working capital goodfrey philips

EXECUTIVE

SUMMARY

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Project ~ Working Capital

EXECUTIVE SUMMARY

Working capital nowadays has been identified as a major thrust area by almost all the firms

throughout world in order to manage the current assets and consequentially current liabilities.

Working capital refers to the capital which is used to carry out the day to day operation of a

business. 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, machinery, and building, furniture etc. Funds are also

needed for short-term purposes i.e. for the purchase of raw material, payment of wages and carry

on day-to-day operations of business etc. These funds are known as working capital.

The above idea of Working capital suggests that lifeline of a business is cash. Cash flows in a

cycle into, around and out of a business. If a business is operating profitably, then it should, in

theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run

out of cash and expire.

The faster a business expands the more cash it will need for working capital and investment.

There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-

progress) and Receivables (debtors owing you money). The main sources of cash are Payables

(creditors) and Equity and Loans.

The cheapest and best sources of cash exist as working capital right within business. Good

management of working capital will generate cash will help improve profits and reduce risks.

For similar reasons optimization of working capital came into existence as an exhaustive project

at Goodfrey Philips India which started in beginning of year 2009.

The project conducted for optimization of working capital is a live project at GOODFREY

PHILIPS INDIA, Chandigarh under the name Working Capital. The project basically deals

with analysis of credit terms of suppliers, supplying different items at all the seven sites of

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GlaxoSmithKline involved in production as well as packaging of different products of the

company. Apart from analyzing the credit terms of suppliers for the company standard norms for

holding the inventory of raw materials, packaging materials was also analyzed to determine the

opportunities for reducing the working capital. A few more aspects of working capital have also

been studied to fulfill the objectives of the study.

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INTRODUCTION

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1. INTRODUCTION

India in a large and growing economy with rapidly expanding financial service sector.

Managing working capital is a matter of balance. A company must have sufficient cash on hand

to meet its immediate needs while ensuring that idle cash is invested to the organization’s best

possible advantage. To avoid tipping the scale, it is necessary to have clear and accurate reports

on each of the components of working capital and awareness of the potential impact of outside

influences.

WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

In the analysis for GOODFREY PHILIPS INDIA, Chandigarh, it was found that the

working capital has increased which could be mainly due to increased sales. The Gross

Operating Cycle declined significantly but the reduction was nullified due to the reduction in

inventory conversion period. This is why we see that Net operating Cycle for last two years is

almost identical. The main areas of emphasis were work in progress conversion period and

creditors conversion period. Debtors conversion period reduced but work in progress and

creditors conversion period increased. Few suggestions that are recommended for better

management of working capital are reducing inter-corporate deposits and loans, reducing

finished goods inventory, increment in creditors payment period etc.

The company uses Operating Cycle Method to calculate its Working Capital method.

Thus, good management of working capital is part of good financial management.

Effective use of working capital will contribute to the operational efficiency of a company,

optimum use will help to generate maximum returns.

Every business needs investment to procure fixed assets, which remain in use for a long

period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business

also needs funds for short-term purposes to finance current operations. Investment in short term

assets like cash, inventories, debtors etc., is called ‘Short-term Funds’ or ‘Working Capital’.

The ‘Working Capital’ can be categorized, as funds needed for carrying out day-to-day

operations of the business smoothly.

The management of the working capital is equally important as the management of long-term

financial investment. The goal of Working capital management is to ensure that the firm is able

to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term

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debt and upcoming operational expenses.

Every running business needs working capital. Even a business which is fully equipped with all

types of fixed assets required, is bound to collapse without

(i) adequate supply of raw materials for processing;

(ii)cash to pay for wages, power and other costs;

(iii)creating a stock of finished goods to feed the market demand regularly; and,

(iv)the ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a business. The

business will not be able to carry on day-to-day activities without the availability of adequate

working capital.

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LITERATURE

REVIEW

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2. LITERATURE REVIEW

In intention to discover the relationship between efficient working capital management and

firm’s profitability(Shin & Soenen, 1998) used net-trade cycle (NTC) as a measure of working

capital management. NTC is basically equal to the CCC whereby all three components are

expressed as a percentage of sales.

The reason by using NTC because it can be an easy device to estimate for additional financing

needs with regard to working capital expressed as a function of the projected sales growth. This

relationship is examined using correlation and regression analysis, by industry and working

capital intensity. Using a Compustat sample of 58,985 firm years covering the period 1975-1994,

in all cases, they found, a strong negative relation between the length of the firm's net-trade cycle

and its profitability. In addition, shorter NTC are associated with higher risk-adjusted stock

returns. In other word, (Shin & Soenen, 1998) suggest that one possible way the firm to create

shareholder value is by reducing firm’s NTC.

The study of (Shin & Soenen, 1998) consistent with later study on the same objective that done

by (Deloof, 2003) by using sample of 1009 large Belgian non-financial firms for the period of

1992-1996. However, (Deloof, 2003) used trade credit policy and inventory policy are measured

by number of days accounts receivable, accounts payable and inventories, and the cash

conversion cycle as a comprehensive measure of working capital management. He founds a

significant negative relation between gross operating income and the number of days accounts

receivable, inventories and accounts payable.

Thus, he suggests that managers can create value for their shareholders by reducing the number

of days accounts receivable and inventories to a reasonable minimum. He also suggests that less

profitable firms wait longer to pay their bills.

In other study, (Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash

conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its relationship

with the current and the quick ratios, with its component variables, and investigates the

implications of the CCC in terms of profitability, indebtness and firm size. The results of their

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study indicate that there is a significant positive relationship between the cash conversion cycle

and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also

positively related to the return on assets and the net profit margin but had no linear relationship

with the leverage ratios.

Conversely, the current and quick ratios had negative relationship with the debt to equity ratio,

and a positive one with the times interest earned ratio. Finally, there is no difference between the

liquidity ratios of large and small firms.

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COMPANY

PROFILE

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3. COMPANY PROFILE

Godfrey Phillips India, with 75 years of active industry experience, take pride in our ability to

create profit and value for the society without compromising on our core ethical systems and

following adopted best practices at all times. We are a people centric, market-driven, socially

responsible company, constantly evolving to find better and newer ways to provide customer

satisfaction and empowering our stakeholders. With our proven ability to understand emerging

trends and issues effecting people’s lives, we have been able to direct our efforts in realizing our

core philosophy of “Making a better world for a better tomorrow."

Celebrating seventy five years of commitment to excellence

Over the years, Godfrey Phillips India, has amassed goodwill by conforming to ethical business

practices at all times and acting as a catalyst for social change. Witness to dramatic changes in

technology, commerce, and society, we have promoted innovative business models, to stay ahead

of the competition. Due to this persisting endeavor to excel, innovate and win, we have grown to

become one of the largest companies in its class, with sales of over 2,600 crores. Over the years,

we have built an extensive network of distributors and retail outlets. We already hold the faith of

500 distributors and have successfully nurtured 800,000 retail outlets, with offices in eight

locations across the country.

Social Commitments

Our commitment to our people and society at large is an extension of our heritage and business

principles, which are to conduct ourselves ethically at all times, contribute towards economic

development, while improving the quality of life for our workforce, and thereby their families,

local communities and the society.

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VISION AND VALUES

Vision

To become a leading tobacco player in India and beyond.

To sustain and enhance our position as one of India’s most prominent business organizations,

while leveraging our proven competencies to diversify our reach across the globe.

With our deep-rooted belief systems and expertise in business, we hope to create sustainable

shareholder value without ever compromising on our ethical value systems, as laid down in the

company guidelines. Our work environment- invigoratingly challenging - provides ample

opportunity to our work force to continuously stretch to innovate and grow in life. We motivate

our employees to think radically and create path breaking solutions confronting the new milieu.

Values

Passion for winning

The passion to win and never be setback by defeat is organically integrated in all our employees.

They are inspired by example to stretch their limits by adopting a positive attitude, being self-

motivated, while relentlessly pursuing and capturing opportunities.

Our ethical system percolates down to every level of management, equipping our managers to

take on even the most challenging situations with utmost positivity. Treating complaints with

gravity, identifying internal and external customer needs, proactively fulfilling them and working

towards zero grievances is our common goal.

Together, we endeavor to deliver the right quality at the right time and price.

THE MANAGEMENT

Godfrey Phillips India is a Company committed to innovation and continuous improvement

which can be seen in the Company employees; from the top management to the factory level.

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Godfrey Phillips India’s management represents the optimum mix of professionalism,

knowledge and experience. They are the guardians to the Company, and protectors of the

shareholder’s interest.

PARTNERS

Philip Morris

Altria Group Inc is the parent Company of Philip Morris, Philip Morris USA and Philip Morris

Capital Corporation. Altria Group owns 100% of the outstanding stock of Philip Morris USA,

Philip Morris and Philip Morris Capital Corporation.

Philip Morris, the owner of some of the world's most respected brands including Marlboro, is

one of the largest shareholders in Godfrey Phillips India and has an agreement with the Company

to provide technological services and assistance in all areas of business.

In 1968 Philip Morris Finance Corporation, a wholly owned subsidiary of Philip Morris Inc.,

U.S.A. acquired full ownership of Godfrey Phillips Ltd., London, U.K., which was the Holding

Company of Godfrey Phillips India Ltd. till the issue of shares to the Indian public during 1975.

As a result of acquisition of Godfrey Phillips Ltd., London, U.K. as above, Philip Morris Inc.

through its wholly owned subsidiary, Philip Morris Finance Corporation became the Holding

Company of Godfrey Phillips India Ltd. After the public issue in 1975, offer for sale to Indian

public in 1979 and a rights issue in 1981 the shareholding of Philip Morris Finance Corporation

in Godfrey Phillips India Ltd. came down to the present level of 25%.

Philip Morris Inc. joined hands with the K. K. Modi Group in 1979.

ACHIEVEMENTS & AWARDS

Recent Awards

Guldhar Factory was awarded the ‘Greentech Foundation Gold Award’ in 2009 and 2010

for Outstanding Achievement in Environment Management. These awards are the most

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coveted awards in the corporate world for outstanding achievements in the field of

Environment Management.

Andheri Factory won the Greentech Safety Silver Award in recognition of excellence in

safety management.

The Indian National Suggestion Scheme Association (INSSAN) presented awards to

Andheri factory, Mumbai team for its best suggestions/ideas during the various

conventions held on different topics and places for a record 14th consecutive year in a

row in 2010.

Previous Awards

Won Golden Peacock Award 2007 for excellence in Product Innovation category for

Four Square.

Tipper won Golden Peacock Award for the best product innovation in the year 2003 and

then again in 2006 for innovative product and service. It has also won the Silver medal at

the Monde Selection Brussels, World Selection of Quality 2006.

The Indian National Suggestion Schemes' Association (INSAAN) presented awards to

Andheri factory for its best suggestions/ideas during the various convention held on

different topics and places for the record 11th consecutive year in a row.

The Guldhar factory won The 'Greentech Environment Excellence Awards' and

Greentech Safety Awards', in the year 2006. These awards are the most coveted awards in

corporate world for outstanding achievements in the field of environment management.

The pack design of Jaisalmer, the premium King Size cigarette of the Company, won the

coveted PFFCA (Paper, Film & Foil Converters Association) Star Award, felicitating the

pack for its excellence in design, development and creativity in packaging.

North Pole has also won the Golden Peacock award for innovative packaging in 2005.

FINANCIALS

If the success of a Company is judged by the satisfaction level of its employees, then the

economic stability of a Company is judged by the satisfaction and belief levels of its

shareholders.

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It is their belief and faith in the system, their passion about the organization that inspires the

Company to sail through difficult period and face challenges. Godfrey Phillips India as a

Company is dedicated to the interests of all those who have invested their faith in it.

The Company strives to maximize growth in revenue while equally managing the cost of doing

business. Thereby, it continuously seeks to create greater value for the shareholders.

BRANDS

FS1

FS1 is the premium line of cigarettes launched by Four Square. Each Turkish Blend cigarette in

the FS1 pack attributes its distinct taste and aroma to Luxury Long Leaf blended with the finest

Indian handpicked tobaccos. It is designed to give the Ultimate Taste Experience. FS1 comes in

3 variants – Full Flavour, Extra Smooth and Regular.

Four Square

Four Square is a well established and leading cigarette brand in India. Launched way back in

1964, the brand commands trust and reputation amongst its consumers and is known for its

innovative ways to meet the changing consumer preferences.

Today, the Four Square franchise has a wide portfolio of variants that are available in both King-

size and Regular-size segments, namely - Four Square Kings, Four Square Special, Four Square

Premier, Four Square Fine Blend and Four Square Rich Gold.

In its relentless pursuit to provide value to customers and leveraging advancements in

technology, the brand has many firsts to its credit like introducing innovative pack designs with a

tactile look and feel, and applying digital means to communicate with and delight consumers.

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Marlboro

Godfrey Phillips India has an arrangement with Philip Morris to manufacture and distribute their

brands, including the iconic Marlboro brand of cigarettes. Available at select cities in India at

approximately 65,000 retail outlets, the brand has 7 variants including the recently launched

Marlboro Gold Advance.

Red & White

Enjoying an iconic stature and a strong emotional bond with its loyal consumers, Red & White is

one of the fastest growing regular filter brands. With a presence in markets such as those of

Punjab, Haryana and Delhi, it is available as a R&W Filter, R&W Plain, R&W Super and R&W

Premium. The brand continues to retain its iconic popularity as ‘Red & White peene walon ki

baat hi kuch aur hai’ still resonates strongly with consumers and is one of the most memorable

ad-lines in India.

North Pole

An innovative brand from the stable of Godfrey Phillips India, it is the largest selling menthol

cigarette in India.

Cavanders

Cavanders is one of the oldest and most trusted brands from the house of Godfrey Phillips India.

Associated with a unique taste and value proposition, Cavanders has always enjoyed a strong

emotional connect with consumers owing to its unique positioning of "Friendship". The brand is

available in a host of variants ranging from Cavanders Gold Leaf and Magna in the plain

segment to Cavanders Gold, Cavanders Special and Cavanders Magnum filter in the Regular size

filter and Cavanders Magna filter in the Micro filter segment. Through the variants stated,

Cavanders has a foothold across the length and breadth of India.

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Tipper

Tipper is a brand driven by innovation, superiority of imagery and offering. The new Tipper

Filter variant has been able to attract a significant share of Tipper's erstwhile micro consumers.

DIVERSE BUSINESS

Pan Vilas – Pan Masala

The quest for the perfect pan masala comes to an end with Pan Vilas. The delicately balanced

blend and the rich trove of finest ingredients give Pan Vilas an unmatched and lingering taste.

The brand goes a step further to ensure quality and establish trust by using a natural alternate to

banned Magnesium Carbonate and applying the best worldwide technology in manufacturing.

It is a treat for those discerning people who can go to any length for the elusive perfect taste.

Thus “Shauq badi cheez hai” aptly captures the brand’s ethos of passionate indulgence

It has been launched in the four key markets of India in early 2010. Pan Vilas is manufactured at

Baramati, a state-of-the-art plant that employs some of the world’s most advanced food

processing technologies. Our success in meeting strict test launch metrics and the overwhelming

response to Pan Vilas from both consumers and the trade industry has further given Godfrey

Phillips India the confidence to introduce a national rollout in 2010-11.

Tea

The Godfrey Phillips India group offers an extensive range of fine teas from a team of highly

talented master blenders. The teas have been crafted to cater to a variety of palates, segments and

markets. The young tea buds and tender leaves are delicately hand plucked, tested for freshness

and quality using the most advanced technology to make each blend special.

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Symphony Premium Teas : The premium range offers an exquisite assortment of original

brews and flavours. Available in three variants- Assam Tea, Darjeeling Tea and Green Tea, the

premium range has been developed to offer a superior brew each time.

INTERNATIONAL BUSINESS

Our foray into international markets and success with new business ventures has been part of an

endeavor to realize our vision of becoming a leading player in India and beyond. Today, we

collaborate with some of the top players in the international tobacco industry to assist them in

marketing their products and providing various professional and expert services including

contract manufacturing, cut tobacco, smoke analysis and various other consultancy services.

Many countries from the Middle East to West Africa, South East Africa, South East Asia, East

Europe, Australia, South America, Southeast Asia and Central America have been added on to

our portfolio of exporting cigarettes as well as cut tobacco. Our brands Force 10, Jaisalmer,

Originals and Ultima are already making substantial inroads in their respective markets.

Our International Division is continually making efforts to forge new global contacts to facilitate

tea exports. Our primary tea brand, Tea City has already made a successful entry into the export

market. Under the brand, we offer Indian teas from various origins such as Assam, Darjeeling,

Dooars, Terai, Nilgiris and South India to meet the requirements of cup quality.

We also export Bulk and Specialty teas to Germany, USA, Japan, UAE, Kazakhstan & Iran with

the objective to expand our consumer base horizontally as well as vertically across segments. We

persistently work towards understanding our consumers and their distinct taste palates in order to

develop the most customized blends as well as specialized teas like organic tea, flavors in

packets & tea bags.

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The success of our International Division can aptly be credited to the superior, state- of- art

infrastructure that supports it, which begins right from the superior quality leaf ensured by our

Leaf Division to the end product from our Manufacturing units. In order to become a leading

player in the tobacco industry, we have constantly been upgrading and improving our systems

and processes through better R&D practices, upgraded manufacturing facilities and a better

understanding of consumer and market needs.

CORPORATE SOCIAL RESPONSIBILITY

The World Business Council for Sustainable Development defines CSR as "…the continuing

commitment by business to behave ethically and contribute to economic development while

improving the quality of life of the workforce and their families as well as of the local

community and society at large."

We, at Godfrey Phillips India not only recognize the importance of being a responsible corporate

citizen but our identity as a cigarette manufacturing Company and our success in it imposes even

a greater responsibility upon us to take it further. Being cognizant of this fact, we strive to be

active and committed participants in enhancing the community we work, live and do business in.

Besides strong internal responsible marketing policies that govern all our actions, we have

undertaken several initiatives like Godfrey Phillips Bravery Awards, Blood Donation Drive,

Women Empowerment projects, Godfrey Phillips WHITE, various GAP (Good Agricultural

Practices) and support programs for tobacco farmers, environmental management besides many

philanthropic and charitable gestures which is a part of the Company culture.

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Godfrey Phillips Bravery

Godfrey Phillips Bravery Awards aims to instil amongst citizens a culture of selfless conduct.

The Bravery awards were instituted in 1990 to acknowledge and reward the unsung heroes of

everyday life. These awards have been initiated to bring to notice the uncommon spirit of the

common man, and appreciate the extraordinary, yet little known acts of physical valor, social

service and humanitarian deeds, while inspiring others to follow suit.

The Godfrey Phillips Bravery Awards have saluted more than 1200 individuals over the years.

The awards are present over 16 states - Orissa, Chhattisgarh, Uttaranchal, Delhi, Haryana,

Punjab, Rajasthan, Uttar Pradesh, Maharashtra, Madhya Pradesh, Gujarat, Andhra Pradesh,

Karnataka, West Bengal, Goa and Himachal Pradesh. Owing to the gravity of the awards, a

meticulous judging process, external to the organization, has been followed since the initiation of

the awards to ensure authenticity. The entries to the awards are required to be attested by

gazetted officers or police officers. These entries are then judged by a panel of eminent

personalities including senior bureaucrats, Director Generals of Police and senior officers of the

Armed Forces, who select the winners based on certain parameters. The candidates are rated on

the basis of personal risk, situational intensity and selflessness in case of the Physical Bravery

category, while determination, foresight, selflessness and perseverance in case of Social Acts of

Courage and the Mind of Steel categories.

Environment Management

As a conscientious corporate citizen, we realize our responsibility towards the conservation of

the environment. Along with the growth of our business we remain committed towards

minimizing the impact of our business on the environment. To this effect, we have adopted a

host of policies that use only such methods which have been proven to be environmentally safe.

The facilities comply with international quality standards like ISO 9001:2008 ( and ISO 14000,)

and the high standards of environment-friendly manufacturing are brought about entirely due to

the recommendations of the motivated factory personnel. The ISO 14001:2004 (Environment

Management System) certification of our plants is a proof of our commitment towards

environmental control. Both the factories have taken up environment friendly initiatives like

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recycling of water, rainwater harvesting, solar power system etc. They have developed steam

heated hot water generator system to replace the electrical system, and have various automation

and interlocking systems to save power.

Both the factories (Mumbai factory was also recertified with ISO 9001:2008 and) are also

certified for OHSAS 18001:2007 which is our commitment towards Occupational Health and

Safety. The new upcoming manufacturing factory in Rabale, near Mumbai was registered with

IGBC for green factory building. Guldhar Plant is the first cigarette manufacturing unit in India

to have been accredited with Social Accountability (SA) 8000:2001.

The safety, well being and health of our associates is also core to our business philosophy, which

explains our consistent efforts towards reducing work related injuries and occupational illnesses.

For this, we follow all the statutory regulations regarding Health, Safety and Environmental

norms, which have helped Godfrey Phillips India establish an incident-free workplace.

The committed employees have also established an industry record by winning the INSAAN

Awards (The Indian National Suggestion Scheme Association, given for the best suggestions

made by a factory worker in the year) for the past 14 years running. Guldhar Factory was

awarded the ‘Greentech Foundation Gold Award’ in 2009 and 2010 for Outstanding

Achievement in Environment Management. These awards are the most coveted awards in the

corporate world for outstanding achievements in the field of Environment Management. It also

received the Eco Friendly Award 2009 from Ghaziabad Management Association for

implementing ‘Best Environment Management Practices’.

We also enable our farmers with GAP or Good Agricultural Practices by undertaking their

training and imparting them with technical know-how. Our efforts in this regard have been

recognized as the Tobacco Institute of India felicitates our farmers each year for their

breakthroughs.

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Social Accountability

M/s International Tobacco Company is only the second tobacco company in the world to have

received the Social Accountability Certification, SA 8000: 2001 in 2006, which is proof of its

commitment to social responsibility in all aspects of our business.

The production facility at M/s International Tobacco Company Limited, Ghaziabad has set

the highest standards in social accountability by following current best industry practices and

norms including the guidelines set by Social Accountability International.

A system audit conducted by a third party company-Chess Management-confirmed that the

company was successful in meeting all its statutory responsibilities with regards to society

proving the resilience of its internal value systems.

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WORKING

CAPITAL

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4. WORKING CAPITAL

5.1 DEFINITION:

According to Ralph Kennedy and Steward Mc Muller “a study of working capital is

of major importance to internal and external analysis because of its close relationship with

the current day to day operations of business”.

5.2 MEANING:

Working capital refers to the funds invested in current assets i.e. investment in stocks,

sundry debtors, cash and other current assets. Current assets are essential to use fixed assets

profitably. For example a machine cannot be used without raw material. Thus it is obvious that

certain amount of funds is always tied up in raw materials, work in progress and finished goods.

However, the business also enjoys credit facilities from its suppliers who may supply raw

materials on credit and the firm may not pay all the expenses immediately. Therefore, certain

amount of funds is automatically available to finance the current assets requirements. However

the requirements for current assets are usually greater than the amount of funds payable through

current liabilities. In other words, current assets are to be kept at a higher level than the current

liabilities.

5.3 THEORETICAL FRAME WORK

Every business needs funds for two purposes for its establishment and to carry out its day

to day operations. Working capital refers to that part of the firm’s capital, which is required for

financing short term or current assets such as cash, marketable securities, debtors and

inventories. Working capital is the amount of funds to cover the cost of operating the enterprise.

The goal of working capital management is to manage the current assets and current

liabilities of the firm in such a way that a satisfactory level of working capital is maintained.

Working capital is the difference between the inflow and outflow of funds. Working capital is

also known as revolving or circulating or short term capital.

CONCEPTS OF WORKING CAPITAL

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There are two concepts of working capital

(a) Gross working capital

(b) Net working capital

(a) Gross working capital

Gross working capital refers to the firm’s investment in current assets. Current assets are

the assets, which can be converted into cash within an accounting year and include cash, short-

term securities, debtors (accounts receivables or book debts), bills receivables and stock

(inventory).

(b) Net working capital

Net working capital refers to the difference between current assets and current liabilities.

Current liabilities are those claims of outsiders which are expected to mature for payment within

an accounting year and include creditors (accounts payable), bills payable and outstanding

expenses.

Net working capital can be positive or negative. A positive working capital will arise

when current assets exceed current liabilities. A negative working capital will occur when

current liabilities are in excess of current assets.

List of current assets and current liabilities

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand Bills payable

Cash at bank Sundry creditors

Bills receivables Accrued expenses

Sundry debtors Short term loans

Stock Dividend payable

Prepaid expenses Bank overdraft

Accrued income Provision for taxes

Short term investments

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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways.

(a) On the basis of concept:

Gross Working Capital

Net Working Capital

(b) On the basis of time:

Permanent or Fixed Working Capital

Regular Working Capital

Reserve Working Capital

Temporary or Variable Working Capital

Seasonal Working Capital

Special Working Capital

Types of Working Capital

Working capital can be divided into two categories on the basis of time:

1. Permanent Working Capital

This refers to that minimum amount of investment in all current assets which is required

at all times to carry out minimum level of business activities. In other words, it represents the

current assets required on a continuing basis over the entire year. Tandon Committee has referred

to this type of working capital as “core current assets”.

The following are the characteristics of this type of working capital:

1. Amount of permanent working capital remains in the business in one form or another. This is

particularly important from the point of view of financing. The suppliers of such working capital

should not expect its return during the life – time of the firm.

2. It also grows with the size of the business. In other words, greater the size of the business,

greater is the amount of such working capital and vice-versa.

Permanent working capital is permanently needed for the business, and therefore, it

should be financed out of long-term funds. This is the reason why the current ratio has to be

substantially more than one.

2. Temporary Working Capital

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The amount of such working capital keeps on fluctuating from time to time on the basis

of business activities. In other words, it represents additional current assets required at different

times during the operating year. For example, extra inventory has to be maintained to support

sales during peak sales period. Similarly, receivables also increase and must be financed during

period of high sales. On the other hand, investment in inventories, receivables, etc., will decrease

in periods of depression.

Suppliers of temporary working capital can expect its return during off season when it is

not required by the firm. Hence, temporary working capital is generally financed from short-term

sources of finance such as bank credit.

MEASURING THE WORKING CAPITAL

Working capital is very essential to maintain the smooth running of business. No business

can run successfully without an adequate amount of working capital. However it must also be

noted that working capital is a means to run the business smoothly and profitably and not an end

in itself. Thus concept of working capital can be conducted through a number of devices such as

1. Ratio analysis

2. Funds flow analysis

3. Budgeting

1. RATIO ANALYSIS

A ratio is a simple arithmetic expression of the relationship of one number to another.

The technique of ratio analysis can be employed for measuring short term liquidity or working

capital position of a firm. Several ratios like current ratio, quick ratio, inventory turnover ratio,

receivable turnover ratio, payables turnover ratio, working capital turnover ratio, cash position

ratio etc.

2. FUNDS FLOW ANALYSIS

Funds flow analysis is a technical device designated to study the sources from which

additional funds are derived and the use to which these sources are put. It is an effective

management tool to study changes in the financial position (working capital) of a business

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enterprise between beginning and ending financial statements dates. The funds flow analysis

consists of:

(a) Preparing schedule of changes in working capital

(b) Statement of sources and application of funds.

3. WORKING CAPITAL BUDGET

Working capital budget, as a part of total budgeting process of a business, is prepared

estimating future long term and short term working capital needs and the sources to finance

them, and then comparing the budgeted figures with the actual performance for calculating

variances, if any, so that corrective actions may be taken in the future. Its main objective is to

ensure availability of funds as and when needed, and to ensure effective utilization of these

resources. The successful implementation of working capital budget involves preparing separate

budgets for various elements of working capital, such as, cash, inventories and receivables.

OBJECTIVES OR NEED OF WORKING CAPITAL

The need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. It requires:

1. For the purchase of materials, components and spares.

2. To pay wages and salaries.

3. To incur day- to- day expenses and overheads such as fuel, power and office expenses etc.

4. To meet the selling costs as packing, advertising etc.

5. To provide credit facilities to the customers.

6. To maintain the inventories of raw materials, work in progress, stores and spares, and finished

stock.

IMPORTANCE OF WORKING CAPITAL

Working capital is just like the heart of the business. If it becomes weak; the business can

hardly prosper and survive. It is an index of solvency of a concern. Its proper circulation

provides to the business the right amount of cash to maintain in business. Without adequate

28

amount of working capital, production interruption may take place and results in reduction of

profit. Just as circulation of blood is very necessary in human body to maintain life, smooth flow

or circulation of working capital is necessary for the health of the enterprise. The prime object of

management is to make profit. Whether or not this is accomplished in most business depends

largely in the manner in which the working capital is administered.

KEY AREAS OF WORKING CAPITAL

Generally in the working capital management there are three important areas. Those are:

1. Cash management

2. Receivables management

3. Inventory management

ADVANTAGES OF ADEQUATE WORKING CAPITAL

Working capital is the life blood of the business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the business.

The main advantages of maintaining adequate amount of working capital are as follows:

Good solvency position in the business

Goodwill, it is easy to get loans

Cash discounts

Regular supply of raw materials

Regular payment of salaries, wages and other day to day commitments

Exploitation of favorable market conditions

Ability to face crisis

Quick and regular return on investment

High morale

29


Every business concern should have adequate working capital to run its business operations.

It should not have either redundant/ excess or shortage of working capital.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

1. Excessive working capital means idle funds which earn no profit for the business and hence the

business cannot earn a proper rate of return on its investment.

2. Where there is a redundant working capital, it may lead to unnecessary purchasing and

accumulation of inventories causing more chances of theft, wastage and losses.

3. Excessive working capital implies excessive debtors and defective credit policy which may cause

higher incidence of bad debts.

4. It may result in overall inefficiency in the organization.

5. When there is excessive working capital, relations with banks and other financial institutions

may not be maintained.

6. Due to low rate of return on investments the value of shares may also fall.

7. The redundant working capital gives rise to speculative transactions.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1. A concern, which has inadequate working capital, cannot pay its short time liabilities in time.

Thus it will loose its reputation and shall not be able to get good credit facilities.

2. It cannot buy its requirements in bulk and cannot avail of discount etc.

3. It becomes difficult for the firm to exploit favorable market conditions and undertake projects

due to lack of working capital.

4. The firm cannot pay day to day expenses of its operations and it creates inefficiencies, increase

costs and reduces the profits of the business.

30

5. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid

funds.

6. The rate of return on investments also falls with the shortage of working capital.

FACTORS DETERMINING THE WORKING CAPITAL REQUIRMENTS

A firm should plan its operations in such a way that it should have neither too much nor

too little working capital. The working capital requirements are determined by a wide variety of

factors.

1. Nature and size of business:

Working capital requirements of a firm are basically influenced by the nature of its

business. Trading and financial firms have a very small investment in fixed assets, but require a

large sum of money to be invested in working capital. Whereas public utilities have a very

limited need for working capital and have to invest abundantly in fixed assets. Their working

capital requirements are nominal because they may have cash sales only and supply services but

not products. Working capital needs of most manufacturing concerns fall between too extreme

requirements of trading firms and public utilities. Such concerns have to make adequate

investments in current assets depending upon the total assets structure and other variables. The

size of the business that is measured in terms of scale of operations also has an impact on the

working capital needs. As BHPV’s scale of operations is large, the firm needs more working

capital then small firm does.

2. Manufacturing cycle:

The manufacturing cycle comprises of the purchase and use of raw material in the

production of finished goods. As the firm’s manufacturing cycle is lengthy the working capital

requirement of the firm is large.

3. Sales growth:

The working capital needs of firm increase as its sales grow. Current assets will have

to be employed before growth takes place. A growing firm needs to invest funds in fixed assets

in order to sustain its growing production and sales. This in turn increase investment in current

assets to support enlarged scale of operations, a growing firm needs funds continuously.

31


I. Demand conditions:

The business variations such as seasonal and cyclical fluctuations in the demand

for products and services affect the working capital requirements. When there is an upward

swing in the economy, sales will increase. Correspondingly, the firm’s investment in inventories

and book debts will also increase. During boom, additional investments in fixed assets may be

made by some firms to increase their productive capacity. These act as further additions to

working capital.

4. Production policy:

To reduce working capital problems arising due to changes in demand for the firm’s

products, a steady production policy may be maintained. If the firm’s productive capacities can

be utilized for manufacturing varied products, it can have the advantage of diversified activities

and solve its working capital problems.

Price level changes:

Generally, rising price levels will require a firm to maintain higher amount of working

capital. However companies which can immediately revise their product prices with rising price

levels will not face a severe working capital problem.

5. Operating efficiency and performance:

The operating efficiency of the firm relates to the optimum utilization of resources at

minimum costs. The use of working capital is improved and the pace of cash cycle is accelerated

with operating efficiency .Better utilization of resources improves profitability and thus helps in

decreasing the pressure on working capital. A high net profit margin contributes towards the

working capital pool. In fact, the net profit is a source of working capital to the extent it has been

earned in cash. A firm can enhance its working capital funds by saving taxes through appropriate

tax planning.

6. Firm’s credit policy:

The credit policy of the firm affects working capital by influencing the level of book

debts. The credit terms to be granted to customers may depend upon norms of the industry to

which the firm belongs. The firm should be discretionary in generating credit terms to its

32

customer. Depending upon the individual case different terms may be given to different

customer’s .A liberal credit policy with out rating the credit worthiness of customers will be

detrimental to the firm and will create a problem for collecting funds later on. Slack collection

procedures result in increase of book debts. The firm should follow a rationalized credit policy

based on the credit standing of customers and other relevant factors.

NEED OF WORKING CAPITAL

1. For the purchase of raw material components and stores

2. For the payment of wages and salaries.

3. To incur day-to-day expenses and overhead costs such as fuel, power and office

expenses.

4. To meet the selling cost as packing, advertising etc.

5. To provide credit facility to the customers.

6. To maintain the inventories of raw material, work-in-progress, stores and spares and

finished stock.

7. To meet the requirement of anticipated needs of future.

8. To face business crisis in emergencies such as depression, because during such

periods, generally, there is much pressure on working capital.

33


SCOPE AND

OBJECTIVES OF STUDY

34

5. SCOPE OF STUDY

The above project was conducted keeping in mind the components of Working capital

mentioned above i.e. inventory, receivables, and payables and further, credit terms with

suppliers; project Working Capital took its shape. The project Working Capital was started at

Chandigarh plant of GOODFREY PHILIPS INDIACH Ltd. early this year with an idea of

standardization of credit period across sites, scrutinizing the inventory holding period of raw

materials, packaging materials and finished goods and estimating the working capital thus

released through these initiatives.

The study was conducted with following broad and specific objectives:

Main objectives of the study are:

To study the Indian banking system and products, services of Goodfrey Philips India.

To study in general the working capital management procedure in Goodfrey Philips

India.

To analyze working capital in Goodfrey Philips India.

To know how the working capital is being financed.

To know the various methods to be followed by Goodfrey Philips India for inventories

and accounts receivables.

To give suggestions, if any, for better working capital management in Goodfrey Philips

India.

35


METHODOLOGY

36

6. METHODOLOGY

The methodology adopted for studying the objectives was surveying the existing and potential

customers of Goodfrey Philips India in the city of Patiala. The study was conducted in one part.

Research Plan

The research study is exploratory in nature. The established objectives were kept in mind during

the study, however no hypothesis was formed as the study was more in the form of descriptive

design attempting to analyze the attitude of respondents towards the project.

Data Collection:

The Core finding of the study is based upon the information collected through secondary data i.e.

information will be collected from financial statements of the Goodfrey Philips India.

MODE OF DATA COLLECTION

The study is based on Secondary data which includes

Secondary Data

Secondary Data was gathered from books and journals and Financial Statements on Goodfrey

Philips India.

Sample Plan

Universe:

The universe of the study was Goodfrey Philips India, Leela Bhawan, Patiala.

37


DATA

ANALYSIS

38

7. DATA ANALYSIS

Financial ratio analysis is a study of ratios between various items or group of items in financial

statement and the turnover ratios. Ratio analysis is the powerful tool of financial analysis. In

financial analysis, ratio analysis is used as an index or yardstick to measure the performance of

the firm.

Working capital is that part of total capital which is important in current assets. To get better

insights about the working capital position of the firm ratio analysis has been utilized.

To determine the Working Capital position of the firm following ratios have been analyzed:

Current ratio

Absolute liquid ratio

Quick ratio

Current asset turnover ratio

Working capital turnover ratio

Inventory turnover ratio

Debtors turnover ratio

Creditors turnover ratio

Inventory to working capital rate

Current ratio, Quick ratio and absolute liquidity ratio are regarded ad liquidity ratios. The

liquidity aspect is essential for both the creditors as well as management of a business

enterprise. These ratios are used to judge firm’s ability to meet short term obligations. These

ratios give an insight about present cash solvency of the firm and its ability to remain solvent

in the event of adversities.

39


2008

1) Current Ratio

Current AssetsCurrent Liabilities

= 26928.14525385.33

= 1.06

C.A = Stock + Debtors + Cash & Bank & other C.A

= 23806.07+ 2306.20 + 815.87

= 26928.14

C.L = liability + loan & Adv

= 16840.69 + 8544.64

= 25385.3

2) Quick Ratio (Acid Test Ratio)

Liquid AssetsCurrent Liabilities

= 3122.07

25385.33 = 0.12

Liquid Asset = Debtor + Cash

= 2306.20 +815.87

= 3122.07

3) Absolute liquid Ratio

Cash+ManlcetableSecCurrent Liabilities

=815.87

25385.33

= 0.032

4) Current Asset Turnover Ratio

Net SaleCurrent Asset

= 90293.2026928.14

= 3.353

5) Working Cap. Turnover Ratio

40

Sale = 90293.20

Working Cap. = C.A – C.L

= 26928.14 – 25385.33

= 1542.81

= 90293.201542.81

= 58.5

6) Inventory Turnover Ratio

SaleAvg . Inventory

= 90293.2019467.82

= 4.63

o p . stock+Closs. Stock2

15129.58+23806.072

7) Debtor Turnover Ratio

SaleAvg . Account Rec .

= 90293.201937.90

= 46.5

o p . stock+Closing deptor2

1569.61+2306.202

2009

Current Ratio = CACL

C.A = Inventories +Dr +Cash

= 41243.266

C.C = C L + Short term advances

41


= 33027.5

=41243.266/33027.5 = 1.24

2) Quick Ratio/Acid Test Ratio

= Liquid Asset

C . L

= L.A = 4795.81/33027.5 = 0.14

3) Absolute Liquid Ratio (Cash Ratio)

= Cash+Mark Securities

C .L

= 1760.49/33027.5 = 0.05

(2009)


¿ SalesC . A

= 226905.15/41243.266 = 5.5

2009

5) Working Capital Ratio

= Costo sale∨sales

(Net )WorkingCapital

= 226905.158215.766

= 27.61

2009


= Sales

Avg . Inventory

42

= 226905.1536447.45

= 6.2

2009

7) Debtors Turnover Ratio

= SalesAvg . Dr

= 226905.15

3035.32

2010

Current Ratio =CACL

C.A = Inventories + Dr + cash + Bank Bal

= 44353.57

C.L = C.L + Short term Loan & Advances

= 30864.63

44353.57/30864.63 = 1.43

2010

Quick Ratio/Acid Test Ratio

=Liquid Asset

C . l

= L.A = Dr. + Cash & Bank

= 8338.99

= 8338.99/30864.63 = 0.27

2010

43


3) Absolute Liquid Ratio (Cash Ratio)

= Cash+Mark Securities

C .L

= 3409.96

30864.63 = 0.11


¿ SalesC . A

= 260766.2744358.57

= 5.8

5) Working Capital Ratio

= Costosale∨sales

(Net )Workin gCapital

= 260766.27

CA−CL(44353.57−30864.63)

= 260766.2713488.94

= 19.33


= Sales

Avg . Inventory

= 260766.27

36447.45+36014.582

= +260766.2736231.015

= 7.2

7) Debtors Turnover Ratio

= Sales

op . Dr+Cl .Dr2

44

= 260766.27

3035.32+4929.032

= 260766.273982.175

= 65.48

45


CURRENT RATIO

The current ratio is very popular financial ratio which is used to measure the ability of a

firm to meet its current liabilities. Current assets are converted into cash for the payment of

current liabilities. Apparently higher is the current ratio, greater is the short term solvency.

Current ratio is given by the formula:

2008 2009 2010

1.06 1.24 1.43

1 2 3

2008

2009

2010

1.06

1.24

1.43

CURRENT RATIO

A current ratio of 2:1 is generally considered to be acceptable. As the firm has a current

ratio (2.63:1) better than acceptable ratio (2:1), the firm is well within a position to meet its

current liabilities.

46

Current Assets

The idea of the current assets turnover is to ascertain the contribution of the current assets

to sales. The relationship indicates efficiency or otherwise utilization of current assets to

attain the maximum turnover sales.

2008 2009 2010

Current Assets 26928.145 41243.266 44358.57

Current Liabilities 25385.33 33027.5 30864.63

2008 2009 2010

26928.145

41243.266 44358.57

25385.33

33027.5 30864.63

Current Assets

47


QUICK RATIO (ACID TEST RATIO)

Quick ratio is much more exacting measure than the current ratio. By excluding inventories,

it concentrates on really liquid assets, with value fairly certain.

Quick Assets consist of only cash and near cash assets. Inventories are deducted from

current assets on the belief that these are not ‘near cash assets’. Quick ratio is given by

the formula:

2008 2009 2010

0.12 0.14 0.27

1 2 3

2008 2009 2010

0.12 0.14 0.27

QUICK RATIO (ACID TEST RATIO)

A quick ratio of 1:1 is considered as acceptable. A higher ratio of 2.03:1 ensures the ability

of the firm’s quick assets to meet its current liabilities.

48

Liquid Assets

2008 2009 2010

Liquid Assets 3122.07 4795.81 44353.57


2008 2009 2010

3122.07 4795.81

44353.57

25385.3333027.5

30864.63

Liquid Assets

49


ABSOLUTE LIQUID RATIO

This ratio measures the absolute liquidity of the business. This ratio considers only the

absolute liquidity of the business and is calculated as:

Cash + Marketable Securities

_________________________

Current Liabilities

2008 2009 2010

0.032 0.05 0.11

1 2 3

2008

2009

20100.032

0.05

0.11

ABSOLUTE LIQUID RATIO

The acceptable standard for this ratio is 0.5:1

Activity ratios are also called as turnover ratios or performance ratios. These ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios usually indicate the frequency of sales with respect to its assets

50

Cash+ Manlcetable Sec

2008 2009 2010

Cash+Manlcetable Sec 815.87 1760.49 3409.96


2008 2009 2010

815.87 1760.493409.96

25385.33

33027.5 30864.63

Cash+ Manlcetable Sec

51


CURRENT ASSET TURNOVER RATIO

The idea of the current assets turnover is to ascertain the contribution of the current assets

to sales. The relationship indicates efficiency or otherwise utilization of current assets to

attain the maximum turnover sales.

Sales

_________________________

Current Assets

2008 2009 2010

3.353 5.5 5.8

1 2 3

20082009

2010

3.353

5.5

5.8

CURRENT ASSET TURNOVER RATIO

52

Net sale

2008 2009 2010

Net Sale 90293.20 226905.15 260766.27

Current Assets 26928.145 41243.266 44358.57

2008 2009 2010

90293.2

226905.15 260766.2726928.145

41243.26644358.57

Net sale

53


WORKING CAP. TURNOVER RATIO

Net working capital turnover ratio indicated the velocity of the utilization of working capital. A

higher ratio indicates the effective utilization of working capital and a low ratio indicate

otherwise.

2008 2009 2010

58.5 27.61 19.33

1 2 3

2008 2009 2010

58.5

27.61 19.33

WORKING CAP. TURNOVER RATIO

The above Working capital turnover ratio suggests that the working capital is being utilized

efficiently.

Working capital is segregated into Inventory turnover, Debtor’s turnover and creditor’s turnover

54

Cost sale or sales

2008 2009 2010

Cost sale or sales 90293.20 226905.15 260766.27

(Net) Working Capital 1542.81 8215.766 13488.394

20082009

2010

90293.2

226905.15260766.27

1542.818215.76599999999

13488.394

Cost SaleCost sale or sales (Net) Working Capital

55


INVENTORY TURNOVER RATIO

This ratio is also known as stock turnover ratio and establishes the relationship between the

cost of goods sold during the year and average inventory held during the year. It is

calculated as follows:

Sales

Average Inventory

2008 2009 2010

4.63 6.2 7.2

1 2 3

2008 2009 2010

4.63

6.27.2

INVENTORY TURNOVER RATIO

56

Net Sales

2008 2009 2010

Net Sale 90293.20 226905.15 260766.27

Avg. Inventory 19467.82 36447.45 36231.015

2008 2009 2010

90293.2

226905.15260766.27

19467.82

36447.45

36231.015

Net Sales

57


DEBTORS TURNOVER RATIO

In case firm sells goods on credit, the realization of sales is delayed and the receivables

are created. The cash is realized from these receivables later on. The speed with which

these receivables are collected affects the liquidity position of the firm. The debtors’

turnover ratio throws light on the collection and credit policies of the firm. The debtor’s

turnover ratio is calculated as follows:

Sales

Average Accounts Receivable

2008 2009 2010

65.48 74.75 65.48

1 2 3

2008 2009 2010

65.48 74.75 65.48

DEBTORS TURNOVER RATIO

58

Sale

2008 2009 2010

Net Sale 90293.20 226905.15 260766.27

Avg. Account Rec. 1937.90 3035.32 3982.175

2008 2009 2010

90293.2

226905.15260766.27

1937.9

3035.32

3982.175

Sale

59


CONCLUSION

60

CONCLUSION

Working capital management is concerned with the problems that arise in attempting to manage

the current assets, the current liabilities and the interrelationship that exists between them. The

major current assets are cash, marketable securities, accounts receivable and inventory.

Current liabilities are those liabilities which are intended, at their inception, to be paid in the

ordinary course of business, within a year, out of the current assets or earnings of the concern.

The basic current liabilities are accounts payable, bills payable, bank overdraft, and outstanding

expenses.

The goal of working capital management is to manage the firm’s current assets and liabilities in

such a way that a satisfactory level of working capital is maintained.

The majority of Indian companies maintain relatively lower cash/bank balances. Marketable

securities are yet to emerge as a popular means of cash management. The excess cash is

deployed to retire short term debt/ in short term bank deposits.

Though there is a notable decline over the years but yet inventory constitutes an important part of

total current assets.

Debtors/ receivables also constitute an important part of current assets. The collections are

required to be as quick as possible and thus corporates offer cash discounts for the purpose.

Accounts payables and short term loan/ advances are major components of current liabilities.

The project Working Capital cardinally focuses on inventory and credit terms for the creditors

and debtors.

The approach followed in the project is to reduce the inventory so as to adhere to the standard

norms of the inventory holding thereby releasing the working capital out of it.

Secondly to revise the credit terms in such a way so as to make them uniform across all the sites.

Thus releasing the working capital at the sites where the credit terms were proposed to be

revised.

BANK RECONCILIATION

Bank reconciliation is a process under which each month bank sends the company a statement

detailing the activity that has taken place in the account during the month. The bank statement

shows the balance at the beginning of the month, the deposits, the cheques paid, and other debits

61


and credits during the month, and the balance at the end of the month. As part of on job training

bank reconciliation has been performed.

SERVICE TAX AUDIT

Service tax is levied on specified taxable services and the responsibility of payment of the tax is

cast on the service provider. System of self-assessment of Service Tax Returns by service tax

assesses has been introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central

Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are

expected to be filed half yearly.

Under service tax audit I was assigned the job of internal tax auditors. As part of internal tax

audit following tasks were performed.

The concerned documents were checked for fulfillment of certain criteria such as

Service tax number on the bill

Description of the service being provided

Classification of service type

Service tax being charged is as per the prescribed regulation

ISSUING C - FORMS

The C-form allows companies to avail lower tax rates for Interstate sales.

Here's how it works when a company sells goods to a customer in another state, the customer is

supposed to give company a C- form, which allows company a to pay just 4% central sales tax.

Without a C-form the tax burden on company is for a local sale as high as 12.5%.

As part of training C- Forms were issued and the records were maintained for the company’s

own use as well as for transferring the data to the concerned government authorities.

ISSUING A.R.E FORMS:

Application for Removal of Excisable Goods was issued for goods being exported as part of one

of the assignments done at the company.

62

RECOMMENDATONS

63


RECOMMENDATONS

The result of the live project done at GOODFREY PHILIPS INDIA is presented in the form of

following recommendations:

Working capital can be improved by:

1. Reducing the inventory holding period of items.

1. Increasing the credit period of Creditors..

3. Decreasing the credit period of Debtors.

64

INVENTORIES

CREDIT PERIOD

CREDIT PERIOD

Pertaining to the above three major prerequisites of the project following key focus areas

have been suggested.

KEY FOCUS AREAS OF THE PROJECT:

1) Inventory:

• Strategic Stock Review

• Quality Clearance Norms

• FG Stock Inventory Review over Plan

• General Stores – Min-Max Level Reviews

• Review of non-moving inventory

2) Trade Payables:

• Increased Credit Period – Category wise

• Common Suppliers – Payment days

• Calculation of Payment due date – Standardization

• Settlement of Pending Advances

3) Trade Receivables:

• Review of Credit Period & Credit Limits

• Review of payment terms

• Review of No. of Clearance days

• Credit period of raw material suppliers to be checked for standardization

• Credit period of same supplier to be checked for standardization across all locations

• General PO terms to be checked for revision for Simplification

• Inventory holding to be validated for checking against the norms

• FG quality clearance time to be reviewed for reduction

• Upward revision of credit limit of suppliers post discussions

• Credit period of same raw material supplied by different supplier to be standardized at same site in case they differ

65


If more than one supplier supply raw material at same site then their credit period should be same

If more than one supplier supply raw material at same site then their credit period should be same

As it is mentioned above in the project report tat cash management serves to be an important part

of working capital management an attempt was made to understand the cash budgeting (Funds

forecasting and budgeting) of GOODFREY PHILIPS INDIACH, Chandigarh which is as

follows:

FUNDS FORECASTING AND BUDGETING AT GOODFREY PHILIPS

INDIA, CHANDIGARH

The principal aim of budgeting as a tool is to predict the cash flows over a given period of time is

to ascertain whether at any point of time there will be excess or shortage of cash. So is the

purpose of cash budgeting done at GOODFREY PHILIPS INDIA, Chandigarh.

The first element of cash budgeting at Chandigarh is selection of period of time to be covered by

the budget. It is referred to as planning horizon. The planning horizon means the time span and

the sub periods within the time span over which the cash flows are to be projected.

At GOODFREY PHILIPS INDIA, Chandigarh the sub period taken for the purpose of budgeting

is a time span of one month which is further used to consolidate it for quarterly and then annual

budgeting.

The second element of cash budgeting is to determine the factors that have a bearing on cash

flows. The items included in cash budget are only cash items; non cash items such as

depreciation and amortization are excluded. The factors that generate cash flows are generally

divided into two broad categories: Operating and Financial. Cash flows generated by the

operations of the firm are known as operating cash flows while the others are termed as financial

cash flows.

At GOODFREY PHILIPS INDIA, Chandigarh as per the limits of the project only operating

cash flows have been considered.

The operating cash flow items which are require to be considered are mentioned as below:

66

OPERATING CASH FLOW ITEMS

Inflows/Cash receipts Outflows/Disbursements

Cash Sales Accounts payable

Collection of accounts receivable Purchase of raw materials

Disposal of fixed assets Wages and Salary

Factory expenses

Administrative and selling expenses

Maintenance expenses

Purchase of fixed assets

As is mentioned in the table above the operating cash flow items which are used at GOODFREY

PHILIPS INDIA for the purpose of budgeting are mentioned in the template attached. This

template is used for obtaining the inputs for the cash flow items from the various departmental

heads on monthly basis. The major heads in the template are receipts, payments for purchase of

raw materials, packaging materials, freight, employee salaries, electricity expenses and provision

for taxation.

After the time span of the cash budget is decided, the final step is the construction of the budget.

Post receiving inputs from various departments the budget is constructed.

67


SUGGESTIONS

68

SUGGESTIONS

The management of the working capital is equally important as the management of long-term

financial investment. The goal of Working capital management is to ensure that the firm is able

to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term

debt and upcoming operational expenses.

The various possible steps that Goodfrey Philips India, Chandigarh may take to improve

its working capital management are as follows:

The company should look indigenous suppliers for its raw material and spare parts

requirements and reduce its lead time.

The company is increasing its installed capacity and its production too each year but

the increase in production is not in proportion to installed capacity. Thus, the two

must be matched.

Availing more credit from its suppliers.00

Prompt collection from its debtors.

Moving towards zero working capital.

Improvement in Inventory Conversion Period, mainly reduction in Work in Progress.

Reduction in loans and inter-corporate deposits and utilizing the money to pay off

debts and loans taken by the company.

Given the working loan of Rs. 56,84,50,000 and interest thereon is Rs. 4,40,80,000 in

2009 which is almost 7.75%. So, the company might consider some other sources of

cheaper loans.

The company can maintain separate books of accounts for their manufacturing and

trading businesses for more clarity and transparency in operations.

69


LIMITATIONS OF THE STUDY

Due to constraints of time and resource, the present study is likely to suffer from certain

limitations. Some of these are mentioned here under, so that the findings of the study may be

understood in a proper perspective. The limitations of the study are:-

1. Employees of the Bank were unwilling to share information due to data privacy.

2. The research was carried out in only one branch of Goodfrey Philips India. As much

financial information not fetch out properly.

3. Proportional representation was not given to the various strata of the population as the

secondary data in this regard was not fully available.

70

BIBLIOGRAPHY

71


BIBLIOGRAPHY

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73


ANNEXURE

Schedule Number

As at 31.3.2010

As at 31.3.2009

SOURCES OF FUNDS Shareholder's funds Share capital 1 1039.88 1039.88

Reserves and surplus 265611.8

666651.7

456804.8

757844.7

5 Loan funds 3

Secured 11455.4

3 9528.71 Deferred tax liabilities (net) 12 97.17

TOTAL 78204.3

4 67373.4

6 APPLICATION OF FUNDS Fixced assets 4

Gross block 42742.1

7 35220.8

8 Less: Depreciation and amortization

18143.03 15411.2

Net block 24599.1

4 19809.6

8 Capital work-in-progress and advances on capital account 7296.99

31896.13 6169.91

25979.59

Investments 5 19485.5

7 20985.7 Deferred tax assets (net) 235.87 Current assets, loans and advances

Inventories 636014.5

8 36447.4

5 Sundry debtors 7 4929.03 3035.32 Cash and bank balances 8 3409.96 1760.49

Loans and advances 910041.4

4 9347.36 54395.0 50590.6

74

1 2 Less: Current liabilities and provisions

Current liabilities 1020823.1

9 23680.1

4 Provisions 11 6749.18 6738.18

27572.3

7 30418.3

2

Net current assets 26822.6

4 20172.3

Total 78204.3

4 67373.4

6 Notes to the accounts

Schedule Number

As at 31.3.2010

As at 31.3.2009

Income Gross sales 260766.3 226905.2 Less : Excise duty 122378.9 113695.6 Net sales 138387.4 113209.5 Other income 13 6526.02 5540.23 144913.4 118749.8 Expenses Raw and packing materials manufactured and other goods 14 56640.22 48272.59 Manufactured and other expenses 15 3390.97 2802.63 Depreciation and amor 4 992.94 1940.86 Increase/(decrease) in excise duty on finished goods 128173.8 102159.1 Profit before taxtion 16739.57 16590.64 provision for taxation- current tax 4552.96 5333 deferred tax charge/(credit) 333.04 400.95 fringe benefit tax 15.1 768.23 Profit after taxation 11838.47 10890.36 Balance brought forword from previous year 40307.99 33959.15 Available for appropiation 52146.46 44849.51

75


APPROPRIATIONS Proposed dividend 2599.7 2599.7 Corporate dividend tax 431.78 441.82 Transferred to general reserve 1500 1500 Surplus carried to balance sheet 47614.46 40307.99 Basic and diluted earnings per share (Face value of share Rs. 10 each) Rs. 113.84

Rs. 104.73

Notes to the accounts 16

For the year ended 31.3.2010


A. CASH FLOWS FROM OPERATING ACTIVITIES

Net profit tax 16739.5

7 16590.6

4Adjustments for : Depreciation and amaortization 3390.97 2802.63Interest income from: Subsidiary companies 387.13 324.14Debts, deposits, Loans etc. 252.52 196.85Dividends from other long term investments 161.9 194.64Interest income from long term Investments - 4.32Profit on redemption/sale of other long term investments 2230.04 2653.41Profit on sale of other current investments 214.84 172.25Exchange Lass /(gain) 11.01 0.16Exchange (gain) / Lass on foregin currency borrowings 1119.25 1594.06Provisions for wealth-tax 17 24Interest expense -fixed loans 633.64 434.49other 56.33 151.69Provisions for decline in value of Investments (Written back)/ made 166 330Fixed assets written off 124.04 153.47Loss on sale of fixed assets 100.87 44.41

76

197.82 1988.98Operating profit before working capital changes

16541.75

18579.62

Adjustments for: Trade and other receivables 3062.92 2048.08

Inventories 432.87 12641.3

8Trade and other payables 2905.72 7329.26 5535.77 7360.2

Cash generated from operations 11005.9

8 11219.4

2Interest received 532.43 384.53Direct taxes paid 4160.46 6467.51 3628.03 6082.98Net cash from operating activities 7377.95 5136.44B. CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets 9675.09 13701.5

2Proceeds from sale of fixed assets 142.67 58.48

Purchase of investments188769.

6 135027

Proceeds from sale of investments192880.

6 4111.01149494.

514467.4

4Dividends from long term other investments 161.9 197.9Interest received from other long term investments - 12.96loans and deposits received back 50 655Interest received from other long term investments 86.16 136.014Net cash used in investing activities 5123.35 1826.27C. CASH FLOWS FROM FINANCING ACTIVITIES Term loan availed 5469.6 -Repayment of long term borrowings 2068.12 1064.61Repayment of working capital borrowings 355.51 1338.82Interest paid 605.24 576.56Divided paid 2593.03 2596.44Corporate divided tax paid 441.82 441.82Net cash used in financing activities 594.12 6018.25 NET (DECREASE) /INCREASE IN 1660.48 944.46

77


CASH AND CASH EQUIVALENTSOpening cash and cash equivalents Cash and bank balances 1760.49 815.87Closing cash and cash equivalents Cash and bank balances 3409.96 1760.49Effect of exchange rate changes on exchange earner foreign currency bank balances 11.01 0.16currency bank balance

Schedule Numer

As at 31.3.2008

As at 31.3.2007

SOURCES OF FUNDS Shareholders' Funds Share Capital 1 1039.88 1039.88

Reserves and Surplus 248956.0

3 49995.9140775.1

4 41815.02 Loan funds 3 Secured 10338.08 6073.35 Defferred tax liabilities (net) 12 165.08 355.44TOTAL 60499.07 48243.81 APPLICATION OF FUNDS Fixed assets 4

Groos block 26025.4

8 23109.0

2

Less: Depreciatiob 12835.8

4 11248.7

6

Net block 13189.6

4 11860.2

6 Capital work-in-Progress and advances on Capital account 2147.42 15337.06 794.6 12654.86 Investments 5 32957.48 24626.57Current assets, loans and advances Income accured on investments 11.9 12.72 Inventories 6 23806.0 15129.5

78

7 8Sundry debtors 7 2306.2 1569.61 Cash and bank balances 8 815.87 1427.6 Loans and advances 9 8544.64 7342.47

35484.6

8 25481.9

8 Less: Current Liabilities and provisions

Current Liabilities 1016840.6

9 provisions 11 6439.46

23280.1

5 14519.6 Net Current assets 12204.53 10962.48Total 60499.53 48243.81

Schedule Numer

For 31.3.2008

As at 31.3.2007

INCOME Gross sales 182461.8 159676.8Less: Excise duty 92168.56 83528.33Net sales 90293.2 76148.46Other income 13 5171.81 3359.85 95465.01 79508.31EXPENSES Raw and packing materials manufacturing and other goods 14 34438 30803.51Manufacturing and other expenses 15 40204.23 34621.44Depreciation 4 1977.49 1906.58Incdrease/(descrease) in exicse duty on finished goods 1871.53 1105.51 78491.25 66226.02 Profit taxation and exceptional items 16973.76 13282.29Exceptional items-Refer note 14 - 240.59Profit before Taxation 16973.76 13522.88Provision for taxation- Current tax 5174.41 4071deferred tax credit 190.36 52.52fringe benefit tax 767.3 639.98Profit after taxation 11222.41 8810.42Balance brought forward from previous year 27278.26 23009.36

79


Available for appropriation 38500.67 31819.78 APPROPRIATIONS Proposed divided 2599.7 2599.7Corporate divided tax 441.82 441.82Trasferred to general reserve 1500 1500Surplus carried to balance sheet 33959.15 27278.26 38500.67 31819.78 Basic and diluted earnings per share (Face value of share- Rs. 10 each

Rs. 107.92 Rs. 84.73

Notes to the accounts 16


For the year ended 3103.2007

A CASH FLOWS FROM OPERATING ACTIVITIES

Net profit before tax 16973.7

6 13522.88Adjustments for: Depreciation 1977.49 1906.58interest income from: Subsidiary companies 297.58 245.05Debts, deposits Loans etc. 168.09 131.14Dividends from long term investments 93.22 31.01interest income from other long term investments 25.91 25.91Profit on redemption/sale of other long term investments 2851.4 1885.91profit on sale of Current investments 411.01 344.4Exchange gain - 0.29Exchange gain on foreign currency borrowings 346.31 11.11Provisions for wealth-tax 18 17Interest expense-fixed loans 344.45 272.77other 23.01 19.51Fixed assets written off/written down 20.33 64.37Loss on sale of fixed assets 77.61 119.63 1732.63 274.96Operatings profit before working 15241.1 13247.92

80

capital changes 3Adjustments for:

Trade and other receivables 20620.9

9 402.83Inventories 8676.49 157.94Trade and other payables 8551.63 596 2185.85 351.11

Cash generated from operations 13055.2

8 12896.81Interest received 281.16 216.71Direct taxes paid 5869.06 4709.18 5587.9 4492.47Net cash from operatings activiities 7467.38 8404.34 B. CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets 4968.26 1910.36Proceeds from sale of fixed assets 210.63 119.02

Purchase of investments 132242.

2 108818

Proceeds from sale of investments127173.

7 5068.5107522.

3 1295.75Dividends from long term other investments 94.04 33.46Interest received from other long term investments 25.91 25.91Loans and deposits made 128 681Loans and received back 320 200Interest received 174.47 151.99Net cash used in investing activities 9339.71 3356.73 C. CASH FLOWS FROM FINANCING ACTIVITIES Term loan availed 4510.28 -Repayment of long term borrowings 1011.79 1167.2Proceeds from(Repayment of) working capital borrowings 1112.55 157.84Interest paid 316.31 301.86Divided paid 2592.31 2333.66Corporate dividend tax paid 441.82 328.15Net cash used in financing activites 1260.6 4288.71 NET (DECREASE)/INCREASE IN CASH AND EQUIVALENTS 611.73 758.9

81


Opening cash and cash equivalents 1427.6 668.41cash and bank balances closing cash and cash equivalents cash and bank balances 815.87 1427.6Effect of exchange rate changes on exchange earner foreign currency bank balances - 0.29 815.87 1427.31

82

working capital goodfrey philips

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