PROJECT ON Working Capital Management

Master of Business Administration (FINANCE)

Submitted in partial fulfillment of the requirements for award of Master of Business Administration of Tilak Maharashtra University, Pune

2011-2012 SUBMITTED BY KAMLESH JAYWANT TEMKAR M.B.A. (FINANCE) PRN NO.07409502247 OF Abhinav Institute of Technology & Management Guided By Prof. Ayyappan Iyer

TILAK MAHARASHTRA UNIVERSITY GULTEKDI, PUNE 411037.

Tilak Maharashtra University, Pune

(Deedmed Under Section 3 of UGC ACT 1956 vide Notification No.F.9-19/85- U3 dated 24th April, 1987 By the Government of India.)

Vidyapeeth Bhavan, Gultekdi, Pune-411037.

CERTIFICATE
This is to Certify that the project titled Working Capital management at Ravin Cables Limited, is a bonafide work carried out by Mr.Kamlesh Jaywant Temkar a student of Master of Business Administration Semester 3rd & 4th, Specialization in Finance PRN No. 07409502247 under Tilak Maharashtra University, in the year 2011.

Head of the Department Examiner Examiner Internal External

Date:

Place:

University

Seal

Certificate

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr. Kamlesh J. Temkar MBA student of Tilak Maharashtra University, Pune has successfully collected the data for the project report for award of Master Degree of Business Administration.

He has done the Project on Cables Limited -Mumbai

Working Capital Management at Ravin

Company Name: Ravin Cables Limited Designation :

Company Seal

Signature

Certificate of Internal Guide

This is to certify that the project titled Working capital management at Ravin Cables Limited -Mumbai is a bonafide work carried out by Kamlesh J. Temkar a candidate for the award of Master of Business Administration of Tilak Maharashtra University, Pune under my guidance and direction.

Signature of guide Name: Date: Place Designation: Institute:

I am obliged to Prof. Ayyappan Iyer for giving his valuable inputs and providing me with the necessary guidance and assistance throughout the project. Ravin Cables limited - Mumbai, has an excellent work culture & I am thankful to Mr. Kalpesh Modi (Vice President-Finance) for giving me this opportunity to closely work with all aspects of working capital management and thus enhance my learning and understanding of the working of the entire working capital management process. I am also grateful for his valuable ideas and suggestions that guided me in the correct direction and thus helped me in successful completion of this project. On this occasion I wish to express my gratitude to Mr. Suryakant Kadam (stores-Incharge-Pune), for providing me all valuable inputs on inventory movements & stock.

I also express my thanks to the whole Accounts/finance team for providing me the all the necessary information and reports at a short span of time. I am also thankful to all others who directly or indirectly extended their support and help by giving me the required information as and when required.

Kamlesh J. Temkar

WORKING CAPITAL COMPONENT / MANAGEMENT THE LIFE LINE OF A COMPANY

Sr. No. CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 CHAPTER 6 CHAPTER 7

TABLE OF CONTENTS RATIONAL FOR STUDY OBJECTIVE OF STUDY PROFILE OF COMPANY THEORETICAL PERSPECTIVE RESEARCH METHODOLOGY DATA ANALYSIS AND INTERPRETATIONS FINDINGS RECOMMENDATIONS

PAGE NO. 8 - 10 11 - 12 13 19 20 23 24 25 26 46 47 51

CHAPTER 8 CHAPTER 9 APPENDIX

LIMITATIONS EXPECTED CONTRIBUTION FROM THE STUDY COPY OF QUESTIONNAIRE BIBLIOGRAPHY

52 53 54 55

56

INDEX

Chapter 1: Rationale of Project report

INTRODUCTION:
Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).

What Is Working Capital?

Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.

Typical problem
Pressure on margins as a result of intensified competition in globalised markets Unsatisfactory cash flow performance in recent years Expensive acquisitions resulting in excessive debt and depressed profits Shortage of capital to finance growth

Effects of active working capital Management

Permanent reduction in funds tied up in working capital Unlocking of capital for strategic investments Increase in profitability Optimizations of business processes through identification of working capital drivers Protection of liquidity

How Subject was chosen?

The working capital management is the very important part of business and the same needs more attention from the expert and also from the management. Management needs to be alert on the problems they face and also try to resolve the same to have a smooth flow of the working capital. Working Capital Management is critically important for small business a large portion of their debt is in short-term liabilities versus long termliabilities. Small business may minimize its investment in fixed assets by renting or leasing plant and equipment. However, there is no way of avoiding an investment in accounts receivables and inventory. Therefore, current assets are

particularly significant for the owner of a small business. By effectively shortening the working capital cycle, you become less dependent on outside financing. In other words, your working capital is truly for you. Ravin Cables Limited is large scale fast growing business entity in cables manufacturing industry & working capital control is one of the important aspects for the same for efficient & profitable growth. So it was challenging as well as interesting to see closely working capital management of the organization.

Chapter 2: Objective of Study:

Title of the project
Working capital management.

Objective of Study

This project has been undertaken with the purpose of sharing my understanding & learning on improving working capital management. Every business organization requires funds for acquisition of assets. Long term capital that is required for any business is generally referred as to capital. But the smooth running of the business the most important capital is Working Capital. Business enterprise earns optimum profit by circulation of Working Capital. The objective to choose this topic is to cover a core area of the business life cycle where by company can maximize their profit by efficient utilization of the funds and to smoothen the day to day running of the business as a going concern.

Optimizing working capital unlocks an average of 20 - 30% of the funds tied up and pays back within a few months

Structural improvement of working capital results in lasting improvement in enterprise value

Together with cost saving programs, working capital optimization improves business profits. In this context it is important to recognize which elements of working capital are the significant factors, in order to optimize the relevant business processes and achieve a permanent reduction in working capital. Active working capital management brings a reduction in the operating costs of managing inventories and receivables, thus improving liquidity. This strengthens the balance sheet and reduces borrowing costs. Active working capital management thus leads to an effective increase in enterprise value.

Only about 10% of all businesses achieve best-practice status in their industry

Working capital requirements and the potential for reduction vary from industry to industry. As a general rule, only a limited number of businesses succeed in achieving top rankings in their industry.

Chapter 3: Profile of the company

PRESENT ORGANISATIONS WORKING CAPITAL TREND Ravin Cables Limited. Company Background Ravin cables Limited is a Part of Karia Group of Companies. Karia Group are pioneers of the Electrical Industry and have over 54 years of experience and expertise.

Ravin has set up regional offices in India as well as overseas over a period of time. Details being as below: 3 LOCAL DELHI

CHENNAI HYDERABAD BANGALORE BARODA

4 OVERSEAS UAE UK

Ravin is the name to recall in the Power Cables industry for superior cables backed by excellent client services. During the 5 decades of existence Ravin has: 5 Specialized in dealing in wide range of Power Cables 6 Established one of the largest plant in Pune 7 Accredited to be largest Exporter of Power Cables 8 Has profitable track record for the past 20 year During the last ten years Ravin Cables forged ahead in the local and international market and emerged as one of the leading manufacturers and suppliers of the above products. Ravins technical experts have the skills and knowledge to design, develop new products and also to keep the pace with the latest technologies in the respective products.

Along with the outstanding technical experts and manufacturing experts, Ravin Cables have highly dynamic and energetic Domestic and Export Marketing network at the door steps of our valuable customer to promote our products and hold our flag flying high, by providing high quality service to the customers. The above front line functions are strongly supported by qualified Finance, Commercial and IT brains.

COMMERCIAL INFORMATION

Manufacturers Name, Office Address and Contact Person Ravin Cables Limited 302, Akruti Trade Centre, 3 Floor, Rd. No. 7, MIDC, Marol, Andheri (E), Mumbai 400 093
rd

Tel. No.

Fax. No.

+91-2230816666

+91-2230816661

Maharashtra, India Contact person: Mr. Hemant K. T. Executive Director [Mar keting] Email: exports@primecab.com

Manufacturing Plant Name & Location Ravin Cables Limited Gat No. 227/230, Alani-Markal Main Road, Markal Village, Dist. Pune 412 105. Maharashtra, India Sales Office Address Ravin Cables Limited 302, Akruti Trade Centre, 3rd Floor, Rd. No. 7, MIDC, Marol, Andheri (E), Mumbai 400 093 Maharashtra, India

+91-2137320660

+91-2137320660

Product Information

List all the products manufactured in your factory. Specify the

product(s) that you intend to be covered by this pre-qualification. Products manufactured in Ravin Cable factory and to be covered by this pre-qualification are as below.

9 INDIAN STANDARDS: 10 LT PVC Power & Control Cables to IS: 1554 Part1 11 LT XLPE Power & Control Cables to IS: 7098 Part 1 12 HT XLPE Cables to IS: 7098 Part 2 13 LT/HT Aerial Bunched Cables to IS: 14255

14 INTERNATIONAL STANDARDS: 15 LT PVC Cables to BS: 6346 16 LT XLPE Cables to BS: 5467 17 LT LSZH SHEATHED Cables to BS: 6724 18 HT LSZH SHEATHED Cables to BS: 7835 19 HT XLPE Cables to BS: 6622 20 LT Flexible Cables to BS: 6004/6500/7919 21 Overhead PVC insulated Conductors to BS:6485 22 Overhead Conductors to BSEN: 50182 23 LSZH sheathed domestic Cables to BS: 7211 24 PE insulated Instrumentation Cables to BS: 5308 Part 1 25 PVC insulated Instrumentation Cables to BS: 5308 Part 2 26 LT Unarmoured Cables to VDE: 250-204 27 Aerial Bunched Cables to NFC 33-209 28 Fire Survival Cables which can pass tests as per IEC: 60331 29 LT XLPE /PVC Cables to IEC: 60502 Part 1 30 HT XLPE Cables to IEC: 60502 Part 2

Ravin Cables Limited is a member of M/s. ELECTRICAL RESEARCH DEVELOPMENT ASSOCIATION, Baroda which is a government recognized independent test house. Company also tests our products at other government approved laboratories like CENTRAL POWER RESEARCH INSTITUTE, NATIONAL TEST HOUSE in India. Ravin Cables Limited is involved in online monitoring of Power Cables & research is on the study of behavior of partial discharge online when the cables are in operation. The objective of such exercise is to define residual life of Power Cables.

Here we can see that there is a change in the Current Ratio of the company from 2.65 in the month of Sept, 2010 to 2.27 in the month of Mar, 2011. The change has brought down ratio by 0.38 pts but in absolute term the reduction in Inventory is noticeable which is 2.52 Crs.

The reduction in Inventory is a good sign which has freed the cash. Also there is a significant improvement in the Cash and Bank Balance which was from Negative got turned in to Positive. Accounts Payable level is maintained almost at a same level. Also change in Accounts Receivable is a good sign which gives sign of better and efficient collection effort put in by AR Team. The ratio got changed was mainly due to higher value of assets which company had in Sept 08 with a same level of liability what they have in Mar 09. Only major change is in Current Assets where liquidation of Inventory has helped a lot to Free Cash and use it in business in new projects and buying new assets to increase production volume. The companys annual turnover is Rs.177 crs for the year ended March 2011, but company has blocked a major fund in the inventory. The Inventory for the year ended March 2011 stood in the balance sheet at Rs.39 crs which is around 22% of the sales. At the time of studies I observed that the company blocked bulk of the funds in inventory due to many reasons like Poor Purchase Planning, No Material Requirement Planning System, Duplication in ordering the material, Cancellation of orders from Customers, etc. There was no control on the inventory planning one year back which management now has improved and also focusing more and more to in this area to liquidate surplus inventory and to free the cash tied in the same. There are many items which were found as Obsolete and Slow Moving in nature and which cant be consumed regularly and some items in nature are not usable, which needs to be scrapped to reduce the level of inventory. The product being a specific in nature and produced as per customers demand are not usable in nature and the same needs to be dismantled and needs to be re modify by applying technical and expert knowledge of production manager and engineers.

Chapter 4:Theoretical perspective

We can say here that Working Capital is a life line of a company. If life line gets deteriorated the same affects adversely company in all the aspects and can turn into a huge problem. The Working Capital Control is therefore, is a must requirement to be kept in control. The following points in tabular form highlight the problem and importance of the working capital. The management should always be alert to avoid this problem by managing this core area well and should always minimize risks.

Effect on Cash Flow

Increase in operating cash flow through reduction in terms of payment and effective collection procedures Reduction in losses on receivables through systematic credit control Reduction in personnel costs through more efficient credit control and collection Increase in operating cash flow through lower inventories and lower replenishment

Profitability

Lower write-offs and scrapping costs through reduction in excess and obsolete inventories

 Lower space costs through the reduction in warehouse space needed.

Raising accounts payable

Terms of payment Payment procedures Payment processes

Optimising discounts

Increase in operating cash flow through longer credit from suppliers

From the above table we can see that three core area of working capital management i.e. Accounts Receivables, Inventories, and Accounts Payables needs to be watched more carefully. These are the areas which generate cash and also impacts profitability. The more carefully one keep watch on this and the more it generates profit for the company. These areas for control purpose needs a consolidated effort from all the departments and level of management and cannot be solved by one individual person.

Negative Working Capital

Some companies can generate cash so quickly they actually have a negative working capital. This is generally true of companies in the restaurant business (McDonalds had a negative working capital of $698.5 million between 1999 and 2000). Amazon.com is another example. This happens because customers pay upfront and so rapidly, the business has no problems raising cash. In these companies, products are delivered and sold to the customer before the company ever pays for them.

Don't understand how a company can have a negative working capital? Think back to our Warner Brothers / Wal-Mart example. When Wal-Mart ordered the 500,000 copies of a DVD, they were supposed to pay Warner Brothers within 30 days. What if by the sixth or seventh day, Wal-Mart had already put the DVDs on the shelves of its stores across the country? By the twentieth day, they may

have sold all of the DVDs. In the end, Wal-Mart received the DVDs, shipped them to its stores, and sold them to the customer (making a profit in the process), all before they had paid Warner Brothers! If Wal-Mart can continue to do this with all of its suppliers, it doesn't really need to have enough cash on hand to pay all of its accounts payable. As long as the transactions are timed right, they can pay each bill as it comes due, maximizing their efficiency.

The bottom line: A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis). In any other situation, it is a sign a company may be facing bankruptcy or serious financial trouble.

Chapter 5: Research Methodology

In this project Methodology used for Data Collection is from various study books & some other material related to this topic plus a practical experience I made in Ravin Cables Limited and with Finance team and also as per guidance of guide from professional knowledge. Study is carried out from all aspects to cover and to understand subject thoroughly. Some cases taken here are Practical Examples of current organization which gives fair idea of companys situation in working capital. Also have selected some simple case study examples, which can put more light on subject elaboration as well as to make it more easy from understanding point

of view as well as to give more depth of knowledge related to subject selected for Project.

RESEARCH OBJECTIVE:
The objective of this research to understand the term of working capital, its components & areas of work to improve working capital ratio through efficient & proactive working capital management. Thus focus on the objective of Working capital management at Ravin Cables Limited.

Data collection method / sources

Live data is collected from books of account maintained by Ravin cables Limited with co-ordination with Finance & Accounts department. In order to understand working capital trend we decided to collect data from sept-10 to Mar-11. This would be basis of our further analysis and evaluation. Supplementary data & case study selection done from some books & intranet as well internet.

Primary data
The primary sources includes the personal interaction & questionnaire and open discussion with below focal points 31 Vice President of Finance & Accounts department. 32 Finance team members 33 Stores In-charge for inventory checks.

Secondary Data:
34 The secondary sources include: 35 Information available & uploaded on Intranet site of company as well other subject relevant internet sites.

36 Weekly & monthly performance reports maintained for stakeholders. 37 Simple cases & related studies to provide more details related to subject. 38 Books of account & books related to working capital management.

Chapter 6:Data analysis and Interpretation

We will proceed with the Case Studies of the topic which will be a back ground to understand the topic also supplementary to the derived valuable points on live data collected from my current organization Ravin Cables Limited.

Now we take here a simplistic case: A Spaghetti Sauce Company uses

$100 to build up its inventory of tomatoes, onions, garlic, spices, etc. A week later, the company assembles the ingredients into sauce and ships it out. A week after the checks arrives from customers. That $100, which has been tied up for two weeks, is the company's working capital. The quicker the company sells the spaghetti sauce, the quicker the company can go out and buy new ingredients, which will be made into more sauce sold at a profit. If the ingredients sit in inventory for a month, company cash stays tied-up and can't be used to grow the spaghetti business. Even worse, the company can be left strapped for cash when it needs to pay its bills and make investments. Working capital also gets trapped when customers do not pay their invoices on time or suppliers get paid too quickly or not fast enough.

The better a company manages its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors.

Not All Companies Are the Same

Some companies are inherently better placed than others. Insurance companies, for instance, receive premium payments up front before having to make any payments; however, insurance companies do have unpredictable outgoings as claims come in.

Normally a big retailer like Wal-Mart has little to worry about when it comes to accounts receivable: customers pay for goods on the spot. Inventories represent the biggest problem for retailers, who must perform rigorous inventory forecasting or they risk being out of business in a short time.

Timing and lumpiness of payments can pose serious troubles. Manufacturing companies, for example, incur substantial up-front costs for materials and labor before receiving payment. Much of the time they eat more cash than they generate.

Dont be Mislead by Faulty Analysis:

To start this discussion, let's first correct some commonly held, but erroneous, views on a company's current position, which simply consists of the relationship between its current assets and its current liabilities. Working capital is the difference between these two broad categories of financial figures and is expressed as an absolute dollar amount.

Despite conventional wisdom, as a stand-alone number, a company's current position has little or no relevance to an assessment of its liquidity. Nevertheless, this number is prominently reported in corporate financial communications such as the annual report and also by investment research services. Whatever its size, the amount of working capital sheds very little light on the quality of a company's liquidity position.

Another piece of conventional wisdom that needs correcting is the use of the current ratio and, its close relative, the acid test or quick ratio. Contrary to popular perception, these analytical tools don't convey the evaluative information about a company's liquidity that an investor needs to know. The ubiquitous current ratio, as an indicator of liquidity, is seriously flawed because it's conceptually based on a company's liquidation of all its current assets to meet all of its current liabilities. In reality, this is not likely to occur. Investors have to look at a company as a going concern. It's the time it takes to convert a company's working capital assets into cash to pay its current obligations that is the key to its liquidity. In a word, the current ratio is misleading. (For related reading, see The Dynamic Current Ratio, Working Capital Works and Do Your Investments Have Short-Term Health?)

A simplistic, but accurate, comparison of two companies' current positions will illustrate the weakness in relying on the current ratio and a working capital number as liquidity indicators:

Liquidity Measures Company ABC Company XYZ Current Assets $600 $300

Current Liabilities $300 $300 Working Capital Current Ratio $300 $0 2:1 1:1

At first glance, company ABC looks like an easy winner in a liquidity contest. It has an ample margin of current assets over current liabilities, a seemingly good current ratio and a working capital of $300. Company XYZ has no current asset/liability margin of safety, a weak current ratio and no working capital.

However, what if both companies' current liabilities have an average payment period of 30 days; company ABC needs six months (180 days) to collect its account receivables, and its inventory turns over just once a year (365 days). Company XYZ's customers pay in cash, and its inventory turns over 24 times a year (every 15 days). In this contrived example, company ABC is very illiquid and would not be able to operate under the conditions described. Its bills are coming due faster than its generation of cash. You can't pay bills with working capital; you pay bills with cash! Company XYZs seemingly tight current position is much

more liquid because of its quicker cash conversion.

Measuring Companys Liquidity the Right Way

The cash conversion cycle (also referred to as CCC or the operating cycle) is the analytical tool of choice for determining the investment quality of two critical assets - inventory and accounts receivable. The CCC tells us the time (number of days) it takes to convert these two important assets into cash. A fast turnover rate of these assets is what creates real liquidity and is a positive indication of the quality and the efficient management of inventory and receivables. By tracking the historical record (five to 10 years) of a company's CCC and comparing it to competitor companies in the same industry (CCCs will vary according to the type of product and customer base), we are provided with an insightful indicator of a balance sheet's investment quality. (For a more comprehensive discussion of the CCC, see Understanding the Cash Conversion Cycle and Using The Cash Conversion Cycle.)

Briefly stated, the cash conversion cycle is comprised of three standard, socalled activity ratios relating to the turnover of inventory, trade receivables and trade payables. These components of the CCC can be expressed as a number of times per year or as a number of days. Using the latter indicator provides a more

literal and coherent time measurement that is easily understood. The cash conversion cycle formula looks like this:

Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) = CCC

Here's how the components are calculated: Dividing average inventories by cost of sales per day (cost of sales/365) = days inventory outstanding (DIO). Dividing average accounts receivables by net sales per day (net sales/365) = days sales outstanding (DSO). Dividing average accounts payables by cost of sales per day (cost of sales/365) = days payables outstanding (DPO)

Liquidity is King
One collateral observation is worth mentioning here. Investors should be alert to spotting liquidity enhancers in a company's financial information. For example, for a company that has non-current investment securities, there is typically a secondary market for the relatively quick conversion of all or a high portion of these items to cash. Also, unused committed lines of credit - usually mentioned in a note to the financials on debt or in the management discussion and analysis (MD&A) section of a company's annual report - can provide quick access to case. A measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.

A company uses working capital (current assets - current liabilities) to fund

operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.

For example, if a company has current assets of $10 million and current liabilities of $9 million, its working capital is $1 million. When compared to sales of $15 million, the working capital turnover ratio for the period is 15 ($15M/$1M). When used in fundamental analysis, this ratio can be compared to that of similar companies or to the company's own historical working capital turnovers.

The number one reason most people look at a balance sheet is to find out a company's working capital (or "current") position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt.

Working Capital is the easiest of all the balance sheet calculations. Here's the formula: Current Assets - Current Liabilities = Working Capital

One of the main advantages of looking at the working capital position is being

able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor - all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.

Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stock pile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly, there is no need to have a large amount of working capital available.

A company that makes heavy machinery is a completely different story. Because these types of businesses are selling expensive items on a long-term payment basis, they can't raise cash as quickly. Since the inventory on their balance sheet is normally ordered months in advance, it can rarely be sold fast enough to raise money for short-term financial crises (by the time it is sold, it may be too late). It's easy to see why companies such as this must keep enough working capital on hand to get through any unforeseen difficulties To find the approximate amount of working capital a company should have, you should look at "working capital per dollar of sales." In other words, you are going to have to compare the amount of working capital on the balance sheet to the total sales (which is found on the income statement - not the balance sheet). A business that sells a lot of low-cost items, and cycles through its inventory rapidly (a grocery store) may only need 10-15% of working capital per dollar of sales. A

manufacturer of heavy machinery and high-priced items with a slower inventory turn may require 20-25% working capital per dollar of sales. A company such as Coca Cola would probably fall somewhere between the two.

Here's the formula for Working Capital per Dollar of Sale Working Capital ------------------------- (Divided by) --------------------------Total Sales (Found on the Income Statement) Let's look at an example: Goodrich, Inc. (Symbol GR) Goodrich provides systems for aircraft as well as manufacturers heavyduty engines. Working Capital: $933,000,000 (current assets - current liabilities) Total Sales (found on the income statement) = $4,363,800,000

Let's plug the numbers into the formula:

Working Capital =

$933,000,000 ------------------------- (Divided by) --------------------------Total Sales (Found on the Income Statement) =

$4,363,800,000

The answer for Goodrich is .2138, or 21.38%. As a manufacturer of heavy duty machinery, GR falls within the 20-25% working capital per dollar of sales range. This is good.

Inventory Appraisal ABC Analysis

39 Inventory is divided in to very varied and versatile range of products and goods. 40 It is very important to have categorization of Inventory Products in to different categories based on the Materiality & Significance. 41 ABC analysis aims at Categorization of all the Inventory items in to 3 categories based upon their Value and Importance.

Division of Inventory under ABC

42 A: These are the Products having Minimum Quantity but Maximum Value per unit. Most Imp. Products. All main Raw Materials. 43 B: These are those which occupy middle position in terms of Value as well as Quantity. Spares, Packing Materials, Tools etc. 44 C: Products having large Volume but least Value per unit, supporting or maintenance products. Stores and Consumables.

Uses of ABC Analysis

45 After categorization, Storage and Identification of all the Products becomes effective and efficient 46 Logistics and Material handling can be defined and specialised for each category depending upon the Preference and Importance 47 Inventory Control Systems which are very costly can be used more prudently if categorization is done as per ABC. 48 Inventory Storage, Carrying and Handling Costs can be controlled

effectively.

Modality of ABC Analysis

49 A Category: Products that are around 70% in Value but 10% in Volume 50 B Category: Products that are around 20% in Value but 20% in Volume 51 C Category: Products that are 10% in Value but 70% in Volume.

Evaluating Companies
Investors should favor companies that place emphasis on supply-chain management to ensure that trade terms are optimized. Days-sales outstanding, or DSO for short, is a good indication of working capital management practices. DSO provides a rough guide to the number of days that a company takes to collect payment after making a sale.
Here is the simple formula: Receivables/ annual sales/365 days

Rising DSO is sign of trouble since it shows that a company is taking longer to collect its payments. It suggests that the company is not going to have enough cash to fund short-term obligations because the cash cycle is lengthening. A spike in DSO is even more worrisome, especially for companies that are already low on cash.

The inventory turnover ratio offers another good instrument for assessing the effectiveness of WCM. The inventory ratio shows how fast/often companies are able to get their goods completely off the shelves.

The

inventory

ratio

looks

like

this:

Cost

of

goods

sold

(COGS)/Inventory
Broadly speaking, a high inventory turnover ratio is good for business. Products that sit on the shelf are not making money. Granted, an increase in the ratio can be a positive sign, indicating that management, expecting sales to increase, is building up inventory ahead of time.

For investors, a company's inventory turnover ratio is best seen in light of its competitors. In a given sector where, say, it is normal for a company to completely sell out and re-stock six times a year, a company that achieves a turnover ratio of four is an underperformer.

Ravin Cable Limited in the above cases of evaluation is a good performer.

DSO of PHIPLs was 70 days in September 10 which stood at 55 days in March 11. The improvement made in the collection has helped a lot to company to improve its DSO and also to improve Working Capital position.

However the inventory is an area where ongoing improvement is required by the company.

Buying a Company for Free

If you can buy a company for the value of its working capital, you essentially pay nothing for the business. Going back to our Goodrich example; the company has $933 million in working capital. There are currently 101.9 million shares outstanding, which means each share of Goodrich stock has $9.16 cents worth of working capital. If GR's stock was trading for $9.16, you would basically be purchasing the stock for free (paying $1 for each $1 the company had in its checking account, inventory, etc.). You would pay nothing for the company's fixed assets (such as real estate, computers, & buildings) and earnings.

For the past ten or twenty years, it has been incredibly rare for a company to trade that low. You can still use the basic concept to your advantage; if you can find a business that is trading for working capital plus half the value of the fixed assets, you would be paying $0.50 for every $1.00 of assets.

Long Term Assets

Everything we've discussed up until now has been a current asset or liability. Now, we are going to take a look at the long term assets that are found on the balance sheet. These are the things that a business owns but can't be used to fund day-to-day operations.

Long Term Investments

Long Term investments and funds are investments a company intends to hold for more than one year. They can consist of stocks and bonds of other companies, real estate, and cash that has been set aside for a specific purpose or project. In addition to investments a company plans to hold for an extended period of time, Long Term Investments also consist of the stock in a company's affiliates and subsidiaries. The difference between Short Term and Long Term investments lie in the company's motive for owning them. Short term investments consist of stocks, bonds, etc. a company has bought and will sell shortly. The investments made under long term investments may never be sold. An excellent example would be Berkshire Hathaway's relationship with Coca-Cola. Berkshire owns 200 million shares of the soft-drink giant, and will most likely continue to hold them forever, regardless of the price they are selling for in the open market.

Carrying Values of Stock Investments

As you now know, when a business purchases common stocks as an investment, they will go into either the Short Term or Long Term Investment categories on the balance sheet. These are normally carried on the balance sheet at cost or market value (whichever is less). This means that most of the time, the stocks the company owns are worth far more than they are on the

balance sheet (for example, if a business owned 50,000 shares of Sprint and they paid $10 per share, they would have $500,000 on the balance sheet under either short term or long term investments. If Sprint rose to $35 per share, the value of their holdings would be $1,750,000, yet the balance sheet would continue to carry $500,000. Thus, the difference of $1,250,000 would not be included in the book value of the company. (This is a prime example of how financial statements are only the beginning of the valuation process. They have their limitations, but without them, we would have no basis to calculate intrinsic value.)

Working Capital has been classified and distinguishes in number of ways some of the important classifications are as follows:

a) Gross and Net Working Capital.

b) Permanent and Temporary Working Capital.

c) Balance Sheet and Cash Working Capital.

d) Positive and Negative Working and Zero Working Capital.

e) Variable, Seasonal, Peak Working Capital.

a) Gross and Net Working Capital:

Gross And Net Working Capital is the basis and fundamental concept of Working Capital.

Gross Working Capital means Total Current Assets without deducting Current

Liabilities. Gross Working Capital integrates the quantum of Working Capital available to meet Current Liabilities.

Net Working Capital is the excess of Current Assets over Current Liabilities.

Net Working Capital = Current Assets Current Liabilities

The concept of Net Working Capital is widely accepted. It indicates the amount available to meet short term dues of the concern and liquidity position of the concern.

b) Permanent and Temporary Working Capital:

This classification is based on time factor and is more useful for planning investment in business. Permanent Working Capital:

It represents the amount of capital locked up in business on continuous basis so long it continues to exist. It is the minimum of cash inventory and debtors etc. to be maintained for business operating at any time during accounting period.

Permanent Working Capital is of two types:

1) Initial Working Capital: It is the amount of Working Capital required at the inception of the business. In initial stages on one hand it may require to grind credit to customers and on other hand it may be difficult to get credit from suppliers.

2) Regular Working Capital: It is the amount of Working Capital required for continuous operations of an enterprise. It refers to the excess of Current Assets over Current Liabilities.

c) Balance Sheet and Cash Working Capital:

Balance Sheet Working Capital: It is a difference between Current Assets and Current Liabilities as per Balance Sheet prepared at the end of financial year. This concept helps in judging in liquidating and short term solvency of a concern. However it does not reveal the flow of money occurring between the accounting period. Cash Working Capital:

It refers to the Working Capital which is available in cash of cash working capital resources. The concept of working capital requires proper adjustment in Balance Sheet Working Capital. The Cash Working Capital indicates the working capital at cash cost, it eliminates profit element and non cash expenses like depreciation from values of stock and debtors. It reveals the operational inflow as well as outflow of cash.

d) Positive, and Negative Working and Zero Working Capital;

Positive Working Capital means Current Assets exceeds Current Liabilities. Negative Working Capital means Current Liabilities exceeds Current Assets. Such position arrives for business dealing in cash sales and purchases are on credit terms. For Example: Chemist Shops. Zero Working Capital: When Current Assets are exactly equal to Current Liabilities, it shows Zero Working Capital.

e) Variable, Seasonal, Peak Working Capital:

Variable Working Capital is of three kinds and it is influence seasonal fluctuations. Seasonal Working Capital: it is amount of working capital to meet the demand of seasonal requirements. During the season more working capital s required and during off seasons less working capital required. For example: Trader in crackers needs more working capital in Diwali period and less working in the remaining period. Peak Working Capital: It is the variable working capital required in peak period i.e. capital required is the highest amount of the working capital require by business organization during its course of operations.

The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below:
i. Nature of Enterprise The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.

ii. Manufacturing/Production Policy Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. iii. Operations The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible iv. Market Condition If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less

competition in the market then the working capital requirements will be low. v. Availability of Raw Material If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same. vi. Growth and Expansion Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. vii. Price Level Chang Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. viii. Manufacturing Cycle The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective

current assets, depending on its level of completion. The basis for assigning value to each component is given below:

Component of Working Capital i. Stock of raw material

Basis of Valuation Purchase cost of raw Materials

ii. Stock of work in process

At cost or market value, whichever is lower

iii. Stock of finished goods iv. Debtors v. Cash

Cost of production Cost of sales or sales value Working expenses

Each constituent of the working capital is valued on the basis of valuation enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.

Chapter 7 Findings.

Findings & Recommendations:

Working Capital Management is critically important for small business a large portion of their debt is in short-term liabilities versus long termliabilities. Small business may minimize its investment in fixed assets by renting or leasing plant and equipment. However, there is no way of avoiding an investment in accounts receivables and inventory. Therefore, current assets are particularly significant for the owner of a small business. By effectively shortening the working capital cycle, you become less dependent on outside financing. In other words, your working capital is truly for you. Optimised working capital management offers:

52 Additional growth opportunities through the release of capital for investment. 53 Enhanced business process. 54 Increase in profitability from efficient management of capital.

55 Permanent reduction in working capital to free the cash. 56 Improve liquidity 57 Proper Cash Cycle to run the business more efficiently and to generate more and more cash from day to day operations.

Choosing the Best Policy:

58 Best policy will be a combination of flexible and restrictive policies 59 Things to consider Cash reserves Maturity hedging Relative interest rates 60 Compromise policy borrow short-term to meet peak needs, maintain a cash reserve for emergencies

Starting point for active Working Capital Management:

A prerequisite for a permanent reduction in working capital is systematic analysis and identification of structural drivers and causes of the high levels of working capital. They can be found in: A businesss processes and structures (such as decentralized inventory management, poor incentives) Corporate strategy and culture Monitoring and control systems (e.g., the failure to use ratios in relation to working capital)

Optimized working capital management offers: Additional growth opportunities through the release of capital for investment.

 Enhanced business processes. Increase in profitability from efficient management of capital. Permanent reduction in working capital. Improved liquidity. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without (i) adequate supply of raw materials for processing; (ii) cash to pay for wages, power and other costs; (iii) creating a stock of finished goods to feed the market demand regularly; and, (iv) the ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. The diagram shown on the next page clarifies it: Working capital cycle involves conversions and rotation of various

constituents/components of the working capital. Initially cash is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too.
This is how various components of current assets keep on changing their forms due to value addition. As a result,

Cash

Creditors

Debtors

Raw Materials

Working Expenses

Finished Goods

Work Progress

In

they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital. While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronization among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business.

These characteristics have certain implications:

i. Decision regarding management of the working capital has to be taken frequently and on a repeat basis.

ii. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too.

iii. The difference between the present value and the book value of profit is not significant.

How to improve Working Capital Management

How can you manage your working capital effectively? First, a small business owner must be prepared for possible problems or unexpected circumstances. Anticipating the possibilities and creating a plan to be able to deal with such

events is indispensable. An entrepreneur must also set realistic goals. Here, we are not just speaking about short term goals but long term goals as well. Do you have a target goal for this month or the following months? Have you set a goal for this year and the years to come? Setting definite goals- both short term and long term- will enable you to make wiser decisions especially when it comes to marketing and financing strategies. Speaking of marketing goals, building new customer relationships and strengthening existing customer relationships are also important steps. Make sure that you are able to give your customers what they really want. Ensure customer satisfaction with each of your deals. Taking care of your customer relationships will certainly make a big difference in your performance as a business. Protect your cash flow by using the right tools such as business credit cards. Credit cards for business are not just for large companies but for small business enterprises as well. Using business credit cards to your advantage will be a big help in keeping steady cash resource. Apart from business credit cards, applying for a business loan may also be necessary especially in executing bigger projects for your business. Having a solid credit history will surely enable you to obtain the business loan you need without much difficulty. Both of these financing options- business loans and business credit cards- offer reliable financial support for business owners. Furthermore, they give entrepreneurs a chance to build up a strong business credit history for future endeavors.

Chapter 8: Limitations

This project may not show result in 6 month time & may require long term perusal to check improvement curve. Some components of working capital are not controllable & depends upon external market demand & competition for e.g. cash in hand, bills payable & receivables. It is difficult for working capital management to decide exact level of each component of working capital as many internal & external factors as well as changing environment are hurdles for the same. Inventory is the most important component in working capital management & the same wholly depends upon industry demand, market situation & price fluctuation trend, which may disturb the current ratio by the great extent.

Chapter 9: Expected Contribution from Study

61 This study helped understanding the term working capital as well the management process for the same to use the fund in more efficient manner. 62 This Study helped to identify the gaps where the improvement could be possible to keep the Current asset & Current Liability data near standard ratio. 63 This study helped to make it understand that improvement process is continuous & working capital management is not exception for the same, but it requires thorough studies & continuous efforts to find out the areas of improvement, Planning & timely implementation of plan with proper evaluation & correction measures available. 64 This study helped to understand different type of working capitals & their need & requirements.

There are few challenges 65 Main components of working capital like Cash & Inventories are some time not full controllable as it is requirement during pick season of business. This reserves lot of fund in working capital. 66 It is not possible to adopt stringent policy for components like Bills

receivables & Bills payable in todays stiff competitive world. 67 Long term effect could be only calculated once we have affirmative result. 68 Adequate tool & ratios would help in working on most efficient manner towards improvement.

ASSUMPTIONS: 69 The information provided by the individuals with whom the personal interaction was conducted is true & fair.

70 The data made available on the intranet is correct as per further analysis based on this data.

Copy of Questionnaire

Interview Date: ____ / ___ / 2011 Interviewers Name: ____________________________

I am a student from Tilak Maharashtra University, Pune Institute of Management. I am conducting a study amongst amendment team to get information about reducing them to reduce process waste and reduce cost. Could you please spare some time to know your approval and suggestions on my project. Thank You.

Interviewees comments: ______________________________________

BIBLIOGRAPHY

BOOKS:

71 KHAN & JAIN FINANCIAL MANAGEMENT

72 PRASANNA CHANDRA FINANCIAL MANAGEMENT

73 C ADVANCED FINANCIAL MANAGEMENT MCOM - II

WEBSITES:

74 WWW.RAVINCABLES.COM

75 WWW.SCRIBD.COM

76 WWW.DOCSTOC.COM

2 project

5.1 MANAGEMENT DISCUSSION & ANALYSIS Summary

 Profit before provisions and tax increased by 35.5% to Rs. 79.61 billionin fiscal 2008 from Rs. 58.74 billion in fiscal 2007 primarily due to anincrease in net interest income by 29.6% to Rs. 73.04 billion in fiscal 2008from Rs. 56.37 billion in fiscal 2007 and an increase in noninterest income by 27.2% to Rs.88.11 billion in fiscal 2008 from Rs. 69.28 billion in fiscal2007, offset, in part, by an increase in non-interest expenses by 21.9% to Rs.81.54 billion in fiscal 2008 from Rs. 66.91 billion in fiscal 2007. Provisionsand provision for contingencies tax) increased (excluding by 30.5%

duringfiscal 2008 primarily due to a higher level of specific provisioning on nonperforming

loans, offset, in part by a reduction in general provision on loans.Profit before tax increased by 38.6% to Rs. 50.56 billion in fiscal 2008 fromRs. 36.48 billion in fiscal 2007. Profit after tax increased by 33.7% to Rs.41.58 billion in fiscal 2008 from Rs. 31.10 billion in fiscal 2007. Net interest income increased by 29.6% to Rs. 73.04 billion in fiscal 2008from Rs. 56.37 billion in fiscal 2007, reflecting an increase of 27.6% or Rs.711.07 billion in the average volume of interest-earning assets and an

57

increase in net interest margin to 2.22% in fiscal 2008 compared to 2.19% infiscal 2007. Non-interest income increased by 27.2% to Rs. 88.11 billion in fiscal2008 from Rs. 69.28 billion in fiscal 2007 primarily due to a 32.2%

increasein fee income and a 14.0% increase in treasury and other non-interestincome. Non-interest expenses increased by 21.9% to Rs. 81.54 billion in fiscal2008 from Rs. 66.91

billion in fiscal 2007 primarily due to a 28.6% increasein employee expenses and a 31.6% increase in other administrative expenses. Provisions and contingencies (excluding

provision for tax) increased toRs. 29.05 billion in fiscal 2008 from Rs. 22.26 billion in fiscal 2007 primarily due to higher level of specific

provisioning on retail loans due tochange in the portfolio mix towards non-collateralised loans and seasoningof the loan portfolio, offset in part by a reduction in general provision onloans due to lower growth in the loan portfolio relative to fiscal 2007.

 Total assets increased by 16.0% to Rs. 3,997.95 billion at year-end fiscal2008 from Rs. 3,446.58 billion at year-end fiscal 2007 primarily due to anincrease in advances by 15.2% and an

increase in investments by 22.1%. During the year, we made a follow-on public offering of equity shares inIndia and an issuance of American Depository Shares (ADSs)

aggregating toRs. 199.67 billion. The Sangli Bank Limited (Sangli Bank) was

amalgamated with ICICIBank with effect from April 19, 2007 in terms of the scheme of amalgamation approved by Reserve Bank of India (RBI) vide its order DBOD No. PSBD 10268/16.01.128/2006-07 dated April 18, 2007 under section 44A (4) of the Banking Regulation Act, 1949. Sangli Bank was a banking company incorporated under the Companies Act, 1956 and licensed by RBI under the Banking Regulation Act, 1949. The consideration for the 58

amalgamation was 100 equity shares of ICICI Bank of face value Rs. 10each fully paid-up for

every 925 equity shares of face value of Rs. 10 each of Sangli Bank. Accordingly, on May 28, 2007, ICICI Bank allotted 3,455,008equity shares of Rs. 10 each, credited as fully paid up, to the shareholders of Sangli Bank. The excess of the paid-up value of the shares issued over thefair value of the net assets acquired (including reserves) of Rs. 3.26 billionand amalgamation expenses of Rs. 0.22 billion have been deducted from thesecurities premium account. 5.2 COMPARATIVE INCOME STATEMENT TREND ANALYSIS SUMMARISED PROFIT & LOSS A/C

(ON 31 MARCH, 2008)59