Working Capital Management

INTRODUCTION
Working capital management involves the relationship between a firms shortterm assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Working capital typically means the firms holdings of current, or short-term, assets such as cash, receivables, inventory and marketable securities. These items are referred to as circulating assets because of their cyclical nature. In a retail establishment, cash is initially employed to purchase inventory, which is in turn sold on credit and results in accounts receivables. Once the receivables are collected, they become cash-part of which is reinvested in additional inventory and part going to profit or cash throw-off. The need for working capital to run the day to day business activities cannot be overemphasized. We will hardly find a business firm which does not require any amount of working capital. Indeed, firms differ in their requirements of the working capital. There are two concepts of working capitalgross and net. Gross working capital refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year an include cash, Short-term securities, debtors, bills receivable and stock. Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors bills payable, and outstanding expenses. Working Capital is the capital that allows businesses to operate on a day-today basis. Depending on the nature and the time period for which the working capital is held in business, it can be classified as:

SAEC

Working Capital Management CAPITAL:

CAPITAL

FIXED CAPITAL

WORKING CAPITAL

GROSS WORKING CAPITAL

NET WORKING CAPITAL

OPTIMUM WORKING CAPITAL

CONTINGENT WORKING CAPITAL

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Working Capital Management

NEED FOR THE STUDY

The need of Working Capital cant be over emphasized every businesses needs some amount of working capital arises due to the time gap between production and realization of cash from sales. There is time gap in purchases of raw material and production. Production, sales and realization of cash thus, working capital needed for the following purposes.

For the purchase of the raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power and office expenses etc. To meet the setting cost as packing, advertising, etc. To provide credit facilities to the customers. To maintain the inventories of raw material, work in progress, stores and spares and finished stock. Adequate working capital enables a concern to face businesses in emergencies such as depression, because during such period, generally there is such pressure on working capital. Adequacy of working capital creates environment of confidence high morale and creates overall efficiency in business. Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. Adequate working capital helps in maintaining solvency position of the business by providing uninterrupted flow of production.

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Working Capital Management

OBJECTIVES OF THE STUDY

Primary objective: A study on working capital management in BHARATHI SOAP WORKS at Guntur. Secondary objectives: To find out the liquidity position of the company To find out the determents of working capital in the company To know asset the working capital prices To find out the sources of working capital finance To examine the core management Bills receivable management Inventory management To measure the operational efficiency of BHARATHI SOAP WORKS. To determine the profitability trends of BHARATHI SOAP WORKS To asses the components of the working capital management and determine the fluctuations caused due to them.

SCOPE OF THE STUDY

The study is of significant help to the following groups. The study provides an insight into the various aspects of WORKING CAPITAL MANAGEMENT Studies of this type are also useful to competitors to make necessary steps to improve WORKING CAPITAL MANAGEMENT Hence the company can make necessary changes in the policy relating to it. Studies of this type are also useful to policy makers to make necessary changes in the policies retaining to the working capital management in BHARATHI SOAP WORKS The scope of my study constitutes to be one of the interesting and key areas of working capital management. The study concentrates of the financial status or affairs of the company and the management of working capital in the company which

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Working Capital Management involves the study of operating cycle and ratios of different periods and their comparison over the last five years.

METHODOLOGY
Case study method been adopted for carrying out the study. For carrying out the project primary data and secondary data has been used. The collection of data has been done through them principle sources. (1) (2) Primary Data Secondary Data It is the information collected directly from accountants, account officers and financial departments, personal interaction and observation. (2) Secondary Data Secondary data is the data which is already published in economic and commercial journals. The data is collected from: Annual reports. Audit reports. Different books. Companys website LIMITATIONS OF THE STUDY: Every study is conducted under certain limitations. The limitations for this study are as follows. The whole study was conducted with in a short span of 45 days. I was sincere in my efforts in gathering the maximum possible information and utilizing it for study. It was not possible to get the lent percent correct information. The research was made according to the information available from related departments and through annual reports published. The study is based on the information provided by the company. Working capitals are calculated on the basis of 5 years financial statements. ********

(1) Primary Data:

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Working Capital Management

INDUSTRY PROFILE
HISTORY OF DETERGENTS: Though the beginning of detergent industry is not shrouded in the veils of history as were the start of soap industry, it is nevertheless not easy to find when the detergent industry, as such, came into existence. An important issue is to decide exactly what is being termed as a synthetic detergent as the term itself leads to confusion. In the United States of America, the word surfactant or syndic is being used, while in Europe the term 'ten sides' (for tension-active material) came into fashion. The chemistry of soap manufacturing remain primarily the same until the year 1916, when the first synthetic detergent was developed in Germany in response to the shortage of fats for making soaps during the World War I. Commonly known as detergents today, synthetic detergents are non-soap washing and cleaning products, which are put together chemically or synthesized to produce a variety of raw materials. Between 1950 and 1965, more than half of the detergents were based on the formula of a propylene tetramer conjugated to benzene (PT benzene), but later they were blamed for a rise in eutrophication in lakes and streams as they contain phosphates (from Sodium tri phosphate). Although the problem has not been completely resolved in some cases, in some countries there has been an agreement for reducing the uses of phosphates however in countries where it is not a big issue no such action has been taken. Since those early discoveries in the chemistry and technique of detergents and builders, developments have been continued that focuses on achieving more efficient and easy to use detergent products. Now the manufacturers give an important consideration to safety for consumers and the environment as well. Given below is a brief summary of important inventions over the years of the history of detergent 1950s > Liquid laundry, hand dishwashing and all-purpose cleaning products Automatic dishwasher powders SAEC 6

Working Capital Management Detergent with oxygen bleach Fabric softeners (rinse-cycle added) 1960s Laundry powders with enzymes Prewash soil and stain removers Enzyme presoaks 1970s Fabric softeners (sheets and wash-cycle added) Multifunctional products (e.g., detergent with fabric softener) Liquid hand soaps 1980s Automatic dishwasher liquids Detergents for cooler water washing Concentrated laundry powders 1990s Ultra (super concentrated) powder and liquid detergents Automatic dishwasher gels Ultra fabric softeners Laundry and cleaning product refills INDUSTRY OVERVIEW: The soap and detergent industry includes companies that are primarily engaged in manufacturing soap, synthetic organic detergents, inorganic alkaline detergents, and crude and refined glycerin from vegetable oils and animal fats. It is an international Industry, and during the early years of 1990, world demand for its products has increased 1 to 3 percent every year. Many of the participants in the industry competed on a global basis. According to analysts, there is a firm correlation the standard of living of a nation and its usage of soap and detergent products. The analysts are expecting the industry to continue to grow in both the industrialized as well as developing nations. Security Tenders: SAEC 7

Working Capital Management According to recent trends, liquid cleansing products are outpacing the traditional bar soap and powder cleaning products. In addition to environmental and health considerations, societal transformation has propelled the changes in the soap and Size: The industry includes about 700 companies with combined annual revenue of about $17 billion. Major companies in the consumer sector include divisions of P&G, Unilever, and Dial. Major companies in the commercial sector include US Chemical and divisions of Ecolab. The industry is highly concentrated with the top 50 companies holding almost 90 percent of the market.

INDIAN DETERGENT INDUSTRY PROFILE

Detergents: The Indian fabric wash market consists of synthetic detergents, Comprising bars, powder, and liquids and oil-based laundry soaps. Although the per capita consumption of detergents in India (2.7 kg pa) is comparable to some countries like Indonesia, China and Thailand (around 2 kg pas), it is lower than in others such as Malaysia, Philippines (3.7 kg) and the USA (10 kg). The Indian detergent market is expected to grow at 7-9% pa in volume terms. The synthetic detergent market can be classified into premium (Surf, Ariel), mid-price (Rim, Wheel), and popular segments (Nirma), which account for 15%, 40% and 45% of the total market, respectively. The product category is fairly mature and is dominated by two players, HLL and Nirma. Nirma created a revolution in the market by pioneering the concept of low-cost detergents. Currently, the market is highly segmented with the differential between the premium and popular segments at almost 7X. Growth High consumer awareness and penetration levels will enable the market to grow at an average 8-10% per annum with slightly higher growth in the rural areas. Higher penetration stems from popularity of low-cost detergents. Hence, besides increase in per capita consumption, there is tremendous scope for movement up the value chain. HLL, Nirma, and P&G are the major players in the market with 40%, 30%, SAEC 8

Working Capital Management and 12% share, respectively. While HLL dominates the premium segment, Nirma is the leader in the popular segment. Personal Cleaning Products Personal cleaning products are cleaning agents that are used to wash and clean our hands, face, body, and hair. These products may include toilet soaps, liquid cleansers, face wash, shampoos, and conditioners. Personal cleaning products help us remain clean and healthy by removing dirt, oil, and environmental pollutants from our body. Personal cleaning products can be categorized into two main types Skin Cleaning Products Hair Cleaning Products Laundry Cleaning Products: Laundry cleaning products are detergents and surface active agents that are manufactured to wash and clean our laundry items. These products come in various forms, such as detergent cakes, powders, and liquids and are formulated to meet different requirements of laundry cleaning, such as stain and soil removal, bleaching, fabric softening and conditioning and disinfectant requirements under the varying temperature, water, and usage conditions. Laundry Cleaning Products can be categorized into five main types Detergent Powder Detergent Cake Fabric Softener Laundry Liquid Stain & Odor Elimin Household Cleaning Products: Household Cleaning Products are cleaners that we use in our homes to wash and clean different household products, such as furniture, glass, plastic items, and different types of surfaces. These products help us keep fit and healthy are killing and removing harmful bacteria and germs from our homes and workplaces. Household Cleaning Products can be categorized into four main classes Floor Cleaners Glass Cleaners Toilet Bowl Cleaners SAEC 9

Working Capital Management Wood Cleaners Dishwashing products are cleaning agents that are formulated to wash and clean dishes and other kitchen utensils. These products are available for hand wash as Dishwashing Products: well as machine wash and are made for different water, temperature, and usage conditions. Dishwashing products can be categorized into four main types Dishwasher Liquid Dishwasher Powder Dishwasher Gel Dishwasher Tablets Detergent Cake: A detergent cake is generally an all-purpose laundry cleaning detergent that comes in the form of a cake. Easy and convenient to use, detergent cakes are generally meant for hand washing of all washable clothes and fabrics. Detergent cakes are one of the most popular and widely used detergent products for laundry cleaning. Detergent cakes are generally formulated using one or more surfactants to improve their cleaning performance and make the good even for use in hard water conditions. Formulation: Detergent cakes are formulated using batch or continuous process of soap making. These cleansing products contain different ingredients that are used to improve their cleaning performance. The surfactant play an important role in improving the cleansing action of detergent by reducing the surface tension of wash liquid thereby improving the wet ability of washable fabric. Ingredients: Some of the important ingredients of detergent cakes include - surfactants, detergent builders, boosters, brightening agents, synthetic fragrances, colors, Detergent Powder: Detergent powders are laundry-cleaning products that are made using a synthetic surfactant in place of the metal fatty acid salts, which are used in soaps. Made in powder form, these detergents are also sold as laundry powders, hard surface cleansers, etc. Majority of the powder detergents has soap in their mixture of ingredients; however they basically function more as a foam depressant than as surfactant SAEC 10

Working Capital Management The main advantage of detergent powders is that they are easy to use and remove the dust, dirt, grease, oil and other environmental pollutants with ease and effectiveness. Detergent powders can be used for hand wash as well as machine wash Ingedients: The most common ingredients that are used in making powder detergents are Surfactants, optical brighteners, fabric softeners, enzymes, detergent builders, bleaches and compounds, synthetic perfumes and fragrances, and more. Soaps & Detergents Ingredients: Along with surface active agents, which are prime ingredient in a soap / detergent, soaps and detergents are made using a variety of ingredients that are added in these products to give them specific properties and characteristics. Soaps & detergents are cleansing products Essential to public and personal health, soaps and detergents contribute to a good personal hygiene; reduce the presence of germs, which cause infectious diseases; extend the useful life of tableware, clothes, linens, surfaces and furnishings; and make our homes and surrounding more pleasant. Properties & Functions: These different ingredients impart different properties and functions in soaps and detergents and their addition or usage depends on the action or characteristics desired in the end product. For example, toilet soaps may contain antimicrobial agents to kill or inhibit bacteria, which can cause odor or disease. Some personal cleaning products may be made using abrasives for removing stubborn greasy dirt. Important ingredients that are used in making soaps and detergents are Alkalis Glycerin Surfactants or Surface Active Agents Detergent Builders Detergent Boosters Detergent Fillers Rinse Agents Film Removers SAEC 11 applications

Working Capital Management Lime & Rust Removers Emulsifiers Dry Cleaning Fluid Conditioning Agent Bleaches & Compounds Ammonia Detergents and health: Detergents are household chemical cleaning compounds used for laundering and dishwashing. They contain wetting agents and emulsifiers, based on non-soap synthetic surfactants. Synthetic detergent powders consist of surface-active agents, builders, and fillers. A study done to understand the Indian consumers knowledge of harmful effects of detergents on health and environment showed that 77.6 percent of respondents had experienced some kinds of skin irritation due to detergents. Of these , the majority comprised of dhobis and rural women. Conventional laundry detergents leave chemical residues on the clothes. These residues enter our bodies either through the skin or through the lungs. They cause many common health problems including allergies, skin infections and in rare cases, cancer. Detergents and water pollution: Most laundry detergents in India are phosphate based. Phosphates are a major source of water pollution that has become the direct cause of 42 per cent of human and animal diseases. In India, per capita consumption of detergents in 1994 was 2.8 kg per annum. This is projected to rise to over 4 kg/capita by 2005. In rural areas the use of detergent bars is expected to grow 7-8 per cent annually. The figures are of concern because high quality detergents have as much as 35 per cent STPP in them. According to Prof Narinder K. Kauschik, Professor emeritus for environmental biology at the Canadian University of Guelph, "the main problem is that of phosphate-based detergents promoting eurtrophication of aquatic environments." Seasonal impacts: Run-off of phosphates into water streams is not only due to detergents, but also due to fertilizers and manures. Findings show that during the dry seasons when the run-off from agriculture is virtually zero, and manure run-off is down to one fifth of the total annual rate, detergents are responsible for additional loadings of rivers by SAEC 12

Working Capital Management about 7.3 per cent which poses significant eutrophication impact risks. In India, it is not uncommon to see ponds, lakes, and part of rivers choking with algae or other aquatic plants. In the Indian context, this is a grim situation since these water bodies are the primary sources of water for a large section of the population Regulations: India has addressed the eutrophication problem only at the level of sewage treatment plants (STPs). The ever-increasing demand of phosphate-laden detergents in rural areas will increase eutrophication of the local water bodies that serve as the primary water resource. Even metropolitan cities like Delhi, Calcutta, Mumbai, and Chennai are partially skewered. More specifically, only 43 per cent of class I cities and 12 per cent of class II cities are skewered. Of this only 37 per cent of sewage is partially treated in class I cities and 5 per cent in class II cities. Prof. Kauschik reveals that in Canada, and in many states of USA, public pressure has led to the regulation of phosphates in detergents since early 1970s. According to him these countries have spent $8.5 billion in 1970s to upgrade sewage treatment plants to remove excessive phosphates. Canada successfully implemented the appropriate regulation to control phosphates emission into water systems by limiting the amount of phosphates in laundry detergents to 0.5%. Progressive labeling requirements BIS: The Bureau of Indian Standards (BIS) has separately laid down the standards for eco-labeling of detergents in India. Based on the quality, safety and performance of these detergents, a set of general and specific requirements for an Ecomark have been established. The specific and general requirements laid down by BIS for ecomarking of detergents states that they should not contain any phosphate. They also stress that the surfactants issued in the manufacture of household laundry detergent powders should be readily biodegradable and the products be packed in packages made of recyclable or biodegradable materials. Eco-friendly household cleaning powders: An environmentally superior detergent is the one that makes use of lesser chemical ingredients. The toxicity of detergents decreases by non-addition of additives like perfumes, color, and brightening agents. Minimal packaging can also reduce environmental harm substantially. Synthetic surfactants may be replaced by non-petrochemical surfactants or vegetable oil soaps; builders like phosphates can be replaced by sodium citrate and sodium bicarbonate; dyes and fragrances can be SAEC 13

Working Capital Management Eliminateorminimized. Future Outlook: Factors such as demographics, environment, globalization, and economy continue to shape the soaps and detergent industry. The effect of demographic factors can be seen in different sectors of industry. As the population of a nation grows old, the demand for cosmetic products with softer colors, milder formulations, and the treatments for aging skin increases. As the consumers become better educated and informed, there is a fast growing market for scientifically based soap and detergent products, which at the same time medicate and beautify.

Mergers & Acquisitions / Globalization: Due to the saturation of traditional markets and in order to tackle the slow growth in domestic markets, organizations now days, are creating sophisticated infrastructures and rationalizing their production so as to make the production process centralized in fewer but larger plants. This has contributed to standardization of the soap and detergent ingredients across the globe. Manufacturers are striving to adopt basic formulations for all consumers all across the world, which can be varied by the addition of some ingredients to satisfy the trends in local markets. Another major consequence of M&A trend is the rationalization of brands in order to realize cost cuts in marketing and branding. Another trend, which is a result of M &As, is the standardization of production process. Competitive Land scape: Population growth, especially households with children, drives demand in the consumer sector, while growth in economy drives demand in the commercial sector. The profitability of individual companies depends on several factors, such as efficient operations and effective sales and marketing. Large companies have scale advantages in domains like buying, manufacturing, distribution, and marketing. Small companies can effectively compete with large companies by formulating specialized products, offering superior customer service, or catering a local market. The industry is capital-intensive with average annual revenue per worker more than $ 7,00,000. Research & Technology: SAEC 14

Working Capital Management The need to meet environmental regulations across the globe various research efforts was undertaken by the soap and detergent industry during the early 1990s. Sodium carbonate, Zeolite, sodium citrate, and sodium nitrate acetate were under investigation as possible builders to replace phosphates. Other questions that were being addressed, include - water quality, product safety, chemical disposal, the ability to wash and clean in unheated water, and indoor air quality. Although several technological developments and an increasing expanding understanding of the chemical processes had improved the ability of industry to restore soiled garments and other objects to their pre soiled condition, available soaps and detergents still failed to achieve the desired results. Chemical scientists, therefore, continued to work on developing and formulating innovative cleaning and laundry additives like new enzymes and oxygen bleaches. COMPANY PROFILE Sri. A. Manickavel, proprietor of BHARATHI SOAP WORKS, came to Guntur on 1980 with Rs.2000/- cash and brought some Detergent cakes cases from Chennai by train and he sold the soaps by rickshaw canvassing door to door. He had very good response in Guntur. Then he planned to start factory at Guntur with an initial capital investment of Rs.65000/- and started business on 8-71981 at pothuri-varithota, Maya bazaar, Guntur under the name and style of M/s BHARATHI SOAP WORKS. The company was registered under SSI unit with District Industries Centre, Guntur In the initial stage, he ran his factory with 12 workers with manual labour. Later with his hard work, he earned and shifted to D.No.67/B-1 Gorantla village, Guntur Mandal in 1985 in his own factory premises with power motors in Guntur for the first time. The then brand names were Blue Diamond, Bharathi. The main objective is to sell good quality detergent cakes to middle class and lower class people with low pric Initially the products were sold at Guntur and Prakasam District only. But now his hard work and maintaining quality, he has got very good market reputation all over Andhra Pradesh by appointing sales agents at different areas. Through its good management and organization, it acquired a good position in the detergent industry.

VISION:SAEC 15

Working Capital Management The company is planning to introduce quality blue and toilet soap in the short period. He can also to do sellers of detergent cakes washing powder chemicals, dates salt other general goods. This firm is providing employment to nearly 100 families. MISSION:Sri .A.Manickavel came to GUNTUR in 1980 and started business with very low amount and day by day improvement he decided to give quality soaps low price to middle class people. He is a popular social worker and philanthropist in Guntur. He directly and indirectly helped the needy like mission and charity institution. Home for the aged and men challenged persons. Orphanages, home for the aged and mentally challenged persons (Dakshinya). President of TAMIL CULUTRAL ASSOCIATION. He is also helping through Lions Club and Rotary Club; by conducting free Eye testing camps, Medical camp, and Blood Donation camps etc. He has also donated to Natural Calamity funds to all the states in India regularly (Gujarat Earth Quakes, A.P Cyclone and recently Tsunami in Andhra Pradesh and Tamilnadu states). Every year he has been donating educational funds for books, cloths, fees etc to poor children directly and through Bala Bharathi in Guntur. He is also interested to participate in the spiritual, cultural and sports activities in the city and entire AP and donating the funds to the organizers. WALC FOUNDATION (WELFARE ARTIFICIAL LIMB CENTRE) Sri.A.Manickavel, who is the President of WALK FOUNDATION and he is providing monetary support to this association to provide freely artificial limbs to the handicapped poor people. RAL ASSOCIATION: TAMIL CULTU Sri A.Manickavels is the Hon. President of TAMIL CULTURAL ASSOCIATION. The associations main activities are to arrange and promote cultural programs to their association members and social services like distributing free Note books, Uniforms to the poor students. This association also contributing the cyclone relief fund to the Chief Minister of Andhra Pradesh etc. NADARGAL MUNNETRA SANGAM: SAEC 16

Working Capital Management Sri A .Manickavel, who is the president of the Nada gal Munnetra Sangam (NADAR COMMUNITY) in A.P. This sangam is running a school in the name and style of KAMARAJ PUBLIC SCHOOL at Tadepalli, Guntur Dist.( A.P.). This school is providing very good education to the poor students. GROWTH AND EXPANSION OF BHARATHI SOAP WORKS: M/s. Bharathi Soap Works is expanding their day to day production capacity and supply of goods from time to time. Initially, M/s. Bharathi Soap Works capital investment is Rs.65000/- but now the investment reached Rs.64, 98,817/-, hundred times. With M/s. Bharathi Soap Works good marketing and promotional activities its present turnover reached to Rs.8.71 crores for the year 2006-2007 when compared to Rs.24 lakhs at the initial stage. M/s. Bharathi Soap Works initially manufactured only medium quality products. But now manufacturing Premium and Economy quality products. With the increasing market share and to face the competition, it started introducing new brands by maintaining different styles of packing to suit the desires of the consumer The main aim of M/s. Bharathi Soap Works is to supply quality products to its consumers. Quality is more important than profit. It is the key for the success of the company. The company stress upon the quality of the products rather than its profit margins. The motive earned huge market at all places in Andhra Pradesh. WORKERS OF BHARATHI SOAP WORKS: At present 75 workers are at production department and 5 employees at office, 2 employees at canteen and 18 employees as motor transport workers. The company provides complete facilities to its workers and employees. As it provides complete assistance and facilities to the employees, workers dedicatedly contributed to increase its market share. The working environment brings about a pleasant atmosphere and enables the employees work dedicatedly, and also he is providing employment for more than 1000 families indirectly for marketing his products all over Andhra Pradesh.

FUTURE PLANNING OF BHARATHI SOAP WORKS: SAEC 17

Working Capital Management The company is planning to manufacture and sell quality Blue detergents and Toilet soaps with in a short period TRADING COMPANY: M/s. ANNAM TRADERS: Sri A. Manickavel is the Managing partner of ANNAM TRADERS. The above firm was established in the year 1990. The main activities are selling of Detergent cakes, washing powder, Chemicals, Dates, Salt and other general goods. This firm also providing employment families. QUALITY POLICY OF THE COMPANY: Satisfying the costumers by providing quality products and services and striving towards continual improvements. QUALITY OBJECTIVES: To improve sales compares to last year. To improve the customer satisfaction level. To reduce the wastage in production process. To update the knowledge of the employees. To continually improve the process. Bharathi soap works is promoted by a young, dynamic and outstanding person Sri A. MANICKAVEL with his visionable & dynamic leadership, the company has carved a niche for itself in the market. Bharathi soap works was emerged as one among the leading company in the marketing segments of its products. Bharathi soap works has grown rapidly since its inception, and today its business operations have spread too many states. The company had bagged The Best Entrepreneur of the State for the year of 2005 received on 26th Jan 2005 and the prestigious award Indira Gandhi Sadbhavana award in 2005 received on 21st Nov 2005. DISTRICT BEST INDUSTRIALIST Bharathi soap works is a medium scale organization with a growth rate of more than 100%. Bharathi soap works had started as a small scale unit and with in a short span of time has grown into a medium scale, providing employment to more than 200 employees. CERTIFICATION:SAEC 18 And also awarded GUNTUR directly and indirectly for more than 100

Working Capital Management Bharathi soap works is an ISO 9001:2000 certified organization and having other certification from MOODY international certification and UKAS quality management certification. QUALITY MAINTENANCE: The main aim of M/s. Bharathi Soap Works is to supply quality products to its consumers, since quality is more important than profit. It is the key for the success of the company. The company stress upon the quality of the products rather than its profit margins. This motive earned huge market at all places in Andhra Pradesh. The company is strictly adopting quality preference only in purchases of raw materials, as well as delivery of finished goods and they assure customer that they never compromise with quality at all stages. Quality assurance demands a degree of detail in order to be fully implemented at every step. Planning, for example, could include investigation into the quality of the raw materials used in manufacturing, the actual assembly, or the inspection processes used. The Checking step could include customer feedback, surveys, or other marketing vehicles to determine if customer needs are being attended or not. If not, what are the sreasons? Acting could mean a total revision in the manufacturing process in order to correct a technical or cosmetic flaw. Competition to provide specialized products and services results in breakthroughs as well as long-term growth and change. Quality assurance verifies that any customer offering, regardless if it is new or evolved is produced and offered with the best possible materials, in the most comprehensive way, with the highest standards. The goal to exceed customer expectations in a measurable and accountable process is provided by quality assurance.

PRODUCTION CAPACITY: SAEC 19

Working Capital Management Products leave factory only after thorough quality check in the laboratory with qualified technicians under proper supervision at all levels, and it is all done before reaching to market, so as to satisfy the customers and they feel proud of customer satisfaction. The company has an excellent production capacity. The present installed production capacity is 35 To 40 Tons of Detergent cakes per day and 20 Tons of washing powder per day. The machines are operated according to the demand in the market BHARATHI SOAP WORKS-PRODUCTS

S.NO

PRODUCTS

BRAND NAME

1. DETERGENT SOAPS

BLUE DIAMOND TRIPLE-X ( XXX ) BINKA BHAVANI MAGIC GREEN DIAMOND THREE DIAMONDS SAREGAMA

. 2. DETERGENT POWDER

XXX SILVER FOAM XXX SILVER LINE XXX HI-POWER

3. 4.

DISH WASH BAR BATH SOAP

XXX RUF & TUF XXX LAHARI ( AYURVEDIC )

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Working Capital Management Under DIAMOND brand, -3- types of detergent cakes are being manufactured, i.e. - Blue Diamond-125gms., and 150 gems. and Green Diamond of 150gms only. Similarly under Triple-X (XXX) brand, -17- types of detergent cakes are being manufacturing. They are: Triple-X More washes (Mini) Triple-X more washes (Medium) Triple-X More wash Triple-X More wash Triple-X More wash Triple-X Easy wash Triple-X Easy wash Triple-X ( Rose ) Triple-X ( Rose ) Triple-X ( White ) Triple-X Pink Super wash Triple-X Pink Super wash Triple-X Gold Super Triple-X (XXX) Triple-X Action Soap Triple-X Raja Soap Triple-X Raja Soap Magic-125 gms., and Magic-200 gms. Under SAREGAMA brand, -3- types of detergent cakes are being manufacturing, i.e.Saregama-150 gms; Saregama-200 gms; and Saregama-300 gms. Under TRIPLE-X ( XXX ) RUF & TUF brand, -2- types of dishwash bars are being manufacturing, i.e.- TRIPLE-X RUF & TUF-150 gms; and TRIPLE-X RUF & TUF-300 gms. : 100 gms. : 200 gms. : 150 gms. : 300 gms. : 350 gms. : 125 gms. : 250 gms. : 200 gms. : 125 gms. : 250 gms. : 300 gms. : 150 gms. : 200 gms. : 150 gms. : 250 gms. : 350 gms. : 175 gms

Under MAGIC brand, -2- types of detergent cakes are being manufacturing i.e.-

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Working Capital Management Similarly, under Triple-X (XXX) brand, -13- types of detergent powders are being manufacturing. They are: Triple-X Silver Foam Triple-X Silver Foam Triple-X Silver Foam Triple-X Silver Foam Triple-X Silver Foam Triple-X Silver Foam Triple-X powder pouch Triple-X HI-POWER Triple-X HI-POWER Triple-X HI-POWER Triple-X Silver Line DETERGENT CAKES: TRIPLE-X (XXX) BRAND DETERGENT CAKES: Product Name Type Price Net Weight Offer Product Name Type Price Net Weight Offer Product Name Type Price Net Weight Offer SAEC : : : : : : : : : : : : : : : 50% More Quality 22 40% Extra Free with Soap BlueNewMagic Detergent Cake Rs.7.00 200Grams Triple-x (XXX) More Wash Detergent Cake Rs.20.00 350Grams Rs.5/- Worth XXX Washing Powder sachet Free Three Diamonds Cake Rs.12.00 350Grams : 1150 gms : 1 Kg. : 850 gms. : 550 gms. : 250 gms. : 125 gms. : 15 gms. : 1 Kg. : 500 gms. : 200 gms. : 3 kg.

DIAMOND BRAND DETERGENT CAKES: Detergent

MAGIC DETERGENT CAKES:

Working Capital Management BHAVANI DETERGENT CAKES: Product Name Type Price Net Weight Offer BINKA DETERGENT CAKES: Product Name Type Price Net Weight Offer Product Name Type Price Net Weight DETERGENT POWDER: SILVER LINE DETERGENT POWDER: Usage: 1 scoop for bucket wash and 2 scoops for machine wash. Suitable for top loading machines. Soap for 30 minutes before washing. For superior results wash in warm water. XXX was gives you not just whiteness but also freshness the power of blue whiteness up your cloths For every wash your clothes look and smell as fresh as new Product Name Type Price Net Weight Offer : : : : : SilverLine DetergentPowder Rs.185.00 3 Kg. Rs.60/-worth of Plastic bucket Free with this pack : : : : : SuperPowerBinka Detergent Rs.5.00 150Grams TriplexMoreWashSoap : : : : MagicSaregamaRich Detergent Rs.10.00 300 Grams Cake Cake : : : : 150 Grams Detergent Bhavani Cake Rs.5.00

SAREGAMA DETERGENT CAKES:

SILVER FOAM DETERGENT POWDER: SAEC 23

Working Capital Management scoop for bucket wash and 2 scoops for machine wash. Suitable for top loading machines. Soak for 30 minutes before washing. For superior results wash in warm water.XXX was gives you not just whiteness but also freshness the power of blue whiteness up your cloths. For every wash your clothes look and smell as fresh as new. Product Name Type Price Net Weight Offer : : : : : SilverFoam DetergentPowder Rs.40.00 1.2Kilograms 200 Grams More With This Pack( Free)

HI - POWER DETERGENT POWDER: Usage: 1 scoop for bucket wash and 2 scoops for machine wash. Suitable for top loading machines. Soak for 30 minutes before washing. For superior results wash in warm water.XXX was gives you not just whiteness but also freshness the power of blue whiteness up your cloths. For every wash your clothes look and smell as fresh as new Product Name Type Price Net Weight Offer DISH WASH: RUF AND TUF Product Name : Type Price Net Weight : : : Ruf&Tuf DishWashBar Rs.10.00 300 grams : : : : : Hi-Power DetergentPowder Rs.50.00 1.00Kilograms 200Grams Medium More Wash Soap

THEORETICAL FRAMEWORK SAEC 24

Working Capital Management INTRODUCTION: Though working capital of vital significance to an undertaking in several ways, the management of which did not receive adequate attention until recently the literature of finance concentrated more on the infrequent episodic events mergers and liquidation neglecting completely the management of working capital. Even now, the management of fixed assets is getting precedence over the working capital. It has been observed by shall and Haley that managing current assets requires more attention than managing plant and equipment expenditure. Mismanagement of current assets can be costly. Too large an investment in current assets means tying up capital that can be used productively elsewhere. On the other hand, too little investment can also be expensive. For example, insufficient inventory may result in loss of sales as the goods that a customer wants to buy may not be available. The finance manager will be forced to spend a large percentage of his time in managing current assets. It is because these assets vary quickly and a lack of attention paid to them may result in appreciably lower profits for the firm. Working capital Definitions: The following are the some of the definitions given for working capital by experts in the area of finance. The sum of the current assets is the working capital of a business.- J.S.Mil. Any acquisition of funds which increases the current assets, increased working capital, for they are one and the same.-Bonneville and Dewey Working capital has ordinarily been defined as the excess of current assets over current liabilities.-C.W.Gerstenberg. THE NEED FOR WORKING CAPITAL The Working Capital is necessary to run the day-to-day business activities. It is very difficult to find a business firm, which does not require any amount of working capital. However, firms differ in their requirements of the working capital. Companies aim at maximizing the wealth of shareholders. In their efforts to maximize shareholders wealth, they should earn sufficient return from their operations. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for the efficient sales activity.

SAEC

25

Working Capital Management Sales do not convert into cash immediately. There is always an operating cycle involved in the conversion of sales into cash. The organization may be faced with an uncertainty regarding availability of sufficient quantity of critical inputs in future and reasonable price. This may necessitate the holding of inventory i.e., current asset. To ensure that each of current assets is efficiently managed to ensure overall liquidity of the unit and same time not keeping too high level of any one of them working capital Management is must. Nature of working capital management: Working capital management is concerned with the problems that arise in attempting to manage the current assets. The current liabilities and the inter relationship that exists between them. The term of current assets refer to those assets which in the ordinary course of business can be or will be converted into cash within one year without disrupting the operating of the firm. The major current assets are cash marketable securities. Account receivable and inventory. The goal of working capital management is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. Each of the short term sources of financing must be continuous managed to ensure that they are obtained and used in the best possible way .The interaction between the current assets and current liabilities, is there fore, the main theme of the theory of working capital management. Concept of working capital: Working Capital Management involves the relationship between a firm short term assets and its short term liabilities. The goal of working capital management is to ensure that a firm is able it continue its operations and that is has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. The management of working capital involves managing inventories, account receivable and payable and cash to pay current liabilities as they fall due. This implies a clearly designed risk policy to determine the required liquidity level. TYPES OF WORKING CAPITAL Working Capital may be classified in two ways. SAEC 26

Working Capital Management On the basis of Concept On the basis of time On the basis of Concept Working Capital 1. 2. Gross Working Capital Net Working Capital

Based on time, Working Capital can be classified into 1. Permanent Working Capital 2. Temporary Working Capital On the basis of Concept: Gross working capital: The gross working capital also known as current capital or circulating capital is represented by the sum total of all current assets of the enterprise. Current assets are the assets which are meant to be converted into cash within a year or an operating cycle. Stock of raw materials, stock of semi-finished goods, stock of finished goods, trade debtors, bills receivable, prepaid expenses, cash at bank and cash at hand. Net working capital: On the other hand, the term net working capital refers to the difference between current assets and current liabilities. Both the net and the gross concepts of working capital have their own uses. The choice of a particular concept obviously depends upon the purpose in view. If the objective is to measure the size and extent to which current assets are being used to optimize productivity of the concern, the gross concept is more useful. If, on the other hand, the objective lies in evaluating the liquidity position of an undertaking, the concept of net working capital becomes pertinent and preferable. On the basis of time: Working Capital can be classified into Permanent Working Capital Temporary Working Capital Permanent Working Capital: Permanent or fixed Working Capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the

SAEC

27

Working Capital Management circulation of current assets. There is always a minimum level of current assets, which is continuously required by the enterprise to carryout its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work-in-progress, finished goods and cash balance. This minimum level of current assets is called fixed Working Capital. Temporary Working Capital: Any amount over and above the permanent level of working capital is temporary, fluctuating, or variable working capital. This portion of the required working capital is needed to meet fluctuations in demand, Consequent upon the change in production and sales as a result of seasonal changes. Temporary working capital can be further classified as: Seasonal working capital: Most of the enterprises have to provide additional working capital to meet the seasonable and special needs. The capital required to meet the seasonal needs of the enterprise is called Seasonal Working Capital. Special working capital: Special working capital is that part of the working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc. Structure of working capital: For a proper appreciation of the problems of working capital management, a closer look at the individual items of working capital is essential.The components of current assets and current liabilities, which are constituents of working capital, are shown in the following table. Current Assets Cash in Hand Cash at Bank Bills Receivable Stock Prepaid Expenses Accrued income Short-Term Investment Working in progress 28 Current liabilities Bills Payable Sundry Creditors Accrued Expenses Short Term Loans Dividends Payable Bank over Draft Provisions for Taxes

1. 2. 3. 4. 5. 6. 7. 8. SAEC

1. 2. 3. 4. 5. 6. 7.

Working Capital Management 9. 10. 11. Finished goods Stores and spares Advances to suppliers

Working capital management: Working capital management is concerned with all decisions and acts that influence the size effectiveness of working capital. According to Gilman, the goal of working capital management is to manage each of the firms current assets and current liabilities in such a way that an acceptable level of net working capital is maintained. It is concerned with the determination of appropriate levels of current assets and their efficient use, as well as the choice of the financing mix for raising the current resources. Adequacy of working capital: Adequacy of working capital implies that should neither be excessive nor inadequate of the firms requirements. Excessive working capital means that the firm has funds which earn no profit for the firm. Inadequate working capital means the company does not have sufficient funds for carrying out its operations, which ultimately result in production interruptions and decreasing the profitability. Working capital should be adequate for smooth running of the operations and uninterrupted flow of production. It will maintain credit-worthiness in the market and meet all the current obligations including the payment of dividends to shareholders. It enables the firm to avail cash discounts by making prompt payments. Inadequate working capital: Both the inadequate and excessive working capital is dangerous. If the working capital is inadequate, the production will suffer. Credit worthiness in the market will be affected because of lack of liquidity. Low liquidity and low production may lead to low profitability which in turn affects the liquidity. Dangers of Inadequate working capital: The following are the dangers of inadequate working capital Loss of goodwill and creditworthiness Firm cannot avail the favorable opportunities Adverse effect on credit opportunities SAEC 29

Working Capital Management Operational inefficiency Low rate of return on fixed assets Increase in business risks Adverse effect on the morale of business executives. Excessive working capital: If the working capital is excessive, excessive inventory is the main target. It results in the operational inefficiency leading to low profitability. Ralph Kennedy and Mc Muller observed that the availability of excessive working capital may lead to carelessness about costs and, therefore, leads to inefficiency of operations. Dangers of excessive working capital: It is not only inadequacy of working capital which is dangerous but also excessive working capital leads to many problems, which are given below: Low rate of return on capital Decline in capital and efficiency Loss of goodwill and confidence Misapplication of funds Evils of over-capitalization Inefficient management Optimum level of working capital: Thus, every finance manager has to work out the optimum level of working capital in order to avoid the dangers of inadequate and excessive working capital. Thus, both the situations of inadequate and redundant working capital are dangerous.

Objectives of Working Capital: The need for working capital cannot be over emphasized. Every business need some amount of working capital. The need for working capital arises due to the gap between production and realization of cash from sales it requires. For the purpose of materials, components and spares. To pay wages and Salaries. To incur day-to-day expenses and overheads such as full, prior, and office expenses etc. SAEC 30

Working Capital Management To meet the selling costs as packing, advertising etc. To provide Credit facilities to the customers. To maintain the inventories of raw materials, work in progress, stares and spores and finished stock. Aspects of working capital: The aspects of management of working capital are: Determining the requirements of working capital Financing the requirements; and Efficient utilization of working capital. Determination of the requirements of working capital: Efficient management of working capital involves careful determination of working capital requirements and formulation of plans for meeting them. A large number of factors influence the working capital needs of firms. The most important of these are: The nature and size of business Manufacturing cycle Business fluctuations Production policy Credit policy Credit availability Growth and expansion activities Profit margin and profit appropriation Price level changes Financing of working capital: A working capital forecast is prepared to determine the amount of working capital required to finance particular level of business operations. The exercise involves complicated calculations embracing every aspect of business activity. The items usually taken into consideration while preparing a working capital forecast are: Costs to be incurred on material; wages and overhead expenses. The budgetary approach to determine the working capital requirements involves preparation of cash budget which is an integral part of the overall budgetary process in any firm. The information required for each of the items in the cash budget has to be assembled from various functional budgets and supporting schedules. Cash budget SAEC 31

Working Capital Management may be prepared for any frequency depending upon the efficiency of the information system used in the firm and the relevance of the frequency. Efficient utilization of working capital: All the components of working capital viz., cash, debtors, inventory and inventories, are to be managed efficiently. There should not be excess or shortage of investment in any of these components. Organizational set-up: Normally a separate organizational set-up for management of working capital in business enterprise may not exist. It is generally invested with the financial executive who looks after all the aspects of financial management of the enterprise. He is concerned with the funds forecasting laying down suitable policies and procedures; Monitoring the levels of cash, receivables and inventory; Deciding about the financial mix for working capital Expenditure control by fixing limits to expenditure Working capital control, review and preplanning Formulation of guidelines for working capital expenditures Obtaining bank finance and other funds to meet the working capital requirements. Importance of working capital management: The management of working capital is one of the key areas of financial decision making. It is significant because the management must see that an excessive investment in current assets should be minimized as it leads to low profitability. At the same time it should protect the company from the problems of stock-outs and risk. The management of fixed assets will be impossible without maintaining proper level of current assets. Current assets will also determine the liquidity position of the company. The importance of working capital can be understood from the following points. Time devoted to working capital decisions: The financial manager will mdevote their largest time for working capital financing, control of current assets, management of liquidity etc. In view of this, it can be said that effective working capital decisions are also significant for successful management of the companys affairs. SAEC 32

Working Capital Management Investment in current assets: Characteristically, current assets present more than sixty percent of the total assets of many firms, because they represent a large investment in the various components of current assets. Further, the investment trends tend to be relatively volatile. Hence, the financial manager has to show special attention for them Importance to small firms: The management of working capital is particularly important to small firms, because for a small firm it may be possible to minimize its investment in fixed assets but it cannot avoid an investment in cash, receivables, and inventors. Therefore, current assets are particularly significant for the financial managers of small firms. Small companies have relatively limited access to long-term capital market, they have to depend heavily on trade credit and short-term loans form banks, both of which affect the net working capital. Relationship between sales growth and current assets: The relationship between growth in sales and increase in current asset investment are very close and direct. An increase in sales will accompany a similar rate of immediate increase in additional inventories and cash balance. All such needs must be financed. Determinants of working capita There are no set rules or formula to determine the working capital requirements of a firm. A large number of factors influence the size of investment in working capital these incl 1. Naturef the business: The working capital requirements of a firm are basically influenced by the nature of its business. Firms engaged in trading and financing activities make very heavy investment in current assets as compared to the investment in fixed assets, whereas in the case of rail and road transport and other public utility services, steel, aluminum, automobile industries, working capital forms a relatively low proportion of total assets. 2. Operating cycle: The operating cycle implies the stages or processes through which the raw materials are processed to get the final product. If the process is lengthy and takes long time to get the finished products, the requirements of working capital will be much larger than that of a unit which has a relatively low operating SAEC 33

Working Capital Management cycle. The shortest manufacturing process will minimize the investment in the form of work-inprogress.

3.

Seasonal elements : The requirement of working capital to a company is

influenced by the demand for the product. If the firms product is seasonal demandoriented not only the amount of working capital fluctuates from one season to the other, but also the composition of working capital changes over the time.

SAEC

34

Working Capital Management During the season, cash and bank balances are converted into inventory. The working capital level will increase and cash balances may reduce. Growth and expansion of business: The working capital requirements of the firm will increase as it grows in terms of sales or fixed assets. Current assets are closely related with that of sales. The requirements of working capital for a growing firm will be more. A growing company has to maintain proper balance between fixed and current assets in order to sustain its growing production and sales. This will in turn increase the investment in current assets to support the increased scale of operations. Firms credit policy The credit policy of the firm affects working capital by influencing the debtor balances. The credit terms of a company may also depend upon the industry credit norms. If a company follows a liberal credit policy, with out following the norms of credit, it will result in more credit sales, increased book debts and increased investment in working capital. Turnover of current assets: Turnover of current assets refers to the speed at which the components of current assets can be converted into cash. The greater the turnover is, greater will be the cash flow and lesser will be the level of working capital. If the turnover is low, the company can witness heavy piling up of various components of current assets and increased level of working capital. Availability of credit: The level of working capital of a company also depends upon the credit facility available to it. The firm will need less working capital, if liberal credit terms are available. The availability of credit facility from commercial banks also influences working capital needs of the firm. Generally, if a firm gets credit facility easily, on favorable conditions, it can operate with less working capital than a firm without such facility. Dividend policy: Dividends are paid to shareholders of the company out of the profits. The payment of dividends results in cash outflow. SAEC 35

Working Capital Management

Further, a desire to maintain an established dividend policy may affect the company by reducing the cash balances. It will cause changes in the level of working capital. Often, changes in working capital also bring an adjustment in the dividend policy. Shortage of working capital therefore, acts as a powerful reason for reducing or skipping a cash dividend. Taxation: Taxation is a short-term liability payable in cash. Advance payment of tax may have to be paid on the basis of anticipated profits. Tax is the first appropriation out of profits. Higher the tax, greater is the strain on the working capital of the company. Government regulations and restrictions Regulations and restrictions by the government and reserve bank of India through such controls, as credit control, import regulations, influence the working capital of companies. For instance, the Tendon committee has prescribed norms for holding inventory and debtors which the company is nit expected to exceed. Principles of the working Capital: With regard to management of working capital, three propositions will be there. These propositions are also termed as the principles involving risk that serve as the basis of working capital theory. Investment risk and return: If working capital is varied relative to fixed asset investment, the amount of risk that a firm assumes is also varied and the opportunity for gain or loss is increased. This principle assumes that a definite relation exists between the degree of risk that a firm assumes and the rate of return. The more the risk assumed, the greater is the opportunity for gain or loss. The opportunity for gain is increased by choosing an appropriate asset and liability structure. The firms return on investment will be greater when there are a low proportion of current assets to total assets and a high proportion of current liabilities to total liabilities. Contribution to net worth: Capital should be invested in each component of working capital as long as the equity position of the firm increases. This principle is based on the concept that SAEC 36

Working Capital Management each rupee invested in fixed or working capital should contribute to the net worth of the firm. Flow of funds: The greater the disparity between the maturities of a firms short-term debt instruments and its flow of internally generated funds, it is not possible to closely synchronies the schedule of expected net cash flows and payments on debt will depend upon the risk preferences of management. The shorter the maturity schedule of debt in relation to expected net cash flows, the less the risk of inability to pay the debt. However, financing is likely to be costlier under longer maturity schedule thus cutting into profits. Profits can be maximized by making every effort to tie debt maturities with the cash inflows of internally generated funds, since in such a case, there will be no need to hold low yielding liquid assets, nor to have more long-term financing then is absolutely necessary. Maximization of shareholders wealth: On the whole, management has to determine the liquidity of the firm on the basis of the information about risk and opportunity costs of holding liquidity. The degree of liquidity desirable is a function of the probability of insolvency at various levels of liquidity, the opportunity cost of maintaining those levels, and the cost of bankruptcy. The behavior of the management should be influenced not only by the risk and the opportunity costs associated with various levels of liquidity, but also by the cost of bankruptcy. The management must behave in a manner consistent with maximization of shareholders wealth. Techniques of working capital management: There are several techniques of control as regards working capital management. Some of the important techniques are ratio analysis, systems approaches applied in the case of material management, PERT as applied in the case of operating cycle analysis, mathematical models as applied in determining economic order quantities; safety stocks and order points; Discriminate analysis, and decision three approaches as applied in credit granting and collection decisions; discriminate analysis and simulation; and linear programming techniques as applied in cash management decisions; cash flow and funds flow analysis SAEC 37

Working Capital Management Concerned as it is with the determination of appropriate levels of current assets and their efficient use, as well as the choice of the financing mix for raising current resources, working capital management deals with decisions, acts and procedures relating to the use and the method of financing each current assets and determining its optimal level. The important components of working capital management, therefore, are inventory management, receivables management and cash management. A variety of factors influence the working capital needs of firms. All factors are of different importance. Further the importance of the factors change for a firm over time. So, an analysis of the relevant factors should be made in order to determine the total investment in working capital. The following is the description of the factors, which largely influence the working capital requirements of the companies. Nature and Size of the Business Business fluctuations Growth of the firm Manufacturing cycle Seasonal fluctuations Credit policy Production policy Operational efficiency Price changes Technology Sources of Working Capital: There are two types of financing sources. They are: a) Long term Financing which have a maturity period for long term, such as shares, debentures, preference shares, and retained earnings, loans for financial institutions, public deposits etc. b) Short term Financing which are to be repaid in short span like one year, bank overdraft, commercial papers, and factoring receivables etc. SAEC 38

Working Capital Management Short term financing refers to borrowing funds or raising credit for a maximum of 1 year period i.e., the debt is payable within a year at the most. Whereas, the Long term financing refers to the borrowing of funds or raising credit for one year or more. The finance manager has to mix funds from these two sources optimally to ensure profitability and liquidity. The mixing of finances from long term and short term should be such that the firm not faces either short of funds or idle funds. Thus, the financing of working capital should not result in either idle or shortage of cash funds. A choice can be made between these two sources in the following ways or approaches. Approaches of Working Capital Depending on the mix of short and long-term financing, the approach followed by any company fall under these three categories Matching Approach Conservative Approach Aggressive Approach a) Matching approach or Hedging approach: In matching approach, long-term sources of finance are used to finance permanent working capital. Temporary working capital can be financed from the short-term funds. The rationale of matching approach is that the maturity of source of funds should match the nature of assets to be financed. b) Conservative approach: According to this approach, most of the requirements of funds should be met from long-term sources. Short term sources should be used only for emergency requirements. Under a conservative plan, a firm finances all its permanent current assets and part of the temporary current assets with long term sources. Conservative approach is less risky but more costly as compared to matching approach. In other words, it is low profit low risk approach. c) Aggressive approach: In the aggressive policy, firm uses more short-term sources of financing than warranted by the matching plan i.e., the firm finances apart of its permanent current assets with short term financing. On the other hand more use of short-term financing makes the more risky but less costlier. SAEC 39

Working Capital Management Financing of working capital: The sources of finance for working capital can be classified as under: 1. Short-term sources. Sundry creditors Bank overdraft Advance payments receive 2. Long term sources Redeemable debentures. Redeemable preference shares & Public deposits. 3. Permanent sources Share capital. Irredeemable debentures. Plough back of profits. Permanent and variable working capital: In the similar way, the working capital requirements of the concern can be divided into two portions Permanent portion and Variable portion. Permanent working capital: The total fund requirements (both on fixed capital and working capital) increases with increased production over a period of time. A portion of the working capital remains the same throughout. In other words, there is a limit below which the current assets do not fall. This portion is the permanent working capital. This minimum level or lowest level of current assets that a company should hold it, is known as the hard core or fixed working capital. The Deejay committee and the Tendon committee have referred to the permanent working capital as the core current assets Fluctuating working capital: There is a variable portion of current assets, over and above the permanent assets. It varies with production plans, seasonality etc. This portion, also known as the fluctuating or temporarworking capital. It can be estimated in advance. The variable prtion of working capital can be financed by short-term funds.

SAEC

40

Working Capital Management The general principle is that the fixed asset and the permanent portion of the working capital should be financed by capital and reserves, long term debt and Permanent portion of the current liabilities. Financing of working capital The committee recommended that the core portion of current assets should be financed by the company out of equity or by raising long term debt. But till recently, companies continued to rely on commercial banks as the major suppliers of working capital. STATEMENT SHOWING THE CHANGES IN WORKING CAPITAL (YEAR-WISE) Previous Year XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Current Year XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

PARTICULARS CURRENT ASSESTS INVENTORIES BOOK- DEBTS CASH /BANK BALANCES LOANS & ADVANCES TOTAL CURRENT ASSETS (A) CURRENT LIABILITIES ADVANCES FROM CUSTOMERS SUNDRY CREDITORS OTHER LIABILITEIS PROVISIONS TOTAL CURRENT LIABILITIES (B) NET WORKING (A-B) DECREASING CAPITAL TOTAL WORKING CAPITAL

INCREASE DECREASE XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

CASH MANAGEMENT Effective management of working capital involves management of its components viz., cash, debtors, and stock. Out of all these current assets, cash assumes specific identification, because the operations of business result in the conversion of cash into raw-materials. Cash is the most liquid asset that a business firm possesses. SAEC 41

Working Capital Management It includes money and such instruments as money orders, and bank drafts. Cash in the enterprise maybe compared to the blood in the human body. Even though firms differ in terms of nature of business, capital structure, and risk and so on, they have in common the basic mechanism involving conversion of funds into saleable products and back into cash. But cash balance in its own form will not yield any return Functions of Cash Management: Management The following are the functions of cash after of any business concern irrespective of its size, nature, volume of business, age etc. The same can also be said that management of receipts and payments. Forecasting cash needs. Expediting cash collections. Disbursing cash to meet firms obligations. Gainful investment of surplus cash. Importance of Cash Management: Management Cash is unique resource and not comparable with any other component of current asset. If excess cash is held, it will not generate profits since cash is sterile. It will not be productive directly as in the case of other assets. Inventory bought excess will be useful even after sometime, without loss of value and many a time value of inventories tend to increase due to inflation. Hence idle cash will not generate profit but causes loss of interest. Further, cash shortage causes irreparable loss to the management, since firms loose not only profitable business opportunities but also good will when they fail to clear the bills timely to cash shortage.

Motives of Holding Cash: Cash Famous economist, Keynes said that businessmen hold cash for 3 motives, which are as follows. Transaction motive. Speculation motive. SAEC 42

Working Capital Management Precautionary motive Transaction motive: Cash manager is expected to arrange appropriate amount of cash in right time to pay for a right purpose. In fact, the cash receipts will never synchronize with cash obligations to pay for. Hence to meet the expenses timely, a firm has to hold optimum amount of cash and keep the firm comfortable in its cash transactions. Larger the business transactions more the amount of cash balance to be maintained and vice versa. Precautionary motive: Firms at times need cash without prior notice. They need cash under emergency conditions such as break down of machines, fire, theft, accidents etc, failing which they have to pay heavy penalties. In such cases, cash rich companies can with stand rather than nil less cash complaints. The causalities, accidents, theft, machinery break down etc., in organizations generally demand cash immediately. To meet the said eventualities, the firms have to maintain cash balances. This cash balance is called precautionary cash balance. Hence they have to raise funds in very short notice or some times spontaneously also. At that time only cash rich companies credit worthy will be able to survive under hectic conditions cited above. Speculative motive: Of course, not all firms do business with speculative motives. Occasionally, every business firm comes across speculative conditions such as sudden and heavy fluctuations in prices of raw materials and rates or interest leading to rise in market for goods. Hence, there is sudden rise in demand for goods, which warrants availability of cash in very short notice. Thus the speculative conditions give chance to rise profitable opportunities. Firms, having ability to generate cash in Short notice will take advantage of these speculative conditions of business opportun Factors affecting cash management: management The amount of cash requirement of a business firm depends upon the following factors, which are discussed as under. Credit Position: SAEC 43

Working Capital Management Firms having goodwill in the market do not require cash balance much. They get services and goods on credit as they re pay the bills timely out of the sales proceeds and such firms need not maintain heavy cash balances. Nature of market: It has great influence on cash requirement, in certain markets one has to buy on cash, since credit facility is not available. In some of the UN organized sectors and small businesses where bank loans are not extended, their firms have to arrange their own cash. Inventory levels: Higher the inventory levels a firm follows more the cash required. Lower the inventory level, less lowly the cash balances to be needed. Thus, inventory level certainly influences the cash requirements of the business. Technology: The firms, which are, followed manual methods need more cash by week ends to pay for wages. Where as the firms whose business activities are more technologies based required less amount of cash for the above said purposes. Efficiency in using cash: Cash balance depends upon the efficiency in using cash. Professional managements maintain optimum cash balance and discharge cash obligations. Benefits of adequate cash maintenance: maintenance The following are the benefits to a business firm who maintains adequate cash: Cash Discount: Firms can enjoy cash discounts and get goods/services at considerable prices if they make down payments. This will increase profits and credibility. Occasionally, creditors may also extend cash discounts for people who pay in advance or with in stipulated period. Large scale buying If firms buy raw materials in large quantities, they can get at low prices, which will increase the overall profitability of the firms. The firms with cash balances will be able to order bulk purchases to get them at lower prices. Liquidity: Firms, regular in payments of bills and taxes will be respected by the suppliers and co operate by way of supplying required quantity of goods at lower prices. The suppliers can also ensure supply of goods in times of scarcity. SAEC 44

Working Capital Management Profitability: Firms, which bargain at the turn of purchasing inputs and services, will get production at low cost. This will enhance profit margin of the firms, which in turn will enhance its profitability. Better bargain: Firm with adequate cash can bargain and obtain inputs at reasonably low price and reduce cost of production. Techniques involved in Cash Management: Management A management cash flow involves vigilant and efficient practices on the part of financial manager. Then only it becomes possible sound cash management. The financial manager should see that there should not be a deviation between projected cash flows and actual cash flows. In order to achieve this, cash management efficiency will have to be improved through a proper control of cash collection and disbursement. The two objectives in managing the cash flows. To accelerate cash collections as much as possible. To de accelerate or delay cash disbursements as much as possible 1) Accelerating Cash Collections: A company can reduce its requirements for cash balances, if it is able to speed up its cash collections. An efficient financial manager can reduce the firms deposit float by speeding up the mailing processing and collection times. Finance manager may use the technique of decentralized collections or lock box system in order to accelerate cash collections. 2) Lock box System: In a lock box system, the company establishes a number of collection centers for its customers and remittances. At each center, the company hires a post office box and instructs customers to mail their remittances to the box. The local bank is given with the authority to pick up the cheques directly from the lock box and deposit the cheques in firms account. The bank prepares a detailed statement of cheques picked up and submits it to the company. 3) Controlling Disbursements: The control of disbursement can also help the firm in conserving cash and so reducing the financial requirements. The firms objective in collecting cash is to speed SAEC 45

Working Capital Management up collections as much as possible. Whereas the objective of disbursements is to slow down the cash outflows as much as possible. Disbursements (cash outflows) arise due to trade credit. The firm should make the payments using the credit terms to the fullest extent. There is no advantage in paying them sooner than agreed upon. But delaying payments as much as possible, the company makes maximum use of trade credit as a source of funds. Often it is interest free source of funds. Optimum Cash Balance: Balance Cash balance cannot be too high or low. If the cash balances are lower then the required level, then it will create problem. The higher level of cash balance will ensure liquidity, but the firm has to sacrifice profits, as excess cash will not yield returns. Thus, the cash manager of a firm has to trade off between higher and lower levels of cash balance and reach out optimum level of cash. The optimum cash balance can be decided considering two types of costs involved in it. They are: ransaction costs: Company has to maintain certain cash balance to meet transaction costs. If such balance is lesser, firm has to borrow higher amounts from outside and consequently incurs higher interest charges. Hence, such interest charges are higher when cash balance is lesser, and lower when cash balance is more. Opportunity costs: Opportunity cost is the revenue forgone by the company when cash balance is more. Because simply cash at bank does not yield any return. Such cost is higher when cash balance is more and lower when cash balance is lesser. Significance: Cash management is concerned with minimizing unproductive cash balances, investing temporarily excess cash advantageously, and to making the best possible arrangements for meeting planned and unexpected demands on the firms cash. It involves managing of cash flows in-and-out of the firm. Cash flows within the firm, and cash balances held by the firm at a point of time. Cash management must be thought of in terms of the overall liquidity needs of the firm. Specifically its current assets and liabilities. In order to reduce the influence of uncertainties with regard to cash needs and to ensure adequate liquidity, firms shall have the need for protective liquidity. The efforts involved for this purpose usually take the form of: SAEC 46

Working Capital Management Explicit identification of the kinds of contingencies against which protection is desirable. Assessment of the probabilities or odds that each of these will develop within a given period in future, such as 5 years. Assessment of the probabilities that developments creating cash drains will occur at the same time. Assessment of the likely amount of cash drain that will result of each of the contingencies develops. An important policy decision regarding cash management is: what should be the optimum amount of cash balance to be held? In determining such a balance, the management needs to consider the joint impact of the follows: The philosophy of the management regarding liquidity and risk of insolvency. The expected cash inflows and outflows based on the cash budget forecast encompassing long-range and short-range cash needs. The size of sales in relation to fixed asset investment. The degree of deviation between the expected and actual net cash flows. The maturity structure of the firms liabilities. The firms ability to borrow at short notice in the event of an emergency. The status of the firms receivables and inventory. The credit position of the firm. The nature of business. Efficient planning and control of cash. Objectives of cash management: Cash management must aim to reduce the required level of cash but minimize the risk of being unable to discharge claims against the company as they arise. If the firm holds too small a cash balance, its liquidity position becomes weak; although the overall profitability will be high, the risk of technical insolvency will increase. On the other hand, if the firm maintains too much of cash balance, it will have a sound liquidity position and less risk. But its overall profitability will be reduced. Therefore, the firm should maintain an optimum cash balance, which is neither small nor large. It is that balance where the liquidity and profitability goals meet and there is a trade off between risk and return. SAEC 47

Working Capital Management When cash reaches an upper limit, marketable securities are converted into cash. The level of marketable securities should also include resources which are saved to meet large expenses. Another consideration that affects the level of marketable securities is the firms banking relationships. If these are good, it means that the securities balance can be reduced. There are various collections and disbursement methods which exercise a joint impact on the over all efficiency of cash management. These methods speed up the mailing time of payments from customers to the firm; reduce the time during which payments received by the firm remain uncollected and speed up the movement of funds to disbursement banks. Methods of cash control: The methods which accelerate the collection process are concentration banking, lock-box system, special handling of remittances which involves personal picking up of these cheques or the use of air-mail or special delivery, initiating controls to accelerate the deposit and collecting of those small cheques up inter-bank transfers of cash and transfers between various divisions of the company, closing of unnecessary bank accounts which create unnecessary pockets of idle funds. The objective of control of disbursements is to slow them down and yet ensure that they are made in time. Establishing a minimum level of cash balance depends in part, upon the compensating balance requirements of banks. In exercising such control, the firm should give consideration to such aspects as quick shifting of funds to the disbursing bank accounts, preventing excessive balances being built up in a particular bank, establishing well defined operating procedures for disbursement, eliminating or minimizing the loss of cash discounts on accounts payable due to clerical inefficiencies and the timing of payment. Some of the methods of delaying disbursements are: Use of drafts instead of cheques, playing the float, maintaining a separate account for pay roll disbursements in order to minimize cash balance in that account by predicting when the pay cheques are likely to be presented for collection. INVENTORY MANAGEMENT

SAEC

48

Working Capital Management The term inventory comprises raw material, work-in-progress, finished goods and stores and spares. Inventories represent a significant portion of assets in the case of most of the manufacturing firms and require substantial investments. Inventory management is concerned with the determination of optimum level of investment for each component of inventory and the inventory as a whole, the efficient use of the components, and the operation of an effective control and review mechanism. Characteristics of inventory: inventory 1. Stock out problem: If adequate stocks are not maintained, the firm faces stock out problem risks for not maintaining adequate stocks. If raw materials are not adequate, production schedules suffer and interrupted production will not ensure regular supply of goods whereby firm looses its market. If production activities are stopped due to irregular supply of raw materials and other inputs, cost of production will be high since fixed costs per unit will be more. 2. Lead time: It is the time taken from the initiation of order till the arrival of goods. Leadtime may vary from one day to many days. It depends upon the availability of item, distance, transportation, etc. The time gap can be reduced through proper inventory planning. 3. Quantity Discounts: If goods are produced on large-scale, producers will enjoy economies of scale. These economies or savings occur where fixed costs are distributed over large production; ultimately cost of production per unit will be lower. Some times production will extend to customers by giving quantity discounts. This is peculiar characteristic associated with inputs mainly raw materials and other consumables. Motives of Holding Inventories: Inventories In a country like India inventories are necessarily to be held. The motives for holding inventories are 3 types such as: Transaction motive. Precautionary motive. Speculation motive. SAEC 49

Working Capital Management a) Transaction motive: To ensure continuous business transactions raw material are held. without adequate inventories it is hardly possible to imagine continuity of production. If enough raw materials are not held, production activities cannot be carried out regularly. If for any reason production is stopped for want of raw materials the staff, depreciation, rent etc., will cause severe loss to the firm. b) Precautionary motive: Some times accidents, machine break down, lay off, strikes, etc occur without prior notice under which situation, production should not suffer. Hence inventories are necessarily to be carried out for smooth going of production and sales even in adverse times. c) Speculation motive: Changes in technology, market conditions, and cause sudden rise or fall in prices of supplies. To cope with changing conditions businessman carries inventories. Price fluctuations affect demand and supply aspects of goods, which will in turn affect production and sales activities. To avoid such odd situations inventory holding is appropriate. Significance: In inventory decisions, management has to take into consideration factors like inventory carrying costs, ordering costs, costs of stock-outs, the rate of return on investment, and the cost of capital. In the case of running enterprises, the decision is concerned, also with additional investments in order to estimate and compare additional costs and additional returns and the net effect on the maximization of the value of the firm. While the technique of marginal analysis is found suitable in taking such decisions, the classification of costs into fixed, variable and relevant, is considered as essential. The decision to invest further, in inventory should be based on considerations of trade off between the resulting savings associated with excess investment and the total cost of holding added inventory. Factors of influencing inventory: Levels of inventory holding are also influenced by the operational flexibility it offers to the firm. A lower inventory level gives less flexibility while a higher inventory level gives greater flexibility. In evaluating the level of inventories, management must therefore, balance the benefits of economics of production, SAEC 50

Working Capital Management purchasing and increased production demand against the cost of carrying the additional inventory. Other things remaining constant, the greater the efficiency with which the firm manages inventory, the lower the required investment and the greater the owners wealth. An important step in inventory management is determination of investment in each component of inventory, viz., raw material, work-in-process, finished goods and stores and spares. Some important factors which influence the levels of each component are stated hereunder. 1. Raw material inventory: The volume of safety stocks needed to protect against material shortages that interrupt production. Considerations of economy in purchase. The outlook for future movements in the price of materials. Anticipated volume of usage and consumption. The efficiency of procurement and inventory control functions. The operating costs of carrying the stocks. The costs and availability of funds for investment in inventory. Storage capacity. Recomponent cycle. Indigenous or foreign source. The lead time of supply. Formalities for importing. 2. Work-in-process inventory: The length of the complete production process. Technological considerations influencing process time. Management policies affecting the length of process time. Length of production runs. Actions that speed up the production process, Managements skill in production scheduling and control. Sales expectations. Level of sales and new orders. SAEC 51

Working Capital Management Price levels of raw materials used, wages and other items that enter into production costs and the values added in production. Customer requirements Usual period of ageing. 3. Finished goods inventory: The policy of the management to gear the production to meet the firm orders in hand. The policy to produce for anticipated orders and stock-keeping. Goods required for the purpose of minimum and safety stocks. Sales policies of the firm. Need for maintaining stability in production. Price fluctuations for the product. Durability, spoilage, and obsolescence. Distribution system. Ability to fill orders without delay. Storage capacity. Availability of raw material on seasonal basis, while customers demand spread throughout the year. 4. Stores and spares inventory: Nature of the product to be manufactured and its lead time of manufacture. State of technology involved. Consumption patterns. Lead time of supply. Indigenous or foreign sources. Minimum and safety stocks and ordering quantities. Objectives of inventory management: Turning to the practical aspects of inventory management, the first step is to define its objectives. Some of these are; To assure continuity of operations in the most efficient manner possible , so that the enterprise may reach its overall objectives. To achieve a balance between economics of holding large inventories and of holding small inventories. SAEC 52

Working Capital Management To minimize direct and indirect costs associated with holding inventories. Some of the important inventory policies relates to; Procurement of raw materials and spares. Size of minimum, optimum, and maximum stocks; Safety stocks, order quantities, order levels and anticipation stocks. Waste, scarp, spoilage, and defectives; Policies relating to alternative use; and Policies relating to order filling. Role of finance manager: Inventory management having become a separate function by itself, there should be a separate organization for it. The finance executive should therefore exercise an overall supervision and control over inventory management. The finance executives role in inventory management may be stated as follows; By understanding the implications of changing inventory policies and positions, he has to anticipate changes in the need for funds. Where finances are a limited factor, he has to help directly in shaping inventory policies that are consistent with the realities of the firms financial position. He has to help in the formulation of inventory policies designed to speed up turnover and maximize return on investment. Inventory control: Inventory control is usually concerned with minimizing the total cost of the inventory. Inventory control is the application of the general theory of material control to inventories. In UK, the term often used is stock control. The efficiency of inventory control affects the flexibility of the firm. They are; The economic order quantity which enables determination of optimum size of order to place, on the basis of demand or usage of the inventory. The technique of safety stocks to overcome problems of uncertainty. The order point formula which tells us the optimum point at which to reorder a particular item of inventory. Techniques of inventory control: The finance managers should aim at an optimum level of inventory on the basis the trade-off between cost and benefit, to maximize the owners wealth. As observed SAEC 53

Working Capital Management above, in this section some simple production-oriented methods of inventory control to indicate a board framework for managing inventories efficiency in format with the goal of wealth-maximization. The major problem that arises comprise the heart of inventory control are; The classification problem to determine the type of control required, The order quantity problem, The order point problem, and Safety stocks Fixation of stock levels: Inventory control demands the maintenance of every item of material at a low level but at the same time making it available when needed. These twin objectives could be realized only through proper planning of inventory levels. With out proper planning, the firm may be compelled to incur losses in the form of either overstocking or under stocking. The store-keeper and stock manager or purchase manager therefore fixes the maximum and minimum levels for important stores items on a regular basis. The various stock levels that are usually considered are; 1.Maximum level: This is the level beyond which stock should not be maintained. In technical terms, it is the sum total of the minimum quantity and the economic order quantity. If stock levels go beyond this level, overstocking results in eating away capital, space and the energies of the store-keeper. The losses arising from depreciation in value, obsolescence, careless and reckless handlings of materials also pose additional dangers. The maximum level is fixed after a careful consideration of; the availability of capital, space available in stores, rate of consumption, delivery time to obtain fresh stock, price fluctuations, cost of holding the inventories, seasonal nature of supply, fashion changes, changes in governmental policies, reorder level and economic order quantity. Max. Stock level = (Reorder level + Reorder quantity) (Minimum consumption x Minimum reordering period) 2. Minimum level: (safety or buffer stock):

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54

Working Capital Management This is the level below which the stock of an item should not fall. This is essentially a safety stock and hence, it is not normally touched. If the stock of an item goes below this level, there is every possibility of production being held up for want of materials. Consequently, the minimum level is fixed to avoid the danger of production dislocations due to the non-availability of materials. This level is decided on the basis of rate of consumption, the lead time, the availability of substitutes and reorder level. Minimum stock level = Reorder level (Average rate of Consumption x Average lead time) Or Minimum stock level =Reorder level (Normal consumption x Normal reorders period or average delivery time). 3. Reorder level: (ordering level) : This is the point at which the store-keeper should initiate purchase requisition for fresh supply. This is normally the point lying between the maximum and minimum levels. It is fixed in such a way that the difference between the minimum level and the reorder level is sufficient to meet the production requirements till fresh stocks arrive. Basically two factors; maximum consumption and lead time determine the reorder level. Reorder level = Maximum consumption x Maximum reorder period Or = Minimum level + consumption during the time required to get fresh supply. Or = Safety stock +consumption during lead time. 4. Danger level: This is the level below which the stock should never be allowed

to fall under normal circumstances. It is slightly less than the minimum level. When the materials reach danger level, the store-keeper should make special efforts to get fresh supplies, so that production is not held up for want of material Danger level = Average rate of consumption x Urgent supply time. Economic order quantity: SAEC 55

Working Capital Management It is the quantity of material which can be reasonably ordered at a time and purchased most economically. It is the quantity which is most favorable to order when fresh supplies are needed. Reorder quantity, it should be remembered, is such that when it is added to the minimum stock it does not exceed the maximum stock level. EOQ is fixed after taking the following costs into consideration.

Ordering cost: This is the cost of placing an order and securing the supplies. It depends on the number of orders placed and the number of items ordered each time. Whenever orders increase in number and fewer quantities are purchased on each order, the ordering cost would begin to rise. Annual ordering cost = D/Q x S. Where D = demand for item Q = units to be purchased on each order S= cost for order.

Carrying Costs: Warehousing, insurance, wastage, loss due to theft, deterioration, etc. are called inventory-carrying costs. These costs are more, as the level of stock is higher. These costs are also known as holding cost. SAEC 56

Working Capital Management

Storage Costs: Costs pertaining to warehousing of goods or inventory are generally called as storage costs. Example: rent, lighting, insurance, checking. Obsolescence Costs: When goods are stored more quantity than demand for it, the quality deteriorates and models will become outdated. At times they have to be sold at heavy discounts since the quality of goods is poor and design or models are outda Set up costs: Normally production is made regularly any item for few days/ weeks. Whenever order is placed for different items the producer changes the regular processing and shift to new process to make it suitable to new order placed. Thus, when processing is shifted, the firm incurs costs of design, loss of clerical time consumption, components, and spares etc. All these constitute set up costs. ACCOUNTS RECEIVEBLES / CREDIT MANAGEMENT: Sales cannot be done for cash alone and Trade credit is inevitable in the modern business society, which is the basis of accounts receivables. Credit is also SAEC 57

Working Capital Management allowed by many as a sales technique to maximize the sales and profit. Trade credit acts as bridge between producers, as funds will be tied up. Hence, accounts receivables management is also a vital aspect of working capital management. In cash sales risk is zero whereas in credit sales risk is high. As the seller receives payment later for transfer of goods effected today. In the credit business, it is not only the uncertainty element but also depreciated value of the when served in the later date i.e., a rupee received today is stronger than expected to receive tomorrow. Objective: Objective The Objective of receivables management is to promote sales and profits until that point is reached where the return on investment is further funding of receivables is less than the cost of funds raised to finance that additional credit. Protecting its current sales from the competitors. Expanding sales by attracting potential customers. Obtaining more sales from existing customers. Costs: Costs The major categories of costs associated with the extension of credit and accounts receivables are: Collection Costs: These costs are administration cost incurred in collecting the receivables from the customers to whom credit sales have been made. Capital Costs: The increased level of accounts receivable is an investment in assets. They have to be financed thereby involving a cost. The cost on the use of additional capital to support credit sales, which apparently could profitable employed elsewhere, are therefore a part of the cost of extending credit or receivables. Delinquency Cost: This is the cost, which arises out of the failure of the customer to meet their obligations when payment on credit sales becomes due after the expiry of the period of credit. Default Cost: Sometimes the firm may not be in a position to recover the dues because of the inability of the customers, such debts are treated as bad debts and are written off as SAEC 58

Working Capital Management they cannot be realized, and such costs are known as default costs associated with credit sales and accounts receivables. Factors of Credit Policy: Policy The following are the factors deciding the credit policy. Competition. Producers Capacity. Buyers Condition. Marketing Techniques. Trade Practice. Competition: Competition is the important factor why seller makes credit sales. Producers always wish to leave the goods from the factory premises as early as possible. Producers Capacity: The more the producers financial capacity the more credit they allow to customers. Buyers Needs: Buyers do wish to get on credit even if the prices are slightly high. It has become common habit to buy more if credit is easily available. Buyers Status: Buyers feel credit as if it is a status. They buy more even though the price is slightly higher. Marketing Technique: Companies use credit as a technique to maximize its sales and push the sales, to make more turnovers and thereby more profit. Trade Practice: Credit has become a tradition both for production and buyers. So the practice is continued. Extreme levels of Credit: Credit The credit policy will never be balanced unless managed with all precautions. A rider on horse if not careful will get slipped. Similarly credit policy if not carefully designed will end of up in losses. The credit policies are different types. Liberal credit policy SAEC 59

Working Capital Management Stringent credit policy Optimum credit policy Liberal credit policy: Under this policy, the firm is ready to sell more on credit so as to maximize the sales. Profits will increase in liberal credit policy as a result of increased sales. More sales by way of liberal credit policy would also give rise to bad debts and losses there upon. Stringent credit policy: The firm is highly careful in extending credit to customers. The financial manager through rigid standards often sacrifices profitable sales opportunities and profits in the name of rigid and cautious credit norms. Therefore the objective of profit maximization is partially fulfilled. Optimum credit policy: Sales increase by credit extension is associated with bad debts costs, because of defaulting accounts. Though return on credit sales increases firms returns, simultaneously firms liquidity is affected because of slow recovery of debts and at times no recovery of some of the debts. The optimum investment in credit can be shown in a graph where it is the intersection of the two curves i.e., marginal ratio or

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60

Working Capital Management return on investment and marginal cost of capital.

Managerial aspects of credit policy: policy Credit policy determines the sales volume and future. So, the credit policy of a company is competitively determined in the market. Even though the company has no control over economic conditions and practices prevailing in industries, it can improve its profitability through an intelligent receivables management. The decision areas in credit policy are: Credit Terms. Credit Standards. Collection Policy. Credit Terms: Terms

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61

Working Capital Management The second basic aspect of receivables management is to determine the credit terms, which cover three things: cash discount, cash discount period, and credit period. Changes in any of the firms credit terms may have an effect on its overall profitability. When a firm initiates or increases a cash discount, the sales volume will increase; the average collection period, the cost of carrying accounts receivable and bad debt expenses will decrease. The decrease in average collection period and in bad debt expense results in increased profits. The negative aspect of an increased cash discount is a deceased profit margin per unit. Decreasing or eliminating a cash discount would have opposite effects. When the cash discounts period is increased, there is a positive effect on profits. Many people who did not take the cash discount in the past will now take it, there by reducing the average collection period. The negative effect on profits is the resulting solar average collection period because people, who were already taking the cash discount, will be able to still take it and pay later. If the discount period is shortened, the effects would be the opposite. Changes in credit period also affect the firms profitability. Increasing the credit period should increase sales. But both average collection period and the bad debt expenses are likely to increase as well. Thus, the effect on profits may be negative. An optimum solution is achieved at a point where the resulting marginal costs and marginal gains from a decision are equal. In determining the best combination of the three variables, the managements decision is again based on the risk return trade off. An optimum solution in achieved at a point where the resulting marginal costs and marginal gains from a decision are equal. SAEC 62

Working Capital Management Credit Standards: Standards The methods used by firms for the extension of credit are called as credit standards. A firm can follow either tight or loose standards. A tight credit policy is likely to lead relatively low sales and debtors. On the other hand, liberal or lenient credit standards are likely to create more sales and receivables. The four Cs of credit standards are capital, capacity, character, and conditions. Capital refers to the financial resources of the debtors. Capacity relates to the ability of the customer to pay as demonstrated in earlier cases. Character refers to the reputation of the customer in fair dealings. Conditions signify the prevailing business condition. Liberal credit standards increase various costs like credit administration and collection costs, opportunity costs, bad debts losses, production and selling costs and cash discounts. But at the same time profitability on additional sales can also increase. Collection policy: policy By calculating the marginal cost of increased collection efforts and the decrease in sales, and comparing this with the savings from reduced bad debt expenses and decreased investment in accounts receivable, various strategies for increasing the level of collection effort can be assessed. The firms collection policies are the procedures followed to collect accounts receivables when they are due. The effectiveness of the firms collection policies can be partially evaluated by looking at the bad debt expenses. This level depends not only on the collection expenditures should reduce the bad debt expense and the average collection period, thereby increasing profits. The costs of this strategy may include lost sales in addition to increased collection expenditures. If the level of collection effort is too intense. Proposed reduction in the level of collection effort can be evaluated in a similar manner. Credit monitoring: monitoring Accounts receivables are monitored through the following techniques: Aging Schedule. SAEC 63

Working Capital Management Balance of payment pate

Aging Schedule: Aging schedule is a technique to check and regulate the accounts receivables. According to this method, bills are listed on the basis of due dates. Then the total sum due from debtors is divided into different age groups. Balance of payments pattern: In this method out of the total sales made in month wise payments received will be shown separately. It will reveal the extent of bills pending and yet to be received. This will help collection departments to know how it has received so far and how much is pending so far and further measures can be taken for the delay in payment if delay is done. Benefits of Credit: Credit Credit Management is risky and it is known as riding on a double-edged sword. If credit is not given sales will not increase, which is allowed as a chance of bad debts. Hence, every firm has to be careful in credit sales and credit extension. The firm has to trade all between benefits and costs of credit sal

The higher the credit, more the sales that will go along to increase profits and wealth maximization to share holders. Simultaneously, this liberal credit policy of the firm may cause funds shortage and problem of illiquidity. As such a prudential SAEC 64

Working Capital Management finance manager has to be optimum in deciding the quantum of credit, standards, and procedures as well as terms of credit. Objectives of receivables management: The first step in the efficient management of receivables is to define its objectives. The more important of these objectives are; To achieve growth in sales. To over come the competitors. Increase profits Finance the customer. Effective policies as regards credit grating and collection have to be evolved keeping in view of the set objectives. Some of the possible credit policies are Open credit without approval of appropriate authority up to a certain limit or with approval if the credit exceeds that limit. Limited credit. Restrictive credit No credit. An effective collection policy has to be developed defining clearly the procedure for Determining delinquent accounts. Developing collection correspondence, Dealing with discount chiselers, Legal action for collection Adjustment and liquidation proceedings. Control: Some of the important techniques for controlling accounts receivables are ratio analysis, discriminate analysis, decision tree approach, and electronic data processing. Information system with regard to receivables turnover, age of each account, process of collections, size of bad debt losses and number of delinquent accounts is also used as one of the control measures. Taken together, the various measures may present a picture of undesirable restrictiveness or leniency. As always, the problem is to determine, on the basis of historical and industry standards, whether or not, the relevant percentages and ratios are unusually high or low. SAEC 65

Working Capital Management

********

DETERMINATION OF WORKING CAPITAL WORKING CAPITAL CALCULATION (IN CRORES) Rs.

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66

Working Capital Management

Particulars

2007-08

2008-09

2009-10

2010-11

2011-12

Inventories

1,01,75,201. 42

2,14,90,126.3 1,98,72,779. 1 19,93,760.72 9,41,424.50 31 17,57,698.76 11,40,501.80

2,53,74,465.2 4 77,54,736.21 38,05,359.33

333473872.3 0 19840788.50 895534.47

Sundry Debtors Cash Balance Loans Advances Prepaid expenses Total & Bank

35,61,176.6 2,85,179.33

4,12,360. 22 4,25,988.00 2

9,46,581.2 22 -

5,24,715. 12

4,48,089. 2269534.00 1790179.00

16,17,347.00

Current 1,48,59,905. 57 1,63,38,858. 17 29,21,519.8 2

2,63,71,892.7 2,49,13,042. 5 09

3,73,82,649.9 0 2,98,45,473.6 9 2,98,45,473.6 9 7537176.21

358269907

Assets(A) Current Liabilities Provisions Total

3,28,80,429.2 3,00,85,841. 8 28 24,01,527.00

20983549

20983549

Current 1,92,60,377. 97

3,28,80,429.2 3,24,87,368. 8 -6508536.53 28 -7574326.19

Liabilities(B) Net

Working 4400472.40

337286358

Capital(A-B)

STATEMENT OF CHANGES IN WORKING CAPITAL OF M/S BHARATHI SOAP WORKS From: Source: BHARATHI SOAP WORKS audited annual reports

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Working Capital Management Working Capital ( In Crores) Increase Decrease 4,48,67,056.0 9 35,61,176.6 14,59,190.61 0 1,77,043.6 1 & 2 15,21,661.0 0 5,92,43,308.3 3 1,60,60,405.7 9 10,18,821.0 0 Current 1,70,79,226.7 9 4,21,64,081.5 4 in 4,49,85,227.6 1 4,65,64,553.9 4 4,65,64,553.9 4 4,00,360.2 2 4,25,988.0 0 1,48,59,905.5 7 1,63,38,858.1 7 29,21,519.8 0 1,92,60,377.9 7 -44,00,472.40 0 21,81,151.1 8 10,95,673.0 0 4,43,83,402.7 6 2,78,452.3 8 19,02,698.8 3 4,12,360.2 12,000.00 2,85,179.3 1,08,135.72

Particulars Inventories Sundry Debtors Cash & Bank 1

2007 5,50,42,257.5 21,01,985.9 9 2

2008 1,01,75,201.4

Balances Loans Advances

Prepaid Expenses TotalCurrentAsset s (A)

Current Liabilities Provisions Total Liabilities (B) Working Capital NetDecrease Working Capital TOTAL

Source: BHARATHI SOAP WORKS audited annual report Working Capital( In crores) Increase Decrease

Particulars

2008 10175201.4 2 3561176.60

2009 21490126.3 1 1993760.72 1941424.50

Inventories Sundry Debtors

11314924.89 1567415.88 1656245.17 68

Cash & Bank 285179.33 SAEC

Working Capital Management Balances Loans Advances Prepaid

& 412360.22 425988.00

946581.22 26371892.7 5 32880429.2 8 32880429.2 8 6508536.53

534221.00 425988.00

Expenses Total Current 14859905.5 Assets (A) Current Liabilities Provisions Total 7 16338858.1 7 2921519.80

16541571.11 2921519.8

Current 19260377.9 7 -4400472.40

Liabilities(B) Working Capital Net Decrease in Working Capital TOTAL

2108064.13 18534974.99 18534974.99

Source: BHARATHI SOAP WORKS audited annual reports Working Capital( in crores) Increase Decrease 1617347.00 236061.96 800922.7 421866 1617347.00

Particulars Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Prepaid Expenses SAEC

2009 21490126.31 1993760.72 1941424.50 946581.22 -

2010 19872779.3 1 1757698.76 1140501.80 524715.22 1617347.00

69

Working Capital Management Total Current Assets 26371892.75 (A) Current Liabilities Provisions Total Liabilities(B) Working Capital Net Decrease in 6508536.53 32880429.28 Current 32880429.28 24913042.0 9 30085841.2 8 2401527.00 32487368.2 8 7574326.19 1065789.66 5477724.66 5477724.66 2794588.00 2401527.00

Working Capital TOTAL

Source: BHARATHI SOAP WORKS audited annual reports

Particulars Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Prepaid Expenses

2010 19872779.3 1 1757698.76 1140501.80 524715.22 1617347.00

2011 25374465.2 4 7754736.21 3805359.33 448089.12 -

Working Capital (in crores) Increase Decrease 5501685.93 5997037.45 2664857.53 76626.10 1617347.00

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Working Capital Management 24913042.0 9 30085841.2 8 2401527.00 37382649.9 0 29845473.6 9 29845473.6 9 7537176.21 15111502.4 0 16805475.5 0 16805475.50 240367.59 2401527.00

Total Current Assets (A) Current Liabilities Provisions Total Liabilities(B) Working Capital Net increase in Working Capital TOTAL

Current 32487368.2 8 -7574326.19

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Working Capital Management Source: BHARATHI SOAP WORKS audited annual reports Working Particulars 2011 25374465.2 4 7754736.21 3805359.33 448089.12 37382649.9 0 29845473.6 9 Current 29845473.6 9 7537176.21 2012 333473872.3 0 19840788.50 895534.47 2269534.00 1790179.00 358269907 20983549 20983549 337286358 7742454 10652279 10652279 8861924 1821445 1790179 12086052 2909825 crores) Increase 308099407 Capital (in

Decrease

Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Prepaid Expenses Total Current Assets (A) Current Liabilities Provisions Total Liabilities(B) Working Capital Net decrease in Working Capital TOTAL

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Working Capital Management RATIO ANALYSIS: 1. CURRENT RATIO: Current Ratio=Current Assets/Current Liabilities (In crores) Particulars 2007-08 2008-09 26371892.75 32880429.28 0.80 2009-10 24913042.09 32487368.28 0.77 2010-11 37382649.90 29845473.69 1.25 2011-12 358269907 20983549 1.7

Total Current 14859905.57 Assets(A) Total Current 19260377.97 Liabilities(B) Current Ratio FIGURE-1 0.77

INTERPRETATION: The company current ratio was sound enough decreasing 2007-08 to201112.In the year 2007-08 it was further decreased to 0.77,and In 2008-09 it was shortly increased to 0.80, in the year 2009-10 the company current ratio some decreasing 0.77 in.2010-11 the company current ratio some increasing to1.25 and 2011-12 also increased to 1.7 It means that company liquidity position is critical position period.

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Working Capital Management 2. QUICK RATIO / ACID TEST RATIO: Quick Ratio = Current Assets Inventory / Current Liabilities (In crores)

Particulars

2007-08

2008-09

2009-10

2010-11

2011-2012

Quick Assets Quick Liabilities Current Ratio

4684704.15

4881766.44

5040262.78

12008184.66 24796035

19260377.97 32880429.28 32487368.28 29845473.69 20983549

0.24

0.01

0.15

0.40

1.18

Figure-2

INTERPRETATION: The company quick ratio was no sound enough since 2007-08 but later in the year2011-12 it was increased to 0.40. It means that company liquidity position was becoming good in positive way in compensation to previous years.

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Working Capital Management

3. WORKING CAPITAL TURNOVER RATIO: Working Capital T.O. Ratio = Sales / Working Capital (in crores) Particulars Sales Working Capital Working Capital T.O. Ratio -16.59 13.38 -13.36 25.33 12.53 2007-08 73034815.33 -4400472.40 2008-09 87117186.16 6508536.53 2009-10 101199557.18 -7574326.19 2010-11 190969819.09 7537176.21 2011-12 422842628 337286358

Figure-3

INTERPERTATION: The stock turn our ratio of the company is in the year 2007-08 is less than the 2008-09.next two years decreased the last year 2010-11 increased in cost of goods Sold as well as average inventory and in 2011-12increased . It indicates effective use of firms inventory

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Working Capital Management

4. INVENTORY TURNOVER RATIO: Inventory Turnover Ratio = Cost of Goods Sold / Average Stock (in crores) Particulars Cost 2007-08 2008-09 2009-10 2010-11 2011-12

of 44847343.43 56883841.84 68920340.27 128867284.5 422842628 2 7839729.46 10122406.57 14971195.51 17803656.50 41162650

Goods Sold Average Stock Inventory T.O. Ratio 5.72 5.61 4.60

7.23

10.27

Figure-4

INTERPRETATION: The collection period of the company better in 2010-11 and the collection period of the company are higher in 2007-08. So that the average working capital ratio of the company where higher in 2010-11. In 2011-12 is highly inventory SAEC 76

Working Capital Management turnover ratio. The company efficiency in terms of collection and as well as managing working capital is increase. 5. CASH TO CURRENT ASSETS Cash to current assets = cash / current assets (in cores)

year cash current assets percentage

2007-08 2,85,179.33

2008-09 19,41,424.50

2009-10 11,40,501.80

2010-11 38,05,359.33

2011-12 8,95,534.47

1,48,59,905.57 2,6,71,892.75 2,49,13,042.09 3,73,82,649.90 35,82,69,907 0.019 0.073 0.045 0.101 0.002

Figure 5

Interpretation: The ratio has been recorded in the year 2007-08, 2008-09,2009-10,201011,2011-12 are 0.019, 0.073, 0.045,0.101, 0.002 the highest ratio is 0.101 due to increase in current assets the lowest ratio is 0.002 due to decrease in cash in the year 2011-12 SAEC 77

Working Capital Management 6. SUPER QUICK RATIO Super quick ratio = cash / current liabilities

Year Cash current liabilities current Ratio Figure 6:

2007-08 8,85,179.33 1,92,60,377.9 7 0.014

2008-09 19,41,424.50 3,28,80,429.2 8 0.059

2009-10 11,40,501.80 3,24,87,368.2 8 0.035

2010-11 38,05,359.33 2,98,45,473.6 9 0.12

2011-12 8,95,534.47 2,09,83,549 0.042

Interpretation: Super quick ratio has been recorded in the year 2007-08, 2008-09,200910,2010-11,2011-12 are 0.014,0.059,0.035,0.12,0.042 the highest ratio 0.12 due to increase in current liability the lowest quick ratio 0.014 due to decreases in cash in the year 2007-08.

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Working Capital Management FINDINGS In all the years, current assets are more than current liabilities. In these, ratio years is satisfactory. The current ratio was fluctuating through out the study period. It is not appreciable. The inventory turnover ratio is not satisfactory as the ratio is decreasing year by year and inventory period is slightly increased. The quick ratio of the Ms. BHARATHI SOAP WORKS is sufficient as the quick assets are More than current liabilities. The quick ratio of BHARATHI SOAP WORKS is satisfactory. Working capital turnover of BHARATHI SOAP WORKS is slightly decreased in the year 2006- 07 and in 2008-09, working capital turnover ratio increased. In the year 2007-08 and 2009-10 decreased. But the overall performance is good, since the risk and hard work by all the staff of company yielded very good results and reputation all over the state. SUGGESTIONS It is suggested that the company should concentrate on the management of current assets and current liabilities more effectively. The total currents assets were continuously decreasing and adversely. The current liabilities were increasing continuously; take necessary steps to maintain the ratio. Inventory should be reduced maximum possible extent by following procedures like just in time import substitution. As far as possible, the raw material should be bought as and when necessary. The inventory levels are nearly 60%-65% of the total current assets. It is not achievable to any organization to maintain that level of inventories management should concentrate on effective. The investment in loans and advances should be minimized to the possible extent. SAEC 79

Working Capital Management It is found that expenditure on major assets are showing increasing trends .it is there fore suggested to introduce cost control system ,and this is possible by purchasing bulk of material. Since the company has a very good brand name, and it has wide infrastructure in importing raw material, it should encash these strengths in doing more of trading activities . The company needs to get and continue current ratio of the firm in order to acquire the standard norms of current ratio in 2:1. CONCLUSION The structure of the current asserts had been study at and found that the current asserts position is satisfactory during the period. The company has all the facilities of achieving full capacity utilization as achieved in previous year. But due to working capital constraints the company is under utilizing its capacity and is forced to go for trading to improve the profitability to achieve better result, management as to take necessary steps in future like. Decrease the purchase price .decrease day to day operating expanses .maintaining inventory level .maintaining adequate cash for operation ABBRIVATIONS ISO TQM LIG HIG CBM IDBI WCTC FICCI International organization for standards Total quality management . Low income group . High income group Cash book management Industrial development bank of India Working capital term notes Federation of Indian chamber of commerce and industry

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Working Capital Management

BIBLIOGRAPHY

Financial Management Financial Management Financial Management Theory & practice Financial Management Financial Management Management Accounting 1. Financial Management & Financial Analysis Financial Management & Resources Advanced Accounting Financial Service -

Khan & Jain I.M.Pandy Parana Chandra Ravi M.Kishore S.N.Maheswar R.K. Sharma & Shasi K.Gupta

R.P.Rustagi

Nataraian R.L.Gupta M.Y.Khan

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