Videocon - Working Capital

A
SUMMER TRAINING
REPORT
ON
ANALYSIS OF WORKING CAPITAL
MANAGEMENT
CONDUCTED BY
IN PARTIAL FULFILMENT FOR THE DEGREE OF

POST GRADUATE DIPLOMA IN BUSINESS
MANAGEMENT (P.G.D.B.M)
(SESSION 2007-2009)
SUBMITTED TO: SUBMITTED BY:

CHAIRMAN HARIKISHAN GARG
K.P SINGH IVth Trimester
NIMT B-SCHOOL Regn No- 27607
BRIEF HISTORY
Videocon Leasing & Industrial Finance Limited, was incorporated on 4th September,
1986 as Adhigam Trading Private Limited. In terms of the necessary resolutions passed
under Sec. 21 of the Companies Act, 1956, the nameof the Company was changed to
Videocon Leasing & Industrial Finance Limited on 14th February, 1991. The Company
received a fresh certificate of incorporation from the Registrar of Companies, Gujarat at
Ahmedabad on 14th
February, 1991.
Adhigam Trading Pvt. Ltd. (ATPL) was promoted by Mr Indrakant T. Parikh and
Naishad I. Parikh in September, 1986 as a private limited company and was initially
engaged in the business of trading in paper tubes. In September, 1988 the Company
decided to diversify in the business of lease financing, hire purchase and investment
activities.
The Management of the Company underwent a change in the year 1990-91 by way of
transfer of equity shares to the Videocon Group. 1,00,000 Equity Shares of Rs. 10/- each
of Adhigam Trading Private Limited were purchased by the Videocon Group at a
premium of Rs. 3/- per share in April, 1991. The total consideration of Rs. 13 Lakhs was
paid by cheques.
2005
-Videocon acquires entire stake of Electrolux India on July 07, 2005
.
-Videocon takes over Hyundai Electronics

Company Profile
Videocon is an Indian multinational with interests in Consumer Electronics, Home

Appliances, Colour Picture Tube Glass, and Oil & Gas. Videocon was founded in 1987
by Nandlal Madhavlal Dhoot. At that time it used to manufacture TV and Washing
Machine. In 1989-90, Videocon started manufacturing Home Entertainment Systems,
Electric Motors & AC. Videocon entered Refrigerators and coolers segment in 1991. In
1995, Videocon started manufacturing Glass shells for CRT and in 1996 it ventured into
Kitchen appliances and crude oil segment. In 1998, Videocon started manufacturing
Compressors & Compressor Motors. In the year 2000, Videocon took over Philips Color
TV Plant. In 2005, Videocon took over 3 plants of Electrolux India and acquired
Thomson CPT. Today, it has evolved into a giant conglomerate with annual revenues of
over U$4.1 billion.
The Videocon group emerges as a USD 2.5 Billion global conglomerate continuing to set
trends in every sphere of its activities from a conference room sized assembly line in
1979.
Today the group operates through 4 key sectors:
Consumer Durables Thomson CPT CRT Glass Oil & Gas
Consumer Electronics, Home Appliances & Compressor manufacturing in India

We enjoy a pre-eminent position in terms of sales and customer satisfaction in many of
our consumer products like Colour Televisions, Washing Machines, Air Conditioners,
Refrigerators, Microwave ovens and many other home appliances, selling them through a
Multi-Brand strategy with the largest sales and service network in India. Refrigerator
manufacturing is further supported by our inhouse compressor manufacturing technology
in Bangalore.
Display industry and its components

With the Thomson acquisition Videocon has emerged as one of the largest Colour Picture
tube manufacturers in the world operating in Mexico, Italy, Poland and China, continuing
to lead through new innovative technologies like slim CPT, extra slim CPT and High
Definition 16:9 format CPT.
Colour Picture Tube Glass

Videocon is one of the largest CPT Glass manufacturers in the world with a high level of
experience and technical expertise operating through Poland and India. Videocon will
leverage on this synergy after the Thomson acquisition to internally source glass for its
CPT manufacturing increasing efficiencies and lowering costs.
Oil and Gas
An important asset for the group is its Ravva oil field with one of the lowest operating
costs in the world producing 50,000 barrels of oil per day. The group has ambitious plans
for expansion in this sector globally.
Vision & Mission
Videocon’s mission: a reflection of continuity and change

Videocon’s mission expression has been crafted to envelope both extant and
emerging realities:
“To delight and deliver beyond expectation through ingenious strategy, intrepid
entrepreneurship, improved technology, innovative products, insightful marketing and
inspired thinking about the future.”
A breakdown of the statement above reveals a ‘means and end’ approach, where the end
is articulated at the beginning with the means linked to it.
“To delight and deliver beyond expectation…” the end

This segment not only underlines the importance of the ultimate goal - customer
satisfaction (‘delight’) and ultimate target - the customer, but also of intermediate
processes and principals, which have contributed to building a robust, dependable
Videocon value chain (‘deliver’). As a result of its focus on developing loyal customers
and reliable associates, Videocon is able to exceed expectations.
“…through ingenious strategy…” the means

In the cutthroat world of today, it is only by taking recourse to advance planning and
strategy that a business can hope to survive. Although textbook strategy has its uses,
reproducing it in verbatim for the real world would be foolish because of the absence of
textbook conditions. Thus, there is a need for a bounded rationality, spontaneity and
improvisation that is flexible enough for scenarios both imaginable and unimaginable.
Videocon ingenious manoeuvres are actually flexi-strategy that abstracts from shifting
ground conditions and decides game-plans, or sometimes changes the rules of the game.
“…intrepid entrepreneurship…”: the means

An enterprise with the odds stacked against it makes great business sense. This is because
higher the obstacles, lower the number of players likely to be active in that field - thus,
fetching extraordinary returns. The only requirement is a bold and confident attitude
willing to brave the odds. Videocon’s foray into oil and gas is a bold and intrepid
endeavour that arises from immense faith on the surefooted competence of the company’s
in-house managerial talent.
“…improved technology…”: the means
Technology is no more a premium input; it has become the bare minimum in recent
years. Rapid advances have only fuelled this phenomenon. Videocon is extremely
vigilant in shunting out dated technology and replacing it with the best-in-class offers of
the times.
“…innovative products…”: the means

Product development, innovation and customization are the tools Videocon uses to stay
ahead of the competition. This is because a continuous stream of innovative products
excites the market and enhances brand recall. A strategy that Videocon banks on a lot,
especially on the domestic front.
“…insightful marketing…”: the means

The market share battle scene has long shifted from technology and processes to the
psyche of the customer. This means that those with deeper insights into the elusive mind
of the buyer are likely to dominate. Videocon is reinforcing marketing strengths to read
better the pulse of the market and help create products that map perfectly into customer
preferences.
“…inspired thinking about the future.”: the means

The future is unpredictable, but not doing anything about it is fraught with grave risk.
Videocon extrapolates future trends on the basis of current changes in technology and
preferences as well as sheer gut feel. Fine-tuned business instincts are worth their weight
in gold, lots of it. The company has perfected its practice almost into an art form with
some calculated gambles like oil and gas proving to be absolute money-spinners.
Key dates
Year Ending Month Jun

AGM Date (Month) Mar
Book Closure Date (Month) Mar
RAW MATERIAL
Product Name Unit Quantity Value
Plastic Parts & Powder Numbers 9,341,424 2,012.19
Passive Components Not Applicable NA 1,491.04
Other Raw Materials Not Applicable NA 844.39
Printed Circuit Boards Numbers 7,640,602 582.38
LOCATION OF VIDEOCON PLANT
Factory/plant Vigyan Nagar, RICO Industrial Area, Shahjanpur, District Alwar,

Alwar District -
Rajasthan - India
Phone :
Fax :
Email : N.A.
Internet : N.A.
HALF YEARLY RESULTS
Half yearly results …………………in Rs. Cr. …………………..

Mar ‘06’ Sep ‘06’ Mar ‘07’ Sep ‘07’ Mar ‘08’
6 mths 6 mths 6 mths 6 mths 6 mths
Sales Turnover 3,376.98 4,232.79 4,211.64 4,480.11 4,877.07
Other Income 79.29 65.26 88.40 107.56 58.59
Total Income 3,456.27 4,298.05 4,300.04 4,587.67 4,935.66
Total Expenses 2,739.07 3,477.57 3,415.30 3,603.14 3,907.13
Operating Profit 637.91 755.22 796.34 876.97 969.94
Profit On Sale Of Assets -- -- -- -- --
Profit On Sale Of Investments -- -- -- -- --
Gain/Loss On Foreign
-- -- -- -- --
Exchange
VRS Adjustment -- -- -- -- --
Other Extraordinary
-- -- -- -- --
Income/Expenses
Total Extraordinary
-- -- -- -- --
Income/Expenses
Tax On Extraordinary Items -- -- -- -- --
Net Extra Ordinary
-- -- -- -- --
Income/Expenses
Gross Profit 717.20 820.48 884.74 984.53 1,028.53
Interest 102.23 142.50 147.20 158.29 173.60
PBDT 614.97 677.98 737.54 826.24 854.93
Depreciation 139.20 168.55 224.95 237.90 246.72
Depreciation On Revaluation
-- -- -- -- --
Of Assets
PBT 475.77 509.43 512.59 588.34 608.21
Tax 37.50 72.59 75.00 95.00 107.50
Net Profit 438.27 436.84 437.59 493.34 500.71
Prior Year Income/Expenses -- -- -- -- --
Depreciation for Previous
-- -- -- -- --
Years Written Back/ Provided
Dividend -- -- -- -- --
Dividend Tax -- -- -- -- --
Dividend (%) -- -- -- -- --
Earnings Per Share(Rs) 19.85 19.78 19.81 22.31 21.84
Book Value(Rs) -- -- -- -- --
Equity 220.84 220.84 220.84 221.09 229.31
Reserves -- -- -- -- --
Face Value(Rs) 10.00 10.00 10.00 10.00 10.00
ACKNOWLEDGEMENTS
I would like to take this opportunity to thank all the people who helped me in completion
of my management training and in the completion of this report.
I would sincere thanks to Mr. (Manager- Finance and Accounts Department)

for providing me guidance at each and every step of the training. I would always be
obliged to him because he shared his real-life experiences with me.
I am thankful to the other members of the finance department who explained me finance
work, solving queries and being there to help me whenever required.
Table of Contents
i. Abstract
ii. Introduction
1. Working Capital Management

1.1 Introduction
1.2 The operating Cycle and Working Capital Needs
1.3 Operating Cycle of VIDEOCON INDUSTRIES LTD
1.4 Factors Affecting Working Capital Requirement
1.5 Liquidity Vs. Profitability- A Risk Return Trade Off
1.6 Working Capital Policy
2. Receivables Management
2.1 Need of Receivables
2.2 Objective of Receivable Management
2.3 Cost of Receivables
2.4 Trade off on Receivables
2.5 Determinants of Receivables
2.5.1 Credit Policy
2.5.2 Credit Control
3. Payable Management
3.1 Discounting of Bills
4. Inventory Management
4.1 Types of Inventory
4.2 Need for Inventory
4.3 Objectives of Inventory Management
4.4 Cost of holding Inventory
4.5 Techniques for Inventory Management
4.5.1 Perpetual Inventory Verification
4.5.2 ABC Analysis
4.5.3 Economic Order Quantity
4.5.4 Reorder Point
4.5.5 Safety Stock
4.5.6 Lean manufacturing
a. Just In Time (JIT)
b. Kanban System
c. Kaizen
d. Single Piece Flow System
e. Gemba Walking
f. Virtual Storage
5. Cash management
5.1 Need of Cash
5.2 Objectives of Cash management
5.3 Cost of Holding Cash
5.5 Benefits of Cash management
5.6 Cash Budget
5.7 Techniques of managing Cash in VIDEOCON INDUSTRIES LTD.
6. Conclusion
7. Refrences
ABSTRACT
The project titled ‘Analysis Of Working Capital Management’ aims at understanding
and analyzing the Working Capital Structure of the plant, Shahjahanpur Videocon
Industries Limited Works, a manufacturing unit of Refrigerator. Working capital
management comprises of four major parts – Inventory management, Receivables
management, Payable Management and Cash management. There are a number of tools
available for a proper working capital management. Most of them are studied as a part of
the project.
As a part of inventory management, various inventory management techniques are

studied. Most of these are being implemented in the plant (like PIV, ABC Analysis, JIT,
Single Piece Flow System etc). Even those tools, which are not practically implemented
(like Reorder Point, Safety Stock etc) are studied. These methods, along with their
working and importance, are studied in detail.
As far as receivables management is concerned, Credit Terms, Credit Policy, and

Collection Policy and Procedure are understood, giving special focus on how they are
being implemented practically. Also, there is an innovative technique being used by
VEDIOCON for managing its receivables efficiently. This technique, known as Channel
Financing makes sure that the receivables are collected almost instantly. Just like any
other firm, even VEDIOCON is trying to minimize its debtors, as far as possible.
Collections are tried to be made as fast as they can, and all these tools are very much
focused and effective in doing so.
Apart from this, I did Discounting of Bills as a part of Payable management technique.
It’s an easy way to check the savings a firm can make by paying its suppliers early.
Another prominent tool being implemented at VEDIOCON is Sweeping Facility for
Cash Management. It makes sure that the cash is not lying idle, and is being used
efficiently, and moreover, is invested wisely, in case opportunities are there.
INTRODUCTION
PURPOSE:
The purpose of the report, ‘Analysis of Working Capital Management’, is to
understand and analyze the working capital structure of the manufacturing unit of
Videocon Industries Limited, that is, in Shahjahanpur.
The objective was also to check the real life situations in an industry as differing from
theories. The project will throw a light on how to link theory with the business world.
Working Capital Management is a part of Corporate Finance, and to understand it, one
has to get involved with it. Working with professionals gives us a feeling of how our
future life would be, and how we are supposed to behave in the business world.
LIMITATIONS:
The report covers the practices followed at one plant of the company, so the study that is
being carried, may be useful for just one factory, and not for others, as there may be
difference in the business module from one factory to another. Therefore, a generalization
of this report, to judge the efficiency of VIDEOCON Limited as a whole, cannot be
done.
In addition, the project -span of 8-weeks, was insufficient for understanding, and
analyzing the working capital structure of a plant completely. Apart from this, the
suggestions being made in this report may or may not be practically applicable in the all
types of industries.
SCOPE:
The report comprises of various suggestions, regarding the proper management of the
working capital, at each and every step of the processes that are taking place at the
Videocon factory. Suggestions for improving the overall efficiency of the plant, by
improving the working capital structure of the plant, have been provided. This is be done
by suggesting ideas to improve inventory management, receivables management and cash
management processes; separately, as well as collectively.
METHODS OF COLLECTING DATA AND THEIR SOURCES:
In most of the cases, the data is collected on the spot from the persons involved in the
different processes. As far as possible, I have tried to collect data by myself. I also tried
to get involved with people from various departments, right from Accounts & Finance
Department to Planning & Purchase Department, Stores Department, Marketing
Department, Fabrication Department and Personnel Department.
Apart from self-experimenting and observing, I constantly interacted with various

employees of the Company and gathered useful information on related matters, which
were used in the report as well as for my personal knowledge.
Various books and internet sites, including that of VIDEOCON itself, have also helped
me a lot in collecting data and understanding concepts.
Working Capital Management

Every business needs investment to procure fixed assets, which remain in use for a longer
period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’.
Business also needs funds for short-term purposes to finance current operations.
Investment in short term assets like cash, inventories, debtors etc., is called ‘Short-term
Funds’ or ‘Working Capital’. The ‘Working Capital’ can be categorized, as funds
needed for carrying out day-to-day operations of the business smoothly. The
management of the working capital is equally important as the management of long-term
financial investment.
Every running business needs working capital. Even a business which is fully equipped
with all types of fixed assets required is likely to collapse, if it does not have;
a) Adequate supply of raw materials for processing;
b) Cash to pay for wages, power and other costs;
c) Creating a stock of finished goods to feed the market demand regularly; and,
d) The ability to grant credit to its customers.
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.
Working Capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the relationship that exists between
them.
The current assets refers to those assets which in the ordinary course of business can be,
or will be converted into cash within one year without undergoing diminution in the value
and without disrupting the operations of firm. The major current assets are:-
 Cash
 Marketable Securities
 Accounts Receivables
 Inventory
The Current Liabilities are those liabilities which are intended, at their inception, to be
paid in the ordinary course of business, within a year, out of current assets or earnings of
the concern. The basic current liabilities are:-
 Accounts Payable
 Bills Payable
 Bank Overdraft
 Outstanding Expenses
The term Working Capital may be used in two different ways.

 Gross Working Capital (or total Working Capital): The gross working capital
refers to the firm’s investment in all the current assets taken together. For
example, if a firm has a cash balance of Rs. 50000, debtors of Rs. 70000 and
inventory of raw material and finished goods has been assessed at Rs. 100000,
then the gross working capital of the firm is Rs. 220000.
 Net Working Capital: The term net working capital may be defined as the
excess of total current assets over total current liabilities. The extent, to which
these current liabilities are delayed, the firm gets availability of funds for that
period.
Gross Working Capital= Sum Total of Current Assets

= RM + WIP + FG + Debtors + Cash and Bank Balance
Net Working Capital= Difference between current assets and current
Liabilities
RM + WIP + FG + Debtors + Cash and Bank Balance
- Creditors – Direct wages - Overheads
The Operating Cycle and Working Capital Needs
The working Capital requirement of firm depends, to a great extent upon the operating
cycle of the firm. The operating cycle may be defined as the time duration starting
from the procurement of goods or raw materials and ending with the sales
realization. The length and nature of the operating cycle may differ from one firm to
another depending upon the size and nature of the firm.
In case of manufacturing concern, this series starts from procurement of raw materials
and ending with the sales realization of finished goods. There is a time gap between
happening of the first event and happening of the last event. This time gap is called the
operating cycle.
Thus, the operating cycle of a firm consists of the time required for the completion of the
chronological sequence of some or all of the following:
i. Procurement of raw materials and services.

ii. Conversion of raw materials into work-in-progress.
iii. Conversion of work-in-progress into finished goods.
iv. Sale of finished goods (cash or credit).
v. Conversion of receivables into cash.
Cash
Creditors
Debtors Raw material
Working
Value Expenses Value
Addition Addition
Finished Goods Work in Process
Figure:1 – Working capital Cycle
Explanation of diagram
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, they rotate and business operations continue. Thus, the
working capital cycle involves rotation of various constituents of the working capital.
VIDEOCON’s Operating Cycle
The operating cycle of VIDEOCON is as follows:-
 Procurement of raw material
The operating cycle for a company primarily begins with the purchase of raw materials,
which are paid for after a delay representing the creditor's payable period. VIDEOCON is
a consumer electronics goods manufacturer. Some raw materials are procured from
outside, some manufactured by its own.
Sometimes it may happen that company needs product in the form of raw material
manufactured by its own SBU’s. In this case stock is transferred within the company but
it won’t be considered as actual sale and no sale tax levied but it is liable to pay excise
duty since excise duty is paid on production and it is the liability of manufacturer.
 Conversion of Raw material into finished goods
These purchased raw materials are then converted by the production unit into finished
goods and then sold. The time lag between the purchase of raw materials and the sale
of finished goods is known as the inventory period.
Labor
Labor is vital for conversion of inputs into finished goods.
There are three types of labour here
Skilled Labour
Here a labour hour rate is fixed and the number of hours required to perform that
work is determined and on the basis of this labor expenses are determined. This is
treated as fixed overheads.
Casual labour
This is not permanent labor. They are paid on daily basis to perform work of a
non-recurrent nature. They are sourced from the Contractors of the Company.
Vendoring
When there is a capacity constraint then a part of the work is done by vendors and
the parts manufactured by these vendors are assembled. This is also called job
work
 Conversion of Work-in-progress into finished goods
 Sale of Finished Goods
Goods are sold either on cash basis or credit basis. Upon sale of finished goods on
credit terms, there exists a time lag between the sale of finished goods and the
collection of cash on sale. This period is known as the accounts receivables period
 Conversion of Receivables into Cash

There are basically two ways available to vendors to pay their dues to
VIDEOCON.
These are:-
Cash Payment method
In this a vendor is supposed to clear his dues within a limited amount of time and
mode of payment must be highly liquid. The vendors can pay by demand drafts,
pay orders, or cheques of party which are subject to realization.
Channel Financing
Channel financing is used to receive fast money from debtors. Most of the firms
generally sells goods or services on credit and it takes a little time to realize.
Hence, receivables form an important part of working capital management.
Liquidity versus Profitability- A Risk-Return Trade off
Net Working Capital has bearing on Profitability as well as risk. The term
Profitability used in this context is measured by profits after expenses. The term Risk
is defined as the probability that a firm will become technically insolvent so that it
will not be able to meet its obligations when they become due for payment.
It is said that greater the amount of working capital the less risk prone the firm is
The decision on how much working capital is maintained involves a trade-off because
having a large working capital may reduce the liquidity risk faced by the firm, but it can
have a negative effect on the cash flows. Therefore, the net effect on the value of the firm
should be used to determine the optimal amount of working capital.
The goal of Working Capital Management is to manage current assets and liabilities
in such a way that a satisfactory level of working Capital is maintained.
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.
CONSEQUENCES OF UNDER ASSESSMENT OF WORKING
CAPITAL
• Growth may be stunted. It may become difficult for the enterprise to undertake
profitable projects due to non-availability of working Capital.
• Implementation of operating plans may become difficult and consequently the
profit goals may not be achieved.
• Cash crisis may emerge due to paucity of working funds.
• Optimum capacity utilization of fixed assets may not be achieved due to non-
availability of the working capital.
• The business may fail to honour its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.
• The business may be compelled to buy raw materials on credit and sell finished
goods on cash. In the process it may end up with increasing cost of purchases and
reducing selling prices by offering discounts. Both these situations would affect
profitability adversely.
• Non-availability of stocks due to non-availability of funds may result in
production stoppage.
While underassessment of working capital has disastrous implications on business,

over assessment of working capital also has its own dangers.
CONSEQUENCES OF OVER ASSESSMENT OF WORKING
CAPITAL
• Excess of working capital may result in unnecessary accumulation of

Inventories.
• It may lead to offer too liberal credit terms to buyers and very poor
Recovery system and cash management.
• It may make management complacent leading to its inefficiency.
• Over-investment in working capital makes capital less productive and
may reduce return on investment.
Working Capital: Policy

There is an inevitable relationship, between the sales and current assets. The actual and
forecasted sales have major impact on the amount of current assets which the firm must
maintain. So, depending upon the sales forecast, the financial manager should also
estimate the requirement of current assets.
There are three types of working capital policies which a firm may adopt i.e. moderate
working capital policy, conservative working capital policy, and aggressive working
capital policy. These policies describe the relationship between sales level and the level
of current assets.
Current assets
Conservative
Moderate
Aggresive
Sales level
Figure 2 : Different types of working Capital

Policies
In case of moderate working capital policy, the increase in sales level will be
coupled with proportionate increase in level of current assets also e.g. if the
sales increase or expected to increase by 10%, then the level of current assets will
also be increased by 10%.
In case of conservative working capital policy, the firm does not like to take risk.
For every increase in sales, the level of current assets will be increased more
than proportionately. Such a policy tends to
reduce the risk of shortage of working capital by increasing the safety component
of current assets. The conservative working capital policy also reduces the risk of
non payment to liabilities.
In case of aggressive working capital policy the increase in sales does not result
in proportionate increase in current asset. For example, for 10% increase in
sales the level of current asset is increased by 7% only.
This aggressive policy has many implications-
• The risk of insolvency of the firm increases as the firm maintains low liquidity.
• The firm is exposed to greater risk as it may not be able to face unexpected
change, in the market
• Reduced investment in current assets will result in increase in profitability of the
firm
VIDEOCON and its Working Capital policy
VIDEOCON follows conservative working capital policy i.e. for every

increase in sales level the level of current assets will be increased more than
proportionately. Such a policy tends to reduce the risk of shortage of working
capital by increasing the safety component of current assets. This policy also
reduces the risk of non payment of liabilities.
RECEIVABLES MANAGEMENT
The term Receivables is defined as debt owed to the firm by customers arising from the
sale of goods and services in the ordinary course of business. Receivables are a type of
loan extended by the seller to the buyer to facilitate purchase process. When companies
sell their products they sometimes demand cash on delivery, but in most cases they sell
goods on credit and allow a delay in payment. The customers’ promise to pay for their
purchases constitutes valuable assets; therefore accountants enter these promises in their
balance sheet as accounts receivables. Most of the businesses today sell goods and
services on credit and it takes times for the receivables to realize. Hence Receivables
management forms an important part of working capital management.
Need of Receivables
The sale of goods on credit is an essential part of working capital management. Credit
sale are treated as marketing tool to aid sale of goods. As a marketing tool, they are
intended to promote sales and increase profits. Hence Receivables management assumes
significance in the context of overall working capital management.
Objective of Receivables management

In a competitive environment, sometimes the firms are compelled and sometimes the
firms desire to adopt liberal credit policies for pushing up the sales. Higher credit sales at
more liberal terms will no doubt increase the profits of the firm, but simultaneously also
increases the risk of bad debts as well as result in more and more funds blocking in the
receivables. Thus, the objective of receivables management is matching the cost of
increasing sales with the benefits arising out of increases sales with the objective of
maximizing the return on investments of the firm.
Cost of Receivables
i) Cost of Financing: The credit sales delays the time of sales realization and therefore
the time gap between incurring the cost and the sales realization is extended. The firm on
the other hand, has to arrange funds to meet its own obligation towards payment to
supplier, employees, etc. these funds are to be procured at some explicit or implicit cost.
This is known as the cost of financing the receivables.
ii) Administrative Cost: A firm will be required to incur various costs in order to
maintain the record of credit customers before the credit sales as well as after the credit
sales.
iii) Delinquency Cost: This is the cost incurred if there is any delay in payment by a
customer.
iv) Cost of default by Customers: If there is default by customers and the receivables
becomes, partly or wholly unrealizable, then this amount, known as bad debt also
becomes a cost to the firms.
Costs
Total cost
of
receivables
Default cost
Delinquency Cost of
costs financing
Credit period
Administrative
(days)
Costs
Normal (20 days) Default (40 days)
Trade off on receivables
The trade off on receivables can be applied to find out whether to liberalize credit
terms or not. More liberal credit terms may be expected to generate higher sales revenue
and higher profits; but they increases the potential costs also as the chances of bad debts
increases and there will be decrease in liquidity of firms. On the other hand a stringent
credit policy reduces the profitability but may increase the liquidity of the firms. Thus, a
firm should try to frame its credit policy in such a way as to attain the best possible
combination of profitability and liquidity.
Figure
4 :
Credit
Policy,
Profitability and Liquidity of a firm
Determinants of Receivables
In any firm the quantum of receivables is determined by several factors.
1. The percentage of credit sales to total sales. Higher the sales higher will be the
receivables. But this is not under the control of financial manager.
2. The terms of sale i.e. the credit and collection policies. These also determine the
quantum of receivables. These are under the control of financial manager.
So, the receivable management must be attempted by adopting a systematic

approach and considering the following aspects of receivables management:
• The Credit Policy
• The Credit Control
Credit Policy
A firm makes significant investment by extending credit to its customers and thus
requires a suitable and effective credit policy to control the level of total investment in
the receivables. The basic decision to be made regarding receivables is to decide how
much credit be extended to a customer and on what terms. This is what is known as credit
policy. The credit policy may be defined as set of parameters and principles that govern
the extension of credit to its customers. This requires the determination of
i) Credit standard
ii) Credit terms
The Credit Standards: when a firm sells on credit, it takes a risk about the paying
capacity of the customers. Therefore to be on safer side, it must set credit standards
which should be applied in selecting customers for credit sales. The following points
should be noted while setting the credit standard for a firm:
• Effect of particular standard on sales volume.
• Effect of a particular standard on the total bad debts of the firm
• Effect of a particular standard on the total collection cost.
Credit Terms: It refers to set of stipulations under which the credit is extended to the
customers. The credit terms specify how the credit will be offered, including the
length of the period for which the credit will be offered, the interest rate on the credit
and the cost of default.
Credit period: It refers to the length of time over which the customers are allowed to
delay payments.
Lengthening the credit period increases the sales by attracting more and more customers,
whereas squeezing the credit period has the distracting effect. The firm must consider the
cost involved in increasing the credit period which will result in increase in the
investment in receivables.
Discount terms: The customers are generally offered cash discount to induce them to
make prompt payments. Different discount rates may be offered for different periods e.g.
3% discount if payment made within 10 days; 2% discount if payment made within 20
days. Both the discount rate and the period within which it is available are reflected in the
credit terms e.g.
3/10, 2/10, net 30 means

that a 3% cash discount if payment made within 10 days ; 2% discount if payment made
within 20 days; otherwise full payment by the end of 30 days from the date of sale.
Practical Implementation
CREDIT TERMS:
Credit Period- The credit period at VIDEOCON is not constant. For some vendors, it is
30 days, for others, it may be 45 days or 60 days. This depends entirely on company’s
policies. It can be different for different vendors.
Cash discount- The cash discount offered by VIDEOCON is 2% to 1.75%, depending

upon cash discount period.
Cash discount period- The cash discount period allowed by VIDEOCON is 1 to 3 days.
This can be summarized as follows:

Credit Discount Period Credit Discount
(days) (%)
1 2
3 1.75
30/45/60 0
There are basically two ways available to vendors to pay their dues to VIDEOCON.
These are:
Cash:
In cash payment method, a vendor is supposed to clear his dues within a limited
amount of time. And the mode of payment must be highly liquid (Cheque or Demand
Draft).
There are three options available with the vendors:

i) Blank Cheque Arrangement: In Blank Cheque arrangement, the vendors provide
VIDEOCON blank Cheques drawn on the name of VIDEOCON. As soon as the material
is received and invoice is generated, VIDEOCON is allowed to fill the relevant amount
pertaining to the transaction that took place between VIDEOCON and its vendor. This
Cheque can be
Cleared on the same day the invoice is generated.
ii) Cheque Arrangement: In simple Cheque arrangement, on

Generation of invoice, a cheque is issued by the vendor drawn on
the name of VIDEOCON.
iii) Demand Draft (D.D.): Here, a demand draft is drawn on the name
of VIDEOCON , by the vendor, as soon as invoice is generated.
Control of Receivables
Once the credit has been extended to a customer as per credit policy, the next important
step in the management of receivables is the control of receivables. The things to be taken
into consideration are:-
1. The collection Procedure: The firm should have a built in system under which
customer may be reminded a few days in advance about the bill becoming due.
The collection procedure of the firm should neither be too lenient nor too strict. A strict
collection policy can affect the goodwill and damage the growth prospects of the sales. If
the firm has a lenient credit policy, the customers with a natural tendency towards slow
payment may become even slower to settle his accounts. Thus, the objective of collection
procedure and policies should be to speed up the slow paying customers and reduce the
incidents of bad debts.
2. Monitoring of Receivables:-
The financial mangers should keep a watch on the credit worthiness of all the individual
customers as well as the total credit policy of the firm.
• A common method to monitor receivables is the collection Period or number of
day’s outstanding receivables.
Average collection period= Average Receivables

Credit sales per day
Another technique for monitoring the Receivables is known as aging schedule. The
quality of the receivables of a firm can be measured by looking at the age of receivables.
The older the receivables, the lower is the quality and greater the likelihood of a default.
In the aging schedule, the total outstanding receivables on particular days are classified
into different age groups together with percentage of total receivables that fall in each age
group.
For example, the receivables of a firm, having a normal credit period of 30 days may be
classified as follows:
Age Group %of total outstanding

(Number of Days) Receivables
Less than 30 days 60%
31-45 days 20%
46-60 days 10%
61 and above 10%
Here the firm has a credit period of 30 days and 60% of the total receivables are less than
30 days old. 20% of the receivables are over due by 15 days, 10% of the receivables are
overdue but 30 days and 10% are over due by more than 30 days.
This type of aging schedule can provide a kind of an early warning suggesting
i) Deterioration of receivables quality
ii) Where to emphasize the appropriate corrective actions
3. Lines of Credit: It is the maximum amount a particular customer may have as due to
the firm at any time. Different lines of credit may be allowed to different customers. As
long as the customer’s unpaid balance remains within this maximum limit, the account
may be routinely handled. However if new order is going to increase the indebtedness of
a customer beyond his line of credit, then the case must be taken for an approval for a
temporary increase in the line of credit.
4.Accounting Ratios: Two accounting ratios may be calculated in particular may be

calculated to find out the changing pattern of receivables. These are
i) Receivables Turnover Ratio
ii) Average collection Period
Both the ratio should be calculated on a continuous basis to monitor the receivables. The
ratios so calculated for the firm must then be compared with the standard for that industry
or with past ratios of the same firm.
Payable Management
As the firm sells goods on credit it may also procure/purchase raw material and finished
goods on credit basis. The payment for these purchases may be postponed for the period
of credit allowed by suppliers. So, the supplier of the firm in fact provides working
capital to the firm for the credit period.
For example, a firm makes a credit purchase of Rs. 60000 per month and the credit
allowed by supplier is two month, then the working capital supplied by creditors is Rs.
120000 (i.e. Rs. 60000*2months). It means the firm would be getting the supplies
without however, making the payment for two months. The postponement of payment to
the creditors makes the firm to utilize this money elsewhere or help the firm to sell on
credit without blocking its own funds.
Since, Working Capital is the difference between current assets and current
liabilities and creditors form an important part of current liabilities. So, a firm can
save a considerable amount if these creditors are managed. The extent, to which the
payment to these current liabilities is delayed, the firm gets the availability of funds for
that period. So, a part of the funds required to maintain current assets is provided by
current liabilities and the firm will be required to invest the funds in only those current
assets which are not financed by current liabilities. So, the aim of the firms is to realize
its debtors as fast as possible but too pay its creditors as late as possible.
Creditors can be managed by discounting of bills.
Bill Discounting is a relatively new concept in India. When a firm buys goods on credit
the supplier will state a final payment date . To encourage firm to pay before final
payment date , the supplier will offer a cash discount for prompt settlement. Now it’s the
decision of firm whether to avail or not that discount facility provided by supplier. For
that they should see whether it is profitable for them or not.
By using discounting of bills technique huge sums of money can be saved, by just paying
the discounted amount in time. Big firms, ( like VIDEOCON ), which have huge cash
reserves, generally, get into a contract with financial institutions or banks( like ICICI
bank or VIDEOCON finance Ltd.). These financial institutions pay the suppliers the
requisite amount on behalf of these firms and they charge some interest on the amount
paid by them to the suppliers from these firms.
Benefits of Discounting of Bills

• Discounting of Bills makes it easy to decide whether the discount being allowed
by the supplier is worth taking or not.
• Also, it make possible to calculate savings being received on account of availing
discount, in monetary terms
• It also helps in improving relationship between vendors/suppliers.
• It’s an indirect cash inflow , because the company is going to pay less than what it
was supposed to pay initially
• The cash thus saved can be invested elsewhere.
• It’s a win-win situation for both-the company as well as suppliers as the suppliers
will be getting money much before the stipulated time and the company is able to
enjoy the benefits of discount offered by the suppliers.
Inventory Management
The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense,

inventory can be defined as an idle resource which has an economic value. It
is however, commonly used to indicate various items of stores kept in stock in
order to meet future demands.
Inventory is assets to the firm and requires investment and hence involves the
commitment of firm’s resources. The inventories need not be viewed as an idle asset
rather these are an integral part of firm’s operations.
Inventory refers to stockpile of products that a firm is offering for sale and the
component that makes up the product. We can also say that inventory is composed of
assets that will be sold in the future in the normal course of business. But the question
arises how much inventory be maintained? If the inventories are too big, they become
strain on the resources; however, if they are too small, the firm may loose sales.
In any organization, there may be following four types of inventory:

(a) Raw materials & parts-- These may include all raw materials,
components and assemblies used in the manufacture of a product;
(b) Consumables & Spares -- These may include materials required

for maintenance and day-to-day operation;
(c) Work in progress -- These are items under various stages of

production not yet converted as finished goods;
(d) Finished Products -- Finished goods not yet sold or put into use.
Need For Inventory
Every organization needs to maintain a minimum amount of inventory so as to fulfill its

customer’s demands. Also, the organizations foresee future demand and they plan their
inventory levels accordingly. These reasons can be classified as:
Transactionary motive: to meet the day to day requirements of sales, production
process, and customer demand etc.
Precautionary motive: A firm should keep some inventory for unforeseen circumstances
also.
Speculative Motive: The firm keeps some inventory in order to capitalize opportunity to
make profit.
Objectives of Inventory management
a. To ensure a continuous supply of raw materials to facilitate uninterrupted

production.
b. To maintain sufficient stock of raw materials in periods of short supply and
anticipate price changes.
c. To control inventory investment by maintaining optimum Inventory.
d. To minimize investment in inventory and to ensure maximum turnover of
inventory in an accounting period.
e. To ensure stocking of relevant materials in adequate quantities and to ensure that
unwanted or slow- moving items and/or non-moving items do not pile up.
f. To minimize inventory carrying costs in business- both ordering cost and carrying
cost.
g. To eliminate waste and delays in the process of manufacturing at all stages so as
to reduce inventory pile up.
h. To ensure adequate and timely supply of finished goods to the market through
proper distribution.
Cost of holding Inventory
Every firm maintains some stock of raw materials, work-in-progress and finished goods
depending upon the requirement and other features of the firm. It is benefited, by holding
inventory but there is cost involved with it. had these cost not there, there would not have
been any problem of inventory management and every firm would have maintained
higher and higher level of inventories. The cost of holding inventory includes the
following:-
• Ordering Cost- The cost associated with the acquisition or ordering of inventory
is known as ordering cost. Firms have to place order with suppliers to replenish
inventory of raw materials. Such expenses involved are referred to as ordering
cost. The ordering cost may have fixed component which is not affected by the
order size; and a variable component which changes with the order size. It
includes:
o Carriage Inward
o Insurance Inward
o Communication cost
o Stationary Cost
o Demurrage Charges
Ordering Cost= (A*O)/Q
Where, A= Annual Requirement of a particular material in units or numbers

or kgs.
O= Ordering cost per order
Q= Lot size, in units
• Carrying Cost:
The very fact that the items are required to be kept in stock means additional expenditure
to the organization. The different elements of costs involved in holding inventory are as
follows:
(a) Interest on capital / cost of capital / opportunity costs
(b) Obsolescence and depreciation
(c) The cost of storage, handling and stock verification
(d) Insurance Costs
The average inventory carrying costs can, therefore, be as follows:
Interest/costs of capital/opportunity cost 15 to 25%

Obsolescence and depreciation cost 2 to 5%
Storage, handling etc. 3 to 5%
Insurance costs 1 to 2%
Total 21 to 37%
Carrying Cost is calculated by:
Carrying Cost= ( C*O)/Q
where, C is carrying cost
• Stock-out Cost (A Hidden Cost):
A stock out is a situation when the firm is not having units of an item in store but there is
demand for that either from the customers or production department. There is always a
cost of stock out in the sense that the firm faces a situation of lost sales or back orders.
Some examples are:

o Non availability/ small amount available with vendors
o Non availability of substitutes
o Quality desired not matching with the supplied ones
o Updated or improved product not available.
Total Cost
The total cost associated with inventory is the sum of ordering and carrying cost i.e.
Total cost= Carrying Cost+ Ordering Cost

= C*O/Q + A*O/Q
One Underlying principle should be kept in time that ordering cost and carrying cost are
inversely related to each other. Suppose the ordering cost increases because more number
of times the order is repeated, a direct consequence would be reduction in inventory held
and hence carrying cost would be less. Conversely, if the number of order is less, this
means that average value of inventory held is higher with the consequence of higher
inventory carrying cost.
Techniques used for inventory management

The finance department of every organization aims at maintaining an optimum level of
inventory on the basis of the trade-off between cost and benefit to maximize the owners
wealth. There are various tools for effective inventory management. The tool depends
upon the type of inventory, namely materials, work-in-progress or finished goods. some
of these tools have an impact not only on inventory but on whole structure of the
organization. They help in reducing cost and improving the efficiency of organization as
a whole.
Perpetual Inventory Verification

This is done to check out actual inventory level and is done on a continuous basis. In
PIV method, the amount of inventory is checked both in documents as well as stores.
Here, some items are checked randomly and while checking those items issues and
receipt of those items is stopped we can say that these items are brought to freezing state.
The database which, ideally, should be refreshed simultaneously whenever there is a
change in inventory and it should match with physical inventory level. Practically, these
two numbers rarely match. This happens because of various reasons, which may or may
not be under the control of management.
Some of the reasons for mismatch are:

• Delay in entering data
• Technical Errors (intranet or SAP not working)
• Documentation Error (document not submitted)
• Posting Error
• Material issued but document not processed
• Document processed but material not issued
• Material send for job work but not received effectively
• Pilferage
• Material waiting for quality check
Benefits Of Perpetual Inventory Verification
a. The exact amount of inventory present in the plant can be checked.

b. Checking it against the database of the stores can give us a fair idea about
how efficiently the system is working
c. Any faults in the system, regarding the errors associated with updating of
database of stores department can be traced.
Recommendations
• PIV should be done as frequently as possible.

• It should be made sure that data is updated from time to time that is as soon as
material is issued or received, corresponding data should be updated on the plant
database.
• Unless or until data is entered no material should be issued or received.
ABC Analysis
This is done to solve classification problem. The most important thing in inventory
control management is classification of different types of inventories to determine the
type and control required for each. The ABC analysis is based on the assumption that
same degree of control should not be exercised on all items of inventory. The ABC
analysis classifies various inventory items into three sets of groups of priority and
allocates managerial efforts in proportion of the priority. The most important items are
classified as class ‘A’ , those of intermediate importance are classified as class ‘B’ and
the remaining items are classified as class ‘C’.
The financial Manager should monitor different items belonging to different groups in
that order of priority. Utmost attention is required for class ‘A’ items, followed by
items in class ‘B’ and then items in class ‘C’.
This is done based on the experience
That 10% of items in the inventory accounts for 70% of consumption in value so they are
classified as ‘A’ class items
20% of items in the inventory account for 20% of consumption in value so they are
classified as ‘B” class items
70% of the items in the inventory accounts for 10% of consumption in value so they are
classified as ‘C’ class items.
Class No Of Inventory
Items (%) Value (%)
A 10 70
B 20 20
C 70 10
Total 100 100
Table :- ABC Analysis
Benefits Of ABC analysis
• It serves as a tool for classification for inventory.

• Each item can be given appropriate attention as per classification.
Limitations of ABC analysis
This system suffers from major drawback. An item of inventory may not be very
expensive, but may be very critical to production process and/ or may not be easily
available; still it will be classified under group ‘C’. It would require serious attention but
due to this classification, it will receive less attention. Similarly a not very important
component may receive extra attention then it deserves . In either case it is detrimental to
the growth of the company. This is a serious limitation of ABC analysis.
ABC analysis is strictly followed in VIDEOCON . It keeps an eye ion those items which
are more crucial for production process than others, such items are given due attention so
that there is neither an excess nor deficit of such materials. On the other hand there is not
much to worry about class B and class C items. There are around 7000 items which are
categorized as A, B, and C items.
Economic Order Quantity Model:

This is to solve order quantity problem.
After ABC analysis we get to know which item deserves how much attention. The next
Problem is to determine the lot size in which a particular item of inventory will be
required. The importance of effective inventory management is directly related to size of
the inventory. A firm should neither place too large or too small orders. The inventory
management basically focuses on maintaining an optimum level of inventory in order to
minimize the cost attached with different inventory levels.
The optimum level of inventory is known as Economic Order Quantity (EOQ) or
Economic lot size. This refers to that quantity per order, which ensures that total of
carrying and ordering cost is minimum.
The approach to determine EOQ is based on the following assumptions:-
• The total usage of particular item for a given period (usually a year) is known
with certainty and the usage rate is even throughout the year.
• There is no time gap between placing an order and getting its supply
• The cost per order of an item is constant and the cost of carrying inventory is also
fixed and is given as a percentage of average value of inventory.
• There are only two costs associated with the inventory, and these are the cost of
ordering and the cost of carrying the inventory.
EOQ is generally used to determine the order quantities of class ‘C’ items and
sometimes for class ‘B’ items also. This method is rarely used for class ‘A’ items because
class ‘A’ items are ordered only when requirement arises, there is no need to keep
inventory of class ‘A’ items.
The formula for estimating EOQ is:
EOQ= √ (2A*O)/C
Where, A = annual requirement of a particular material in units or numbers

Or Kgs
O = Ordering cost per order
C = carrying cost per unit
Figure 7 :- Graphical Presentation Of EOQ Model
Explanation
The figure shows that the total ordering cost for any particular item is decreasing as the
size per order is increasing. This will happen because with the increase in the size of
order, the total number of order for a particular item will decrease resulting in decrease in
the order cost. The total annual carrying cost is increasing with the increase in order size.
This will happen because the firm would be keeping more and more items in the stores.
However, the total cost of inventory (i.e. the total carrying cost + the total ordering cost)
initially reduces with the increase in size of order. The trade-off of these two costs is
attained at the level at which the total amount of cost is least. At this particular level the
order size is designated as the economic order quantity. If the firm places the orders for
that item of this economic order quantity, then the total annual cost of inventory of that
item will be minimized.
Benefits of EOQ
• It makes sure that there is neither an excess nor deficit of inventory.

• It saves cost as it saves carrying and ordering cost.
• It also results in strong relationship with vendors.
• It results in saving of time.
Practical Implication
EOQ is a relatively old technique for assessing the lot size of the order. Moreover, it
suffers from the disadvantage that the order cost is assumed to be uniform during a
particular period. The main point of problem in calculating EOQ is regarding the
estimation of ordering and carrying costs. Because there are no set rules to find exact
storage cost, maintenance cost etc. Since the production unit of VIDEOCON is involved
in manufacturing of tailor-made products, assessment of EOQ is not very relevant for this
kind of business line. However, the general usage items like nuts, bolts, crimps, wires,
batons, nails, lubricants, gaskets etc. are common for all types of items. Hence, it may
have restricted application in the Refrgerator plant.
EOQ is estimated on the basis of prior experience and future requirements. This happens
so because it is very difficult to classify to calculate storage and maintenance costs. They
have to be estimated because there are no provisions available to calculate them. To
prove the usefulness of this method, some arbitrary costs (ordering cost and carrying
cost) are assumed. Accordingly, EOQ is calculated to show how this model works and
how it can be useful in maintaining proper inventory levels.
I
ITEM EOQ
SL98354BOOOS 219
CS94314KOOOS 237
SL97299OMOOS 327
SH97609OOKOS 245
SH97608OOMOS 258
Table – Economic Order Quantity
RECOMMENDATIONS:
• Provisions to calculate EOQ must be made because a guess work may

prove to be wrong.
• At first, the total cost involved in ordering, transporting, procurement,
storage and maintenance must be calculated. Than, a part of this
(say 20%) should be taken as carrying cost and rest as ordering cost.
Reorder point (under certainty conditions): To solve order point

problem:
Reorder point is that level of inventory at which an order should be placed for
replenishing the current stock of inventory. It may be defined as level of inventory
when fresh order should be placed for procuring additional inventory equal to the
economic order quantity. It is the inventory level which is equal to consumption during
the lead time.
Reorder point is calculated as:
Rρс = L*U
Where, L = Lead time (in days)

U = Average daily usage of inventory
Benefits of reorder point

• It makes sure that plant does not run out of stock in any given day.
• It makes it easier to keep track of inventory and to know when exactly next lot of
material is needed.
PRACTICAL IMPLEMENTATION:
Practically, reorder point is not calculated at VIDEOCON. Trends of requirements of

various items are observed and accordingly order point is estimated for different items.
Here the problem is in estimating exact lead times and average daily usage of inventory.
The difficulty in estimating lead time is that it is never fixed and also, it depends not only
on the material, but also on the supplies and his geographical location. A material which
can be ordered from different suppliers may have different lead times. As far as average
daily usage of inventory is concerned, the fact is that VIDEOCON follows engineered-to-
order business, i.e. it manufactures according to immediate demands. So, it becomes
difficult to estimate average daily usage of inventory. The demands keep fluctuating day-
by-day.
To emphasize on the importance of reorder point, a calculation based on assumed lead

times and average daily usage of inventory is done. This can prove to be helpful in
implementing reorder point at VIDEOCON.
ITEM Rc
SL98354BOOOS 100
CS94314KOOOS 180
SL97299OMOOS 150
SH97609OOKOS 144
SH97608OOMOS 120
RECOMMENDATIONS:
• Reorder point is a useful tool and hence, should be implemented. It will make sure
that the plant does not run short of inventory for even a single day.
• Lead times should be estimated based on both – the type of material and the
supplier.
Safety stock: To overcome unexpected situations
The EOQ and the reorder point have some assumptions, which are not possible
practically. For instance, the demand for inventory is like to fluctuate from time to time.
The demand may exceed the anticipated level.
Similarly, the receipt of inventory from the suppliers may be delayed beyond the
expected lead time. The delay may be due to strikes, floods, transportation, and other
bottlenecks. To avoid such undesirable situations safety stock is maintained.
Safety Stock may be defined as the minimum additional inventory to serve as a
safety margin or buffer or cushion to meet an unexpected increase in usage resulting
from an unusually high demand and/or an uncontrollable late receipt of incoming
inventory.
Benefits of Safety Stock
• It is useful as it makes sure that even after reorder point is passed, the plant is able
to maintain its immediate demand.
• It acts as a buffer.
• It is an effective tool to minimize shortage cost.
The determination of the optimum safety stock involves dealing with uncertain demand.
The first step, therefore, is to estimate the probability of being out of stock as well as the
size of stock-out in terms of the shortage of inventory at different levels of safety stock.
To give an overview of the whole process, I calculated safety stock of a few items based
on certain assumptions regarding the stock-out acceptance factor, average number of
units per order, average daily usage of inventory and lead time.
ITEM Ss
SL98354BOOOS 156
CS94314KOOOS 256
SL97299OMOOS 213
SH97609OOKOS 187
SH97608OOMOS 209
Table – Safety Stock
Lean Manufacturing
There are many hidden wastes in any organisation . To get rid of these hidden wastes we
need to first unhide them. The best way to do this is to have a VISUAL FACTORY
where there is nothing hidden . Lean Manufacturing is a tool to enable us to achieve this
objective
Fundamentals of Lean Manufacturing :
1. Smooth flow of Material & Information to meet on demand service to customers

but without having to hold high inventories .
2. Elimination of hidden wastes .These wastes fall into seven basic categories :
a. Over Production
b. Defects/Rework
c. Motion
d. Transportation
e. High Inventory
f. Over processing &
g. Waiting
3. To achieve waste elimination , workplace organization using the 5 S System is
necessary:
a. Sort ... Remove unneeded items
b. Set –in – order... A place for everything and everything in its place (PEEP)
c. Shine ... Clean enough to inspect and expose any defect .
d. Standardize.. Create instructions and Standard Operating procedures
e. Sustain... Maintain the above through support and encouragement
4. Reducing Lead Time at every stage of every process through
a. Visual Controls using Kanban cards
b. Receiving material just in time (JIT).
c. Line Balancing to avoid up piling up of material at any stage.
d. Studying the flow of material or Value Stream Mapping.
e. Total Productive Maintenance to improve overall operation of the
equipment.
f. Set up time reduction using SMED (single minute exchange of dies ).
Lean manufacturing is a management philosophy focuses on reduction of the seven

wastes to improve overall customer value. Lean management (also known as Big JIT)
is a philosophy of operations management that seeks to eliminate waste in all aspects of
aspects of firm’s production activities: human relations, vendor relations, technology and
management of materials and inventory.
BY eliminating waste quality is improved, and automatically, production time and cost
are reduced. To solve the problem of waste lean manufacturing has several tools at its
disposal. All of these tools aim at reducing wastes, of one of several types, as far as
possible.
Some of the tools of lean manufacturing which helps in inventory management and
control are:-
• Just In time ( right amount in the right place at right time)

• Kaizen ( continuous improvement process)
• Kanban (pull production)
• Single Piece Flow System
• Gemba Walking
• Virtual Storage
Lean Manufacturing can be achieved by implementing following tools:
Just in Time Concept:

The basic philosophy behind JIT is that the firm should keep minimum level of inventory
on hand relying on suppliers to furnish ‘stock’ ‘just in time’ as and when required. This is
in direct contrast to the traditional inventory philosophy which emphasizes keeping
sufficient levels of safety stocks to ensure that production will not be interrupted.
Thus JIT system benefits in two ways:-
• By reducing the ordering cost. This is attempted by locating inventories supplies in
convenient locations.
• By reducing the safety stock . This is attempted by developing a strong relationship
with suppliers and setting up restocking strategies that cut time.
Just-in-time is implemented, nearly, at each and every stage of manufacturing/production
in the plant. Stores Department and Fabrication Departments are the main users of this
technique.
While manufacturing switchboards, earlier, for an order of say 1000 items in three
months period, one part of the whole manufacturing was done and than other steps took
place. So, inventory of material used to pile up. Also, the different parts used to lie
scattered here and there.
After implementation of JIT, the process is done such that all the steps are taken
simultaneously. So, material keeps moving. Moreover, provisions are made so that all the
parts of a product are kept together.
Procurement of packing cases is another good example of implementation of JIT
concept in VIDEOCON . All the finished goods need to be packed in wooden packing
cases (also known as crate packing cases).
There are certain issues related to wooden packing cases:
• They are bulky and over-sized.
• They have storing constraints.
• Dryness of wood up to a specific point is allowed (if the wood gets drier, it
becomes very difficult to pierce nails in it).
So, in order to avoid all these problems, what best can be done is – as soon as the
material is about to complete, the Final Assembly Department informs it to Packing and
Purchase Department. Now, packing and Purchase Department gets ready with their
wooden packing materials, just-in-time as the finished goods are received by them.
RECOMMENDATIONS:
• All the workers, especially those who are working in Fabrication
Department, Stores Department and Purchase Department, must be
given proper training regarding the practical implementation of JIT.
• Any sort of delay between any two processes should be minimized as far as
possible. Any kind of idle time should not be allowed.
• Another point that must be kept in mind is that, right amount of material should
pass from one stage to the other. There is no need to pile-up materials, which are
not going to be used immediately.
Kanban System
The Japanese refer to Kanban as a simple parts-movement system that depends on cards
and boxes/containers to take parts from one work station to another on a production line.
Kanban stands for Kan- card, Ban- signal. The essence of the Kanban concept is that a
supplier or the warehouse should only deliver components to the production line as and
when they are needed, so that there is no storage in the production area. Within this
system, workstations located along production lines only produce/deliver desired
components when they receive a card and an empty container, indicating that more parts
will be needed in production. In case of line interruptions, each work-station will only
produce enough components to fill the container and then stop. In addition, Kanban limits
the amount of inventory in the process by acting as an authorization to produce more
inventory. Since Kanban is a chain process in which orders flow from one process to
another, the production or delivery of components are pulled to the production line. In
contrast to the traditional forecast oriented method where parts are pushed to the line.
The Kanban method described here appears to be very simple. However, this is a "visual
record" procedure.
Figure 8 :- Kanban System
Advantages of Kanban Process
• A simple and understandable process

• Provides quick and precise information
• Low costs associated with the transfer of information
• Provides quick response to changes
• Limit of over-capacity in processes
• Avoids overproduction
• Is minimizing waste
• Control can be maintained
• Delegates responsibility to line workers
"Kanban represents an efficient tool to continuously rationalize the production process

and find the source of problems". Since the circulation of Kanban will stop if there is a
production problem on line, it is easy to both spot and correct the problem
instantaneously.
Kanban is implemented in Stores Department at VIDEOCON, Shahjahanpur. For this, a
Kanban card is attached with each and every item present in the Stores Department. Each
Kanban carries all the relevant information about the item, which is useful in estimating
its requirements. A typical Kanban card bears following information:
CAT NO.:.........................................................................................
DESCRIPTION:..............................................................................
INITIATOR:....................................................................................
BUYER:...........................................................................................
CONSUMPTION:...........................................................................
MAXIMUM LEVEL:......................................................................
MINIMUM LEVEL:........................................................................
REORDER LEVEL:........................................................................
Figure 4 – Kanban Card
RECOMMENDATIONS:
• CAT numbers should be different, that is no two CAT numbers should be
same.
• To make it more effective, no one should be permitted to take material out of or to
put back the material in the bin unless and until he has updated the entries on the
Kanban card.
• The data mentioned on the card attached with each bin should be updated as soon
as some material is issued from that bin.
• Reorder level should always be kept in mind so that as soon as that point is
reached, the bin should again be filled with the same material up to its optimum
capacity.
KaiZen
KAIZEN: For continuous improvement:
Kaizen literally stands for ‘Kai’-change and ‘Zen’-to become good. The Kaizen
philosophy lies behind many Japanese management concepts such as Total Quality
Control, Quality Control Circles, small group activities, labor relations, etc.
Kaizen is based on a Five-S framework:
a. Seiri - Tidiness
b. Seiton - Orderliness
c. Seiso - Cleanliness
d. Seiketsu - Standardized clean-up
e. Shitsuke - Discipline
Key elements of Kaizen are:

• Quality - Quality circles
• Effort - Suggestion for improvement
• Teamwork - Involvement of all employees
• Willingness - To change
• Communication
• Improved morale
• Personal discipline
The Kaizen method of continuous incremental improvements is an originally Japanese

management concept for incremental change.
The Kaizen cycle has four steps:
• Establishing a plan to change whatever needs to be improved
• Carrying out changes on a small scale
• Observing the results
• Evaluating both the results and the process and determining what has been learned
BENEFITS OF KAIZEN:
a. It improves safety.
b. It improves efficiency of workers as well as the whole plant.
c. It improves the dedication of the employees as it keeps them safe from any kind of
mishap.
d. It makes the plant well-organized.
There is a Gang Punching Machine in the fabrication department. Earlier, it had a
manual system for moving the sheet, to be punched, inside the machine and
simultaneously moving a knob. Once, a worker accidentally cut his fingers in the process
of Gang Punching.
To avoid any further mishaps, a wooden block was placed in the machine which could be
pushed to move sheets inside the machine and the need for pushing the sheet inside the
machine by hand was avoided. This ensured the safety of the employees working at the
machine.
Apart from this, there are many big and small changes made, like inclusion of stools to
help workers in cutting sheets, pathways, separate parking bays for keeping trolleys,
posters to provide information to employees regarding their safety, etc.
RECOMMENDATIONS:
• It should be checked that all the Kaizen principles followed are being
implemented properly.
• Employees should be asked to implement Kaizen principle on their own
and their valuable suggestions should be kept in mind, and as far as
possible, should be implemented.
• Another point that must be kept in mind is that Kaizen need not be a big change;
it can be as small as keeping a chart of most frequently used telephone numbers
near your desk, to big changes like replacing a number of old machines with a
multi-tasking/many-in-one machine
Single piece flow system
To become lean, companies have to create continuous flow wherever applicable.

Shortening the elapsed time from raw materials to finished goods leads to the best
quality, lowest cost, and shortest delivery time. Creating flow exposes inefficiencies
that demand immediate solutions. Everyone concerned is motivated to fix the problems
and inefficiencies because the plant will shut down if they don't.
Flow means that a customer order triggers the process of obtaining the raw materials
needed just for that customer's order. The raw materials then flow immediately to
supplier plants, where workers immediately fill the order with components, which flow
immediately to a plant, where workers assemble the order, and then the completed order
flows immediately to the customer. The whole process should take a few hours or days,
rather than a few weeks or months.
There are, Various steps involved in production of any item at VIDEOCON Refrigerator
plant. Every second step acts as a customer to the previous step. Each step depends on its
immediate predecessor for performing its function.
A problem/delay at any one or more of the steps will lead to a halt in the production
process. So, each and every employee involved at different stages of the production
process is thoroughly trained, and is held responsible for his part in the production
process.
The production process starts with planning, where it is decided what is to be
produced in the next one month or so. After this, a blue-print of the products is made in
the programming stage. A computerized design is made by using various kinds of
programming softwares available with the plant. Now, the punching process on metal
sheets and other items starts followed by bending and drilling/tapping. To make the
product attractive and easy-to-use, powder coating is done. After that, painting of
different parts takes place. Finally, different parts are assembled together to get
theproduct as desired by the customer.
Thus, the layout of company should be such that all these processes should be done in a
continuous manner
Advantages of single piece flow system

Quality. It is much easier to build in quality in one-piece flow. Every operator is an
inspector and works to fix any problems in station before passing them on. But if defects
do get missed and passed on, they will be detected very quickly and the problem can be
immediately diagnosed and corrected.
Higher Productivity. In a one-piece-flow cell, we can quickly see who is too busy and
who is idle. It is easy to calculate the value-added work and then figure out how many
people are needed to reach a certain production rate.
Gemba Walking
Gemba means Actual Place. Instead of relying on reports to run a plant or company, the
manager should put on some walking shoes and "go and see" at the "actual place",
whether its a factory or a store. This Practice is also followed in VIDEOCON .
Virtual Storage
This is another technique of effective inventory management. Here the supplier is asked
to open their stores or warehouses within the premises of company and as and when the
material is required an order is placed to the supplier and the suppliers of the godown
deliver the goods to the company with the copy of invoice.
So, virtual storage helps to receive timely delivery of inventory as the goods are lying in
the godown and are issued as and when required.
However, this practice is not followed in VIDEOCON .
CASH MANAGEMENT
Cash is the most liquid current asset. It is the common denominator to which all current
assets can be reduced because the other major liquid assets, i.e. inventory and receivables
get eventually converted into cash. This clearly underlines the significance and essence of
cash management.
Cash can be defined in many ways, it’s not only the money in hand or bank, it is much
more than that.
Cash includes:
• Currency
• Cheques
• Drafts
• Demand deposits
• Marketable securities
• Time deposits
NEED OF CASH:
Cash, of all types, acts as a reserve pool of liquidity that provides cash quickly, as and
when needed. They also provide a short-term investment outlet for excess cash and are
also useful for meeting planned outflows of funds.
The major reasons of keeping cash are:
• Transaction motive – this refers to the holding of cash to meet routine cash
requirements
• Precautionary motive – these refer to the cash balances held in reserve for
random and unforeseen fluctuations in cash flows
• Speculative motive – it refers to the desire of a firm to take advantage of

opportunities which present themselves at unexpected moments
• Compensating motive – usually banks ask clients to maintain a minimum

balance of cash with them (bank). Since this balance can not be utilized by the
firms for transaction purposes, the banks themselves can use the amount to earn a
return. Such balances are compensating balances.
OBJECTIVES OF CASH MANAGEMENT:
The basic objectives of cash management can be classified majorly in the following three
types:
a. To meet the cash disbursement needs (payment schedule) – these include payments
to vendors as well as salaries to employees etc.
b. To minimize funds committed to cash balances – this is important as cash which is

lying idle is of no use to the firm
c. To synchronize inflows and outflows of cash – an excess of either inflow or outflow

may be detrimental to the growth of the company.
COST OF HOLDING CASH:

Cash management has some costs associated with it.
No earning power - Irrespective of the form in which cash is held as an
asset, it has no earning power. That is, cash does not earn any return.
Depreciation cost - Cash keeps lying idle, without earning anything; in

fact it keeps depreciating with time.
BENEFITS OF CASH MANAGEMENT:

Some of the major benefits of cash management are:
a. To prevent insolvency or bankruptcy arising out of inability of a firm to
meet its obligations.
b. The relationship with bank is not strained.
c. It helps in fostering good relations with trade creditors and suppliers of
raw materials, as prompt payment may help their own cash management.
d. A cash discount can be availed if payment is made within the due date
e. It leads to a strong credit rating
f. To take advantage of favorable business opportunities that may be
available periodically
g. The firm can meet unanticipated cash expenditure within a minimum of
strain during emergencies (strikes, fire, new market strategy by competitor
etc.)
Cash is the most liquid current asset. It is of vital importance to the daily operations of
business. While the proportion of assets held in the form of cash is very small, its
efficient management is crucial to the solvency of the business. Therefore, planning
cash and controlling its use are very important tasks.
Cash budgeting is a useful device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and outflows f cash
over a projected short period of time which may usually be a year ,half or a quarter
year. Effective cash management is facilitated if he cash budget is further broken down
into month, week or even on daily basis.
There are two components of cash budget

(i) cash inflows and
(ii) cash outflows.
The main sources for these flows are given hereunder:
Cash Inflows
(a) Cash sales
(b) Cash received from debtors
(c) Cash received from loans, deposits, etc
(d) Cash receipt of other revenue income
(e) Cash received from sale of investments or assets.
Cash Outflows
(a) Cash purchases
(b) Cash payment to creditors
(c) Cash payment for other revenue expenditure
(d) Cash payment for assets creation
(e) Cash payment for withdrawals, taxes
(f) Repayment of loans, etc.
A suggestive format for ‘Cash Budget’ is given below:
Cash Budget of M/s…

Particulars Months
January Feburary
March
Estimated cash inflows
------------
-----------
I. Total cash inflows
Estimated cash outflows

------------
-----------
II. Total cash outflows
III. Opening cash balance

IV. Add/Deduct surplus/Deficit
during the month (I–II)
V. Closing cash balance (III–IV)
VI. Minimum level of cash

Balance
VII. Estimated excesses or shortfall ofcash (V–VI)
How VIDEOCON Manages its cash?
Managing cash is very essential for the business since it is crucial for solvency of
business. VIDEOCON uses various techniques to manage its cash operations.
Sweeping Facility
Rather than keeping cash at different locations, the collections and disbursals of all the
locations are recorded and the cash is kept at one central location as it is quite
cumbersome for an organization to maintain records of collection and disbursals of cash
of its different offices. It also involves a number of extra personnel, and is certainly a
waste of work force, time and money. Also, the money lying scattered with various
offices is of no use as such, because it is simply lying idle. A better option will be to
deposit this cash into a bank, having central banking facility, where it can be invested to
earn some profit. For this a suitable multi-locational bank is selected, preferably the one,
which has branches in all the locations where the different offices of the company are
located.
Moreover, if all the money is kept at one place, it will definitely amount to a huge sum.
This huge sum will make it easier for the company to negotiate with the bank regarding
the interest rate which VIDEOCON is supposed to pay for availing such facility.
BENEFITS OF SWEEPING FACILITY:

It’s a win-win situation for both – the company and the bank. Both of the parties are
benefited by this technique.
Benefits for the company:

a. Gets a chance to negotiate with the bank over the interest rate which VIDEOCON
is supposed to pay to the bank.
b. This huge sum can be invested in business also, which will again prove to
be profitable.
Benefits for the bank:

a. Bank charges the company according to the services rendered by it.
b. Bank can use these funds for its daily business purposes.
Sweeping Facility service is a prominent tool used for proper cash management at
VIDEOCON. For this purpose VIDEOCON has selected Standard Chartered Bank
because of its intensive reach in nearly each and every corner of the country, especially in
Delhi, Mumbai, Powai and all other places where VIDEOCON offices are located and
also because it has the facility of Central Banking, which is a prerequisite for a bank to
offer such service.
What happens is – all the money is deposited in one account. Now, as and when a center
in any particular region requires some money, it withdraws the same with the bank .
Later, the bank receives the same amount from the central account of VIDEOCON .
All the financial decisions regarding the selection of bank, its location and interest rate
etc are made at the Head Office of VIDEOCON – Treasury Department, VIDEOCON
Mumbai.
All the offices are allowed to make cash collection and disbursals through a common
bank account of VIDEOCON at Standard chartered Bank, Delhi.
Day Light Limit

Every Branch of VIDEOCON maintains two accounts one having the sweeping facility
and one not having. This day light limit is used where sweeping facility is not available.
Here, based on the past experience or on the basis of current business transactions daily
cash flows are estimated i.e. how much cash inflow will be there and how much cash
outflow will be there and based on this estimation that much amount is maintained in the
account.
RECOMMENDATIONS:
Now-a-days most of the banks provide central banking facility, so the
main criterion of selection of bank should be the interest rate it is charging
for rendering such services (it should be as low as possible.
Conclusion
The objective of working capital management is to maintain the optimum balance of each
of the working capital components. This includes making sure that funds are held as cash
in bank deposits for as long as and in the largest amounts possible, thereby maximizing
the interest earned. However, such cash may more appropriately be "invested" in other
assets or in reducing other liabilities. When considering these techniques and strategies of
Working capital, departments need to recognize that each department has a unique mix of
working capital components. The emphasis that needs to be placed on each component
varies according to department. For example, some departments have significant
inventory levels; others have little if any inventory.Furthermore, working capital
management is not an end in itself. It is an integral part of the department's overall
management. The needs of efficient working capital management must be considered in
relation to other aspects of the department's financial and non-financial performance.

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A

IN PARTIAL FULFILMENT FOR THE DEGREE OF

SUBMITTED TO: SUBMITTED BY:

-Videocon takes over Hyundai Electronics

Videocon is an Indian multinational with interests in Consumer Electronics, Home

Consumer Durables Thomson CPT CRT Glass Oil & Gas

Consumer Electronics, Home Appliances & Compressor manufacturing in India

Display industry and its components

Colour Picture Tube Glass

Vision & Mission

Videocon’s mission: a reflection of continuity and change

“To delight and deliver beyond expectation…” the end

“…through ingenious strategy…” the means

“…intrepid entrepreneurship…”: the means

“…innovative products…”: the means

“…insightful marketing…”: the means

“…inspired thinking about the future.”: the means

Year Ending Month Jun

LOCATION OF VIDEOCON PLANT

Factory/plant Vigyan Nagar, RICO Industrial Area, Shahjanpur, District Alwar,

HALF YEARLY RESULTS

Half yearly results …………………in Rs. Cr. …………………..

I would sincere thanks to Mr. (Manager- Finance and Accounts Department)

1. Working Capital Management

As a part of inventory management, various inventory management techniques are

As far as receivables management is concerned, Credit Terms, Credit Policy, and

Apart from self-experimenting and observing, I constantly interacted with various

Working Capital Management

The term Working Capital may be used in two different ways.

Gross Working Capital= Sum Total of Current Assets

i. Procurement of raw materials and services.

Debtors Raw material

Finished Goods Work in Process

Figure:1 – Working capital Cycle

Working capital cycle involves conversions and rotation of various

 Conversion of Raw material into finished goods

 Conversion of Work-in-progress into finished goods

 Sale of Finished Goods

 Conversion of Receivables into Cash

While underassessment of working capital has disastrous implications on business,

• Excess of working capital may result in unnecessary accumulation of

Working Capital: Policy

Figure 2 : Different types of working Capital

VIDEOCON and its Working Capital policy

VIDEOCON follows conservative working capital policy i.e. for every

Objective of Receivables management

Normal (20 days) Default (40 days)

Trade off on receivables

Profitability and Liquidity of a firm

So, the receivable management must be attempted by adopting a systematic

3/10, 2/10, net 30 means

Cash discount- The cash discount offered by VIDEOCON is 2% to 1.75%, depending

This can be summarized as follows:

There are three options available with the vendors:

ii) Cheque Arrangement: In simple Cheque arrangement, on

Average collection period= Average Receivables

Age Group %of total outstanding

4.Accounting Ratios: Two accounting ratios may be calculated in particular may be

Creditors can be managed by discounting of bills.

Benefits of Discounting of Bills

The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense,

In any organization, there may be following four types of inventory:

(b) Consumables & Spares -- These may include materials required