17163075 working capital management in hcl info systems limited
TRANSCRIPT
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A REPORT
ON
WORKING CAPITAL MANAGEMENT INWORKING CAPITAL MANAGEMENT IN
HCL INFOSYSTEMS LIMITEDHCL INFOSYSTEMS LIMITED
BY
(Submitted in partial fulfillment of the requirements ofMBA program at
ICFAI Business School, Chandigarh)
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ACKOWLEDGEMENT
Achievement is finding out what you would be then doing, what you have to
do. The higher the summit, the harder is the climb. The goal was fixed and we
began with a determined resolved and put in ceaseless sustained hard work.
Greater challenge, greater was our effort to overcome it.
This project work, which is my first step in the field of professionalization, has
been successfully accomplished only because of my timely support of well-
wishers. I would like to pay my sincere regards and thanks to those, who
directed me at every step in my project work.
I would also like to thank the faculty members and the staff members of HCL
Infosystems Ltd. for their kind support and help during the project.
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TABLE OF CONTENTS
Acknowledgement
Abstract
1. Introduction
The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations
2. Hindustan Computers Limited
3. HCL Infosystems An Overview
Companys history
HCL at a glance
Alliances and partnerships
Management team
Corporate information
4. Conceptual Framework
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Introduction to Working Capital Management
Significance of working capital management
Liquidity vs Profitability: Risk Return trade off
Classification of working capital
Types of working capital needs
Financing of working capital
Factors determining working capital requirements
Working capital cycle
Sources of working capital
HCL financials
Working capital position
Inventory management
Cash management
Receivables management
Managing payables (Creditors)
Financing current assets
Working capital & short-term financing
5. Analysis
Industry analysis
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Financial graphs
Concluding analysis
Suggestions and recommendations
Bibliography
6. Appendices
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ABSTRACT
This project is based on the study of working capital management in HCL
Infoystems. An insight view of the project will encompass what it is all about,
what it aims to achieve, what is its purpose and scope, the various methods used
for collecting data and their sources, including literature survey done, further
specifying the limitations of our study and in the last, drawing inferences from
the learning so far.
HCL Infosystems Limited (HCL), is a leading domestic computer hardware
and hardware services company. HCL is engaged in selling manufactured ( like
PCs, servers, monitors and peripherals) and traded hardware ( like notebooks,
peripherals) to institutional clients as well as in retail segment. It also offers
hardware support services to existing clients through annual maintenancecontracts, network consulting and facilities management.
The working capital management refers to the management of working capital,
or precisely to the management of current assets. A firms working capital
consists of its investments in current assets, which includes short-term assets
cash and bank balance, inventories, receivable and marketable securities.
This project tries to evaluate how the management of working capital is done in
HCL Infosystems through inventory ratios, working capital ratios, trends,
computation of cash, inventory and working capital, and short term financing.
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INTRODUCTION
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INTRODUCTION:
The project undertaken is on WORKING CAPITAL MANAGEMENT IN
HCL INFOSYSTEMS LIMITED.
It describes about how the company manages its working capital and the
various steps that are required in the management of working capital.
Theproblems
Purposeofstudy
Researchmethodology
Scopeofthestudy
Datasources
Limitations
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Cash is the lifeline of a company. If this lifeline deteriorates, so does the
company's ability to fund operations, reinvest and meet capital requirements
and payments. Understanding a company's cash flow health is essential to
making investment decisions. A good way to judge a company's cash flow
prospects is to look at its working capital management (WCM).
Working capital refers to the cash a business requires for day-to-day operations
or, more specifically, for financing the conversion of raw materials into finished
goods, which the company sells for payment. Among the most important items
of working capital are levels of inventory, accounts receivable, and accounts
payable. Analysts look at these items for signs of a company's efficiency and
financial strength.
The working capital is an important yardstick to measure the companys
operational and financial efficiency. Any company should have a right amount
of cash and lines of credit for its business needs at all times.
This project describes how the management of working capital takes place at
HCL Infosystems.
THE PROBLEMS
In the management of working capital, the firm is faced with two key problems:
1. First, given the level of sales and the relevant cost considerations, what are the
optimal amounts of cash, accounts receivable and inventories that a firm should
choose to maintain?
2. Second, given these optimal amounts, what is the most economical way to
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finance these working capital investments? To produce the best possible
results, firms should keep no unproductive assets and should finance with the
cheapest available sources of funds. Why? In general, it is quite advantageous
for the firm to invest in short term assets and to finance short-term liabilities.
PURPOSE OF STUDY
The objectives of this project were mainly to study the inventory, cash and
receivable at HCL Infosystems Ltd., but there are some more and they are -
The main purpose of our study is to render a better understanding of
the concept Working Capital Management.
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To understand the planning and management of working capital at HCL
Infosystems Ltd.
To measure the financial soundness of the company by analyzing various
ratios.
To suggest ways for better management and control of working capital at
the concern.
RESEARCH METHODOLOGY
This project requires a detailed understanding of the
concept Working Capital Management. Therefore,
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firstly we need to have a clear idea of what is working
capital, how it is managed in HCL Infosystems, what are
the different ways in which the financing of working
capital is done in the company.
The management of working capital involves managing inventories,
accounts receivable and payable and cash. Therefore one also needs to
have a sound knowledge about cash management, inventory management
and receivables management.
Then comes the financing of working capital requirement, i.e. how the
working capital is financed, what are the various sources through which it
is done.
And, in the end, suggestions and recommendations on ways for better
management and control of working capital are provided.
SCOPE OF THE STUDY
This project is vital to me in a significant way. It does have some
importance for the company too. These are as follows
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This project will be a learning device for the finance student. Through this project I would study the various methods of the working
capital management.
The project will be a learning of planning and financing working capital.
The project would also be an effective tool for credit policies of the
companies.
This will show different methods of holding inventory and dealing with
cash and receivables.
This will show the liquidity position of the company and also how do they
maintain a particular liquidity position.
DATA SOURCES:
The following sources have been sought for the prep of this report:
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Primary sources such as business magazines, current annual reports, book
on Financial Management by various authors and internet websites the
imp amongst them being : www.hcl.com, www.indiainfoline.com,
www.studyfinance.com .
Secondary sources like previous years annual reports, reports on working
capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash
management, receivables management, inventory management and short
term financing was required.
This data was gathered through the companys websites, its corporate
intranet, HCLs annual reports of the last five years.
A detailed study on the actual working processes of the company is also
done through direct interaction with the employees and by timely
studying the happenings at the company.
Also, various text books on financial management like ICFAIs book,
Khan & Jain, Prasanna Chandra and I.M.Pandey were consulted to equip
ourselves with the topic.
LIMITATIONS OF THE STUDY:
http://www.hcl.com/http://www.indiainfoline.com/http://www.studyfinance.com/http://www.hcl.com/http://www.indiainfoline.com/http://www.studyfinance.com/ -
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We cannot do comparisons with other companies unless and until
we have the data of other companies on the same subject.
Only the printed data about the company will be available and not
the backend details.
Future plans of the company will not be disclosed to the trainees.
Lastly, due to shortage of time it is not possible to cover all the
factors and details regarding the subject of study.
The latest financial data could not be reported as the companys
websites have not been updated.
HINDUSTAN COMPUTERS LIMITED:
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Type Public(BSE: 500179,BSE:532281)
Founded 11th August 1976
Headquarters Noida, India
(Delhi metropolitan area),India
Key People Shiv Nadar, Founder, Chairman & CEOSanjay Kumar Choudhary , Vineet Nayar
Industry Information Technology Services
Revenue 4.7 billion USD
Employees ~53,000 (as on 31st Dec 2007)
Website www.hcl.in
Hindustan Computers Limited, also known as HCL Enterprise, is one of
India's largest electronics, computing and information technology company.
Based inNoida, nearDelhi, the company comprises two publicly listed Indian
companies, HCL Technologies and HCL Infosystems.
HCL was founded in 1976 by Shiv Nadar, Ajai Chowdhry and four of their
colleagues. HCL was focused on addressing the IT hardware market in India for
the first two decades of its existence with some sporadic activity in the global
market. In 1981, HCL seeded a company focused on addressing the computer
training industry,NIIT, though it has currently divested its stake in the
company. In 1991, HP took minority stake in the company (26%) and the
company was known as HCL HP for the five years of the joint venture. On
termination of the joint venture in 1996, HCL became an enterprise which
http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=500179http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=532281http://www.bseindia.com/price_finder/stockreach.asp?scripcd=532281http://en.wikipedia.org/wiki/New_Okhla_Industrial_Development_Authorityhttp://en.wikipedia.org/wiki/Delhi_metropolitan_areahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/wiki/USDhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Electronicshttp://en.wikipedia.org/wiki/Computinghttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Noidahttp://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/HCL_Technologieshttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/w/index.php?title=Ajai_Chowdhry&action=edit&redlink=1http://en.wikipedia.org/wiki/1981http://en.wikipedia.org/wiki/NIIThttp://en.wikipedia.org/wiki/1991http://en.wikipedia.org/wiki/1996http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=500179http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.bseindia.com/price_finder/stockreach.asp?scripcd=532281http://en.wikipedia.org/wiki/New_Okhla_Industrial_Development_Authorityhttp://en.wikipedia.org/wiki/Delhi_metropolitan_areahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/wiki/USDhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Electronicshttp://en.wikipedia.org/wiki/Computinghttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Noidahttp://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/HCL_Technologieshttp://en.wikipedia.org/wiki/Shiv_Nadarhttp://en.wikipedia.org/w/index.php?title=Ajai_Chowdhry&action=edit&redlink=1http://en.wikipedia.org/wiki/1981http://en.wikipedia.org/wiki/NIIThttp://en.wikipedia.org/wiki/1991http://en.wikipedia.org/wiki/1996 -
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comprises HCL Technologies (to address the global IT services market) and
HCL Infosystems (to address the Indian and APAC IT hardware market). HCL
has since then operated as a holding company.
HCL INFOSYSTEMS AN OVERVIEW
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HCL INFOSYSTEMS LIMITED
AN OVERVIEW ABOUT THE COMPANY
Companyshistory
HCLataglance
Alliancesandpartnerships
Managementteam
Corporateinformation
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HCL Infosystems is no flash in the Information Technology pan. Founded in
1976, the firm has climbed into pantheon of India's corporate giants on the
strength of its IT products and services. HCL Infosystems specializes in IT
hardware (PC's and servers, as well as networking, imaging and
communications products), and system integration services serving the
domestic Indian market. In addition to its consumer products, the company
provides commercial IT products, facilities management, network services, and
IT security services for clients in such industries as government, financial
services, and education. HCL Corporation owns significant stakes in HCL
Infosystems (about 44%) and sister company HCL Technologies.
HCL Infosystems Ltd, a listed subsidiary of HCL, is an India-based hardware
and systems integrator. It claims a presence in 170 locations and 300 service
centres. Its manufacturing facilities are based in Chennai, Pondicherry and
Uttarakhand .Its headquarters is inNoida.
HCL Peripherals (A Unit of HCL Infosystems Limited) Founded in the year
1983, has established itself as a leading manufacturer of computer peripherals
in India, encompassing Display Products, Thin Client solutions, Information
and Interactive Kiosks. HCL Peripherals has two Manufacturing facilities, one
in Pondicherry (Electronics) and the other in Chennai (Mechanical) .The
Company has been accredited with ISO 9001:2000, ISO 14001, TS 16949 and
ISO 13485.
HISTORY
http://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Pondicherryhttp://en.wikipedia.org/wiki/Uttarakhandhttp://en.wikipedia.org/wiki/Noidahttp://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Pondicherryhttp://en.wikipedia.org/wiki/Uttarakhandhttp://en.wikipedia.org/wiki/Noida -
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HCL Infosystems Ltd is one of the pioneers in the Indian ITmarket, with its origins in 1976. For over quarter of a century,
we have developed and implemented solutions for multiplemarket segments, across a range of technologies in India. Wehave been in the forefront in introducing new technologies andsolutions. The highlights of the HCL saga are summarized
below:
Y E AR H I G H L I G H T S
1976
- Foundation of the Company laid- Introduces microcomputer-based programmable calculators with wideacceptance in the scientific / education community
1977
- Launch of the first microcomputer-based commercial computer with a ROM-based Basic interpreter- Unavailability of programming skills with customers results in HCL developing
bespoke applications for their customers
1980- Formation of Far East Computers Ltd., a pioneer in the Singapore IT market, forSI (System Integration) solutions
1983
- HCL launches an aggressive advertisement campaign with the theme ' even atypist can operate' to make the usage of computers popular in the SME (Small &Medium Enterprises) segment. This proposition involved menu-based applicationsfor the first time, to increase ease of operations. The response to the advertisementwas phenomenal.-HCL develops special program generators to speed up the development ofapplications
1986
- Zonal offices of banks and general insurance companies adopt computerization- Purchase specifications demand the availability of RDBMS products on the
supplied solution (Unify, Oracle). HCL arranges for such products to be ported toits platform.- HCL assists customers to migrate from flat-file based systems to RDBMS
1991
- HCL enters into a joint venture with Hewlett Packard- HP assists HCL to introduce new services: Systems Integration, IT consulting,
packaged support services ( basic line, team line )
1994- HCL acquires and executes the first offshore project from IBM Thailand- HCL sets up core group to define software development methodologies
1995 - Starts execution of Information System Planning projects
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- Execution projects for Germany and Australia- Begins Help desk services
1996- Sets up the STP ( Software Technology Park ) at Chennai to execute software
projects for international customers- Becomes national integration partner for SAP
1997- Kolkata and Noida STPs set up- HCL buys back HP stake in HCL Hewlett Packard
1998 - Chennai and Coimbatore development facilities get ISO 9001 certification
1999
- Acquires and sets up fully owned subsidiaries in USA and UK- Sets up fully owned subsidiary in Australia
- HCL ties up with Broadvision as an integration partner
2000
- Sets up fully owned subsidiary in Australia- Chennai and Coimbatore development facilities get SEI Level 4 certification- Bags Award for Top PC Vendor In India- Becomes the 1st IT Company to be recommended for latest version of ISO 9001: 2000- Bags MAIT's Award for Business Excellence- Rated as No. 1 IT Group in India
2001-Launched Pentium IV PCs at below Rs 40,000-IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001
2002
-Declared as Top PC Vendor by Dataquest-HCL Infosystems & Sun Microsystems enters into a Enterprise DistributionAgreement- Realigns businesses, increasing focus on domestic IT, Communications &Imaging products, solutions & related services
2003
- Became the first vendor to register sales of 50,000 PCs in a quarter- First Indian company to be numero uno in the commercial PC market- Enters into partnership with AMD- Launched Home PC for Rs 19,999
2004
- 1st to announce PC price cut in India, post duty reduction, offers Ezeebee at Rs.17990- Maintains No.1 position in the Desktop PC segment for year 2003- Becomes the 1st company to cross 1 lac unit milestone in the Indian Desktop PCmarket- Partners with Union Bank to make PCs more affordable, introduces lowest everEMI for PC in India- Registers a market share of 13.7% to become No.1 Desktop PC company foryear 2004- Crosses the landmark of $ 1 billion in revenue in just nine months
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2005
- Launch of HCL PC for India, a fully functional PC priced at Rs.9,990/-
- Rated as the No.1 Desktop PC company by IDC India -Dataquest
- 'Best Employer 2005' with five star ratings by IDC India -Dataquest.- 'The Most Customer Responsive Company 2005'
-IT Hardware Category by The Economic Times -Avaya Global Connect.
-Top 50 fastest growing Technology Companies in India' & 'Top 500 fastest
Growing Technology Companies in Asia Pacific' by 'Deloitte & Touche'. by
'Deloitte & Touche'
-'7th IETE -Corporate Award 2005' for performance excellence in the field of
Computers & Telecommunication Systems by IETE.
-India 's 'No.1 vendor' for sales of A3 size Toshiba Multi Functional Devices for
the year '04 -'05 by IDC.
-Toshiba 'Super Award 2005 towards business excellence in distribution of
Toshiba Multifunctional products,
-Strategic Partners in Excellence' Award by In focus Corporation for projectors.
-'Most valued Business Partner' Award for projectors by In focus Corporation in
2005
2006
(till
June)
- 75, 000+ machines produced in a single month- HCL Infosystems in partnership with Toshiba expands its retail presence in India
by unveiling 'shop Toshiba'- HCL Infosystems & Nokia announce a long term distribution strategy
- HCL the leader in Desktops PCs unveils India's first segment specific range ofnotebooks brand - 'HCL Laptops'- IDBI selects HCL as SI partner for 100 branches ICT infrastructure rollout- HCL Infosystems showcases Computer Solutions for the Rural Markets in India- HCL Support wins the DQ Channels-2006 GOLD Award for Best After SalesService on a nationwide customer satisfaction survey conducted by IDC- HCL Infosystems First in India to Launch the New Generation of HighPerformance Server Platforms Powered by Intel Dual - Core Xeon 5000 Processor- HCL Forms a Strategic Partnership with APPLE to provide Sales & ServiceSupport for iPods in India
VISION STATEMENT:
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"Together we create the Enterprises of Tomorrow"
MISSION STATEMENT:
"To provide world-class Information Technology solutions and services
in order to enable our customers to serve their customers better"
CORE VALUES:
Nothing transforms life like education.
We shall honor all commitments
We shall be committed to Quality, Innovation and Growth in every
endeavor We shall be responsible corporate citizens
QUALITY POLICY:
"We shall deliver defect-free products, services and solutions to meet the
requirements of our external and internal customers, the first time, every time."
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OBJECTIVES:
MANAGEMENT OBJECTIVES
To fuel initiative and foster activity by allowing individuals, freedom
of action and innovation in attaining defined objectives.
PEOPLE OBJECTIVES
To help people in HCL Infosystems Ltd., share companys success,
which they make possible; to provide job security based on their
performance; to
recognize their individual achievements; and help them gain a sense of
satisfaction and accomplishment from their work.
ALLIANCES and PARTNERSHIPS:
To provide world-class solutions and services to all our customers, HCL
Infosystems have formed Alliances and Partnerships with leading IT companies
worldwide.
HCL Infosystems has alliances with global technology leaders like Intel, AMD,
Microsoft, Bull, Toshiba, Nokia, Sun Microsystems, Ericsson, nVIDIA,
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SAP, Scansoft, SCO, EMC, Veritas, Citrix, CISCO, Oracle, Computer
Associates, RedHat, Infocus, Duplo, Samsung and Novell.
These alliances on one hand give us access to best technology & products as
well as enhancing our understanding of the latest in technology. On the other
hand they enhance our product portfolio, and enable us to be one stop shop for
our customers.
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MANAGEMENT TEAM:
Ajai ChowdhryCo-Founder HCL, Chairman and CEO - HCL Infosystems.An engineer by training, Ajai Chowdhry is one of the six co-founder members of HCL, India 's premier IT conglomerate.
J V Ramamurthy
Chief Operating Officer HCL Infosystems Ltd.J V Ramamurthy has an engineering degree in Electronics &Communications, from Guindy Engineering College, and a Masters'
degree in Applied Electronics from the Madras Institute ofTechnology, both in Chennai.
Rajendra Kumar
Executive Vice President - Frontline Division HCL Infosystems Ltd.Mr. Rajendra Kumar has been with HCL for over 30 years and hasseen HCL grow from a startup company to a gigantic conglomeratethat it is today.
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CORPORATE INFORMATION:
BOARD OF DIRECTORS Chairman & Chief Executive Officer
Ajai Chowdhry
Whole-time Director
J.V. Ramamurthy
Directors
S. BhattacharyaD.S. PuriR.P. KhoslaE.A. Kshirsagar
Anita RamachandranT.S. PurushothamanNarasimhan JegadeeshV.N. Koura
COMPANY SECRETARY Sushil Kumar Jain
AUDITORS Price Waterhouse, New Delhi
BANKERS State Bank of IndiaCanara BankHDFC Bank Ltd.ICICI Bank Ltd.Societe GeneraleStandard Chartered BankState Bank of PatialaState Bank of Saurashtra
REGISTERED OFFICE 806, Siddharth,
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96, Nehru Place, New Delhi - 110 019.
CORPORATE OFFICE E - 4, 5, 6, Sector XI, Noida - 201 301 (U.P.)
WORKS R.S. Nos: 34/4 to 34/7 and part of 34/1,Sedarapet, Puducherry - 605 111.
R.S. Nos: 107/5, 6 & 7, Main Road,Sedarapet, Puducherry - 605 111.
Plot No 78, South Phase, AmbatturIndustrial
Estate,Chennai - 600 058. Plot No SPL. A2, Thattanchavadi, Industrial
Area, Puducherry - 605 009. Plot Nos. 1, 2, 27 & 28, Sector 5, 11E,
Rudrapur, Distt. - Udham Singh Nagar,Uttarakhand - 263 145.
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WORKING CAPITAL MANAGEMENT
CONCEPTUAL FRAMEWORK
SignificanceofworkingcapitalmanagementLiquidityVsprofitability:RiskReturntradeoff
Classificationofworkingcapital
Typesofworkingcapitalneeds
Financingofworkingcapital
Factorsdeterminingworkingcapitalrequirements
Workingcapitalcycle
Sourcesofworkingcapital
HCLfinancials
Workingcapitalposition
Inventorymanagement
Cashmanagement
Receivablesmanagement
Managingpayables(Creditors)
Financingcurrentassets
Workingcapital&short-termfinancing
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INTRODUCTION TO WORKING CAPITAL
Working Capital is the Life-Blood and Controlling Nerve Center of a
business
The working capital management precisely refers to management of
current assets. A firms working capital consists of its investment in current
assets, which include short-term assets such as:
Cash and bank balance,
Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets
and current liabilities.
WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES
There are two major concepts of working capital:
Gross working capital
Net working capital
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Gross working capital:
It refers to firm's investment in current assets. Current assets are the assets,
which can be converted into cash with in a financial year. The gross working
capital points to the need of arranging funds to finance current assets.
Net working capital:
It refers to the difference between current assets and current liabilities. Net
working capital can be positive or negative. A positive net working capital
will arise when current assets exceed current liabilities. And vice-versa for
negative net working capital. Net working capital is a qualitative concept. It
indicates the liquidity position of the firm and suggests the extent to which
working capital needs may be financed by permanent sources of funds. Net
working capital also covers the question of judicious mix of long-term and
short-term funds for financing current assets.
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Significance Of Working Capital Management
The management of working capital is important for several reasons:
For one thing, the current assets of a typical manufacturing firm account
for half of its total assets. For a distribution company, they account for even
more.
Working capital requires continuous day to day supervision. Working
capital has the effect on company's risk, return and share prices,
There is an inevitable relationship between sales growth and the level of
current assets. The target sales level can be achieved only if supported by
adequate working capital Inefficient working capital management may lead
to insolvency of the firm if it is not in a position to meet its liabilities and
commitments.
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LIQUIDITY VS PROFITABILITY: RISK - RETURN TRADEOFF
Another important aspect of a working capital policy is to maintain and
provide sufficient liquidity to the firm. Like the most corporate financial
decisions, the decision on how much working capital be maintained involves a
trade off- having a large net working capital may reduce the liquidity risk
faced by a firm, but it can have a negative effect on the cash flows. Therefore,
the net effect on the value of the firm should be used to determine the optimal
amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They
are the determination of:
The optimal level of investments in current assets.
The appropriate mix of short-term and long-term financing used to support
this investment in current assets, a firm should decide whether or not it
should use short-term financing. If short-term financing has to be used, the
firm must determine its portion in total financing. Short-term financing
may be preferred over long-term financing for two reasons:
The cost advantage
Flexibility
But short-term financing is more risky than long-term financing. Following
table will summarize our discussion of short-term versus long-term financing.
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Maintaining a policy of short term financing for short term or temporary assets
needs (Box 1) and long- term financing for long term or permanent assets
needs (Box 3) would comprise a set of moderate risk profitability strategies.
But what one gains by following alternative strategies (like by box 2 or box 4)
needs to weighed against what you give up.
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CLASSIFICATION OF WORKING CAPITAL
Working capital can be classified as follows:
On the basis of time
On the basis of concept
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TYPES OF WORKING CAPITAL NEEDS
Another important aspect of working capital management is to analyze the
total working capital needs of the firm in order to find out the permanent and
temporary working capital. Working capital is required because of existence of
operating cycle. The lengthier the operating cycle, greater would be the need
for working capital. The operating cycle is a continuous process and therefore,
the working capital is needed constantly and regularly. However, the
magnitude and quantum of working capital required will not be same all the
times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changesreflect permanent changes in the firm as is the case when the inventory and
receivables increases as the firm grows and the sales become higher and
higher. Other changes are seasonal, as is the case with increased inventory
required for a particular festival season. Still others are random reflecting the
uncertainty associated with growth in sales due to firm's specific or general
economic factors.
The working capital needs can be bifurcated as:
Permanent working capital
Temporary working capital
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Permanent working capital:
There is always a minimum level of working capital, which is continuously
required by a firm in order to maintain its activities. Every firm must have a
minimum of cash, stock and other current assets, this minimum level of
current assets, which must be maintained by any firm all the times, is known
as permanent working capital for that firm. This amount of working capital is
constantly and regularly required in the same way as fixed assets are required.
So, it may also be called fixed working capital.
Temporary working capital:
Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. The position of the required
working capital is needed to meet fluctuations in demand consequent upon
changes in production and sales as a result of seasonal changes.
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The permanent level is constant while the temporary working capital is
fluctuating increasing and decreasing in accordance with seasonal demands as
shown in the figure.
In the case of an expanding firm, the permanent working capital line may not
be horizontal. This is because the demand for permanent current assets might
be increasing (or decreasing) to support a rising level of activity. In that case
line would be rising.
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FINANCING OF WORKING CAPITAL
There are two types of working capital requirements as discussed above. They
are:
Permanent or Fixed Working Capital requirements
Temporary or Variable Working Capital requirements
Therefore, to finance either of these two working capital requirements, we
have long-term as well as short-term sources.
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FACTORS DETERMINING WORKING CAPITAL
REQUIREMENTS
There are many factors that determine working capital needs of an enterprise.
Some of these factors are explained below:
Nature or Character of Business.
The working capital requirement of a firm is closely related to the
nature of its business. A service firm, like an electricity undertaking or a
transport corporation, which has a short operating cycle and which sells
predominantly on cash basis, has a modest working capital requirement.
Oh the other hand, a manufacturing concern like a machine tools unit,
which has a long operating cycle and which sells largely on credit, has a
very substantial working capital requirement.
HCL Infosystems carry on activities related to computer systems.
Though they are primarily an assembling firm they also have
manufacturing facilities in Chennai and Pondicherry. This requires them
to keep a very sizeable amount in working capital.
Size of Business/Scale of Operations.
HCL is the leader in its segment in both consumer as well as
commercial market share. They have increased their share in the
consumer segment notably in the last four years. This they have
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achieved through retail expansion. The scale of operations and the size
it
holds in the Indian IT market makes it a must for them to hold their
inventory and current asset at a huge level.
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Rate of Growth of Business.
The rate of growth of sales indicates a need for increase in the working
capital requirements of the firm. As the firm is projected to increase
their sales by 80% from what it was in 2006, it is required to guard them
against the increasing requirements of the net current asset by way of
efficient working capital management. The sales and projected sales
level determine the investment in inventories and receivables.
HCL Infosystems
Limited
2008 2007 2006 2005 2004
PROJECTE
D
Gross Sales/Income
from Operations
3400 2833 2381 1967.3
7
1522.03
Price Level Changes.
Changes in the price level also affect the working capital requirements.
It was the reduced margins in the price of the raw materials that had
prompted them to go for bulk purchases thus making on additions to
their net current assets. They might have gone for this large-scale
procurement for availing discounts and anticipating a rise in prices,
which would have meant that more funds are required to maintain the
same current assets.
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The upper portion of the diagram above shows in a simplified form the chain of
events in a manufacturing firm. Each of the boxes in the upper part of the
diagram can be seen as a tank through which funds flow. These tanks, which are
concerned with day-to-day activities, have funds constantly flowing into and
out of them.
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried
out on the stock, and it will become part of the firms work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished
product.
As production progresses, labor costs and overheads need have to be met.
Of course at some stage trade creditors will need to be paid.
When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.
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Each of the areas- Stock (raw materials, WIP, and finished goods), trade
debtors, cash (positive or negative) and trade creditors can be viewed as tanks
into and from which funds flow.
Working capital is clearly not the only aspect of a business that affects the
amount of cash.
The business will have to make payments to government for taxation.
Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of
cash
Some shares may be redeemed for cash
Dividends may be paid
Long-term loan creditors (existing or new) may provide loan finance,
loans will need to be repaid from time-to-time, and
Interest obligations will have to be met by the business
Unlike, movements in the working capital items, most of these non-working
capital cash transactions are not every day events. Some of them are annual
events (e.g. tax payments, lease payments, dividends, interest and, possibly,
fixed asset purchases and sales). Others (e.g. new equity and loan finance and
redemption of old equity and loan finance) would typically be rarer events.
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SOURCES OF WORKING CAPITAL
HCL Infosystems has the following sources available for the fulfillment of its
working capital requirements in order to carry on its operations smoothly:
Banks:
These include the following banks
State Bank of India
Canara Bank
HDFC Bank Ltd.
ICICI Bank Ltd. Societe Generale
Standard Chartered Bank
State Bank of Patiala
State Bank of Saurashtra
Commercial Papers:
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Commercial Papers have become an important tool for financingworking capital requirements of a company.
Commercial Paper is an unsecured promissory note issued by thecompany to raise short-term funds. The buyers of the commercialpaper include banks, insurance companies, unit trusts, andcompanies with surplus funds to invest for a short period withminimum risk.
HCL issues Commercial Papers and had 4000 commercial papersin the year 2006.
HCL FINANCIALS:
CONSOLIDATED FINANCIAL PERFORMANCE
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WORKING CAPITAL POSITION :
CURRENT ASSET TOTAL ASSET
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PARTICULARS 2006 2005 2004 2003 2002CURRENT
ASSETS
100970 81533 54091 45042 55985
NET BLOCK 7970 5329 4925 4954 5552
TOTAL ASSETS 122479 99139 87076 71285 75205
CA/TA 82.44 82.24 62.12 63.18 74.43
The current asset percentage on total asset is the highest over the years. This
increasing percentage of current assets to the total assets at first might indicate
a preference for liquidity in place of profitability, but a look into the nature of
the business carried on by HCL Infosystems reveal the reason behind it. How
far their preference to current assets has affected the sales is shown below.
NET CURRENT ASSET SALES
PARTICULARS 2006 2005 2004 2003 2002
NET CURRENTASSETS
40343 34742 14301 18752 27065
SALES 238136 199886 154295 166604 127003
WORKING 16.12 142.93 -23.736 -30.7 -0.46
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CAPITAL %INCREASE
SALES %
INCREASE
19.14 29.54 -7.38 31.18 8.7
The sales has increased and the profits risen despite the 16.12% increase in
working capital. But what is noteworthy here is that the firm has managed to
maintain the trend of an increase in net current assets. Whether the change has
worked for the company has to be analysed in the context of the growth in
sales as compared to the previous year. There has been a 19.14% rise in the
sales or revenue generated. This would automatically suggest towards a very
efficient working capital management where the assets of the firm which are
short-term in nature have been utilized optimally in connection to their fixed
assets. The firm has gone towards such a dramatic shift in their working
capital position might be because of the tremendous growth witnessed in the
domestic IT market.
CURRENT ASSET FIXED ASSET
PARTICULARS 2006 2005 2004 2003 2002
NET CA/NET BLOCK 5.062:1 6.519:1 2.903:1 3.785:1 4.875:1
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The ratio of the net current asset to the fixed ones is an indicator as to the
liquidity position of the firm. This ratio has declined for the firm compared to
the previous year. There could be an argument as to whether the increased ratio
of working capital to net block is a conservative policy and whether it would be
detrimental to the interest of the company. Or, whether it would have been
proper if the company invested more into the capital expenditure in the form of
plant and machinery or invested in any other form that would have got them an
internal rate of return. What has to be kept in mind before coming to a
conclusion as to the policy of the company, is the fact that the firm being
primarily into assembling, its investment in the fixed asset segment need not be
high. A look into the capacity utilization of the plant would reaffirm this point.
It would be ideal for the firm to continue in the same line and not have
excessive investment in the fixed asset as they can easily add onto this part.
COMPUTER and MICRO PROCESSOR BASED SYSTEMS
YEAR INSTALLED
CAPACITY
ACTUAL
PRODUCTION
% CAPACITY
UTILIZATION
2006 1150000 581805 50.59
2005 600000 448121 74.69
2004 525000 295192 56.23
DATA GRAPHIC/DISPLAY MONITOR/TERMINALS/HUBS
YEAR INSTALLED
CAPACITY
ACTUAL
PRODUCTION
% CAPACITY
UTILIZATION
2006 250000 267326 106.93
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2005 250000 259617 103.85
2004 350000 297991 85.14
That the fixed assets of the firm are being put to efficient use and the firm is
trying for optimum capacity utilization is something that can be easily deduced.
Whether the current assets or the working capital of the firm has anything to do
with it is for us to see. An increased production in normal circumstances means
better raw material to finished goods conversion rate, i.e. the firm is taking less
of time in the production process and this happens when the current asset
employed in relation with the fixed ones are at optimum. The other notable
feature here is that though the firm has added on to its installed capacity in all
three years, they were still able to increase the capacity utilization. That they
have been able to do it shows that the more current assets, especially inventory
used in relation to the fixed assets, i.e., plant and machinery and their
management has only helped in increasing their utilization to the maximum.
CURRENT ASSET CURRENT LIABILITY
PARTICULARS 2006 2005 2004 2003 2002
CURRENT ASSETS 100970 81533 54091 45042 55985
CURRENT LIABILITES 60627 46791 39790 26290 28920
% CURRENT ASSETSINCREASE
23.84 50.7 20.09 -19.54 8.9
%CURRENT LIABILITES
INCREASE
29.57 17.6 51.35 -9.1 19.45
The 16.12% increase in Net Current assets despite of the fact that there has
been an increase in the Current Assets by 23.84% and increase in Current
Liability has been by 29.57% over that of the previous year has to be attributed
to the fact that in 2005, the company showed such a high increase in CA, that it
is still being offset. This is an indication as to the expanding operations of the
firm. HCL has increased its current assets in order to meet the increasing sales.
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The firms level of liquidity being high, we need a check on whether it affects
the return on assets.
INVENTORY MANAGEMENT
Inventories
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Inventories constitute the most important part of the current assets of large
majority of companies. On an average the inventories are approximately 60% of
the current assets in public limited companies in India. Because of the large size
of inventories maintained by the firms, a considerable amount of funds is
committed to them. It is therefore, imperative to manage the inventories
efficiently and effectively in order to avoid unnecessary investment.
Nature of Inventories
Inventories are stock of the product of the company is manufacturing for sale
and components make up of the product. The various forms of the inventoriesin the manufacturing companies are:
Raw Material: It is the basic input that is converted into the finished
product through the manufacturing process. Raw materials are those units
which have been purchased and stored for future production.
Work-in-progress: Inventories are semi-manufactured products. They
represent product that need more work they become finished products for
sale.
Finished Goods: Inventories are those completely manufactured
products which are ready for sale. Stocks of raw materials and work-in-
progress facilitate production, while stock of finished goods is required
for smooth marketing operations. Thus, inventories serve as a link
between the production and consumption of goods.
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Inventory Management Techniques
In managing inventories, the firms objective should be to be in consonance
with the shareholder wealth maximization principle. To achieve this, the firm
should determine the optimum level of inventory. Efficiently controlled
inventories make the firm flexible. Inefficient inventory control results in
unbalanced inventory and inflexibility-the firm may sometimes run out of stock
and sometimes pile up unnecessary stocks.
Economic Order Quantity (EOQ): The major problem to be resolved
is how much the inventory should be added when inventory is
replenished. If the firm is buying raw materials, it has to decide lots inwhich it has to purchase on replenishment. If the firm is planning a
production run, the issue is how much production to schedule. These
problems are called order quantity problems, and the task of the firm is
to determine the optimum or economic lot size. Determine an optimum
level involves two types of costs:-
Ordering Costs: This term is used in case of raw material and
includes all the cost of acquiring raw material. They include the
costs incurred in the following activities:
Requisition
Purchase Ordering
Transporting
Receiving
Inspecting
Storing
Ordering cost increase with the number of orders placed; thus the
more frequently inventory is acquired, the higher the firms
ordering costs. On the other hand, if the firm maintains large
inventorys level, there will be few orders placed and ordering
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costs will be relatively small. Thus, ordering costs decrease with
the increasing size of inventory.
Carrying Costs : Costs are incurred for maintaining a given level
of inventory are called carrying costs. These include the following
activities:
Warehousing Cost
Handling
Administrative cost
Insurance
Deterioration and obsolescence
Carrying costs are varying with inventory size. This behavior is
contrary to that of ordering costs which decline with increase in
inventory size. The economic size of inventory would thus depend
on trade-off between carrying costs and ordering cost.
Composition 2006 2005 2004
Raw Material 6349 7749 6127
Stores and Spares 3713 2987 2622
Finished Goods 13374 7245 6506
Work-in-progress 595 784 871
The increasing component of raw materials in inventory is due to the fact
that the company has gone for bulk purchases and has increased
consumption due to a fall in prices and reduced margins for the year.
Another reason might be the increasing sales, which might have induced
them to purchase more in anticipation of a further increase in demand of
the product. And the low composition of work-in-progress is
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understandable as because of the nature of the business firm is involved
in.
To the question as to whether the increasing costs in inventory arejustified by the returns from it the answer could be found in the HCL
retail expansion. HCL caters to the need of the two separate segments:
a) Institutions for which they manufacture against orders and,
b) Retail segment of the market.
They are more into retail than earlier and at present more than 650 retailoutlets branded with HCL sign ages and more are in the pipeline
The company in order to meet its raw materials requirements could have
gone for frequent purchases, which would have resulted in lesser cash
flows for the firm rather than the high expenditure involved when
procuring in at bulk. The reason why the firm has gone for these bulk
purchases because of the lower margins and the discounts it availed
because of procuring in bulk quantities.
A negative growth in WIP could be because:
a) The time taken to convert raw materials to finished goods is very
minimal
b) This is also due to capacity being not utilized at the optimum.
ABC System: ABC system of inventory keeping is followed in the
factories. Various items are categorized into three different levels in the
order of their importance. For e.g. items such as memory, high capacity
processors and royalty are placed in the A category. Large number of
firms has to maintain several types of inventories. It is not desirable the
same degree of control all the items. The firm should pay maximum
attention to those items whose value is highest. The firm should
therefore, classify inventories to identify which items should receive the
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most effort in controlling. The firm should be selective in approach to
control investment in various types of inventories. This analytical
approach is called ABC Analysis. The high-value items are classified
as A items and would be under tightest control. C items represent
relatively least value and would require simple control. B items fall in
between the two categories and require reasonable attention of
management.
JIT: The relevance of JIT in HCL Info system can be questioned. This is
because they procure materials on the basis of projections made at least
two or three months before. Even at the time of procurement they ensure
that they procure much more than what actually is required by the firm
that is they hold significant amount of inventory as safety stock. This is
done to counter the threat involved in default and accidentalbreakdowns. The levels of safety stock usually vary according to the
usage.
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Conversion Periods
Raw Material
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Particulars 2006 2005 2004
Raw Material Consumption 121077 97971.31 57775.14
Raw Material Consumption/day 332 268.41 158.28
Raw Material Inventory 7072 6960.275 4364.735Raw Material Holding Days 21 25.93 27.57
The raw material conversion period or the raw material holding cost has
reduced from 26 to 21. This is despite an increase in its consumption. This
indicates that the firm is able to convert the raw material at its disposal to the
work-in-progress at a lesser time as compared to the last year. It would be to the
benefit of the firm to reduce the production process and increase the conversionrate still as the firm is required to meet the increasing demand.
Work-in-progress
Particulars 2006 2005 2004
Cost of Production 191911 159651.19 113500.33Cost of Production/day 525.78 437.4 310.95
Work in progress inventory 689.5 827.52 679.455
WIP Holding days 1.31 1.89 2.19
The work-in-progress holding time is important for a firm in the sense that it
determines the rate of time at which the production process will be complete or
the finished goods will be ready for disposal by the firm. The firm as it is in the
process of assembling should take the least possible time in conversion to
finished goods unlike a hard core manufacturing firm, as any firm would like to
have its inventory in the work-in-progress at the minimum. There would also be
less of stock out costs as due to better conversion rates the firm is able to meet
the rise in demand situations. More the time it spends lesser its efficiency would
be in the market. Here the firm has been able to bring down its WIP conversion
periods.
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Finished Goods
Particulars 2006 2005 20004
Cost of goods sold 228177 178438.85
124768.92
Cost of goods sold/day 625 488.87 341.832
Finished goods inventory 10310 6875.725 5026.505
Finished goods inventory Holding days 16 14.06 14.8
The time taken for the firm to realize its finished goods as sales has increased ascompared to last year. This growth in sales could be traced back to the growing
domestic IT market for the commercial as consumer segment in India. HCL has
around 15% of the market in desktop and it is the market leader in this segment.
So it is only natural that they are able to better their conversion rate of finished
goods to sales.
Operating Cycle
Particulars 2006 2005 2004
Inventory conversion period 38 42 45
Average collection period 70 63 66
Gross operating cycle 108 105 111
Average payment period 22 23 17
Operating cycle 86 82 94
The operating cycle of the firm reveals the days within which the inventory
procured gets converted to sales or revenue for the firm. This time period is of
importance to the firm as a lag here could significantly affect the profitability,
liquidity, credit terms, and the policies of the firm. All the firms would like to
reduce it to such extend that their cash inflows are timely enough to meet their
obligations and support the operations. That the firm has been able to reduce the
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ratio is in itself an achievement as they were having huge stocks of inventory.
But the reduction in the cycle could also be attributed to the boom in the market
and the growth it is expected to reach. This boom automatically ensures the
demand for the finished goods and thus helping in it to garner sales for the firm.
Raw Material Consumption
Particulars 2006 2005 2004
Imported 92007 70784.27
42129.63
Indigenous 29070 27187.04
15645.51
% Imports 75.99 72.25 72.92
A major chunk of the imports come from Korea and Taiwan and is purchased in
US$. The value of imported and indigenous raw material consumed give a clear
picture that if there is a change in the EXIM policy of the government it isbound to affect the company adversely as more than 70% of their consumption
is from imports. But this is the scenario witnessed in the industry as a whole
and though HCL is into expanding its operation to Uttaranchal it in the present
state is would be affected by a change in the import duty structure.
A major chunk of their current assets are in the form of inventory and the
change in technology will invariably be a threat faced by the firm. The question
of technology applying here like says a certain device going say out of fashion
or outdated. For e.g. TFT monitors being in demand more than CRT.
CASH MANAGEMENT
SOURCES OF CASH:
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Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash!)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit.
Long-term loans
If you have insufficient working capital and try to increase sales, you can
easily over-stretch the financial resources of the business. This is called
overtrading.
Early warning signs include:
Pressure on existing cash
Exceptional cash generating activities e.g. offering high discounts for
early cash payment
Bank overdraft exceeds authorized limit.
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors
Paying bills in cash to secure additional supplies
Management pre-occupation withsurvivingrather than managing
Frequent short-term emergency requests to the bank (to help pay wages,
pending receipt of a cheque).
CASH MANAGEMENT IN HCL INFOSYSTEMS:
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The cash management system followed by the HCL Infosystems is mainly
lock box system.
Cash Management System involves the following steps:
1. The branch offices of the company at various locations hold the
collection of cheques of the customers.
2. Those cheques are either handed over to the CMS agencies or bank of the
particular location take charge of whole collection.
3. These CMS agencies or bank send those cheques to the clearing house to
make them realized. These cheques can be local or outstation.
4. The CMS agencies or bank send information to the central hub of the
company regarding realization/cheque bounced.
5. The central hub passes on the realized funds to the company as per the
agreed agreements.
6. The CMS agencies or concerned bank provides the necessary MIS to the
company as per requirement.
In cash management the collect float taken for the cheques to be realized into
cash is irrelevant and non-interfering because banks such as Standard
Chartered, HDFC and CitiBank who give credit on the basis of these cheques
after charging a very small amount. These credits are given to immediately and
the maximum time taken might be just a day. The amount they charge is very
low and this might cover the threat of the cheque sent in by two or three
customers bouncing. Even otherwise the time taken for the cheques to be
processed is instantaneous. Their Cash Management System is quite efficient.
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Cash-Current Liability
Particulars 2006 2005 2004
Absolute Liquid Ratio 0.24:1 0.31:1 0.11:1
The absolute liquid ratio is the best for three years and the cash balances as to
the current liability has improved for the firm. Firm has large resources in cash
and bank balances. While large resources in cash and bank balances may seem
to affect the revenue the firm could have earned by investing it elsewhere as
maintenance of current assets as cash and in near cash assets and marketable
securities may increase the liquidity position but not the revenue or profit
earning capacity of the firm.
Dividend Policy-Cash
Particulars 2004 2005 2006
Dividend Policy% 210 310 400
Shift in Sales 154295 199886 238136
Cash Balance 4463.43 14582.65 14529.29
Cash in Hand 118.33 128.97 128.97
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The other notable feature in HCL statements has been the growing dividend
policy of the firm. The payment of dividend means a cash outflow. Thus cash
position is an important criterion at the time of paying dividends. There is a
theory that greater the cash position and ability to pay dividends. The firm has
adopted a policy of disbursing the revenue earned as profits to the shareholders
as dividends as could be seen from the increasing % of dividends declared.
Particulars 2006 2005 2004
PBIDT 14284 15634 14523
Equity Dividend% 400 310 210
This could mean two things for the firm the amount of cash retained in the
business for capital expenditure purposes are minimal or nil. But rather than
investing more in plant and machine which they can at any point in time by
adding on a additional line if need they would like to optimize their utilization
in fixed assets at present. This also means that the percentage of cash in hand
maintained by the firm as a source of liquidity could be reduced, i.e. the amount
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of idle cash in the business could be made to a level which the firm feels
optimum.
The firm feels that they should retain cash and it would be in the interest of thefirm as well as the shareholders. This would automatically mean as decrease in
Earning/share (EPS)(Basic EPS declined from 8 in 2005 to 6.74 in 2006). It
would prompt more of investors being interested in the shares of the company,
which would boost the purchase of the securities and increase the market
price/share thus being beneficial for the firm.
Cash Flows
Cash Flows 2006 2005 2004
Net Cash from Operating activities 6924 2675.57 13706.34
Net Cash from Investing activities -3515 15661.29 -2169.16
Net Cash from Financing activities -3512 -8217.68 -11412.1
The firm has disposed of investments worth around 655 Crores to meet its
growing needs. The other notable feature is decline is the firms inflows from
operations primarily due to the reason that the cash generated from the
operations is the lowest in three years. And the firms growing dividend policy
has contributed to the outflows in financing activities.
Cash Flow in Operating Activities
Working Capital Changes
Working Capital Changes 2006 2005 2004
Trade and other receivables -14166 -14510.69 -7106.68
Inventories -5221 -2683.92 -7221.11
Trade Payables and other Liabilities 13026 6419.13 14311.5
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The cash from the operation has been subject to considerable change due to the
changes that could be adjusted towards trade receivables and trade payables.The outflows in inventory have become as low as 37% of what it was last year
despite an increase in the inventory consumption by 16.64%. The resulting
reduction in the cash outflows might be because of the inventories being
procured more on credit. That the cash from operations has declined has
affected the current liability index of the firm.
Cash Flow in Investing Activities
Investments in Mutual Funds 2006 2005 2004
Investments (year end) 13539 12277.44 28059.88
Purchase of Investment -65992 -53075.99 -59249.81
Disposal/Redemption of Investment 65312 65489.84 52087.36
The investments have reduced from the last year due to the redemption of
investments taken place to meet various needs such as increasing demand in
stock or inventory and to ensure better credit and receivables policy. We can see
that the firm has in these three years increased their cash inflow from the
investing activities by way of disposal of investments when in need. That is the
firm has redeemed to realize cash as to meet its expanding operations, fund the
inventory procurement and meet the obligations.
The investments in mutual funds are beneficial to the firm in the context that
they contain interest bearing securities which add up as a source of revenue forthe firm unlike cash which remains idle and unproductive when not in use. This
reduction of dividend could be attributed to disposal of investments in mutual
funds and subsidiary. This disposal creates a fund, which can be used by the
company as and when the need arises.
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Cash vs. Marketable Securities
The investment in marketable securities rather than having large cash balances
in something that has been given thought for by the firm. This is because whilea firm gets revenue in the form of interests by investments, it actually has to
pays certain amount money to the banks for maintaining current accounts and
fixed deposits usually have a longer maturity period. That is, the problem with
high investments is that the opportunity to earn is lost, thus a firm has to
maintain an optimal cash balance. But the investment in mutual funds or other
marketable securities might create a problem of investment, as they might not
be readily realizable as say liquid cash or the amount deposited in the current
account. The investments in say fixed assets say may earn a fixed rate ofinterest but they have a maturity period attached to them.
In HCL, Standard Chartered is the concentration bank in which all the inflows
from the deposit banks are concentrated and passed on to the disbursement
banks for further disbursement.
Liquid Cash Balance
The liquid cash maintained in the business is only that much as is required to
satisfy the daily requirements of the firm and not more. The rest of the cash is
invested into mutual funds and also held in fixed deposits and current accounts.
Instruments Used
The instrument used here are primarily cheques comprising of around 97% of
what is used in. The rest 2-3% comprise of the letters of credit.
Thus working capital is the lifeline for every business. The main advantages of
sufficient working capital are:
It helps in prompt payment
Ensures high solvency in the company and good credit standing.
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Regular supply of material and continuous production.
Ensures regular payment of salaries and wages and day to day
commitments.
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RECEIVABLES MANAGEMENT
Cash flow can be significantly enhanced if the amounts owing to a business
are collected faster. Every business needs to know.... who owes them money....
how much is owed.... how long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small
businesses whom can least afford it. If you don't manage debtors, they will
begin to manage your business as you will gradually lose control due to
reduced cash flow and, of course, you could experience an increased incidence
of bad debt.
The following measures will help manage your debtors:
1. Have the right mental attitude to the control of credit and make sure that it
gets the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers
and customers.
4. Be professional when accepting new accounts, and especially larger ones.
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5. Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
6. Establish credit limits for each customer and stick to them.
7. Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10.Consider charging penalties on overdue accounts.
11.Consider accepting credit /debit cards as a payment option.
12.Monitor your debtor balances and aging schedules, and don't let any debts
get too old.
Recognize that the longer someone owes you, the greater the chance you willnever get paid. If the average age of your debtors is getting longer, or is
already very long, you may need to look for the following possible defects.
Poor collection procedures.
Lax enforcement of credit terms.
Slow issue of invoices or statements.
Errors in invoices or statements.
Customer dissatisfaction.
Weak credit judgement.
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Debtors due over 90 days (unless within agreed credit terms) should generally
demand immediate attention. Look for the warning signs of a future bad debt. For
example..
1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed terms.
3. Evidence of customers switching to additional suppliers for the same goods.
4. New customers who are reluctant to give credit references.
5. Receiving part payments from debtors.
Profits only come from paid sales.
The act of collecting money is one, which most people dislike for many reasons
and therefore put on the long finger because they convince themselves that there
is something more urgent or important that demand their attention now. There is
nothing more important than getting paid for your product or service. A customer
who does not pay is not a customer.
HERE ARE FEW WAYS IN COLLECTING MONEY FROM DEBTORS: -
Develop appropriate procedures for handling late payments.
Track and pursue late payers
Get external help if you own efforts fail.
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Dont feel guilty asking for money .. its yours and you are entitled to it.
Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for the
remainder, it lessens the problem.
When asking for your money, be hard on the issue but soft on the person.
Dont give the debtor any excuses for not paying.
Make that your objective is to get the money, not to score points or get even.
RECEIVABLES MANAGEMENT IN HCL INFOSYSTEMS:
PARTICULARS 2006 2005 2004 2003
DEBTORS TURNOVER RATIO 5.21 5.80 5.53 6.62
AVERAGE COLLECTION PERIOD 70 63 66 55
A better turnover ratio implies for the firm, more efficiency in converting the
accounts receivable to cash. A firm with very high turnover ratio can take the
freedom of holding very little balances in cash, as their debtors are easily
realizable. In case of HCL, the collection period for the firm is 70 days.
PARTICULARS 2006 2005 2004
PROVISION FOR DOUBTFUL DEBTS(CASH FLOW) 3 49.85 25
DEBTS DOUBTFUL(EXCEEDING 6 MONTHS) 47 134.09 69.8
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The debts doubtful have doubled but their percentage on the debts has almost
become half. This implies a sales and collection policy that get along with the
receivables management of the firm.
COLLECTION POLICIES:
It refers to the collection procedures such as letters, phone calls and other follow
up mechanism to recover the amount due from the customers. It is obvious that
costs are incurred towards the collection efforts, but bad debts as well as average
collection period would decrease. Further, a strict collection policy of the firm is
expensive for the firm because of the high cost is required to be incurred by the
firm and it may also result in loss of goodwill. But at the same time it minimizesthe loss on account of bad debts. Therefore, a firm has to strike a balance between
the cost and benefits associated with collection policies.
The steps usually followed in collection efforts are:
Sending repeated letters and reminders to the customers
Personal visits
Using agencies involved in collection process
Making telephonic reminders
Initiating legal actions
Real Time Gross Settlement (RTGS)
Real Time Gross Settlement as such is a concept new in nature and though the firm
uses the system with all the members of the consortium, it is still in its primal stage
and will take time before all of the clients of the firm are willing to accept it. The
firm has made a proposal to the consortium of the banks during appraisal for faster
implementation of internet based banking facility by all the banks and adoption of
RTGS payment system through net.
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The debtors turnover ratio is completely dependent upon the credit policy
followed by the firm. The credit policy followed by the firm should be such that
the threat of bad debts and the default rate involved should be terminated.
PARTICULARS 2006 2005 2004 2003
CREDITORS TURNOVER RATIO 16.44 15.68 21.29 21.14
PAYMENT PERIOD 22 23 17 16
That the creditors turnover ratio has declined and payment period has increased
indicate that the company has got a leeway in making the payment to the creditors
by way of increased time.
With creditors they are having pre-agreements and have undertaken arrangements
with them, which they believe to be the best in the business and these are fixed.
(NOTE: Acceptances are not included in the computation of creditors turnover)
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MANAGING PAYABLES (Creditors)
Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can
create liquidity problems.
Consider the following: -
Who authorizes purchasing in your company - is it tightly managed or spread
among a number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities, which take account of stock holding and
purchasing costs?
Do you know the cost to the company of carrying stock?
Do you have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms as it reduces
dependence on a single supplier.
How many of your suppliers have a return policy?
Are you in a position to pass on cost increases quickly through price increases
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to your customers?
If a supplier of goods or services lets you down can you charge back the cost
of the delay?
Can you arrange (with confidence!) to have delivery of supplies staggered or
on a just-in-time basis?
There is an old adage in business that "if you can buy well then you can sell
well". Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors- slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).
Remember that a good supplier is someone who will work with you to enhance the
future viability and profitability of your company.
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Financing Current Assets
The firm has to decide about the sources of funds, which can be availed to make
investment in current assets.
Long term financing:
It includes ordinary share capital, preference share capital, debentures, long term
borrowings from financial institutions and reserves and surplus.
Short term financing:
It is for a period less than one year and includes working capital funds from
banks, public deposits, commercial paper etc.
Spontaneous financing:
It refers to automatic sources of short-term funds arising in normal course of
business. There is no explicit cost associated with it. For example, Trade Credit
and Outstanding Expenses etc.
Depending on the mix of short and long term financing, the company can
follow any of the following approaches.
Matching Approach
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In this, the firm follows a financial plan, which matches the expected life of
assets with the expected life of source of funds raised to finance assets. When the
firm
follows this approach, long term financing will be used to finance fixed assets
and permanent current assets and short term financing to finance temporary or
variable current assets.
Conservative Approach
In this, the firm finances its permanent assets and also a part of temporary current
assets with long term financing. In the periods when the firm has no need for
temporary current assets, the long-term funds can be invested in tradable securities
to conserve liquidity. In this the firm has less risk of facing the problem of
shortage of funds.
Aggressive Approach
In this, the firm uses more short term financing than warranted by the matching
plan. Under an aggressive plan, the firm finances a part of its current assets with
short term financing.
Relatively more use of short term financing makes the firm more risky.
Current asset to fixed asset ratio:
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The financial manager should determine the optimum level of current assets so
that the wealth of shareholders is maximized. A firm needs fixed and current
assets to support a particular level of output.
The level of current assets can be measured by relating current assets. Dividing
current assets by fixed assets gives CA/FA ratio. Assuming a constant level of
fixed assets, a higher CA/FA ratio indicates a conservative current assets policy
and a lower CA/FA ratio means an aggressive current assets policy assuming
other factors to be constant. A conservative policy i.e. higher CA/FA ratio implies
greater liquidity and lower risk; while an aggressive policy i.e. lower CA/FA ratio
indicates higher risk and poor liquidity. The current assets policy of the most
firms may fall between these two extreme policies. The alternative current assets
policies may be shown with the help of the following figure.
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In this figure the most conservative policy is indicated by alternative A, where as
CA/FA ratio is greatest at every level of output. Alternative C is the mostaggressive policy, as CA/FA ratio is lowest at all levels of output. Alternative B
lies between the conservative and aggressive policies and is an average policy.
WORKING CAPITAL & SHORT-TERM FINANCING
CONSORTIUM BASED FINANCING
Current Working Capital Limits
NAME OF THE BANK FUND BASED NON-FUND BASEDSTATE BANK OF INDIA 3600 46000ICICI BANK 1282 19000HDFC BANK
1200 10000STANDARD CHARTERED BANK 1200 19000STATE BANK OF SAURASHTRA 715 7500STATE BANK OF PATIALA 1300 7700CANARA BANK 1203 6000SOCIETE GENERALE 1000 4000HSBC BANK 1000 18300TOTAL 12500 137500
In order to finance the working capital needs of the firm in the form of Working
Capital Demand Loan, there is a consortium of nine banks. The consortium if
banks provide a fund based limit of 125 Crores which comprises of cash credit and
working capital demand loans and non-fund based limits which has bank gurantee
and letter of credit subject to a limit of 1375 Crores. The Lead Bankin this
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consortium of banks is State Bank of India and the second lead bank is ICICI. It
is SBI, which fixes the limit on the basis of consortium. They, in consultation of
the company decide the allocation of limit to various member banks. The
allocation cannot be higher than the limits fixed by it. SBI is the biggest
contributor in the cons