Information System: Information is to be provided in three forms – operating statement,

quarterly budget and funds flow statement. Borrowers with credit limit of more than Rs 1
Crore are required to submit quarterly information. This information should be used to
see if the desired results have been achieved. A variance of about 10 % is considered to
be normal.

This report has helped in bringing a financial discipline through a balanced and
integrated scheme for bank lending.

Also the key components of the Chore Committee recommendations, which highly
influence the existing reporting system, are as follows:
 Quarterly information system-form 1:It gives estimation of production and sales
for the current year and the ensuing quarter, and the estimates of current assets
and liabilities for the ensuing year.
 Quarterly information system-form 2: This gives the actual production and sales
in the current year and for the latest completed year and the actual current assets
and liabilities for the latest completed year.
 Half yearly operating statements- form 3:It gives the actual operating
performance for the half year ended
 Half yearly funds flow statement-form 3b:It gives the sources and uses of funds
for the half year ended.

Credit monitoring: Based on the recommendations of the Marathe Committee, the RBI
replaced its Credit Authorization Scheme by its Credit Monitoring Arrangement in 1988.
The issues examined are:
 Whether the minimum current ratio is 1.33?
 Whether the sales, production, etc estimates match with the actual. If not, what
are the reasons for deviations
 Are the information system requirements complied with?
 Are the renewals of the limits in time?
  Is the bank following the norms for inventory and receivables prescribed by the
RBI standing committee, if they are different, are they justified?

Financial information, specific industry analysis and financial models are used to
determine the credit worthiness of the borrower

SBI Recastsed Working Capital Finance Norms

The State Bank of India (SBI) has revamped its policy on working capital finance to
lower the cost to corporates and also to monitor the performance of assets better in
October 1997. The main features of the new policy are:

 Decades-old quarterly information system (QIS) has been scrapped and replaced
with a modified and simpler version of financial follow-up reports, styled FFR1
and FFR2. These have to be submitted at quarterly and half-yearly intervals
 The old penalties on non-submission of QIS have been scrapped
 The system of fixing quarterly working capital limits for borrowers also stands
withdrawn
 Decided to withdraw the commitment charge of one per cent levied on the
unutilized portion of fund-based working capital limits.
 The interest rate on additional working capital limits sanctioned as ad-hoc
financing has been cut
 Currently, ad hoc financing is priced two percentage points higher than the rate
applicable to cash credit advances. Henceforth, the rate for ad-hoc working capital
loans will be the same as that applicable to cash credit.
 The bank has decided to focus on liquidity management as the key to determining
a company's maximum permissible bank finance (MPBF) .The bank will,
therefore, evaluate a company's eligibility for finance in terms of its inventory
levels, treasury management and inter-firm comparisons.
  The bank has replaced the old MPBF method for calculating working capital
limits with a new assessment procedure called ``Projected Balance-Sheet
Method'' (PBS). The procedure aims at assessing the short-term financial
requirements of borrowers with a clear focus on their specific needs and a flexible
approach.

The main features of the Projected Balance Sheet method include:

 The PBS method includes all temporary investments money market mutual
funds, certificates of deposit and commercial paper in it current assets
 Investments in inter-corporate deposits (ICDs), shares and debentures and in
subsidiaries and associates are classified as non-current assets.
 ICDs taken from another companies will, however, be reckoned as current
liabilities
 The margins deposited for letters of credit (LCs) and guarantees relating to
working capital, which are not recognised as current assets earlier, will be deemed
as current assets by the bank.
 The facility for purchase of demand and usance bills drawn under letters of credit
will be computed outside the main assessment of working capital finance
 Receivables in the form of sale bills (inland/export) drawn under L/Cs will not be
included in current assets. Correspondingly, bank borrowings in the form of L/C
bill purchase limits will not be included in the projected bank finance under
current liabilities.
 The new assessment method will be used for assessing working capital finance
above Rs 25 lakh.
 For small-scale units, which require working capital finance above Rs 25 lakh and
upto Rs 2 crore, the assessment will need to be carried out in terms of the
projected turnover of the unit as mandated by the RBI. The PBS method of
assessment will be used as a supporting analysis.
  Even while withdrawing the need for QIS, the bank has emphasised that
submission of financial follow-up reports will be a condition for disbursing the
advances sanctioned.
 Non-submission or delayed submissions will be treated as defaults in complying
with the terms of sanction and the bank will be free to take necessary action in
this regard if such a default occurs.
The SBI's policy changes follow nearly six months after the Reserve
Bank of India withdrew the detailed MPBF guidelines in its April 1997 credit policy. The
central bank has permitted banks to evolve assessment methods, which they consider
appropriate.
 Public Deposits: Unsecured deposits are taken from the public to finance the WC
requirements. The interest rate payable 14 – 15 % One year deposit
on the public deposits was subject to 14 – 15 % Two year deposit
15% Three year deposit
ceiling till 1996.

The regulations regarding public deposits according to the Company’s Acceptance Of

Deposits Amendment Rules 1978 include:
 They cannot exceed 25 % of share capital
 The minimum maturity period is six months and maximum three years. For
NBFC’s maximum maturity period is 5 years
 A company which has public deposits is required to set aside, a deposit or
investment by 30 April of each year, an amount equal to 10 % of he deposits
maturing by 31 march of the following year. The amount so set aside can be
used only for repaying such deposits
 A company inviting deposits from the public is required to disclose certain
facts about its financial performance and position.

The following are the advantages and disadvantages of public deposit from the
Company’s point of view:
 Simple procedure for obtaining deposits
 No restrictive covenants are involved
  No security needs to be offered
 The post tax cost is fairly simple
Only limited amount of funds can be raised
The maturity period being short, the funds have to repaid faster

The following are the advantages and disadvantages of public deposits from the investor
point of view:
 Higher rate of interest
 Short period of maturity, normally 1 to 3 years
No security offered by the company
The interest on public deposits is not exempt from tax

 INTER-CORPORATE DEPOSITS: They are defined as deposits made by one

company in an other company for a period upto 6 months. They are divided into
the following types:
 Call deposits: they are withdrawable by the lender after giving a day’s
notice, however in real life it takes about three days. The interest on such
deposits is around 16 % p. a
 Three-months deposit: they are taken to overcome the shortage resulting
out of disruption in production, excessive imports of raw material, tax
payment, delay in collection, etc. The interest in this case is normally
around 18 % p.a
 Six-months deposits: They are normally made with good borrowers and
the interest rate in this case is around 20 % p.a

Important characteristics of the inters-corporate deposits market include:

 Lack of regulation: It has helped to make inter-corporate deposits hassles
free and hence very convenient
  Secrecy: The brokers do not reveal the names of their borrowers and
lenders, which would other wise lead to unwanted competition and
underwriting of rates
 Importance of personal contacts: The lending decisions in these markets
are often based on personal contacts rather than reliable market
information

Although deposits can be of varying maturity structures, they work best as short-term
bridging instruments and not as a regular funding source.

 Short-Term Loans From Financial Institutions: The LIC, GIC and UTI
provide short-term loans to manufacturing companies that have a good track
record. The following are the eligibility conditions if obtaining the loans:
 Declared an annual dividend of 6 % for the past 5 years, in some cases it is 10
% over last 3 years
 The debt equity ratio should not exceed 2:1
 The current ratio should be at least 1:1
 The average of the interest cover ratios for the past three years should be at
least 2:1

The important features of the short-term loans provided by the financial institutions
include:

 They are unsecured and given on the basis of a demand promissory note
 The loan is given for a period of 1 year and can be renewed for two
consecutive years if the eligibility conditions are satisfied
 The company has to wait for at least 6 months after its repayment in order to
avail of a fresh loan
 The interest rate works out to be around 19.29 %, which is reduced further by
1% if prompt payment is made
 RIGHTS DEBENTURES FOR WORKING CAPITAL: In order to get long
term resources for working capital, the public limited companies can issue ‘rights’
debentures to their shareholders. The key guidelines to be followed include:
 The amount of debenture issue should not exceed 20 % of the gross current
assets, loans and advances minus the long term loans presently available for
financing working capital OR 20 % of paid up share capital, including
preference capital and free reserves, whichever is the lower of the two
 The debt – equity ratio including the proposed dividend issue should not
exceed 1:1
 They shall be first offered to Indian resident shareholders of the company on a
pro rata basis
 COMMERCIAL PAPER: Large firms who are financially strong issue
commercial paper .It represents a short-term unsecured promissory note issued by
firms of high credit rating. Its important feature include:
 Maturity ranges from 60-180 days
 It is sold at a discount from its face value and redeemed at its face value.
Thus the implicit interest rate is a function of size of the discount and the
period of maturity
 Either directly placed with investors or sold through dealers
 Usually bought by investors who keep it till the maturity and hence no
well developed secondary market
A company can issue commercial paper only if:
 It has net worth of Rs. 50 million
 MPBF is at least Rs. 100 million
 Face value of it does not exceed 30 % of its WC limit
 Its equity is listed on a stock exchange
 Its commercial paper receives a minimum rating of p2 from
CRISIL or an equivalent rating from another credit rating agency
 It has a minimum current ratio of 1.33
  It enjoys health code no. 1 status
 The minimum size of the issue is Rs. 2.5 million and the
denomination of each note is half a million Rs or a multiple thereof
The effective pre-tax cost of commercial paper is:

[Face Value-Net Amount Realized] [360]

[Net Amount Realized] * [Maturity Period]

But the real driving force behind the CP boom has been the easing liquidity
situation, and the sharp drop in the CP rates from a high of 20.15 per cent in
March, 1996, to around 9-12 per cent now. Since the CP is a cheaper
alternative to bank credit, where rates start at 12.50-13 per cent
By relying largely on CP issues, AAA-rated corporates like the Rs 9,004-crore
Reliance Industries, the Rs 6,600.10-crore Hindustan Lever, the Rs 1,485.60-crore
Philips India, the Rs 730.40-crore Gujarat Ambuja, and the Rs 1,026-crore Indian
Aluminum have not even drawn on their sanctioned cash credit limits.
 Foreign Currency Borrowings. For treasurers scouting for cheap and flexible
alternatives to bank finance, tapping the deep markets abroad is a lucrative option.
Echoes Rana Kapoor, 40, general manager, ANZ Investment Bank: "Allowing
short-term foreign currency loans to meet working capital financing requirements
has created the beginning of an on-shore dollar market, which can form a stable
source of funding at competitive costs for the CFO." Predicts Paresh Sukhtankar,
35, the head of credit and market risk at the HDFC Bank: "With a fully-
convertible rupee, corporates will be able to freely access the international market
to raise their working capital requirements." Such paper provides a mechanism for
highly-rated borrowers to raise funds overseas even more cheaply in spite of not
furnishing the backing of a bank

If domestic interest rates fall and liquidity improves--as is happening now--expect

CFOs to toggle back to the domestic markets to raise funds.
 Factoring: A factor is a financial institution set up to provide services related to
management and financing of debt arising from credit sales. Though it is well
established in the western countries, the Indian scenario is as follows:

Region Factors
North The Punjab national bank
South Bank of Allahabad
West SBI factoring and commercial services limited
East Canbank factoring limited:

The important features of factoring services include:

 The factors selects the account of the clients, and establishes credit limits
applicable to the selected accounts
 It takes the responsibility for collecting the debt of accounts handled by it. For
each account the factor pays to the client at the end of the credit period or
when the account is collected, whichever comes earlier
 The factor advances the money to the client against not yet collected and not
yet due debts. Normally the amount received is 70-80 % of the face value of
the debt and carries an interest rate which is equal or a little higher than the
lending rate of the commercial banks
 The credit risk could be borne by the client or the factor, India it is mostly on
the recourse basis, i.e. the risk is borne by the client
 The factor charges a commission which may be 1-2 % of the face value of the
debt factored

The following are the

advantages and disadvantages
of factoring:
 Ensures definite pattern
of cash inflows from
credit sales
  Continuous factoring may virtually eliminate the need for the credit and
the collection department
Comparatively an expensive form of financing
The factoring debt may be perceived as a sign of financial weakness

Says K. Shankar Narayan, 59, the managing director of the Rs 440-crore SBI Factor &
Commercial Services: "Upto 90 per cent of the sales ledger of the principal can be
financed through factoring."

Of course, this array of benefits does not come free. Discounts to the face value of
receivables average between 17 per cent and 18 per cent, which includes a charge for risk
protection, making factoring an expensive source of short-term credit. Admits E.R.
Sheshadari, 43, executive vice-president, Foremost Factors: "There is a cost, but you
have to weigh that against the advantage of immediate liquidity and 100 per cent risk
cover."

In the US, the market for factoring services amounts to a whopping $33 billion; in India,
the total value of factoring deals in 1996-97 did not exceed Rs 1,000 crore.

Unfortunately, factoring services have not acquired the status of a separate industry;
instead, they have been clubbed with Non Banking Finance Companies (NBFCs),
resulting in the dilution of their focus.

Factoring services here tend to be of the full recourse variety, rather than the non-
recourse variety that is the staple abroad, much of the benefits associated with the transfer
of credit risks are wiped out.
 IDBI offers Working Capital Loan to provide a loan
component of working capital finance to companies already
assisted by IDBI.

Eligibility criteria: Financially sound companies.

Net Worth: Not less than Rs.15 crore.
Total Debt-Equity Ratio: Not more than 3:1
Current Ratio: Not less than 1.25:1
Interest Coverage: Not less than 2:1
Nature of Assistance: Rupee or Foreign currency loan.
Extent of Assistance: Up to 80% of working capital gap. Minimum of Rs.2 crore or US$
0.50 million.
Rupee Loan: Minimum Term Lending Rate to be announced from time to time plus risk
spread. Risk spread to be based on the perception of credit risk involved and credit rating
of borrower.
Foreign Currency Loan: Source of foreign currency fund allocated to a particular
borrower and interest rate is normally linked to LIBOR.
Repayment: 12-18 months with a roll-over facility at the discretion of IDBI.
Security: Extension of first charge on the company's fixed assets - present and future and
any one or more of the following:

First charge of the company's movable properties.

Personal guarantee of the promoter-directors and/or corporate guarantee wherever

considered necessary.
Documentation:Working Capital Facility Agreement.

Demand Promissory Note.

Deed of Hypothecation.

Deed of Guarantee (personal/corporate), wherever stipulated.

Such other statements as may be required

WORKING CAPITAL FINANCE – THE STATUS TODAY

 Though norms for computation of Working Capital have been liberalized, PSU
banks continue to adopt the formula based norms to assess working capital which
protects them from any accusation of bias in lending.
 Fear of NPAs, enquiries on bad loans and capital adequacy constraints make
banks credit averse
 Increased competition for good client accounts: An analysis of the assisted units
of State Financial Institutions reveals that in most cases, the proven clients have
availed their subsequent loans from banks (most often PSU banks). Infact it was
also seen that all good clients had been visited by more than one banker offering
them better terms of credit. In many cases the existing loans of these clients to the
SFC was prepaid through loans provided by the banks
Banks have become increasingly choosy in providing credit to industry.

Working Capital Guarantee Program

Ex-Im Bank’s working capital guarantee encourages commercial lenders to make
working capital loans by providing a 90 percent guarantee. Exporters leverage their assets
from an expanded borrowing base and higher advance limits; which enables them to
purchase raw materials and finished products for export; pay for materials, labor and
overhead to produce goods and/or services for export; support standby letters of credit; or
guarantee advance payments under sales contracts. An Ex-Im Bank-guaranteed working
capital loan can cover multiple export sales or individual contracts. There is no maximum
dollar limit on these loans. (should I remove this??????)

WORKING CAPITAL MANAGEMENT IN SMALL SCALE INDUSTRIES

As we all know that working capital management is more important to small firms as
compared to large firms because they may have little investment in fixed assts but high
investment in current assets. Here we will look at WC management in the small scale-
manufacturing units and how it affects them.

The small-scale sector has emerged as a dynamic and vibrant sector of the Indian
economy. The sector accounts for 40% of the industrial production, 35% of the total
exports. There are about 30 lacs Small Scale Industries in the country and about 90% of
employment in the country is in this sector.

We will now look at the management of working capital in SSI’s. For the purpose of this
project the details about various SSI’s are given below:

GIRNAR PACKAGING [Vapi (Gujarat)]

The main unit under the name of Girnar Packaging is situated at Vapi (Gujarat)
approximately 150Kms from Mumbai. It was started in 1980.
Sources of finance
The long-term finance, if required, is raised from commercial banks. The banks
provide loans to them to an extent of four times the money contributed by the
partners.

The short-term finance is raised by hundis. The company makes purchases of raw
materials with a credit period of 30 days. Similarly, they sell the goods also at 30 days
credit period. The amount to be paid to the suppliers is normally paid after the credit
period of 30 days. Hence they efficiently manage their funds and reduce their WC
requirements
As soon as the goods are sold, they draw a bill on the customer and then discount the bill
with the bank. (For sourcing funds) Also, the customer and the company share the
interest charged equally. Thus this provides a good source of short-term finance.
Inventory, Receivables

Formerly, they used to keep inventory of four weeks. But now they are
practicing JIT. They now maintain a stock for only 3 days. The value of the
3-day inventory is around Rs 20 lakhs. (They have realized the importance of
funds and hence are trying to avoid blocking of too much money in the
inventory and hence are resorting to modern inventory management
practices.)

 Capacity utilisation (should I remove this point)

The entire plant capacity is utilised, as Girnar gets enough orders. In fact, they
receive and accept 20 % more orders than their actual capacity. They do so to earn
more profits and because they expect a few cancellations or postponement of
some orders that they receive. If they cannot complete the orders, they give out
the job to other small firms and then they send it to their customers.

ON-LINE PACKAGING LIMITED (GOA)

On – Line Packaging Ltd, situated in Goa, was established in the year 1998 .
 Sources of Finance
The owner’s meet the company’s Short term and Long-term finance
needs. The company does not have to depend on Banks or any other
financial institutions.
 Working capital of the plant is 30 lakhs, which is contributed by the
partners.
 Inventory The planning and production of the packaging material is done as per the
client’s policy of Just In Time (JIT). The company usually gets four weeks for
planning and production. The finished products are kept ready one week prior to
the actual delivery date. They simply keep the inventory to minimum and
procure it as and when necessary.

JANAK ENTERPRISES (DAHANU)

Janak Enterprises is an ancillary unit situated at Dahanu. The company was

established in 1973 and used to produce hinges since the year of commencement.
Later on, in 1977, they started manufacturing 2-wheeler parts for Kinetic Engineering
Limited. But since 1979 till date, they are producing Scooter horns for Bajaj Auto
Limited.

 Long term and short term requirements of Janak Enterprises are covered by Co -
operative Banks like Saraswati & Kapol Co - operative Bank and Nationalised
Banks like State Bank of India and Bank of Baroda. Nationalized banks also give
loans for R & D projects. They pay a comparatively high rate of bank interest.

 Loans are given on the basis of past performance of the unit. But according to
them, bank financing depends to a considerable extent on Bank - Agent
relationships and facts of a proposal.

 Working Capital is given on basis of production, sales price, material cost,

content of raw material, salary structure, wage bills and wage structure and other expenditures.

 Their cash is mainly stuck in debts and inventory.

POTENTIAL ENGINEERING LIMITED (MUMBAI):

It was established in the year 1982. The Company is engaged in manufacturing and
marketing of Pollution Control Equipments (Skimmer division), Electrical
Instrumentation Equipments (Flameproof division) used in hazardous areas and
Packaging Materials
.
 Initial Investment
The initial investment of the company was 8 to 10 lakhs rupees in
the gala, raw materials, machinery and working capital. No loans were
taken during that time; the firm was self-financed.
 Sources Of Finance
The firm realized a need to take loans two years after commencement, in 1984,
for working capital and cash flow management. In 1987, they took another loan
(long-term) for the purchase of new machinery for the new division. The loans
were taken at the rate of 14.5 percent per annum from Dena Bank. Dena
Bank was chosen only because most of the accounts of the family members of the
partners were in that bank.
The firm also takes short-term finance on a regular basis from Dena Bank to
fulfill its working capital requirements at the Prime Lending Rate (16% for less
than 10 lakhs, 16.5 % for greater than 10 lakhs).

Now they work only on cash credit basis i.e. they only take credit in the form of
cash for fulfilling working capital requirements. The cash credit limit is calculated
on the basis of stock hypothecated and sundry debtors.

 Working Capital Management

Being a small-scale enterprise, the firm is constantly pressed with capital crunch
issues. Hence it is imperative that they practice an Aggressive Working Capital
Management Strategy.

 Inventory: The firm maintains an inventory of 30 days for outsourced hardware

items. If it is an everyday requirement, there may also be 3 months worth of
purchase at one time. Raw materials stock is usually maintained for 15 days..
  Purchase Terms: A credit period of 45 to 60 days is maintained with suppliers.
However, now, due to late recovery of credit from customers, the firm is forced to
ask its suppliers to extend their credit period to about 90 days.
 Sales Terms: With customers, the credit period is ideally supposed to be upto 60
days, but this limit is always extended. At times, it is upto 120 or even 150 days
before big customers like Trading Houses pay up.
 Rotation of Working Capital: The current rate of rotation of working capital is 4
to 5 times a year. However, when the business was started, the rate of rotation of
working capital was almost 9 times in a year. This slump can be attributed to the
prolonged credit periods of customers

SHIVAM PACKAGING (KHOPOLI):

Shivam packaging commenced production from February 1999.

Sources of Finance

Long Term Finance:

Shivam Packaging Industries Pvt. Ltd. has taken a term loan of Rs. 36,00,000
from the Union Bank of India. They had to give a 200% collateral for getting this
loan. The plant and machinery, land and building are also pledged with the Union
Bank of India. The tenure of this loan is 5 years at the rate of 16.5%.
Short Term Finance:
The working capital (the Stock and Debtors) loan limit provided by the Union
Bank of India to Shivam Packaging Ltd. is Rs. 25,00,000. This is also known as
the Cash Credit account.

“SSIs don’t usually have very quick returns”, said Mr. Rohit Bhubna.

 Working Capital:
 Inventory Rs. 15,00,000
Sundry Debtors Rs. 20,00,000
Cash & Bank Balances Rs. 20,000
Less: Liabilities Rs. 15,00,000

Working Capital Rs. 20,20,000

 They maintain a raw material inventory of about 45-50 tons, which is Rs. 14-15
Lakhs in money value.
 The Economic Ordering Quantity for him is 10 tons of Paper, which is 1
truckload. The minimum time taken for the raw material to reach the factory is
one week, since all his suppliers are located at Vapi.
 They maintain a maximum of 10-day inventory of finished goods, depending on
the consignment, or if the delivery is deferred.

SATYAM CHEMICALS (TARAPUR):

The manufacturing unit is situated at Tarapur and its main office is at Goregaon.
(1981)

 Loans taken
Initially they did not take any term loan but after 3 years he took a short-term
loan of Rs 2 lacs and a cash credit of Rs 2.5 lacs from Saraswati Bank at a rate of
18.5% to 19% p.a.
Short-term loan taken during initial investment was repaid within the first few
years. The present rate of interest is 16% and interest on cash credit is also 16%

 Working Capital
 Their working capital requirement is approximately Rs. 30 lacs. It mainly
includes the cost of raw materials, credits given to customers for an average of 3
months, etc. The working capital is high mainly due to the credit given to the
customers and the long period of time for which the credit is given. The credit
period may sometimes stretch upto 4-5 months. The cash credit that is taken is
used to fulfill the working capital requirements. The operating cycle is

approximately 3 months.

LIJJAT PAPAD:

Capital structure
10% - owned capital
25% - Margin Money Scheme
65% - Term Loan
Part of profits after the members take their share is ploughed back in the
organisation.

 Sources of long term and short term finance

KVIC gives 4 % loans. They can also take loans from nationalized banks and
KVIC offers an attractive subsidy of 12% interest. The KVIC representatives’
visit once or twice a year to officially check the utilization of the funds
provided by them.

 Details of working capital : inventory, receivables

They use an ‘aggressive working?? capital management strategy as most of their
working capital requirements are met through sales turnover. They deal only in
cash transactions and don’t sell goods on credit to anyone. Even their dealers have
to keep a deposit of Rs 1,50,000 – which is interest free, with the organisation
until he is the dealer for the organisation. Additionally, he also has to make
 advance payment for the goods that he is buying. Even in the export transactions
they trade through Merchant traders who have to make advance payments to the
institution. They don’t have huge overheads as the actual manufacturing is done
by the members at their respective houses and this being a purely labour oriented
process there is hardly any expenditure on machinery and equipment.

OBSERVATIONS REGARDING WC MANAGEMENT IN SSI’s

Since it was a matter relating to finance, not everybody revealed all the aspects of WC
management. However an effort was put in to get the maximum out of them .The
following conclusion can be made on the basis of information gathered:

Most of them are not very professionally managed and hence they are really not aware of
their working capital policy as to whether it is aggressive or conservative. Basically they
are not very conscious about it. However now they have started realizing the of
importance of cost of money and have started planning their cash.
Cash management: They are facing problems managing their cash as their cash is
mainly stuck in debts and inventory, to overcome this they try and discount the bill with
the bank as soon as possible, deal only on cash basis and keep the credit period to the
minimum.
Receivables management:
 They try to match the credit they get with the credit period they give, for efficient
management, as is in the case of Girnar packaging. (Matching approach)
 Debtors take unusually long time to repay and hence most of their funds are
blocked in there. They need efficient receivable management system. Since they
are SSI’s it is practically difficult for them to have contract for payment period
over which they can charge interest, also there is more personal relation with their
customers and they normally wouldn’t take immediate action if the payment is not
made on time.
Inventory management:
 Though most of them are not very professionally managed, some of them are now
practicing JIT and are aware of the EOQ concept. They have realized the need to
reduce blockage of funds in inventory and are working towards it.
 Trying to reduce the lead time and servicing the orders as fast as possible is the
only way out for them
Financing for WC:
 Their main source of their cash has been bank loans. Many of them have taken
bank loans at a very high interest rates. At times they give 200% collateral as is in
the case of Shivam packaging. Thus they are paying a high cost of cash and hence
need better cash management.
 Many of them take cash credit to finance their fluctuating WC needs
 Cash credit limit is fixed on the basis of sundry debtors and stock hypothecated
(hence collateral is very important for obtaining bank loans),
 Obtaining bank finance is not only about past performance and future projections
but also about developing trust-based relationship with the bankers. This makes
obtaining loans easier.

Implication Of Budget 2001 On Finances In SSI’s

The new Credit Guarantee Scheme of August 2000 has been provided budgetary of Rs
100 crore in the current year. The limit of loan without collateral that was earlier fixed at
Rs 10 lakh has been raised to Rs 25 lakh under this scheme. Already 7 banks have
entered into an agreement with the Credit Guarantee Fund Trust that has been created to
implement the scheme. A credit linked capital subsidy scheme for technology
upgradation was launched in October 2000 envisaging 12 per cent capital subsidy. It is
expected that loans to the extent of Rs 5000 crore would be made available to the SSI
sector over the next 5 years under the scheme. It will thus enable the SSI’s to finance
their WC requirements easily.
Financial Assistance to Small Scale Units: Delhi Financial Corporation (DFC)
(should I remove this)?????

1. Short Term Working Capital Financial Assistance For existing borrowers.

Maximum limit upto Rs 150 lakhs over and above the term loan sanctioned by
DFC subject to a maximum exposure of Rs. 240 lakhs. In partnership and
proprietary units the maximum limit of loan shall be Rs. 90 lakhs including
existing exposure of DFC.
2. Working Capital Term Loan For existing units for minimum period of three years.
Loan above Rs. 20 lakhs shall be considered largely for units having encouraging
working results. Units which have availed working capital from bank and working
capital under single window scheme would also be eligible.

Maximum limit under working capital term loan scheme to a company shall be
Rs. 150 lakhs over and above the term loan sanctioned by DFC subject to a
maximum exposure of Rs. 240 lakhs. In partnership and proprietary units the
maximum limit of loan shall be Rs. 90 lakhs including existing exposure of DFC.

Fear of Non Performing Assets, enquiries on bad loans and capital adequacy constraints
make banks credit averse.

WORKING CAPITAL AND SMALL SCALE INDUSTRIES

Small scale industries have a distinct set of characteristics such as low bargaining power
leading to problems of receivables and lower credit on purchases, poor financial strength,
high level of variability due to dependence on local factors, etc. Consequently, it has been
rightly argued that the industry norms on different current assets cannot be adopted.

The PR Nayak Committee that was appointed to devise norms for assessing the working
capital requirement of small-scale industries arrived at simplified norm pegging the
Working Capital bank financing at 20% of the projected annual turnover. However, in
case of units which are non-capital intensive such as hotels, etc. banks often assess
requirements both on the Nayak Committee norms as well as the working cycle norms
and take the lower of the two figures.

Eligibility and Norms for bank financing of SSIs as per Nayak Committee [CHECK
THE YEAR]

a. Applicability: In case of SSIs, with working capital requirement of less than Rs. 5
crores
In case of other industries, with working capital requirement of less than
Rs. 1 crore

b. Quantum of Working Capital bank financing: 20% of the projected annual turnover
c. Subject to a Promoter bringing in a margin of: 5% of the projected annual turnover (i.e.
20% of the total fund requirement that has been estimated at 25% of the projected annual
turnover)

In a number of public sector banks that faced massive erosion in capital, enquiries were
instituted against officials who sanctioned the bad loans thereby making bankers more
cautious of taking any kind of credit decisions. In such circumstances banks increasingly
resorted to investing in risk-free government debt and avoided taking on industrial credit.

The sector had witnessed a high level of directed lending in the past decade most of
which turned bad thereby putting off the banks from further credit to the sector. Even
otherwise, the adverse impact of liberalization has been felt more in the SME sector that
among larger industries.

ESTIMATION OF WORKING CAPITAL REQUIREMENT

(An Example)

ELEMENTS AVERAGE PERIOD OF ESTIMATE FOR

CREDIT COMING YEAR
Purchase of materials 6 weeks 2,60,000
Wages 1.5 weeks 1,95,000
ADMIN.O/H
Rent 2 months 48,000
Salaries 1 month 36,000
Office expense 2 weeks 45,500
FACTORY O/H(Includes 2 months 60,000
depreciation 20%)
SALES
Cash 14,000
Credit 7 weeks 6,50,000

• Raw materials are in stock for 4 weeks

• FG are in stock for 1 month
• Process time 15 days
• Factory overheads and wages accrue evenly
• FG are valued at cost of production
• Minimum cash balance required is 40,000

Assumptions :

1) Production and sales are evenly distributed throughout the year

2) Raw materials are issued to production right in the beginning, whereas wages and
overheads are incurred evenly.

3) 15 days is taken as 2 weeks

1) 1year = 52 weeks

SOLUTION:

ELEMENT YEARLY WEEKLY

Raw Material 2,60,000 5,000
Wages 1,95,000 3,750
Prime Cost 4,55,000 8,750
Overheads 60,000 1,154
Cost Of Goods Sold 5,15,000 9,904
CURRENT ASSETS RS RS

(A)STOCK
Raw Material 20,00
0
(2,60,000/52 *4)
Finished Goods 39,61 59,616
6
(515,000/52*4)
(B) WIP
Raw Material 10,00
0
(2,60,000/52*2)
Wages 3,750

(1,95,000/52*2*0.5)
Overheads 1,150

(60,000/52 *2*0.5)
(C) DEBTORS 87,500

(6,50,000/52*7)

(D) CASH 40,000

TOTAL 2,02,020

CURRENT LIABILITIES

CREDITORS
Raw materials 30,000

(2,60,000/52*6)
Wages 5,625

(1,95,000/52*1.5)
Administration overheads

Rent (48,000/52*8) 7,385

Salary (36,000/52*4) 2,769

Office expense (45,500/52*2) 1,780 11,904

Factory overheads 9,235

60,00/52*8)

TOTAL 56,570

WC reqd.(CA-CL) 1,45,260

KEY WORKING CAPITAL RATIOS

The following, easily calculated, ratios are important measures of working capital
utilization.

Ratio Formulae Result Interpretation

On average, you turn over the value of your
entire stock every x days. You may need to
Average Stock * break this down into product groups for
Stock
365/ effective stock management.
Turnover = X days
Cost of Goods Obsolete stock, slow moving lines will extend
(in days)
Sold overall stock turnover days. Faster production,
fewer product lines, just in time ordering will
reduce average days.
Receivables Debtors * 365/ = X days It takes you on average x days to collect money
Ratio Sales due to you. If your official credit terms are 45
(in days) day and it takes you 65 days,it’s a problem
One or more large or slow debts can drag out
the average days. Effective debtor management
 will minimize the days.

On average, you pay your suppliers every x

days. If you negotiate better credit terms this
will increase. If you pay earlier, say, to get a
Payables Creditors * 365/
discount this will decline. If you simply defer
Ratio Cost of Sales (or = X days
paying your suppliers (without agreement) this
(in days) Purchases)
will also increase - but your reputation, the
quality of service and any flexibility provided
by your suppliers may suffer.
For example, 1.5 times means that you should
be able to lay your hands on Rs 1.50 for every
Total Current
Rs 1.00 you owe. Less than 1 times e.g. 0.75
Current Assets/
= X times means that you could have liquidity problems
Ratio Total Current
and be under pressure to generate sufficient
Liabilities
cash to meet oncoming demands.

(Total Current
Assets - Similar to the Current Ratio but takes account
Quick Ratio Inventory)/ = X times of the fact that it may take time to convert
Total Current inventory into cash.
Liabilities
Working
( Net Sales/ A high percentage means that working capital
Capital As % Sales
Working Capital) needs are high relative to your sales.
turnover

Other working capital measures include the following:

• Bad debts expressed as a percentage of sales.

• Cost of bank loans, lines of credit, invoice discounting etc.
 • Debtor concentration - degree of dependency on a limited
number of customers. Once ratios have been established for your
business, it is important to track them over time and to compare
them with ratios for other comparable businesses or industry
sectors.

TRENDS IN THE FOOD AND BEVERAGES INDUSTRY:

FOOD & BEVERAGE

Cash Days Days Days
Over- Prior Inven.
Conver. Working Sales Payable
all Company Name Year Turns
Effic. Capital Outst. Outst.
Rank Sales
CCE Rk. DWC Rk. DSO Rk. Ts. Rk. DPO Rk.
40 COCA COLA CO $20,458 18% 127 (15) 11 32 284 6 537 66 63
59 PEPSICO INC $20,438 16% 173 (14) 14 34 311 9 339 64 72
COCA COLA ENTERPRISES
149 $14,750 9% 452 (10) 17 34 309 15 209 60 88
INC
162 CAMPBELL SOUP CO $6,267 16% 178 33 277 31 264 5 597 29 463
198 PEPSI BOTTLING GROUP INC $7,982 10% 415 9 87 40 375 15 204 45 185
214 WM WRIGLEY JR CO $2,146 18% 131 62 558 32 281 4 818 15 896
220 DEAN FOODS CO $4,066 8% 474 7 81 29 242 17 183 39 258
COCA COLA BOTTLING CO
238 $995 8% 481 13 128 28 223 13 245 31 421
CONSOLI- DATED
269 PEPSI- AMERICAS INC NEW $2,528 10% 398 27 234 38 350 11 287 31 416
286 KELLOGG CO $6,955 12% 306 42 375 36 332 7 445 19 807
440 SARA LEE CORP $17,511 9% 456 53 476 34 301 4 741 35 319
569 HERSHEY FOODS CORP $4,221 9% 459 71 635 34 308 4 699 13 936
451 Industry Average $5,539 8% 43 33 8 32

CROSS SECTION ANALYSIS OF THE FOOD AND BEVERAGE INDUSTRIES

 Here if we observe most of them have a higher as cash conversion efficiency, in

case of Coco Cola Enterprise Inc and Wm Wrigley Jr. Co it is double the industry
standard i.e.18%..
 We can see major differences as far as the days WC is concerned, Coca Cola Co,
Coca Cola Enterprises Inc And Pepsi Co. Inc. have negative DWC as compared to
industry standard which is 43 days which that they are positively using suppliers
money to finance their activities and shows extremely well managed debtors and
creditors.
 Day Sales Outstanding has been more or less same for all the companies
 As far as the inventory turnover ratio is concerned, we can see that Sara Lee Corp
And Hershey Foods Corp are managing very poorly whereas Dean Foods Co,
Coca Cola Enterprises Inc And Pepsi Bottling Group Inc have almost double the
ratio. However extremely high inventory turnover could because of less stock of
inventory resulting in frequent stock outs. Hence a further detailed investigation
would be necessary before drawing any conclusion.
 Coca Cola Co, Pepsi Co Inc And Coca Cola Enterprises Inc have been able to
postpone the payments to creditor by almost a month as compared to the industry
average, where as Kellogg Co And Hershey Foods Corp have a DPO of 19 and 13
days respectively which is very less and hence they have higher WC needs as
compared to others since they need to pay their creditors faster. This is clearly
evident from their day’s payable outstanding
 Procter And Gamble Hygiene And Healthcare Ltd.

Balance sheet (Rs Mn)

Period ended 06/98 06/99 06/00
No. Of months 12 12 12

SOURCES OF FUNDS
Equity capital 216.4 216.4 216.4
Capital reserve 3.0 3.0 3.0
Share premium account 860.1 860.1 860.1
P&L/general reserve 600.9 208.7 836.5
Other reserves 113.1 113.1 55.5
Reserves and surplus 1577.2 1185.0 1755.1
Net worth 1793.6 1401.4 1971.5
Secured loans 226.6 130.3 58.1
Unsecured loans 127.1 129.9 -
Total debt 353.7 260.1 58.1
Capital employed 2147.3 1661.5 2029.6

APPLICATION OF FUNDS
Gross block 2209.4 2339.3 2290.9
Accumulated depreciation (626.9) (749.4) (925.6)
Capital work in progress 154.1 73.9 116.9
Total fixed assets 1736.5 1663.7 1482.2
Investments 88.2 87.0 87
Inventories 388.6 470.0 450.6
Sundry debtors 211.5 59.5 207.2
Cash and bank balance 202.3 354.7 604.6
Total loans and advances 1016. 1438.3 669.5
Sundry creditors/acceptances (1024.7) (1280.9) (1370.9)
Other liabilities (96.7) (1010.7) (100.6)
Provisions (194.6) (120.1) -
Net current assets 322.5 (89.3) 460.4
Capital deployed 2147.3 1661.5 2029.6

Procter And Gamble Hygiene And Healthcare Ltd.

Profit and loss account (Rs Mn.)
Period ended 06/98 06/99 06/00
No. Of months 12 12 12
Gross sales 4406.8 4682.6 4751.4
Excise duty (517.0) (654) (535.0)
Net sales 3889.8 4028.5 4216.4
Other income 78 57.3 105.4
Total income 3967.9 4085.8 4321.8
Raw materials 1236.9 1482.9 1381.2
Stock adjustment (inc)/dec 107.3 (12.1) (20.7)
Purchase of finished goods 163.3 176.3 319.7
Cost of material 1507.6 1647.2 1680.3
Employee cost 266.1 302.5 320.9
Power and fuel 47.7 50.7 56.3
Advertising/promotion 392.5 314.3 426.0
Freight and forwarding 161.8 168.7 119.4
Other expenses 765.8 688.1 616.4
Cost of sales 3141.5 3171.6 3219.3
PBIDT 826.4 914.3 1102.5
Interest and finance charges 64.7 29.2 40.8
PBDT 761.7 885.1 1061.7
Depreciation 227.5 230.5 245.5
PBT 534.3 654.6 816.2
Provision for tax 102.4 96.0 125.9
Extraordinary items /prior year - 1.0 60.0
Adjusted PAT 431.9 568.6 750.3
Dividend payout 178.5 96.8 180.2
Forex inflow 211.9 242.0 338.0
Forex outflow 588.4 419.3 566.5
Contingent liabilities 114.8 91.1 156.3
Hindustan Lever Ltd

Period ended 12/98 12/99 12/00

No. Of months 12 12 12
SOURCES OF FUNDS
Equity capital (Ref. Note) 2,195.7 2,200.6 2,200.6
Capital reserve 12.6 12.6 12.6
Share premium account 1,780.1 1,949.4 1,949.4
Revaluation reserve 6.7 6.7 6.7
Profit & Loss/ General reserve 12,814.0 16,668.5 20,520.0
Other reserves 321.2 194.8 193.0
Reserves and surplus 14,934.6 18,832.0 22,681.6
Net worth 17,130.3 21,032.6 24,882.2
Secured loans 1,467.5 1,413.0 692.2
Unsecured loans 1,175.6 359.7 423.9
Total debt 2,643.1 1,772.7 1,116.1
Capital employed 19,773.4 22,805.3 25,998.3

APPLICATION OF FUNDS
Gross block 13,841.3 14,810.6 16,687.4
Accumulated depreciation (4,207.3) (4,978.7) (5,949.5)
Capital work in progress 903.7 1,039.8 1,296.8
Total fixed assets 10,537.7 10,871.7 12,034.7
Investments 6,975.1 10,361.1 17,697.4
Inventories 11,456.8 13,100.1 11,821.0
Sundry debtors 1,929.4 2,337.5 2,645.1
Cash & bank balance 6,598.8 8,104.5 5,220.8
Total loans & advances 6,102.1 6,269.4 7,926.2
Sundry creditors/ Acceptances (17,873.6) (20,810.9) (21,635.3)
Other liabilities (706.6) (621.7) (707.5)
Provisions (5,246.4) (6,806.4) (9,004.1)
Net current assets 2,260.5 1,572.5 (3,733.8)
Capital deployed 19,773.4 22,805.3 25,998.3

RATIOS
Turnover ratios (x)
Net sales to total assets 4.8 4.4 4.1
Net sales to fixed assets 9.0 9.3 8.8
Net sales to working capital 41.9 64.5 (28.4)
Net sales to inventory 8.3 7.7 9.0
Gross sales to debtors 52.9 46.7 43.1
Liquidity ratios (x)
Current ratio 1.1 1.1 0.9
Debt equity ratio 0.2 0.1 0.0
Interest cover 46.5 74.5 147.6
Return on (%)
Networth (post tax) 47.0 50.7 52.0
Capital employed (pre tax) 58.7 61.8 64.6
Per share (Rs)
Net earnings (EPS) 3.7 4.8 5.9
Cash earnings (CPS) 4.1 5.4 6.5
Dividend payout 2.2 3.2 4.3
Book value (NAV) 7.8 9.6 11.3
Asset composition (%)
Net fixed assets 53.3 47.7 46.3
Working capital 11.4 6.9 (14.4)
Hindustan Lever Ltd

Period ended 12/98 12/99 12/00

No. of months 12 12 12
Gross Sales 102,152.4 109,176.9 113,921.4
Excise Duty (7,413.1) (7,800.9) (7,884.6)
Net sales 94,739.3 101,376.0 106,036.8
Other income 2,447.4 3,189.8 3,450.7
Total income 97,186.7 104,565.8 109,487.5
Raw materials 32,473.4 33,260.6 31,351.1
Stock adjustment (Inc)/ Dec 79.0 (1,285.1) 838.4
Purchase of finished goods 22,758.8 26,053.3 26,133.5
Cost of material 55,311.2 58,028.8 58,322.9
Employee cost 5,270.3 5,841.5 6,143.5
Power & fuel 1,184.3 1,231.4 1,399.5
Advertising/ promotion/ public 6,766.6 7,465.3 7,092.6
Freight & forwarding 3,457.7 3,662.2 4,460.7
Other expenses 12,589.0 12,945.9 13,976.6
Cost of sales 84,579.1 89,174.9 91,395.7
PBIDT 12,607.6 15,390.9 18,091.8
Interest & finance charges 292.8 223.9 131.5
PBDT 12,314.8 15,167.0 17,960.3
Depreciation 1,010.5 1,287.6 1,309.4
PBT 11,304.4 13,879.4 16,650.9
Provision for taxation 2,930.0 3,180.0 3,550.0
Extraordinary items/ Prior year adj. (317.2) (38.0) (172.3)
Adjusted PAT 8,057.1 10,661.4 12,928.6
Dividend payout 4,830.5 7,105.1 9,423.6
Forex inflow 11,211.4 13,677.2 17,992.3
Forex outflow 7,128.5 7,943.7 9,859.0
Book value of quoted investments 3,687.5 5,233.0 8,726.0
Market value of quoted investments 6,451.4 8,632.0 9,699.7
Investment in affiliate/ subsidiary 2,233.1 1,581.4 2,922.9
Contingent liabilities 2,170.1 1,731.7 3,757.3
RATIOS
As % of net sales
Gross sales 107.8 107.7 107.4
Excise duty (7.8) (7.7) (7.4)
Net sales 100.0 100.0 100.0
Other income 2.6 3.1 3.3
Total income 102.6 103.1 103.3
Cost of material 58.4 57.2 55.0
Employee costs 5.6 5.8 5.8
Selling expense 10.8 11.0 10.9
Other expenses 13.3 12.8 13.2
Cost of sales 89.3 88.0 86.2
Profitability ratios (%)
PBIDT excl. other income 10.7 12.0 13.8
PBIDT 13.3 15.2 17.1
PBDT 13.0 15.0 16.9
Profit before tax 11.9 13.7 15.7
Profit after tax 8.5 10.5 12.2
Growth ratios (% yoy)
Net sales 21.2 7.0 4.6
PBIDT 33.8 22.1 17.5
PBT 33.0 22.8 20.0
PAT 42.2 32.3 21.3
Payout ratios (%)
Tax (% of PBT) 25.9 22.9 21.3
Dividend (% of PAT) 60.0 66.6 72.9
Britannia Industries Ltd

Balance sheet (Rs mn)

Period ended 03/98 03/99 03/00 03/01
No. of months 12 12 12 12
SOURCES OF FUNDS
Equity capital 185.7 185.7 278.5 278.5
Profit & Loss/ General
990.4 1,307.9 1,586.1 2,075.2
reserve
Other reserves 35.2 - - 47.5
Reserves and surplus 1,025.6 1,307.9 1,586.1 2,122.7
Net worth 1,211.3 1,493.6 1,864.6 2,401.2
Secured loans 647.0 1,170.3 1,098.2 1,762.6
Unsecured loans 337.7 - - -
Total debt 984.7 1,170.3 1,098.2 1,762.6
Capital employed 2,196.0 2,663.9 2,962.9 4,163.8

APPLICATION OF FUNDS
Gross block 1,728.7 1,928.7 2,048.5 2,515.7
Accumulated depreciation (470.1) (613.4) (766.8) (944.9)
Capital work in progress 18.6 37.9 24.4 16.9
Total fixed assets 1,277.2 1,353.3 1,306.1 1,587.7
Investments 911.9 1,293.1 1,469.9 2,156.1
Inventories 585.8 663.6 704.6 830.8
Sundry debtors 489.7 299.8 377.9 326.2
Cash & bank balance 56.8 285.8 493.7 345.8
Total loans & advances 591.0 677.9 731.0 809.5
Sundry creditors/
(1,509.0) (1,687.3) (1,955.9) (1,696.6)
Acceptances
Other liabilities (30.0) (14.0) (15.6) (32.2)
Provisions (177.5) (208.3) (270.7) (326.6)
Net current assets 6.9 17.5 65.1 257.0
Miscellaneous expenses - - 121.8 163.0
Capital deployed 2,196.0 2,663.9 2,962.9 4,163.8

RATIOS
Turnover ratios (x)
Net sales to total assets 3.8 3.8 3.8 3.1
Net sales to fixed assets 6.5 7.4 8.7 8.1
Net sales to working capital 1,197.5 573.4 175.0 50.0
Net sales to inventory 14.1 15.1 16.2 15.5
Gross sales to debtors 17.3 34.4 31.0 41.0
Liquidity ratios (x)
Current ratio 1.0 1.0 1.0 1.1
Debt equity ratio 0.8 0.8 0.6 0.7
Interest cover 14.4 142.6 16.5 14.9
Return on (%)
Networth (post tax) 23.9 26.5 27.4 29.4
Capital employed (pre tax) 21.5 21.8 29.1 27.0
Per share (Rs)
Net earnings (EPS) 15.6 21.3 18.3 25.3
Cash earnings (CPS) 21.9 29.9 24.5 32.1
Dividend payout 5.5 6.1 5.0 6.1
Book value (NAV) 65.2 80.4 67.0 86.2
Asset composition (%)
Net fixed assets 58.2 50.8 46.0 39.7
Working capital 0.3 0.7 2.3 6.4
Britannia Industries Ltd
Profit & loss account (Rs mn)
Period ended 03/98 03/99 03/00 03/01
No. of months 12 12 12 12
Gross Sales 8,478.4 10,301.4 11,698.4 13,384.2
Excise Duty (235.7) (277.7) (302.9) (525.1)
Net sales 8,242.7 10,023.8 11,395.5 12,859.0
Other income 113.4 130.6 159.1 161.2
Total income 8,356.1 10,154.4 11,554.6 13,020.2
Raw materials 2,863.4 3,653.2 4,042.1 3,880.7
Stock adjustment (Inc)/ Dec (52.3) (33.7) (45.2) (114.9)
Purchase of finished goods 949.6 1,224.7 1,257.3 1,850.1
Cost of material 3,760.7 4,844.1 5,254.2 5,615.9
Employee cost 725.7 829.1 904.5 953.0
Power & fuel 107.7 123.2 161.2 152.9
Advertising/ promotion/ public 525.2 584.0 770.1 852.9
Freight & forwarding 318.5 401.0 471.5 613.8
Other expenses 2,326.9 2,632.1 2,957.8 3,519.6
Cost of sales 7,764.6 9,413.6 10,519.2 11,708.1
PBIDT 591.4 740.8 1,035.5 1,312.2
Interest & finance charges 49.2 6.3 73.2 100.9
PBDT 542.2 734.5 962.3 1,211.3
Depreciation 118.2 158.9 171.8 188.9
PBT 424.0 575.6 790.5 1,022.4
Provision for taxation 134.7 180.0 260.7 434.1
Extraordinary items/ Prior year
- - (19.6) 117.1
adj.
Adjusted PAT 289.3 395.6 510.2 705.4
Dividend payout 102.1 113.4 139.1 168.8
Forex inflow 64.4 39.6 29.4 23.5
Forex outflow 128.2 148.9 159.1 129.4
Book value of quoted
150.4 577.0 283.1 69.0
investments
Market value of quoted
165.3 630.6 320.0 88.9
investments
Contingent liabilities 167.3 405.5 207.9 592.0
RATIOS
As % of net sales
Gross sales 102.9 102.8 102.7 104.1
Excise duty (2.9) (2.8) (2.7) (4.1)
Net sales 100.0 100.0 100.0 100.0
Other income 1.4 1.3 1.4 1.3
Total income 101.4 101.3 101.4 101.3
Cost of material 45.6 48.3 46.1 43.7
Employee costs 8.8 8.3 7.9 7.4
Selling expense 10.2 9.8 10.9 11.4
Other expenses 28.2 26.3 26.0 27.4
Cost of sales 94.2 93.9 92.3 91.0
Profitability ratios (%)
PBIDT excl. other income 5.8 6.1 7.7 9.0
PBIDT 7.2 7.4 9.1 10.2
PBDT 6.6 7.3 8.4 9.4
Profit before tax 5.1 5.7 6.9 8.0
Profit after tax 3.5 3.9 4.5 5.5
Growth ratios (% yoy)
Net sales 13.5 21.6 13.7 12.8
PBIDT 61.0 25.3 39.8 26.7
PBT 43.8 35.8 37.3 29.3
PAT 61.8 36.8 29.0 38.3
Payout ratios (%)
Tax (% of PBT) 31.8 31.3 33.0 42.5
Dividend (% of PAT) 35.3 28.7 27

CALCULATION OF IMPORTANT RATIOS RELATED TO WORKING

CAPITAL FOR THE THREE COMPANIES

1) Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory

2) Inventory Period=[Average Inventory]/[(Cost Of Goods Sold)/365]
3) Accounts Receivables Turnover = Net (Credit) Sales / Average Accounts
Receivable
4) Accounts Receivable Period = [Average Accounts Receivable]/[(Sales)/365]
5) Accounts Payable Period= [Average Accounts Payable]/[(Cost Of Goods
Sold)/365]
6) Current Ratio = Current Assets/Current Liabilities
7) Quick Ratio = Current Assets-Inventory/Current Liabilities
8) Operating Cycle= Inventory Period+ Accounts Receivable Period
9) Cash Cycle = Operating Cycle-Account Payable Ratios
10) Working Capital Turnover Ratio =Net Sales / Working Capital

Company P&G P&G HLL HLL Britannia Britannia

Year 99-00 98-99 99-00 98-99 99-00 98-99
Inventory 3.65 3.8 4.68 4.72 7.65 7.75
turnover
Inventory 99.99 95.13 77.98 77.23 47.53 47.076
period days days days days days days
Accounts 31.61 29.73 42.56 47.51 35.73 25.39
receivables turnover
Accounts 11.54 12.27 8.57 7.68 10.21 14.37
receivable period days days days days days days
Accounts payable 288 275 days 133 122 126.58 120.43
period days days days days days
Current ratio 1.13 1.15 1.31 1.39 1.007 1.066
Quick ratio 0.88 0.91 0.74 0.78 0.67 0.66
Operating cycle 112 107 days 87 85 days 58 64
days days days days
Cash cycle
Working capital 8.75 (47.21) (28.4) 175 573
64.5
turnover ratio

CROSS SECTION ANALYSIS:

 We can see that HLL is managing its inventory better as it has a high
inventory ratio as compared to P&G; though BIL has the highest turnover
ratio. The inventory is moving fast in its case. However we further need to
find out that they need do not maintain an extremely low level of
inventory, which may further lead to stock outs, etc ;before we draw any
final conclusion.
 Again we see that the number of days for which HLL is keeping its
inventory is comparatively lower, though BIL keeps it for the least number
of days and hence we can see that it does better inventory management.
 Again we see that HLL has a higher accounts receivable turnover
indicating that it is efficiently doing credit management. We can say that it
is probably using better credit standards and putting more collection effort
as compared to P&G and BIL. How ever the ratios have been calculated
on the basis of net sales and not net credit sales and hence finding the
internal break up of the net sales as to whether cash or credit , is important
from the analysis point of view.
 As a result of the above efforts, HLL is obviously able to collect its
receivables in a comparatively shorter period and this can be said from the
account receivable period. However its credit policy also needs to be
 considered before deciding whether it has a fast or a slow collection
period.
 Because of better inventory management, receivables management and
cash management, HLL has a better liquidity position as compared to
P&G and BIL; this can be seen from the high current ratio of 1.31.
However since it is a normal practice to maintain a current ratio of 2:1.
1.31 would still be considered to be a low ratio compared to the industry
averages.
 We can see that P&G is in the best liquidity position of the two as it has
the highest quick ratio. Though HLL has a high current ratio, it also has a
comparatively high inventory and hence has a lower quick ratio and less
liquidity as compared to P&G.
 Since BIL has a comparatively the least inventory period and accounts
receivable period it is able to have a shorter operating cycle, this is clearly
evident from the above table. This is because of better inventory
management and credit management not to oversee the problems of
keeping less then required inventory or conservative credit policy.
 As far as he working capital turnover ratio is concerned (which here have
been picked up from their respective balance sheet) we see wide
differences among the same company over two years and also among the
different companies. In case of P&G and HLL ,it has also become
negative because they had excess of current liabilities over current assets.
In P&G this happened because they had a high amount of other liabilities
(1010.7).
For HLL WC ratio has moved from a positive 64.5 to negative
28.4, this is because their cash balance has reduced and at the same
time their provisions have considerably increased over a period of
two years. It shows a cash crunch for the company, thus
demanding better cash management.
Again for BIL the turnover ratio has gone down from a significant 573 to
175 because over the period of two years their working capital
requirement has considerably increased though their sales haven’t
increased by that extent.
 As far as the working capital turnover ratio is concerned it is very high for
BIL why?????????

CALCULATION OF THE VARIOUS RATIOS

P&G P&G HLL HLL BIL. BIL.

99-00 98-99 99-00 98-99 99-00 98-99

Inventory [(1680.2)]/ [1641.1]/ 58322.9/ 58028.8/ 5254.2 4844.1
turnover [(470+388.6) 12460.55 12278.45 /684.1 /624.7
[(450.6+470)/ /2]
2]
Inventory (460.3*365)/ (429.3*365)/ [12460.55]/ [12278.45]/ 684.1 624.7
period 1680.2 1647.1 [(58322.9)/ [(58028.8)/ /14.39 /13.27
365] 365]

Accounts [4216.4]/ [4028.5]/ [106036.8]/ [101376]/ 11395. 10023.8

receivables [(207.2+59.5) [(59.5+211.5) [(2337.5+2645.1) [(1929.4+ 5 /394.75
turnover /2] / /2] 2337.5) /318.85
2] /2]
Accounts [133.35*365]/ [135.5*365]/ [2491.3] / [2133.45] / 318.85 394.75
receivable 4216.4 4028.5 [(106036.8)/ [(101376)/ /31.22 /27.46
period 365] 365]
Accounts 127 120
payable DAYS DAYS
period
Current 2127.20/ 2070.45/ 28715.85/ 27949.3 / 2092.1 1825.2
ratio 1881.55 1796.5 21887.7 20006.4 5 /1813.05
/2075.9
Quick 1666.9/ 1641.15/ (28715.85- (27949.3- 14.8.05 1200.5
ratio 1881.55 1796.5 12460.55)/ 12278.45)/ /2075.9 /1813.05
21887.7 20006.4
Operating 100+12 95+12 78+9 77+8 48+10 47+14
cycle
Cash cycle
Working 4028.5/ 4216.4/ 106036.8/ 101376/ 11395. 10023.8
capital 460.4 -89.3 -3733.6 1572.5 5 /17.5
turnover /65.1
ratio

 Assuming that there are 365days in a year

 For calculating current ratio average current assets and average current
liabilities are taken
 For working capital average current assets and liabilities have been taken
Sixty per cent of the MNCs showed a rise in the profitability ratio during 1999-00, while
64 per cent of the domestic firms showed an increase in the profitability ratio during the
same period. In the capital turnover ratio (2.31 in 1998-99 to 2.5 in 1999-00), working
capital turnover ratio (6.62 to 7.71) and stock turnover ratio (7.28 to 7.48), MNCs
showed significant improvement during 1999-00 from 1998-99. On the other hand,
Indian companies also showed an increase in the case of capital turnover ratio (0.82 to
0.87), working capital turnover ratio (3.45 to 4) and stock turnover ratio (6.97 to 7.38)
during 1999-00. One interesting thing is that the ratios for MNCs were higher compared
to that of Indian companies during 1999-00.

WHAT INDUSTRALIST HAVE TO SAY ABOUT MANAGING WORKING

CAPITAL

To maximise cash flow, finance teams throughout Europe are tightening their
grip on working capital
 Larry Rosen, group senior vice-president and treasurer of Aventis: .

Though “a cash flow culture” is slowly growing at the company we are

increasingly aware of the impact that receivables, payables and inventory-
control have on the bottom line, there’s still work to be done. “. ’It boils down
to individual managers negotiating with customers and suppliers to optimise
the price terms and financing relationships...
“We always want to relate the terms that we grant to customers and the terms
that we receive from suppliers to the opportunity cost of money.” He explains
that the company’s ERP system and other back-end tools let managers access
information in other parts of the company that were previously impossible to
get a hold of. That way managers can now make “better-informed decisions”
rather than educated guesses about areas such as inventory control, and they
can see more clearly how working capital actions in one part of a firm affect
another

 Aventis now benchmarks four elements of working capital on a monthly basis

for every country where it does business: days of inventory, day sales
 outstanding, days payable outstanding and the best possible days payable
outstanding
 According to REL Consultancy Group, a management consulting firm,
working capital represents around 65% of the book assets of the world’s
biggest companies.
 The deputy CFO of Sodexho Alliance, the E10.5 billion French food and

management services firm, says “It’s not something that merely concerns the
finance team, but it’s regarded as part of our operational strategy.” They
started with receivables management, training managers at all levels of the
organization . Benchmarking data shows that the training has paid off—the
US has reduced its billing cycle from 17 days to ten days
 V.K. Kaul, 53, the CFO of the Rs 1,068-crore Ranbaxy Laboratories:
"Factors such as the state of the industry, the quality, and credibility, of the
management, the financial discipline practised, and the track-record will
figure in credit appraisal
 Increasingly, commercial success in a fiercely-competitive marketplace is
predicated by intangibles such as brand equity and know-how. "Placing
intangibles, such as brands, on the balance-sheet forces the firm to identify
and finance its value-drivers," says Mohandas Pai, 40, director (finance) of the
Rs 139.22-crore Infosys
 S. Narayan Prasad, 43, senior manager (corporate banking), National Bank
of Bahrain, cautions: "With the banks' NPAs at 14 per cent of advances, the
regulators will frown on unsecured transactions."
 WC MANAGEMENT IN SERVICE INDUSTRY (AIRLINES) A CASE

For purpose of studying WC management in service industry, an airline was visited.

For maintaining privacy ,the name of the airline and the people interviewed has not
been mentioned.

Working Capital Policy:As far as investing in current assets is concerned ,initially

,they had very high investment and a major portion of their current assets was kept in
cash which came in as revenue. In the sense it was a conservative policy that they
followed.
However over a period of years they have realized the opportunity cost of
cash and hence have started following an aggressive policy, keeping their investment
in C.A to the minimum .Now they take cash credit, as per their requirement as and
when they need.

Working Capital Financing Policy: Their entire floating WC (Rs 100crs) requirement
is met by cash credit facility they take from the banks. They have a term loan of Rs 50
cr. They also have a housing loan of Rs.28 Cr. They roll over cash credit every year.
So it is a form of a short-term loan, which keeps getting extended.
The permanent working capital requirement (700 Cr) is supported by the long-
term loan from banks for which they mortgage their assets. Hence they use a, moderate
mix of short term and long term sources to finance their working capital needs middle
route to avoid running out of cash. We can say that they use the strategy C.

CASH MANAGEMENT

The main source of their cash include sale of air tickets and engineering services they
provide to others. They receive the cash even before actual sale takes place. This is
because, they sell the tickets to the agents and collect the money for it, but the actual
value of ticket is known only when the passenger fly’s, at a future date.
 Their sales are done through agents (BSP and GSA) and to the government
parties. They have about 100-200 agents only in Mumbai. They follow receipts and
payment methods to plan their cash requirements. Their cash flow statement looks like
following:

Collections
Month Op Cash Inward Unsche. Engg Foreign Misc Total
bal credit remm. rcpts Ser. Remm. rcpts
Coll.
Op bal
April
May
June
July
August
September
Oct
Nov
Dec
Jan
Feb
Mar
Total

Disbursements
Month Sal/ Fuel/ LBP Capital INS/ Misc. Unsch. Total Cl. bal
PLI/ Oil Payment Exp. INT
PF/
TDS

Op bal
April
May
June
July
August
September
Oct
Nov
Dec
Jan
Feb
Mar
Total

Collections: The main source of cash is the inward remittances. All the centers send
their collections to Mumbai (this is the cash they earn through sale of tickets).
Unscheduled receipts come from special flights they operate, say for the prime
minister or for Hajj pilgrims. They also provide engineering services to others, which
is a source for cash. Foreign remittances include sale of tickets abroad and earnings
from abroad. They can, based on their past experience and considering the peak
seasons and peak routes estimate more or less how much they will receive from each
sector, each month. Hence their cash can be effectively planned.

Disbursements: Their main expenditures include payment of salary, fuel and oil,
landing and parking charges, capital expenditure, insurance and interest payment,
catering, etc. Most of this is also predictable since they know how many flights they
are going to fly (therefore how much fuel, parking charges, salary, insurance premium,
interest charges they need to pay. They need to monitor better specially if they are
intending to make capital expenditure. The closing balance for them has mostly been
negative since their expenses are more; to meet this cash deficit they take cash credit
for the balance amount by mortgaging their assets.
If carefully observed, we see that it is not as per a certain date. It is on an ongoing
basis. It is not a forecast, they just believe in borrowing the difference.(debt trap???)

Collection of cash: Initially a lot of their cash was blocked in various branches at
various banks, as they have to keep a certain minimum balance in the bank. As a result
a large amount (at one time about Rs 500 crores) was blocked to meet the minimum
balance. Hence they paid a high opportunity cost for the cash.
But now they have made it a centralized collection procedure, the entire amount is
deposited at a central account. This has been done for the central and the western zone.
 Hence they no longer keep bank accounts at various places. As a result a large amount
of their funds are freed up and they have better cash flows; though they still continue to
be negative.
Also initially for payment of salaries they used to deposit the amount with the
bank 5 days before the last day of the month. They used to lose interest on crores of
Rupees for five full days.
Now they follow an electronic clearance system. Now a sponsor bank acts as an
interface with the RBI. The sponsor bank does payment to the RBI. The branch
network of RBI is used for the distribution of salaries and also for payment to the
suppliers. This speeds up the entire process again freeing the funds for 5 days. They
save almost 30 cr. interest on this. The entire amount is deposited in and paid from the
Mumbai branch. Hence the cash position is known all the time and better planning and
control can be done. However one major drawback in this is that payment in foreign
currency cannot be done because of exchange rate fluctuations.
Future plans: They are planning to open up regional cash management centers at
strategic locations like Hongkong, Nairobi, London, America, etc, from where
centralized administration of cash can be done for those regions. Also the EURO
currency will solve the exchange rate problems and conversion cost will be reduced.
They also wish to have an ERP system for better monitoring and control of cash.
Though they haven’t finalized about it as yet.

Monitoring receivables: They mainly have to collect money from the agents and the
government parties. Collecting cash from the government parties is no problem as the
payment is assured.
As far as the BSP agents are concerned, they are IATA approved and have
BSP (bill settlement procedure). All the agents pay to one central authority. They take
bank guarantees from the agents of the amount up till which the can sell the tickets
(IATA agents do not require a separate B/G as their is a combined guarantee for all their
agents taken by IATA.) and do not indulge in risk taking .All agents pay to one central
authority every 15 days (for cargo 30 days). This credit period is based on the industry
averages. Since they are IATA agents same credit period is given by all the airlines.
Investment of surplus: Initially the AIR CORPORATION ACT and now the
COMPANIES ACT lays certain restrictions regarding where they can invest their surplus
funds, for ex: they cannot invest in shares, etc. They normally invest in fixed deposits. In
India they earning interest rate of 9.5% where as abroad they earn a 3 to 5% interest rate.
They could possibly look in for better options of investment where they could get higher
returns. As far as this airline is concerned, they mostly have cash deficit and hence do not
have surplus to invest.
However they are looking forward to better cash positions in future. They wish that a
sound system for ‘overnight investment’ (where the funds are invested only for the night
period and the next morning before the office starts the funds are back in your bank)
could be developed in India. This means making the maximum us of your funds.

CREDIT MANAGEMENT.
Credit policy: They have very aggressive credit standards. They do not give credit
without security. (A B/G or L/C is normally demanded) They give credit for 15-30 days.
This is the normal industry average .All airlines give this much credit period. .
Cash discount:It is a normal practice in the airline industry to offer a 40-45% incentive
on the gross fare published by the IATA. (Gross Fare – Incentive = Set Fare). To
government parties they offer 12% cash discount if they pay within 30 days. (Again this
is a normal industry practice.) Hence if you buy through the agent you get an incentive
benefit and if bought directly a cash discount (govt.parties). Also the agents are given 7
to 12% commission on set fare .GSA are given extra 3% overwriting commission.
Creditability: The IATA publishes a default report of the agents; any agent whose name
appears on that list is not generally given business again by any airline. They can only
sell tickets upto a limit for which the agent gives security .therefore they don’t require to
do any credit rating for them The govt.obviously pays, though it may sometimes delay
.No credit rating is normally done by the airline. For foreign countries they outsource the
credit appraisal in case they find a need to do so.
 INVENTORY MANAGEMENT:

1997 1998 1999 2000

Inventory 5609.07 4598.6 4204.4 3479.1
(Rs million)
Current Assets (Rs million) 18830.49 21233.8 21986.8 23708.0

Total Assets 38945.67 42288.1 38616.9 36508.3

(Rs million)
Sales 36803.3 38732.1 42549.3 44480.5
(Rs million)
Inventory as % of CA 29.78 % 21.65 % 19.12 % 14.67 %

Inventory as a % of TA 14.40 % 10.87 % 10.88 % 9.52 %

Inventory as % Of sales 15.24% 11.98% 9.87% 7.82%

Inventory Period 56.73 days 43.74 days 36.06 days 25.54 days

Trend section analysis of inventories for this company is as follows:

 As we can see above, their inventory as a % of current assets has reduced over a
period of years showing an improvement in their liquidity position.
 Their inventory as a % of sales has been less because it is a service provider and
not a manufacturer. (Its inventory mainly includes spare parts, loose tools and to
some extent fuel and oil.)
 Their inventory as a % of sales has gone down over a period of years , showing
that they are managing with lower inventories.
 Obviously, their inventory period has also gone down. The inventory period has
reduced by 50% over the last five years.
This achievement can be contributed to the following measure undertaken by the
company:
 An inventory monitoring cell was introduced
 Purchases were controlled
  Regular review of total inventory
 Special emphasis on monitoring of expensive and frequently required items.

13%

5% 33%
In spite of significant improvement in
6%
inventory management, it has not
shown much on the profitability, this is 13%

simply because, this is a service

30%
industry and inventory is not a very
significant element.
salary fuel and oil LBP cap exp int/ins misc.
In spite of not having major sales,
collection, credit or inventory problems, the airline is still running into losses. They
main reason being heavy expenditures, salaries and fuel expenditures, being its major
components.
Estimation of working capital: in this case it is basically meeting the deficit through the
cash credit.