working cap of nahar
TRANSCRIPT
PREFACE
Business plays a very important role in economic development. To keep pace with
gigantic business powers. India has to produce competent business administrators who
need to have a balanced training in field of business administration. MBA plays an
important role in this field. MBA is a combination of both Theoretical and Practical
aspects of business and summer training gives an opportunity to work in real corporate
business environment.
The concept of summer training which is there in curriculum of business
management school serves two purposes;
Firstly- It gives the student a fair amount of insight of problems faced by them.
Secondly- This type of project helps business management students to get a first hand
experience of actual working condition, which otherwise is possible only when a student
enters the job.
In the preparation of this report, both the above purposes are kept in mind to make the
report more meaningful.
I undertook my training in NAHAR SPINING MILLS, LUDHIANA. During my
training, I studied about “WORKING CAPITAL OF MANAGEMENT” of NAHAR
SPINNING MILLS LIMITED LUDHIANA. I gained a good experience and in depth
knowledge during the surveys. This summer training report consists of my findings,
collection of data and then analyzed conclusions were drawn.
ACKNOWLEDGEMENT
Heartily thanks to all those who supported me ………
Acknowledging any one in mere words is a very difficult job. I would like to pay my
sincere thanks to all those people who helped me during this project work with their
guidance and invaluable advice.
The process of preparing this report on “Working capital of organization”, was a learning
experience for me. During the course of my preparation of this report I had to delve
deeply into many details and thus was able to enlighten myself.
Foremost of all, I express my sincere indebt ness to the Almighty for bestowing me with
favorable circumstances and keeping me in the high spirits. This project is the end
product of valuable contribution of the many persons to whom, I remain indebted.
I am thankful to Sh.HANS RAJ KAPOOR, GENERAL MANAGER (FINANCE) OF
NAHAR SPINNINGS MILLS who gave me an opportunity to take up my project in
organization. I would like to thank MR. ANIL GARG & SH.P.K. VASHISTH, MR
SANJEEV MITTAL (FINANCE CONTROLLER) for his support and encouragement
throughout the completion of my project. I am thankful for his active co-operation and
his keen involvement in my project. I am indebted to his for understanding and
appreciating my problems, which emerged during the course of my project
I am highly privileged to all the people, related directly or indirectly and the respondents
for being cooperative and sparing a few moments from their busy schedule; without their
help this project wouldn’t have proven meaningful.
SURABHI PURI
TABLE OF CONTENT
CERTIFICATE
ACKNOWLEDGEMENT
PART –I
INTRODUCTION
ORGANIZATIONAL PROFILE
PART- II
RATIONALE OF STUDY
OBJECTIVES OF STUDY
SCOPE OF STUDY
RESEARCH METHODOLOGY
THEORETICAL BACKGROUND OF WORKING CAPITAL
CONCEPT OF WORKING CAPITAL
TYPES OF WORKING CAPITAL
OPERATING CYCLE OF WORKING CAPITAL
DETERMINANTS OF WORKING CAPITAL
MEANING AND NATURE OF WORKING CAPITAL
REQUIREMENT OF WORKING CAPITAL
ANALYSIS OF WORKING CAPITAL
SWOT ANALYSIS
CONCLUSION
BIBLIOGRAPHY
INDIAN COTTON TEXTILE INDUSTRY
Indian textile industry is once of the largest segment of Indian economy for over 1/5 th of
industrial production. The winds of change have transformed a traditional art to a modern
industry, employing state of our technology and providing employment to over 15million
people.
The combination of traditional art and contemporary design has produced a variety of
yarn, fabric, home textile and other textile products. With over 9million hectares under
cotton cultivation & an annual crop of around 300 million kgs. India is amongst the
world’s largest reservoirs of this popular fiber. In addition to so odd varieties of different
description being grown in India, enables the industry to produce over almost every
conceivable count & construction of fabrics in a width of choice.
The process of economic liberalization begun in last decade has seen industry become
globally competitive not only in terms of price but also in quality. Modernization has not
been restricted to installation of sophisticated processing machinery wide width looms,
auto corners electronic clearers, spicer etc but also to adaptation of quality system
confirming to ISO-9000 stds. The recent euphoria created the European markets eco
friendly textiles has sent Indian industry into a flurry of activities to adapt it self to
market requirements.
Today with over 1300 spinning over 275 composite mills & around 1.49 million
registered loom, Indian cotton textile is a force to reckon with.
INTRODUCTION
The flagship company of nahar group- OSWAL WOOLEN MILLS LTD. Was
established in 1947 for spinning worsted yarns and knitted garments. Today it is a giant
Textile group of northern Indian with turnover of more than rs.1800 crore, producing all
types of yarns, fabrics and branded garments in addition to steel, sugar and vegitable oils .
The thrust of the group is in the Textile field aiming mainly at EXPORTS. There
are NINE important companies in the group
Nahar group of a vertically integrated well established & reputed conglomerate with a
wide range of portfolio from spinning knitting, weaving, processing, hosiery and
garmenting having latest art of technology units. The group has out sanding performance
in national textiles industry.
0.45million spindles & 5000 motors in multi- location units all over country
places. Nahar is in the top rank of spinners of country.
India’s one of the largest hosiery knitwear manufactures & exporters having
prestigious buyer like a old navy, gap, Perry Ellis, a shworth, cag and Philips,
van- heusen etc.
Holding hi profiled operated brands “Monte carto”, “Canterbury” and “Cotton
country” for wide range of garments.
Recognized “Golden trading house status” awarded by government of india.
NAHAR GROUP OF COMPANIES
“ONE OF THE PREMIER RECOGNISED GOLDEN
TRADING HOUSE OF INDIA”
“LALA VIDYA SAGAR OSWAL”
“FOUNDER NAHAR GROUP”
NAHAR SAGA
Nahar has busted into textile scenario through its flagship company woolen mills in 1949.
It has started from 800 spindles to modern day textile giant having varied Interest in
spinning, knitting, dying, weaving and garment.
Nahar group, promoted by Oswal family has grown leaps and bounds and
established itself as one of top business houses in india.
Nahar has seen very robust growth since its inception, having top international textile
brands like IEOD, OLD NAVY, GAP, QUICK SILVER, PERRY ELLIS, CAG,
PHILIPS, and VAN- HEUSEN in its kitty and exporting to market in
USA,
Europe,
Far East and
Middle East.
Nahar group has emerged as a reliable, trusted and committed global patner.
Following the retail boom nahar is making its foray in retail sector through its exclusive
outlets of its Brands.
“MONTE CARTO”
“CANTERBURRY” AND
“COTTON COUNTY”
PHILOSOPHY OF NAHAR
VISION
“BUILDING WORLD CLASS BRANDS & PRODUCT”.
Nahar is continuously working to provide best quality products at most competitive
prices. Customers are of utmost importance and it strives to achieve higher customer
satisfaction. Its business model is based on employing “BEST MINDS” & “BEST
HANDS” in industry to provide value added products and implementing cost cutting
tools.
VALUES
“WE VALUE OUR VALUES”.
Performance and teamwork are two attributes which they envisage in their employees and
are fully devoted to provide greater employee satisfaction and excellent working
environment. They abide by high ethical standards which is a key to their solid success.
They enhance their productivity by adapting to best technical capabilities and system. In
this way, they achieve and sustain their stupendous growth. They tend to became best by
making commitment to strive relentlessly to improve their products and team.
CORPORATE SOCIAL RESPONSIBILITY
“OUR MOTTO- PAYBACK TO SOCIETY”.
Their objective is to fulfill their social responsibility by encouraging and
supporting educational instructions and running health facilities
They also abide by their commitment to confirm to various enviromromental
norms and standards.
QUALITY POLICY & QUALITY OBJECTIVE
QUALITY POLICY
To provide the required support and assistance to manufacture group companies in
meeting the customer requirement of quality and delivery, especially in the area of
procurement of material and marketing of products. This will be achieved through
continuous improvement in effectiveness of well designed quality management
system.
QUALITY OBJECTIVES
Enhance customer
Enhance timely procurement of material.
BOARD OF DIRECTORS
SH. Jawaharlal oswal CHAIRMAN.
SH. Dinesh oswal MANAGING DIRECTOR.
SH. Kamal oswal DIRECTOR.
DR (Mrs.) H.K. BAL DIRECTOR.
SH. Amarjeet Singh DIRECTOR.
DR O P Sahni DIRECTOR.
Prof K.S. Maini DIRECTOR.
SH S.K Sharma ADDITIONAL DIRECTOR.
GENERAL MANAGER (FINANCE)
SH. HANS RAJ KAPOOR.
FINANCE CONTROLLERS
SH. ANIL GARG.
&
SH. P.K. VASHISTH
COMPANY SECRETORY
SH. BRIJ SHARMA.
AUDITORS
M/S GUPTA VIGG & CO.
(CHARTED ACCOUNTANT)
101, Kismat complex
G.T Road miller ganj ldh-141003.
BANKERS
PUNJAB NATIONAL BANK,
STATE BANK OF INDIA &
ICICI BANK LTD.
REGD OFFICE
373, Industrial area –‘A’ ldh-141003.
WORKS
Industrial Area-‘A’, Ludhiana (Punjab)
Dhandari kalan, G. T. ROAD, Ludhiana (Punjab)
Village Simrai, Mandideep, Distt. Raisen (M.P.)
Village Lalru, Distt. Patiala (Punjab)
Village Jalalpur, Distt. Patiala, (Punjab)
Rishab Spinning Mills, Village Jodhan, Distt. Ludhiana
NSML Unit 3, 100% EOU, Village Lehli/Lalru, Distt. Patiala
Nahar Fibres, Jitwal Kalan, Malerkotla.
PERFOMANCE REVIEW
OPERATING INCOME :
YEARS OPERATING INCOME
2002-03 46068
2003-04 38903
2004-05 44937
2005-06 48657
2006-07 91331
PERFOMANCE REVIEW OF EXPORTS
YEARS EXPORTS
2002-03 23839
2003-04 21026
2004-05 27148
2005-06 30178
2006-07 59980
PERFOMANCE REVIEW OF GROSS PROFIT & PROFIT AFTER TAX:
YEARS GROSS PROFIT PROFIT AFTER TAX
2002-03 8039 2485
2003-04 7612 2640
2004-05 6555 1604
2005-06 7807 2824
2006-07 18645 6429
PRODUCT MIX
100% Cotton Raw Material and Dyed Yarns
These yarns are available in single, double and multi-fold on cones.
RAW MATERIAL COMBED YARNS:
Count range NE 10 to NE 120.
Available from indigenous and foreign growth of cotton.
Specially yarns made from ELS cotton turn as PIMA & GIZA.
RAW WHITE EARNED YARNS :
Count range NE 10 to NE 32.
Available from indigenous and foreign growth of cotton.
DYED YARNS :
Count range NE 10 to NE 40.
Available from 100% Cotton & also Blended with Polyster, Acrylic & Viscose
staple fibres.
MELAGE YARNS :
Count range NE 10 to NE 40.
Available from 100% cotton & also blended with polysters acrylic
&Visorse staple fibres.
100% GRASSED/ MERCERISED YARNS :
Count range NE 20/2 to NE 120/2.
Available from indigenous and foreign growth of cotton in Raw White & Dyed
form
COMPACT SPIN YARNS:
Count range NE 20 to NE 60.
ORGANIC COTTON YARNS
100% Organic Cotton & Blends of organic cotton with normal cotton.
OPEAL AND YARN ON RIETER R 40 FULLY AUTOMATED ROTORS.
BLENDED YARNS:
Cotton: Viscose- Count range NE 10 to NE 40.
Cotton: Wool- Count range NE 10 to NE 10.
Cotton: Polyststers- Count range NE 10 to NE 60.
Cotton: Acrylic-Count range NE 10 to NE 40.
Polyster: Viscose- Count range NE 10 to NE 60.
SPECILISED BLENDED YARNS :
Cotton: Dralon- Count range NE 10 to NE 40 available from Drab Lon Acrylic
fibre.
Cotton: Coolmax- Count range NE 10 to NE 40 available from Dacron Polyster
fibre v(cool max)
Cotton: Nylon- Count range NE 10 to NE 60.
SYNTHETIC/ MAN MADE FIBRE YARNS :
100% Polyster yarns- Count range NE 10 to NE 40.
100% Cool max yarns- Count range NE 20 to NE 40.
100% Viscose yarns- Count range NE 10 to NE 40.
SPECIALIZED YARNS :
Grindle yarn.
Space dyed yarn.
Slub yarn.
Core spun yarn.
High twist yarn.
Reverse yarn.
FABRICS
KNITTED.
WOOVEN.
KNITTED:
In house capacity to knit world class fabrics on circular knitting & flat bed machines &
can manufacture single- Jersey, Jacquard auto stripers s/j striples, Flerce, Veleury
interlock stripes & pique knits with large fleet of world’s latest machines and have
facility of both compaction fabrics.
WOOVEN:
Nahar is manufacturing world class woven fabrics such as
Dooby, Twills, Choinos, Gabardines, Canvas, Tussers, Cavallery, Twills, Satins, Broker
twills, Ottoman, Bed ford cord & Rib stop etc.
Nahar also expertise in 100% cotton & cotton blended fabrics such as
Cotton polysters,
Polyster Cotton,
Cotton: Tencel,
Cotton: Nylon,
Cotton: Lycra &
Cotton: Lenin.
GARMENTING
KNITTED
WOOVEN
WOOLEN
KNITTED
Nahar has capacity to produce on switch track & assembly line system to ensures quality
& efficiency their garments range include
T-shirt,
Polo shirts,
Sweat shirts,
Sports wear,
Rug by shirts,
Crew/ V- neck tops,
Flerce hooded tops,
Jackets & Plants on world class garments machines.
WOOVEN
Nahar manufacture Trousers, Shirt under brand. “COTTON- COUNTRY” for
domestic market in India and brand is very well established across the country.
WOOLEN
Nahar has a leadership in woolen garments: Sweaters & Cardigans with leading brands
“MONTE- CARLO” & “CANTERBURY” in India.
“MONTE- CARLO” has been awarded SUPER BRAND Indian council.
ACHIVEMENTS OF NAHAR
The group has also achieved excellence in exports which has also been recognized by the
Export Council as well as the Govt. of India by bestowing several export awards and
trophies such as:-
First Gold Trophy in GLOBAL EXPORTS in 1989.
First Silver Trophy in HOSIERY EXPORTS in 1990.
Export Award consecutively for five years (1989-1999 to 1993-1994) for EXPORT
of WOOLEN GARMENTS.
International Award of EXCELLENCE PERFORMANCE in EXPORTS in 1993.
Silver Trophy for Second Highest EXPORT PERFORMANCE in 1989-99.
Nahar is a licensed producer for following yarns:-
Supima cotton yarn: with supima tags.
Egyptian cotton yarn: with Giza cotton.
US cotton yarn: from cotton of us origins.
Cotton Dacron (cool max) yarn- with tags.
Organic cotton yarn- certified from skal.
International for outsainable textile and blended yarn.
ISO 9002
For Quality System Management (from BIS & DNV (Nether lands).
ISO 14002
Environment certification (from BIS & DNV (Nether lands).
OCKO- TAX CERTRIFICATION
FOR HUMAN ECOLOGICAL (From BTTG UK).
RATIONALE OF THE STUDY
Working capital is the life blood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run successfully
without an adequate amount of working capital.
The management of working capital is very important. It involves the study of day to day
affairs of the company. The motive behind the study of the project is to develop an
understanding about the working capital management in the running of business
organization and to help the company in developing the efficient working capital
management.
Cash is one of the current assets of a business. It is needed at all times to keep the
business going. A business concern should always keep sufficient cash for meeting its
obligations. Any shortage of cash will hamper the operations of a concern and any excess
of it will be unproductive. Cash management forms an important part of working capital
management.
Receivables constitute a significant portion of current assets of a firm. It is necessary to
have a proper control and management of receivables, as, for investment in receivables, a
firm has to incur certain costs and there is a risk of bed debts also.
The investment in inventory constitutes a major portion of current assets, so there should
be proper inventory management. Because of the large size of inventories maintained by
the firms, a considerable amount of funds is required to be committed to them. It is,
therefore absolutely imperative to manage inventories efficiently and effectively in order
to avoid unnecessary investment. An undertaking, neglecting the management of
inventories will be jeopardizing its long- run profitability and fail ultimately. The
management is to see that the quantity of working capital is neither too low to affect the
production adversely nor too high to block the funds unnecessarily.
OBJECTIVES OF THE STUDY
This study is being carried out keeping in mind the following objectives:
To analyze the working capital management of the company.
To determine the operating cycle of the unit.
To determine the future need of working capital in the running organization.
To examine that the investment in the working capital is optimum.
SCOPE OF THE STUDY
The study is conducted at “NAHAR SPINNING MILLS LIMITED LUDHIANA”,
Corporate Office, and Ludhiana for 7 weeks duration. The scope of the study is limited to
the Working capital management of NAHAR SPINNIG MILLS A SMALL UNIT OF
OSWAL. The reliability of the study is restricted to the personal perception of the people
interviewed and the data provided by the company.
To get proper understanding of this concept, I have done the study of the Balance sheets,
Profit and loss accounts, Cash accounts etc. So, scope of the study is limited up to the
availability of official records and information provided by the employees. The study is
supposed to be related to the period of last five years.
RESEARCH METHODOLOGY
Research in a common parlance refers to a search for knowledge. One can also define
research as a scientific and systematic search for pertinent information on a specific topic.
In fact, research is an art of scientific investigation.
PURPOSE OF RESEARCH
To recognize the various type of information which are necessary for the study of
working capital management.
Collection of data from various departments of Nahar Spinning Mills Limited
Ludhiana to analyze the working capital management.
For understanding the various reports, personal interviews are conducted.
With the help of various techniques like:
- Operating Cycle analysis
- Ratio Analysis
- Common size statement
The overall position of Nahar spinning mills is studied and analyzed.
STEP I: STUDYING THE POLICIES AND PROCEDURES FOLLOWED BY
NAHAR SPINNING MILLS IMITED:
The first and foremost step was to study the policies and procedures followed for
the working capital management.
STEP II: DATA COLLECTION:
Data can be classified into
a) Primary Data b) Secondary Data
Primary Data
Depending upon the nature of the problem, primary data can be collected through
various methods. In this study, personal interviews with senior officials of different
departments of Corporate Office, NSM and various members of finance and accounts
department of NAHAR will be conducted.
Secondary Data
Data provided by
The company manuals.
Annual reports.
Balance sheets etc.
Data collected through internet.
Report Writing & Presentation.
Report Encompasses – Charts, diagrams
THEORETICAL BACKGROUND
OF
WORKING CAPITAL
MANAGEMENT.
Meaning of working capital:-
In simple words working capital means that which is issued to carry out the day to day
operations of a business. Capital required for a business can be classified under two main
categories
Fixed capital
Working capital
Every business needs funds for two purposes, for its Establishment and to carry on its day
to day operations. Long term funds are required to create production facilities through
purchase of fixed assets such as plant and machinery, land, building, furniture etc.
Investment in these assets represents that part of firm capital, which is blocked on a
permanent or fixed basis called fixed capital. Funds are also needed for Short term
purposes i.e. for the purchase of raw material, payment of wages and other day to day
operations of business. These funds are known as working capital. In other words,
working capital refers to that firm’s Capital, which is required for short – term assets or
current assets. Funds thus invested in current assets keep revolving last and being
constantly converted into cash and this cash flow is again converted into other current
assts. Hence it is known as circulating or short – term capital.
In the words of Shubin, “Working capital is the amount of funds necessary to cover the
cost of operating the enterprise.”
CONCEPT OF WORKING CAPITAL
GROSS WRKING CAPITAL.
NET WORKING CAPITAL
GROSS WORKING CAPITAL:
In the broad sense, the term working capital refers to the gross working capital and
represents the amount of funds invested in current assets. Thus, the gross working
CONCEPT OF WORKING CAPITAL
GROSS WRKING CAPITAL NET WORKING CAPITAL
capital is the capital invested in total current assets of the enterprise. Current assets
are those assets which in the ordinary course of business can be converted into cash
within a short period of normally one accounting year.
NET WORKING CAPITAL:
In narrow sense, the term working capital refers to the net working capital. Net working
capital is the excess of current assets over current liabilities, or it represents the
difference between current assets and current liabilities. Net working capital may be
positive or negative. Positive net working capital is that when current assets are more
than current liabilities. But when current liabilities become more than current assets then
the working capital is negative. Current liabilities are those liabilities which are intended
to be paid in the ordinary course of business within a short period of normally one
accounting year out of the current assets or the income of the business.
Both Gross working capital and net working capital have increased over the past two
years. As seen before, there is increase in sales, and increase in production, therefore
more working capital is needed to assist the increase in production. There is very less
difference in the Gross working capital and Net working capital because of less amount
of current liabilities of Nahar.
TYPES OF WORKING CAPITAL
PERMANENT WORKING CAPITAL.
TEMPORARY WORKING CAPITAL.
Permanent Working Capital:
Permanent or fixed working capital is the minimum amount which is required to
ensure effective utilization of fixed facilities and for maintaining the circulation of
current assets. There is always a minimum level of current assets which is
continuously required by the enterprise to carry out its normal business
TYPES OF WORKING CAPITAL
PERMANENT WORKING CAPITAL TEMPORARY WORKING CAPITAL
operations. For example, NSM has to maintain some minimum level of raw
materials, work-in-process, finished goods and cash balance.
This minimum level of current assets is called permanent or fixed working capital
as this part of capital is permanently blocked in current assets.
Temporary Working Capital:
The extra working capital needed to support the changing production and
sales activities, is called variable or functioning or temporary working
capital.
It is the amount of working capital which is required to meet the seasonal
demands and some special exigencies. This can be shown in the following
diagram:
Amount of Working
Capital Temporary capital
Permanent capital
Time
OPERATING CYCLE or CIRCULAR FLOW CONCEPT
“Operating cycle is the Time Duration required for converting sales into cash after
the conversion of resources into inventories.”
Funds invested in current assets keep revolving fast and are being constantly
converted into cash and this cash flow out again in exchange for other current assets.
Hence, it is also known as revolving or circulating capital. The circular flow concept of
working capital is based upon this operating or working capital cycle of a firm.
The Cycle starts with the purchase of raw material and other resources and Ends with the
realization of cash from the sale of finished goods. It involves purchase of raw material,
its conversion into stock of finished goods through work-in-progress, conversion of
finished stock into sales, debtors and receivables and ultimately realization of cash and
this cycle continues again from cash to purchase of raw material and so on.
Sales of the finished stocks are not always full cash sales; there are credit sales also.
These credit sales after some period are converted into cash. So the whole process takes
the time. This time taken is known as the length of operating cycle. So operating cycles
includes:-
1. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)
So operating cycle can be known as following:-
Sales
If the length of the operating cycle has short length period then less working capital is
required. So working capital requirement is directly related with operating cycle.
OPERATING CYCLE OF TWO TYPES:
1. Gross Operating cycle
2. Net operating cycle
Raw Material
Work in Progress
Cash Collection from Debtors
Finished Goods
Credit Sales Cash Sales
GROSS OPERATING CYCLE:
Gross Operating cycle is the total time period from the conversion of Raw Material
into finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP
NET OPERATING CYCLE:
As we provide period to debtors for the payments, our creditors also provide period to
us for payment to them. So this reduces our requirement of working capital. This also
affects the operating cycle. Operating cycle’s length reduces with so many days as
provided by the creditors to us. The difference between gross operating cycle and
period allowed by the creditors for payment is known as net operating cycle.
NOC = GOC – CPP
WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS
FOR FUTURE:-
These needs may be of Raw Material or Finished Goods. Sometimes because of non-
availability of Raw Material or due to seasonal availability of Raw Material some
advances stock of Raw Material becomes necessary for company. In the similar way due
to sudden arise of demand of finished goods in future more finished goods are kept in
stock. For both reasons more working capital is required because funds will be involved
in these safeties stocks.
NEED OF WORKING CAPITAL
The need for working capital arises due to the time gap between production and
realization of cash from sales. Thus,working capital is needed for the following purposes:
For the purchase of raw materials, components and spares.
To pay wages and salaries.
To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses, etc.
To meet the selling costs as packing, advertising, etc
To provide credit facilities to the customers.
To maintain the inventories of raw material, work-in-progress, stores and spares
and finished stock.
DETERMINANTS OF WORKING CAPITAL
Following are the main determinants of working capital:
Nature and Size of Business :
The working capital of a firm basically depends upon nature of its business For
example: Public utility undertakings like electricity; water supply needs very less
working capital because offer only cash sales whereas trading & financial firms have a
very less investment in fixed assets but require a large sum of money invested in
working capital. NAHAR SPINNING MILLS Limited, which is a manufacturing
company, requires considerable investment in both fixed assets and working capital.
The size of business also determines working capital requirement and it may be
measured in terms of scale of operations. Greater the size of operation, larger will be
requirement of working capital. As NSM is growing, its requirement of working
capital is also increasing.
Manufacturing Cycle:
Longer the process period of manufacture, larger is the amount of working capital
required. The operating cycle of is NAHAR SPINNING MILLS 144 days for the
financial year 2006-07. It has decreased from the previous year. Consequently,
amount of working capital required has also decreased as compared to the last year.
Seasonal variation: In certain industries like NSM, raw material (cotton) is not available
throughout the year.
They have to buy raw material in bulk during the season to ensure an uninterrupted
flow and process them during the year.
Generally, during the busy season, a firm requires large working capital than in the
slack season.
Production Policy:
Production policy also determines the working capital level of a firm. If the firm has
steady production policy, it may require need of continuous working capital. But if
the firms adopt a fluctuating production policy means to produce more during the
lead demand season then the more working capital may require at that time but not in
other period during a financial year. So the different productions policy arise different
type of need of working capital.
In NSM Limited, the production is kept steady by accumulating inventories during
slack period with a view to meet high demand during the peak season. Now, since, the
production of Spinning yarn is kept steady throughout the year, therefore, the unit
requires higher working capital.
Firm’s Credit Policy:
The firm’s credit policy directly affects the working capital requirement. If the firm
has liberal credit policy, hence the more credit period will be provided to the debtors
so this will lead to more working capital requirement. With the liberal credit policy
operating cycle length increases and vice versa.
In NAHAR, the bulk of purchase of raw material and sale of finished goods is done on
credit. Therefore, credit policy is an important criterion to be taken into consideration.
Sales Growth:
Working capital requirement is directly related with sales growth. If the sales are
growing, more working capital will be needed due to arises need of more Raw
Material, Finished goods and credit sales.
Rate of Growth of Business:
The working capital requirements of a concern increase with the growth and
expansion of its business activities. As NSM is growing its business with
DEMERGERS AS NAHAR SPINNING MILLS WITH NAHAR EXPORTS,
therefore its working capital requirement is also increasing.
MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT
The management of working capital is concerned with two problems that arise in
attempting to manage the current assets, current liabilities and the inter relationship that
exists between them. A satisfactory level of working capital should be maintained,
i.e., it is neither inadequate nor excessive. Both excess as well as short working capital
positions are bad for any business. However, out of the two, it is the inadequacy of
working capital which is more dangerous from the point of view of the firm.
Disadvantages or Dangers of Inadequate Working Capital:
A concern which has inadequate working capital cannot pay its short-term
liabilities in time. Thus, it will lose its reputation.
It cannot buy its requirements in bulk and cannot avail of discounts, etc.
The firm cannot pay day-to-day expenses of its operations and it creates
inefficiencies, increases costs and reduces the profits of the business.
It becomes impossible to utilize efficiently the fixed assets due to non-availability
of liquid funds.
Disadvantages of Redundant or Excessive Working Capital:
Excessive Working Capital means idle funds which earn no profits for the
business and hence the business cannot earn a proper rate of return on its
investments.
It may lead to unnecessary purchasing and accumulation of inventories causing
more chances of theft, waste and losses.
Excessive working capital implies excessive debtors and defective credit policy
which may cause higher incidence of bad debts.
When there is excessive working capital, relations with banks and other financial
institutions may not be maintained.
MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT
There are two major decisions management relating to working capital management:-
1. What should be ratio of current assets to sales?
2. What should be the appropriate mix of short term financing and long term
financing for financing these current assets?
1. CURRENT ASSETS IN RELATION TO SALES:-
If the firm can forecast accurately the factors, which affect the working capital,
the investment in current assets, can be designed uniquely. When uncertainty affects the
above factors, as it usually does, the investment in current assets cannot be specified
uniquely. In case of uncertainty, the outlay on current assets should consist of base
component meant to meet normal requirement and a safety component meant to cope
with unusual requirement. The Safety component depends upon low conservative or
aggressive in the current assets policy of a firm. If the firm adopts a very conservative
current asset policy it would carry a high level of current assets in relation to sales. If a
firm adopts a moderate current assets policy it would carry moderate level of current
assets in relation to sales, finally if a firm follows a highly aggressive current assets
policy, it would carry a low level of current assets in relation to sales.
NSM is following current assets policy showing moderate level of current assets in
relation to sales as is evident from ratio analysis.
1. Determining a Short Term and Long Term Financing Mix for Financing of
current assets:-
Aggressive policy
Moderate policy
COST OF ASSETSCOST OF ASSETS
Conservative
SALES
There are Three approaches in this regard, which are discussed below:
HEDGING APPROACH.
CONSERVATIVE APPROACH.
AGGRESSIVE APPROACH.
HEDGING APPROACH
This approach is also called matching approach. In this approach there is a proper
matching of expected life of asset with the duration of fund. The hedging approach
suggests that the permanent working capital requirements should be financed with funds
from long term sources while the temporary or seasonal working capital requirements
should be financed with short term funds.
term financing
Fixed Assets
Time
Permanent current assets
Temporary current assetsShort term financing
Long term financing
ASSETS
CONSERVATIVE APPROACH:
In this approach there is more reliance on long-term financing in comparison to short-
term financing. Even some part of the temporary current assets is financed from long-
term sources because long-term sources are less risky in comparison to short-term. This
approach suggests that the entire estimated investments in current assets should be
financed from long-term sources and the short term sources should be used only for
emergency requirements.
Temporary Current Assets short
Term financing
Permanent Current Assets Long-term
financing
Fixed Assets
Time
ASSETS
AGGRESSIVE APPROACH
In this approach there is more reliance on short term financing. This approach suggests
that the entire estimated requirements of current assets should be financed from short-
term sources and even a part of fixed assets investments be financed from short-term
sources. This approach makes the finance-mix more risky, less costly and more
profitable.
Temporary current assets Short term
Financing
Permanent current assets Long term
Financing
Fixed Assets
Time
In NSM, the current assets are financed from short term sources mainly. Only in the time
of some special exigencies or need, current assets are financed from long term sources.
ASSETS
WORKING CAPITAL ANALYSIS
OPERATING CYCLE ANALYSIS
Operating cycle refers to the time period which starts from the raw material purchases
and ends with realization of receivable. So it is total time gap between raw material
purchases to total debtors’ collection. This is also known as working capital cycle.
Operating cycle is therefore expressed in terms of months or weeks or days.
Higher the operating cycle period, higher is the working capital requirement.
It comprises of raw material conversion period, WIP conversion period, FG
conversion period and debtors’ conversion period and creditors period.
The basic reason for calculating operating cycle is to find out the means for
reducing the duration of operating cycle because if duration of operating cycle
will be less than working capital requirement will be less.
OC = R + W + F + D – C
Where,
R = raw material conversion period
W = work in process period
F = finished goods conversion period
D = debtor collection period
C = creditors payment period
SWOT ANALYSIS OF NAHAR SPINNING MILLS
STRENGTHS
a) This is a professionally managed company and all the departments are being
headed by professionals.
b) The company was a follower of new management concepts like Kaizen, Quality
Circles, and Five Ss etc. and as such is continuously upgrading the skill level of
the workers for better product quality.
c) The company is already in the line of spinning Yarn and as such is having the
requisite technology / personals / labour.
d) The Technology used by the company is comparable to its peer and as such is
capable of supplying quality products.
e) The expansion projects will improve the productivity and profitability of the
company and consequently competitiveness.
f) The existing units will add to the cash generation of the company resulting into
improved repayment capacity of the unit.
g) The company is better equipped to face the world competition in view of the
State of the art machinery and improved productivity.
h) The companys’ Nahar unit is ISO 9000 certified, whereby its quality
manufacturing is at par with its competitors.
i) The Companys’ Spinning Facility has been certified, which is top certification.
j) The company has been awarded status of Star Trading House.
k) The Ludhiana is the hub for Spinning Procurement, as the unit is located in
Ludhiana itself the company has the advantage of First information &
procurement.
l) The Company has raised the Term Funds at the best interest rates, which are
either lower then then its peers or at par with its peers.
WEAKNESSES
a) The basic raw material of the company is cotton, which is an agriculture produce.
The cotton prices are thus dependent on the production of cotton (demand /
supply) in the country/international market.
b) The company is also in yarn segment where the margins are thin.
c) The company is manufacturing Grey Cotton Yarn (70%), while the
diversification / entry to other cotton yarns like mélanges, higher counts is still to
be made.
OPPORTUNITIES
a) The company can import cotton at competitive rates and better quality at any
time in case of need due to the appreciated rupee.
b) The company can explore International segment thoroughly as potential in the
international market is high.
c) With the closing down of Textile industry in Europe, the advantage of foreign
acquisition would can be explored.
THREATS
a) The company is operating in international markets and is facing competition
from China, Pakistan, Portugal, Turkey and Brazil.
b) The competition being faced by the company has increased after the quota
restrictions are lifted in tune with WTO.
c) The appreciated rupee has reduced the margins in the Exports.
d) The new spinning capacities have also come up, where by increased the supply
of cotton yarn.
e) The talent pool is shrinking, with new units being come up.
FINDINGS & SUGGESTIONS
The project was based on Working Capital Management of Spinning mills business of
NAHAR GROUP Limited. Acrylic yarn forms 8-10% of the whole NSM business. It is
the product of manmade fibre. Working capital management is very important part of any
business. It involves the study of day to day affairs of the company. The motive behind
the study of the project is to develop an understanding about the working capital
management in the running of business organization and to help the company in
developing the efficient working capital management.
OBJECTIVES OF THE STUDY
This study has been carried out keeping in mind the following objectives:
To analyze the working capital management of the company.
To determine the operating cycle of the unit.
To determine the future need of working capital in the running organization.
To examine that the investment in the working capital is optimum.
FINDINGS:
Ludhiana Unit of Spinning Mills Limited gives it the maximum sales as it is the
biggest unit.
Cotton yarn forms the major part of Spinning Mills Limited. Yarn is only 8-10%
of the total NSM business.
Gross and net working capital has increased due to increase in production of
Yarn.
Net working capital is INCREASED. It has INCREASED from the previous year
because of INCREASE in finished goods conversion period.
Liquidity ratios of NAHAR SPINNING MILLS are too high because of
maintaining more inventory stock of raw material.
The share of inventories in the total current assets is more than 60%.
The total limit provided to NAHAR SPINNING MILLS Limited by various banks
is Rs 6026599728.8.
Most of the cash of all the units is managed at corporate office. It holds the cash
for major receipts & payments.
For filling its fund requirement, NAHAR GROUP depends upon the STATE
BANK OF INDIA.
Due to increase in production capacity of NAHAR SPINNING, there has been
increase in the raw material stock.
The raw material (Fibre) is not seasonal, but its time of purchase is dependent on
the rate at which it is available in the market.
A merger is going to be there of AmKryons International Pvt Ltd into Vardhman
Polytex Limited.
SUGGESTIONS:
Due to competition, prices are market driven and for earning more margin
company should give the more concentration on cost reduction by improving its
efficiency.
The unit should also adopt proper inventory control like ABC analysis etc. This
inventory system can make the inventory management more result oriented. The
EOQ can be followed in stores. Proper inventory management technique will help
the unit to decide upon the quantity of inventory to be kept. With its help the unit
can also decide upon the no. of days the inventory is to be kept. It will help in
reducing the inventory conversion period.
The investments of surplus funds are made by the corporate office and the unit is
not generally involved while taking decisions with regard to structure of
investment of surplus funds. The corporate office should involve the units so as to
better ascertain the future requirements of funds and accordingly the investments
are made in different securities.
Management should make the proper use of inventory control techniques like
fixation of minimum, maximum and ordering levels for all the items for less
blockage of money.
Company’s average debtor collection period is 48 days. So company should try to
reduce it for improving the efficiency.
As the margin in Acrylic yarn is less, therefore the company should try to
decrease the various manufacturing and other expenses incurred. It should also
increase the export sales.
CONCLUSION
Dur ing t he pe r i od o f s even weeks I have t r i ed t o go t h rough t he i n
dep th s t udy o f work ing cap i t a l managemen t o f NAHAR GROUP o f
NSM.
To conc lude t h i s t op i c , I wou ld l i ke t o s ay t ha t t hough NAHAR
SPINNING fo rms a sma l l g roup o f t he NAHAR, bu t t he managemen t
o f i t s work ing cap i t a l i s ve ry impor t an t , a s t he r e a r e t h in ma rg in s i n
s a l e o f F IBRE & YARN. The GROUP o f NSM which i s i n to t he
manufac tu r i ng o f F IBRE
& YARN i s e f f ec t i ve ly u t i l i z i ng t he work ing cap i t a l a l l ove r t he
p r ev ious yea r s . The s t a f f he r e i s good and fu l l o f young b lood ,
wh ich pe r fo rms t he i r du t i e s ve ry we l l .
Cash managemen t and r ece ivab l e managemen t a r e a l so good because
o f c en t r a l i z ed con t ro l on t he se . Raw ma te r i a l f o r t he a l l un i t s o f
NAHAR SPINNING MILLS LIMITED i s pu rchased by co rpo ra t e
o f f i c e i n bu lk wh ich i s t he be s t way . Sa fe ty measu re s fo r i nven to r i e s
a r e a l so qu i e t su f f i c i en t i n NSM. Ove ra l l t he work ing cap i t a l
managemen t o f NSM i s ve ry much e f f i c i en t .
BIBLIOGRAPHY.
Gupta Shashi K; Sharma R.K.; Financial Management; Kalyani
Publishers; 2006-07
Pandey,I.M.; Financial Management; Vikas Publishing House Private
Ltd.;2003-2004
Jain,S.P.; Narang,K.L.; Cost Accounting; Kalyani Publishers;2002-2003
Manuals, brochure, Balance sheet, Profit & Loss account & annual reports
for different years of the company.