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1 INTRODUCTION
An enterprise whether industrial, trading in other acquires two types of assets
to run its business. They are fixed assets, which are necessary for carrying the
production/business.it is the current assets which are generally referred to as working
capital.
In managing fixed assets the time factor is very important discounting and
thats why discounting and compounding play a very important role in any capital
budgeting decision. But the time frame of current assets is only one accounting of
period the time value of money is significant in the management of current assets.
Any short run immediate need of the company whether that is need for cash or
adjustments to fluctuations in sales can be made only through adjusting the levels of
the various components of the current assests.this calls for efficient management of
current assets, which form part of working capital.
Working capital management involves not only managing the component of
current assets but also the managing the current liabilities. A set-financing pattern is
evolved to meet the requirement of a unit for acquisition of fixed assets and current
assets. Fixed assets are to be financed by owned funds and long term liabilities raised
by a unit while current assets are partly financed by current liabilities and other short
term loans arranged by the unit from the bank.
Working capital management involves not only managing the different
components of current assets but also managing current liabilities, or to be more
precise, the financing aspect of current assets.it is therefore appropriate to provide
brief description of current assets and liabilities. The total current asset with firm is
gross working capital whereas net working with the unit is calculated as follows.
in the chapters on Planning an SSI Unit and Business Plan, a discussion
was made on the fixed capital and the working capital. Every business
needs investment to procure fixed assets, which remain in use for a longer
period. Money invested in these assets is called Long term Funds or Fixed
Capital. Business also needs funds for short-term purposes to finance current
operations. Investment in short term assets like cash, inventories, debtors etc.,
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Working capital refers to current assets of the company that are changed in the
ordinary course of business and one firm to another, for instance from cash to
inventories, inventories to receivables into cash.
It refers to the firms investment in current assets.current assets area the assets which
can be converted into cash with in the accounting year and include cash, short term
securities,debtors,bills receivables and stock.
when current assets exceed. Current liabilities, the working capital is positives.
Working capital is needed for financing current assets.
When ever the requirement of working capital funds arise due to in creasing level of
business actively arrangement s should be made quickly to rises the finance.
In case of some surplus funds are there in the organization.it should not be allowed to
remain idle should be invested short-term securities.therefore,the need of working
capital requirement cannot be over emphasized.
The need for working capital to run the day-to-day business activities would be felt
essential.
However, firm differ in their requirement of working capital.
1. The study has great significance and provides benefits to various parties whom
directly or indirectly interact with the company.
2. It is beneficial to management of the company by providing crystal clear picture
regarding important aspects like liquidity, leverage, activity and profitability.
3. The study is also beneficial to employees and offers motivation by showing how
actively they are contributing for companys growth.
4. The investors who are interested in investing in the companys shares will also get
benefited by going through the study and can easily take a decision whether to invest
or not to invest in the companys shares.
To find out the working capital policies and procedures of the firm.
To study the liquidity position through cash inflows, outflows of the company.
For the preparation of a project the collection of data is very essential. There
are two broad methods, from which date is to be collected. They are primary data and
secondary data.
Primary data:
This is collected through discussions and by interviewing the personnel
concerned with in the company.
Secondary data:
This information is collected mainly from published information Viz.,annual
reports,journals,books,magazine,internet available on the subject.
Magazines
Journal
Internet
Period of study:
For the purpose of the project work we have considered two years from
2008S-1
The is related with varies aspects of working capital current assets and
liabilities
The calculation may be done in varies analysis through some selected ratios.
especially coated and specially paper. Thus. While international pricing does impact
domestic pricing there by impacting profitability but the paper imports constitutes less
than 10% of total paper & paper board supply.
RECENT SCENARIO & OUTLOOK:
After a prolonged down cycle, the domestic paper industry started to firm up
in the lst year. At the same. At the some time in the past. 6-9 months has witnessed
sharp rise in operating costs as inputs like causes tic soda and chlorine have risen
about 40- per cent over the past year, while wood prices have risen about 40 per cent
over the past year, while wood prices have risen approximately 30 per cent over the
past 6-8 months.
STUDY AND GROWTH OF PAPER INDUSTRY:
At the turn of current century, there were only for units in operation whose
combine annual out was 20,000 tones. Attracted by high profits under the protective
tariff umbrella, many new paper mills were setup at the beginning of the first plan in
1950 the production crossed the one lakhs ton mark. The output of paper excluding
news print recoded a study growth of the second plan onwards and reached 19.4 laksh
tones in the 1990. Imports at 20,000 tones. Accounted for les than one percent of
domestic consumption.
Year
production company
1960-61
3.4
0.4
1970-71
7.5
0.4
1980-81
11
11.0
0.3
1990-91
30
20.7
2.7
There are now over 325 units with a total installed capacity of 33 laksh tones
while production excluding news print is about 21 lakhs tones. Capacity utilization
however, came down from a high 99 percent in 19970 to 62 percent in 1990 or the
installed capacity merrily 46 percent (15.17 lakhs tones) is form 33 large integrated
paper mills each with a capacity of 20,000 tones and more) while the balance is
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accounted for by agro resident based and waste paper based small mills.
PRODUCT:
The most basic marketing mix tools are PRODUCT, which stands for the
firms tangible offer to the market. Including the product quality, design. Features
branding and packaging.
According to PHILIP KOTLER defines product as follows.
A product is any tying that can be offered to a market for attention.
Acquisition use or consumption and that might satisfy a want. Or need it include
physical objectives serious. Persons, places, organizations and ideas.
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Products are destined for use by ultimate consumer or households and in such
form that they can be used without further commercial processing. Industrial products
are defined to be sold primarily for use in producing other goods or rendering
services.
CONSUMER GOODS CLASSIFICATION:
Consumers buy a vest number of goods we can classify these goods on the
basis of consumers shopping habits like Convenience goods. Goods that are customer
usually purchases frequently, immediately and with the minimum of efforts in
comparison and buying examples includes tobacco products, soaps, news paper and
dugs,etc. Shopping goods. Goods that are customer in the process of selection and
purchases characteristically compares on such bases as suitability, quality, prices and
style example included furniture, clothing and major appliances. etc..Specialty goods.
Goods with unique characteristics and for brand identifications for which a significant
group of buyers are habitually wiling to make a special purchasing efforts. Example
includes specific band and types of fancy. Cars, stereos, photographic equipment etc.
Unsought goods. Good that the consumer does not know about or know about but
does not normally think of buying new product, such as micro events, food
processors, are unsought goods until the consumer is made aware of them through
advertising digital player. LIC & encyclopedia.
INUSTIRAL GOODS CLASSIFICATION:
Industrial goods can be classified in terms of how they enter the production
process and the relative coastlines like Material and parts Goods that enter the
manufactures product completely. They fall into two classes; raw materials and
manufactured materials and pats. Raw materials Ra material fall into two major
classes; firm products example wheat. Number crude. Petroleum, iron ore etc.) Firm
product is supplied by many products, which turn them over to marketing
intermediaries. Who provide assembly grading, storage, transpiration and selling
services? Their commodity character results in relatively little advertising and
promotion activity with some exceptions there are fewer and larges producers. Who
often market them directly to industrials user. Because the users depend on those
materials. Long- term. Supply contracts are common price and deliver reliability are
major factors influencing the selection of suppliers.
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industrial users price and services are the major marketing considerations and
branding and advert singing tend to be less important.
Capital items:
Goods that are enter the finished product. They include tow groups installation and
accessory equipment Installations consists of building eg. Factories and offices and
fixed equipment generations. Dell press computes. Elevators) installations are major
purchases they are usually broth directly from the produces. With the typical sales
preceded by long negotiation period. The process uses a top notch sales force. Which
after includes sales engineers advertising ins much less importation personal selling
Accessory equipment portable factor equipment do no become part of the finished
product. They simply help in the production process. All cause middle even beaus the
market is geographically depressed. The buyers. Are numerous and the orders are
small quality. Features price and service and major inconsideration in vendor
selection.
The sales force tends to be more important than advertising although the letter
be use effectively Suppliers and services Items that do not enter the finished product
at al suppliers are of two kinds operating suppliers (e.g. ; lubricates. Coal. Typing
Paper. Pencils etc.) And maintenance and repair items (eg; PAINT NAILS.
BRTOOMS ETC.,) supplier is the equivalent of convenience goods in the industrial
field. As they are usually purchases with a minimum effort on a straight rebury basis.
They are normally9 marketed through intermediaries because of the grate number of
customers, their geographical and the low unit value of these goods, business services
include maintenance and repair services (Eg; Window cleaning, type rewriter rapiers)
and business advisory services.
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Government has completely delicensed the paper industry with effect from17th July,
1997. The entrepreneurs are now required to file an Industrial Entrepreneur
Memorandum with the Secretariat for Industrial Assistance for setting up a new paper
mill or substantial expansion of the existing mill in permissible locations.
The Paper industry is a priority sector for foreign collaboration and foreign equity
participation upto 100% receives automatic approval by Reserve Bank of India.
Several fiscal incentives have also been provided to the paper industry, particularly to
those mills which are based on non-conventional raw material.
Capacity, Production, Raw material and Import
There are, at present, about 515 units engaged in the manufacture of paper and
paperboards and newsprint in India. The country is almost self-sufficient in
manufacture of most varieties of paper and paperboards. Import, however, is confined
only to certain specialty papers. To meet part of its raw material needs the industry
has to rely on imported wood pulp and waste paper. Production of paper &
paperboard during the year 2002-03(upto December, 2002) is 24.52 lakhs tonnes. At
present about 60.8 per cent of the total production is based on non-wood raw material
and 39.2 per cent based on wood.
Performance of the industry has been constrained due to high cost of production
caused by inadequate availability and high cost of raw materials, power cost and
concentration of mills in one particular area.
Several policy measures have been initiated in recent years to remove the bottlenecks
of availability of raw materials and infrastructure development. To bridge the gap of
short supply of raw materials, duty on pulp and waste paper and wood logs/chips have
been reduced. The capacity utilization of the industry is low at 60%. About 194 paper
mills, particularly small mills, are sick and /or lying closed. Several policy measures
have been initiated in recent years.
Imports of paper and paper products was growing over the years. However, it has
increased during 2001-02 after a fall in 2000-01. About 1,40,000 tonnes of paper was
exported in 2000-01 mainly to the neighboring countries.
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India's per capita consumption of paper is around 4.00 kg, which is one of the lowest
in the world. With the expected increase in literacy rate and growth of the economy,
an increase in the per capita consumption of paper is expected
Outlook
The demand for upstream market of paper products, like, tissue paper, tea bags, filter
paper, light weight online coated paper, medical grade coated paper, etc., is growing
up. These developments are expected to give fillip to the industry.
Indian paper industry needs the following for being globally more competitive.
Sustained availability of good quality of raw materials (forest based) and bulk
import of waste paper to supplement the availability of raw materials.
Based on the recommendations made in the Report and in consultant with the industry
Associations, action plans are being finalized in consultation with other
Ministries/Departments concerned. The Main Action Points proposed are as under:
Infrastructure
Improvements of key ports, roads and railways and communication facilities which
will help the entire industrial sector including pulp & paper.
Raw Material
(i) For Wood Based industry
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Paper industry in India is the 15th largest paper industry in the world. It
provides employment to nearly 1.5 million people and contributes Rs 25 billion to the
government's kitty. The government regards the paper industry as one of the 35 high
priority industries of the country.
In 1951, there were 17 paper mills, and today there are about 515 units
engaged in the manufacture of paper and paperboards and newsprint in India. The
pulp & paper industries in India have been categorized into large-scale and small15
scale. Those paper industries, which have capacity above 24,000 tonnes per annum,
are designated as large-scale paper industries. India is self-sufficient in manufacture
of most varieties of paper and paperboards. Import is confined only to certain
specialty papers. To meet part of its raw material needs the industry has to rely on
imported wood pulp and waste paper.
Growth of paper industry in India has been constrained due to high cost of
production caused by inadequate availability and high cost of raw materials, power
cost and concentration of mills in one particular area. Government has taken several
policy measures to remove the bottlenecks of availability of raw materials and
infrastructure development. For example, to overcome short supply of raw materials,
duty on pulp and waste paper and wood logs/chips has been reduced
SIMHAGIRI paper mills is established in 2008 in Bobbili Vijanagaram dist
A private ltd company by name and style of m/s SIMHAGIRI paper mills (P) ltd is
constitute to take up the project for manufacture of Kraft paper and other paper
products. The company had obtained registration certificate from the registrar of
companies A.P Hyderabad. The registration no of the company is 44270.
:Chairman
:Managing Director
:Executive Director
: Executive Director
:Director
16
In Private Company members want to be change or sell his, its will be take a
View of organization:-
Company.
Employees
Customers
Employees:- Employees are absolutely essential for the smooth running of business.
Employees unity and mutual understandings is also very important in every
organising. If all employees working (or) perform is well and proper way. Achieve the
goals of the organization. It will be failure to create. Internal - problems in the
organization.
Customers:- Company point of view customer is the boss Generally consumer
have a wide range of product choice. He always an opportunity to make a purchase
decision. Brand purchase decision and payment decision.
Decision process in the organizing:
Identifying alternatives
Role of company:Finance
HR
Product
Marketing
ion
Finance management going to determine the growth rate of a firm and the rise
of a firm.
Human resource management:The objectives of H.R.M is to analysis recruitment, training and development
of manpower of manpower. It is involved in each and every activity. In the organising.
The major activities of H.R.M
Organisation Design
Human resources utilising planning
Job analysis
work analysis
Information passing system in the organising
Staffing recruiting
Maintain all employees in a proper way.
Maintain good relations between employees
Conducting employees meeting for feedback purpose.
finding the attitude employees
Production:- Firm creates manufacturing capacities for the production of goods and
services. Some services provided to customers. They sell their goods or services to
earn products. They rises funds to assure manufacturing & other facilities.
Production means. Inputs transfer to services. It includes.
Financial Resources
Human Resources
Engineering &
19
Manpower
maintenance planning
Quantity planning
planning
Financial
Production
Marketing
Investment
Planning
Planning
Planning
Material
Distribution
Quality
Planning
Planning
Planning
Determine:
Establish target
Checking performance
Utilization of resources
Right Quantity, Quality at night time
Objectives of production:
Out put
Conversion
process
20
Services, Customer
goods
Feedback of production:
Production
Marketing
Customers
HR
Financial
21
Marketing Mix
Product
Direct, indirect selling
Features of product
Advertising
Publicity
Promotion
Place
High price
convenient place
Low price
Inconvenient place
Market price
Potential place
Competition price
Price
Product:- The product can be define of its Tangible such as weight, dimensions and
materials. The survival of may organisation depends on their developing and
marketing success full a product. The product have good Features and maintain, good
colour, size, packing, style, Quality and Quantity, fits a market. These are all elements
influence the sales of product
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Price:- The pricing decision is the critical one in services too as this component of
the marketing mix. Price determine the revenue of the firm.
The cot of access to the market and local competition.
The final step is to decide.
The pricing will be decided by these elements.
The pricing decided depend upon production cost.
The pricing decided depend upon competitor price.
The pricing decided depend upon market price.
Sometimes price will be very high and very low. This time sales will be fluxgates.
Some times customers got a benefit like discount on purchase this time price will be
favour of customer.
Place: In marketing mix point of view place means distribution and selling point.
This stage decided potential, convenience, inconvenience places for selling goods.
The distribution of products to convenience place sales will be increase, in
convenience place sales will be reduced. Selling point of view place is important.
Promotion:- Promotion means sales promotion to give advertising, publicity, is also
one of the sales promotion Activity, direct marketing and in direct marketing is highly
influence the promotion of product.
Plant resources approx value
70 lakhs
Wire
35 lakhs
Press
16 lakhs
Pre dryer
35 lakhs
Port Dryer
07 lakhs
04 lakhs
M.G.
35 lakhs
23
Rewinder
14 lakhs
Motors
100 lakhs
Boiler Machine
50 lakhs
34 lakhs
_____________
Total
400 lakhs
_____________
400 lakhs
Civil works
200 lakhs
Other estimation
200 lakhs
Total
800 lakhs
400 lakhs
400 lakhs
waste paper
per ton
6500 to 7500/-
paper cones
per ton
14,500/-
E.T. sludge
200 to 600/-
7,500/-
24
2,500/23,000/-
Husk
sodium sulphate
45,000/-
Cole, salt
10,000/-
Power
25
56,000/-
2000/-
1250 to 1300/-
Requirement of
Cost of material
Total
Raw material
cost
Waste paper
= 1200 kg
7 =
8400
2.50 =
80
chemical
5 kg
23
115
Dry strength
4 kg
X 56
224
E.T. sludge
20 kg
0.60
12
Sodium silicate
3 kg
7.50
22.50
Power - 1200/-
1200
1200
Husk
885 kg
1770
sodium sulphate
2 kg
90
32 kg
45
11,913
Maintenance expenses
Machinery
110
=
Total
26
346
12,259
Waste paper
Aluminum sulphate
o Chemical
2400 kg
7=
1,68,000
640 kg
2.50 =
1,600
100 kg
23
2300
Dry Strength
80 kg
56
4480
E.T. Sludge
400 kg
0.60
246
Sodium silicate
60 kg
7.50
450
Power
20
1200
24,000
Husk
17700 kg
35,410
Sodium sulphate
40 kg
45
1,800
2.38,270
Maintenance expenses
Machinery
274
workers
2310
other maintenance
1700
= 4281
2,42,554
Waste paper
72000 kg
7 =
5,04,000
X 2.50 =
4,800
300 kg
23
6,900
Dry Strength
240 kg
56
13,440
E.T. Sludge
1200 kg
0.60
720
Sodium silicate
180 kg
7.50 =
1,350
Power
60 kg
1200 =
72,000
Husk
53,100 kg
1. Sodium sulphate
120 kg
2 = 1,06,200
45
5,400
7,14,,810
27
Maintenance expenses
machinery
5480
workers (100x70)
7000
other maintenance
5000
17,480
7,32,290
Cost estimation of Per Year (60 tons)
Waste paper
= 2,62,80,000 kg
X 7
18,39,60,000
Chemical
7,00,800 kg
X 2.50 =
17,52,000
1,09,500 kg
23 =
25,18,500
Dry Strength
87,600 kg
56
49,05,600
E.T. Sludge
4,38,000 kg
X 0.60 =
2,62,800
Sodium silicate
65,700 kg
X 7.50 =
4,92,750
Power
21900 kg
X 1200 =
2,19,00,000
Husk
X 2
3,87,63,000
Sodium sulphate
19,71,000
1,93,81,500 kg
43,800 kg
45
25,65,25,650
Maintenance expenses
machinery
20,00,000
workers (100x70)
30,00,000
other maintenance -
18,25,000
= 68,25,000
26,33,50,650
Sales management
Sales management is a key function in much kind of enterprises. From the
company view point there are three general objectives of sales management.
Sales volume
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contribution of profit
continuing growth
Top level management has the final responsibility, because it is accountable
for the success or failure of the entire enterprise, ultimately too top level management
is accountable for supplying a ever - increasing volume of socially responsible
products. Those final buyers want at satisfactory prices. Sales management appraisal
of market opportunities targets are set for sales volume, gross margin and net profit in
units of product. Sales management Includes, personal selling also. It do the entire
selling job and service existing account that is to maintain contacts with present
customers, take orders and search, out and obtain new customer. Personnel selling are
short term and adjusted from one promotional period to another distribution. Channels
also aim at supporting personal selling endeavors of enterprise.
Personal selling includes:
Sales presentation
Sales meetings
Sales programs
Sales samples
Direct selling:Direct marketing through various advertising media that interact directly. With
consumers. Under certain market and product condition selling directly to retailers in
reasonable alternative. It helps to large scale traders.
It includes:
Catalogue
Mailing
Tele marketing
Electronic Display
Fax -mail
E - Mail
29
Voice - Mail
T.V. shopping
Indirect selling:The other option open to manufactures is selling his product with the help of
middlemen. Witch is popularly known as indirect selling. There are four alternative
channels of indirect selling.
If the size of market is small, it will be worth while Togo for direct marketing.
In case of larger market on the other hand we may have many channels.
Customer Relation
Customer relation is more important in every organization.
Customer relation also known as relationship marketing begins with understanding
the needs and behavior of the customer. Hence getting feedback of product such as
Quality, Quantity, Size, Colour, Packing, Style from the customer is essential. For the
supplier to as certain how his products and services. The market helps to finding the
customer needs and his likes, product or dislike product also. Customer relation help
full to maintain long-term. Business and it helpful to increase our customers.
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3 THEORETICAL FRAMEWORK
Working capital management involves the relationship between a firms short
tears assets and its short-term liabilities. The goal of working capital is to ensure that
a firm is able to continue its satisfy boit maturing short-term debt and pcoming
operationally expenses. The management of working capital involves managing
inventories,accountis receivable and payable and cash . to pay current liabilities as
they fall due. This implies a clearly designed risk policy to determine the required
liquidity level.
CONCEPT OF WORKING CAPITAL:
There two concept of working capital :
In the broad senses, the term working capital refers to the gross working
capital and represents the amount of funds invested in current assets. Current assets
are those assets which in the ordinary course of business can be converted into cash
within a short period of time, normally one accounting year.
In a narrow sense, the term woking capital refers to the net or the working
capital. Net working capital is the excess of current assets over current liabilities.
Working capital = current assets - current liabilities
Net working capital may be positive or negative. When the current assets
exceed the current liabilities, the working capital is positive and the negative working
capital results when the current liabilities are more than the current assets. Current
liabilities are those liabilities which are intend to be paid in the ordinary course of
business within a short period or normally one accounting year out of the current
assets or the income of the business.
31
1.on the basis of concept, working capital can be further classified into
o a.gross working capital
o b.net working capital
2.on the basis of time, working capital can be further classified into
o a.permanent or fixed workin capital
o
32
33
higher amount of
working capital.
Operating efficiency and performance:
The operating efficiency of the firm relates to the optimum utilization of
resources at minimum costs. The contribution towards working capital would be
affected by the way in which profits are appropriated and operating efficiency of the
firm is well operated by the firm.
Firms credit policy:
The credit policy of the firm affects working by influencing the level of bool
debts. A high collection period will mean tie up of funds in book debts. Stock
collection proceedings can increase the changes of bad debts.
Availability of credit:
A firm will need less working capital if liberal credit terms are available to it.
The available credit from banks also influence the working capital needs of the firm.
Permanent and variable working capital:
These are always a minimum level of assets, which is continuously maintained
by the firm to carry on business operations. This minimum levels of current assets.
Production Cycle
Another factor which has a bearing on the quantum of working capital is the
production cycle. The term production or manufacturing cycle refers to the time
involved in the manufacture of goods.
sustain such activities the need for working capital is obvious. The longer the time
span (i.e. the production cycle), the larger will be the tied up funds and, therefore, the
larger is the working capital needed and vice-versa. There are enterprises which, due
to the nature of business, have a short operating cycle. A distillery, which has an
ageing process, has generally to make a relatively heavy investment in inventory. The
other extreme is provided by a bakery. The bakeries sell their products at short
intervals and have a very high inventory turnover. The investment in inventory and,
consequently, working capital is not very large.
Further, even within the same group of industries, the operating cycle may be
different due to technological considerations. For economy in working capital, that
process should be selected which has a shorter manufacturing process.
Having
selected a particular process of manufacture, steps should be taken to ensure that the
cycle is completed in the expected time. This underlines the need for effective
organisation and coordination at all levels of the enterprise. Appropriate policies
concerning terms of credit for raw materials and other supplies can help in reducing
working capital requirement. Often, companies manufacturing heavy machinery and
equipment minimize the investment in inventory or working capital by requiring
advance payment from customers as work proceeds against orders. Thus, a part of the
financial burden relating to the manufacturing cycle time is passed on to other.
Business Cycle
The working capital requirements are also determined by the nature of the
business cycle. Business fluctuations lead to cyclical and seasonal changes which, in
turn, cause a shift in the working capital position, particularly for temporary working
capital requirements. The variations in business conditions may be in two directions
(i) upward phase when boom conditions prevail, and (ii) downswing phase when the
economic activity is marked by a decline. During the upswing of business activity,
the need for working capital is likely to grow to cover the lag between increased sales
and receipt of cash as well as to finance purchases of additional material to cater to
the expansion of the level of activity. Additional funds may be required to invest in
plant and machinery to meet the increased demand. The downswing phase of the
business cycle has exactly an opposite effect on the level of working capital
requirement. The decline in the economy is associated with a fall in the volume of
36
sales which, in turn, leads to a fall in the level of inventories and book debts. The
need for working capital in recessionary conditions is bound to decline. In brief,
business fluctuations influence the size of working capital mainly through the effect
on inventories. The response of inventory to business cycles is mild or violent
according to nature of the business cycle.
Growth and Expansion
As a company grows, it is logical to expect that a larger amount of working
capital is required. It is, of course, difficult to determine precisely the relationship
between the growth in the volume of business of a company and the increase in its
working capital. The composition of working capital in a growing company and the
increase in its working capital. The composition of working capital in a growing
company also shifts with economic circumstances and corporate practices. Other
things being equal, growth industries require more working capital than those that are
static. The critical fact, however, is that the need for increased working capital funds
does not follow the growth in business activities but precedes it. Advance planning of
working capital is, therefore a continuing necessity for a growing concern. Or else,
the company may have substantial earnings but little cash.
Vagaries in the Availability of Raw Material
The availability or otherwise of certain raw materials on a continuous basis
without interruption would sometimes affect the requirement of working capital.
There may be some materials which cannot be procured easily either because of their
sources are few or they are irregular. To sustain smooth production, therefore, the
firm might be compelled to purchase and stock them far in excessof genuine
production needs. This will result in an excessive inventory of such materials. The
procurement of some essential raw materials is difficult because of their sporadic
supply. This happens very often with raw materials which are in short supply and are
controlled to ensreequitable distribution. The buyer has in such cases very limited
options as to the quantum and timing of procurement. If may so happen that a bulk
consignment may be available but the firm may be short of funds, while when surplus
funds are available the commodities may be in short supply.
This element of
uncertainty would lead to a relatively high level of working capital. Finally, some raw
materials may be available only during certain seasons. They would have to be
37
necessarily obtained, when available, to provide for a period when supplies are lean.
This will cause seasonal fluctuations in working capital requirements.
Profit Level
The level of profits earned differ from enterprise to enterprise. In general, the
nature of the product, hold on the market, quality of management and monopoly
power would by and large determine the profit earned by a firm. A priori, it can be
generalised that a firm dealing ina high quality product, having a good marketing
arrangement and enjoying monopoly power in the market, is likely to earn high profits
and vice-versa. Higher profit margin would improve the prospects of generating more
internal funds thereby contributing to the working capital pool. The net profit is a
source of working capital to the extent that it has been earned in cash. The cash profit
can be found by adjusting non-cash items such as depreciation, outstanding expenses
and losses written off, in the net profit. But, in practice, the net cash inflows from
operations cannot be considered as cash available for use at the end of cash cycle.
Even as the companys operations are in progress, cash is used for augmenting stock,
book debts and fixed assets. It must, therefore, be seen that cash generation has been
used for furthering the interest of the enterprise. It is in this context that elaborate
planning and projections of expected activities and the resulting cash inflows on a
day-to-day, week-to-week and month-to-month basis assume importance because
steps can then be taken to deal with surplus and deficit cash.
The availability of internal funds for working capital requirements is
determined not merely by the profit margin but also by the manner of appropriating
profits. The availability of such funds would depend upon the profit appropriations
for taxation, dividend, reserves and depreciations.
Level of Taxes
The first appropriation out of profits is payment or provision for tax. The amount of
taxes to be paid is determined by the prevailing tax regulations. The management has
no discretion in this respect. Very often, taxes have to be paid in advance on the basis
of the profit of the preceding year. Tax liability is, in a sense, short-term liability
38
payable in cash. An adequate provision for tax payments is, therefore, an important
aspect of working capital planning. If tax liability increases, it leads to an increase in
the requirement of working capital and vice-versa management has no discretion in
regard to the payment of taxes, in some cases non payment may invite penal action.
There is, however, wide scope to reduce the tax liability through proper tax planning.
The service of tax experts can be availed of to take advantage of the various
concessions and incentives through avoidance as opposed to evasion of taxes. Tax
planning can, therefore, be said to be an integral part of working capital planning.
Dividend Policy
Another appropriation of profits which has a bearing on working capital is
dividend payment. The payment of dividend consumes cash resources and thereby,
affects working capital to that extent. Conversely, if the firm does not pay dividend
but retains the profits, working capital increases.
In some cases,
shortage of working capital has been a powerful reason for reducing or even skipping
dividends in cash. There are occasions, on the other hand, when dividend payments
are continued in spite of inadequate earnings in a particular year because of sound
liquidity. Sometimes, the dilemma is resolved by the payment of bonus shares. This
enables the payment of dividend without draining away the cash resources and, thus,
without reducing working capital. Dividend policy, is thus, a significant element in
determining the level of working capital in an organization.
Depreciation Policy
Depreciation policy also exerts an influence on the quantum of working
capital. Depreciation charges do not involve any cash outflows.
depreciation policy on working capital is, therefore, indirect.
39
The effect of
depreciation affects the tax liability and retention of profits. Depreciation is allowable
expenditure in calculating net profits. Enhanced rates of depreciation lower the
profits and, therefore, the tax liability and, thus, more cash profits.
Higher
depreciation also means lower disposable profits and therefore, a smaller dividend
payment. Thus, cash is preserved. In the second place, the selection of the method of
depreciation has important financial implications. If current capital expenditure falls
short of the depreciation provision, the working capital position is strengthened and
there may be no need for short-term borrowing. If, on the other hand, the current
capital expenditure exceeds the depreciation provision, either outside borrowing will
have to be resorted to or a restriction on dividend payment coupled with retention of
profits will have to be adopted to prevent the working capital position from being
adversely affected. It is in these ways that depreciation policy is relevant to the
planning of working capital.
production/sales is carried on evenly throughout the year and all costs accrue
similarly. As the working capital requirements are related to the cost excluding
depreciation and not to the sale price, WC is computed with reference to cash cost.
The cash cost approach is comprehensive and superior to the operating cycle approach
based on holding period of debtors and inventories and payment period of creditors.
Some problems have been solved, however, using the operating cycle approach also.
The steps involved in estimating the different items of CA and CL are as
follows:
Estimation of Current Assets
40
Cost
x
(in units)
of
raw
material(s)
per
Average inventory
holding
unit
period
(27.1)
(months/days)
12months/365 days
Estimated workx
units)
in-process
cost
Average
x
per unit
time
span of work-in-
(27.2)
progress
inventory
(months/days)
12months/365 days
Finished Goods Inventory: Working capital required to finance the finished goods
inventory is given by factors summed up in Eq.27.3
Budgeted Production
(in units)
per
unit
(excluding
Average inventory
x
depreciation)
holding
period
(27.3)
(months/days)
12months/365 days
Debtors: The WC tied up in debtors should be estimated in relation to total cost price
(excluding depreciation) Symbolically.
41
Budgeted
credit
unit
excluding
Average
x
collection
depreciation
debt
period
(27.4)
(monthly/days)
12months/365 days
Cash and Bank Balances: Apart from WC needs for financing inventories and debtors,
firms also find it useful to have some minimum cash balances with them. It is
difficult to lay down the exact procedure of determining such an amount. This would
primarily be based on the motives for borrowing sources in times of need and past
experience and so on.
Estimation of Current Liabilities
The working capital needs of business firms are lower to the that extent such needs
are met through the current liabilities (other than bank credit) arising in the oridinary
course of business. The important current liabilities (CL) in this context are, tradecreditors, wages and overheads.
Trade Creditors
Budgeted
yearly
production
(in
Credit
x
unit
units)
period
allowed by creditors
(27.5)
(monthly /days)
12 months/365 days
Average time-lag in
x
unit
units)
payment of wages
(monthls/days)
12months/365 days
42
(27.6)
The average credit period for the payment of wages approximates to a half-a-month in
the case of monthly wage payment. The first days monthly wages are paid on the 30 th
day of the month, extending credit for 29days, the second days wages are, again, paid
on the 30th extending credit for 28 days, and so on.
approximates to half-a-month.
Overheads (Other Than Depreciation and Amortisation)
Budgeted
years
production
(in
Average time-lag in
x
unit
units)
payment of overheads
(27.3)
(months/days)
12months/365 days
(II)
(III)
(IV)
If advance payment is to be made to creditors, the item would appear under CA. The
same would be the treatment for advance payment of wages and overheads.
Management of Working Capital In India
current liabilities.
The length of the operating cycle is the most widely use method to determine
working capital need. The working capital financing policy is based on the
matching approach.
Operating cycle:
Operating cycle is the time duration required to converts sales, after the
conversion of resources into inventories into cash. The operating cycle of a
manufacturing company involves 3 phases.
Sale of products either for cash or on credit creates book debts for collection .
All these steps put together from an operating cycle, which can be represented as
under
Realization
Cash
Raw material
Stores and
45
Semi finished
goods
Bills receivable
Sales
Finished goods
sundry
The intervening period required for completion these entire process is the operating
cycle. the operating cycle may thus be defined as the intervening period from the
time the goods or services enter the business till their religion in cash.
The study of these operating cycle is obviously very important, as the actual
requirement of the nit may be limited to the funds required to complete an operating
cycle.
Operating cycle formulate:
The length of the operating cycle of a manufacturing firm is the sum of
inventory conversion period and debtors conversion period.
The inventory conversion period is the total time needed for producing and
selling the product. The debtors conversion period is the time required to collect the
outstanding amount from the customers. The total of inventory conversion period and
debtors conversion period is referred to as gross operating cycle
a. Raw Material conversion period
Raw Material inventory 360
Cost of production
c. finished goods conversion period
finished goods inventory 360
Cost of goods sold
d. debtors conversion period
debtors 360
Credit sales
e. payables deferral period
creditors 360
Credit purchases
f. Net operating cycle =Gross Operating Cycle- Payables
INVENTORY MANAGEMENT
Inventories are the stock of the product of a company, raw material and components
that make up the product. Inventories constitute the most significant part of current
assets
Need for holding inventories
The question of managing inventories arises only when the company holds
inventories. Maintain inventers involves tying up of funds and incidence of storage
and handling costs . if it is expensive to mention inventories ,way do companies hold
inventers? There are motives for holding inventers, they are same like in cash it is
transaction, precautionary and speculative
Objective of inventory management:
47
Types of Inventory
Inventers are stocks of the product of a company, manufactured for sale and compotes
that makeup the product
Inventers can be classified in to four categories namely:
Raw materials
Work-in-progress
Finished goods
Suppliers
ABC analysis
Inventory turnover
Cost of delinquency
Opportunity costs
business and industry norms. The credit policy is used to refer the combination of
their decision variables.
1.credit standards
2.credit terms
collection efforts
Credit terms are meant decide the type of customers to whom goods could be sold
on credit. If a firm has more slow-paying customers, investment in account receivable
increase customers will also expose the firm to higher risk of default credit items
especially the derivation of credit and terms of payment .investment in account in
account receivable will be high if customers are allowed time period extended for
making payments collection efforts determine the actual collection period..
The working capital analysis done by the following
through a statement
ratio analysis
operating cycle
manufacturing cycle
demand condition
production policy
business cycle
credit policy
availability of credit
sales growth
50
profit level
dividend policy
depreciation policy
51
(Rs.in Lakhs)
2010
2011
Increase
10386000
14200000
3814000
Deposits
215100
1102000
886900
1420000
3620000
2200000
Loans &
13230000
15840000
2610000
25251100
34762000
9510900
2971000
3613000
642000
Decrease
advances
Total current
assets
Less: current
liabilities
Increasing
10152900
working
capital
Total
22280100
31149000
Interpretation:
52
10152900
10152900
During the period 2010-2011 there was an increase in the working capital of the
company
(Rs.in Lakhs)
2010
2011
Increase
Decrease
Rs
Rs
Rs
Rs
Cash&bankbalances
14200000
2630000
----
11570000
Deposits
1102000
2720000
1618000
----
Loans advances
19400000
11500000
----
7900000
Stock in trade
0.00
6800000
6800000
----
34702000
23650000
8418000
----
3613000
8315000
Current assets&
loans advances
Less: current
liabilities
Provisions
Decrease working
4702000
2,26,000
capital
Total current
31089000
15335000
17062000
17062000
liabilities
Interpretations:
During the period of 2009-2010there was a decrease in the working
capital of the company.
53
Year
Changes in
working capital
31-3-2009
25251100
2971000
22280100
2971000
31-3-2010
3470200
361300
3114900
10152900
31-3-2011
23650000
8315000
15335000
-226000
Average
17457100
3882433
16910000
4299300
Interpretation
Table 4.3 explains the segment of changes in working capital for the 2009,2010,2011 The
working capital in the 2009 at the end of the statement 2009 was an 29.71.010, but same
was 226000 negative as an 31st march 2011 this due to increase
Current ratio:
The current ratio is a measure of firms short/term solvency. It indicates the
availability of current assets in rupees for current liability.
Current Assets
Current Ration=
--------------------------------current liabilities
Current assets
Current
Ratio
(Rs)
liabilities(Rs)
2009-2010
34762000
3613000
9.62
2010-2011
23650000
8315000
2.84
Average
29206000
5964000
6.23
Interpretation:
In the table 4.4 explain the Current Ratio of 2:1 is considered satisfactory.
This rule is based on logic that in a worse situation , even it the value of current assets
becomes half, the firm will be able to meet its obligation. The current ratio represents
a margin of safety for creditors. It measures only total rupees worth of current assets
and current liabilities and does not measure the quality of assets and current liabilities
and does not measure the quality of assets. However , it is measure of the firms
liquidity.
Stock Turnover Ratio:
This ratio indicates the efficiency of the firm in producing and selling its
product. The average of opening and closing balances of inventory. In a
manufacturing company, inventory of finished goods is used to calculate this ratio.
55
Cost of
Opening
Closing
Average
Ratio
goods sold
inventory
inventory
Inventory
(Rs)
(Rs)
(Rs.)
2010-2011
----
----
----
----
2012-2013
431572319
-----
6800753.30
3400376.65
126.9
Average
431572319
----
680075330
3400376.65
126.9
Interpretation:
In the table 4.5 Explain the statement of changes in stock turnover ratio for
the 2010,2011 2012,2013. The turnover ratio 2010 -2011 was nil because of no stock.
In 2012 and 2013 was 126.9 as on 31 march 2013
365
56
Days
Stock Turnover
Stock conversion
Ratio
Period
2010-2011
365
------
-----
2012-2013
365
126.9
28
Average
365
126.9
28.6
Interpretation:
Table 4.6 explain the stock conversion period the changes in ,
2010,2011,2012,2013 In the 2010 was nil because of no stock . In 2012and2013 is
increased to 28 the stock conversation period as 31.march.2013
Year
Days
Debtors Turnover
Average Collection
Ratio
Period (Days)
2010-2011
365
-----
------
2012-2013
365
19746564.3
0.000
Average
365
19746564.3
0.000
Interpretation:
Table 4.7 explain the average collection period of ,2010,2011,2012,2013.in
2010 it was nil because of no stock. In 2013 there is no increase in the average
collection period the average credit period of debtors was not influence in this
company because there is no collection period.
Working Capital turnover Ratio:
A firm may also like to relate net current assets to sales.Net current assets are
thing but the difference between current assets and current liabilies. The result of this
ratio indicates how many times the working capital has rotated for generating the
sales.
sales
Working Capital Turnover Ratio = ----------------------------------Net Current Assets
58
Sales (Rs.)
Current
Current
Net Current
Assets
Liabilities
Assets(Rs.)
(Rs.)
(Rs.)
Ration
2011-2012
-----
34762000
3613000
31157054.82
----
2012-2013
45491777.00
23650000
8315000
23253536.12
1.98
Average
45491777.00
18563500
5964000
16741203.97
1.98
Interpretation:
Table 4.8 explains the working capital turnover ratio in years , 2011, 2012. In
the ratio was nil. in 2012- 2013 increase 1.98.it shows an improvement in this year.
5.1 SUMMARY
The present study is categorized into five chapters
Chapters one deals with introduction, need objective, methodology ,limitations of the
study
Introduction
An enterprise whether industrial, trading in other acquires two types of assets to run
its business. They are fixed assets, which are necessary for carrying the
production/business.it is the current assets which are generally referred to as working
capital.
In managing fixed assets the time factor is very important discounting and
thats why discounting and compounding play a very important role in any capital
59
budgeting decision. But the time frame of current assets is only one accounting of
period the time value of money is significant in the management of current assets.
Any short run immediate need of the company whether that is need for cash or
adjustments to fluctuations in sales can be made only through adjusting the levels of
the various components of the current assests.this calls for efficient management of
current assets, which form part of working capital.
60
The current ratio reveals that the company can meet its short term obligation
at any given point of time. Though the ratio 2:1 is considered satisfactory, the
survey revels that the companys current ratio is above the standard.
It is suggested that the company must improve the net working capital ratio
because this ratio is negative. It tries to improve their net working capital ratio.
5.2 FINDINGS
The current ratio reveals that the company can meet its short term obligation
at any given point of time. Though the ratio 2:1 is considered satisfactory, the
survey revels that the companys current ratio is above the standard.
The inventory turnover ratio indicates that conversion of inventory into cash is
very through the study. an increasing trend
Net profit margin is in negative from this will the company financial position
in worst condition.
Cash ratio showed decreasing balance between the periods 2010 working
capital of the company showed an decreasing balance.
5.3 SUGGESTIONS
It is suggested that the company must improve the net working capital
ratio because this ratio is negative. It tries to improve their net working
capital ratio.
Increase
this ratio
simhagiri paper mill has reduce its net working capital.net working capital
can be reduced when inventory level is to minimum.
63
5.4 GLOSSARY
Operating cycle is the time duration required to sales after the conversion of
resource onto inventories into cash.
CONCLUSION
Though the working capital is increasing year by year and the ideal cash is also
increasing.
The company has to exercise a lot of proper control and proper system of working
capital management to manage such cash and inventory in a profitable way.
For this purpose the company may consider the above suggestions for effective
management of working capital.
65
5.5 ANNEXURE
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED
31-MARCH-2010
Particulars
schedule
Year ended
31-3-2010
Year ended
31-3-2011
Sales
45491777.00
0.00
Miscellaneous receipts
151363.00
0.00
Closing stock
6800753.30
0.00
52443893.30
0.00
INCOME
LESS:EXPENDITURE
0.00
Stock-in trade
0.00
0.00
39430675.00
0.00
Manufacturing expenses
6430532.00
0.00
3484639.00
0.00
66
Administrative expenses
642615.00
0.00
779522.00
0.00
Financial expenses
3154267.19
0.00
Miscellaneous expenses
709351.20
0.00
Depreciation
6625577.40
0.00
Deferred tax
1766104.00
0.00
-10579389.49
0.00
52443893.30
To Net Loss
-10579389.49
0.00
-10579389.49
0.00
Sch.no.
As 31-3-2010
As 31-3-2011
44854951.00
0.00
86743968.19
63454466.00
330000.00
5800569.00
1766104.00
0.00
133695023.19
106662135.00
1.SOURCES OF FUNDS
SHAREHOLDERS
FUNDS
(a) CAPITAL
(B) RESERVES AND
SURPLUS LONE
FUNDS
FIXED ASSETS:
(a) GROSS BLOCK
95042921.18
39852601.00
6625577.40
0.00
88417343.78
39852601.00
11202301.00
21541850.00
99619644.78
61394451.00
11202301.00
progress
TOTAL
INVESTMENTS
CURRENT
ASSETS,LOANS
ADVANCES
0.00
0.00
AND
CASH
ACCOUNTS
131230.00
766266.00
BANK
ACCOUNTS
2506735.82
13432084.82
DEPOSITS
2723586.00
1101485.00
STOCK
TRADE
IN
6800753.30
0.00
SUNDRY
7887105.00
0.00
11519210.00
19470263.00
31568620.12
34770098.82
(e)
DEBTORS
(d)
LOANS&ADVANCES
TOTAL
LESS:CURRENT
9
LIABILITIES
AND
PROVISIONS
(a)
CURRENT
LIABILTIES
NET
ASSETS
Miscellaneous
Expenditure
8315084.00
CURRENT
10
68
3613044.00
23253536.12
31157054.82
242452.80
14110629.18
10579389.49
0.00
133695023.19
106662135.00
Schedule AS at 31.3.2011
AS at 31.3.2011
No.
SOURCES OF FUNDS:
SHARE HOLDERS FUNDS
SHARE CAPITAL
AUTHERISED
CAPITAL
SHARE 1.
ISSUED,SUBSCRIBED&PAIDUP
37500000.00
37500000.00
37407100.00
100000.00
2801500.00
2.
Secured Lone
63454466.00
Unsecured Loans
5800569.00
38391663.00
---
106662135.00
66506663.00
61394451.00
37701589.00
14198350.00
10386944.00
DEPOSITS
1101485.00
215100.00
3628178.00
1428494.00
15842085.00
13233850.00
APPLICTION OF FUNDS:
FIXED ASSESTS
CURRENT ASSES & LOANS &
ADVANCES:
CURRENT ASSETS
69
3613044.00
2971731.00
31157054.82
22292657.00
Preliminary expenditures
303066.00
297950.00
Pre-operative expenses
13807563.18
6214467.00
NOTES ON ACCOUNTS
106662135.00
66506663.00
MISCELLANEOUS
EXPENDITURE
70
BIBLIOGRAPHY
Chandra Prasanna (2007) financial management-theory and practice. 7th
Edition , New Delhi, Tata Mc Graw-Hill.
Pandey. I M (2010) P.K. financial management, 10th edition, vikas
publishing house pvt.ltd.
Khan M.Y. Jain. P.K.( financial management-text, prob. Lems and cases, 4th
Edition, New Delhi, Tata Mc Graw-Hill
Websites
www.google.com
www.simhagiri.com
71