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INDEX Chapter No. Title Page No. 1 Introduction 2 Research Methodology 3 Literature Review 4 A
INDEX
Chapter No.
Title
Page No.
1
Introduction
2
Research Methodology
3
Literature Review
4
A
Company Profile
4
B
Data Analysis
5
Conclusion
6
References
CHAPTER 1 INTRODUCTION

CHAPTER 1

INTRODUCTION

WORKING CAPITAL MEANING AND DEFINITION OF WORKING CAPITAL Working capital is the amount of funds which

WORKING CAPITAL

MEANING AND DEFINITION OF WORKING CAPITAL

Working capital is the amount of funds which a company has to finance its day

to day operations it can be regards as the part of capitals which the capitals is

basically classified into fixed and working.

Fixed capital is normally invested in fixed assets and working capital in current

assets. It is used in day to day operations. These are the funds that are invested in

current assets. The form of these current assets keeps on changing. Ex: Raw material

to work in progress to finished product. , so it is also called circulating capital.

A study of working capital is of major part of the external and internal analysis

because of its close relationship with the current day to day operation of the business.

Working capital consists of broadly for that the assets of a business that are used at

related current operation and is represented by raw material, stores, work in progress,

and finished goods merchandise, bills receivable.

Definition of working capital

Gerstenberg

“working capital means current assets of company that are changed in the

ordinary course of business from one form to another, ex: from cash to inventories,

inventories to receivables, receivables into cash”

Shubin

“ Working capital is the amount of funds necessary to the cost of operating the enterprise.

“ Working capital is the amount of funds necessary to the cost of operating the

enterprise. Operating expenses involve investment in current assets, payment towards

overhead and expenses. Investment made in these heads is classified as working

capital”.

J. smith

“ The sum of the current assets is the working capital of the business”

‟‟WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITY”

CONCEPT OF WORKING CAPITAL There are two concepts of working capital that are: 1) Balance sheet

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital that are:

1)

Balance sheet concept

2)

Operating cycle concept.

1)

Balance sheet concept:

Working capital as per this defined in terms of current assets and current

liabilities. Balance sheet concept further classifies working capital into a) gross and b)

net working capital.

a) Gross working capital: it refers to total investment made in current assets. It is also

called circulating rotating from one head to another. Ex. Cash to raw material, raw

material to finished products, finished products to debtors, and debtors to cash. This

concept stresses on quantity aspect; i.e. to refer to total investment made in different

current assets. Bonneville and beway have defined gross working capital as ‟‟ any

fund received which increases the current assets”.

b) Net Working capital: as per this concept working capital is the difference between

current assets and current liabilities. This concept stresses on quality aspect of

working capital. The difference between current assets highlights on liquidity aspect

and quality of current assets. A firm that has excess of current assets over liabilities is

said to possess adequate liquidity. On the contrary firm that has excess of current

liability over current assets means it does not have adequate liquidity. It means that

part of current assets of such firm are financed through fixed assets.

2) Operating cycle concept: Operating Cycle or Working Capital Cycle indicates the length of time between
2)
Operating cycle concept:
Operating Cycle or Working Capital Cycle indicates the length of time between
affirms paying for raw materials entering into finished stock and receiving cash on the
sales of such Finished Stock.
This operating cycle differs from firm to firm. Longer the operating cycle greater
will be the amount of Working Capital required and vice versa. Thus it plays an
important role in determining the Working Capital needs of a firm.
OPERATING CYCLE CHART
Cash
Raw Materials
Debtors
Sales
Finished good
Work In
Process
Operating Cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of a G.C.T.M
involves three phases.
1.
Acquisition of resources such as raw material, labour, power and
fuel etc.
2.
Manufacture of the product which includes conversion of raw
material into work-In- progress into finished goods. 3.Sales of the product either for cash or on

material into work-In- progress into finished goods.

3.Sales of the product either for cash or on credit. Credit sales creates

book Debts for collection.

In the MAFATLAL MILL LTD (manufacturing concern), the working capital

operating cycle starts with the purchase of raw materials and ends with the realization

of cash from the sale of finished products. It is also called as cash conversion cycle,

production cycle etc. It involves the purchase of raw materials and stores, its into

stocks of finished goods through the work-in-Progress with the progressive increment

of labor and service costs, conversion of finished goods (Yarn Products) into sales,

Debtors and receivables and ultimately realization of cash and this cycle continuous

again from cash to purchases of raw material and so on.

CLASSIFICATION OF WORKING CAPITAL Working capital can be classified on the basis of concept and on
CLASSIFICATION OF WORKING CAPITAL
Working capital can be classified on the basis of concept and on the basis of time.
Various types of working capital are as follows
KINDS OF
WORKING
CAPITAL
1. ON THE BASIS
OF CONCEPT
2. ON THE BASIS
OF TIME
GROSS
NET WORKING
PERMANENT OR
TEMPORARY OR
WORKING
CAPITAL
FIXED
VARIABLE
CAPITAL
REGULAR
RESERVE
SEASONAL
SPECIAL
1)
On the basis of concept :
Working capital on this basis of concept is classified into
A)
Gross working capital: It refers to total investment made in current asset.
Current assets are the asset which can be converted into cash within a short period of
an accounting year. Current assets include cash, debtors, bills receivables and short
term securities etc.
B)
Net working capital: It is 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. Net working capital can be positive or negative. Positive net
working capital will arise when current asset exceeds current liabilities. A negative
net working capital occurs when current liabilities are in excess of current assets.
2) On the basis of time : Classification of working capital in this case is made

2)

On the basis of time :

Classification of working capital in this case is made on the basis

of time for which investment is required. Kinds of working capital in

this category are:

1)

Permanent : Some portion of working capital always remain permanent or fixed.

This refers to minimum investment a firm has to make and keep in certain current

assets. Firm has to always maintain minimum cash balance, inventory, debtors etc. as

there current assets are required permanently. They are normally financed through

long term capital.

Such permanent working capital is further classified into

  • a) regular and b) reserve

  • a) Regular: regular permanent working capital is used in routine business operations.

  • b) Reserve: reserve working capital refers to some portion of working capital that is

kept as reserve to meet any contingency.

2)

Temporary working capital: required of such capital varies or fluctuates

depending on season. Its requirement is not continous it is normally finance through

short term sources, like overdraft, cash credit and other short term liabilities.

Temporary working capital is further classified into:

A) Seasonal working capital: requirement of working capital is based on particular seasons ex; winter, summer
  • A) Seasonal working capital: requirement of working capital is based on

particular seasons

ex; winter, summer or festival seasons etc during these seasons there will be

additional demand for the products. To meet out such demand firm has to make

additional arrangement of working capital.

  • B) Special working capital: requirement of such working capital is necessitated to

meet demands of special occasion‟s ex. Occasion of world cup cricket, Olympics,

kumba mela, elections. During these special occasions demand for goods and service

will increase. To meet such special demand firm has to make temporary arrangement

of working capital

DETERMINANTS OF WORKING CAPITAL

Requirement of working capital differs from one firm to other. This is because

of business conditions and policies of conducting business differ. Working capital

required by each from is determined by following factors.

1)

Nature of business: important factor that determines requirement of working

capital is nature of business a firm is undertaking. Firm that are engaged in production

and marketing need more working capital compared to the firm that are in trading or

service oriented business. This is because manufacturing units need more current

assets compared to service oriented units.

2)

Size of business: Size of the business obviously determines the

requirement of the working capital bigger the size more is the requirement of the

working capital. Larger the scale of operations, larger the investment required in

current assets.

3)

Operating cycle: Operating cycle means period from which investment is

locked up in different operations. Longer the period of inventory holding, work in

progress, finished goods etc more is the investment needed in the operations. This

necessities more investment in current assets.

4)

4) Stock turn over: stock turnover refers to number of times stock is turned over that

Stock turn over: stock turnover refers to number of times stock is turned over

that is it refers to sales. Quicker the stock turn over (quick sales) less is the working

capital. Slow pace of stock turnover demands more investment is locked up in

operation.

5)

Credit policy: Credit policy of the firm will influence requirements of working

capital. Firms that offer liberal credit to the debtor have make more investment in

production operations. Such firms need more working capital to keep their production

operation continuous. Requirement of working capital will be much more if the firm

buys on cash and sells on credit. On the contrary firms that buy on credit and sell on

cash basis need less working capital.

6)

Production policy: Firms that undertakes all production operations within the

organization need more working capital. Such firms have to make investment to

manufacture every component or part. On the contrary, firms which undertake

outsourcing that is buying some of the components or parts from out side agencies

need less working capital.

7)

Growth of business: Firms that are experiencing growth need more working

capital. Such firms have to constantly increase their production levels. To meet rising

needs of sales targets. They need to continuously increase investment in current

assets.

8)

Earning capacity and its appropriation: firms that earn sufficient profits and

invest a portion of profit in business needs less working capital. Ploughing back of

profits and accumulated reserves will minimize dependency on external capital for

working capital needs. On the contrary firms that follow liberal divided policy are

firms that do not have adequate surplus need to borrow more to meet regular working

capital needs.

Needs of Working Capital: The need for working capital to run the day-to-day business activities cannot

Needs of Working Capital:

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 required any

amount of working capital. Indeed, firms differ in their requirements of the working

capital.

The firm‟s aim is that maximizing the wealth of shareholders. Earning a

steady amount of profit requires successful sales activity. The firm has to invest

enough funds in current assets for generating of sales activity. Current assets are

needed because sales do not convert into cash instantaneously. There is always an

operating cycle involved in the conversion of sales into cash. Therefore Working

Capital required for:

1)

To meet the cost of inventories including total of raw materials purchased

parts, operating Supplies, work in progress, finished goods.

2)

To pay wages, salaries, for indirect labor, clerical staff, managerial and

supervision staff.

3)

To meet overhead costs, including those of maintenance services activities,

fuel, power charges, taxes and general expense administration.

4)

To bear the expansion (with regard to promotion of sales) e.g. expenses on

packing, advertisement, salesmanship, Sales Servicing, After requires, Credit

Facilities, Delivery Services, etc.

IMPORTANCE OF WORKING CAPITAL Even though the skills for maintaining the working capital are somewhat unique,

IMPORTANCE OF WORKING CAPITAL

Even though the skills for maintaining the working capital are somewhat

unique, the goals are the same-viz. to make an efficient use of funds for minimizing

the risk of loss to attain profit objectives.

Firstly, the adequate of working capital contributes a lot in raising the credit-standing

of a corporation in terms of favorable rates of interest on bank loan, better terms on

goods purchased, reduced cost of production on account of the receipt of cash

discounts, etc.

Secondly, a company with sufficient working capital is always in a position to take

the advantage of any favorable opportunity either to purchase raw materials or to

execute a special order or to wait for better market position.

In the third place, the ability to meet all reasonable demands for cash without

inordinate delay is a great psychological factor to improve the all rounds efficiency of

the business.

Lastly, during slump the demand for working capital, instead of coming down, shoots

up. A good amount of working capital is locked up in the inventories and book debts.

Concerns having ample resources can tide over that period of depression.

Thus, working capital is regarded as one of the conditioning factors in the long run

operations of the firm, which is often inclined to treat it as an issue of short run

analysis and decision making.

Components of Working Capital: There are two components of Working Capital A. Current Assets B. Current

Components of Working Capital:

There are two components of Working Capital

  • A. Current Assets

  • B. Current Liabilities

    • A) Current Assets:

Components of Current Assets are as follows:

  • 1. Cash & Bank Balance

  • 2. Stock of Raw Material at cost- work in process and Finished Goods.

  • 3. Advanced Recoverable in Cash or kind or kind or for value to

be received.

  • 4. Deposits under the company scheme.

  • 5. Advanced payment of income takes credit certificates ..

  • 6. Outstanding debts for a period exceeding six months.

  • 7. Balance with central excise authorities.

    • B) Current Liabilities:

Components of Current Liabilities are as follows: 1. Sundry Creditors for the goods and expenses. 2.

Components of Current Liabilities are as follows:

  • 1. Sundry Creditors for the goods and expenses.

  • 2. Income tax deducted at sources from contractors.

  • 3. Expenses Payable.

  • 4. Unclaimed Dividend.

  • 5. Security Deposits.

  • 6. Liabilities for bills discounted.

  • 7. Bank Overdraft Acceptance.

Working Capital Management concerned with the following aspects:

  • 1. Cash Management:

Cash is the important current asset for the operation of the business. cash is

the basic input needed to keep the business running on a continuous basis; it is also

the ultimate output expected to be realized by selling the service or product

manufactured by the firm. The firm should keep sufficient cash, neither more nor less.

Cash is the liquid form of an asset. It is the ready money available in the

firm or with the business, essential for its operations. A firm needs the cash for the

following three purposes:

  • (a) The Transaction Motive:

  • (b) The Precautionary Motive:

  • (c) The Speculative Motive:

2. Receivables Management: Receivable represents amounts owed to the firm as a result of sale of
  • 2. Receivables Management:

Receivable represents amounts owed to the firm as a result of sale of

goods or services on the ordinary course of business. These are claims of the firm

against its customers and form part of its current assets. These receivables are carried

for the customers. The period of credit and extent of receivables depends upon the

credit policy followed by the firm. The main purpose of maintaining or investing in

receivables is to meet competitors, to increase sales, and to maintain a cordial

relationship with the clients.

  • 3. Inventory management:

Every enterprise needs inventory for smooth running of its activities. It

serves as a link between production and distribution process. There is, generally a

time lag between the recognition of a need and its fulfillment. The greater the time

lag, the higher the requirements for inventory. The unforeseen fluctuations in demand

and supply of goods necessitate the need for inventory. Moreover, it provides a

cushion for future price fluctuations.

TEXTILE INDUSTRY IN INDIA The Textile Sector in India ranks next to Agriculture. Textile is one

TEXTILE INDUSTRY IN INDIA

The Textile Sector in India ranks next to Agriculture. Textile is one of India‟s oldest

industries and has a formidable presence in the national economy in as much as it

contributes to about 14 per cent of manufacturing value-addition, accounts for around

one-third of our gross export earnings and provides gainful employment to millions of

people. The textile industry occupies a unique place in our country. One of the earliest

to come into existence in India, it accounts for 14% of the total Industrial production,

contributes to nearly 30% of the total exports and is the second largest employment

generator after agriculture.

Textile Industry is providing one of the most basic needs of people and the holds

importance; maintaining sustained growth for improving quality of life. It has a

unique position as a self-reliant industry, from the production of raw materials to the

delivery of finished products, with substantial value-addition at each stage of

processing; it is a major contribution to the country's economy. This paper deals with

structure, growth and size of the Indian textile industry, role of textile industry in

economy, key advantages of the industry, textile industry export and global scenario

and strength, weakness, opportunities and treats of the Indian textile industry.

INTRODUCTION

The Indian textile industry is one of the largest in the world with a massive raw

material and textiles manufacturing base. Our economy is largely dependent on the

textile manufacturing and trade in addition to other major industries. About 27% of

the foreign exchange earnings are on account of export of textiles and clothing alone.

The textiles and clothing sector contributes about 14% to the industrial production and

3% to the gross domestic product of the country. Around 8% of the total excise

revenue collection is contributed by the textile industry. So much so, the textile

industry accounts for as large as 21% of the total employment generated in the

economy. Around 35 million people are directly employed in the textile

manufacturing activities. Indirect employment including the manpower engaged in agricultural based raw-material production like cotton and

manufacturing activities. Indirect employment including the manpower engaged in

agricultural based raw-material production like cotton and related trade and handling

could be stated to be around another 60 million.

A textile is the largest single industry in India (and amongst the biggest in the world),

accounting for about 20% of the total industrial production. It provides direct

employment to around 20 million people. Textile and clothing exports account for

one-third of the total value of exports from the country. There are 1,227 textile mills

with a spinning capacity of about 29 million spindles. While yarn is mostly produced

in the mills, fabrics are produced in the powerloom and handloom sectors as well. The

Indian textile industry continues to be predominantly based on cotton, with about 65%

of raw materials consumed being cotton. The yearly output of cotton cloth was about

12.8 billion m (about 42 billion ft). The manufacture of jute products (1.1 million

metric tons) ranks next in importance to cotton weaving. Textile is one of India‟s

oldest industries and has a formidable presence in the national economy inasmuch as

it contributes to about 14 per cent of manufacturing value-addition, accounts for

around one-third of our gross export earnings and provides gainful employment to

millions of people. They include cotton and jute growers, artisans and weavers who

are engaged in the organised as well as decentralised and household sectors spread

across the entire country.

INDIAN TEXTILE INDUSTRY STRUCTURE AND GROWTH

India‟s textile industry is one of the economy‟s largest. In 2000/01, the textile and

garment industries accounted for about 4 percent of GDP, 14 percent of industrial

output, 18 percent of industrial employment, and 27 percent of export earnings

(Hashim). India‟s textile industry is also significant in a global context, ranking

second to China in the production of both cotton yarn and fabric and fifth in the

production of synthetic fibers and yarns.

In contrast to other major textile-producing countries, mostly mostly small-scale, nonintegrated spinning, weaving, cloth finishing, and

In contrast to other major textile-producing countries, mostly mostly small-scale,

nonintegrated spinning, weaving, cloth finishing, and apparel enterprises, many of

which use outdated technology, characterize India‟s textile sector. Some, mostly

larger, firms operate in the “organized” sector where firms must comply with

numerous government labor and tax regulations. Most firms, however, operate in the

small-scale “unorganized” sector where regulations are less stringent and more easily

evaded.

The unique structure of the Indian textile industry is due to the legacy of tax, labor,

and other regulatory policies that have favored small-scale, labor-intensive

enterprises, while discriminating against larger scale, more capital-intensive

operations. The structure is also due to the historical orientation towards meeting the

needs of India‟s predominately low-income domestic consumers, rather than the

world market. Policy reforms, which began in the 1980s and continued into the 1990s,

have led to significant gains in technical efficiency and international competitiveness,

particularly in the spinning sector. However, broad scope remains for additional

reforms that could enhance the efficiency and competitiveness of India‟s weaving,

fabric finishing, and apparel sectors.

Structure Of India‟s Textile Industry

Unlike other major textile-producing countries, India‟s textile industry is comprised

mostly of small-scale, nonintegrated spinning, weaving, finishing, and apparel-

making enterprises. This unique industry structure is primarily a legacy of

government policies that have promoted labor-intensive, small-scale operations and

discriminated against larger scale firms:

• Composite Mills. Relatively large-scale mills that integrate spinning, weaving and,

sometimes, fabric finishing are common in other major textile-producing countries. In

India, however, these types of mills now account for about only 3 percent of output in

the textile sector. About 276 composite mills are now operating in India, most owned by the

the textile sector. About 276 composite mills are now operating in India, most owned

by the public sector and many deemed financially “sick.”

• Spinning. Spinning is the process of converting cotton or manmade fiber into yarn to

be used for weaving and knitting. Largely due to deregulation beginning in the mid-

1980s, spinning is the most consolidated and technically efficient sector in India‟s

textile industry. Average plant size remains small, however, and technology outdated,

relative to other major producers. In 2002/03, India‟s spinning sector consisted of

about 1,146 small-scale independent firms and 1,599 larger scale independent units.

• Weaving and Knitting. Weaving and knitting converts cotton, manmade, or blended

yarns into woven or knitted fabrics. India‟s weaving and knitting sector remains

highly fragmented, small-scale, and labor-intensive. This sector consists of about 3.9

million handlooms, 380,000 “powerloom” enterprises that operate about 1.7 million

looms, and just 137,000 looms in the various composite mills. “Powerlooms” are

small firms, with an average loom capacity of four to five owned by independent

entrepreneurs or weavers. Modern shuttleless looms account for less than 1 percent of

loom capacity.

• Fabric Finishing. Fabric finishing (also referred to as processing), which includes

dyeing, printing, and other cloth preparation prior to the manufacture of clothing, is

also dominated by a large number of independent, small scale enterprises. Overall,

about 2,300 processors are operating in India, including about 2,100 independent units

and 200 units that are integrated with spinning, weaving, or knitting units.

• Clothing. Apparel is produced by about 77,000 small-scale units classified as

domestic manufacturers, manufacturer exporters, and fabricators (subcontractors).

Growth of Textile Industry India has already completed more than 50 years of its independence. The

Growth of Textile Industry

India has already completed more than 50 years of its independence. The analysis of

the growth pattern of different segment of the industry during the last five decades of

post independence era reveals that the growth of the industry during the first two

decades after the independence had been gradual, though lower and growth had been

considerably slower during the third decade. The growth thereafter picked up

significantly during the fourth decade in each and every segment of the industry. The

peak level of its growth has however been reached during the fifth decade i.e., the last

ten years and more particularly in the 90s. The Textile Policy of 1985 and Economic

Policy of 1991 focussing in the direction of liberalisation of economy and trade had in

fact accelerated the growth in 1990s. The spinning spearheaded the growth during this

period and man-made fibre industry in the organised sector and decentralised weaving

sector.

Size of Textile Industry in India

The textile industry in India covers a wide gamut of activities ranging from

production of raw material like cotton, jute, silk and wool to providing high value-

added products such as fabrics and garments to consumers.

The industry uses a wide variety of fibres ranging from natural fibres like

cotton, jute, silk and wool to man made fibres like polyester, viscose, acrylic and

multiple blends of such fibres and filament yarn.

The textile industry plays a significant role in Indian economy by providing

direct employment to an estimated 35 million people, by contributing 4 per cent of

GDP and accounting for 35 per cent of gross export earnings. The textile sector

contributes 14 per cent of the value-addition in the manufacturing sector.

• Textile exports during the period of April-February 2003-2004 amounted to $11,698.5 million as against $11,142.2

Textile exports during the period of April-February 2003-2004 amounted to

$11,698.5 million as against $11,142.2 million during the same period in the previous

year, showing an increase of around 5 per cent.

Estimates say that the textile sector might achieve about 15 to 18 per cent

growth this year following dismantling of MFA.

ROLE OF INDIAN TEXTILE INDUSTRY IN THE ECONOMY

Textile industry plays a significant role in the economy. The Indian textile industry is

one of the largest and most important sectors in the economy in terms of output,

foreign exchange earnings and employment in India. It contributes 20 per cent of

industrial production, 9 per cent of excise collections, 18 per cent of employment in

industrial sector, nearly 20 per cent to the country‟s total export earnings and 4 per

cent ton the GDP. The sector employs nearly 35 million people and is the second

highest employer in the country. The textile sector also has a direct link with the rural

economy and performance of major fibre crops and crafts such as cotton, wool, silk,

handicrafts and handlooms, which employ millions of farmers and crafts persons in

rural and semi-urban areas. It has been estimated that one out of every six households

in the country depends directly or indirectly on this sector.

India has several advantages in the textile sector, including abundant availability of

raw material and labour. It is the second largest player in the world cotton trade. It has

the largest cotton acreage, of about nine million hectares and is the third largest

producer of cotton fibre in the world. It ranks fourth in terms of staple fibre

production and fourth in polyester yarn production. The textile industry is also labour

intensive, thus India has an advantage.

The key advantages of the Indian industry are:

• India is the third largest producer of cotton with the largest area under cotton cultivation

India is the third largest producer of cotton with the largest area under cotton

cultivation in the world. It has an edge in low cost cotton sourcing compared to other

countries.

Average wage rates in India are 50-60 per cent lower than that in developed

countries, thus enabling India to benefit from global outsourcing trends in labour

intensive businesses such as garments and home textiles.

Design and fashion capabilities are key strengths that will enable Indian

players to strengthen their relationships with global retailers and score over their

Chinese competitors.

Production facilities are available across the textile value chain, from spinning

to garments manufacturing. The industry is investing in technology and increasing its

capacities which should prove a major asset in the years to come.

Large Indian players such as Arvind Mills, Welspun India, Alok Industries

and Raymonds have established themselves as 'quality producers' in the global

market. This recognition would further enable India to leverage its position among

global retailers.

India has gathered experience in terms of working with global brands and this

should benefit Indian vendors.

GOVERNMENT INITIATIVES

With a view to raise India's share in the global textiles trade to 10 per cent by 2015

(from the current 3 per cent), the Ministry of Textiles proposes 50 new textile parks.

Out of the 50, 30 have been already sanctioned by the government (with a cost of US$

710 million). Set up under the Scheme for Integrated Textile Parks (SITP), this

initiative will not only make the industry cost competitive, but will also enhance

manufacturing capacity in the sector.

Apart from the above, a series of progressive measures have been planned to strengthen the textile

Apart from the above, a series of progressive measures have been planned to

strengthen the textile sector in India:

Technology Mission on Cotton (TMC)

Technology Upgradation fund Scheme (TUFS)

Setting up of Apparel Training and Design Centres (ATDCs)

100 per cent Foreign Direct Investment (FDI) in the textile sector under

automatic route.

Setting up two design centres in Gujarat in collaboration with National

Institute of Fashion Technology.

Setting up a Handloom Plaza in Ahmedabad with an estimated investment of

US$ 24.6 million.

Revival plans of the mills run by National Textiles Corporation (NTC).

Already, for the revival of 18 textile mills, US$ 2.21 million worth of machineries has

been ordered for the upgradation and modernisation of these mills.

Setting up a handloom mall with an investment of US$ 24.6 million at

Jehangir Mill in Ahmedabad.

Scrapping of the Textile Committee cess being collected from the textile and

textile machinery industry under the Textile Committee Act.

In a further bid to bolster the envisaged annual growth rate of 11 per cent, the

Government will also increase the TUF (Technology Upgradation Fund) from US$

124 million in 2006-07 to US$ 211 million in 2007-08.

The Government of India has also included new schemes in the Annual Plan for 2007-

08 to provide a boost to the textile sector. These include schemes for Foreign

Investment Promotion to attract foreign direct investment in textiles, clothing and

machinery; Brand Promotion on Public-Private Partnership (PPP)) approach to

develop global acceptability of Indian apparel brands; Trade Facilitation Centres for

Indian image branding; Fashion Hubs for creation of permanent market place for the

benefit of Indian fashion industry; Common Compliance Code to encourage acceptability among apparel buyers and Training

benefit of Indian fashion industry; Common Compliance Code to encourage

acceptability among apparel buyers and Training Centres for Human Resource

Development on Public Private Partnership (PPP) mode.

INDIAN TEXTILE INDUSTRY

In textile Scenario

In exports Cotton yarns, fabric, made ups etc made largest chunk with US$ 3.33

Billion or 26.5% in textiles category, and Ready Made garments (RMG)-cotton

including accessories made largest chunk with 4.67 Billion US $ or 37.1 % of total

exports. Whereas, manmade yarn and fabrics in textiles group and RMGMan made

fibers constituted second position in the two categories, respectively. Carpets and

woolen garments are other items exported from India.

In global scenario

Developed countries' exports declined from 52.2% share in 1990 to 37.8 % in 2002.

And that of developing countries increased from 47.8% to 62.2 % in the same period.

In 2003 the exports figures in percentage of the world trade in Textiles Group (for

select countries) were:

INDIAN TEXTILE INDUSTRY – SWOT ANALYSIS Strength » India has rich resources of raw materials of
INDIAN TEXTILE INDUSTRY – SWOT ANALYSIS
Strength
»
India has rich resources of raw materials of textile industry. It is one of the
largest producers of cotton in the world and is also rich in resources of fibres like
polyester, silk, viscose etc.
»
India is rich in highly trained manpower. The country has a huge advantage
due to lower wage rates. Because of low labor rates the manufacturing cost in textile
automatically comes down to very reasonable rates.
India is highly competitive in spinning sector and has presence in almost all
processes of the value chain.
»
»
Indian garment industry is very diverse in size, manufacturing facility, type of
apparel produced, quantity and quality of output, cost, and requirement for fabric etc.
It comprises suppliers of ready-made garments for both, domestic or exports markets.
Weakness
» Knitted garments manufacturing has remained as an extremely fragmented industry. Global players would prefer to

»

Knitted garments manufacturing has remained as an extremely fragmented

industry. Global players would prefer to source their entire requirement from two or

three vendors and the Indian garment units find it difficult to meet the capacity

requirements.

»

Industry still plagued with some historical regulations such as knitted

garments still remaining as a SSI domain.

»

Labour force giving low productivity as compared to other competing

countries.

»

Technology obsolescence despite measures such as TUFS.

»

Low bargaining power in a customer-ruled market.

»

India seriously lacks in trade pact memberships, which leads to restricted

access to the other major markets.

»

Indian labour laws are relatively unfavorable to the trades and there is an

urgent need for labour reforms in India.

Opportunity

»

Low per-capita domestic consumption of textile indicating significant

potential growth.

»

Domestic market extremely sensitive to fashion fads and this has resulted in

the development of a responsive garment industry.

»

India's global share is just 3% while China controls about 15%. In post-2005,

China is expected to capture 43% of global textile trade.

»

Companies need to concentrate on new product developments.

» Increased use of CAD to develop designing capabilities and for developing greater options. Threats »

»

Increased use of CAD to develop designing capabilities and for developing

greater options.

Threats

»

Competition in post-2005 is not just in exports, but is also likely within the

country due to cheaper imports of goods of higher quality at lower costs.

»

Standards such as SA-8000 or WARP have resulted in increased pressure on

companies for improvement of their working practices.

»

Alternative competitive advantages would continue to be a barrier.

CONCLUSION

The Indian textile industry has a significant presence in the Indian economy as well as

in the international textile economy. Its contribution to the Indian economy is

manifested in terms of its contribution to the industrial production, employment

generation and foreign exchange earnings. The industry also contributes significantly

to the world production of textile fibres and yarns including jute. In the world textile

scenario, it is the largest producer of jute, second largest producer of silk, third largest

producer of cotton and cellulosic fibre\yarn and fifth largest producer of synthetic

fibre\yarn. Textile Industry is providing one of the most basic needs of people and the

holds importance; maintaining sustained growth for improving quality of life. The

Government of India has also included new schemes in the Annual Plan for 2007-08

to provide a boost to the textile sector. These include schemes for Foreign Investment

Promotion to attract foreign direct investment in textiles, clothing and machinery etc.

CHAPTER 2 RESEARCH METHODOLOGY

CHAPTER 2

RESEARCH

METHODOLOGY

OUTLINE OF THE STUDY The Management of working capital is very important. It involves the study

OUTLINE OF THE STUDY

The Management of working capital is very important. It involves the study of day to

day affairs of the company. The motive behind the study is to develop an understanding

about the working capital management in the running business organization and to help

the company in developing the efficient working capital management. So It helps in

future planning and control decisions.

OBJECTIVES OF THE STUDY:

1)

To study the working capital management.

2)

To know the sources of working capital.

3)

To study the different components of working capital of the company.

4)

To calculate the operating cycle of an organization.

5)

To calculate the working capital of an organization.

6)

To study the liquidity position of the company with the help of ratios.

SCOPE OF THE STUDY

The study is conducted at „Mafatlal Ltd.‟ Ahmedabad. The study of Working capital

management is purely based on secondary data and all the information is available

within the company it self in the form of records. To get proper understandings of this

concept, I have done the study of the balance sheets, profit & loss a/cs, cash accounts,

trial balance, cost sheets. I have also conducted the interviews with employees of

accounts and finance department and stores department. So, scope of the study is

limited upto the availability of official records and information provided by the

employees. The study is supposed to the related to the period of last four financial

years.

RESEARCH METHODOLOGY

  • To Recognize the various type of information which are necessary for the study of working capital management.

  • Collection of data from various department to analyze.

  • For understanding the various reports, personal interviews are conducted.

  • With the help of various techniques like:

    • Operating Cycle Analysis

    • Ratio Analysis

    • Common size statement

 Schedule of changes in working capital The overall position of MAFATLAL is studied and analyzed.
  • Schedule of changes in working capital

The overall position of MAFATLAL is studied and analyzed.

  • Suggestions are given on the basis of findings for better understanding of working capital management.

SOURCES OF INFORMATION

  • Primary data:- The personal interview with senior officials and various members of finance and accounts department and also with other departments and collected the data.

  • Secondary data:- Audited reports of the company.

CHAPTER 3 Literature Review

CHAPTER 3

Literature

Review

CHAPTER 4 A COMPANY PROFILE

CHAPTER 4 A

COMPANY

PROFILE

Mafatlal Industries Limited has been a leader in Textiles for over 100 years. Mafatlal Industries Ltd.

Mafatlal Industries Limited has been a leader in Textiles for over 100 years.

Mafatlal Industries Ltd.

Kaledonia, 6th Floor, Sahar Road, Andheri (E), Mumbai 400069

Telephone: +91-22-6771 3800 / 3900

Fax No: +91-22-6771 3924 / 25

Registered Office

Mafatlal Industries Limited,

Asarwa Road, Ahmedabad - 380 016

Telephone: +91-79-2212 3944,

Fax No: +91-79-2212 3045

Textile Division

Post Box No 55, Kapadwaj Road, Nadiad 387 001

Telephone: +91-0268-2550226

Fax No: 91-0268-2565030

MIL‟s product portfolio comprises a complete range of products consisting of yarn dyed Shirtings, Suitings, Voiles,
MIL‟s product portfolio comprises a complete range of products consisting of yarn
dyed Shirtings, Suitings, Voiles, Prints, Linens, Bleached White Fabrics, Rubia, value
added and fashion Denims, Corduroys, School Uniforms, Corporate/ Institutional
Uniforms, Bed & Bath Linen and Readymades in Cotton, Linen, Polyester/ Cotton,
Polyester/Viscose, Cotton/Lycra, PV/Lycra, Terry Rayon and Polyester wool blends.
The total sales of Mafatlal Industries Ltd. for the last financial year 2012 - 2013 was
over 80 million meters.
Nadiad
Unit
Navsari
Unit
Established
in
1913.
Composite unit established in 1931.
One of the largest composite textile mills in
Produces
Cotton
and
Polyester
the
country.
blended Fabrics in Yarn Dyed and
Piece
Dyed
varieties.
It produces some of the
Has
well-equipped
Quality
count range
of
7's
to
finest fabrics, in a
140's, which are
Assurance
Laboratories.
supplied to the most demanding customers
Obtained ISO-9001 Certification in
and
oversees.
2005.
Its modern equipments include shuttle less
looms and latest processing equipments such
as Combi Bleaching Range, Continuous
Dyeing Range and 16 colour Stormac Rotary
Denim
Division
With the amalgamation of Mafatlal
Denim
Limited
into Mafatlal
Industries
Limited,
speciality
and
Printing
machines.
fashion denims (mercerized, stretch,
coated and
ring)
have
now
been
Has
well-equipped
Quality
Assurance
added to our product range.
laboratories
accredited
by
Marks
and
Spencer,
Next,
DGQA,
DGS&D
and
Production
commenced
in
1997.
Ordinance
Factories.
State-of-the-art
composite
manufacturing
facilities.
Obtained ISO-9001 Certification in 1994.
Produces
fashion
denim
fabrics.
Accreditions:
ISO
9001:2008
ISO
14001:2008
Oeko-Tex
Standard
100
GOTS
(Global
Organic
Textile
Standard)
OE
(Organic
Exchange
/
Textile
Exchange)
FOUNDER SHRI MATATLAL GAGALBHAI The story of the Mafatlal Group is a stirring saga of a
FOUNDER
SHRI MATATLAL GAGALBHAI
The story of the Mafatlal Group is a stirring saga of a blend of traditional values and
modern technology triumphing over circumstances. Mr. Mafatlal Gagalbhai the
founder, was born in 1873, to a weaver of Ahmedabad. His father, who was neither
educated nor prosperous, made a living by doing odd jobs. It wasn't long before a
young Mafatlal, who was still in his early teens, had to leave school to help his father
peddle textile products. With goods hanging from their shoulders, both father and son
would scour the countryside in search of buyers. Some of the buyers proved to be Mr.
Mafatlal's benefactors in later years, when he metamorphosed into an industrialist.
They not only provided him with capital, but also gave it at low rates of interest.
Driven by curiosity and ambition, he took up a job as a mill-hand. He wanted to
understand the entire gamut of operations; his big break came only at the age of 31.
Alongwith Chandulal Mahadevia, a friend, and Arthur Shorrock, an Englishman who
knew some British textile-machinery manufacturers in Lancashire, he took over the
management of a small mill in Ahmedabad, and named it the Shorrock Mill. Of the
initial equity capital of Rs 3.25 lakhs, Mr. Mafatlal picked up 30 shares of Rs 1,000
each while his father picked up another 30 shares. Along with his partners, he evolved
an innovative scheme to raise the rest of the funds. In those days, business concerns
were run by managing agencies. So, the enterprising partners promised investors a
share in the managing agency.
SHRI ARVIND MAFATLAL The first mill did extremely well, and Mr. Mafatlal developed an appetite for
SHRI ARVIND MAFATLAL
The first mill did extremely well, and Mr. Mafatlal developed an appetite for
expansion. Six years later, in 1912, he bought a mill in neighbouring Nadiad for Rs
6.26 lakhs. The second mill was christened New Shorrock. For Mafatlal and the
others in the textile business, the War years were the years of prosperity and
expansion. Although the partnership was doing well, Mr. Mafatlal wanted to do
something on his own. So, in 1916, he bought Jaffer Ali Mill, which was founded by
the Nawab of Surat and renamed it Surat Cotton Spinning & Weaving Mills. Three
years later, Mr. Mafatlal came to Mumbai, taking over the China Mill, which had
been set up by a Parsi family in 1887.
Shri Hrishikesh Mafatlal
It was in the 1970's and 1980's, under the leadership of Mr. Arvind Mafatlal, that the
existing business was consolidated. The Group also diversified into Information
Technology, Chemicals and the Engineering Industry. The late 1980's saw the Group
further diversifying into the Financial Service Industry, Gas Distribution and later into
Healthcare business. From 1995 onwards, the strategy has been to focus on the Core
Competence viz. Textiles and Chemicals and divest from other businesses. Today,
Chairman Mr. Hrishikesh Mafatlal, provides the strategic vision for Arvind Mafatlal
Group, as it strides ahead with ambitious plans for the future.
The Arvind Mafatlal Group believes in business excellence without compromise. This is the way we have
The Arvind Mafatlal Group believes in business excellence without compromise.
This is the way we have always done business. Actions matter, mere intentions don't.
What does excellence without compromise mean?
It means honouring business commitments even in competitive times.
It means zero short-cuts.
Our group's living truth is reflected perfectly in our corporate identity.
A blue lotus formed out of the letters AMG and a verbal expression "The Ethics of
Excellence."
The blue lotus or 'Indivar' is Lord Vishnu's favourite flower.
The Indivar plant always has at least one flower in the bloom every day.
The flower has an exquisite fragrance but it doesn't spread by itself. You have to sniff
it. Very similar to the Arvind Mafatlal Group, the organisation that doesn't shout
about its achievements.
Indivar. It rises above circumstances. Every day.
Quality Policy
We shall provide our customers in National and International Markets products and
services of agreed standards. We also commit to extend the Quality concept to all
phases of our business by strengthening partnership with our customers and suppliers.
We shall continue our endeavours to develop new products and markets, especially
for exports.
We shall develop our information system to regular feed back on product quality performance, and acceptance
We shall develop our information system to regular feed back on product quality
performance, and acceptance from our external customers to prepare ourselves to
meet the future requirements.
We shall pay special attention to Health, Safety & Environmental requirement.
We provide skills and training to our employees and promote open communication to
maximise their contribution in achieving quality excellence.
We shall continue ISO 9001:2008 series of quality standards to ensure total customer
satisfaction by supplying our products which conform to contractual requirements.
H.A.MAFATLAL
Chairman
GROUP COMPANIES
Navin Fluorine‟s integrated fluoro chemicals complex has been the largest in India
since 1967. Here, the company manufactures the widest range of fluoro chemicals in
the bulk and speciality segments. So far, it has developed over 40 products on a
commercial scale using indigenously built multi-purpose plants and product
technology.
Visit us at: www.nfil.in
The Arvind Mafatlal Group took over MIINDIA Chemicals in 1976, and, in the years to follow,
The Arvind Mafatlal Group took over MIINDIA Chemicals in 1976, and, in the years
to follow, turned it around totally. In fact, the company has been the largest
manufacturer of rubber chemicals in India for more than two decades. Today,
NOCIL‟s customer profile spans the global market as well.
Visit us at: www.nocilrubberchemicals.com or www.natocil.com
BOARD OF DIRECTORS MANAGEMENT TEAM
BOARD OF DIRECTORS
MANAGEMENT TEAM

1905

1905 Sets up first textile mill in Ahmedabad, India 1912 Purchased a second textile mill in

Sets up first textile mill in Ahmedabad, India

1912

Purchased a second textile mill in neighbouring Nadiad, India

1916

Purchased another mill in Surat

1919

Shifts base to Mumbai with the purchase of a textile mill

1931

Establishes one more textile mill in Navsari

1944

Shri Navichandra Mafatlal takes over the family business, after the sad demise of the

founder, Shri Mafatlal Gagalbhai.

1945-54

Group invests heavily in cotton textile mills and their modernization to become the

third largest mill owner in India. Establishes a strong foothold in mumbai

1954

Shri Arvind Mafatlal takes over the reins of the group companies and starts

diversification of the Group businesses.

1970

Mafatlal promotes ace cricketers and football players thereby gaining tremendous

mileage.

1979

After division of the Mafatlal Group business, the Arvind Mafatlal Group focuses on

textiles, petro chemicals, rubber chemicals and fluoro chemicals.

1980-90

Consolidates its position in textiles, expanding the textile machinery activities.

Mr. Hrishikesh Mafatlal takes over the reins of the company.

1994

1996

1996 Obtains ISO-9001 certification. Joint Venture (50%:50%) with Burlington Industries, USA called Mafatlal Burlington Industries Ltd.

Obtains ISO-9001 certification.

Joint Venture (50%:50%) with Burlington Industries, USA called Mafatlal Burlington

Industries Ltd. for manufacturing denim fabrics.

2000

2006

Major expansion in the area of corporate uniform and work wear fabric.

Paved a new path to success by acquiring the entire stake of Burlington Industries,

USA to setup Mafatlal Denim Ltd.

2007

2009

Introduce largest collection of school uniform fabrics in domestic market.

Mafatlal Denim Ltd. establishes itself as the largest supplier of denim material in

India, and as a reliable supply chain partner for value added and fashion denims.

2011

The sad demise of the Chairman Emeritus Shri Arvind Mafatlal

2012

Launches home furnishing range with terry towels and bedsheets

2013

Mafatlal Denim Ltd. amalgamated with Mafatlal Industries Ltd.

Modernisation of Nadiad unit.

Capacity expansion of Navsari unit.

They say, change is the only constant and change invariably brings transformation. With constant innovation over

They say, change is the only constant and change invariably brings transformation.

With constant innovation over the years, Mafatlal has introduced a wide range of

textile fabrics. It has been witness to revolutionary changes in the textile market, right

from olden days of managing agencies, to current system of textile dealers and

merchants. Mastering a range of fabrics that spells quality, the brand today has a wide

distribution network.

Mafatlal Industries Ltd. has spread its fame and fragrance far and wide. The finesse

and quality of its products are world renowned. In India, famous brands like Marks &

Spencer, Next, Debenhams, Tommy Hilfiger, Gap, Marco Polo, Jules, Wrangler, Lee,

Jack & Jones, UF and Esprit procure their fabric from here.

Mafatlal Industries Ltd. has gone beyond boundaries and extended its horizons by

exporting its world-class fabrics, including denims, to customers in USA, South

America, UK, Switzerland, Italy, France, Germany, UAE, Qatar, Saudi-Arabia,

Yemen, Oman, Egypt, Bangladesh, Sri Lanka, Sudan, Mauritania, Malaysia,

Indonesia, Thailand, Hong Kong and Japan.

Social Responsibility in itself is a feeling that we belong to the people at large and

more so to the people we serve. The satisfaction of giving is supreme when we expect

nothing in return. This giving comes from unconditional urge to do something

meaningful for the Society. Mafatlal Industries Limited has always held this thought

close to its heart. We have strived for improvement in conditions faced by the needy

and the poor. We fully believe that such acts of giving back to the Society are at the

core of a balanced life.

With inspiration from Param Pujya Ranchhoddasji Maharaj, „Shri Sadguru Seva

Sangh Trust‟ was founded in 1968. The Trust was guided and nurtured by the late

Shri Arvind Mafatlal. The Trust is fully supported under the aegis of Arvind Mafatlal

Group. The Trust is aimed at providing food to the hungry, clothing support to the

downtrodden and the gift of sight to the blind.

Whether it is health care, education, agriculture, dairy or women empowerment „Shri

Sadguru Seva Sangh Trust‟ (SSSST) has contributed towards an overall development

of entire areas surrounding the districts of Chitrakoot and Anandpur in Madhya

Pradesh. Essential Health services in the field of General Medicine, Gastroenterology,

Obstetrics, Gynaecology and Paediatrics have been made available. The Trust has

performed a record 14 lakh (1.4 million) eye surgeries under innumerable eye camps

through Shri Sadguru Netra Chikitsalaya which is located Anandpur. at Chitrakoot and The late Shri Arvind

through Shri Sadguru Netra Chikitsalaya which is located

Anandpur.

at Chitrakoot and

The late Shri Arvind Mafatlal was a great philanthropist and was actively associated

with BAIF Development Research Foundation and also was at the helm of affairs as

its Chairman for many decades. Along with the legendary freedom fighter late Shri

Manibhai Desai, he created a huge body of work in people oriented fields of Rural

Development. He laid great emphasis on cattle development, animal health

laboratories, tribal rehabilitation and most importantly resource development in terms

of water and land. The BAIF programs today are spread across 16 States of India

impacting the lives of around 4.4 million families.

At Mafatlal Industries Limited, we consider our contribution as a humble tribute to

what Society has given us. We have pledged our resources in various sectors and are

striving continuously with the sole objective of creating an environment of well-being

in all spheres of life.

We wish every life to be empowered and every deed to have a meaningful impact on

society.

CHAPTER 4 B DATA ANALYSIS

CHAPTER 4 B

DATA

ANALYSIS

The following factors should be considered carefully while determining the amount of Working capital required: 1.
The following factors should be considered carefully while determining the amount of Working capital required: 1.

The following factors should be considered carefully while determining the amount of

Working capital required:

  • 1. Nature of business The amount of working capital is basically related to the

nature and the volume of the business. Firms engaged in public utility services require

moderate amount of working capital whereas firms producing luxury goods require

large amount of working capital.

  • 2. Size of business Size is also a determining factor in estimating working

capital requirements. The size may be measured either in terms of scale of operations

or in terms of assets or sales.

  • 3. Changes in technology Changes in technology may lead to improvement in

processing of raw material, saving in wastage, higher productivity and more speedy

production. All these improvements enable the firm to reduce the working capital

requirements.

  • 4. Length of operating cycle The amount of working capital depends upon the

length or duration of operating cycle. The speed with which the operating cycle is

completed, determines the amount of working capital. The larger is the period, the

more is the investment in inventories and wage bills.

  • 5. Terms of purchase and sale A firm buying raw materials and other services

on credit and selling on cash basis will require less investment in current assets as

compared to a firm which purchases on cash basis and sells on credit. The period of

credit and the efficiency in collection of debts also influence the amount of working

capital required. The terms and conditions of purchase and sale are generally

governed by the prevailing trade practices and by changing economic condition.

  • 6. Inventory - Some concerns are force to hold large inventories in terms of raw

materials or finished goods due to the reason of seasonal nature of availability, long

distances, scarcity etc, in such case the working capital requires is more.

  • 7. Business cycles Business cycle refers to the alternate expansion and

contraction in general business activities. In a period of boom when the business is

prosperous, there is need for larger amount of working capital due to increase in sales

and rise in prices of raw materials. The contrary happens in the period of depression.

  • 8. Profit margin A high rate of profit margin due to quality products or good

marketing management or monopoly power in the market, reduces the working capital

requirements of the firm, as profit earned in cash is a source of working capital. On

the contrary, firms earning low margin of profits due to competition or mismanagement need larger amount
the contrary, firms earning low margin of profits due to competition or
mismanagement need larger amount of working capital.
9.
Credit policy – A firm following liberal credit policy and thus granting credit
facilities to all customers without evaluating the credit worthiness will require more
working capital to carry book debts. On the contrary, a firm that adopts strict credit
policy and grants facilities to customers with high credit standing will require less
amount of working capital as funds tied-up in receivables will be released promptly
for further uses.
Adequate working capital is a source of energy to any business organization. It
provides
the following advantages to a business enterprise:
1.
Adequate working capital enables a firm to make prompt payments to the
suppliers and thus it can also avail the advantage of cash discount by paying cash for
the purchase of raw material.
2.
If a firm has adequate working capital, it can declare and distribute enough
dividends when there are sufficient profits. This creates satisfaction among the
shareholders.
3.
In business, promptness to third parties creates goodwill and increases the
debt capacity of the concerned firm. This in turn ensures uninterrupted flow of
production.
4.
A firm having adequate working capital and liquid assets can arrange loans
from the banks on easy and favourable terms, as it provides a good security for the
unsecured loans.
5.
Adequate working capital has psychological effect on the directors and
executives of the firm as it motivates them to work vigorously. It creates an
environment of security, confidence, high morale and increases overall efficiency in
the business.
6.
Adequate working capital increases the productivity or efficiency of fixed
assets in the business.
Excess or redundant working capital refers to the idle funds which do not earn any
profits for the firm. ―Inadequate working capital is disastrous; whereas redundant
working capital is a criminal waste‖. A firm may suffer following disadvantages from
excess working capital:
1. It may lead to unnecessary purchasing and accumulation of inventories causing more chances of mishandling
  • 1. It may lead to unnecessary purchasing and accumulation of inventories

causing more chances of mishandling of inventories, theft, waste, losses, etc.

  • 2. .Excessive working capital implies excessive debtors and defective credit

policies causing higher incidence of bad debts that ultimately affects profits of the

firm.

  • 3. It indicates inefficient management of the firm. It shows that the management

is not interested in effectively utilizing the resources and encouraging economy.

  • 4. Excessive working capital remains idle and earns no profits for the firm, even

though interest has to be paid on it. This reduces the amount of profits.

  • 5. It is an indicator of inefficient management. Hence, shareholders believe that

they are not getting proper return on their investments. This results in lowering the

value of shares causing discontentment among shareholders.

  • 6. It promotes profits of speculative nature by stock-piling. It results in liberal

dividend policy, but the management has to face difficulties in future when there are

no speculative profits.

Mafatlal Industries Standalone Profit & Loss account ------------------- in Rs. Cr. ------------------- Mar Mar '12 Jun
Mafatlal Industries
Standalone Profit & Loss
account
------------------- in Rs. Cr. -------------------
Mar
Mar '12
Jun '11
May '10
Mar '09
'13
12
9 mths
13 mths
14 mths
12 mths
mths
Income
Sales Turnover
797.49
143.75
670.61
152.66
138.23
Excise Duty
0.00 0.00
0.00
0.00 0.00
Net Sales
797.49
143.75
670.61
152.66
138.23
Other Income
49.87 -13.46
123.06
51.31
401.34
Stock Adjustments
25.72 0.64
10.30
-1.17
0.17
Total Income
873.08
130.93
803.97
202.80
539.74
Expenditure
Raw Materials
569.73
75.59
98.59
59.66
61.03
Power & Fuel Cost
70.71
34.38
56.90
57.40
49.99
Employee Cost
72.74
35.53
70.18
48.46
35.73
Other Manufacturing Expenses
3.12
0.99
4.61
3.19 2.93
Selling and Admin Expenses
0.00
0.00
43.38
10.13
24.98
Miscellaneous Expenses
59.81
45.81
14.27
10.66
10.42
Preoperative Exp Capitalised
0.00 0.00
0.00
0.00 0.00
Total Expenses
776.11
192.30
287.93
189.50
185.08
Mar
Mar '12
Jun '11
May '10
Mar '09
'13
Operating Profit 47.10 -47.91 392.98 -38.01 -46.68 PBDIT 96.97 -61.37 516.04 13.30 354.66 Interest 32.00 2.45
Operating Profit
47.10
-47.91
392.98
-38.01
-46.68
PBDIT
96.97
-61.37
516.04
13.30
354.66
Interest
32.00
2.45 12.73
6.04 10.52
PBDT
64.97
-63.82
503.31
7.26
344.14
Depreciation
14.44
2.03
2.52
3.33 4.02
Other Written Off
0.00
0.00
0.00
0.01 12.79
Profit Before Tax
50.53
-65.85
500.79
3.92
327.33
Extra-ordinary items
-0.87
14.00
4.28
58.84
10.34
PBT (Post Extra-ord Items)
49.66
-51.85
505.07
62.76
337.67
Tax
12.50 0.00
124.50
11.00
0.16
Reported Net Profit
37.16
-51.86
380.56
51.76
337.51
Total Value Addition
206.38 116.71
189.34
129.85
124.05
Preference Dividend
0.00
0.00
0.00
0.00
0.00
Equity Dividend
6.96
0.00
0.00
0.00
0.00
Corporate Dividend Tax
1.18
0.00
0.00
0.00
0.00
Per share data (annualised)
Shares in issue (lakhs)
98.13
98.14
98.14
98.14 50.00
Earning Per Share (Rs)
37.87
-52.84
387.78
52.74
675.01
Equity Dividend (%)
50.00
0.00
0.00
0.00 0.00
Book Value (Rs)
330.22 311.06
363.91
-23.87
-210.38
Mafatlal Industries Standalone Balance Sheet ------------------- in Rs. Cr. ------------------- Mar Mar '12 Jun '11 May
Mafatlal Industries
Standalone Balance Sheet
------------------- in Rs. Cr. -------------------
Mar
Mar '12
Jun '11
May '10
Mar '09
'13
12
9 mths
13 mths
14 mths
12 mths
mths
Sources Of Funds
Total Share Capital
39.81
39.81
69.81
69.81
95.00
Equity Share Capital
9.81
9.81
9.81
9.81
5.00
Share Application Money
4.10
0.00
0.00
0.00
0.00
Preference Share Capital
30.00
30.00
60.00
60.00
90.00
Reserves
314.25
295.46
347.32
-33.24
-110.19
Revaluation Reserves
0.00 0.00
0.00
0.00 0.00
Networth
358.16
335.27
417.13
36.57 -15.19
Secured Loans
89.97
5.45
34.21
36.09
51.88
Unsecured Loans
0.00
0.09
36.14
36.87
48.65
Total Debt
89.97
5.54
70.35
72.96 100.53
Total Liabilities
448.13
340.81
487.48
109.53
85.34
Mar
Mar '12
Jun '11
May '10
Mar '09
'13
12
9 mths
13 mths
14 mths
12 mths
mths
Application Of Funds
Gross Block
411.28
200.60
200.10
217.31
266.48
Less: Accum. Depreciation
317.28
184.20
183.96
197.56
232.75
Net Block
94.00
16.40
16.14
19.75 33.73
Capital Work in Progress
62.49
3.64
0.00
0.00 0.00
Investments 48.72 50.10 54.77 124.78 165.67 Inventories 106.63 28.77 26.80 15.67 16.36 Sundry Debtors 122.17 51.82
Investments
48.72
50.10
54.77
124.78
165.67
Inventories
106.63
28.77
26.80
15.67
16.36
Sundry Debtors
122.17
51.82
60.92
50.23
52.74
Cash and Bank Balance
141.40
189.23
3.08
33.21
3.54
Total Current Assets
370.20
269.82
90.80
99.11
72.64
Loans and Advances
56.71 50.40
35.16
70.18
52.08
Fixed Deposits
0.00 0.00
633.00
2.24
16.92
Total CA, Loans & Advances
426.91
320.22
758.96
171.53
141.64
Deffered Credit
0.00 0.00
0.00
0.00 0.00
Current Liabilities
163.41
42.40
175.27
139.06
229.20
Provisions
20.56 7.15
167.11
67.46 26.53
Total CL & Provisions
183.97
49.55
342.38
206.52
255.73
Net Current Assets
242.94
270.67
416.58
-34.99
-114.09
Miscellaneous Expenses
0.00 0.00
0.00
0.00 0.01
Total Assets
448.15
340.81
487.49
109.54
85.32
Contingent Liabilities
96.02 87.77
95.57
90.42
61.54
Book Value (Rs)
330.22
311.06
363.91
-23.87
-210.38
Mafatlal Industries Cash Flow ------------------- in Rs. Cr. ------------------- Mar '13 Mar '12 Jun '11 May
Mafatlal Industries
Cash Flow
------------------- in Rs. Cr. -------------------
Mar '13
Mar '12
Jun '11
May '10
Mar '09
12 mths
9 mths
13 mths
14 mths
12 mths
Net Profit Before Tax
50.53 -65.86
507.74
62.74 337.67
Net Cash From Operating Activities
39.34
-369.37
465.30
-34.40
72.05
Net Cash (used in)/from
Investing Activities
8.53
17.55
147.03
83.17
2.35
Net Cash (used in)/from Financing
Activities
-63.25
-93.58
-13.15
-33.47
-90.97
Net (decrease)/increase In Cash and
Cash Equivalents
-15.38
-445.40
599.18
15.30
-16.57
Opening Cash & Cash Equivalents
99.48
634.63
35.45
20.15
36.72
Closing Cash & Cash Equivalents
84.10
189.23
634.63
35.45
20.15
Mafatlal Industries
Raw Materials
------------------- in Rs. Cr. -------------------
Mar 2013
Product Name
Unit
Quantity
Value
Fibres & Cotton
Not Reported
NA
124.30
Yarn
Not Reported
NA
61.82
Others
Not Reported
NA
8.94
Fabrics
Not Reported
NA
7.64
Total
202.7
Operating Profit & OPM Operating Profit gives an indication of the current operational profitability of the
Operating Profit & OPM
Operating Profit gives an indication of the current operational profitability of the
business and allows a comparison of profitability between different companies after
removing out expenses that can obscure how the company is really performing.
Interest cost depends on the management's choice of financing, tax can vary widely
depending on acquisitions and losses in prior years, and depreciation and amortization
policies may differ from company to company.
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. PBT stands for Profit
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and
Amortization. PBT stands for Profit Before Tax, and PAT stands for Profit After Tax.
The graph visually shows how the net profit of the company stand reduced due to the
impact of Interest, Depreciation, and Tax.
Total Assets & Asset Turnover Ratio Total Assets is the sum of all assets, current and
Total Assets & Asset Turnover Ratio
Total Assets is the sum of all assets, current and fixed. The asset turnover ratio
measures the ability of a company to use its assets to efficiently generate sales. The
higher the ratio indicates that the company is utilizing all its assets efficiently to
generate sales. Companies with low profit margins tend to have high asset turnover.
Net Sales Sales is the total amount of products or services sold by the company.
Net Sales
Sales is the total amount of products or services sold by the company.
Networth Networth is the difference between a company's total assets and its total liabilities. It is
Networth
Networth is the difference between a company's total assets and its total liabilities. It
is also known as shareholder`s equity.
Return On Capital Employed % Capital Employed is defined as total assets less current liabilities. Return
Return On Capital Employed %
Capital Employed is defined as total assets less current liabilities. Return On Capital
Employed is a ratio that shows the efficiency and profitability of a company's capital
investments. The ROCE should always be higher than the rate at which the company
borrows money.
Dividend Dividend is a payment made by a company to its shareholders usually as a distribution
Dividend
Dividend is a payment made by a company to its shareholders usually as a distribution
of profits. When a company makes profit it can either re-invest it in the business or it
distribute it to its shareholders by way of dividends. The dividend payout ratio is the
amount of dividends paid to shareholders relative to the amount of total net profit of a
company.
A reduction in dividends paid is not appreciated by investors and usually the stock
price moves down as this could point towards difficult times ahead for the company.
On the other hand a stable dividend payout ratio indicates a solid dividend policy by
the company's management.
Book Value (Rs) Book value is a company's assets minus its liabilities. In simple terms it
Book Value (Rs)
Book value is a company's assets minus its liabilities. In simple terms it would be the
amount of money that a share holder would get if a company were to liquidate.
Ratio Analysis is a powerful tool of financial analysis. Alexander Hall first presented it in 1991

Ratio Analysis is a powerful tool of financial analysis. Alexander Hall first presented

it in 1991 in Federal Reserve Bulletin. Ratio Analysis is a process of comparison of

one

figure against other, which makes a ratio and the appraisal of the ratios of the ratios to

make proper analysis about the strengths and weakness of the firm‟s operations. The

term

ratio refers to the numerical or quantitative relationship between two accounting

figures.

Ratio analysis of financial statements stands for the process of determining and

presenting the relationship of items and group of items in the statements.

Ratio analysis can be used both in trend analysis and static analysis. A creditor would

like to know the ability of the company, to meet its current obligation and therefore

would think of current and liquidity ratio and trend of receivable.

Major tool of financial are thus ratio analysis and Funds Flow analysis. Financial

analysis is the process of identifying the financial strength and weakness of the firm

by

properly establishing relationship between the items of the balance sheet and the

profit

account.

The financial analyst may use ratio in two ways. First he may compare a present ratio

with the ratio of the past few years and project ratio of the next year or so. This will

indicate the trend in relation that particular financial aspect of the enterprise. Another

method of using ratios for financial analysis is to compare a financial ratio for the

company with for industry as a whole, or for other, the firm‟s ability to meet

itscurrent

obligation. It measures the firm‟s liquidity. The greater the ratio, the greater the firms

liquidity and vice-versa.

A ratio can be defined as a numerical relationship between two numbers expressed in

terms of (a) proportion (b) rate (c) percentage. It is also define as a financial tool to

determine an interpret numerical relationship based on financial statement yardstick

that

provides a measure of relationship between two variable or figures.

Meaning and Importance:

Ratio analysis is concerned to be one of the important financial tools for appraisal of

financial condition, efficiency and profitability of business. Here ratio analysis id useful from following objects. 1.

financial condition, efficiency and profitability of business. Here ratio analysis id

useful

from following objects.

  • 1. Short term and long term planning

  • 2. Measurement and evaluation offinancial performance

  • 3. Stud of financial trends

  • 4. Decision making for investment and operations

  • 5. Diagnosis of financial ills

  • 6. Providing valuable insight into firms financial position or picture.

ADVANTAGES & DISADVANTAGES OF RATIO ANALYSIS:

Advantages:

The following are the main advantages derived of ratio analysis, which are obtained

from

the financial statement via Profit & Loss Account and Balance Sheet.

  • a) The analysis helps to grasp the relationship between various items in the financial

statements.

  • b) They are useful in pointing out the trends in important items and thus help the

management to forecast

  • c) With the help of ratios, inter firm comparison made to evolve future market

strategies.

  • d) Out of ratio analysis standard ratios are computed and comparison of actual with

standards reveals the variances. This helps the management to take corrective action.

  • e) The communication of that has happened between two accounting the dates are

revealed effective

Action.

  • f) Simple assessmentsof liquidity, solvency profitability efficiency of the firm are

indicted by ratio analysis. Ratios meet comparisons much more valid.

Disadvantages:

Ratio analysis is to calculate and easy to understand and such statistical calculation

stimulation thinking and develop understanding. But there are certain drawbacks and

dangers they are.

i)There is a trendy to use to ratio analysis profusely.

ii)Accumulation of mass data obscured rather than clarifies relationship.

iii) Wrong relationship and calculation can lead to wrong conclusion.

1. In case of inter firm comparison no two firm are similar in size, age and

1.

In case of inter firm comparison no two firm are similar in size, age and product

unit.(for example) one firm may purchase the asset at lower price with a higher

returnand another firm witch purchase the asset at asset athigher price will have a

 

lower

return)

2.

Both the inter period and inter firm comparison are affected by price level changes.

A

change in price level can affect the validity of ratios calculated for different time

 

period.

3.

Unless varies terms like groupprofit, operating profit, net profit, current asset,

current

liability etc., are properly define, comparison between two variables become

 

meaningless.

4.

Ratios are simple to understand and easy to calculate. The analyst should not take

decision should not take decision on a single ratio. He has to take several ratios into

consideration.

STANDARDS OF COMPARISION:

1.Ratios calculated from the past financial statements of the same firm.

2.Ratio developed using the projected or perform financial statementof the same firm

3.Ratios of some selected firm especially the most progressive and successful, at the

same point of time.

4.Ratios of the industry to which the firm belongs.

IMPORTANCE OF RATIO ANALYSIS

In the preceding discussion in the form, wehave illustrated the compulsion and

implication of important ratios that can be calculated from the Balance Sheet and

Profit &

Loss account of a firm. As a tool of financial management, they are of crucial

significance. The importance of ratio analysis lies in the fact and enables the drawing

of

inferences regarding the performance of a firm. Ration analysis is a relevant in

assessing

the performance of a firm in respect of the following aspect.

CAUTION IN USING RATIOS

1.It is difficult to decide on the proper bases of comparison.

2.The comparison rendered difficult because of difference in situation of two companiesorofone-company for different years. 3.The

2.The comparison rendered difficult because of difference in situation of two

companiesorofone-company for different years.

3.The price level change make the interpretation of ratios invalid4.The difference in

thedefinition of items in the balance sheet and Profit & Loss

statement make the interpretation of ratios difficult.

5.The ratios calculated at a point of time are less informative and defective as they

suffer from sort term changes.

6.The ratios are generally calculated from the past financial statement and thus are no

indicatorsof Future.

CURRENT RATIO :

The relationship of current assets to current liabilities is

known as current ratio. It is also known as banker‟s ratio or working capital ratio.

1.CURRENT RATIO It is relationship between firm‟s current assets and current liability. Current assets Current ratio
1.CURRENT RATIO
It is relationship between firm‟s current assets and current liability.
Current assets
Current ratio = _______________________________
Current liability
YEAR
2013 2012
2011 2010
2009
CURRENT
370.20
269.82 90.80
99.11
72.64
ASSESTS
CURRENT
163.41
42.40 175.27
139.06
229.20
LIABILITIES
RATIO
2.26
6.36
0.51 0.71
0.31
CURRENT RATIO
7
6.36
6
5
4
3
2.26
2
1
0.71
0.51
0.31
0
2009
2010
2011
2012

CASH MANAGEMENT

Introduction

CASH MANAGEMENT Introduction Cash management is one of the key areas of working capital management. Cash

Cash management is one of the key areas of working capital management. Cash is the

liquid current asset. The main duty of the finance manager is to provide adequate cash

to

all segments of theorganization. The important reason for maintaining cash balances

is

the transaction motive. A firm enters into variety of transactions to accomplish its

objectives which have to be paid for in the form of cash.

Meaning of cash

The term “cash” with reference to cash management used in two senses. In a narrower

sense it includes coins, currency notes, cheques, bank drafts held by a firm. n a

broader

sense it also includes “near-cash assets” such as marketable securities and time

deposits

with banks.

Objectives of cash management:

There are two basic objectives of cash management. They are-

To meet the cash disbursement needs as per the payment schedule.

To minimize the amount locked up as cash balances.

Basic problems in Cash Management:

Cash managementinvolves the following four basic problems.

Controlling level of cash

Controlling inflows of cash

Controlling outflows of cash and

Optimum investment of surplus cash.

Determining safety level for cash:

The finance manager has to take into account the minimum cash balance that the firm

must keep to avoid risk or cost of running out of funds. Such minimum level may be

termed as “safety level of cash”. The finance manager determines the safety level of

cash

separately both for normal periods and peak periods. Under both cases he decides

about

two basic factors. They are-

Desired days of cash:

Desired days of cash: It means the number of days for which cash balance should be

It means the number of days for which cash balance should be sufficient to cover

payments.

Average daily cash flows:

This means average amount of disbursements which will have to be made daily.

Criteria for investment of surplus cash:

In most of the companies there are usually no formal written instructions for investing

the

surplus cash. It is left to the discretion and judgment of the finance manager. While

exercising such judgment, he usually takes into consideration the following factors-

Security:

This can be ensured by investing money in securities whose price remains more or

less

stable.

Liquidity:

This can be ensured by investing money in short term securities including short term

Fixed deposits with banks.

Yield:

Most corporate managers give less emphasis to yield as compared to security and

liquidity of investment. So they prefer short term government securities for investing

surplus cash

Maturity:

It will be advisable to select securities according to their maturities so the finance

manager can maximize the yield as well as maintain the liquidity of investments.

CASHRATIO It is relationship between cash and current liabilities. Cash Cash ratio = _______________________ Current liabilities.
CASHRATIO
It is relationship between cash and current liabilities.
Cash
Cash ratio = _______________________
Current liabilities.
YEAR
2013 2012
2011 2010
2009
CASH
141.40
189.23
3.08
33.21 3.54
CURRENT
163.41
42.40
175.27
139.06
229.20
LIABILITIES
RATIO
0.87
4.46
0.02 0.24
0.01
The cash ratio is generally a more conservative look at a company's ability to cover its
liabilities than many other liquidity ratios. This is due to the fact that inventory and
accounts receivable are left out of the equation. Since these two accounts are a large
part of many companies, this ratio should not be used in determining company value,
but simply as one factor in determining liquidity. Very few companies will have
enough cash and cash equivalents to fully cover current liabilities, which isn't
necessarily a bad thing, so don't focus on this ratio being above 1:1.
CASH RATIO
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2009
2010
2011
2012
2013
RECEIVABLES MANAGEMENT Introduction: Receivables constitute a significant portion of the total assets of the business. When

RECEIVABLES MANAGEMENT

Introduction:

Receivables constitute a significant portion of the total assets of the business.

When a firm seller goods or services on credit, the payments are postponed to future

dates and receivables are created. If they sell for cash no receivables created.

Meaning:

Receivable are asset accounts representing amounts owed to the firm as a result of

sale of

goods or services in the ordinary course of business.

Purpose of receivables:

Accounts receivables are created because of credit sales. The purpose of receivables is

directly connected with the objectives of making credit sales. The objectives of credit

sales are as follows-

Achieving growth in sales.

Increasing profits.

Meeting competition.

Factorsaffecting the size of Receivables:

The main factors that affect the size of the receivables are-

Level of sales.

Credit period.

Cash discount.

Costs of maintaining receivables:

The costs with respect to maintenance of receivables are as follows-

Capital costs: This is because there is a time lag between the sale of goods to

customers and the payment by them. The firm has, therefore to arrange for additional

funds to meet

its obligations.

Administrative costs:

Firm incur this cost for manufacturing accounts receivables in the form of salaries to

the

staff kept for maintaining accounting records relating to customers.

Collection costs:

The firm has to incur costs for collecting the payments from its credit customers.

Defaulting costs:

The firm may not able to recover the over dues because of the inability of customers.

The firm may not able to recover the over dues because of the inability of customers.

Such debts treated as bad debts.

Receivables management:

Receivables are direct result of credit sale. The main objective of receivables

management is to promote sales and profits until that point is reached where the ROI

in

further funding of receivables is less than the cost of funds raised to finance that

additional credit (i.e.; cost of capital). Increase in receivables also increases chances

of bad debts. Thus, creation of receivables is beneficial as well as dangerous. Finally

management of accounts receivable means as the process of making decisions relating

to investment of funds in this asset which result in maximizing the overall return on

the investment of the firm.

Receivables management and Ratio Analysis:

Ratio Analysis is one of the important techniques that can be used to check the

efficiency

with which receivables management is being managed by a firm. The most important

ratios for receivables management are as follows-

DEBTORS TURNOVER RATIO:-

Debtors constitute an important constituent of current assets and therefore the quality

of

the debtors to a great extent determines a firm‟s liquidity. It shows how quickly

receivables or debtors are converted into cash. In otherwords, the DTR is a test of the

liquidity of the debtors of a firm. The liquidity of firm‟s receivables can be examined

in

two ways they are DTR and Average Collection Period.

It indicates the number time debtors turned over each year. Generally the highervalue

of

debtor‟s turnover shows high efficiency to manage the credit management.

Debtors turnover ratio = Total sales ______________________________ Debtors YEAR 2013 2012 2011 2010 2009 TOTAL 797.49
Debtors turnover ratio =
Total sales
______________________________
Debtors
YEAR 2013
2012
2011 2010
2009
TOTAL
797.49
143.75
670.61 152.66
138.23
SALES
DEBTORS
122.17
51.82 60.92
50.23 52.74
RATIO
6.53
2.77
11.09
3.03
2.62
Debtors constitute an important constituent of current assets and therefore the quality
of
the debtors to a great extent determines a firm‟s liquidity. It shows how quickly
receivables or debtors are converted into cash. In other words, the DTR is a test of the
liquidity of the debtors of a firm. The liquidity of firm‟s receivables can be examined
in two ways they are DTR and average collection period. The higher the ratio the
better. The company‟s ratio is bumping over years, but it‟s improving.
Debt Turnover Ratio
12
11.09
10
8
6.53
6
4
3.03
2.77
2.62
2
0
2013
2012
2011
2010
2009
DEBT COLLECTION PERIOD Debtor‟s collection period is nothing but the period required to collect the money
DEBT COLLECTION PERIOD
Debtor‟s collection period is nothing but the period required to collect the money
from
The customers after the credit sales. A speed collection reduces the length of
operating
cycle and vice versa. The more quickly the customers pay, the less risk from bad
debts,
the lower the expenses of collection and more liquid the nature of of this asset.
It indicates the speed with which debts are collected.
Days/months in a year
Debt collection period = _______________________________
Debtor‟s turnover ratio
YEAR
2013
2012 2011
2010
2009
DAYS
365
365 365
365
365
RATIO
6.53
2.77 11.09
3.03
2.62
DAYS
56
132 33
120 139
The debt collection period decreases dramatically rom 139 in 2009 to 56 days in
2013. Its less than standard period of 90 days.
CASH TO CURRENT ASSETS RATIO YEAR 2013 2012 2011 2010 2009 CASH 141.40 189.23 3.08 33.21
CASH TO CURRENT ASSETS RATIO
YEAR
2013
2012 2011
2010
2009
CASH
141.40
189.23
3.08
33.21
3.54
CURRENT
370.20
269.82
90.80
99.11
72.64
ASSESTS
RATIO
0.38
0.70 0.03
0.33
0.05
Cash to Current Assets
2013
2012
2011
2010
2009
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Compare to previous years, the data of last two years shows that company has very
good cash balance.
INVENTORY MANAGEMENT
Introduction:
Inventories are stock of the product a company is manufacturing for sale and
components. That makeup the products. The various forms inwhich inventories exist
in a
manufacturing company are: Raw-materials, work-in-process, finished goods.
Raw-Materials:-Are those basic inputs that are converted into finished products
through the manufacturing process. Raw-materials inventories arethose units,
which have been purchased and stored for future production.
Work-In-Process inventories are semi-manufactured products. The represent
products that need more work before they become finished products for sale.
Finished Goods inventories are those completely manufactured products, which
are ready for sale. Stocks of raw-materials and work-in-process facilitate production which stock of finished goods

are ready for sale. Stocks of raw-materials and work-in-process facilitate

production which stock of finished goods is required for smooth marketing

operations. These inventories serve as a link between production and

consumption of goods.

Stores and spares are also maintained by some firms. This includes office and

plant cleaning materials like soaps, brooms, oil, fuel, light, bulbs etc. These

materials do not directly enter in production. But are necessary for production

process.

Need to holding inventory

The question of managing inventories arises only when the company holds

inventories.

Maintaining inventories involves tying up of the company's funds and incurrence of

storage and handling cost. It is expensiveto maintain inventories, why does company

hold inventories? There are three general motives for holding inventories.

1.Transaction Motive:-Emphasizes the need to maintain inventories to facilitate

smooth production and sales operations

2.Precautionary motive:-Necessitates holding of inventories to guard against the risk

of unpredictable changes in demand and supply forces and other factors.

3.Speculative motive:-Influences the decision to increase or reduce inventory levels to

take advantages of price influences.

A company should maintain adequate stock of materials for a continuous supply to

the

factory for the uninterrupted production. It is not possible for a company to procure

raw

materials whenever it isneeded. A time lag exists between demand for materials and

its

supply. Also there exists uncertainty in procuring raw materials in time on many

occasions. The procurement of materials may be delayed because of such factors as

strike, transport disruption or short supply. Therefore, the firm should maintain

sufficient

stock of raw materials at a given time to stream line production.

Objective of Inventory Management

In the context of inventory management the firm is faced with the problem of meeting

two conflicting needs ;

To maintain a large size of inventory for sufficient and smooth production and sales operations. To
To maintain a large size of inventory for sufficient and smooth production and
sales operations.
To maintain a minimum investment in inventories to maximize profitability.
Both excessive and inadequate inventories are not desirable. Theseare two dangerous
points within which the firm should operate. The objective of inventory management
should be to determine and maintain optimum level of inventory investment. The
optimum level of inventory will lie between the two danger points of excessive and
inadequate inventories.
The firm should always avoid a situation of over investment or under investment in
inventories. The major dangerous of over investment are,
Unnecessary tie-up of the firms funds losses of profit
Excessive carrying cost
Risk of quality
The aim of inventory management thus should be to avoid excessive and
inadequate
levels of inventories and to maintain sufficient inventory for smooth production
and sales
operations. Efforts should be made to place an order at the right timewith the right
source to acquire the right quantity at the right price and quality. An effective
inventory
management should
Ensure a continuous supply of raw materials to facilitate uninterrupted
production.
Maintain sufficient stock of raw materials inperiods of short supply and
anticipate price changes.
Maintain sufficient finished goods inventory for smooth sales operations and
efficient customer service.
Minimize the carrying cost and time.
Control investment in inventories and keep it at an optimum level.
Inventory management techniques :
In managing inventories the firm objective should be in consonance with the
shareholders' wealth maximization principle. To achieve this firm should
determine the optimum level of inventory. Efficientlycontrolled inventories make
the firm flexible. Inefficient inventory control results in unbalanced inventory and inflexibility-the firm may sometimes run
the firm flexible.
Inefficient inventory control results in unbalanced inventory and inflexibility-the
firm may sometimes run out of stock and sometimes may pileup unnecessary
stocks. This increases level of investment and makes the firm unprofitable.
To manage inventories efficiency, answers should be sought to the following two
questions.
1) How much should be ordered?
2) When should it be ordered? The first question how much to order, relates to the
problem of determining economic order quantity (EOQ), and is answered with an
analysis of costs of manufacturing certain level of inventories. The second
question when to order arise because of determining the reorder point.
Inventory turnover Ratio:-
Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its products. It is calculated by dividing the cost of goods sold by the
average inventory. The average inventory is the average of open and closing
balance of inventory.
It indicates the inventories turning into receivables through sales.
Sales
Inventory turnover ratio = __________________________
Inventory
YEAR
2013 2012
2011 2010
2009
SALES
797.49
143.75
670.61 152.66
138.23
INVENTORY
106.63
28.77 26.80
15.67
16.36
RATIO
7.48
4.99
25.02
9.74
21.10
A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula
to calculate the days it takes to sell the inventory on hand or "inventory turnover
days." This ratio should be compared against industry averages. A low turnover
implies poor sales and, therefore, excess inventory. A high ratio implies either strong
sales or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a rate
of return of zero. It also opens the company up to trouble should prices begin to fall.
INVENTORY HOLDING PERIOD YEAR 2013 2012 2011 2010 2009 Days 365 365 365 365 365 INVENTORY
INVENTORY HOLDING PERIOD
YEAR
2013 2012
2011 2010
2009
Days
365 365
365 365
365
INVENTORY
7.48
4.99
25.02
9.74
21.10
RATIO
INVENTORY
48.80
73.14
14.58
37.47
17.30
HOLDING
PERIOD
Working Capital Turnover Ratio
YEAR 2013
2012
2011
2010 2009
Sales
797.49
143.75
670.61
152.66 138.23
Net working
206.79
227.42
(84.47)
(39.95)
(156.56)
capital
Ratio
3.86 0.63
The working capital turnover ratio measures how well a company is utilizing its
working capital to support a given level of sales. Working capital is current assets
minus current liabilities. A high turnover ratio indicates that management is being
extremely efficient in using a firm's short-term assets and liabilities to support sales.
Conversely, a low ratio indicates that a business is investing in too many accounts
receivable and inventory assets to support its sales, which could eventually lead to an
excessive amount of bad debts and obsolete inventory. Company achieved very good
ration in year 2013, all other years are below average and in RED and company
should take some measures to improvise this.
Operating and cash Conversion Cycle
Operating cycle method is the best technique for estimating future cash working
capital of a firm. Under this method, total operating expenses for a period are divided
by the number of operating cycles in the relevant period to find out the cash cost of
working capital. Thus, the computation of total operating expenses, operating cycle and number of operating cycles
working capital. Thus, the computation of total operating expenses, operating cycle
and number of operating cycles in the year is essential for estimating the amount of
working capital, as discussed below:
Operating expenses include purchase of raw material, direct labour cost, fuel and
power, administrative and selling and distribution expenses for a specific period for
which estimates can be obtained from cost records.
Operating cycle period means the total number of days involved in the different stages
of operation commencing from the purchase of raw materials and ending with
collection of sale proceeds from debtors after adjusting the number of day„s credit
allowed by suppliers. It is calculated by using the following formula:
I. PERIOD OF OPERATING CYCLE =
Material storage period (M)+ Work-in-progress period (W) + Finished goods period
(F)+ Debtors collection period (D) - Creditors payment period (C)
-
The basic objective of working capital management is that there should be an
optimum investment in working capital. There should not be either excessive working
capital or shortage of working capital. In order to decide the optimum investment working capital, there

capital or shortage of working capital. In order to decide the optimum investment

working capital, there is a need to consider different policies of working capital. The

different policies are discussed.

(A) Ratio of current assets to sales:-

The current assets change as a result of changes in the sales. A firm has to decide

about the proportion of current assets to be maintained in relation to sales. There can

be aggressive, moderate or conservative current assets policies.

AN AGGRESSIVE CURRENT assets policy is followed, a firms will

maintain a very low level of current assets in relation to sales.

A CONSERVATIVE POLICY implies carrying of a very high level of current

assets in relation to sales.

A MODERATE POLICY is a via media between the two extreme policies

mentioned above and results into a moderate proportion of current assets to sales.

A MODERATE CURRENT assets policy tries to balances risk and profitability by keeping moderate level of
A MODERATE CURRENT assets policy tries to balances risk
and profitability by keeping moderate level of current assets in relation to
sales
Conservative
Moderate
Current
Aggressive
Assets
0
Sales
(B) Financing of current assets:-
In conservative current asset financing policy, a firm relies more on long term
financing such as shares, debentures, preference shares, long term debt and retained
earnings. In this method, as the emphasis is on long term financing, the firm has less
risk of facing problems of shortage of funds.
An aggressive policy is said to be followed by a firm, when it relies heavily on short-
term bank financing and other short-term sources. Even some part of fixed assets is
financed by short-term funds. The policy exposes the firms to a higher degree of but
reduces the average cost of financing.
Problems with Excessive Working Capital: -
• It„s Results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and
It„s Results in unnecessary accumulation of inventories. Thus, chances of
inventory mishandling, waste, theft and losses increase.
• It„s an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bad debts results, which adversely affects profits.
Excessive working capital makes management complacent which degenerates
into managerial inefficiency.
Tendencies of accumulating inventories tend to make speculative profit grows.
This may tend to dividend policy liberal and difficult to cope with in future when the
firms are unable to make speculative profits.
Inadequate Working Capital is bad and has the following Problems:
Its Stagnates growth. It becomes Difficult for the firms to undertaken
profitable for non-availability of working capital funds.
It becomes difficult to implement operating plans and achieve the firm„s profit
target. Operating inefficiencies creep in when it becomes difficult even to meet day –
to-day commitments.
• Fixed assets are not efficiently utilized for the lack of working capital funds.
Thus then firms„ profitability would deteriorate.
Paucity of working capital funds renders the firms unable to avail attractive
credit opportunities etc.
The firms, loses its reputation when it is not in a position to cover its short-
term obligations. As a result, the firm faces tight credit terms.
FUTURE REQUIRMENT OF WORKING CAPITAL“MAFATLAL”. Profit of the Mafatlal was increased during last three year, shows
FUTURE REQUIRMENT OF WORKING CAPITAL“MAFATLAL”.
Profit of the Mafatlal was increased during last three year, shows that their
requirements of working capital will also increasing in future.
As the sales grow, the working capital needs also grow up. Actually it is very
difficult to find out an exact proportion of increase in current assets, as a result of
increase in sales. Advance planning of working capital becomes essential because
current assets will have to be employed even before growth in sales takes place. Ones
sales start increasing, they must be sustained. For this Mafatlal will have to expand its
production facilities which will require more investments in fixed assets. This will in
turn result in more requirements of turn results of current assets which will increase
working capital needs.
The working capital needs of the Mafatlal increase as it grows in terms of
sales or fixed assets. A growing Mafatlal may need to invest funds in fixed assets in
order to sustain its growth in production and sales. This will lead to increase
investment in current assets which will result in increase in working capital needs.
The operating efficiency of the Mafatlal relates to the Optimum utilization of
resources at minimum cost. Mafatlal will contribute to its working capital, if it is
efficient in operating costs. The working capital is better utilized and cash cycle is
reduced which reduces working capital needs.
The working capital requirement of a firm depends to a great extend on the
credit policy followed by a firm for its debtors. A liberal credit policy followed by a
firm will result in huge funds blocked in debtors which will enhance the need for
working capital.
The need for working capital is also affected by the credit policy allowed by the
Mafatlal‟s creditors. If the creditors are ready to supply material and goods on liberal
credit, working capital requirement are substantially reduced. If purchases are mainly
for cash, working capital needs go up. While planning the working capital due attention should be
for cash, working capital needs go up. While planning the working capital due
attention should be given toward the credit policies followed by the firm and its
creditors.
RECOMMENDATION
Having done a detailed study of the financial performance and financial standing of
Mafatlal, under this project work I would like to make the following suggestion for
the improvement in the financial management of the company, with special reference
to its Working Capital Management.
Mafatlal is facing increased competition in the market so it will have to adopt
more aggressive working capital management policy in order to increase its share and
sales turnover.
It is observed that the credit period for Debtors is ranging for 30 days to 120
days. I would like to suggest that the maximum credit period should not exceed 90
days.
Many debtors had not made the payment even after one year period. Due to
this there is reduction in the collection from the debtors year to year.
Company has to maintain sales turnover for that purpose company has to maintain and increase their
Company has to maintain sales turnover for that purpose company has to
maintain and increase their working capital.
Gross profit has increasing but net profit has decreasing so that purpose
effectively utilizes and maintain working capital.
CHAPTER 5 CONCLUSION

CHAPTER 5

CONCLUSION

CONCLUSION Working capital is simply current assets minus current liabilities. It's the best way to judge

CONCLUSION

Working capital is simply current assets minus current liabilities. It's the

best way to judge how much a company has in liquid assets to build its business,

fund its growth, and produce shareholder value.

 

As Mafatlal is a textile manufacturing company the procedure of goods to be

 

ready for sale takes too much time. Thus, working capital is blocked in high

amount. But with the comparison to other company its Working Capital is

blocked for lesser time then another textile companies.

 
 

Mafatlal makes payment to his creditors within a month and collect from debtors

 

takes appx 1.25 month. So, its overall short-term liquidity position is very good.

 
 

The mean percentage of current assets to total assets for the last four years is

 

40% which shows decrease in investment of current assets.

 
 

Overheads have increased as compare to the last two years thereby reducing the

profit.

If a company has ample positive working capital, it's is in good shape, with plenty of

cash on hand to pay for everything it might need to buy. But negative working capital

means that the company's current liabilities exceed its current assets, removing its

ability to spend as aggressively as a working-capital-positive peer. All other things

being equal, a company with positive working capital will always outperform a

company without it.

REFERENCES

REFERENCES

1. Financial Management - I. M. PANDEY 2. Financial Management -PRASANNA CHANDRA 3. Financial Management -
1.
Financial Management
- I. M. PANDEY
2.
Financial Management
-PRASANNA
CHANDRA
3.
Financial Management
- KHAN & JAIN
4.
Annual Report of Mafatlal Industries Ltd.
WEB-LINKS:
www.mafatlals.com
www.moneycontrol.com
www.wikipedia.org
OTHER BOOKS:
Agrawal M.R, Financial Mnagement, Garima Publications
Pandey I.M, Financial Management, Mc-Graw Hill Publications Annual
reports of the company for the year 2011-12, 2010-11.