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ANALYSIS OF WORKING CAPITAL
A Case Study
Of
DCM Shriram Consolidated Ltd., Kota
D I S S E R T A T I O N
Submitted in lieu of paper XIII (optional group)
Of the M. Com. Final Examination
2005 – 2006
University of Kota
Under the supervision of:- Submitted by: -
Prof. Dr. Gopal Dhaker Madhu Sharma
(Head) M. Com. Final (ABST)
Deptt. of ABST
Govt. J.B.D. Girls College,
Kota (Raj.)
A C K N O W L E D G E M E N T
I with to acknowledge the help of all those people, who have provided me with
information, guidance and other help during my dissertation period . Without their help, it
would have been difficult for me to have reached this stage of completion of my dissertation
work.
It is indeed a great privilege to express my deep regards, profound sense of
gratitude and sincere thanks to my revered guides Prof. Dr. Gopal Dhaker (Head) Deptt. of
ABST, Lect. Govt. J.D.B. Girls College, Kota for bestowing their noble guidance, invaluable
advice, germinating interest and inspiring hard work throughout the course of my work.
I would also like to thank a large number of people who listened patiently to my
queries and helped me find the answers.
I know that in this process I might have missed a few names to whom it will be
unpardonable if I do not thank so I would like to express my sincere thanks gratitude to all
those who have helped me in presenting this dissertation.
Last, but not the least to mention in this course of my work are my parents whose
blessing and good wishes remained always with me and I am also thankful to my friends. On
this occasion of submission of this dissertation, I wish to pay deep regards to my parents.
(MADHU SHARMA)
P R E F A C E
Management of working capital plays a significant role in the organization as
the blood plays its role in the human body .It not only provides energy to the business but
simultaneously it is essential for the success of any business organization management of
working capital has close implication with the two important factor’s that judge the overall
success of the business profitability and solvency. Now–a-days, the major problem faced by
every business organization is of finance because of drastic changes in the size and scale of
business and increased competition, which results in the increase in credit business and
shortage of financial brackets. In such an environment, the working capital management has
occupied one of the key position in the business management.
In our study, our main objective is to reflect our attention on the position of
working capital in DACL Ltd. and discuss various aspects of working capital management in
the company.
The DSCL Ltd. is leading company in the field of fertilizer, Cement, PVC resigns
& caustic soda. Our study is grouped under seven chapters from 2000-2001 to 2004-
2005Discusses various aspects of the working capital management and effects there of on
ultimate performance of the company.
It gives me great pleasure to acknowledge my indebtness to all those who have
helped me completing this project and bringing it out in it’s present form. I am very greatful
to my supervisor under whose kind supervision and able guidance, this work has completed.
(MADHU SHARMA)
C E R T I F I C A T E
This is certified that MADHU SHARMA student of M.Com. Final (ABST)
has written the dissertation entitled “Analysis of Working Capital – A Case
Study of DCM Shriram Consolidated Ltd.,Kota” under my supervision. This
is her own work and is being submitted in lieu of optional paper XIII of M.Com.
Final Examination.2005-2006 of the Kota University, Kota.
(PROF. DR. GOPAL DHAKER)
C O N T E N T S
_____________________________________________________________________
S. NO. CHAPTERS PAGE NO.
1. Company Profile
2. Working Capital Finance
3. Inventory Management
4. Working Capital Management
5. Management of Cash
6. Management of Receivables
7. Conclusion and Suggestions
CHAPTER-1
C O M P A N Y P R O F I L E
Major Unit of Subsidiary Company
Introduction to Kota Unit
The Essential DSCL
The Business
Roll of Honour
Community Development
Business Team
CHAPTER-1
COMPANY PROFILE
DCM Shriram Consolidated Limited
A leading Indian organization, DSCL is aspires to become a world class enterprise that
is responsive to change, outward-looking, competitive, delivers superior quality at low cost
with focused business and robust financials.
DSCL has been built on core values of being caring, credible and fair with all
shareholders, committed to continuous improvement; and being a responsible corporate
citizen.
DSCL is a multi location conglomerate based New Delhi; India. It is diversified
Industrial house with annual turnover above Rs. 10 billion. DSCL has a long history of
accessing & employing the best technologies for its projects & has worked successfully with
renowned international & domestic technology partners. As a learning organization DSCL
has worked regularly with national & international consultant of reputed, in diverse area of
business strategy, quality, organizational development etc.
In an increasingly global business environment, DSCL region is to strengthen it’s
commodity business while moving to “Value added” & “Knowledge based” product &
services in the area of its operations.
DSCL has built an enabling work culture and beliefs in releasing human energy within
the organization through participation, teamwork, professionalism, entrepreneurship,
openness and upholding human dignity. The company is committed to enhancing the employ
ability of individuals through competence building via continuous training and development
activities.
DSCL believes in a pro-active industrial relation policy and has an enviable track record
in this field. Employ welfare is given outmost priority and is institutionalized across the
organization.
DSCL has initiated several management initiatives in the recent past for upgrading the
organization, the major one being institution building quality management
ISO9000certification and implementation of SAP R/3 ERP package in information
technology.
DSCL strongly believers in socially responsible activity as a responsible corporate citizen.
DSCL has met significant contribution to the society in the field of environment health care,
family planning, education, cultural heritage & rural development & promoting sports.
Several prestigious institutions of higher learning & arts of DSCL are Lady Shriram College,
Delhi Schools of Economics, Shriram Centre for performing arts etc.
MAJOR UNITES OF SUBSIDIARY COMPANY ARE
1. Shriram Fertilizer& Chemicals, Kota ( Raj.).
2. Shriram Cement Workes, Kota (Raj.).
3. Swatantra Bhart Mills & DCM Silks Mils (Dehli).
4. Shriram Alkali &Chemicals, Bharuch (Gujarat).
5. Shriram Environment & Allied Services.
6. Ghaghagra Suger, Lakshmipur Kehri (U.P.).
7. Shriram Bisoeed Limited, Hyderabad (Andhra Pradesh).
8. DSCL ESCO Limited, New Dehli.
9. Shriram Polytech Ltd.
10. DCM Shriram Credit and Investment Ltd.
11. DCM Shriram International Ltd.
12. DSCL Energy services Co. Ltd.
13. DCM Shriram Infrastructure Ltd.
14. DCM Shriram Power Supply Ltd.
15. DCM Shriram Aqua Foods Ltd.
INTRODUCTION TO KOTA UNIT
The vast fertilizer and chemical complex of DSCL at Kota Raj., Shriram fertilizer
and chemicals and shriram Cement works a it’s flagship venture. Spread over 1000 acres,
the complex was initiated in 1963.The unit expanded over the years, to build a name for
itself with its products. The unit is run with its high degree of the professional and
technical competence and has grown at speedy pace, keeping with the technological
advances in respective fields. This fertilizer plant at kota most energy efficient naphtha
based fertilizer plant in India.
After Promoting Sports
DSCL has wide spread marketing/distribution n/w for customer satisfaction.
Extensive and specialized services provided to farmers under Shriram integrated Rural
Development Project (SIRDP). All these have given Shriram Brand ahigh market
acceptance.
SHRIRAM UREA –
An integral part of the grain sector, Shriram Urea helps to yield the rich harvest for
the farmers in Raj., Punjab,Haryana & U.P. this plant was setup in 1969 in collaboration with
Halder Topsoe and Stamicarbon through the Chiyoda Corporation . The current production is
4,00,000 MT urea per annum, it’s reflect tremendous technical strength and dedicated human
resource in it’s 110% operating efficiency. It requires 2,00,000 MT Naphtha as raw material
per annum .
CHEMICAL AND CHLOR ALKALI -
The combined production capacity of the Chlor Alkali plants at Shriram Fertilizer &
Chemicals, Kota and Shriram Alkali & Chemicals, Jhagadia – 93,000 MT per annum –Makes
DSCL one of the largest Chlor – Alkali (Caustic Lye , Liquid Chlorine & Caustic Soda
Flakes) manufacturers in India. One of the largest manufacturers of Chlor Alkali in the
country, comprises of two pants :
SAD, JHAGADIA, GUJARAT -
Latest member cell technology
Located in the chemical market of India
20 MV captive power plant
SFC, KOTA , RAJASTHAN -
Mercury cell technology with metal Anode
Anode Cathode Protection device for improved efficiency
Power Supply for 75 MW captive power plant
Mercury Bearing Effluent Treatment System ensuring pollution free operations.
CAUSTIC SODA PACK –
Caustic is an extremely important chemical used in the manufacture of paper, aluminum
and variety of industrial products. The DSCL caustic soda plant was set up in collaboration
with Shin Etsu and has seen a regular induction of modern technology and expansion.
COMMISSIONED –
1963 at Kota
1969 at Jhagadia (Gujarat)
PRODUCTION –
43,000 MT/ Annum (At Kota)
50,000 MT/ Annum (AT Jhagadia)
CAPACITY –
12% (Kota)
100% (Jhagadia)
COLLABORATION –
Shin – Etsu Chemical Co. Ltd., Japan
Asahi Chemical Industry Co. Ltd., Japan
Betrams, Switzerland
RAW MATERIALS REQUIREMENT (ANNUAL) –
Salt 70,000 MT Kota
Jagadia
PVC PLANT –
Computer process controlled plant only manufacture five grade of resins comprising of
two electrical furnaces of 12 MVA and 20 MVA rating.
Calcium Carbide : For captive conception
PVC Resin : For specific application, manufacture five
specialized,grade of high and low k-value resin ranging
from 56 to 71.
PVC Compound : manufactures a wide range of high – tech and
customized compounds.
SHRIRAM PVC RESIN AND COMPOUND
COMMISSIONED
1964 at Kota (Raj.)
PVC RESIN PRODUCTION-
34000 MV / Annum
CAPACITY UTILIZATION-
100%
COLLABORATION/TECHNOLOGY-
Shin-Etsu Chemicals Co. Ltd., Japan
Kaneka, Japan
PVC COMPOUNDS PRODUCTION/CAPACITY-
Up to 12000 MT / Annum customized production
COLLABORATION/TECHNOLOGY-
Zeon Kasei Co.Ltd., Japan
RAW MATERIAL REQUIREMENT (ANNUAL)-
Charcoal/Coke/SLV etc. 80,000 MT
CARBIDE PLANT-
The carbide plant was commissioned in 1963in collaboration with Chiyoda of Japan of
manufacture Calcuim Carbide and Acetylene. Acetylene in turn is used to manufacture PVC.
The plant has been recently modernized with the state of art technology for product quality,
efficiency and environment safety in technical collaboration with Mannesman. A by product
of the process, Calcium Hydroxide is used by the company for manufacturing of cement.
CEMENT-
Shriram cement, a product with a difference from DSCL, Commissioned in 1986, this plant
has a production capacity of 2,00,000 MT per annum and operates at the high utilization
levels. A unique technology from Lafarge of France, for conversion of Calcium Hydroxide to
Portland cement in a wet process totally computerized control and backed by X-Ray
analyzes, gives consistent good quality. Making Shriram cement a premium brand in the
market. A walk through the cement plant at Kota can indeed prove to be very refreshing as
the cement plant works in a dust free environment due to large number of modern emission
control equipment – a measure taken for cleaner environment.
FEATURES-
Only plant in India converting a waste product, Calcium Hydroxide slued, into
high grade cement.
Pioneer in introducing 43 grade cement in India.
Computer process controlled plant
Electrostatic Precipitator (ESP) : Pollution control device leading to better
efficiency and pollution free environment.
PRODUCTION-
OPC – 43 Grade PPC
COMMISSIONED-
1987 Kota (Rajasthan)
PRODUCTION-
2,71,000 MT / Annum
CAPACITY UTILIZATION-
135%
COLLABORATION / TECHNOLOGY-
Lafarge Coppee Lavalin, France
Holder bank, Switzerland
MARKETING NETWORK-
45 wholesalers and dump agant
900 dealers
RAW MATERIALS REQUIREMENT (ANNUAL)-
Lime Stone
4,25,000 MT
POWER-
Power is the most important infrastructure for growth and industrial development. To
ensure a steady supply of power for critical areas and have smoother, more efficient
operation, two captive thermal power plant with a generating capacity of 45 Mw were set up
in collaboration with Mitsubishi, foster wheeler and Stall. These plants run at high capacity
utilization and are fitted with electrostatic precipitators, which help in emission control-as
DSCL’s continuing commitment to protect environment.
Power growth – towards Self – Reliance and cost reduction.
75 MW captive Thermal Power Plant at Kota.
20 MW diesel power plant at Jhagadia
Meeting the need of complex – reduces dependence on state power supply. Consultancy
proven ability in ; erection, commissioning and operation of power plant.
COMMISSIONED-
1969 at Kota (Rajasthan) 35 MW
1988 at Kota (Rajasthan) 10 MW
1994/95 at Kota ((Rajasthan) 30 MW
1997 at Jagadia (Gujarat) 20 MW
2000 at Kota (Rajasthan) 10.3 Mw
POWER GENERATION-
85.5 MW (Kota)
20 MW (Jagadia)
CAPACITY UTILIZATION-
Over 90% (Kota)
Over 90% (Jagadia)
COLLABORATION / TECHNOLOGY-
Mitsubishi Heavy Industries, Japan
Siemens, Germany
Wartsila, India/ Finland
RAW MATERIAL REQUIREMENT (ANNUAL)-
Steam Coal
Diesel
5,50,000 MT
PLASTICS-
A world of unlimited demand has opened its door to a material of future PVC. With its
varied used in agriculture, water transportation, health care, etc. PVC is at the industrial
forefront with great potential for the coming years. The PVC plant was commissioned in
1964 in collaboration with Shin-Etsu with a production capacity of 6600 tones per year,
which has today grown to 34000 tones. Modernized collaboration with Kanegafuchi Japan,
the plant operate at over 100% capacity utilization. Today our range of five Shriram PVC
Resins, each a special product for specific application is manufacture to meet the requirement
of our image & quality conscious customer.
THE ESSENTIAL DSCL
MULTI – BUSINESS PROXY-
Rs.920 crores assets company (approximately US $ 200 millions)
A board presents in the growing agri , plastic and chemicals business
One of the lowest cost manufacturers of its products
Reinforced by a vertical, lateral and backward linkage across its product lines
Ventured into value-added businesses for future growth
MANAGEMENT –
Headed by Mr. Ajay Shriram and Mr. Vikran Shriram
A strong and independent Board of Directors
Organized across Strategic Business Units-managed independently by professionals.
Continuously enriched pool of skills and competences
PERFORMANCE –
Revenue of Rs.1,410 crores, a 28 % growth over 2002-03 a 35 % increased
Merger of the sugar business into DSCL
ETHOS -
Excellence in financial performance
Building a world-class organization
Long- term relationships with all stakeholders
Strong governance with corporate best practices
Strong human resource practices, emphasis on Team Excellence
PRODUCTS AND TREIR LOCATION MANUFACTURE
Location Products
Kota, Rajasthan (1) Fertilizers, Chlor-alkali, Stable Bleaching Powder, Calcium Carbide, PVC resin, PVC compounds, Cement and PVC profits.
Bharuch, Gujarat (2) Chlor-alkali
Ajbabur, Utter Pradesh (3) Sugar
Rupapur, Utter Pradesh (4) Sugar
Hyderabad, Andhra Pradesh (5) Hybrid seed
Vietnam and Philippines (under a joint venture)
Gurgoan, Haryana (6) Innovative Polymer Application Centre
Tonk, Rajasthan (7) Yarn
Bhiwadi, Rajasthan (8) Fenesta Windows and Doors systems
THE BUSINESS
DSCL’s business and their
Progressive migration along the value
Chain are marked by the transition
From commodity businesses to
Knowledge services.
Commodity businesses
Value-added businesses
Knowledge and service businesses
The progress on the value chain is captured by the movement from the inner
circle to the outer one – from commodity to value-added businesses.
Revenue Analysis
25%
44%
14%
17%
Agri Plastics Chemicals Others
ROLL OF HONOUR
Roll of honour –
1. Fertilisers 1. Caustic soda 1. PVC resins 1. Energy services
(ESCO)
2. Suger 2. Cholrine 2. Polymer compounds 2. Cement
3. Hybrid seeds 3. Hydrochloric acid 3. UPVC Window and 3. Textiles
Door systems
4. Agri-inputs-trading 4. Bleaching powder 4. Calcium Carbide 4. Development
5. Agri-retail
1993-94 NPC Runner up Award for, “Best Productivity Performance in Cement Industry”
1994-95 NPC Award for, “Best Productivity Performance in Cement Industry”
1995-96 FAI’s Runner Up Award for, “Best Production Performance of Nitrogenous
Fertilizer Unit”
1996-97 NPC Award for, “Second Best Productivity Performance in Fertilizer Industry”
1998-99 SAP R-3/SAP Star Customer Award 1998’
1999-0 NCCBM Award for, “Best Improvement in Thermal Energy Performance in
Cement Industry”
2000-01 National Award for Energy Efficiency-SFC Kota & SAC Bharuch.
2001-02 National Award for Oil Conservation-SAC Bharuch.
2002-03 First TERI( TATA Energy Research Institute ) Award for environment
conservation-
SAC Bharuch.
2002-03 2nd Rank in Over all environment Rating of the Indian Caustic-Chlorine Sector By
Center for Science & Environment (CSE), Under Their Green Rating Project.
2002-03 National Award for Oil Conservation By Ministry of Petroleum & Natural
Gas,Govt. of
India for Unique and Innovative Efforts in Energy Conservation for SAC Bharuch.
2002-03 National Award To DSCL ESCO’ as Best Esco Company in India By Ministry of
Petroleum & Natural Gas Govt. of India.
2003-04 National Award for Pollution Control & Rajiv Gandhi Environment for Clean
Technology For SAC Bharuch
2004-05 National Award for, “Public Recognition of Outstanding Activity for Prevention &
Control of Pollution”
COMMUNITY DEVELOPMENT
AGRICULTURE EXTENSION ACTIVITIES –
Shriram Krishi Vikas Kendras (SKVKs) impart Scientific knowledge to farmers across
subjects like crop cycles and Harvesting, Helping them achieve richer harvests and profitable
returns.
WATER TO THE PEOPLE -
DSCL is countering the dearth of water in arid terrains through the digging of bore wells,
the installation of submersibles pumps and the construction of water storage helped finance
mare than 650 wells.
INFRASTRUCTURE –
DSCL has partnered with the local community to build vast stretches of roads benefiting
the entire region in and around its cane-growing areas.
EDUCATION –
DSCL continues to support education activities by running various schemes at
primary and professionals levels with a special focus on protecting the future of the girl child.
The company, around its sugar operations in UP, has invested in Sanskar Pariyojna,
and integrated education program, in collaboration with the Vinobha Bhave Trust to inculcate
Shiksha (education), Swasth (health), Safaai (cleanness) & Swabhiman (self-reliance) in
individuals.
It deputed trainers and officers across ten villages covering a population in excess of
ten thousand.
In kota, DSCL has instituted scholarship programmers that encourage students to
peruse advanced academic studies. The infrastructure of a numbers of schools in the plants’
vicinities has been strengthened through the introduction of basic facilities, including safe
drinking waters. The company has build a school at Nimoda Mines for students up to class
ten.
In Bharuch, it has funded a degree college and has instituted a scholarship
programme that touches several villages around its facilities, with 25 students being eligible
annually.
DSCL responded to earthquake-torn, kutch region of Gujarat and re-built a school
there.
SPORT –
DSCL launched the DSCL Open National Tennis Championship to motivate sports persons
and help India curve a niche in the international tennis arena. In appreciation of the
companies ability of organized a tournament of such a stature, The game was awarded the
National Status in 1996. The prize money, the largest in its category for a National
tournament, comprehensively covers the means, ladies, boys and girls (under 18,16 & 14
respectively) categories.
HEALTH –
DSCL helped euip the Maharao Bhim Singh Hospital at Kota with a state of the art
intensive care unit called the Shriram ICU’ and Private wards called “The Shriram Wards “.
The company encourages and promotes family planning as a national imperative, running
incentive schemes in the villages surrounding its facilities. It has also provided medical
assistance consulting, medicines and campus-to select villages in eastern Utter Pradesh and
conducted medicals camps in villages around Kota.
BUSINESS TEAM
BOARD OF DIRECTORS Shri Ajay S. Shriram
Chairman & Senior Managing Director
Shri Vikram S. Shriram
Vice- Chairman & managing director
Shri Rajiv Sinha
Dy. Managing Director
Shri Ajit S. Shriram
Director (Sugar)
Dr. S.S. Baijal
Shri Arun Bharat Ram
Shri Pradeep Dinodia
Shri Vimal Bhandari
Shri Sunil kant Munjai
Shri D. Sengupta
Shri O.V. Bundellu
IDBI Nominee
Shri S.L. Mohan
GIC Nomiee
Shri S.N. Chaturvedi
UTI Nomiee
COMPANY SECRETARY Shri V.P. Agrawal
AUDIT COMMITTEE Dr. S.S. Baijal
Chairman
Shri Arun Bharat Ram
Shri Pradeep Dinodia
Shri O.V. Bundellu
IDBI Nominee
BANKERS Punjab National Bank
Bank of Baroda
Oriental Bank of Commerce
State Bank of India
AUDITORS M/s. A.F. Ferguson & Co.
New Delhi
REGISTERED OFFICE 6th Floor, Kanchenjunga Building,
18, Barankhamba Road,
New Delhi – 110 001
Tel No.: (91) 11-23316801
Fax No.: (91) 11-23357803
E-mail: [email protected]
.
CHAPTER – 2
W O R K I N G C A P I T A L F I N A N C E
Introduction
Trade Credit
Bank Credit
Short Term borrowing and current provisions
Long Term Sources
Financing of Working Capital in DSCL Ltd.
CHAPTER-2
INTRODUCTION
The need for financing arises mainly because the investment in working capital / current
assets, that is, raw materials, work / stock-in-process, finished goods and receivable typically,
fluctuates during the year. Although long term funds partly finance current assets and provide
the margin money for working capital, such assets/ working capital are virtually exclusively
supported by short – term sources. Let us discuss to sources of Working Capital in details.
Main sources of Finance the Working Capital are –
Trade Credit
Bank Credit
Current provisions and non bank short term borrowing, and
Long Term Sources comprising Equity Capital and Long Term borrowing.
The relative importance of any of these sources vary from country to country and from
time to time depending on prevailing environment, in India trade Credit and Short Term Bank
Borrowing are the primary source of Working Capital.
TRADE CREDIT
Trade Credit is the important sources of the finance inventories. As trade credit is
available in the from of goods or services only, this facility can be utilized only finance
inventories and cannot be utilized for any other purpose. One of the main advantages of trade
credit is that it is available without any cost. Second it is also easily assessable. It is available
without any formality or fulfillment of documents. Any business irrespective of its size can
avail this facility very easily. Because trade credit is one of the main weapons of capture the
market. Wherever in any industry deficiency in short term borrowing anses, it is compensated
by trade credit. Means it is the main source of finance, available to a business concern. Now
the question arises to what extent a firm exploit the source. Firm may avail to facility till
there is no loss of discount. Trade credit can be used for any other purpose inventories, if
inventory turnover period is shorter than the credit period.
BANK CREDIT
The other primary source of working capital is the bank borrowing. Credit
arrangement from bank may be in different way’s– such as loan arrangements where entire
amount is granted as from loan and is rebate in instalments with interest. Overdraft
arrangements where the borrower can over drop to certain limit at the time of necessity can
repay as per his convenience. Cash credit arrangements- when bank sanctions a limit up to
which borrower can drop the needed amount.
It is provided generally against pledge or hypothecation of goods. Bills purchased & bills
discounted arrangements introduced in 1970 in India, now the RBI envisages to practice as it
certain advantage over the disadvantages of cash credit. Cash credit it many thimes has no
links with production. Second many times there is double finance over the same goods- such
as goods purchased on trade credit and hypothecated to bank under cash credit arrangements.
Under this arrangement before discounting the bill, the bank satisfies itself about the credit
worthness of the drawer and geneuineness of the bill. To popularise the schemes, the discount
rates are fixed at lower rates than those of cash credits. The discounting bankers ask the
drawer of the bill (i.e. seller of goods) to have his bill accepted by the drawees (buyers ) bank
before discounting it. The letter grants acceptance against the cash credits limit, earlier fixed
by it. On the basis of the borrowing values of stocks. Therefore the buyer who buy’s goods
on credit cannot use the same goods as the sources of obtaining additional bank credit.
MODE OF SECURITY:-
Banks provide credit on the basis of the following modes of security.
HYPHOTHICATION –
Under this mode of security, the banks provide credit of borrowers against security of
movable property, usually and inventory of goods. The goods hypothecated, however
continue to be in a possession of the owner of these goods (i.e., the borrower).
Hypothecation facility is normally not available to new borrowers.
PLEDGE –
Pledge, as a mode of security, is different from hypothecation in that in the former,
unlike in the latter, the goods which are offered as security are transferred to the
physical possession of the lender. An essential prequisite of pledge, therefore, is that
the goods are in the custody of the bank. He would be responsible for any loss or
damage if he uses the placed goods for his own purposes. In case of none-payment of
the loans, the bank enjoys the right to sell the goods.
LIEN –
The term ‘lien’ refers to the right of a party to return goods belonging to another party
until a debt due to him is paid. Lien can be of two types: (i) particular lien, and (ii)
general lien. Particular lien is a right to retain goods until a claim pertaining to these
goods fully paid.
MORTGAGE –
Mortgage is, conveyance of interest in the mortgaged in the property. The mortgage
interest in the property is terminated as soon as the debt is paid. Mortgages are taken
as an addition security for working capital credit by banks.
CHARGE –
Where immovable property of one person is, by the act of parties or by the operation
of law, made security for the payment of money to another and the transaction does
not amount to mortgage, the latter person is said to have a charge on the property and
all the provisions of simple mortgage will apply to such a charge. Bank may demand
any of the above securities, depending on the nature of advances or credit facilities
availed. Generally in the case of advanced of movable goods required essentially for
production activity are hypothecated to bank such as advanced for stock of inventory.
Whereas the assets which can be parted with the borrower-such as excess inventories
bills etc. are pledged or bank has line over those securities. Fixed assets as land,
building, plant etc. are mortgaged or bank have charge over such securities through
documents of transfer.
SHORT TERM BRROWING AND CURRENT PROVISIONS: -
Internal Financing and Short Term borrowings are also very important and prevalent
of financing working capital. Internal Financing includes Retainations, Surplus and
Reserves. Retained earning are the earnings of corporation which is not distributed among
the shareholders. It is also known as ploughing back of profits. Ploughing back of profits
has become popular because-it is an in expensive method of acquiring funds. It avoids
taxation leakage and it stimulated high growth rate. As an organization has to maintain
high solvency standard, retention of earning, helps in this task. Retained earning may
represents in the high stock of inventories or may used to issue bonus shares. It may be
used to finance the firms expansion plans, replace obsolete machinery or plants, redeem
debts or financing working capital. Retained earning is very much helpful during the
period of inflection when costs are rising, it helps to maintain level of inventories and
meeting the recurring expenses.
Certain resources are also maintain by a corporation to meet contingencies and to
provide additional capital. It is not charge against profits but an appropriation of profits.
Resources are credited to prevent the dissipation of surplus in the form of dividends, to
provide additional capital, to help anticipate emergencies. In a broad sense all allocation
to reserves represent additions to capital. Reserves may for any specific purpose to just to
increase capital. When it is created to meet any future meet it is called revenue reserve.
On the other hand it is called capital resource which is payable only at the time of
winding up of the corporation Resources never means additional cash with the firm, but it
is always represent net increase in the assets. These reserves are also one of the main
source of working capital.
Now- a -days mobilization of funds through accepting public deposits is also gaining
popularity. People as well as the corporation find the deposits more suitable to their
requirement. As general public finds better interest rate. On the other hand corporation
also find the public deposits more suitable to their requirements. While arranging funds
from banks they have to go through many procedures and funds are availed on certain
conditions and can be used for specific purposes only. Whereas the deposit from public
does not suffer from such inhibitions. Corporation find such deposits at lower cost- even
some times the deposit are used for the purpose for which they can not get credit under
Government, anti inflationary policy. Therefore day by day the popularity of public
deposits are increasing and this has become a good source to finance working capital after
bank and trade credit.
LONG TERM SOURCES
As we know working capital has two main concepts permanent and temporary
working capital, permanent Working Capital is the minimum requirement of Working
Capital without which there will be no possibility of regular production. That portion of
Working Capital generally financed by long- term resources as fund cannot be withdrawn
from such portion.
FINANCING OF WORKING CAPITAL IN DSCL LTD.
We have analysed in past chapter’s the position of Working Capital from the view
point of size, composition & source. Now we will see that what are the sources of
Working Capital.
Table – 2.1
Size and Sources of Working Capital Finance in DSCL Ltd.
During 2000-2001 To 2004-2005
(Rs. in Crores)
Years Size of Working Unsecured Reserve and Secured Capital loans Surplus loans
2000-2001 171.92 21.55 32.49 186.91
2001-2002 226.13 71.45 249.50 342.14
2002-2003 226.61 64.91 297.93 342.58
2003-2004 267.71 110.18 353.56 348.44
2004-2005 392.82 226.51 425.49 468.06
The above table shows the different sources, and size of Working Capital during our
study period. The main source of Working Capital is secured loans. Thus the dependence
of company for its Working Capital finance has increased towards secured loans.
Second main source of Working Capital is reserve & surplus which is also increasing.
We have already seen that company has adequate working Capital in comparison to its
needs therefore company has managed funds from the above maintained sources.
CHAPTER-3
I N V E N T O R Y M A N A G E M E N T
Introduction
Objectives
Structure of Inventory
Need to Hold Inventory
Benefits of Holding Inventory
Techniques of Inventory
Evaluation of Inventory Management in DSCL
CHAPTER - 3
INTRODUCTION
Inventory Management is critical area of Working Capital Management which plays a
crucial role in the economic operation of the firm.
Inventory is the first most important component of Working Capital. “ Inventory as a current
assets, differs from other current assets because only financial managers are not involved.
Rather all the functional area, marketing, production, finance & purchasing and involved. The
views conceming the appropriate level of inventory would differ among the different
functional area.
The term inventory refers to the stockpile of the products a firm is offering for sale and the
components that make up the products. In other words, inventory is composed of assets that
will be sold in future in the normal course of business operations. The assets which firms
store as inventory in anticipation of need are (i) raw materials, (ii) work –in – process (semi-
finished goods) & (iii) finished goods .The raw material inventory contains item that are
purchased by the firm from others and are converted into finished goods through the
manufacturing (production) process. They are an important input of the final product. The
work-in-process inventory consists of items currently being used in the production process.
They are normally semi-finished goods that are at various stages of production in multistage
production process. Finished goods represents final or completed products which are
available for sale . The inventory of such goods consists of items that have been produced but
are yet to sold.
According to the Accounting Research and Terminology Bulletin, the term ‘Inventory’ means
“ the aggregate of those items of tangible personal property which (1) are held for sale in the
ordinary course of business, (2) are in the process of production for such sales, or (3) are to
be currently consumed in the production of goods or services to be available for sale”.
OBJECTIVES
Inventor should be turned over as quickly as possible, avoiding stock-outs that migst
result in closing down the production line or lead to loss of sales. It implies that while the
management should try to pursue the financial objective of turning inventory as quickly
as possible, it should at the same time ensure sufficient inventories to satisfy production
and sales demands. In others words, the financial manager has to reconcile these to
conflicting requirements. Stated differently, the objective of inventory management
consists of to counter balancing parts: (i) to minimize investments to inventory, and (ii) to
meet a demand for the product by efficiently organizing the production and sales
operations. These two conflicting objectives of inventory management can also be
expressed in terms of cost and benefit associated with inventory. That the firm should
minimize investment in inventory implies that maintaining inventory involves costs, such
that the smaller the inventory, the lower is the cost to the firm. But inventories also
provide benefits to the extent that they facilitate the smooth functioning of the firm: the
larger the inventory, the better it is from this view point. An optimum level of inventory
should be determined on the basis of trade-off between costs and benefits associated with
the levels of inventory. An effective inventory management should-
Ensure a regular supply of materials to facilitate uninterrupted;
Maintain adequate stock of raw materials in the period of scare supply and
anticipated
price changes;
Maintain sufficient stock of finished goods for smooth sales operation and effective
customer’s services.
Minimize the carrying costs and time; and
Control investment in inventories and keep it at an optimum level.
STRUCTURE OF INVENTORY
The term inventory comprises finished goods, semi-finished goods or work in
progress, raw material and separates.
RAW MATERIALS-
As to avoid the interruption in supply of aw material certain level of stock of raw
material is maintain. On the other hand bulk purchasing has its advantages too,
such as credit facility, trade discount etc. Stock of raw material is also maintained
in anticipation of price changes.
STOCK OF FINISHED GOODS-
Demand and production both may never be in a synchronized way. Demand may
depend upon season, occasions etc. on the other hand production may not
increase beyond a certain level in short run. Therefore to meet the spontaneous
demand spurt, or to meet demand in a particular season, it is necessary to
maintain a certain level of finished goods.
WORK IN PROCESS-
Production cycle indicates certain stages, therefore, as the material passes through
many stages, stock is also pilled up in production cycle.This stock is of semi-
finished goods.Which wait for next processing stage. Therefore certain stock
level is also be maintain as work in process.
STORES AND SPARE PARTS-
Besides, Raw material and semi-finished goods, there is a good stock of tools and
spare part of inventory. Which also involve a certain amount of cost. stock of
such spare parts are to be maintained, as these are also among the necessary items
in production.
NEED TO HOLD INVERNTORY
Need for management of inventory arises when the company holds inventory.
Holding of inventory involves trying up of the company’s funds due to storage
and it also costs. There are three general motives for holding inventories.
(1) PRODUCTION AND SELES MOTIVE: -
Smooth production can be ensured only when the raw material required for
the production is always available. Similarly, sales can go well if the concern
has sufficient production. For smooth functioning these concern needs
sufficient inventory.
(2) PRCAUTIONARY MOTIVE: -
It necessitates holding of inventory to guard against the risk of unpredictable
changes in demand and supply forces.
(3) THE SPECULATIVE MOTIVE: -
It influence the decision to increase or decrease inventory level to take
advantage of price fluctuations.
Due to the above reasons and to achieve excellence in the business
operations. It has become necessary to hold inventory. An enterprise should
maintain adequate stock of materials for continuous supply to the factory for
an uninterrupted production. It is very difficult to procure raw materials
whenever it is needed. A time lag always exists between demand for
materials and its supply. The procurement of materials may be delayed
because of such factors as strike, transport disruption short supply etc.
Therefore, the concern should maintain sufficient stock of raw material at a
given time to stream line the production. Others factors which may effect
holding of inventory are quantity discounts and anticipated price increase.
BENEFITS OF HOLDING INVENTORY
He major benefits of holding inventory are the basic function of inventory. In the
other word, inventories perform certain basic function which are of crucial importance in the
firm’s production and marketing strateiges.
The basic function of inventories is to act as a buffer to decouple or uncouple the
various activities of a firm so that all do not have to be pursued at exactly same rate. The key
activities are: “(i) purchasing, (ii) production, (iii) selling.” The term uncoupling means that
these interrelated activities of a firm can be carried on independently. Without inventories,
purchasing and production would be completely controlled by the sale schedule. If the sales
of the firm increase, these two would also increase and vice varsa.
Since inventory enables uncoupling of the key activities of a firm, each of them can be
operated at the most efficient rate. This has several benefits effects on the firm’s operation. In
the other words, three types of inventory, raw materials, work-in-process and finished good,
perform certain useful function. Alternatively, rigid trying of purchase and production to
sales schedules is undersirable in the short run as it will deprive the firm of certain benefits.
The effect of uncoupling (maintaining inventory) are as follows.
BENEFITS IN PURCHASING-
If the purchasing of raw material and other goods is not tide to production/sales, that is,
a firm can purchase independently to ensure the most efficient purchase, several advantages
would become available. A firm can purchase larger quantities than is warranted by usage in
production or the sales level. This will enable it to avail of discounts that are available on
bulk purchase.
BENEFITS IN PRODUCTION-
Finished goods inventory serves to uncouple production and sale. This enables production
at rate different form that of sale. That is, production can be carried on at a rate higher or
lower than the sale rate. This would be of special advantage to firms with seasonal sales
pattern. In their case, the sales rate will be higher than the production rate during a part of the
year (peak season) and lower during the off-season. The choice before the firm is either to
produce at a level to meet the actual demand, that is, higher production during peak season
and lower or nil production during off-season or production continuously throughout the year
and build up inventory which will be sold during the period of seasonal demand.
In brief, since inventory permits least cost production scheduling, production can be
carried on more efficiently.
BENEFITS IN WORK-IN-PROCESS-
The inventory of work-in-process performs two functions. In the first place, it is necessary
because production processes are not instantaneous. The amount of such inventory depends
upon technology and the efficiency of production.
Second purpose it uncouples the various stages of production so that all of them do not
have to be performed at same rate. The stages involving higher setup cost may be most
efficiently performed in batches with a work-in-process inventory accumulated during a
production run.
BENEFITS IN SALES-
The maintenance of inventory also helps a firm to enhance its sales efforts. If there are no
inventories of finished goods, the level of sale will depend upon the level of current
production. A firm will not be able to meet demand instantaneously. There will be a lag
depending upon the production process. If the firm has inventory, actual sales will not have to
depend on lengthy manufacturing processes. Thus, inventory serves to bridge the gap
between current production and actual sales. A related aspect is that inventory serves as a
competitive marketing tool to meet customer demands.
TECHNIQUES OF INVENTORY
An optimum level of inventory on the bases of the trade-off between cost and benefits to
maximize of owner’s wealth. Many sophisticated mathematical techniques are available to
handle inventory management problems. But they are more appropriately a part of production
management and lie outside the scope of this book. Nevertheless, they involve in built
financial costs.
ECONOMIC ORDER QUANTITY (E.O.Q.)-
The optimum size is popularly known as the “Economic Order Quantity”. The
economic order quantity is used to minimize the annual total costs for ordering
and carrying the inventory as well. There are certain factors which affect the
economic size of order to be placed, viz use of materials during the given period,
costs of placing and order and costs of carrying the inventories. The size of
inventory strikes a balance between the ordering costs and carrying costs and
suggest the optimum size of the order to be placed. It can be shown as follows:
_____
EOQ = 2 C0
1
Where EOQ = Economic Order Quantity
C = Annual consumption in unites
O = Ordering Costs per order
I = Storage or carrying costs as a % of average stock.
Total Variable Cost = Order Cost + Carrying Cost
Total Cost = Purchase Cost + Carrying Cost + Ordering Cost
Purchase Cost = Annual Consumption Purchase price per unit
Carrying Cost = EOQ Carrying Cost per unite per year
2
Ordering Cost = Annual Consumption Ordering Cost per order
EOQ
Number of Orders = Annual Consumption
EOQ
Time gap between two orders = Numbers of days in a year
No. of orders
RE-ORDER LEVEL-
The optimum order point or order level is the level of inventory at which the
economic order quantity of additional stock should be ordered. It is the point at
which the expected uses of an item of inventory would just exhaust the existing
inventory during the time required in obtaining fresh delivery. Thus the reorder
level can be determined by applying the following formula:
Re-order Level = Max. Consumption Rate Max. Re-order period
Re-order Level = (Lead Time Usage Rate per day) + safety stock
DANGER LEVEL-
Danger level is such a level at which the firm may suffer heavy production and
other type of loses. At this level the minimum required raw material is purchased
at any price, the raw material at this level is arranged war level. The danger level
may be calculated with the help of following formula:
Danger Level = Minimum Rate of Consumption Minimum Re-order Period
AVERAGE STOCK LEVEL-
Average stock level represents the average stock which is maintained in the stores.
This level is above the minimum level and below the max. level. The following
formula is used to calculate average stock level:
Average Level Stock = 1 (Max. Stock Level + Minimum Stock Level )
2
Alternative formula = Minimum Stock Level + 1 Re-order Quantity Different
Level of Stock can be indicated with the help of following diagram as:
Maximum Usage
Re-order point _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___________ Re Order Qty.
Minimum Usage _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _____
Purchasing Time
MAXIMUM STOCK LEVEL-
The Maximum stock level is that stock level, which shows the largest quantity of stock.
The fixation of maximum stock level is essential to avoid unnecessary blocking up of capital
in inventory.
Maximum stock level can be computed as under: -
(ROL + ROQ) – (Minimum rate of consumption minimum reorder period) Here
reorder refers the economic order quantity. Economic order quantity shows the size of order
which is economical for the concern in all respects.
MINIMUM STOCK LEVEL / SAFETY STOCK-
It can be determined on the basis of past experience of delays in receiving suppliers
fluctuations in the consumption rate plus other relevant factors such as transport bottlenecks,
strikes or shutdowns. The minimum stock level may be calculated by applying the following
formula –
Minimum level = [Re-order Level – (Normal Consumption Rate Normal Re-
order Period)]
Or
Minimum Level = Usage Rate per Day Days of Safety
EVALUATION OF INVENTORY MANAGEMENT
IN DSCL LTD.
An analysis has been made to examine size, structure & movement of inventories held
By DSCL Ltd.
SIZE OF INVENTORY-
The table shows that the size of inventory during 2000-01 & 2001-02 was decreasing
and increasing in 2002-03, 2003-04 and 2004-05. On the other hand sales is fluctuating which
is a sign of efficient management.
Table – 3.1
Size of Inventory In DSCL During 2000-2001 To 2004-2005
Year Amount in Crores
2000-2001 53.90
2001-2002 47.49
2002-2003 68.46
2003-2004 205.47
2004-2005 304.00
STRUCTURE OF INVENTORY-
In a manufacturing company inventory can be divided into following groups:
Raw Material
Work in Process
Store and spare parts and
Finished Goods
The share of each component varies from firm to firm.
RAW MATERIAL-
DSCL used mainly Naptha, Charcol, Kapas Cotton, Synthetic Yarn etc. as raw
material. It produces mainly urea, caustic soda, cement, yarn and PVC resigns. Company
maintains much more inventory of Stores & Spares compared to raw material. Thus
investment in raw material is not much.
STORES & SPARE PARTS-
In manufacturing company the store and spare parts are the maximum proportion of
aggregate inventory.
Table – 3.2
Value and Percentage of stores and spare parts to
Aggregate inventory in DSCL during 2000-2001 To 2004-2005
Year Amount % of store and spare parts (in Crores) to inventory
2000-2001 33.44 62.04
2001-2002 33.73 71.02
2002-2003 25.87 37.79
2003-2004 35.02 17.04
2004-2005 54.39 17.89
It is clear from the above table the % of store and spares has fluctuated from year to
year.
Also store and spare parts constitute the major portion of inventory.
GOODS IN PROCESS-
In a manufacturing company the size of goods in process depends upon the length of
production cycle. This table shows the size and % of goods in process during last 5 years.
Table – 3.3
Value and % of goods in process to
Aggregate inventory in DSCL during 2000-2001 To 2004-2005
Year Amount % of goods in process to (in Crores) inventory
2000-2001 17.66 32.76
2001-2002 13.76 28.97
2002-2003 42.59 62.21
2003-2004 170.45 82.95
2004-2005 190.65 86.05
FINISHED GOODS-
The size of finished goods in a company depend on market forces. Finished goods has to
be maintained the meet the requirement of customers. A manufacturing concern wants to
minimize the investment in finished goods.
This table shows the amount and % of finished goods to aggregate inventory during last 5
years.
Table – 3.4
Value and % of finished goods to
Aggregate inventory in DSCL during 2000-2001 To 2004-2005
Year Amount % of goods in process to (in Crores) aggregate inventory
2000-2001 6.43 15.00
2001-2002 7.72 16.20
2002-2003 27.25 39.80
2003-2004 148.53 72.28
2004-2005 193.89 88.75
This table shows that investment in finished goods is increasing which in not good
sign for company.
TURNOVER OF INVENTORY –
Rapid turnover means higher profit. On the other hand, slow turnover means lower
profit.
Inventory turnover has a direct impact on the profitability of the firm.
Rapid turnover of inventory means minimum investment in inventory. Inventory
Turnover is to be calculated by dividing the sales to inventory at the end of the year.
Table – 3.5 shows the turnover of inventory in DSCL during our study period.
Table – 3.5
Turnover of inventories in DSCL During
2000-2001 To 2004-2005
(Rs.in Crores)
Year Sales Inventory Turnover Ratio 2000-2001 958.37 53.90 17.78
2001-2002 1053.67 47.49 22.18
2002-2003 1150.14 68.46 16.80
2003-2004 1475.62 205.47 7.18
2004-2005 1905.19 304.00 6.27
The turnover ratio shows that the company has good turnover in comparison to its
investment in inventories.
CHAPTER – 4
W O R K I N G C A P I T A L M A N A G E M E N T
Concept of Working Capital
Needs of Working Capital
Types of Working Capital
Components of Working Capital
Uses of Working Capital
Working Capital of DSCL Ltd.
CHAPTER – 4
INTRODUCTION
In day to day working of business concern, Working Capital plays an important role,
because Working Capital is required for payment of wages, expenses, raw materials and
payment to creditors. Whether a business firm is earning profit or incurring loss or facing
financial crises can be seen with the help of quantum of Working Capital due to shortage of
Working Capital a business firm is lame, because there is no sufficient Working Capital a
business can not run its business smoothly. Due to this reason working capital management
has assumed greater importance in every business firm.
The Management of Working Capital is concerned with the management of the firms
current accounts, which includes current assets and current liabilities.
Working Capital plays equivalent vital role in the business as blood plays in the human
body. Shortage fixed can be tolerated by a business concern for short period but shortage of
working capital can create lots of serious problems within a period of few days.
In this modern area of cut – throat competition, it has become essential to provide
certain facilities to customers to capture the market; the credit facility is one of them. Thus
working capital is required as there is a time gap between credit self and collection proceeds
from the customers.
Reciprocal relationship between current assets and current liabilities is the main these of
the theory of working capital management.
CONCEPTS OF WORKING CAPITAL
Working Capital means the funds available for day to day operation of an enterprise.
There are two concepts of Working Capital.
(1) GROSS WORKING CAPITAL
(2) NET WORKING CAPITAL
(1) GROSS WORKING CAPITAL –
Gross concept of Working Capital is quantitative in nature. In represent the total of
all current assets. It is also known as circulating capital or current capital. The word
current assets means, those assets which can be converted into cash within an
accounting period or trade cycle like: -
Inventory
Trade debtors
Loans and advances
Investments
Cash and Bank Balance
Marketable securities
Bills receivables
(2) NET WORKING CAPITAL –
Net Working Capital represents the excess of current assets over current liabilities or
the portion of current assets which is financed by long term funds. It is known as net
working capital.
The net concept of Working Capital is qualitative in character. Net working capital
may be negative or positive. When current assets exceed over correct liabilities there
will be positive net working capital. If current liabilities exceed over current assets it
will be negative working capital.
Current liabilities are those usually repaid within an accounting you like.
Account Payable / sundry creditors
Bills Payable
Trade Advances
Outstanding Expenses
Short Term Bonus
Bank Overdraft
Both gross and net concepts have their own significance for management. The gross
concept of Working Capital is a going concern concept, because current assets are necessary
for the proper utilization of fixed assets. The net concept of Working Capital shows the
financial soundness and liquidity of a firm. This concept creates the confidence to the
creditors about the security of their amounts.
NEEDS OF WORKING CAPITAL
Funds are required for an enterprise for day to day running. These funds are generated
usually through sales. However, sales don’t convert into cash instantaneously. This is always
time gap between the sales activity and receipt of cash. Working Capital is required for this
period in order to sustain operating activity of an enterprise.
Therefore, it is clear that Working Capital is required because of time gap between sales
and actual realization of cash. This time gap is technically termed as operating or cash cycle
of business.
OPERATING CYCLE –
The continuing flow from cash to suppliers to inventory, to accounts receivable and back
into cash is what is called the term cash cycle refers to the length of time necessary to
complete the following cycle of events:
1. The raw material and stores inventory stage
2. The working progress inventory stage
3. The finished goods inventory stage
4. The receivable stage
WORKING CAPITAL POLICIES –
Conservative Working Capital Policies: - A conservative polices suggest to carry
higher level of current assets in relation to sales. Surplus current assets enable the firm to
absorb sudden variation in sales, production plan and procuremant time without disrupting
production plans. Additionally, the higher liquidity levels reduse the risk of insolvency. But
lower risk translate in to lower return. Large investment in current assets lead to higher
interests, carrying cost and encouragement for sufficient. But conservative police will enable
the firm to absorb the day to day business risks. It assures continuous flow of operation and
eliminate worry about recurring obligations. Under this policy long term financing covers
more than the total requirement for working capital. The excess cash is invested in short-
term marketable securities and in need, the securities are sold off in the market to meet the
urgent requirement of working capital.
TYPES OF WORKING CAPITAL
In modern business world, Working Capital is of many types. Because to run the
organization well,it is necessary to maintain funds in the organization. Generally, Working
capital of every business firm may be of many types:
Permanent, fixed or regular Working Capital
Flexible or Temporary variable Working Capital
Seasonal Working Capital or Special Working Capital
Negative Working Capital
Cash Working Capital and
Balance Sheet Working Capital
PERMANENT, FIXED OR REGULAR WORKING CAPITAL –
This working capital is the minimum quantity which required to run the organization
every time, it also refers to the hard care Working Capital. If this quantity of Working
capital is not maintained then the business may be greatly handicapped in day to day
working. It is that the minimum level of investment in the current assets that is caved
by the business at all times to carry out minimum level of its activities. This part of
Working Capital is as permanent as the investment in fixed assets.
FLEXIBLE OR TEMPORARY WORKING CAPITAL –
It refers to that part of total Working Capital which is required by a business over and
above permanent Working Capital. It is also called as variable Working Capital. Such
type of Working Capital represents such amount of additional current assets which are
required at different times during an accounting period of additional inventory and
cash balance to cover the pick selling period as assured by changed circumstances
since the volume of temporary Working Capital keeps on fluctuating from time to
time according to the business activities it may be finance from the short term
services. This type of Working capital changes with the charge into operational
activities according to O.M. Joy, “Any amount of over and above the permanent level
of Working Capital is temporary fluctuating or variable Working Capital”.
SEASONAL WORKING CAPITAL OR SPACIAL WORKING CAPITAL –
It refers the extra Working Capital which are required due to additional demand on
some special occasions. This working Capital is also additional amount of current
assets like cash, receipts and inventory which are required during the accounting
period of a business concern. Additional Working Capital may also be needed on
account certain abnormal circumstances and it is termed as special Working Capital.
Thus, this type of Working Capital is needed to meet extra ordinary requirements or
contingencies. The classification of the seasonal Working Capital as regular and
variable is also helpful in arranging finance for the business firm.
NEGATIVE WORKING CAPITAL –
Negative Working Capital is when current liabilities exceed current assets. This
position is not accurate theoretically and occur when a business firm is nearing a
crisis. If any business concern to pay his liabilities, then it is called Negative Working
Capital.
CASH WORKING CAPITAL –
This Working Capital is calculated at the time shown in profit and loss account of a
business. It is the real flow of money or value at accurate time and is considered to be
most realistic approach to Working Capital.
BALANCE SHEET WORKING CAPITAL –
It is that Working Capital which is calculated from the items appearing in the balance
sheet of organization.
COMPONENTS OF WORKING CAPITAL
Construction of Working capital is being made through current assets and current
liabilities. Current assets involves cash, marketable securities, inventories and
receivables and current liabilities involves o/d, creditors, bills payable and outstanding
expenses. The main problem is that how Working Capital is recated in the business ?
INVENTORY –
The inventory contributes a lot to the constitution of Working Capital. Before going to
the process the inventory creates the working Capital. We must see that what
inventory itself
is ? There are differences brought by different authorities as regard to the meaning of
inventory. It is very difficult to prepare a complete list of various components of
inventory which can express a clear view of inventory. According to American
institute of Accountants. “The aggregate of those items of tangible personal property
which (1) are held for sale in the ordinary course of business, (2) are in the process of
production for sale and (3) are to be currently consumed in the production of goods or
be available for sale.” For the point of study the inventory can be divided into the
following four categories :
RAW MATERIALS –
Raw material is defined as the stock of materials on which manufacturing process is
yet to be carried on. Means Raw Materials is the first step in the production process.
A firm maintains proper stock of Raw Materials for uninterrupted production. It is not
possible for a firm to purchase whenever it needed. There is a time lag between
demand and supply of Raw Materials. There is a uncertainly in procuring raw material
in time due to strike, flood, short supply etc. therefore a firm maintain a proper level
of raw materials for uninterrupted production.
GOODS IN PROCESS –
Goods in process indicates incomplete process of manufacturing. To make more clear,
good in process means the stock of raw materials, which is still under manufacturing
process and yet has not become a finished product. The size of good in process is
determined by the length of the manufacturing cycle. Larger the time of
manufacturing process, larger will be size of goods in process. On the other hand, if
manufacturing process takes short time there will be low stock of goods in process.
FINISHED STOCK-
Finished stock is the last resort of the manufacturing process. There is no room for the
confusion in the definition of finished goods, because in the in the finished product,
raw material is fully converted is into the saleable product. The stock of finished
goods inventory is held by a firm to serve customers continuous basis and to meet
fluctuating demand.
STORE AND SPARE PARTS-
Stores and spares consists of innumerable items. Store and spares are kept to fight to
break dawn of machinery in the operation. The reasonable quantity and quality of
spare parts must be kept to get away from the interruption in the production. In the
engineering enterprise store and spare parts are the parts of Raw Material.
Engineering and public utilities have high investment store and spare parts.
RECEIVABLES-
Receivable is the second most important component of Working Capital next to
inventory. It is essential for each and every business institution to sell their product on
credit basis in this though competition in order to maximum the profits. Credit sale
bring out the receivables. Looking to the profits we must consider both merits and
demerits of credit sale. By merits we mean the profit involved and demerits we means
the risk occurred in the proceeds collection. After all receivables effects profitability,
liquidity and Working Capital of business concern. Therefore a proper level of
receivables should be maintain for the proper profitability. Receivables plays an
important roll in contributing the short term financial position and profitability.
CASH –
Cash in the business may be compared to the back bone of the human body, back
bone gives the strength to the human body and cash gives profit and solvency to the
business. In a business ultimately a transaction results either in flow or out flow of
cash. The term cash is used in two senses. In narrow sense it is used for cash, cheques,
drafts and demand deposits in bank. In broad sense it also includes near cash assets
like-marketable securities and fixed deposits in bank. Cash in hand, as an asset it has
no any earning power in itself. But a minimum cash balance is essential to meet the
requirements of the business. The question arise that what is the proper level of cash
or how much cash be kept by a business. There is no any formula to determine the
proper level of cash, which should be kept by a business. The proper level of cash
depends on various factors like- nature of business, period of credit sale and the
position of receivables and inventory. Now the question arise that what is the aim ti
keeping cash. According to Keynes there are three motives for keeping cash:
1) Transaction motive
2) Precautionary motive and
3) Speculative motive
In general we can say that a business keeps cash to take day to day obligations, to
take benefit from favourable market conditions and to allow for contingencies.
USES OF WORKING CAPITAL
BUSINESS LOSSES –
Working capital is also used to finance operational losses of companies. On
the other hand if a company is in profit then fund is created.
Redemption of share capital and debentures or repurchase of debentures,
When cash is paid to redeem preference shares or debentures or repurchase
the debentures, the result is that Working Capital is reduced.
PAYMENT OF LONG TERM LOAN –
It results in the reduction of current assets. Hence, there is use of Working
Capital. Even if a long term debt is cancelled by issuing new securities, the
cancellation is shown as a use of fund and issue of new security as a source of
fund.
PAYMENT OF DIVIDEND IN CASH –
There are two ways of dealing with proposed dividend and the subsequent
payment. If the proposed dividend is treated as a current liability, actual
amount will not be shown as a use of funds.
PAYMENT OF TAXES –
Working Capital is also used to pay the taxes. When tax is paid from Working
Capital, there is reduction in Working Capital and this means use of.
PURCHASE OF FIXED ASSETS -
The purchase of fixed assets such as plant machinery either reduces current
assets or increase current liabilities.
PAYMENT OF LONG TERM LIABILITIES –
Payment of long term liabilities reduces working Capital.
WORKING CAPITAL OF DSCL LTD.
The following table shows excess of Current Assets over current liabilities or
net Working Capital of the DCM Shriram Consolidated Ltd., Kota for the last
five accounting year’s.
Table - 4.1
COMPUTATION OF WORKING CAPITAL IN DSCL
DURING 2000-2001 TO 2004-2005
(Rs. In Crores)
Particulars 2001 2002 2003 2004 2005
A) Current Assets
Inventories 53.90 47.49 68.46 205.47 304.00
Sundry debtor’s 127.04 153.06 124.37 182.51 303.61
Cash and Bank 14.01 14.86 8.07 42.13 25.50
Balance
Loan and Advances 65.95 120.17 107.83 90.57 96.61
260.90 335.58 308.73 520.68 729.72
B) Current liabilities & Provisions
Current liabilities 68.84 86.67 56.88 234.62 337.11
Provisions 20.14 22.78 25.24 33.09 55.71
88.98 109.45 82.12 267.71 392.82
Working Capital (A-B) 171.92 226.13 226.61 252.97 336.9
Above table shown that the size of Working Capital was decreasing in 2001
and increasing in the other following years.
We know that size of Working Capital is influenced by various factors, In a
given time period. Working Capital size may be influenced by sales, level of output
nature of business, business cycles and length of the process etc.
CHAPTER – 5
M A N A G E M E N T O F C A S H
Introduction
Motives for Holding Cash
Objective of Cash Management
Control Over Cash Flows
Evaluation of Cash Management in DSCL Ltd.
CHAPTER –5
INTRODUCTION
Cash is the medium of exchange on the common purchasing power and which is
the most significant components of working capital. Cash is the basis input required to keep
the organization running on a continuous basis. At the same time it is the ultimate output
which is expected to be realized by selling goods and services. An organization should hold
sufficient cash, neither more, nor less. Since excessive cash remain idle which in turn
increases the cost without contributing anything towards the profitability of the organization
and in the opposite case, trading and / or manufacturing operation will be disrupted. In other
words, it can be stated that the higher the level of unused cash, the greater is the cost of
holding it in the form of loss of interest which could have been earned either by investing it in
securities or by reducing the burdun of interest charges by paying off the loans taken
previously. If the level of cash balance is more than the desired level it shows
mismanagement of funds. Therefore, for smooth functioning and hjgher profitability, proper
and effective cash management is of paramount importance.
Cash is the most liquid asset that a firm owns. It includes money and instruments like
cheque, money orders or bank drafts which banks normally accepts for deposit and
immediately credit to the depositer’s account. Sometimes near- cash items, such as
marketable securities or bank time deposits are also included cash. The basis characteristic of
near- cash assets is that they can easily be converted into cash.
MOTIVES FOR HOLDING CASH
The term cash with reference to cash management is used in two senses. In a narrow
sense, it is used broadly to cover currency and generally accepted equivalents of cash, such as
cheques, drafts and demand deposits in banks. The broad view of cash also includes near cash
assets, such as marketable securities and time deposits in banks. The main characteristics of
these is that they can be readily sold and converted into cash. They serve as a reserve pool of
liquidity that provides cash quickly when needed. There are four primary motives for
maintaining cash balances : (i) Transaction motive; (ii) Precautionary motive; (iii)
Speculative motive ; and (iv) Compensating motive.
TRANSACTION MOTIVE –
An important reason for maintaining cash balances is the transaction motive. This
refers to the holding of cash to meet routine cash requirements to finance the transaction
which a firm carries on in the ordinary course of business. A firm enters into a variety of
transactions to accomplish its objectives which have to be paid for in the form of cash.
Business concerns that have highly predictable inflows and outflows of funds can hold
relatively less cash then firms that have irregular cash flows.
PRECAUTIONERY MOTIVE –
It is also related to the nature and level of business activity. Precautionary balances are
those which are set aside because cash inflows and outflows are not synchronized. For
example, precautionary balance may be used to meet an unanticipated expenses as the result
of an unanticipated decline in sales revenues.
SPECULATIVE MOTIVE –
It refers to the desire of a firm to take advantage of opportunities which present
themselves at unexpected moments and which are typically outside the normal course of
business. The speculative balances are sensitive to interest rate changes and are usually hold
in the form of interest hearing securities.
COMPENSATING BALANCE –
A compensating balance is the fourth motive for holding cash. This motive is with
commercial banks that require borrowers to leave a portion of their borrowed funds in deposit
at the bank. Banks may require, that 10% of a loan be left in deposit. There are two reasons
for requiring a compensating balance; it raise the effective interest rate for banks and it
provides banks with funds to make additional loans.
OBJECTIVE OF CASH MANAGEMENT
The basic objectives of cash management are two – fold : (a) to meet the cash disbursement
needs (payment schedule); and (b) to minimize funds committed to cash balances. These are
conflicting and mutually contradictory and the task of cash management is to reconcile them.
MEETING PAYMENTS SCHEDULE –
The important of sufficient cash to meet the payment schedule can hardly be
overemphasized. The advantages of adequate cash are: (i) it prevents insolvency or bankruptc
arising out of the inability of a firm to meets its obligations; (ii) the relationship with the bank
is not strained; (iii) it helps in fostering good relations with trade creditors and suppliers of
raw materials, as prompt payment may help their own cash management; (iv) a cash discount
can be availed of if payment is made within the due date; (v) it leads to a strong credit rating
which enables the firm to purchase goods on favourable terms and to maintain its line of
credit with banks and other sources of credit; (vi) to take advantages of favourable business
opportunities that may be available periodically; and finally, (vii) the firm can meet
unanticipated cash expenditure with a minimum of strain during emergencies, such as strikes,
fires or a new marketing campaign by competitors.
MINIMISING FUNDS COMMITTED TO CASH BALANCES –
The second objective of cash management is to minimize cash balances. In minimizing
the cash balances, two conflicting aspects have to be reconciled. A high level of cash balance
will, as shown above, ensure prompt payment together with all the advantages. But it also
implies that large funds will remain idle, as cash is a non-earning assets and the firm will
have to forego profits.
CONTROL OVER CASH FLOWS
Drawing of cash plan is not enough, a strict compliance of plan is required through proper
control of cash collections and payments. On the other hand inflow is to be accelerated, so as
to cope with the growing requirements whereas outflow must be checked. There must also be
a proper channedl of arrangement of investment of surplus cash. For this cash periodical
reports are very much helpful.
ALLOCATION OF CASH INFLOW-
Cash can be conserved through maximized inflow and lesser permanent investment.
Collection can be accelerated by reducing the time gap caused by waiting time, To speed up
collections the followings techniques may prove useful:
LOCK BOX SYSTEM -
In this system, a firm establishes the collection centers in accordance with the
concentration of customers hires a post office box and instruct its customer to
remit the bills of cheques directly to this box. The firm’s authorized bank
picks up the remittance collects for the gain and supply the detail of cheques
collected. Although it is a costlier system but the cheques are collected
immediately.
PROMPT PAYMENT BY CUSTOMERS –
Prompt billing with the notification what the custmer has to pay, the period of
payment is the way to ensure prompt payment from customers. Use of
modern devices for billing and enclosure of a sell addressed return envelope
will speed up collection from customers. Another technique which is
commonly used is trade discount.
PROMPT CONVERSION OF PAYMENTS INTO CASH –
There is a time lag between the cheque is prepared and mailed by the
customer and the time the funds are converted into cash by the bank. The
early conversion of payments into cash, as a technique to speed up
collections, is done to reduce the time lag between posting the cheque by
customer and the realization of cheque from bank.
DECENTRALISED COLLECTIONS –
When a number of collection centers are operating instead of single collection
centers at the head office, the time lag between mailing can be reduced. This
is called decentralized system of collection of bill at multiply centers. This is
useful technique to speed up the collection of accounts receivable.
Besides, collection of payments personally is one of the important means to
accelerate the inflow of funds.
SLOW DISBURSEMTNS –
A firm should make its payments using the credit terms to their fullest extent.
There is no advantage in paying the amount sonner than expected or agreed to
as this source is free from interest. But a firm must not make undue delays
which may endanger its credit standing.
In disbursement the centralized system for payment is also very much helpful
in conversation of funds. Payment flot is also one of the resources of funds.
Once a cheque is issued, it takes a particular time in transit and on the basis
flow can be calculated. Finance Manager of a firm can take advantage of flot
in disbursement but he must be careful, as it may prove riskly.
EVALUATION OF CASH MANAGEMENT IN DSCL LTD.
RESOURCES AND USES OF FUNDS –
Sources and uses of funds shown that how funds are acquired & utilized and
its affects the amount of Working Capital. Table 5.1 shows the sources & uses
of funds in DSCL.
Table – 5.1
Sources and uses of funds or statement of changes in
Net – Working Capital in DSCL during 2000-2001 To 2004-2005
(Rs. In Crores)
Particulars Schedule 2001 2002 2003 2004 2005
I) Sources of Funds
1- Share holder funds :
a) Share Capital 1 74.73 16.75 16.75 16.75 16.75
b) Reserves and surplus 2 32.49 249.50 297.93 353.56 425.49
107.22 266.25 314.68 370.31 442.24
2- Loan Funds :
a) Secured Loans 3 186.91 342.14 342.58 348.44 468.06
b) Unsecured Loans 21.55 71.45 64.91 110.18 226.51
208.46 413.59 407.49 458.62 694.57
3- Deferred tax liabilities : 4 - 89.83 96.58 110.88 96.16
(net) Total (1+2+3) 208.46 769.67 818.75 939.81 1232.97
II) Application of Funds
1- Fixed Assets : 5
a) Gross Block 551.77 633.65 669.93 845.52 1040.71
b) Less : Depreciation 171.50 200.07 235.09 303.65 352.77
c) Net Block 380.27 433.58 434.84 541.87
687.94
d) Capital work in progress 28.77 42.58 35.00 70.86 151.76
409.04 476.16 469.84 612.73 839.70
2- Investments : 6 48.39 58.64 122.30 74.11 56.37
3- Current Assets Loans & 7
Advances
a) Inventories 53.90 47.49 68.46 205.47 304.00
b) Sundry debtors 127.04 153.06 124.37 182.51 303.61
c) Cash & Bank Balances 14.01 14.86 8.07 42.13 25.50
d) Loans & Advances 65.95 120.17 107.83 90.57 96.61
260.90 335.58 308.73 520.68 729.72
Less : Current Liabilities &
Provisions 8 88.98 109.45 82.12 267.71 392.82
Net Current Assets 103.14 226.13 226.61 252.97
336.90
4- Miscellaneous Expenditure - 8.74 - - -
Total funds utilized 208.46 769.67 818.75 939.81 1232.97
This table shows that sources of funds are increasing slowly. The company is
depending more on loan funds to finance its capital expenditure programme.
SIZE OF CASH IN TERMS OF SALE –
Company keeps cash to meet its day to day operations and to maintain
liquidity & solvency. This table shows the –
Table – 5.2
Size of cash and their values of sales in DSCL.
(Rs. In Crores)
Year Size of Cash Value of Sales
2000-2001 10.18 958.37
2001-2002 14.86 1053.67
2002-2003 8.07 1150.14
2003-2004 42.13 1475.62
2004-2005 25.50 1905.19
.
Size of cash and bank balances in comparison of sales values. Analysis shows
that on 2002-2003 cash balances decreased and the sales value increased year by
year.
CURRENT RATIO –
This ratio shows the short term solvency position or soundness of current financial
position of the company, 2:1 Ratio is taken as satisfactory. Current Ratio of DSCL was
upto the standard in 2001-02 but very high in 2002-03, 2003-04 and 2004-2005.
QUICK RATIO –
To judge the liquid position of the firm or adequacy of cash quick ratio is to be
calculated 1:1 is considered as satisfactory. This ratio has been very satisfactory in DSCL as
it has been above from the standard during last 5 years.
I have judged the performance of cash management of DSCL through various ratio and
techniques.
DSCL maintain adequate cash balance to meet day to day operations weekly reports are
prepared to check the cash balances. Current and quick ratio of company are more than and
ard. Company is in sound position of Working Capital.
CHAPTER – 6
M A N A G E M E N T O F R E C E I V A B L E S
Introduction
Objective of Maintaining Receivables
Factors Determinants the Size of Receivables
Credit Policy
Evaluation of Receivables in DSCL Ltd.
CHAPTER – 6
INTRODUCTION
When a firm sells its products or services and does not receive cash for the same
immediately, the firm is said to have granted trade credit to customers. Trade Credit, thus,
creates receivables which represent an important component of current assets. Receivables
occupy the second prominent place after inventories and constitute a substantial portion of
current assets in most of the business house. According to Emerson, “ When goods or
services are sold under an arrangement permitting the customer to pay for them at a later
date, the amount due from the customer is recorded as an account receivables.” Trade credit
is granted to protect sales from competitors and to attract potential customers to buy product
on favourable terms and condition, Granting credit and creating receivables amounts in
blocking of firm’s funds
The term receivables is defined by Hampton John J, as “ receivables are assets
accounts, representing amount, owned to the firm as a result of the sale of goods or services
in the ordinary course of business.” Trade credits generate receivables, which the firm is
expected to collect in the near future. They, therefore, represent the claims of a firm against
its customers and are carried to the assets side of the balance sheet under titles such as
account receivables, trade receivables, customer receivables or books debts.
OBJECTIVE OF MAINTAINING RECEIVABLES
The purpose of granting credit is to facilitate sales. It is valuable for customers as it
augments their resources. It is particularly appealing to these customers who cannot borrow
from other resources or find it very expensive to do so. In short, the main objectives of
maintaining receivables are as follows :
1. EXPANSION OF SALES –
Though, it is a good strategy to effect cash sales to the maximum possible extent, yet it
may not always be possible to do so customers who are not willing to buy goods on
cash basis, have to be encouraged with the offer of credit terms. In the absence of such
an offer, a firm may not be able to sell goods at a desired level. Receivables enable it to
push its sales effectively in the market.
2. INCREASE IN PROFITS –
If the level of sales increases, the profit will also increase. This is ordinarily so because
the marginal contribution affected by an increase in sales is higher than the additional
costs associated with such an increase.
3. MAINTAIN LIQUIDITY –
The concept of operating cycle explains that receivables are one step ahead of
inventories. So, if facilities to maintain liquidity in the business because it can be easily
converted into cash, whenever required.
FACTORS DETERMINANTS THE SIZE OF RECEIVABLES
There are different factors which determine the size of investment in receivables. These
factors can be classified as general and specific factors. These are discussed below :
1. GENERAL FACTORS -
General factors include those factors which affect every type of business they
generally are concerned with investment in assets. These factors are nature and size of
business, opinion of management, expected sales figure, quantity of business, normal
economic position, changes in price level, availability of funds etc. all these factors
are not in the hands of the concern and their effect is long term.
2. SPECIFIC FACTORS –
These factors are those which can be controlled by the concern and they have a short
term effect of investment in receivables. These factors include the following:
TERMS OF SALES –
The size of receivables is closely linked with a firm’s term of sales which
include the period of credit, rate of discount, etc. if the concern does not sell
goods on credit no receivable will come into account. but generally due to
competition. Market condition a firm is forced to offer credit terms which are
at least generous as those offered by competitors.
THE VOLUME OF CREDIT SALES –
When the firm decides to give credit, the question that arises, is that how much
credit must be offered. In other words, it can be said that what % of total
sales would be credit sales. There is a positive relationship between volume of
credit sales and size of receivables. Increase in credit sales means large size of
receivables and decrease in credit sales means small size of receivables.
STABILITY OF SALES –
If the business of the concern is seasonal in nature (example, woolen clothes,
electric fans, ice cream etc.) than in a particular season there will be an
increase in size of receivables.
CREDIT POLICY OF THE FIRM –
A firm with a liberal credit policy may keep a higher level of receivables as
compared to a form having tight/ rigid credit policy. Due to liberal credit
policy a firm can offer more facilities to its customers for purchasing goods
which increases level of sales and size of receivables. On the other hand tight
credit policy decrease level of sales and size of receivables. Credit policy of
the firm is affected by different factors which include (i) credit period, (ii)
size of policy of cash discount, (iii) discounting and endorsement of bills
receivables etc. all the above factors are discussed below :
CREDIT PERIOD :
The duration of time for which the credit is extended to the customers is
referred to as credit period. Usually the credit period of the firm is governed
by the industry norms but the firm can extend credit for longer duration to
increase sales.
SIZE AND POLICY OF CASH DISCOUNT :
Another important factor is cash discount. Many firms induce their customers
to pay cash by providing them cash discount. The cash discount term
indicates the rate of discount and the period for which discount has been
offered. The most desirable credit terms which increase the overall
profitability of the firm, should be offered to customers.
CREDIT POLICY
The credit policy of a firm provides the framework to determine (a) whether
or not to extend credit to a customer and (b) how much credit to extend. The
credit policy decision of firm has two broad dimensions: (i) Credit standards
and (ii) Credit analysis. A firm has to establish and use standards in making
credit decisions, develop appropriate sources of credit information and
methods of credit analysis. We illustrate below how these two aspects are
relevant to the accounts receivable management of a firm.
CREDIT STANDARDS –
The term credit standards represents the basic criteria for the extension of
credit to customers. The quantitative basis of establishing credit standards are
factors such as credit ratings, credit references, average payments period and
certain financial ratios.
This means the criteria for the extension of credit to customers. In credit
standard secondary factors such as collection cost, average collection period,
level of bad debts in sales, certain financial ratios, credit references etc.
For this a firm considers the cost benefit relation of the trade credit by
considering the factors :
How much cost will be involved in particulars credit ?
What will be the effect of relaxation of credit standard ?
How much will be the capital cost to finance the credit ? and
How much sales will increase and what will be the net return by credit ?
These all will determine that a firm credit policy will be lenient or stringent.
CREDIT TERMS –
The condition under which the firm sells on credit to its customers are called
terms. Two important components of credit terms are : (i) credit period, and
(ii) cash discount terms.
(i) CREDIT PERIOD –
The duration of time for which the credit is extended to the customers is
referred to as credit period. Higher the credit period higher the sales figure.
(ii) CASH DISCOUNT TERMS –
Cash discount is another component of credit terms. Many firms offer to grant
cash discounts to their customers in order to induce them to pay, their
liabilities on time. the cash discount term indicates the rate of discount and the
period for which discount has been offered. If a customer does not utilize this
opportunity he is expected to make the payment by the due date.
Credit terms can be used as an instrument to push sales. The financial manager
should compare costs and benefits of alternative terms to find out the most
desirable credit terms.
COLLECTION POLICY –
The collection policies and techniques used to collect delinquent account affect
profitability. As a general rule the more guickly account receivables are
converted into cash, the greater will be the profits of the firm. However, if
collection policies are too harsh, some potential customers may deal
elsewhere, a collection policy is important for the following reasons :-
(i) Delinquent accounts become increasingly difficult and costly to collect as time
passes.
(ii) Sales to slow paying customers and inhibited by slow collections.
(iii) The reputation for stringent credit policies discourages some customers from
becoming delinquent.
(iv) Delinquent receivables add to the volume of working capital that must be
financed.
Collection becomes a problem when customers do not pay for the goods or
services according to the terms of trade and they become delinquent. Therefore, the
collection policy should be designed to make payment as easy and convenient as
possible.
The determination of optimum credit policy in receivables involve a trade off
between costs and benefits. The optimum credit policy will be determined by the trade
off between liquidity and profitability as shown in the figure given below. It is
indicated in the figure that the firm becomes less liquid, as its credit policy relaxes. But
profitability increases as the credit policy becomes more and more liberal. The
optimum credit policy should occur at a point where there is a trade off between
liquidity and profitability.
EVALUATION OF RECEIVABLES IN DSCL LTD.
Evaluation of receivables management involve analysis of size and composition of
receivables and efficiency of collecting.
SIZE OF RECEIVABLES –
Table 6.1 shows the size of receivables in DSCL. There is downfall in 2001-2002 & 2003-
2004.
TABLE – 6.1
Size of Receivables in DSCL during 2000-2001 To 2004-2005
(Rs. In Crores)
Years Trade Receivables Loans and Advances Total Receivables
2000-2001 124.71 65.95 190.66
2001-2002 153.06 120.17 273.23
2002-2003 124.37 107.83 232.20
2003-2004 182.51 90.57 273.08
2004-2005 303.61 96.61 400.22
PERCENTAGE OF TRADE RECEIVABLES TO SALES –
This ratio shows the position of receivables in relation of sales. Higher the ratio means higher
investment in receivables on the other hand lower ratio means lower investment in
receivables.
Table – 6.2 shows that % of trade receivables to sales is continuous decreasing means good
control.
Table – 6.2
Percentage of Trade Receivables to Sales in
DSCL during 2000-2001 To 2004-2005
(Amount in Crores)
Years Trade Receivables Turnover % of Trade Receivables
2000-2001 124.71 985.37 13.01
2001-2002 153.06 1053.67 14.52
2002-2003 124.37 1150.14 10.81
2003-2004 182.51 1475.62 12.36
2004-2005 303.61 1905.19 15.93
CHAPTER – 7
C O N C L U S I O N A N D S U G G E S T I O N S
In this chapter main conclusions and findings of the study is discussed first and then in the
last few suggestion for improvement of Working Capital of the unit is given.
In previous chapters of this dissertation I have analysed the different aspects of Working
Capital management in DSCL. Through various analysis for example analysis of inventory
management, analysis of cash management, analysis of receivables, analysis of Working
Capital Finance etc.
Different analysis show different picture or it is not possible to draw complete picture of the
management on the basis of individual analysis. For example inventory management analysis
may show an efficient management of inventory, whereas on the other hand i.e. cash etc. the
picture may be absolutely reverse. Therefore, it becomes essential for us to fuse all the
pictures drawn from different analysis and create a realistic and complete image of the
Working Capital management of the company.
Let us briefly evaluate each aspect of the Working Capital management and their inter effects
and the over all effects of each on Working Capital management.
The size of Working Capital of the company, excepting the year 2000-2001 of the study
period has always been increasing in comparison of turnover.
The state of affairs at inventory front was good. Further analysis of inventory structure
reveals that a large amount of inventory is blocked in stores and spare parts. Similarly stock
of goods in process and raw material are also largely maintained. Although management has
tried to decrease its investment in inventories still it caused an increase in Working Capital of
DSCL.
Regarding cash management, company has substantial amount of loans and advances thus
cash balance has lowered. Cash volume has increased and decreased with increase and
decrease in sales respectively showing that company is in sound position of Working Capital
regarding the aspect of cash management. The current & quick ration of the company is also
above from the standard.
Composition of receivables reveals that DSCL has taken preferential interest in trade
receivables compared to loan and advances, that is a good for this company. Although DSCL
% to trade receivables to sales during our study period is not satisfied. It is increasing and
decreasing. Which is not good sign for company. As receivables constitutes a major role for
Working Capital so some special techniques should be invented.
The term finance of Working Capital in DSCL has good provisions. The main source of
Working Capital is secured loan. Thus the dependence of company for its Working Capital
finance has increased towards secured loans.
On the whole, we can say that DSCL has maintained its Working Capital in efficient way,
regarding the consequences of slow collection policy. The management has shown their
intelligence in maintence of inventory although a large part of its constitutes spare & parts.
To be on safer side company must review the position of inventory through periodical
inventory reports. On the other hand, it must fix Economic order quantity for inventory. Thus
company has must examine each and every aspect of Working Capital thoroughly and rectify
the small loopholes in the management. Thus making it more efficient & successful.
