I offer a sincere thanks to ms Gagan for their full-fledged cooperation, care and immense amount of help without which it would have been really difficulty to complete this project.

PREFACE For management concern it is important to develop managerial skills. In order to achieve positive and concrete results along with the theoretical concepts the exposure of real life situations existing in corporate world is very much needed.

To fulfill this need this practical training is required. I took training in fast growing company FRIENDS ENGINEERING WORKS. located in Saha (Haryana). It was my fortune to get training in a very healthy atmosphere. I got ample opportunity to view the overall working of the company. This report is the result of my eight weeks of summer training in Friends Engineering Works. as a part of MBA. The subject of my report is Market Analysis of Plastic Industry. This training report presents a precise record of what I have learnt in the company during the eight week training duration.

TABLE OF CONTENTS

Chapter 1 Introduction A) Statement of Problem (Background of the problem task undertaken (i.e. how & why the project was selected) B) Introduction to the company: This section contains: a. Introduction to the industry (detailed) b. Introduction to Organization/ Products(detail Chapter 2 Review of literature
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Chapter 3

Research Methodology

a) Research design b) Data collection techniques c) Objective of study d) Scope of study e) Significance of study f) Statistical tools used for interpretation & analysis g) Limitation of study

Chapter 4 Analysis & Interpretation help of tables & diagrams. Chapter 5 Findings & Suggestions a) Finding of the study

Each question should be analyzed with the

b) Suggestions & recommendations

Chapter 6 Conclusion

Bibliography:

Statement of Problem

To find out the liquidity by using Current and quick ratio and to measure the financial performance.. These ratio reveals that company has sound liquidity position throughout the period of study. Both the ratio shows fluctuating trend within reasonable limit. The other objective of study is the efficient use of cash management system. Inventory turnover ratio depict the fluctuating trend which indicates the accumulation of inventory in turn which cause loss to the company by way of deterioration of stock, interest loss on blockage of stock etc.

Camparison between Financial statement of the company. To check the strength of the company. To proper utilization of funds and to arrange the source of funds

CHAPTER 1

INTRODUCTION

INTRODUCTION TO IFEW GROUP IFEW, established in 2008 surges ahead to establish itself as a reputed Industrial conglomerate with a wide ranging portfolio from Sheet metal, plastic bowls and injections blow moulding and plastic bowls and injections injection moulding components. . The Markets of the ifew group are crisscrossed allover the globe. The objective is meeting the buyers expectations with consistent quality backed by R&D divisions equipped with latest equipment, cream of highly qualified technocrats and adhering to the timely schedules of the companies.

The year was 2008. While their beginnings were small the vision was big. The burning desire to evolve Grow & one day position itself as a responsible & reputed corporate entity playing out its role in improving the peoples quality of life through their products & service remained a driving force. It is their relentless spirit of enterprise, boundless enthusiasm, grit & determination to live the dream that enabled them to add a new dimension to their philosophy- where commitment leads, achievement follows. Propelled by new technologies and inspired by our exalted goal to explore new frontiers, our march towards blazing new trails to span new horizons takes on a new dimension setting the tone for a new millennium. Rajeev Chairman Vision is the key. Without vision there can be no mission, no agenda to road map the future. Vision provides the vital differential between the ordinary & extra ordinary, defining the cutting edge that powers organizations way above & beyond competition. No progressive group can ignore this vital input. Sushil Verma
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Chuhan

Accountant Globalization offers exciting challenges that can be converted into rewarding opportunities only if you are sharply attuned to the ground realities pertaining to business and industry. At the end of the day, words remain words. Explanations remain explanations. Promises remain promises. Only performance speaks. Today's we step into the new millennium those nascent days of 800 spindle start-up become a distant memory as the IFEW Group surges ahead to establish itself as a reputed Industrial conglomerate with a wide ranging portfolio Sheet Metal, plastic bowls and injections blow moulding and plastic bowls and injections, injection moulding components , Infrastructure Development.

INDUSTRY PROFILE The Indian industry is very large and diverse and has its roots going back several thousand years. After the industrial revolution in Europe, this sector in India also saw growth of an Industrial complex. However, over the last 50 years the industry in India has shown a chequered performance. Today the industry contributes 14% to industrial production in the country, is estimated to directly employ approximately 35 million people apart from the indirect employment in allied sectors, accounts for about 27% to the countrys exports, and is, in sum, an important economic engine for the nation. It has gradually removed these restrictions, and has also brought down import duties on capital equipment, creating grounds for foreign investors to set up manufacturing plants competitively in India. In recent years, when India has started becoming a global manufacturing base it can certainly provide a competitive base for companies into which to invest. However, during the last 10 years, the industrys actions, government policies as well as market events have began to converge, providing several growth opportunities for the sector domestically as well as in the global market. As the MFA quota-regime draws to a close, India presents many opportunities for buyers, suppliers and investors to partner with its plastic bowls and injections industry, and to profit from the partnership.
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and apparel

PLASTIC BOWLS AND INJECTIONS AS A GROWTH ENGINE Plastic bowls and injections Industry plays a significant role in the Indian economy. It constitutes 20 per sent of Industrial production, 9 per cent of excise collections, 30 per cent of export revenue and 18 per cent of employment in industrial sector. On a relative basis, the industry is globally more competitive than other industries in the country. In addition, the industry has a high potential to grow, as it is labour intensive where India has natural advantage.

However, despite these advantages, industry performance has been sub-optimal in comparison to other countries. Indias share in re-location of world trade has been extremely low in comparison to countries like china and even Sri-Lanka and Bangladesh. In addition, domestic per capita consumption of plastic bowls and injections products at 2.5 kilograms (USA-30kilograms, world average at 7.5kilograms) is among the lowest in the world. OPPORTUNITIES AND THREATS In the next decade, Indian plastic bowls and injections industry would be subjected to
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numerous opportunities and threats. As the domestic mettal sheet consumption is low, there is potential for increasing domestic consumption in tandem with the projected GDP growth of 6-8%. If structural rigidities can be removed, the domestic plastic bowls and injections

market can grow at about 7% per annum in the coming 10 years. If the industry can be
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made globally competitive, India can also capitalize on opportunities available in the export market. A competitive industry has the potential of achieving export earning of over Euro 35 billion by 2010. High growth in plastic bowls and injections industry will also provide significant opportunity to create additional employment, as capital to employment, as capital to employment ratio in plastic bowls and injectionss industry is most favorable as compared to any other industry. Accordingly, if the industry can realize its growth potential, it is estimated that 6 million direct jobs can be created in the organized sector by 2010. The increased direct employment in the industry would spin off substantial indirect jobs. As a result of the growth potential in the domestic and export market, the mettal sheet consumption in the country will grow from its present level of 4.5 million tons to above 8 million tons, which will induce growth in the farm sector and the manmade mettal sheet industry. However, the opportunity in the industry is limited as the current trend of relocation of world rate is expected to taper off by 2010. Accordingly, if the industry continuous to operate at the current competitiveness level, net exports are expected to stagnate at Euro 10 billion with limited or no impact indices. POLICY MEASURES The plastic bowls and injections and garments sector is a very diverse sector. It covers a wide variety of products based on different mettal sheets, at varying degree of value addition, based on different creation techniques like weaving or knitting, diversely processed and so on. Some of the factors to boost plastic bowls and injections and garment exports are covered in this part.

on

the

other

economic

Technological up gradation Economies of scale-de-reservation, assembly lines production Stronger mettal sheet base higher crop productivity
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COMPANY PROFILE

FRIENDS ENGINEERING WORKS LIMITED (IFEW) was originally incorporated as During 1989,first time the Company offered its share to general public through convertible debentures to part finance toilet soap plant. The Company was successfully exporting of toilet soap products. In 1992, the company has been awarded status of a Recognised Export House for its export performance. The management conceived an idea of setting up a composite plastic bowls and injections unit of its own kind in India, in a phased manner.With a view to appropriately reflect the scope and extent of companys proposed multidimensional activities, it was considered expedient to change the name of the company to Saha Industrial Enterprises limited in1994.

STATUS OF IFEW LIMITED

IFEW Limited is the unit of FRIENDS ENGINEERING WORKS Limited. It establish at SAHA(Ambala) place in HARYANA STATE. IFEW Ltd. produce 15000 Plastic bowls and injections injection per day. It manufactures sheet metal, plastic bowls and injections blow moulding and other moulding.
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QUALITY POLICY We are committed to produce as per customers requirement by using specified yarn, continuous improvement in process and optimum realization at all stages.

We

shall

achieve

this

by

N Need fulfill of customers. A Adherence of standard norms. H Human Resource development through continuous training. A Adoption of latest technology. R Responding fastest to customers queries. F Flexibility in product mix. A Application of environment friendly technology. B Bringing sense of belongingness. R Reduction in rejects and wastes. I Innovation in process. C Continuous vendor development. S Striving to minimize non-conforming product.
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PRODUCT PROFILE

WEAVES

Sheet mettal

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Plastic bowls and injections blows moulding

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Plastic injections

Others components

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DIFFERENT DEPARTMENTS

MATERIALS DEPARTMENT This department carries out all the functions of material management by fulfilling the needs of all departments. Departments in need of material place order either through HODs or SAP formalities. Once it is approved, it is passed on to purchase department. COMMERCIAL DEPARTMENT It deals with the raw material procurement, storage and issue with a close coordination with material department. COSTING DEPARTMENT Deals with product costing. Department has set standards for calculating cost. Cost is decided as per company expenses and not the market price. FINANACE & ACCOUNT DEPARTMENT Finance department deals with actual figures (trading accounts and balance sheet) Various functions of Finance (like capital structure, dividend policy and working capital management) are centralized, which are prepared is accountant Implementation is done here . SECURITY DEPARTMENT Looks after entire setup from safety point of view and saves from theft, pilferage, fire etc. Controlling in-and-out movements of men as well as material. EDP DEPARTMENT Responsible for communication programming.
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PERSONAL & ADMINISTRATION DEPARTMENT This department is responsible for: Wages and salaries- Which include Basic Salary, HRA, Conveyance,

Medical, and LTA etc. Record keeping- The entire employees database is maintained, along with details like leaves etc. HR DEPARTMENT The main functions of this department are recruitment , selection , induction , performance appraisal, training etc. placement ,

CHAPTER 2

REVIEW OF LITERATURE

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REVIEW OF LITERATURE Research works in this area gave an outstanding view about the exploration of this topic in different dimensions. RAGUNATH REDDY AND KAMESHWARI(2004) state the working capital was to be effectively utilized for generating funds from sales in CIPLA LTD. GHOSE AND MAJI(2004) examined the working capital management of the Indian cement companies from 1992-1993 to 2001-2002 instead of using the three index values representing the average performance of the component of current assets, the degree of utilization of the total current assets in relation to sales and the efficiency in managing the working capital, have been computed for the selected firms over the ten years study period. They concluded that the Indian cement industry did not perform remarkable during the period. REDDY AND PATKAR(2004)studied the size and its components and liquidity management in factoring companies. They also studied the correlation between liquidity and profitability of factoring companies. They concluded that the sundry debtors and amount due to the creditors are the major components of the current assets and current liabilities respectively in determining the size of working capital.

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CHAKRABORTY (2004)stated that the conventional method of measuring liquidity would not be sufficient to cover this extended view of liquidity and new framework must be developed to cover analysis of amount and trend of internal cash flow, which is better proposition to focus on a firms liquidity position than those based on financial ratios. He discussed about the theory of corporation liquidity and flexibility backed by Net Liquidity Balance (NLB) of Shulman And Cox and concluded that it is definitely a better approach to measure liquidity over the conventional method of ratio analysis. DEBASISH SURETAL(2001) studied the association between the liquidity and profitability of Indian private sector enterprises as a case study of Aluminium producing industry. They have identified very high degree of positive correlation between liquidity and profitability of selected companies. They also observed that liquidity variables jointly influenced the profitability of tha selected companies. HYDERABAD(1999) found that long term funds were used for working capital and observed that flexibility and adjustment in the requirement of working depended on the availability and cost of working capital. DEBASISH SURETAL(1997) conducted a study on working capital management in Colgate(Palmolive) India Ltd. He observed that working capital management is not satisfying the conventional standard. INDRESENA REDDY AND SOMESHWAR RAO(1996) conducted a study on working capital management in HCL. He used seven ratios and statements of change in working capital and concluded that the companys working capital management is not upto the expected level. It needs to be improved by effective utilization and control of current assets. SHANKAR K(1996)discussed about new working capital finance instruments like commercial paper, factoring, forfeiting, debt securitization and norms for working capital management called zero working capital which means all times the current assets shall equal the current liabilities. This concept would ensure a smooth and uninterrupted working capital cycle and it would pressure on the finance manager to improve the
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quality of current assets at all time which means current ratios is one and quick ratio below one.

Chapter-3

RESEARCH METHODOLOGY

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RESEARCH METHODOLOGY Primary Objective(s) is to The Basic objective of cash management is two fold: To meet the cash disbursement needs (payment schedule); To minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management reconcile them.
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Research Design:

Data Collection: Data has been collected through both primary and secondary approach. Data Sources The research involved gathering Secondary data as well as Primary data. For the purpose two types of survey was conducted by me to collect the data Customer survey and Consumer survey

Primary Data Consumer survey was done to know their purchasing behaviour because they are the one who constitute the market and are the target of the business . In Insurance Industry untill and unless we have the knowledge of the consumer behaviour and factor which influence them to buy a paticular brand ,companies cannot focus upon the target market. Hence a consumer survey was done to know their wants, purchasing power, and buying habits in order to segment the market , and based on this consumer profile was identified. Secondary Data Secondary data regarding sales figures, promotional expenses and other related expenses was collected from the companys own record to analyse the impact on sales due to the running schemes and make cost benefit analysis. Scope of the Study Both primary and Secondary data has been be used for the study. Primary data was collected through direct interaction with the companys finance and accounts department. If needed schedule/questionnaires would be devised to get the information on all the
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relevant areas of the study such as receivable management, inventory management, management of cash etc. And I collected the data from the secondary sources comprising Annual Reports of the firm, other journals and periodicals. Apart from the conducting this research work on the basis of these information, various techniques of financial management e.g., comparative statement, trend analysis and ratio analysis etc. were used in the present study. To present a broad view so far the purpose of the analysis and to make it easy to understand the problem/concept of a few graphs and tables shall also be presented. In each chapter, the analysis has been compared with actual management practices of the company under study.

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OBJECTIVE OF THE STUDY.

To find out the liquidity by using Current and quick ratio and to measure the financial performance.. These ratio reveals that company has sound liquidity position throughout the period of study. Both the ratio shows fluctuating trend within reasonable limit. The other objective of study is the efficient use of cash management system. Inventory turnover ratio depict the fluctuating trend which indicates the accumulation of inventory in turn which cause loss to the company by way of deterioration of stock, interest loss on blockage of stock etc.

Camparison between Financial statement of the company. To check the strength of the company. To proper utilization of funds and to arrange the source of funds

Limitation of the Study

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Although every effort has been made to study the Working Capital Management in detail, in an organization of IFEW limiteds size, it is not possible to make an exhaustive study in a limited duration of 2 months. It is not possible to include the data of the year 2007-08 because the companys financial year starts on 1st October & ends on 30th September. However, the available data is analyzed with great efforts to get an insight into Working Capital Management in IFEW limited.

The present study is limited to one Co., i.e. ESCORT ltd. and covers a period from 2005 and 2006 due to limitation of time and accessibility to data base. The authenticity of the suggestions and recommendations depend upon the rationality of the data provided to me. Have to rely upon the data supplied. Executives are not ready to part with the information beyond a limit.

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CHAPTER 3

Statistical tools used for interpretation & analysis

COMPONENT OF WORKING CAPITAL

WORKING CAPITAL - OVERALL VIEW Working Capital management is the management of assets that are current in nature. Current assets, by accounting definition are the assets normally converted in to cash in a period of one year. Hence working capital management can be considered as the management of cash, market securities receivable, inventories and current liabilities. In fact, the management of current assets is similar to that of fixed assets the sense that is
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both in cases the firm analyses their effect on its profitability and risk factors, hence they differ on three major aspects: 1. In managing fixed assets, time is an important factor discounting and compounding aspects of time play an important role in capital budgeting and a minor part in the management of current assets. 2. The large holdings of current assets, especially cash, may strengthen the firms liquidity position, but is bound to reduce profitability of the firm as ideal car yield nothing. 3. The level of fixed assets as well as current assets depends upon the expected sales, but it is only current assets that add fluctuation in the short run to a business. To understand working capital better we should have basic knowledge about the various aspects of working capital. To start with, there are two concepts of working capital: Gross Working Capital Net working Capital Gross Working Capital: Gross working capital, which is also simply known as working capital, refers to the firms investment in current assets: Another aspect of gross working capital points out the need of arranging funds to finance the current assets. The gross working capital concept focuses attention on two aspects of current assets management, firstly optimum investment in current assets and secondly in financing the current assets. These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason the arrangement should be made quickly, and similarly if some surpluses are available, they should not be allowed to lie ideal but should be put to some effective use. Net Working Capital:
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The term net working capital refers to the difference between the current assets and current liabilities. Net working capital can be positive as well as negative. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. The net working capital helps in comparing the liquidity of the same firm over time. For purposes of the working capital management, therefore Working Capital can be said to measure the liquidity of the firm. In other words, the goal of working capital management is to manage the current assets and liabilities in such a way that a acceptable level of net working capital is maintained. Importance of working capital management: Management of working capital is very much important for the success of the business. It has been emphasized that a business should maintain sound working capital position and also that there should not be an excessive level of investment in the working capital components. As pointed out by Ralph Kennedy and Stewart MC Muller, the inadequacy or mis-management of working capital is one of a few leading causes of business failure. CASH MANAGEMENT: Cash management is one of the key areas of working capital management. Apart from the fact that cash is the most liquid current asset, cash is the common denominator to which all current assets can be reduced because the other major liquid assets, that is, receivables & inventory get eventually converted into cash. This underlines the significance of cash management. The term cash can be used in two senses. In a narrow sense, it is used to cover currency & generally accepted equivalents of cash, such as cheques, drafts & demand deposits in banks. The broad view of cash also includes near-cash assets, such as marketable securities and time deposits in banks which can be readily sold & converted into cash. They serve as a reserve pool of liquidity that provides cash quickly when needed. They also provide a short-term investment outlet for excess cash & are also useful for meeting planned outflow of funds.

THE NEED FOR CASH:

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The following are the three basic considerations in determining the amount of cash or liquidity: Transaction need: Cash facilitates the meeting of the day-to-day expenses and other debt payments. Normally, inflows of cash from operations should be sufficient for this purpose. But sometimes this inflow may be temporarily blocked. In such cases, it is only the reserve cash balance that can enable the firm to make its payments in time. Speculative need: Cash may be held in order to take advantage of profitable opportunities that may present themselves and which may be lost for want of ready cash/settlement. Precautionary need: cash may be held to meet contingencies in the future. It provides a cushion or buffer to withstand some unexpected emergency.

THE FACETS OF CASH MANAGEMENT: Cash management is concerned with managing of: i. ii. iii. Cash inflows into & out of the firm, Cash flows within the firm, & Cash balances held by the firm at a point of time by financing deficit or investing surplus cash.

It is generally represented by a Cash Management Cycle. Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity & control. Cash management also seeks importance because cash is the most significant & the least unproductive asset.

CASH MANAGEMENT CYCLE:

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Business Operations

Cash Collections

Information & Control

Deficit Surplus

Borrow Invest

Cash Payments

In order to synchronize the cash receipts & payments a firm needs to develop appropriate strategies for cash management viz. i. ii. iii. iv. Cash planning: the pattern of cash inflows & outflows should be properly predicted in advance. Cash budget is a tool to achieve this objective. Managing the cash flows: the cash inflows should be accelerated, while as far as possible, cash outflows should be decelerated. Optimum cash balance: in deciding about the appropriate level of cash balances, the cost of idle cash & danger of shortage should be taken into consideration. Investing surplus cash: the surplus cash should be properly invested to earn profits. The firm should decide about the division of such cash balance between various alternative short-term investment opportunities such as bank deposits, marketable securities, inert corporate lending.

The ideal cash management system will depend upon various factors viz., product, organization structure, competition, culture & options available.

CASH MANAGEMENT IN IFEW LIMITED (ASP DIVISION):

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A proper planning marks the management & control of cash in the factory. For this purpose the Finance Department of the company prepares a monthly cash budget i.e a summary of the firms expected cash inflows & outflows. This monthly budget is broken down into weekly budget and on this basis the finance department keeps cash sufficient to meet 1 weeks requirement.

To meet day-to-day petty cash requirements Imprest Cash accounts are maintained in different departments of the company. Any cash payment from imprest cash account is first authorized by the head of the department.

The company has an umbrella cash credit limit of Rs 1.70 crores with HDFC bank. Out of this Rs 45 lakhs is available to the ASP Division and the remaining to Railway Equipment division and to corporate office.

The cash section at the company keeps a constant tab on:

i. ii. iii. iv. v.

Details of payments released in the day. Details of payments outstanding at the end of the day after taking into account the payments released during the day. Details of collections to be made during the day. Daily position as regards to utilization of cash credit limit with HDFC bank. Monthly cash flow statement.

To accelerate cash collections the company has adopted CMS (Centralized Management System) with HDFC bank. The firm has a number of bank accounts in the areas where it has its depots. The customers deposit their cheques in the bank accounts located in their respective areas. These funds are then transferred to the central bank account maintained at the head office. The purpose is to reduce the time lag between the mailing time from customers to the firm and the time when the firm can make use of these funds.
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This way the company reduces its deposit float, and consequently, the financing requirements.

All payments are effected through the head office, mainly through cheque or demand draft, whenever demanded.

To ensure an efficient management of cash, the company makes use of the following Cash Position ratios: 1. Absolute Cash Ratio = Cash Reservoir/ Current liabilities. 2. Cash position to Total Assets Ratio = Cash Reservoir/ Total Assets. 3. Interval Measure = Cash Reservoir/ Average Daily Cash Expenditure.

Statement showing the above ratios:

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P AR T IC UL AR S Cash In Hand Cheques in Hand Cash at Bank C AS HR E S E R VO IR Assets as per B/S Less: Misc Exp T O T ALAS S E T S 1,853,413.00 9,570,469.00 13,889,433.00 25,313,315.00

2 0 0 3 -0 4 4,732.00 86,193.00 25,757,200.00 25,848,125.00

2 0 0 4 -0 5

2 0 0 7 -0 8

2 0 0 8 -0 9 380,954.00 7,202,996.00 7,321,324.00 14,905,274.00

670,922.00 785,377.00 19,818.00 0.00 27,133,412.00 16,450,859.00 27,824,152.00 17,236,236.00

634,566,504.00 643,115,756.00 614,736,492.00 801,834,585.00 741,174,730.00 14,874,750.00 10,830,572.00 5,225,458.00 4,640,610.00 4,365,660.00 619,691,754.00 632,285,184.00 609,511,034.00 797,193,975.00 736,809,070.00

C UR R E NTL IAB& P R O V 154,734,422.00 192,472,900.00 223,943,144.00 385,327,800.00 360,930,100.00 AB S O L UT EC AS HR AT IO C AS HP OS IT IONT O T O T ALAS S E T S 0.16 0.04 0.13 0.04 0.12 0.05 0.04 0.02 0.04 0.02

The above statement shows that the cash position of the company has deteriorated in the last five years. On one hand cash reservoir has fell down, while on the other hand, current liabilities of the company have increased many fold. This has had a somewhat negative effect on the cash position of the company. Again, over the last five years, while total assets of the company have increased, cash reservoir has decreased. As a result, while in the year 2002-03 cash represented 4% of the total assets, in the present financial year it is just 2% of the total assets. On one hand this situation reflects the efficiency of management in keeping the absolute cash balance low, however, it may give a feeling of crunch situation to the investors. The main motive should be that the company should be able to meet its liabilities comfortably as & when they fall due. INVENTORY MANAGEMENT: Inventories constitute the most significant part of current assets of a large majority of companies in India. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore, absolutely imperative to manage inventories efficiently & effectively in order to avoid unnecessary investment NATURE OF INVENTORIES:
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The various forms in which inventories exist in a manufacturing company are: 1. Raw Materials: raw materials are those basic products that are converted into finished product through the manufacturing process. Raw materials inventories are those units which have been purchased & stored for future productions. 2. Work-in-progress: work-in-process inventories are semi-manufactured products that require further work to be done before they are ready for sale. 3. Finished goods: finished goods inventories are those completely manufactured products which are ready for sale. Stocks of raw materials & work-in-process facilitate production, while stock of finished goods is required for smooth marketing operations. Thus, inventories serve as a link between the production & consumption of goods. The levels of three kinds of inventories for a firm depend on the nature of business. A manufacturing firm will have substantially high levels of all three kinds of inventories, while a retail firm will have a very high level of finished goods inventories & no raw materials or work-in-process inventories. Firms also maintain a fourth kind of inventory, supplies or stores & spares. These materials do not directly enter production but are necessary for production process.

NEED FOR HOLDING INVENTORIES: There are three general motives for holding inventories: 1. Transaction motive emphasizes the need to maintain inventories to facilitate smooth production & sales operations. 2. Precautionary motive necessitates holding inventories to guard against the risk of unpredictable changes in demand & supply forces & other factors. 3. Speculative motive influences the decision to increase or reduce inventory levels to take advantage of price fluctuations. OBJECTIVES OF INVENTORY MANAGEMENT: The aim of inventory management should be to avoid excessive & inadequate levels of inventories & to maintain sufficient inventory for smooth production & sales operations. Also, it should minimize the carrying cost & time of inventories. INVENTORY MANAGEMENT PROCESS IN IFEW LIMITED (ASP Division): The company holds the following types of inventories:
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Raw materials & components Work-in-process Finished goods Stores & spares Tools, dies & jigs.

To ensure an optimum level of aforesaid inventories the following Inventory management & control techniques are practiced at IFEW limited: 1. Economic order quantity (EOQ) : EOQ lets the firm determine the lot sizes in which it has to purchase raw materials for replenishment. At this lot size, total costs of ordering & carrying inventories are minimized. The purchase department of Friends Engineering Works. determines EOQ levels for different raw materials & components & places orders for that quantity.

2. Setting of various stock levels : Stores department of IFEW limited has set different levels for different raw materials & components. For each item of raw material a maximum level has been set. The quantity of individual raw material should not go beyond this Maximum Level at any point in time. Similarly, for each raw material item a Minimum Level has also been set and the quantity of raw material should not fall below this level to ensure smooth production. If quantity of any raw material falls below this minimum level, the purchase department is directed to make emergency purchases of that item. Stores department also sets Re-order point for individual raw material item. Reorder point is that inventory level at which an order should be placed to replenish the inventory. Once a re-order point is touched, stores department generates a request for further purchase of that item & sends the same to the Purchase department. Setting of different levels requires a close liaison among the Shop floor, Stores and the purchase department.

3. ABC Inventory Control System: IFEW limited carries a number of items in inventory that differ in value. Therefore, the stores department exercises discriminating control over different items of stores classified on the basis of
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investment involved. Usually the items are divided into three categories according to their importance, namely, their value & frequency of replenishment during a period. i. A category of items consists of only a small percentage i.e. about 10% of total items handled by the stores but requires heavy investment about 70% of inventory value, because of their high prices or heavy requirement or both. B Category of items is relatively less important; they may be 20% of the total items of material handled by stores. The percentage of investment required is about 20% of the total investment in inventories. C Category of items does not require much investment; it may be about 10% of total inventory value but they are nearly 70% of the total items handled by store.

ii.

iii.

A category of items are controlled effectively by using a regular system which ensures neither over-stocking nor shortage of materials for production. Such a system plans its total material requirements by making budgets. In case of B category of items moderate control is exercised while no constant control is warranted for C category of items.

4. Establishment of system of budgets : the Stores department carefully studies the production plans & production schedules set by the Business heads for the year. On this basis the exact quantities of various types of inventories & the time when they would be required is known. Based on this, inventories requirements budget is prepared. Such a budget discourages the unnecessary investment in inventories. Copies of these budgets are submitted to the Purchase department to ensure a regular supply of materials.

5. Review of slow & non-moving items : stores department does a periodic review of slow moving & non-moving items on the basis of requisitions received by it from the Shop floor. Efforts are made to either consume them or dispose them off as early as possible to minimize the investment in inventories.
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Valuation of Inventories: In determining the cost of Raw materials & Components, Tools, Jigs & Dies, Stores & Machinery Spares, Weighted Average Cost Method is used while in case of trading goods FIFO Method is used.

LEVELS OF INVENTORY:

(All figures in lakhs) PARTICULARS 2004-2005 Raw Material Work-in-process Finished goods Stores & Spares Tools, Dies & Jigs Total Inventory Sales Current Assets Total Assets Inventory % of: Sales Current Assets Total assets 369.00 210.00 290.00 76.00 83.00 1,028.00 12,331.00 3,804.00 6,196.00 0.08 0.27 0.17 2005-2006 257.00 174.00 529.00 81.00 71.00 1,112.00 11,821.00 3,632.00 6,322.00 0.09 0.31 0.18 2006-2007 357.00 189.00 677.00 78.00 77.00 1,378.00 11,494.00 3,742.00 6,095.00 0.12 0.37 0.23 2007-2008 616.00 300.00 614.00 61.00 66.00 1,657.00 10,752.00 4,408.00 7,971.00 0.15 0.38 0.21 2008-09 611.00 208.00 591.00 98.00 73.00 1,581.00 10,158.00 3,958.00 7,368.00 0.16 0.40 0.21

Source: Extracts of Balance Sheets. As can be seen from above, the stock of inventory has increased considerably in the last 5 years & as a result Inventory now constitutes almost 40% of Current assets in the financial year 2008-09. Such an increase in inventory levels indicates that tremendous amount of funds are blocked in the inventory & thus is one of the main reasons for the falling efficiency of the company.

39

To enable IFEW limited to substantially reduce its inventory holding period, the following steps can be suggested: An inventory monitoring cell should be constituted at the corporate office The purchases should be controlled by the materials management group reporting to a senior finance executive. The company should provide for weekly meetings between material planning, production control & purchase departments for better matched material availability. Monthly review of total inventory at the level of chief executives of plants & corporate management can be introduced. Inventory control should be dovetailed with the budgeting system Top 100 inventory items can be identified for closer scrutiny & control.

Most importantly the company should follow JIT system. In a JIT system delivery of material is synchronized with the manufacturing cycle & speed. It eliminates the necessity of carrying large inventories and thus saves carrying & other related costs to the manufacturer. The system requires sound understanding & coordination between the manufacturer & suppliers in terms of the timing of delivery & quality of materials. The success of the system depends on how well the company manages its suppliers. RECEIVABLE MANAGEMENT: Trade credit arises when a firm sells its products or services on credit & does not receive cash immediately. It is an essential marketing tool, acting as a bridge for the movement of goods through production & distribution stages to customers. A firm grants trade credit to protect its sales from the competitors & attract the potential customers to buy its products at favorable terms. Trade credit creates accounts receivables or trade debtors that the firm is expected to collect in the near future. Management of sundry debtors is an important issue & requires proper policies & their implementation. This is mainly because: Investment in account receivable constitutes a substantial portion of a firms assets.
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The interval between the date of sale & the date of payment has to be financed out of working capital. This necessitates the firm to get funds from banks or other sources. There are chances of bad debts. There will be costs of collection of debts.

ASPECTS OF MANAGEMENT OF DEBTORS: There are basically 2 aspects of management of sundry debtors: 1. Credit policy: Credit policy of a firm provides a framework of three decision variables: i. Credit standards & credit analysis credit standards are criteria to decide to whom credit sales can be made & how much. Besides establishing credit standards, a firm has to look into the creditworthiness of individual customers & sanction credit limit. This would involve an analysis of the financial status of the party, its reputation & previous record of meeting commitments. The credit manager here has to employ a number of sources to obtain credit information. The following are the important sources: Trade references; Bank references; Credit bureau reports; Past experience; Published financial statements; & Sales interviews and reports. ii. iii. Credit terms credit terms specify the duration of credit & terms of payments by customers. They include credit period & cash discount. Collection efforts collection efforts determine the actual collection period. Collection efforts of a firm aim at accelerating collections from slow-payers & reducing bad-debts. Depending on the financial condition & past experience with a customer, the firm should decide about its collection tactics & procedures.

The firm may follow a lenient or a stringent credit policy. The firm which follows a lenient credit policy sells on credit to customers on very liberal terms and standards. On the contrary a firm following a stringent credit policy sells on credit on a highly selective basis only to those customers who have proper credit worthiness and who are financially sound.

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Any increase in accounts receivables that is, additional extension of trade credit not only results in higher sales but also requires additional financing to support the increased investment in accounts receivables. The costs of credit investigations and collection efforts and the chances of bad debts are also increased. 2. Monitoring receivables: A firm needs to continuously monitor & control its receivables to ensure the success of collection efforts. 2 methods of evaluating the management of receivables are: i. Average age of receivables: it involves computation of average collection period. The average collection period so calculated is compared with the firms stated credit period to judge the collection efficiency. Ageing schedule: when receivables are analyzed according to their age, the process is known as preparing the ageing schedule of receivables. The ageing schedule, by indicating a tendency for older accounts to accumulate, provides a useful supplement to average collection period of debtors.

ii.

There is always cost of maintaining receivables which comprises of the following costs: i. The company requires additional funds as resources are blocked in receivables which involve a cost in the form of interest (loan funds) or opportunity cost (own funds). Administrative costs which include record keeping, investigation of credit worthiness etc. Collection costs. Defaulting costs.

ii. iii. iv.

RECEIVABLES MANAGEMENT IN IFEW LIMITED (ASP Division):

During the financial year 2006-07, ASP division sold about 38% of its products directly to OEMs and about 12% to dealers for sale in Replacement Market. Remaining 50% of its production was exported to countries like Brazil, Italy, and USA etc. The proportion of exports in total sales of ASP Division is increasing year-on-year. Credit policy & practices at IFEW limited (ASP Division):
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The company has 13 depots located in different states namely Delhi, Punjab, Uttar Pradesh, Rajasthan, Gujarat, Maharashtra, Madhya Pradesh, Tamil Nadu, Kerela, West Bengal, Orissa, Karnataka & Andhra Pradesh. Sales are booked at both the factory and the depots. Prices of all products are fixed by the Accounts department of the company, which takes into account the tax structures of different states. The price lists are then forwarded to the respective depots. These depots are divided into 4 zones and accordingly 4 Regional Managers are appointed. There are sales executives under each Regional Manager who look into order booking, material dispatch and follow up of receivables at their respective depots. A copy of month-end report of sales and collections made at each depot is send to business heads. These individual depot reports are collected at the Commercial department in Plant 1 at Faridabad by the Product Management Group. The company currently makes all sales on credit. All sales are unsecured credit sales. Generally, a 90days credit is extended to debtors. However, to encourage early payment the company offers a 3% cash discount for payment within 15days, 1 % cash discount for payment within 40days with the condition that they should not have any old outstanding account which is due for more than 60days. The company charges 1%p.m penal interest if payment is made after 90days. Generally, all payments are received with 90 days. The company has a system of centralized control and decentralized collections. As stated earlier the Commercial Department at Plant 1 receives a statement of sales, collections and outstandings monthly from all the depots to initiate appropriate actions, if any. The company also requires its depots to give a monthly forecast of their requirements. Depot managers are authorized to evaluate credit-worthiness of their customers and factory has no role to play in this. The customers are required to make payments by cheques or by demand drafts.
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The company hardly faces the problem of bad debts. Also, cheques received from customers have hardly bounced. The responsibility for follow-up of accounts at the factory is of its marketing department.

MONITORING OF RECEIVABLES: ASP division uses the following two methods to monitor its receivables: 1. Ageing Schedule: Accounts department of the company prepares ageing schedule of receivables on periodic basis i.e classifies them according to their age. Ageing schedules are prepared party-wise (& not bill-wise). The ageing schedule breaks down debtors according to the length of time for which they have been outstanding. For this purpose receivables are classified into outstanding for less than 60 days; outstanding for less than 90 days; outstanding for less than 6 months; outstanding for less than a year. A copy of ageing schedules are sent periodically to the respective parties and to business heads of IFEW limited so that necessary actions can be taken, if any. The purpose of classifying receivables by age groups is to have a closer control over the quality of individual accounts.

2. Average age of receivables: A periodic analysis of Debtors collection period and Debtors turnover ratio is made at the company. Debtors turnover ratio indicates the number of times debtors turnover each year.

Debtors Turnover ratio = Credit Sales/ Average Debtors Generally, the higher the value of debtors turnover, the more efficient is the management of credit.

Average Collection period = 360/ Debtors Turnover The average collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the average collection period, the better
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the quality of debtors, since a short collection period implies prompt payments by debtors.

IFEW limiteds (ASP Division) debtors turnover, average collection period & debtors to sales ratio for the last 5 financial years are given in the Table below

(All figures in lakhs) PARTICULARS Net Credit Sales Opening Debtors Closing Debtors Average Debtors Debtors 2004-2005 12,331.00 2,050.00 2,050.00 2,050.00 6.02 2005-06 11,821.00 2,050.00 1,961.00 2,005.50 5.89 2006-07 11,494.00 1,961.00 1,750.00 1,855.50 6.19 2007-08 10,752.00 1,750.00 2,103.00 1,926.50 5.58 2008-09 10,158.00 2,103.00 1,833.00 1,968.00 5.16
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Turnover(times) Avg Collection period (in Days) Debtors/sales ratio 61.00 62.00 59.00 65.00 71.00

0.17

0.17

0.15

0.20

0.18

Note: Opening debtors for the year 2002-03 have been assumed to be equal to Closing Debtors for want of information.

CHAPTER 4

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ANALYSIS & INTERPRETATION OF DATA

COMPARATIVE ANALYSIS OF WORKING CAPITAL THROUGH RATIOS Various ratios of working capital has been discussed here and compared with the competitors to analyze the working capital position of the company.

1. CURRENT RATIOS The liquidity of working capital is an important aspect to be analyzed by the management for maintaining proper liquid resources to meet operational needs. Current ratios indicates firms commitment to meet its short term liabilities & is calculated by the formula: Current assets /current liabilities Rationale: Higher the ratio, larger is the amount available per rupees of current liability, the more the firms ability to meet current obligations & greater the
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safety of funds of short-term creditors. Thus current ratio measures margin of safety to creditors. Graph below compares current ratio for the past five years with its competitors.

INTERPRETATION As table 1.1 shows Conventionally ideal current ratio is 2:1, but in practice ideal ratio varies significantly from industry to industry & from company to company.

3 2 1 0 2004- 2005- 2006- 2007- 200805 06 07 08 09 1.94 2.46 1.89 1.67 1.14 1.63 1.41 1.45 1.55 1.58

Escorts Gabriel

Munjal Showa 1.62 1.39 1.47 1.37 1.04

TABLE 1.1 The table 1.1 shows current ratio of Friends Engineering Works. Varied from 2.46 to 1.14. it has been fluctuating between the two. However the trend seems to be decreasing. Thus it can be said that the margin of safety for creditors is decreasing and companys liquidity position is deteriorating. But when it is compared to its competitors Munjal Showa and Gabriel Ltd. it has still maintained a good position. Hence the decline may be an implication of market forces because its competitors are also facing the same situation. Only Gabriel Ltd. has managed to improve its current ratio. It means as

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compared to the other two Gabriel Ltd. has a strong liquidity position whereas the liquidity position of IFEW and Munjal Showa are declining. 2. QUICK RATIO This is the most rigorous and absolute test of liquidity position of business unit. It shows to what extent cash is available with the firm to meet its current liabilities.

2 1.5 1 0.5 0 2004- 2005- 2006- 2007- 200805 06 07 08 09 1.5 1.3 1.32 1.79 1.17 1.1 1.31 1.23 1.09 1.05 0.96 1.12 0.72 0.81 1.16

Escorts Munjal Showa Gabriel TABLE 1.2 INTERPRETATION:

Table1.2 shows The quick ratio of IFEW is showing a declining trend. From 1.5 in 2002 to 0.72 in 2007,it has dipped almost 50%. If we compare its quick ratio to Munjal Showa and Gabriel they are in a better position. Gabriel Ltd. has the strongest quick ratio among the three i.e. of 1.16. This means that the liquidity position of IFEW is not that good. It is showing insufficiency of funds. Since the company is running into losses it must have been affected the liquidity position. It is very important for the company to have a good liquidity position because it may suffer various bottlenecks.
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From the ratios available for Friends Engineering Works., it is apparent that it is too less than the standard norms but seeking the kind of industry and its aggressive policy for utilization of its current assets the ratio seems sufficient but if we compare current ratio and acid test ratio, then it can be implied that funds are blocked in slow moving inventory. Both the current and quick ratios should be considered in relation to industry average to infer whether the firms short-term financial position is satisfactory or not.

3.

INVENTORY TURNOVER RATIO: TABLE 1.3

20 15 10 5 0 2004- 2005- 2006- 2007- 200805 06 07 08 09 10.18 12.08 9.53 8.16 6.44 9.78

Escorts Gabriel

Munjal Showa 13.98 16.61 16.8 19.49 16.71 10.78 10.1 10.38 9.19

Inventory turnover = cost of sales / average stock As per the observation of table 1.3 The inventory turnover ratio shows how rapidly the inventory is turning into receivable through sales. Generally a high inventory turnover is indicative of good inventory management. A low inventory turnover implies excessive inventory levels than warranted by production and sales activities, or a slow moving or obsolete inventory. We have seen that the sale of IFEW is declining and the company is under losses. Hence a decreasing inventory turnover ratio implies that there are unnecessary tie-ups of funds, reduced profit and increased costs. Among the competitors
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Munjal Showa has the highest inventory turnover ratio which means that it is efficiently managing its inventory to convert them into sales. 4. FIXED ASSETS TURNOVER RATIO TABLE 1.4

8 6 4 2 0 200 200 200 200 200 4-05 5-06 6-07 7-08 8-09

3.34 4.18 3.65 4.23 2.68 Escorts Munjal Showa 6.87 6.43 6.19 7.42 5.55 2.03 2.42 2.68 3.16 3.69 Gabriel
Fixed Assets Turnover Ratio = sales / fixed assets

Table 1.4 shows Fixed assets turnover ratio measures sales per rupee of investment in fixed assets. This ratio is supposed to measure the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization and a low ratio reflects inefficient use of asset. Fixed asset turnover ratio shows the firms ability in generating sales by utilizing fixed assets. A look on the graph tells the whole story of fixed assets turnover of IFEW. It was doing well in 2003 but there after it declined and though its position is somewhat manageable but comparing to its competitors it is not good.
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5.DEBTORS TURNOVER RATIO TABLE 1.5

10 8 6 4 2 0

200 200 200 200 200 4-05 5-06 6-07 7-08 8-09

3.75 5.28 5.05 5.48 5.02 Escorts Munjal Showa 7.73 7.07 5.73 8.1 8.67 5.51 6.01 7.2 8.37 7.2 Gabriel
Debtors Turnover Ratio = Net sales / average debtors

Table 1.5 indicates that the firm sells goods or services for cash and credit. When the firm extends credit to its customers, debtors are created in the account of the firm. Since the debtors are expected to be converted into cash over a short period and, are included in current assets. The position of liquidity of a firm depends upon these debtors to a great extent. The debtors turnover ratio is a test of liquidity of debtors of a firm. It shows how quickly receivables or debtors are converted into cash. It tells us how many times accounts receivables (debtors) turnover during the year. If the figure for net credit sales is not available, then net sales figure is to be used. Higher the debtors turnover, greater is the efficiency of credit management.

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Here IFEW has maintained a good ratio but while comparing this data with its competitors it is way behind them. So it suggests that the receivable management of the company is not that efficient as of the other players in the market. Suggestion: Presently the company is accepting cheques from the customers which has a float period of about 10 to 14 days so the company can ask for demand draft which will bring the float period down and hence will increase the debtor turnover ratio.

5. INTEREST COVERAGE RATIO Interest Coverage Ratio = Earnings before interest and taxes/ TABLE 1.6 interest

100 50 0 -50 -100 200 200 200 200 200 4-05 5-06 6-07 7-08 8-09
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3.03 12.2 -9.9 -39 -91 Escorts Munjal Showa 55.1 79.5 71 57.9 61.3 1.96 3.28 4.54 5.34 3.74 Gabriel

Table 1.6 shows A high interest coverage ratio means that the firm can easily meet its interest burden before interest and taxes suffer a considerable decline. The lenders use this ratio to assess debt-servicing capacity of a firm. This ratio shows the number of times the interest charges are covered by funds that are ordinarily available for their payment. Since taxes are computed after interest, interest coverage is calculated in relation to before tax earning. Depreciation is a non-cash item. Therefore, funds equal to depreciation are also available to pay intere The interest coverage ratio of the company is in a pathetic condition. The company is unable to operate such that too pay even interest. The interest coverage ratio of Munjal Showa is too good. If the condition persists and this ratio doesnt improve no bank will give credit facility to the company and it will have to face serious consequences. EOQ ANALYSIS The ASP Division of Friends Engineering Works. Maintains its stock on Just-In-Time purchases. The company produces on make to order rather than make to stock. In this preview the company should have low inventory but the inventory level of the company is quite high and it has shown an increasing trend over past few years. Moreover the inventory turnover ratio has also gone down from 10.18 in 2002 to 6.44 in 2007, a fall of almost 40%. If we consider the storage period the raw material storage period has increased from 22.38 days to 26.94 in 2007, the WIP storage period has increased from 5.02 to 11.19 days for the same period. It has almost doubled. The finished goods storage period has also doubled. It rose from 9.64 days to 20.57 days. Thus the storage period of the entire inventory has increased. Storage of unnecessary or idle stock costs a lot in terms of opportunity cost and the cost of handling those items. An EOQ analysis can reduce these extra costs associated with the stock. But the company does not follow EOQ system. EOQ system will decrease the ordering cost and holding cost to minimum without having any stock out cost that will thus benefit the company both in terms of total purchasing cost and providing liquidity and efficient management of inventory.
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I analyzed some of the companys raw materials on EOQ basis to check whether the current inventory technique is suitable for the company or whether EOQ is more beneficial to it. Since the company is not having any details regarding ordering cost and holding cost per unit per annum the analysis is made to minimize inventory level without increasing the

working capital 5000 4000 3000 2000 1000 0 2004- 2005- 2006- 2007- 200805 06 07 08 09
purchasing workload. Since ordering cost and holding cost is not available following adjustment has been made in the formula to nullify their non-availability and to calculate the EOQ.The figure above shows that the company has managed to bring down the working capital, which is a positive sign. A detailed analysis of the various constituents of the working capital has been done to learn the intricacies that have been managed to get the result. The figure above shows that the gross working capital has an increasing trend whereas net working capital is going down and in the year 2005-06 it has decreased to much. But prima facie it suggests that investment in current assets has increased much and the liabilities have also not been fixed to a great extent.
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gwc nwc

 OPERATING CYCLE OF IFEW Calculation of duration of operating cycle:=R+W+F+DC Where, R = duration of Raw material storage period W = duration of WIP storage period F = duration of finished goods storage period D = duration of Receivables collection period C = duration of the credit period allowed by supplier Formulae for calculation of these duration R = Average stock of Raw Material/Average consumption per day W= Average stock of WIP / Average cost of production F = Average stock of Finished Goods / Average cost of Finished goods D = Average Credit sales / Average Debtors C = Average Credit Purchases / Average Creditors PARTICULARS 200405 Raw material 22.36 16.96 21.95 21.49 26.94 2005-06 2006-07 2007-08 2008-09

storage period WIP storage period Finished storage period

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5.02

7.02 9.68

10.71 17.24

10.22 23.14

11.19 20.57

goods 9.64

Debtors period Creditors period Operating period

collection 97.26

69.16

89.54

83.17

72.73

payment 119.04

76.41

79.76

72.82

99.91

cycle 15.26

26.41

59.68

65.20

31.52

Table 1.8

70 60 50 40 30 20 10 0 2004- 2005- 2006- 2007- 200805 06 07 08 09 Operating cycle period

Figure 1.8 The above table 1.8 shows The operating cycle shows irregular trend. It was increasing all the way but all of a sudden it went down in 2006-07. The main reason behind this is that debtors collection period has decreased and creditors payment period has increased a lot. The credit period granted by customers is generally 90 days but since the company is running on loss sometimes it cannot pay the amount in stipulated time, this has led to increase in credit period availed from customer and thus decreased the operating cycle to such an extent.
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 CONSUMPTION OF RAW MATERIALS/DAY

18 16 14 12 10 8 6 4 2 0

Consumption of raw materials/day (D) 20 20 20 20 20 02- 03- 04- 05- 0603 04 05 06 07

RAW MATERIALS INVENTORY IN DAYS

30 25 20 15 10 5 0 2002- 2003- 2004- 2005- 200603 04 05 06 07 Inventory in days (B/D)

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Figure 1.9 Figure 1.9 shows A close look on the figures and graphs above indicates that in the last four years though the sales remained same or decreased but the stock of raw materials has increased. Besides this the consumption has also increased from 66% in 2002-03 to 66% in 2006-07. This was due to the fact that the company has so far unable to recover the rise in price of raw materials from its sales. The prices of raw materials have increased a lot from 2002-07 but due to stiff competition in the market it cannot be recovered by increasing the sale price so that the company should not loose its market share. The increase in inventory may pertain to wrong estimation of executable orders based on which purchases were made which were added on the stock.

CHAPTER 5
59

FINDINGS & SUGGESTIONS

FINDINGS & SUGGESTIONS Findings:

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Current assets comprise a significant portion i.e. 30.89% (average for three years of study) of total investment in assets of the company. There is fluctuating and rather increasing trend of this ratio during the period which shows management in-efficiency in managing working capital in relation to total investment. Further current assets to fixed assets ratio also shows on fluctuating trend during the study period which substantiate above mentioned criterion of in-effectiveness in management of working capital by the company.

Current assets turnover ratio for the first three years of study shows fluctuating trend which is due to significant increase in sales. In 2005 current assets turnover ratio is highest one i.e. 2.98 during the study, reasons being during this year company has achieved sales growth 44.36% over the previous year.

The ratio used for analysis of liquidity position are current ratio and quick ratio. These ratio reveals that company has sound liquidity position throughout the period of study. Both the ratio shows fluctuating trend within reasonable limit but these ratio are higher than conventionally accepted norms i.e. 2:1 in case of current ratio & 1:1 in case of quick ratio, which shows ineffectiveness of the management in managing current/quick assets in relation to current liabilities.

The ratios used for cash management are cash to current assets ratio, cash to current liabilities ratio. Cash to current liabilities also shows decreasing trend and cash to current assets ratio also shows decreasing trend. All these ratios reveals that management has no definite cash policy.

Inventory turnover ratio depict the fluctuating trend which indicates the accumulation of inventory in turn which cause loss to the company by way of deterioration of stock, interest loss on blockage of stock etc. Further composition of inventory reveals that portion of individual element of inventory has fluctuating trend which indicates that management has no policy in respect of inventory management.

Keeping in view of detailed analysis of our study and our findings mentioned in above paragraphs, the following suggestions shall be helpful in increasing the efficiency in working capital management.
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Suggestion In my study time I analysis many problems in IFEW. So on the behalf of my study I gave them following suggestion: IFEW should increase its capacity utilization. It should work at full capacity to minimize its cost of production. With this increase in capacity utilization, the cost will spread over more units thereby decreasing the per unit cost.

IFEW should increase the credit facilities provide to its consumers. Earlier, it was selling its main product that is plastic either against advance payments or cash payments. This sales policy, no doubt, shows the high preferences for IFEW plastic on the part of customer, but in the wake of neck to neck compition due to emergence of new players in the industry, it has changed this policy to maintain and improve its market share. It should extand more credit facility to attract more and more buyers.

IFEW must move into higher HP segments to capture more e 35 HP segments (App. 19%) its contribution to higher HP segments almost negligible because of which it can not exports its plastic Affrica and Middle East, where there is demand for 70 plastic. It is therefore, suggested that in ordered to be competitive in the international market also, IFEW should reset to manufacturing after cutting out many of the frills in its lower HP Plastic.

IFEW should undertake such activities that can add value to society. IFEW as good corporate citizen, should sponsor programmes related to environment protection, rural upliftment and welfare for general public. It should spend a crunch of its profit on the social activities, which will further improve its image in the society.

IFEW should take advantage of Indias second position in low and medium HP plastic segment, in which escort is a leader, by exporting its product to Asian, Affrican and to some extend Latin American markets.
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CHAPTER 6

CONCLUSION

63

CONCLUSION The success or failure of an organization primarily depends on its ability to sustain its comparative advantage irrespective of the kind of strategy it adopts cost leadership, differentiation or focus. Earlier IFEW was doing marvelous job in auto components manufacturing industry. But after self-manufacturing of components by various auto companies IFEW lost a big part of its job. However it has foreign market working for it as well. But to excel in todays global market place they have to be globally competitive. After analyzing the financial statements and having a deep study of working capital cycle of the company I came to the conclusion that though the company is suffering huge losses and various ratios do not speak in its favor, the reason could not be found as its inefficiency or incapability to succeed rather the reason being unavailability of the market in the present working scenario. The companies have to have some new avenues, which will explore new markets and paths of success. Quality could be the key word for companys future prospects. Regarding working capital management I learnt that it is the most complex thing to manage in a company. Working capital is just not related to finance department. Various departments affects its working and finance department has to keep an eye of control over all of them. Its function starts right from estimating demand by marketing department and before coming to final destination of operating cycle in finance department it knocks the door of purchasing, quality control, shop floor, stores and finally to customers. All cost centers have their own styles of working and it becomes very difficult to control the time taken by other department. Though control is being
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made but it is not easy to maintain ideal norms and sometimes it serves the relations of finance people with other department people. With the economy in boom and various industries coming up IFEW have to look over the quality aspect of its product and strive to offer unmatchable quality at unbeatable price to regain its market share both in domestic market as well as in foreign market.

BIBLIOGRAPHY I M Pandey, Financial Management, 9th edition. M Y Khan, Financial Management. Kannadhasan M (2007), Working Capital Management in a Public limited Company- A Case Study, The Icfain journal of Management Research volume vi. 5, pp 21-33.
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Ghosh Arindam (2007), Working Capital Management Practices in Some Selected Industries in India, The Management Accountant, January, 2007, pp 6067. Chakraborty P K (2004), Managing Corporate liquidity and Financial Flexibility: Different Approach, The Management Accountant, vol. 39, no. 8, pp 653-55 Denasosj Sur (1997),Working Capital Management in Colgate Palmolive (India) Ltd.A case Study , The Management Accountant, vol. 32, no. 11, pp 828-33.

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