PROJECT REPORT OF ANAND MALODE 1(EXISTING)

8/7/2019 PROJECT REPORT OF ANAND MALODE 1(EXISTING)

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PROJECT REPORT

ON

Working Capital Management at Raymond Ucodenim Ltd.

SUBMITTED

RASHTRASANT TUKADOJI MAHARAJ NAGPUR UNIVERSITY, NAGPUR

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

BY

ANAND K. MALODE

UNDER GUIDANCE OF

DR. JUGALKISHOR F. AGRAWAL

Department of Business Management,

Vilasrao Deshmukh College of Engineering & Tech. Mouda, Nagpur

2010-2011


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CERTIFICATE

This is to certify that Anand K. Malode is a bonafide student ofDepartment of

Business Management, Vilasrao Deshmukh College of Engineering & Tech.,Mouda,

Nagpur and studying in M.B.A. Part-II and has completed his project titled


This project report is submitted to RTM Nagpur University in partial fulfillment

of academic requirement for the degree of Master of Business Administration during the

academic year 2009-2011.

I find the work comprehensive, complete and of sufficiently high standard to

warrant its presentation.

Dr. Jugalkishor F. Agrawal Mr. Prasanna Tidke

Guide Director


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DECLARATION

I have carried out the work presented in this project report titled


under the guidance of Dr. Jugalkishor F. Agrawal Dept .of Business Management,

Vilasrao Deshmukh college Of Engineering & Tech., Mouda, Nagpur during the

academic year 2009-2011. This work has not been submitted for any other examination

conducted by RTM Nagpur University or for any other purpose.

DATE : ______________ ......

PLACE: _______________ Mr. ANAND K.MALODE


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ACKNOWLEDGEMENT

I take this opportunity to convey my gratitude to those who provided me help

during the course of my study.

It is indeed a great pleasure to express me sincere thanks and great sense of

gratitude of Dr. Jugalkishor F. Agrawal for their invaluable guidance, timely help and

suggestions and constant encouragement during my project work.

DATE : ____________

PLACE: ____________ Mr. ANAND K. MALODE


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Sr.

NoIndex Page No.

1. EXECUTIVE SUMMARY 1-3

2. INTRODUCTION 4-7

3. COMPANY PROFILE 8-17

4

5.

OBJECTIVES AND SCOPE OF THE PROJECT

Objectives

ScopeMethodology

WORKING CAPITAL

Management of Working CapitalNeed for adequate Working Capital

Factors determining Working Capital requirementSources of Working Capital

Working Capital Classification

18

19-33

6. STATEMENT OF WORKING CAPITAL 34-35

7. INVENTORY MANAGEMENT 36-44

8. CASH MANAGEMENT 45-48

9.RECEIVABLES MANAGEMENT (DEBTORS)

49-56

10.CONCLUSION

57-58


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11.RECOMMENDATION

59-66

12. REFERENCES 67

13. BIBLIOGRAPHY 68


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I. EXECUTIVE SUMMARY

The term working capital has several meanings in business and economic development

finance. Working capital means a businesss investment in short-term assets needed to

operate over a normal business cycle.

Current assets and current liabilities include three accounts which are of special

importance. These accounts represent the areas of the business where managers have the

most direct impact: accounts receivable (current asset) ,inventory (current assets),

accounts payable (current liability).

Use of working capital is providing the ongoing investment in short-term assets that a

company needs to operate. A second purpose of working capital is addressing seasonal or

cyclical financing needs.

Working capital is also needed to sustain a firms growth, to provide liquidity and to

undertake activities to improve business operations and remain competitive, such as

product development, ongoing product and process improvements, and cultivating new

markets.

Raymond Uco Denim Ltd was incorporated in 1925 and is now a Rs.1, 400 crore plus

conglomerate having varied businesses like Textiles, Readymade Garments, Denims,

Engineering Files & Tools, Aviation and Designer Wear. The company is one of the

largest players in the core worsted fabric business with over 60% domestic market shares.

Objectives of the Project are to study working capital management process, to study

receivable management of the company and to study the process of cash and inventory

management.

Working capital management is management for the short-term current assets and current

liabilities, which is of critical importance to a firm. Cash management is to identify the

cash balance which allows the business to meet day to day expenses, but reduces cash

holding costs.


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Inventory management is to identify the level of inventory which allows for uninterrupted

production but reduces the investment in raw materials and minimizes reordering costs

and hence increases cash flow, supply chain management. Debtors management is to

identify the appropriate credit policy.

A business need for working capital can come as a result of several reasons that include

increasing sales growth or seasonal growth, customers paying slower, need to increase

inventory to support sales growth and/or adding product lines, etc.

Though there is no set of universally applicable rules to ascertain working capital needs,

but these are some of the factors which could be considered: nature of the product,

manufacturing cycle, depreciation policy, seasonal variation, etc.

Working capital can be financed by trade credit, bank credit, cash credit, loans, letter of

credit, commercial paper, etc.

In the year 2010 the inventory period for Raymond Uco Denim Ltd has increased

tremendously from 106 days in 2009 to 272 days in 2010.

This is also supported by the decline in the inventory turnover ratio to a meager of 1.34

times in 2010. Since the company is in the textile industry therefore the inventory varies

according to seasonal and festive demands.

The current ratio is a reflection of financial strength. The current ratio measures the

ability of the firm to meets its current liabilities. Current assets get converted into cash

and provide the funds needed to pay current liabilities. The current ratio has decreased

from 2.68:1 (2009) to 2.33:1 in the year 2010.

Current liabilities have increased by 34.67% from the last year 2009. Provisions have

increased by 20.78%, thus the total current liabilities have increased by 31.42%. Hence as

the increase in the current liabilities is much more than the increase in the current assets,

the current ratio has declined slightly.


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The debtors turnover ratio has improved further in 2010 as it has increased to 5.50 times.

Hence as an effect of the increase in the debtors turnover ratio, there is a significant

improvement in the credit period as it has reduced to 66 days from 77 days. For the year

ended 2009-2010, the cash ratio has fallen from 2.46:1(2009) to 1.73:1 in 2010.

Hence better cash management is needed at Raymond Uco Denim Ltd The extra money

could be utilized to push sales and to pay the increase in the current liabilities. Measures

have to tightened to earn larger profits.


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II. INTRODUCTION

Three Meanings of Working Capital:

The term working capital has several meanings in business and economic development

finance. In accounting and financial statement analysis, working capital is defined as the

firms short-term or current assets and current liabilities. Net working capitalrepresents

the excess of current assets over current liabilities and is an indicator of the firms ability

to meet its short-term financial obligations.

From a financing perspective, working capital refers to the firms investment in two types

of assets. In one instance, working capital means a businesss investment in short-term

assets needed to operate over a normal business cycle. This meaning corresponds to the

required investment in cash, accounts receivable, inventory, and other items listed as

current assets on the firms balance sheet. In this context, working capital financing

concerns how a firm finances its current assets.

A second broader meaning of working capital is the companys overall nonfixed asset

investments. Businesses often need to finance activities that do not involve assets

measured on the balance sheet. For example, a firm may need funds to redesign its

products or formulate a new marketing strategy, activities that require funds to hire

personnel rather than acquiring accounting assets.

Working capital is a valuation metric that is calculated as current assets minus current

liabilities. Also known as operating capital, it represents the amount of day-by-day

operating liquidity available to a business. A company can be endowed with assets and

profitability, but short of liquidity, if these assets cannot readily be converted into cash.


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Current assets and current liabilities include three accounts which are of special

importance. These accounts represent the areas of the business where managers have the

most direct impact:

accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)

In addition, the current (payable within 12 months) portion of debt is critical, because it

represents a short-term claim to current assets. Common types of short-term debt are

bank loans and lines of credit.

Any change in the working capital will have an effect on a business's cash flows. A

positive change in working capital indicates that the business has paid out cash, for

example in purchasing or converting inventory, paying creditors etc.

Hence, an increase in working capital will have a negative effect on the business's cash

holding. However, a negative change in working capital indicates lower funds to pay off

short term liabilities (current liabilities), which may have bad repercussions to the future

of the company.


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Business Uses of Working Capital:

Just as working capital has several meanings, firms use it in many ways. Mostfundamentally, working capital investment is the lifeblood of a company. Without it, a

firm cannot stay in business. Thus, the first, and most critical, use of working capital is

providing the ongoing investment in short-term assets that a company needs to operate.

A business requires a minimum cash balance to meet basic day-to-day expenses and to

provide a reserve for unexpected costs. It also needs working capital for prepaid business

costs, such as licenses, insurance policies, or security deposits. Furthermore, all

businesses invest in some amount of inventory, from a law firms stock of office supplies

to the large inventories needed by retail and wholesale enterprises. Without some amount

of working capital finance, businesses could not open and operate.

A second purpose of working capital is addressing seasonal or cyclical financing needs.

Here, working capital finance supports the buildup of short-term assets needed to

generate revenue, but which comes before the receipt of cash. For example, a toy

manufacturer must produce and ship its products for the holiday shopping season several

months before it receives cash payment from stores. Since most businesses do not receive

prepayment for goods and services, they need to finance these purchases, production,

sales, and collection costs prior to receiving payment from customers.

Another way to view this function of working capital is providing liquidity. Adequate and

appropriate working capital financing ensures that a firm has sufficient cash flow to pay

its bills as it awaits the full collection of revenue. When working capital is not

sufficiently or appropriately financed, a firm can run out of cash and face bankruptcy. A

profitable firm with competitive goods or services can still be forced into bankruptcy if it

has not adequately financed its working capital needs and runs out of cash.


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Working capital is also needed to sustain a firms growth. As a business grows, it needs

larger investments in inventory, accounts receivable, personnel, and other items to realize

increased sales. New facilities and equipment are not the only assets required for growth;

firms also must finance the working capital needed to support sales growth.

A final use of working capital is to undertake activities to improve business operations

and remain competitive, such as product development, ongoing product and process

improvements, and cultivating new markets. With firms facing heightened competition,

these improvements often need to be integrated into operations on a continuous basis.

Consequently, they are more likely to be incurred as small repeated costs than as large

infrequent investments. This is especially true for small firms that cannot afford the cost

and risks of large fixed investments in research and development projects or new

facilities. Ongoing investments in product and process improvement and market

expansion, therefore, often must be addressed through working capital financing.

Working capital management is a continuous planning process wherein the manager has

to take appropriate decisions, as and when required, the failure of which can result in

huge losses for the company. This challenging aspect of working capital management

influenced me to choose this topic as my project.

Working capital management is a continuous planning process wherein the manager has

to take appropriate decisions, as and when required, the failure of which can result in

huge losses for the company. This challenging aspect of working capital management

influenced me to choose this topic as my project.


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III. COMPANY PROFILE

Raymond Ltd was incorporated in 1925 and is now a Rs.1, 400 crore plus

conglomerate having varied businesses like Textiles, Readymade Garments, Denims,

Engineering Files & Tools, Aviation and Designer Wear. The company is one of the

largest players in the core worsted fabric business with over 60% domestic market share.

The denim division has an installed capacity of 30 million meters and produces high

quality ring denims. The company currently ranks among the top 3 producers in India.

The engineering files & tools division constitutes around 12% of the total revenues and is

comparatively a smaller division.

However, Raymonds is the largest manufacturer of engineering files & tools in the

country. The company has entered into global tie-ups and this is expected to add

additional revenues to Raymond Ltd over the next two years. Recognized as the most

respected Textile Company of India, Raymond is amongst the first three fully integrated

manufacturers of Worsted Suiting in the world.

As the flag-bearer of the multi-product, multi-divisional Raymond Ltd Group, it enjoys

over 60% share of Indian Worsted Suiting Market. It produces 25 million meters of high-

value pure-wool, wool blended and premium polyester viscose suiting in addition to half

a million blankets and shawls, all marketed under the flagship brand "Raymond" - a

worldwide trusted name since 1925.

It also produces and markets plush-velvet furnishing fabric in wide array of designs and

colors including carpeting for the niche markets of India and Middle East. Manufacturingfacilities include three world-class fully integrated plants in India, employing state-of-

the-art technology from wool scouring to finishing stage and modern quality management

(ISO 9001) as well as Environment Control Systems (ISO 14001). All the plants are self-

sufficient in terms of providing educational, housing, recreation and spiritual support

system for the employees and connected townships.


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Today the mill has turned into a Rs. 1400 crores conglomerate and is Indias leading

producer of worsted suiting fabric with 60% market share. It is also the largest exporter

of worsted fabrics and readymade garments to 54 countries including Australia, Canada,

USA, the European Union and Japan. The Raymond Ltd group is also the leader among

ready-mades in India with a turnover of Rs. 2000 million with its three brands Park

Avenue, Parx and Manzoni.

Customers today the world over, are looking at one-stop shops that can fulfill all their

needs. At Raymond, they offer fully finished products that span various garment

categories that has been made possible by a seamless horizontal and vertical integration

across divisions. Their textile solutions encompass everything - from worsted suiting to

denim and shirting.

Its not just range but volume and quality that make them the textile major that they are

today. Their plants have a capacity of 31 million meters in producing the finest worsted

fabrics and wool blends. The blends comprise of exotic fibres like cashmere, Mohair or

Angora or blends of wool with casein and bamboo or the ultimate in fine pure wool

Super 230s.


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Raymond Limited continues to achieve enhanced customer satisfaction through ongoing

innovation. Internationally renowned menswear designers today, style their latest

collections from Raymond- the fabric in fashion.

About the company:

Raymond Limited is the worlds largest producer of worsted suiting fabrics, commanding

an over 60% market share in India. With a capacity of 31 million meters, they are among

the few companies in the world, fully integrated to manufacture worsted fabrics, wool &

wool blended fabrics. They also convert these fabrics into suits, trousers and apparels that

are exported to over 55 countries in the world; including European Union, USA, Canada,

Japan and Australia amongst others.

A trendsetter and an innovator in the Indian textile market, their expertise has been

brought to bear by their in-house research & development team. Their innovations have

become milestones in the worsted suiting industry. They mastered the craft of producing

the finest suiting in the world using super fine wool count (from 80s to 230s) and


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blending the same with superfine polyester and other specialty fibres, like Cashmere,

Angora, Alpaca, Pure wool and Linen.

Raymond Limited is amongst the few companies in the world with the expertise to

manufacture even finer worsted suiting fabric- the Super 230s. Today they are recognized

as a pioneer in manufacturing worsted suiting in India, producing nearly 20,000 designs

and colors of suiting fabrics, which are retailed through 30,000 stores in over 400 towns

across India. From fabric to fine tailored clothing, Silver Spark Apparel Ltd. marks the

Group's foray into the global apparel market.


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World-class facilities:

Raymonds manufacturing facilities include three world-class fully

integrated plants in India, deploying state-of-the-art technology

modern quality management systems like ISO 9001 and Environment

Control Systems (ISO 14001). All their plants are self-sufficient and

provide staff welfare measures such as education, housing, recreation

and support systems their employee.

Raymond Limited plants are located in India at the following locations: Thane, near

Mumbai, Chhindwara in Central India and Vapi in Gujarat, near Mumbai.

Thane Plant:

This is the mother plant and is the center of competence for world-class manufacturing

and design facilities. With decades and expertise and finely honed skills, this plant is a

treasure house of knowledge for producing superfine worsted suiting fabrics.

Chhindwara Plant:

The Raymond Limited Chhindwara plant, set up in 1991, is a state-of-the-art integrated

manufacturing facility located 57 kms away from Nagpur in Central India. Built on 100

acres of land, the plant produces premium pure wool, wool blended and polyester viscose

suiting. This plant has achieved a record production capacity of 14.65 million meters,

giving it the distinction of being the single largest integrated worsted-suiting unit in the

world.

Vapi Plant:

Raymond Limited has increased its worsted suiting capacity by 3 million meters, as part

of the second developmental phase of the Vapi plant. After this expansion, Raymond

Limited will have a total capacity for manufacturing 31 million meters of worsted suiting


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per annum. Modeled to meet international standards, the Vapi plant has been set up on

112 acres of lush green land with Hi-tech machinery such as warping equipment from

Switzerland, weaving machines from Belgium, finishing machines, automatic drawing-in

and other machines from Italy.

Investment Rationale Core business to add growth:

The worsted fabric business registered single digit growth over the last two-three years.

This business is likely to take off in the near future and improved product mix and

volume growth will drive growth for the main business of the company. The company is

expanding the capacity of its worsted fabric business by 3 million meters to 28 million

meters through expansion at Vapi plant. This would yield significant improvement in the

operational margins on back of reduced labor cost. The company is also expected to

benefit from the increased outsourcing opportunity in the worsted fabric segment.

Performance of subsidiaries to fuel profitability:

Raymond Limited has formed many subsidiaries like Raymond Limited Apparel Limited,

Colourplus Fashions Ltd, and Hindustan Files Limited etc. The double-digit growth rate

in these companies would significantly improve the consolidated revenues of Raymond

Limited resulting in healthy consolidated numbers. They expect these subsidiaries to

register 12-14 % CAGR over the next two years thereby contributing to the improved

profitability of the company.

Advantage of integrated business:

Raymond Limited has an opportunity to take advantage of the post quota regime through

its increased scalability and ability to move up the value chain right from yarn to

retailing, through its vertically integrated business model. The company has made

capacity additions at opportune time to take advantage of promising business situation.

Global Tie-ups to establish international presence:

Raymond Limited has entered into joint ventures with Gruppo Zambiati of Italy for

manufacturing high value cotton shirts and cotton linen shirting fabric. It has also entered


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into a joint venture with Lanificio Fedora Italy for manufacture of blankets, shawls, and

will transfer its Jalgaon unit to the venture for its 50% stake. These tie-ups would lead to

international branding and a unique growth opportunity for Raymond.

Strong retail penetration & prime real estate value:

Raymond Limited has one of the largest retail penetrations through its 300 odd stores in

prime locations, in 150 cities in India. It also has around 25 shops in 15 plus cities of

Middle East, Sri Lanka, Bangladesh and Nepal. The Raymond Limited Shop retail chain

occupies a space of 1 million square feet built-up area. This is apart from around 160

acres of land at Thane a suburb of Mumbai. The current buoyancy in the real estate rates

is likely to give significant value to Raymond Limited for its property, which is estimated

around Rs.100 crore.

Foray in the Chinese market:

The company is planning entry into Chinese market, which impacts the global textile

business; this is a step ahead towards establishing Raymonds presence in the global

market. The Chinese venture could help Raymond Limited through sourcing of raw

material and intermediate products for the companies manufacturing facilities in India

and marketing its products in Chinese market.

Details of all Raymond Limited products are enlisted below:

Raymond Limited

Incorporated in 1925, Raymond Limited Limited has five divisions comprising of

Textiles, Denim, Engineering Files & Tools, Aviation and Designer Wear.

Raymond Limited Textile is India's leading producer of worsted

suiting fabric with over 60% market share. Raymond Limited

Textiles is the worlds third largest integrated manufacturer.

Raymond Limited Textile has developed strong in-house skills for research &

development and is thus, perceived as pioneer and innovator.


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Furnishings:

The company is known in the market for trend setting designs in

furnishings (home & office) and product innovations.

Product portfolio:

Plain - Hotels & Auditoriums in India.

Shadow Velvet - shadow effect in the plain fabric for elegant appearance -

leading hotels in India.

Stencil Sole producer. Shades ofPlain Velvet.

Dobby - Back-coated plush fabrics that improves the binding strength of pile tothe base fabric. Targeted at the automotive upholstery market. Also used in office

chairs and panels.

Full Pile Jacquard - The entire fabric range is treated with Flurogard to make itstain resistant.

Fire resistance treatment on Raymond Limited velvet:

To cater to the specific requirements of auditoriums, theatres & automobile industry, the

facility to treat the entire product range is available. The fabric is treated with special

chemicals to impart fire resistant property to the fabric.

Raymond Denim, set up in 1996 produces 20 million meters of differentiated Ringspun

denim per annum. The company currently ranks among the top 3

producers in India. Raymond Denim enjoys a substantial market

share in all parts of the world.


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The company exports 55% of its production to around 20 countries around the world and

to leading denim wear brands like Levi's, Pepe, Lee Cooper and retail brands like Zara,

H&M, Gap, Tommy Hilfiger, etc. Raymond Limited UCO Denim is a Joint Venture

between Raymond Limited Indias largest textile and apparel major and UCO NV of

Belgium. We produce and market specialty ring color and stretch denim.

With a combined capacity of 80 million and manufacturing facilities across 3 continents

US, Europe and Asia, Raymond Limited UCO is in a best position to develop an

optimal and flexible service to meet global requirements of large international brands.

Raymond UCO Denim is a Joint Venture between Raymond Ltd, India's largest textile

and apparel major and UCO NV of Belgium. We produce and market specialty ringcolour and stretch denim.

With a combined capacity of 47 million and manufacturing facilities across 2 continents

Europe and Asia, Raymond UCO will be in a best position to develop an optimal andflexible service to meet global requirements of large international brands.

Our facilities

Raymond UCO Denim has state of the art manufacturing facilities in Giurgiu (Romania)and Yavatmal (India). All our facilities produce differentiated ringspun denim, specialty

denim and other niche products for the global fashion market.


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Raymond UCO Denim, India

Capacity: 40 million meters

STATE-OF THE ART PRCESSES USED

To ensure the manufacture of products of international quality, this unit uses state-of-the-art equipment, systems and practices. These include:

Tensorapid equipment to measure Tensile and tear strengths.

Uster testing to control the evenness of all yarns.

Each & every bale of yarn is tested and passed through a double passagedraw for effective quality blending.

Marzoli ring spinning frames and open-end spinning are equipped with auto

doffing and auto bobbin transfer systems. Together with Caipo and Amsler

devices, these systems produce creative denim yarns.

Indigo and sulphur dyeing is achieved through two-slasher dye ranges.

Suker Muller & Masters slasher dye ranges support Picanol & Vamatex high

speed looms to produce 20 million meters per annum.

The Denim Fabrics & Apparels is finished on the Cibitex range with micro

processing to stabilize shrinkage & skew. The stenter finish stabilizes

shrinkage & width of stretch products.

Routine Testing and checking at every stage of the manufacturing process.

Shade standards and consistency are maintained via a system of wash

blankets tested from every roll of Fabrics & Apparels.

The Raymond water treatment plant purifies and recycles all indigo effluent

using reverse osmosisystem This enables the company to use all the water forland projects.

Creative denims are developed with specialist finishing, fancy yarn devices


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IV. OBJECTIVES AND SCOPE OF THE PROJECT

Objectiv

es of the Project: To study working capital management process. To study receivable management of the company. To study the process of cash and inventory management.

Scope of the project:

The scope of the project includes elaborate discussion on:

Statement of working capital. Inventory management Cash management. Debtors management.

The above-mentioned topics form the core part of working capital management.

Limitations:

Not considered other current assets and their ratios, which form a part of working capital

like Stock of raw material, work in progress, outstanding expenses, labor, etc as too many

calculations may lead to confusion.

Methodology: Acquisition of primary and secondary data.

Primary data: The first hand data obtained from the company sources (E.g.;information about the company.

Secondary data: Annual reports, balance sheets, trial balance, etc.


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V. WORKING CAPITAL

Working capital management is management for the short-term current assets and current

liabilities, which is of critical importance to a firm. Lack of efficient and effective

utilization of working capital leads to earn low rate of return on capital employed. The

requirement of working capital varies from firm to firm depending upon the nature of

business, production policy, market conditions, seasonality of operations, conditions of

supply, etc.

Working capital management entails short term decisions - generally, relating to the next

one year period - which are "reversible". These decisions are therefore not taken on the

same basis as Capital Investment Decisions (NPV or related, as above) rather they will be

based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of

days from the outlay of cash for raw material to receiving payment from the customer. As

a management tool, this metric makes explicit the inter-relatedness of decisions relating

to inventories, accounts receivable and payable, and cash. Because this number

effectively corresponds to the time that the firm's cash is tied up in operations and

unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The

result is shown as a percentage, determined by dividing relevant income for the 12

months by capital employed; Return on equity (ROE) shows this result for the firm's

shareholders. Firm value is enhanced when, and if, the return on capital, which resultsfrom working capital management, exceeds the cost of capital, which results from capital

investment decisions as above.


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Management of working capital:

Guided by the above criteria, management will use a combination of policies and

techniques for the management of working capital. These policies aim at managing the

current assets (generally cash and cash equivalents, inventories and debtors) and the short

term financing, such that cash flows and returns are acceptable. It simply refers to

management of the working capital, or in more precise terms, the management of current

assets. A firms working capital consist of its investment in current asset which include

short term asset such as cash and bank balance, inventories, receivables, and marketable

securities.

Cash management: Identify the cash balance which allows for the business to meet day

to day expenses, but reduces cash holding costs.

Inventory management: Identify the level of inventory which allows for uninterrupted

production but reduces the investment in raw materials - and minimizes reordering costs -

and hence increases cash flow, supply chain management ; Just In Time (JIT); Economic

order quantity (EOQ); Economic production quantity (EPQ).

Debtors management: Identify the appropriate credit policy, i.e. credit terms which willattract customers, such that any impact on cash flows and the cash conversion cycle will

be offset by increased revenue and hence Return on Capital (or vice versa); Discounts

and allowances.

Short term financing: Identify the appropriate source of financing, given the cash

conversion cycle: the inventory is ideally financed by credit granted by the supplier;

however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors

to cash" through "factoring".


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Need for adequate working capital:

Every firm must maintain a sound working capital position otherwise; its business

activities may be adversely affected.

The excess working capital, i.e. when the investment in working capital is more than the

required level, it may result in unnecessary accumulation of inventories resulting in

waste, theft, damage etc. Delay in collection of receivables resulting in more liberal credit

terms to customers than warranted by the market conditions. Adverse influence on the

performance of the management.

On the other hand, inadequate working capital is not good for the firm. It may result in

the following:

The fixed asset may not be optimally used. Firm growth may stagnate. Interruptions in production schedule may occur ultimately resulting in lowering of

the profit of the firm.

The firm may not be able to take benefit of an opportunity. Firm goodwill in the market is affected if it is not in a position to meet its

liabilities on time.

Working Capital Needs:

A business need for working capital can come as a result of several reasons that include

the following:

Increasing sales growth or seasonal growth.


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Customers paying slower. Need to increase inventory to support sales growth and/or adding product lines. Desire to take discounts on purchases from vendors. Recent operating losses have reduced your cash reserves. Increased expenses due to additional marketing efforts, new employees, office

relocation, etc.

Factors determining working capital requirement:

Though there is no set of universally applicable rules to ascertain working capital needs,

the following factors may be considered:

Nature of business:

The Working capital requirement depends upon the nature of business carried on by the

organization. In a manufacturing firm the requirement is generally high, but it also

depends on the type and nature of the product. The proportion of current asset to total

assets measures the relative requirements of working capital of various industries.

Manufacturing cycle:

Time span required for the conversion of raw materials into finished goods is a block

period. The period in reality extends a little before and after the work-in-progress. The

manufacturing cycle and the fund requirements vary in direct proportion. The funds

blocked in manufacturing cycle vary from industry to industry. Further, even within the

same group of industries, the operating cycle may be different due to technological

considerations.


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Business cycle:

Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a shift

in working capital position particularly for working capital requirement. The variations in

business conditions may be in two directions: Upward phase when boom conditions

prevail, and Downswing phase when economic activity is marked by a decline. During

the upswing of business activity, the need for working capital is likely to grow and during

the downswing phase the working capital requirement is likely to be less. The decline in

economy is associated with a fall in the volume of sales, which, in turn, leads to a fall in

the level of inventories and book debts.

Seasonal variation:

Variation apart, seasonally factor creates production or even shortage problem. This is the

reason as to why manufacturing concerns producing seasonal products purchase their raw

material throughout the year and carry on the manufacturing activity. For example

woolen garments have a demand during winter. But the manufacturing operation for the

same has to be conducted during the whole year resulting in working capital blockage

during off-season.

Credit policy:

The credit policy influences the requirement of working capital in two ways:

Through credit terms granted by the firm to its customers/buyers of goods. Credit terms available to the firm from its creditors.

Growth and expansion:

It is, of course difficult to determine precisely the relationship between the growth andvolume of business and the increase in working capital. The composition of working

capital also shifts with economic circumstances and corporate practices. However, it is to

be noted that the need for increased working capital funds does not follow the growth in

business activity but precedes it.


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Dividend policy:

The payment of dividend consumes cash resources and, thereby, effects working capital

to that extent. However, if the firm does not pay dividend but retains the profit, working

capital increases. There are wide variations in industry practices as regards the inter

relationship between working capital requirement and dividend payment. In some cases,

shortage of working capital is sometimes a powerful reason for reducing or even skipping

dividends in cash (resolved by payment of bonus shares).

Depreciation policy:

There is an indirect effect of depreciation policy on working capital. Enhanced rates of

depreciation lower the profits and tax liability and, thus, more cash profits. Higher

depreciation means lower disposable profits and a smaller dividend payment. Thus cash

is preserved. If the 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.

Sources of working capital finance:

Working Capital Finance - Gives your business the money it needs to grow.

Working capital finance makes it possible for the business to obtain capital if the business

has been denied for a bank loan, or if it has little cash flow. Traditional funding through a

standard bank can be difficult to obtain, but they also don't satisfy the needs of expanding

companies. Without capital a business will have to slow down their growth, which can

hurt a business. Working capital finance makes it possible for any business to have access

to the cash it needs, when it needs it.

Working capital finance allows a company to turn their income streams into instant

capital. They can turn their accounts receivables into cash by selling them to a lender who

specializes in accounts receivable factoring. Another method for obtaining working


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capital is to lease equipment or to obtain credit from a company (for eg. Companies like

Office Depot or Lowes in US) that sells items that the business needs. Obtaining lines of

credit from a company are easier than going after a bank loan. If at all possible obtain a

line of credit from a company that will report your business credit scores to the major

business credit bureaus. This will help build your business credit scores, so it is easier to

qualify for large bank loans.

Another popular method of working capital finance is utilizing asset-based financing.

That means that the company would use assets from their own business to secure loans.

They could pledge any commercial real estate their business owns, business vehicles,

equipment, etc. Lending institutions approve asset-based loans quicker because the risk

isn't as high. Small companies often can obtain more cash with an asset-based loan.

Commercial banksare the largest financing source for external business debt including

working capital loans, and they offer a large range of debt products. With banking

consolidation, commercial banks are multistate institutions that increasingly focus on

lending to small business with large borrowing needs that pose limited risks.

Consequently, alternate sources of working capital debt become more important. Savings

banks and thrift lenders are increasingly providing small business loans, and, in some

regions, they are important small business and commercial real estate lenders. Although

savings banks offer fewer products and may be less familiar with unconventional

economic development loans, they are more likely to provide smaller loans and more

personalized service.

Commercial finance companies are important working capital lenders since, as non -

regulated financial institutions, they can make higher risk loans. Some finance companies

specialize in serving specific industries, which allows them to better assess risk and

creditworthiness, and extend loans that more general lenders would not make.


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Another approach used by finance companies is asset-based lending in which a lender

carefully evaluates and lends against asset collateral value, placing less emphasis on the

firms overall balance sheet and financial ratios. An asset-based lending approach can

improve loan availability and terms for small firms with good quality assets but weaker

overall credit. Commercial finance companies also are more likely to offer factoring than

banks.

Trade credit extended by vendors is a fourth alternative for small firms. While trade

credit does not finance permanent or long-term working capital, it helps address short-

term borrowing needs. Extending payment periods and increasing credit limits with major

suppliers is a fast and cost-effective way to finance some working capital needs that can

be part of a firms overall plan to manage seasonal borrowing needs.

Other working capital finance options exist beyond these three conventional credit

sources. Business development corporations (BDCs) are a second alternative source for

working capital loans. BDCs are high-risk lending arms of the banking industry that exist

in almost every state. They borrow funds from a large base of member banks and

specialize in providing subordinate debt and lending to higher-risk businesses. While

BDCs rely heavily on bank loan officers for referrals, economic development

practitioners need to understand their debt products and build good working relationships

with their staffs.

Venture capital firms also finance working capital, especially permanent working capital

to support rapid growth. While venture capitalists typically provide equity financing,

some also provide debt capital. A growing set of mezzanine funds,7 often managed by

venture capitalists, supply medium-term subordinate debt and take warrants that increase

their potential returns. This type of financing is appropriate to finance long-term working

capital needs and is a lower-cost alternative to raising equity.

However, the availability of venture capital and mezzanine debt is limited to fast-growing

firms, often in industries and markets viewed as offering the potential for high returns.


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Government and nonprofit revolving loan funds also supply working capital loans. While

small in total capital, these funds help firms access conventional bank debt by providing

subordinate loans, offering smaller loans, and serving firms that do not qualify for

conventional working capital credit.

Many entrepreneurs and small firms also rely on personal credit sources to finance

working capital, especially credit cards and second mortgage loans on the business

owners home. These sources are easy to come by and involve few transaction costs, but

they have certain limits. First, they provide only modest amounts of capital. Second,

credit card debt is expensive with interest rates of 18% or higher, which reduces cash

flow for other business purposes.

Third, personal credit links the business owners personal assets to the firms success,

putting important household assets, such as the owners home, at risk. Finally, credit

cards and second mortgage loans are not viable for entrepreneurs who do not own a home

or lack a formal credit history.

Immigrant or low-income business owners, in particular, are least able to use personal

credit to finance a business. Given these many limitations, it is desirable to move

entrepreneurs from informal and personal credit sources into formal business working

capital loans that are structured to address the credit needs of their firms.


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Working capital finance may be classified into the following:

Spontaneous source of finance:Finance that naturally arises in the course of business is called as spontaneous financing.

For example: Trade creditors, credit from employees, credit from suppliers of services

etc.

Negotiated financing:

Financing which has to be negotiated with lenders (commercial banks, financial

institutions, and general public) is called as negotiated financing. This kind of financing

may short term or long term in nature.Between spontaneous and negotiated sources of finance, the latter is more expensive and

inconvenient to raise. Spontaneous source of finance reduces the amount of negotiated

financing.

The working capital may be financed in either of the following ways, keeping in

view of accessibility to different sources as well as the cost factor-

Hedging Approach to Working Capital Financing:

Under hedging approach to financing working capital requirements of a firm each asset

in the balance sheet asset side would be off set with a financing instrument of the same

approximate maturity. The basic approach of this method of financing is that the

permanent component of current assets and fixed assets would be met with long-term

funds and the short term or seasonal variation in current assets would be financed with

short-term debt. If the long-term funds are used for short-term needs of the firm, it can

identify and take steps to correct the mismatch in financing.


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Trade credit:

Trade credit refers to the credit extended by suppliers of goods and services in the normal

course of transaction/ business/ sales. It is an informal spontaneous source of finance.

Not requiring negotiation and formal agreement trade credit is free from the restrictions

associated with formal/negotiated source of finance/ credit. It does not involve any

explicit interest charge, however there is an implicit cost of trade credit. As, the cost of

trade credit is generally very high beyond the discount period; the firms should avail of

the discount on prompt payment.

Bank Credit:

It is the primary institutional source of working capital finance in India. Banks in five

ways provide working capital finance:

Cash credit/ Overdraft:

Under cash credit/ overdraft form the banks specify, a pre-determined borrowing/ credit

limit. The borrower can draw/ borrow upto the stipulated credit/ overdraft limit. This

form of bank financing of working capital is highly attractive to the borrowers because,

firstly, it is flexible in that although the borrowed funds are repayable on demand, banks

usually do not recall cash advances/ roll them over and, secondly the borrower has the

freedom to draw the amount in advance as and when required, while the interest liability

is only on the amount actually outstanding.

Loans:

Under this arrangement the entire amount of borrowing is credited to the current account

of the borrower or released in cash. The borrower has to pay interest on the total amount.

The loans are repayable on demand or in periodic installments. They can also be renewed

form time to time. As a form of financing, loans imply a financial discipline on the part

of the borrowers. From the modest beginning in the early nineties, at least 80 % of

MPBF/ credit limit must be in the form of loans in India.


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Bills purchased/ discounted:

Under this arrangement, a bill arises out of a trade sale-purchase transaction on credit.

The seller of goods draws the bill on the purchaser of goods, payable on demand or after

a usance period, not exceeding 90 days. On acceptance of bill by the purchaser, the seller

offers it to the bank for discount/ purchase. On discounting the bill, the bank releases the

funds to the seller. The bill is presented by the bank to the purchaser / acceptor of the bill

on due date for payment. The bills can also be rediscounted with the other banks / RBI.

Term loans:

Under this arrangement the banks advance loans for three to seven years repayable in

yearly or half yearly installments.

Letter of credit:

It is an indirect form of working capital financing and banks assume only the risk, the

credit being provided by the supplier himself. The purchaser of goods on credit obtains a

letter of credit from a bank. The bank undertakes the responsibility to make the payment

to the supplier in case the buyer fails to meet his obligation.

Commercial paper:

Commercial paper is a debt instrument used for short term financing that enables highly

rated corporate borrowers to diversify their sources of short-term borrowings and provide

an additional financial instrument to investors to a freely negotiable interest rate. The

maturity period ranges from three months to one year. Since it is short-term debt, the

issuing company is required to meet dealers fees, rating agency fees, and any other

relevant charges. It is a short term unsecured promissory note issued by corporations with

high credit ratings.

Inter corporate loans and deposits:

In the present corporate world, it is a common practice that the company with surplus

cash will lend other period for short period normally ranging from 60 to 180 days. The

rate of interest will be higher than the bank rate of interest and depending on the financial


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soundness of the Borrower Company. This source of finance reduces the intermediation

of funds in financing.

Public Deposits:

The period of public deposits is usually restricted to a maximum of 5 years at a time.

Thus, this source can provide finance only for short term to medium term, which could be

useful for meeting working capital needs of the company. It is therefore advisable to use

the amounts of public deposits for acquiring assets of long-term nature unless its pay

back period is very short.

Funds generated from operations:

Funds generated from operations during an accounting period increase working capital by

an equivalent amount. The two main components of funds generated from operations are

profits and depreciation. Working capital will increase by the extent of funds generated

from operations.

Deferred tax payment:

Under this arrangement the tax authorities supply the credit. This is created by the

interval that elapses between the earning of the profits of the company and the payment

of the taxes due on them.

Accrued Expenses:

For most firms accrued expenses act as a spontaneous source of short-term finance. One

such example would be that of employees accrued wages. For large firms, the accrued

wages held by the firm constitute an important source of financing. In case of Raymond

Limited Limited, this would amount to wages and salaries of about 6000 employees and

workers.


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VI. STATEMENT OF WORKING CAPITAL

PARTICUL

ARS

For the year ended

Changes In W-cap

Increase Decrease

2004 2009 2010 2004-

05

2009-

06

2004-

05

2004-05

Current

Assets

Inventories29490.66 28756.59

31904.16 3147.5

7734.07

Sundry

Debtors24614.52 22627.67

24846.74 2219.0

7

1986.8

5

Cash and

Bank2675.92 1324.83

2503.17 1178.3

4

1351.0

9

Other

Current

Assets

1887.79 2277.723315.06

389.931037.3

4

Loans and

Advances12122.14 12206.35

14442.0684.21

2235.7

1

Total

Current

Assets

70791.03 67193.1677011.19 9818.0

3

3597.8

7

Current

Liabilities

Acceptances89.75 42.17

45.092.92 47.58

Sundry

Creditors10491.99 11009.37

16427.41517.38

5418.0

4

Advances

against sales449.05 459.52

560.3510.47 100.83


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Due to

Subsidiary

Cos

137.82 207.25177.84

69.43 29.41

Depositsfrom Dealers

and

Agents

4874.25 5134.955318.21

260.7 183.26

Overdrawn

Bank

Balances186.60 484.16

1125.67 297.56 641.61

Other

liabilities1491.91 1689.99 2044.72 198.08 354.73

Interest

accrued but

not due315.87 477.20

528.05 161.3350.85

Provisions 8373.15 5605.176770.84 1165.6

7

2767.9

8

TotalCurrent

Liabilities

26410.39 25109.78 26227.34 1117.56

1300.61

Net Working

Capital

(CA CL)

44380.64 42083.38 50783.85 8700.4

72297.2

6


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VII. INVENTORY MANAGEMENT

Inventory refers to the stock of products a firm is offering for sale and the components

that make up the product. It includes raw materials; work in process (semi-finished

goods). Managing inventory is a juggling act. Excessive stocks can place a heavy burden

on the cash resources of a business. Insufficient stocks can result in lost sales, delays for

customers etc. The key is to know how quickly the overall stock is moving or, put

another way, how long each item of stock sit on shelves before being sold. Obviously,

average stock-holding periods will be influenced by the nature of the business.

Inventory Financing:

As with accounts receivable loans, inventory financingis a secured loan, in this case with

inventory as collateral. However, inventory financing is more difficult to secure since

inventory is riskier collateral than accounts receivable. Some inventory becomes obsolete

and looses value quickly, and other types of inventory, like partially manufactured goods,

have little or no resale value.

Firms with an inventory of standardized goods with predictable prices, such as

automobiles or appliances, will be more successful at securing inventory financing than

businesses with a large amount of work in process or highly seasonal or perishable goods.

Loan amounts also vary with the quality of the inventory pledged as collateral, usually

ranging from 50% to 80%. For most businesses, inventory loans yield loan proceeds at a

lower share of pledged assets than accounts receivable financing. When inventory is a

large share of a firms current assets, however, inventory financing is a critical option to

finance working capital.

Lenders need to control the inventory pledged as collateral to ensure that it is not sold

before their loan is repaid. Two primary methods are used to obtain this control: (1)

warehouse storage; and (2) direct assignment by product serial or identification numbers.


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Under one warehouse arrangement pledged inventory is stored in a public warehouse and

controlled by an independent party (the warehouse operator).

A warehouse receipt is issued when the inventory is stored, and the goods are released

only upon the instructions of the receipt-holder. When the inventory is pledged, the

lender has control of the receipt and can prevent release of the goods until the loan is

repaid. Since public warehouse storage is inconvenient for firms that need on-site access

to their inventory, an alternative arrangement, known as a field warehouse, can be

established.

Here, an independent public warehouse company assumes control over the pledged

inventory at the firms site. In effect, the firm leases space to the warehouse operator

rather than transferring goods to an off-site location. As with a public warehouse, the

lender controls the warehouse receipt and will not release the inventory until the loan is

repaid.

Direct assignment by serial number is a simpler method to control inventory used for

manufactured goods that are tagged with a unique serial number. The lender receives an

assignment or trust receipt for the pledged inventory that lists all serial numbers for the

collateral. The company houses and controls its inventory and can arrange for product

sales. However, a release of the assignment or return of the trust receipt is required before

the collateral is delivered and ownership transferred to the buyer.

This release occurs with partial or full loan repayment. While inventory financing

involves higher transaction and administrative costs than other loan instruments, it is an

important financing tool for companies with large inventory assets. When a company has

limited accounts receivable and lacks the financial position to obtain a line of credit,

inventory financing may be the only available type of working capital debt. Moreover,

this form of financing can be cost effective when inventory quality is high and yields a

good loan-to-value ratio and interest rate.


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Factors to be considered when determining optimum stock levels include:

What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can the company remove slow movers from their product range without

compromising best sellers?

It should be noted that stock sitting on shelves for long periods of time ties up money,

which is not working.

For better stock control, the following may be considered:

Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory.

Apply tight controls to the significant few items and simplify controls for thetrivial many.

Sell off outdated or slow moving merchandise - it gets more difficult to sell thelonger the company keeps it.

Consider having part of the companys product outsourced to anothermanufacturer rather than make it yourself.

Review your security procedures to ensure that no stock is going out the backdoor!

Higher than necessary stock levels tie up cash and cost more in insurance,accommodation costs and interest charges.


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The inventory of a manufacturing concern usually includes:

Raw material Work-in-Progress Finished goods

Inventory management at Raymond Limited

The inventory of Raymond Limited ltd. includes the following:

Raw material Work-in-Progress Stores and Spares Finished goods.


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The table below gives a brief description of all the types of inventory, the components

included, the valuation methods Followed and other relevant details:

Particulars Raw Material WIP Finished Goods

Stores

& Spares

Componen

ts

i. Wool (Australia)

(Fine micron, coarse)

ii. Polyester(Reliance Ltd.)

iii. Viscose (Locally)

iv. Yarn(RSM)(Rajasthan)

v. Camel hair(Locally)

vi. Soya bean fiber

(Locally)

__ Fabric Oils,

Lubricants

etc.

At its peak Fine micron-Julyand

Stored for the entire

year

Wedding andfestive

Seasons.

Stable: April-August

And Dec-Jan.

Valuation

Method SpecificIdentification

WeightedAverage

Weighted Average

Cost or marketvalue

Whichever is less.

Weighted

Average

Value as in

March

2010

(Rs.Crores)

20 68-70

110

(In accordance withAS-2

Including Exciseduty)

8-9

Managed

by

Production

&Planning dept.

Production

&Planning

dept.

Production and

PlanningDept, Warehouse

dept & Marketingdept.

_


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Ratios:

Ratio usedfor evaluation

Formula used Ratio for the financial year

ended

2010 2009 2004

Inventory

Turnoverratio

(Times)

COGS

Average Inventory 1.34 3.432.84

Inventory

Period

(Days)

365

Inventory Turnover Ratio 272 106129

Current

Ratio

Current assets, loans and advances

Current liabilities and provisions 2.33 2.68 2.68

Interpretation:

Inventory Turnover ratio:

This ratio measures the number of times a companys inventory is turned over in a

year. A high turnover ratio is considered good. From working capital point of view, a

company with a high turnover requires a smaller investment in inventory than one

producing the same sales with a low turnover.

This ratio indicates managements efficiency in turning over the companys inventory,

which can be compared with other companies in the same field. It also suggests how

adequate a companys inventory is for its business volume.


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Current ratio:


ability of the firm to meets its current liabilities- current assets get converted into cash

and provide the funds needed to pay current liabilities. A current ratio can be improved

by increasing current assets or by decreasing current liabilities. Steps to accomplish an

improvement include:

Paying down debt. Acquiring a long-term loan (payable in more than 1 year's time). Selling a fixed asset. Ploughing back profits into the business.

A high current ratio may mean that cash is not being utilized in an optimal way. For

example, the excess cash might be better invested in equipment. The higher the current

ratio, the greater the margin of safety, the larger the amount of current assets in relation to

current liabilities, the more the firms ability to meet its current obligations.

The current ratio for Raymond Uco Denim Ltd. was 2.68:1 in 2004. The current ratio

stood at 2.68:1 for the year ended 2009.If we compare current ratio of 2009 with 2004,we

can see that the percentage of the ratio remains same for both years but here cash bank

balance has decreased by 51%. Other current assets have increased by 20.6% compared

with 2004. And provisions has decreased by 33.05%, current liabilities so the current

ratio for both the years has remained constant i.e. 2.68:1.

When one sees the changes in assets, cash and bank balance has increased tremendously

by 79.07 %. This is because company has received prompt payments from debtors. Other

current assets have decreased by 25%.


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The overall decrease in earning of interest and dividend was 70%. The Current

Liabilities, provisions have increased by 22.42 %. This is because the provision made by

the company such as proposed dividend, tax on dividends, retirement benefits and excise

duties has increased by 22%.

But the current ratio has decreased from 2.68:1 (2009) to 2.33:1 in the year 2010.

This is the result of the changes in current assets and current liabilities or changes in the

working capital. Current assets comprises of Inventory, Debtors, Cash & Bank balances,

Other Current Assets and Loans & Advances.

The percentage of inventory held by Raymond Limited

Increased by 10%, which is evident form the decline in the inventory turnover ratio and

the increase in the inventory period. Debtors have increased by 7% compared to the

previous year. That means sales and marketing efforts needs a push because inventory is

pilling up. Inventory has increased and so has the debtors.

Cash and bank balances have increased drastically by 88% in 2010 as in the year 2009.

Attention has to be paid to the increase in the amount of cash balances. Other current

assets have also increased by 45.54%. Loans and advances have also increased by

37.35%. Thus the overall current assets have increased by 17.57%. Dividend and interest

subsidy receivable has increased as compared to the last year.


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VIII. CASH MANAGEMENT

There are four primary motives for maintaining cash balances.

TTrraannssaaccttiioonnss MMoottiivvee -- to meet payments arising in the ordinary course of

business.

SSppeeccuullaattiivvee MMoottiivvee -- to take advantage of temporary opportunities

PPrreeccaauuttiioonnaarryy MMoottiivvee- to maintain a cushion or buffer to meet

Unexpected cash needs

CCoommppeennssaattiinngg mmoottiivvee --Hold cash balances to compensate banks for

providing certain services and loans.

The basic objectives of cash management are:

To meet the cash disbursement needs. To minimize funds committed to cash balances.

These are conflicting and mutually contradictory and the task of cash management is to

reconcile them.

Cash Management Techniques:

The strategic aspects of efficient cash management are:

Efficient inventory management Speedy collection of accounts receivables Delaying payments on accounts payable.

There are some specific techniques and processes for speedy collection of receivablesfrom customers and slowing disbursements.


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Speedy Cash Collections:

Expedite preparing and mailing the invoice Accelerate the mailing of payments from customers Reduce the time during which payments received by the firm remain uncollected Prompt payment by customers Early conversion of payments into cash. Concentration Banking Lock Box System

Slowing disbursements:

Avoidance of early payments Centralized disbursements Float Paying from a distant bank Cheque encashment analysis Accruals (goods and services accrued but not paid for)

Cash Management At Raymond Uco Denim Ltd

For early conversion of its receivables into cash, some of the incentives offered by

Limited for early payment are as under:

Cash discounts for payment made within the due period. Bonuses given to the party vary with the volume as well as value of sales. One-third of advertising expenses of retailers and franchisees are borne by the

company.

Raymond Limited ltd. has invested about Rs. 600 crores (approx.), which stands as their

core investment. In order to diversify its risk the company has invested this amount in

various instruments including Mutual funds, debt instruments, corporate deposits,

equity markets, etc.


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Amongst others alternatives the company prefers to invest an amount of Rs.2-5 crores (or

the adjusted amount after considering the daily requirements) in mutual funds on a daily

basis (temporary investment) and play safe with their core investment amount. Another

reason for this decision is the tax-free dividend income (5%-6%) earned by investing in

Mutual funds.

Raymond Limited Ltd. generally experiences surplus profits. Om Kotak Mahindra

ltd., DSP Meryll Lynch are the chief corporate advisors for the company. However the

Board of Directors takes the final decision. One such decision taken by the B.O.D

includes that the companys investment in the equity market should not exceed Rs.50

crores (keeping the volatility of the stock markets in mind).

Finally, it can be seen that the Average Rate of Return on Investment is 5%-6%. All

the decisions regarding investments and cash management are looked after by the

Finance Department (Corporate division).


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Ratios:

Ratio used

for evaluationFormula used Ratio for the financial year

ended

2010 2009 2004

Cash Ratio Cash & Book Balances + Current

Investments

Current Liabilities

1.73 2.46 2.35

Sales to CashRatio Sales_

Cash

51.34 84.19 37.15

Cash Profit

RatioCash Profit * 100

Sales

17.72 18.68 22.75

Notes:

In all the calculations involving Net Sales, the amount is taken net of excise duties paid.

Net sales = Net sales Excise duty

(Rs. In lakhs)

Particulars 2010 2009 2004

Net sales(Net of excise) 132275.51 111534.44 99431.64


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IX. RECEIVABLES MANAGEMENT (DEBTORS)

Cash flow can be significantly enhanced if the amounts owing to a business are collected

faster. Every business needs to know.... who owes them money.... how much is owed....

how long it is owing.... for what it is owed.

Late payments can erode profits and lead to bad debts

Slow payment has a crippling effect on business. If you don't manage debtors, they will

begin to manage your business as you will gradually lose control due to reduced cash

flow and, of course, you could experience an increased incidence of bad debt.

The following measures will help manage your debtors:

Have the right mental attitude to the control of credit and make sure that it getsthe priority it deserves.

Establish clear credit practices as a matter of company policy. Make sure that these practices are clearly understood by staff, suppliers and

customers.

Be professional when accepting new accounts, and especially larger ones. Check out each customer thoroughly before you offer credit. Use credit agencies,

bank references, industry sources etc.

Establish credit limits for each customer... and stick to them. Continuously review these limits when you suspect tough times are coming or if

operating in a volatile sector.

Keep very close to your larger customers. Invoice promptly and clearly. Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get

too large or too old


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Debtors due over 90 days (unless within agreed credit terms) should generallydemand immediate attention. Look for the warning signs of a future bad debt.

For example.........

Longer credit terms taken with approval, particularly for smaller orders. Use of post-dated cheques by debtors who normally settle within agreed terms. Evidence of customers switching to additional suppliers for the same goods. New customers who are reluctant to give credit references. Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many reasons and

therefore put on the long finger because they convince themselves there is something

more urgent or important that demands their attention now. There is nothing more

important than getting paid for your product or service. A customer who does not pay is

not a customer.


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Here are a few ideas that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the

remainder. It lessens the problem.

When asking for your money, be hard on the issue - but soft on the person. Don'tgive the debtor any excuses for not paying.

Make it your objective is to get the money - not to score points or get even.Accounts Receivable Financing:

Some businesses lack the credit quality to borrow on an unsecured basis and must pledge

collateral to obtain a loan. Loans secured by accounts receivable are a common form of

debt used to finance working capital. Under accounts receivable debt, the maximum loan

amount is tied to a percentage of the borrowers accounts receivable. When accounts

receivable increase, the allowable loan principal also rises. However, the firm must usecustomer payments on these receivables to reduce the loan balance. The borrowing ratio

depends on the credit quality of the firms customers and the age of the accounts

receivable.

A firm with financially strong customers should be able to obtain a loan equal to 80% of

its accounts receivable. With weaker credit customers, the loan may be limited to 50% to

60% of accounts receivable. Additionally, a lender may exclude receivables beyond a

certain age (e.g., 60 or 90 days) in the base used to calculate the loan limit.

Older receivables are considered indicative of a customer with financial problems and

less likely to pay. Since accounts receivable are pledged as collateral, when a firm does

not repay the loan, the lender will collect the receivables directly from the customer and


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apply it to loan payments. The bank receives a copy of all invoices along with an

assignment that gives it the legal right to collect payment and apply it to the loan. In some

accounts receivable loans, customers make payments directly to a bank-controlled

account (a lock box).

Firms gain several benefits with accounts receivable financing. With the loan limit tied to

total accounts receivable, borrowing capacity grows automatically as sales grow. This

automatic matching of credit increases to sales growth provides a ready means to finance

expanded sales, which is especially valuable to fast-growing firms.

It also provides a good borrowing alternative for businesses without the financial strength

to obtain an unsecured line of credit. Accounts receivable financing allows small

businesses with creditworthy customers to use the stronger credit of their customers to

help borrow funds. One disadvantage of accounts receivable financing is the higher costs

associated with managing the collateral, for which lenders may charge a higher interest

rate or fees. Since accounts receivable financing requires pledging collateral, it limits a

firms ability to use this collateral for any other borrowing. This may be a concern if

accounts receivable are the firms primary asset.


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Receivables (Debtors) Management At Raymond Uco DenimAt RaymondUco Denim Ltd the sales process is as follows:

Raymond Uco Denim Ltd has one agent for each area (state). These agents are the

delcredere agents, and receive commission of up to 2.5 % to 4% (approx). The amount of

commission however varies according to the quality as well as the quantity of the goods.

Under these agents are the various dealers, wholesalers, retailers and franchisees.

The amount invested by the wholesalers is 4 crores and above, therefore they are given

more credit. Whereas, franchisees invest 1 to 3 crores. Retailers on the other hand invest

less as compared to wholesalers and franchisees. Retailers pay to the company either

directly or through the bank dealers (250 in number). In case of direct payments the

company keeps 12.5% as advance deposits. In case of payment through bank dealers

factoring service is being used.

The bills would be earlier discounted with the various banks. These banks included

amongst others, a few Nationalized Banks, UTI, Standard Chartered, Bank Of India, etc.

AGENT (ONE)

DEALERS

WHOLESELLE

RS RETAILER

FRANCHISEES


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The payments are usually in the form of demand drafts or cheques. Almost 50 % of these

payments are received through CMS (Cheque Management Services), and as this facility

is obtained free of cost from UTI bank the company is availing it to its maximum

possible benefit. This definitely very much in favors of the company as it reduces the

delay in collections, as it would otherwise take at least 10 days for the transactions

without the facility.

The company has now started using the factoring service.

The main factoring agents with which the company deals include:

HSBC Bank Standard Chartered Bank UTI Bank. Kotak Mahindra Bank

At present Raymond Uco Denim Ltd is using the factoring services for its 15 parties,

which are as follows:

B.R. Textiles Motilal Vijaysain Pokarna Fabrics Pvt. Limited R.S. Textiles Woollen Collections Shyam Brothers Kamdev Pushpak Rahul Textiles Varun Textiles Shantilal Raichand Sha Shantilal Manshalal Abhisekh Enterprises R. R. Apparels


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The company uses with recourse as well as the without recourse factoring facility

(single channel financing) .The rates vary with the type of facility i.e. with or without

recourse as well they vary with respect to the different banks. However these rates are

recovered entirely from the various agents and dealers. Thus they dont burden the

company at all .The rates are roughly around 6.25 % for with recourse and varies from 10

% to 16 %.

The services without recourse (single channel financing) are availed from the

following banks:

ABN AMRO Bank, CENTURION Bank, HSBC Bank, ICICI Bank.

The credit period given by Raymond Uco Denim Ltd [(as not due)- for MIS

purpose]:

Retailers - 16 days

Franchisees - 45 to 60 to 90 days.

Wholesalers - 60 to 90 days

The provision regarding bad debts is not thought as very essential as the company as

never had any bad debts till date; this is attributed to the credit policy as well as the

collection policy of the company. The company never writes off any party or any amount

as bad, it tries of every possible measure to recover their payments, when not received

directly the company adjusts for the same from the agents commission. The receivables

overdue are against invoices as well as against debit notes. When the overdue is against

the invoices aggressive actions are take by the company. The company withholds

commission for its habitual defaulters. However on an average the credit given is for 104

days.


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Collections Disbursements

Marketable securities

Investment

CONTROL THROUGH INFORMATION

REPORTING

= Funds Flow

= Information Flow


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Ratios:

Ratio used

for evaluationFormula used

Ratio for the financial year

ended

2010 2009 2004

Debtors

Turnover

Ratio

(times)

Net Sales

Avg. Debtors

5.50 4.72 3.70

Credit Period 365

Debtors Turnover Ratio

66 77 99

Interpretation:

Debtors Turnover Ratio:

The debtors turnover ratio has been gradually increasing over the years from 2004 to2009, from 3.70 to 4.72 respectively. This indicates that the credit period has declined

from 99 days (2004) to 77 days (2009). This implies that for the year ended 2009 debtors

on an average are collected in a period of 77 days. A turnover ratio of 4.72 (2009)

signifies that debtors get converted into cash (4.72) approximately 5 times in a year.

Raymond Uco Denim Ltd is a cash rich company. The liberal policy is adopted to

augment its sales thereby not losing its key customers. It is suggested that the company

should adopt stringent credit practices for its debtors thereby, having more funds at its

disposal for investments as well as for daily operating requirements and thus saving on

the interest costs. In order to keep up with the industry credit standards Raymond Uco

Denim Ltd has been gradually reducing its credit period.


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X. CONCLUDING OBSERVATIONS

Every organization should closely watch the movement of current assets and current

liabilities after certain fixed intervals to maintain healthy working capital in the

organization. It helps to keep a record of cash management, debtors management and

inventory management, which forms a major part of working capital. Managing

inventory is a juggling act. Excessive stocks can place a heavy burden on the cash

resources of a business. Insufficient stocks can result in lost sales, delays for customers

etc. The key is to know how quickly the overall stock is moving or, put another way, how

long each item of stock sit on shelves before being sold.

For Raymond Uco Denim Ltd the inventory turnover ratio has increased from 2.84

times (2004) to 3.43 times (2009), but showed a major decline in the year 2009-06.

In the year 2010 the inventory period has increased tremendously from 106 days in 2009

to 272 days in 2010. This is also supported by the decline in the inventory turnover ratio

to a meager of1.34 times in 2010.

Since the company is a textile industry therefore the inventory varies according to

seasonal and festive demands. However, it is seen that as the inventory carrying cost is

reducing because of the falling interest rates, the company may stock more if desired.

There are no norms or standards followed by the company for the raw material, in

process and finished goods inventory due to quantity restrictions and price fluctuations.


ability of the firm to meets its current liabilities- current assets get converted into cashand provide the funds needed to pay current liabilities. The current ratio has decreased

from 2.68:1 (2009) to 2.33:1 in the year 2010.This is the result of the changes in current

assets and current liabilities or changes in the working capital. Current assets comprises

of Inventory, Debtors, Cash & Bank balances

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