EXECUTIVE SUMMARY

Hillary emerged as INDIA’S largest manufacturer of fabrics-worsted, polyester & silk furnishing. & silk furnishing. Sixteen years after the advent of economic liberalization June 1991, India is now clearly moving along a high growth path. BSL Ltd. is more consolidated and technologically modern operations, to further leverage the goodwill that its product enjoys in domestic and global markets.

Summer training is by the most important & interesting part of MBA (Second Sem.) every student is required to go to under the training in a leading business organization on a project in the functional area of his/her choice.

The duration of this training is 8-10 weeks. The rational behind this summer training is to expose management student to corporate culture so that they may broaden their outlook & get an insight as to how the theoretical knowledge which they have gained at there institution is applied in business situation.

I was extremely lucky to be selected one of the premier organization in the country BSL LTD , Hillary for a 2 months being thoroughly managed organization was had a good opportunity to put over theoretical knowledge in practices.

During our 2 months in the company, I worked on the project “working capital financing & management” for BSL Ltd.

These 2 months constituted one of the most interesting & rewarding period of my MBA studies.

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ACKNOWLEDGEMENT

Any work accomplishment is seldom on person achievement. There are usually many people behind it who contribute to its goodness in form or the other. It was my good luck that the staff of BSL was supportive which ease my job by quite a long extent.

For the development of the project. I extend my he artful to MR. PARVEEN JI JAIN & MR. LAXMAN JI TIKYANI Department of finance for providing excellent mentoring, encouragement & support.

I sincerely thank ho despite his tight schedule spared time for discussions and gave basic ground rules and directions, without which completion of this project would have been impossible.

I am highly grateful to the management of BSL LTd. for giving me the opportunity to work on this Project, and in the process enrich myself with immense learning on all aspect, from the study of Working capital, its Management and Financing to the understanding of the textile Industry as a whole.

I am grateful to all employees of BSL Ltd. For providing me all the information and help I required for the completion of this project.

Last but not the least; I am grateful to my institute, DEPARTMENT OF COMMERCE & MANAGEMENT, UNIVERSITY OF KOTA (KOTA) & my family that provided me this opportunity to interact with this organization and understand the intricacies o the corporate world.

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PERFACE

The summer training a management student plays an important role in developing him as a well-groomed professional. It allows a student to give theoretical concepts a practical stand in the field of application. It gives the candidate an idea of dynamic & versatile professional world as well as exposure to the intricacies and complexities of corporate world.

Doing the summer training at BSL LTD was a great experience. An opening experience to the concepts of FINANCE, which helped me a lot in understanding the concept that are applied for in the organization. This organization since its inception has progressed a lot & is walking on the guidelines of success. As the organization is marching with the tenacious speed towards the horizon.

During the MBA course we are taught dozen of subjects which if not applied properly are a simply waste of time. Implementing & learning the concepts of FINANCE in a work place having large number of professionals provides an opportunity to groom oneself to changing needs and increase the knowledge.

Cotton In a period of 2 months exposure to the corporate environment, I got a learning of organizational structure, its protocols, etc.

Real learning places its worth only when it gives sweet fruits in future. Summer training is one way to learn at work. I enjoyed the interesting experience and every part of it.

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ABSTRACTS

BSL LTD is one of the fastest growing Textile Industry in INDIA. Presently it has plant in operation at Mandpam, Hmeergah.

The title of my project study was “Working Capital Financing & Management”. Working capital is taken to be the lifeblood of a business. Lack of working capital may lead a business to “technical insolvency” and ultimately to liquidation. That is why, the working capital management of a firm is considered to be one of the most important tasks of financial managers. A decision regarding the volume of current assets has its own importance no doubt, but the question of financing is, in fact, the area of working capital management. Since the management is concerned with proper financial structure and cost of funds, so the funds required for working capital must be raised judiciously.

The main aim of my project was to analyze the completer process of working capital financing and study the existing system in the organization and also to suggest working capital funning required by the company.

The report can be divided into the following parts according to the project analysis and was handled accordingly:

1. Literature SurveyThis section is used to build a theoretical or further study in the project. The concepts such as, sources of funds, working capital cycle, key ratio and working capital management are discussed. The optimum level of working capital and different financing policies are also reviewed.

2. Process of Working capital finance In this section, various steps involved in the working capital funding from banks are discussed. The process of getting the working capital financed is a very comprehensive one, consisting of a number of steps; starting from assessing the fund requirements to the step of auditing by the bank and the auditors. The process o estimating the levels of inventory, receivable, other current assets and liabilities is also discussed. The methods of appraisal, final sanction and ways of disbursal of funds by the banks are also included.

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3. Working capital finance and management at BSL LimitedThis portion of the project study aimed at understanding the existing system of working capital financing at BSL Limited. This included a study of technique used by company, like term loans & working capital loan & innovative techniques which can be used for borrowings, like Commercial Paper, FCNR (B) linked loans. The high credit rating of the company is also mentioned in this section. Working Capital requirements, it has been suggested to increase the working Capital borrowing limit in view of the increased funds requirement due to commissioning of the new plants.

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TABLE OF CONTENT

1. EXECUTIVE SUMMARY………………………………………………..12. ACKNOWLEDGEMENT…………………………………………………2 3. PERFACE………………………………………………………………….34. ABSTRACTS………………………………………………………………45. TABLE OF CONTENTS………………………………………………….66. LIST OF FIGURE…………………………………………………………77. 1 INTRODUCTION………………………………………………………8

1.1 INTRODUCTION TO TEXTILE WORLD……………………..81.2 RELATED GROUP………………………………………………101.3 CORPORATE INFORRMATION………………………………101.4 BUSINESS OVERVIEW………………………………………….131.5 PRODUCTS WE MANUFACTURE……………………………..14

1.5.1 PRODUCT APPLICATION………………………………141.5.2 FOCUS ON GLOBAL MARKET………………………...16

1.6 VISION AND MISSION…………………………………………..181.7 FINANCIAL DEPARTMENT……………………………………191.8 MANAGERIAL CHALLENGES………………………………….21

2 OBJECTIVES AND SCOPE OF STUDY……………………………..22

2.1 OBJECTIVE………………………………………………………222.2 SCOPE……………………………………………………………..223 LITERATURE SURVEY………………………………………………..234 CHAPTER 4…………………………………………………………24

CONCEPT OF WORKING CAPITAL……………………………244.1 NEEDS FOR WORKING CAPITAL………………………….254.2 TYPES OF WORKING CAPITAL……………………………254.2.1 PERMANENT WORKING CAPITAL………………………254.2.2 TEMPORARY WORKING CAPITAL……………………..264.3 ADEQUACY OF WORKING CAPITAL……………………..284.4 APPROCHAES FOR DETERMINING THE FINANCING MIX……………………………………………………………………29 4.5 SOURCES OF FUNDS………………………………………….314.6 USES OF FUNDS………………………………………………..32

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4.7 CHANGES IN WORKING CAPITAL…………………………334.8 WORKING CAPITAL CYCLE AND KEY RATIOS………….334.9 CALCULATION OF WORKING CAPITAL…………………384.10 WORKING CAPITAL MANAGEMENT……………………394.11 OPTIMUM LEVEL OF WORKING CAPITAL……………404.12 WOKING CAPITAL FINANCING & POLICIES………….42

4.13 TANDON, CHORE, KANNAN AND CERTAIN OTHER COMMITTEES RECOMMENDATION...............464.14 METHODS OF LENDING……………………………..514.15 RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE…………………………..54

CHAPTER 5………………………………………………………… 47 RESEARCH DESIGN 5.1 GENERAL METHODOLOGY………………………………..47CHAPTER 6 PROCESS OF WORKING CAPITAL FINANCING……………49CHAPTER 7 ……………………………………………………….. 527.1 ASSESSING WORKING CAPITAL REQUIRREMENT…527.2 PREPARING CMA, APPLICATION & OTHER SUPPORTING DOCUMENTS…………………………………… 55 7.3 APPLICATION TO SINGLE BANK CONSORTIUM OF BANKS………………………………………………………………..577.4 APPRAISAL BY SINGLE BANK/LEAD BANK…………….577.5 SANCTION BY SINGLE BANK /MEMBER BANKS OF CONSORTIUM……………………………………………………… 597.6 AGREEMENT & CREATION OF SECURITY………………598. WORKING CAPITAL EQUIEMENT AT BSL LIMITED……739 .1 A SWOT ANALYSIS IS THE KEY TO A SUCESSFUL INDUSTRY……………………………………………………………77 10. BIBLEOGRAPHY ………………………………………………79

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CHAPTER 1

1.1 INTRODUCTION TO INDIAN TEXTILE WORLD

The textile industry occupies a unique position in the Indian economy as it contributes significantly to the industrial production, employment generation and foreign exchange earnings.

The Indian textile industry is extremely complex and varied with hand-spun and hand-woven sector at one of the spectrum and the capital-intensive sophisticated mill sector at the other, with the decentralized power loom and knitting sector coming in between.

This industry use natural fibers –cotton, jute, silk and wool, as well as synthetic man-made fibers- polyester, viscose, nylon, acrylic and their multiple blends.

The complex and varied structure of the industry coupled with our ancient culture and tradition provides it with the unique capacity to produce, with the help of latest technological inputs an designs capability, a wide variety of products suitable to varying consumer tastes and preferences, both within the country and overseas.

The textile industry has shown remarkable resilience and grown considerably in terms of installed spindle age, yarn production and output of fabric and garments.

It is the only industry, which is self-reliant and complete in value chain i.e. from raw material to the highest value added products- garments/made-ups.Therefore the growth and development of his industry has significant bearing on the overall development of the Indian economy.

The scope of improvement that can be made on the employment front with in a very short span of time with minimum investment, only if government of

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India places it as per priority industry like some of our neighboring countries have. Thus garment manufacturing and export industry that is the real engine of growth for the whole textile sector in India. With substantial and development of this sector, there is much scope for the growth of Indian textile for exports.

With promise of greater globalization and liberalization, Indian textile industry seems to be looking ahead with both challenges and innovation, to have close look at how major structural changes in world economy will affect to prospects of Indian textile industry.

In light of this, a review of Indian textile scenario in particular and the world situation in general will help all sectors of Indian Textile Industry to re-organize themselves to face new challenges both known and unknown that may come in future. Thus we find many scopes in development of Indian Textile Industry.

1.1. INTRODUCTION TO THE ORGANIZATION

Our company was incorporate as a limited company 1971 under the company’s act 1956 in the state of Rajasthan having the name “BSL Ltd.”.It’s Chairman – Emeritus is L. N. Jhunjhunwala. “BSL Ltd” is the part of LNJ Bhilwara Group.

Our company is presently engaged in the manufacturing o yarn, worsted & synthetic fabric, readymade garments & accessories.BSL Ltd. is located in Bhilwara, Rajasthan, the ‘Textile City’ of India. This industrial township is not only well connected with all the major cities of the country but is also suitably located in terms of procurement of raw material as well as accessibility to a modern shipping port.

The company has been a innovator in textile field and conducted its business with the purpose of growing into a notable organization. Today, despite the midst of highly fierce and competitive textile markets, BSL is still poised to serve both local and international markets with a pledge of providing great

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satisfaction to its customers. In an effort to finalize this vertical plan, there are plans underway to enter the apparels sector to complete the production chain from yarn to ready-to-wear garments.

1.2. Related groups

Group

BSL Limited have five associates concern.

1) RSWM Limited2) Maral Overseas Limited3) BMD pvt. Limited4) Bhilwara Spinners Limited5) Bhilwara Processors Limited

1.3. CORPORATE INFORMATIONBOARD OF DIRECTORS:-CHAIRMAN & MANAGING DIRECTOR:

MR. A.K.Churiwala

DIRECTORS:-

Shri Ravi Jhunjhunwala

Shri Shekhar Agarwal

Shri R.P.Khaitan

Shri B.D.Mundhra

Shri Sushil Kumar Churiwala

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Sushil Jhunjhunwala R.N.Gupta

Riju Jhunjhunwala

Nivedan Churiwala

KEY EXECUTIVES:-

Shri M.C.Maheshwari Vice President (Export)

Shri S.Sen Gupta Vice President (Spinning)

CFO & COMPANY SECTORY

Shri Parveen Jain

AUDIT COMMITTEEDuring the year, Shri Sushil Jhunjhunwala was co-opted as additional member of the committee. The Reconstituted Audit Committee as under:-(i) Shri R.N. Gupta, Chairman(ii) Shri R. P. Khaitan, Member(iii)Shri Riju Jhunjhunwala, Member(iv)Shri Sushil Jhunjhunwala, Member

SHAREHOLDER’S COMMITTEES

The Board of Directors has constituted following Committees for shareholder related matters:-

I.The shareholder’s / investor’s grievance redress committee has following member:-

(i) Shri R.P. Khaitan, Chairman (Non-Executive)11

(ii) Shri Ravi Jhunjhunwala, Member (Non- Excutive)(iii) Shri A.K. Churiwal, Member (Chairman & Managing

Director)

II. The second committee is Share Transfer Committee, which has following members:-

1) Shri A.K. Churiwal2) Shri Nivedan Churiwal3) Shri R.N. Gupta4) Shri Sushil Jhunjhunwala

AUDITORS:

M/S A.L.Chechani & Co.,

Chartered Accountants (Bhilwara)

BANKERS:

Oriental Bank of Commerce

The Bank of Rajasthan Limited

Union Bank of India

State Bank of India

REGISTERED OFFICE:

26, Industrial Area, Post Box No. 17,

Gandhi NAGAR

Bhilwara – 311001 (Rajasthan)

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WORKS

MANDPAM, Dist. BHILWARA – 311001 (Rajasthan)

WIND ENERGY PLANT

Village Gorera, Jaisalmer – 345001 (Rajasthan)

1.4. BUSINESS OVERVIEW

Our company is currently engaged in manufacture of combed & carded cotton yarns ranging. These yarns are suitable for application such as apparels, terry towel, denims medical fabrics, furnishing fabrics & industrial fabrics. Further as apart of vertical integration, our company has installed knitting machine. Our company has capacity to knit single jersey, rib & interlock fabric & other possible structures. Knitting is the cheapest & fastest process of converting yarn into fabrics. The knitted fabrics produced by our company are used for made ups in apparel &garment industry.

Our company has installed plant & machineries imported from textile machinery manufacturers like Switzerland, Italy, Germany, Czechoslovakia. We have also installed plant & machineries purchased from Laxmi Machine Works, Kiloskar Toyoda Textile Machine & Zinser Textile System.

We have continuously expanded & modernized our facilities in the line with the industry trend, which has also been supported day term loans from financial institution & banker under the Technology Up gradation Fun Scheme (TUFS) introduced by government of India.

Our company has a Captive Power Plant of 3.5 MW based on furnaces oil along with standby arrangement for electricity.

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Our Company is exporting cotton yarns & knitted to countries like Austria, China, Norway, Italy, U.K., U.S.A., Spain, Germany, Canada and other.

1.5. PRODUCT WE MANUACTURE :

Offering a diverse products line to fulfill demand of customer worldwide, we have perfected our spinning processes by applying state-o-the-art automated technology & innovation to every phase of our yarn manufacturing process. We are recognized worldwide as the industry leader for spun yarns due to our continued focus on product quality & our commitment to extraordinary customer service.

YARN

Open End Yarn

Multifold Open End Yarn

Ring Spun Combed Yarn

Multifold Ring Spun Yarn

Z & S Twist Yarn

KNITTED FABRICS

Single Jersey fabrics customer requirement plain pique, fleece & various structures as per customer requirement.

Rib fabrics manufacturing, Thermal Milano & various structure as per customer requirement.

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Interlock fabrics manufacturing plain I/L, Eight lock, Double Face I/L & other structure as per customer requirement.

1.5.1 PRODUCT APPLICATION

In a world full o competitiveness & commitment to fulfill specific customer requirement, BSL Limited translate conceptual ideas of our customer into reality & shape them through our technical bent & professional acumen. We strongly believe that the customer satisfaction is essence of marketing.

Our yarns are used to produced a diverse range of high quality products. Our major products are listed below:

MAYUR SUITING

BSL SUITING

MELANTRA MELANGE YARN

LA ITALIA TROUSER GARMENTS

GEOFFREY HAMMONDS FABRIC

1.5.2 FOCUS ON GLOBAL MARKET15

The year 2008-09 was a challenging year for domestic & exports market. The BSL Ltd. has been focusing on emerging markets of Indo-China,

Middle-East and Latin America, Where traditional system are still thriving. In the year 2008-09 for the first time crossed Rs. 100 crore export mark, and anticipates growth in these and other developing

countries.

Innovative design and product are becoming essential to meet consumer’ ever evolving demands and choice. The company therefore has set up a

state-of-the-art technology design centre.

A.K. CHURIWAL (MANANGING DIRECTOR)

1.6 KEY STRENGTHES

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The key strengths associated with BSL LIMITED include:

Captive power plant: The Company has installed WIND POWER PROJECT in Jaisalmer. The Wind Power had generated 35.25 Lac units during the year.

Information Technology: A robust IT platform with “BSL” enables a seamless integration of management practices with business processes at BSL resulting in the achievement of optimum speed, efficiency, transparency, internal control & overall profitability.

Logistics Management: An efficiency in logistics management helps rationalize freight costs, shrinking the truck turnaround time & delivery efficiency.

Manufacturing: BSL has consistently increased cement production through effective debottlenecking and a high sweating of assets. The company has enhanced productivity through improved kiln operations, better raw material mix and optimum utilization of human & financial resources.

Besides these, BSL exhibits unique strength in:

Quality Management

Raw Material Management

Human Resources Management

Internal Control Systems Management

Risk Management Outlook

1.7 Vision and Mission

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BSL Ltd. is committed to operating a successful business by developing manufacturing, manufacturing & supporting quality yarn products for global textile industry we shall accomplish by:

VISION

Remain at the forefront in high quality textile products manufacturing

Create value for shareholder & allied industries

Completing our vertical integration chain by entering into high quality apparel manufacturing

Endeavour for the ultimate satisfaction of our allied partners with

MISSION

Developing long tern relationship with suppliers with an aim to be the most reliable supplier in textile to garment

Providing superior quality products at competitive price & establishing a brand value in the international arena

Exceeding industry standards with exceptional customer &technical service

1.8 FINANCIAL DEPARTEMANT

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Need of money for every organization is the same as the need of blood in the human body. Money is the means through which an organization achieves its goals. The finance dept of the company has all financial records related to company transactions. Mainly the functions of the dept. can be divided in the three major categories:-

TOP LEVEL:

As this level, high authorities are involved in planning and controlling the financial issues. They plan, direct, coordinate and control the resources, its allocation and proper utilization in order to take maximum benefit from it.

MIDDLE LEVEL

At this level, personnel get the instructions from the high authority and follow them. They collect information, prepare documents and statements and check them out in the order to implement the planning. They are the head of particulars section of finance department & then report to the higher level personnel about the result of their respective section that help out to higher authority to prepare further strategy.

LOWER LEVEL

It includes the accounting jobs. Those peoples are engaged in rerecording the truncation into primary books, transferring them into ledger and finally preparing the balance of every account. These all records are done through computers.

The debt, prepares bank report for updating bank transactions. For collecting debts from debtors. List of debtors is prepared then invoices are sent to them. If any debtor fails to make its account clear then reminders are sent to them. Since the company is much attentive towards maintaining cordial relationship with outsiders so to refer the case of unpaid debtors is rarely to the court. In order to clear the creditors account when invoices are sent by then it is checked out and finally payments are made to them either though , cheques or by transferring the amount in their bank accounts,

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and consumption the monthly report is prepared. Quarterly Balance sheet is prepared which shows the financial o the company.

FINANCIAL PERFORMANCE IN YEAR 2007-2008

PARTICULAR 2006-2007 2007-2008

Turnover 182.09 178.88

Export 102.14 103.37

PBIDT 16.80 13.91

Interest 8.45 12.81

Depreciation 7.58 9.96

Taxation 1.17 (2.31)

PAT (0.40) (6.55)

Gross Block 202.41 205.41

Less : Depreciation 106.35 115.91

Net Block 96.06 89.51

Net Worth 46.68 40.12

1.9 MANAGERIAL CHALLENEGS FACED

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In today’s world of global competition, it is imperative to raise the efficiency level of the organization through the measures like cost cutting and improvement in technology. In this scenario, jobs like planning capital expenditure, maintaining Cash balances, monitoring day to any transaction, planning and managing tax liability, keeping accounting records and preparation and presentation of financial statements becomes very crucial. Also, investment decisions, financing decision and capital structure policies or the company must be made with utmost care, as all these decisions have a very strong bearing on the overall performance of the company. Every firm needs funds, both for its day to day activities and for future endeavors. So, the most important function is to raise short-term and long-term loans at the lowest interest rates possible.

Similarly the challenges before the BSL Limited can be summarized as below:

To devise innovative methods of borrowing to further decrease the cost of funds,

Keeping the working capital requirements at lowest possible levels,

Maintaining good relationship with banks and other financial institutions,

Maintaining high credit rating, as it directly affects the rate of interest at high borrowing will be made by firm.

2 OBJECTIVE AND SCOPE OF THE STUDY

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II.1 OBJECTIVE

The principal objective of the project is to study and analyze the complete process of financing of working capital from banks. The objective of the present study is limited to mere understanding of the procedure of Working Capital financing and estimating of Working Capital for the current year.

2.2 SCOPE

At BSL LIMITED the entire exercise of Working Capital Financing either for getting any new sanction or reviewing the exiting borrowing limits is carried out at the start of the financial year. During the course of this project, I was able to get firsthand experience of all the documentation and fulfillment of other formalities laid under the bank norms for getting the funds sanctioned.

It my study of the process of Working Capital Financing at BSL Limited, the following points have been covered:

Complete Analysis of the last year’s performance and critical of the inventory levels, debtors, creditors and other important factors affecting working capital needs,

Computation of Working Capital requirement for the current year and assessment of borrowing limits,

Preparing CMA and other supporting documents,

Application to consortium of banks,

Clearance of any objection raised by the member Banks,

Creation of Security.

CHAPTER 3

LITERATURE SURVEY

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3.1 WHAT IS WOKING CAPITAL

“Working Capital” refers to the cash a business requires for day-to-day operations, or more specifically, for financing the conversion of raw material into finished goods, which the company sells for payment. Working Capital typically means the firm’s holding of current or short-term assets such as Cash, Receivables, Inventory, and Marketable Securities. These items are also referred to as “Circulating Assets” because of their cyclical nature. In a retail establishment, cash is initially employed to purchase inventory which is in turn sold on credit and results in accounts receivables. Once the receivables are collected, they become cash, part of which is reinvested in additional inventory and party going to the profit or cash thro-off. According to the Balance Sheet concept, it is simply represented by the excess of current assets over current liabilities and is the amount normally available to finance current operations. In this case the Current Assets are called Gross Working Capital and the excess of Current Assets over Current Liabilities is called Net Working Capital.

Current assets mainly include, stocks of raw materials, work-in-progress, finished goods, trade debtors, prepayments and cash balances. Whereas the main components of Current liabilities are trade creditors, accruals, taxation payable, dividends payable and term and short term loans.

In financial reporting, the term “funds” has usually been defined as Working Capital, or the excess of current assets over current liabilities.

CHAPTER 4

CONCEPT OF WORKING CAPITAL

There are two concepts of Working Capital:

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Gross Working Capital

It refers to the firm’s investment in total current or circulating assets.

Net Working Capital

The term ‘Net Working Capital’ has been defined in two different ways:

i. It is the excess of current assets over current liabilities. This is, as a matter of fact, the most commonly accepted definition. Some people define it is as only the difference between current assets and current liabilities. The former seems to be a better definition as compared to the latter.

ii. It is that portion of a firm’s current assets which is financed by long-term funds.

For example, a business requires investment in current assets such as cash, accounts receivable and short-term investment etc. to the extent of Rs. 15000. A part of this requirement can be financed by the firm by purchasing on credit or postponing certain payments or, in other words, by creation of current liabilities such as accounts payable, outstanding expenses etc. suppose the amount of current liabilities comes to Rs. 10,000. This means the business still needs Rs. 5,000 for its working capital purposes. This amount will have to be financed from long-term sources of funds as indicated in the definition of Net Working Capital given above.

4.1 NEEDS FOR WORKING CAPITAL

The basic objective of financial management is to maximize shareholders’ wealth. This is possible only when the company earns sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However,

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sales do not convert into cash instantaneously. There is always a time gap between the sale of goods and receipt of cash. Working Capital is required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to sustain the sales since it may not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold.

4.2 TYPES OF WORKING CAPITAL

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

1. Permanent Working Capital

2. Temporary or Variable Working Capital.

4.2.1 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. Tondon Committee has referred to this type of working capital a ‘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.

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Permanent working capital is permanently needed for the business and therefore it should be financed out of long term funds.

4.2.2 TEMPORARY WORKING CAPITAL

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 period 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.

The diagrams given below illustrate the difference between permanent and temporary working capital. In Fig. 1, permanent working capital is fixed over a period of time, while temporary working capital is fluctuating. In Fig. 2, the permanent working capital is increasing over a period of time with increase in the level of business activity. This happens in case of a growing company. Hence, the permanent working capital line is not horizontal with the base line as in Fig.1.

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Temporary or

Amount of working capital fluctuating

(Rs.) Permanent

Time

Fig. 1

Amt. of working capital Temporary or

(Rs.) Fluctuating

Permanent

Time

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Fig. 2

4.3 ADEQUACY OF WORKING CAPITAL

A firm must have adequate working capital, i.e., as much as needed by the firm. It should neither be excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm has idle funds which earn no profits for the firm. Inadequate working capital means the does not have sufficient funds for running its operations which ultimately result in production interruptions and lowering down of the profitability.

It will be interesting to understand the relationship between working capital, risk and return. In a manufacturing concern, it is generally accepted that higher levels of working capital decrease the profitability too. While lower levels of working capital increase the risk but have the potentiality of increasing the profitability also. This principle is based on the following assumption:

i. There is direct relationship between risk and profitability−higher is the risk, higher is the profitability, while lower is the risk, lower is the profitability.

ii. Current assets are less profitable than long-term funds.

iii. Short-term funds are less expensive than long-term funds.

On account of the above principle, an increase in the ratio of current assets to total assets will result in decline in the profitability of the firm. This is because investment in current assets, as stated above, is less profitable than that in the fixed assets. However, an increase in this ratio would decrease the risk of the firm becoming technically insolvent. On the other hand, decrease in the ratio of current assets to total assets would increase the profitability of the firm because investment in fixed assets is more profitable than the investment in current assets. However, this

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will increase the risk of the firm becoming technically insolvent on account of its possible inability of meeting its commitments in time due to shortage of funds.

SOURCES OF WORKING CAPITAL

The working capital requirements should be met both from short-term as well as long-term sources of funds. It will be appropriate to meet at least 2/3(if not the whole) of the permanent working capital requirements from long-term sources and only for the period needed.

The financing of working capital through short-term sources of funds has the benefits of lower cost and establishing close relationship with the banks.

Financing of working capital from long-term resources provides the following benefits:

(i) It reduces risk, since the need to repay loans at frequent intervals is eliminated.

(ii) It increases liquidity since the firm has not to worry about the payment of these funds in the near future.

The financing manager has to make use of both long-term and short-term sources of funds in a way that the overall cost of working capital is the lowest and the fund are available on time and for the period they are really needed.

APPROCHAES FOR DETERMINING THE FINANCING MIX

There are three basic approaches for determining the working capital financing mix.

(i) The hedging approach . According to this approach, the maturity of source of funds should match the nature of assets to be financed. The approach is, therefore, also termed as ’Matching Approach’. It divides the requirements of total working capital funds into two categories.

a) Permanent Working Capital, i.e., funds required for purchase of core current assets. Such funds do not vary over time.

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b) Temporary or Seasonal Working Capital, i.e., funds which fluctuate over time.

The permanent working capital requirement should be financed by long-term funds while the seasonal working capital requirements should be financed out of short-term funds.

(ii) The conservative approach. According this approach all requirements of funds should be met from long-term sources. The short-term sources should be used only for emergency requirements. The conservative approach is less risky, but more costly as compared to the hedging approach. In other words conservative approach is ‘low profit-low risk’ (or high cost, high net working capital) while hedging approach results in high profit-high risk (or low cost, low net working).

(iii) Trade-off between hedging and conservative approaches. The hedging and conservative approaches are both on two extremes. Neither of them can therefore help in efficient working capital management. A trade-off between these two can give satisfactory results. The level of such trade-off will differ from case to case depending upon perception of the risk by the persons involved in financial decision-making. However, one way to determining the level of trade-off is by finding the average of the minimum and the maximum requirements of working capital during period. The average working capital so obtained may be financed by long-term funds and the balance by short-term funds. For example, if during the quarter ending 31st March 2000, the minimum working capital required is estimated at Rs.10,000 while the maximum at Rs. 15,000 the average level comes to 12,500[i.e. (10,000 + 15,000) ÷ 2]. The firm should therefore, finance Rs. 12,500 from long-term sources while any extra capital required any time during the period, from short-term sources (i.e., current liabilities).

4.3 SOURCES OF FUNDS30

Transactions that increase working capital are sources of funds. The primary sources of working capital of a firm include:

Funds generated from operations:The earnings of a business represent one of the principle “sources of funds”. The amount of funds generated from operations is not the net income shown in the income statement, because some of the expanses, principally depreciation and amortization, do not involve the expenditure of funds. In order to determine working capital provided by operations, it is necessary to deduct from revenues only those expenses which require an expenditure of funds and therefore cause a reduction in working capital. A convenient way of determining working capital from operations is simply to add back to net income all those expenses, which did not require an outlay of funds, i.e. working capital.

Certain items include in the income statement decreases without increasing working capital like Payment of premium on bonds payable causes interest expenses to be less than the amount of cash paid. Therefore, these items should be deducted from net income in computing the amount of working capital provided by the operations.

The computation o the working capital fund provided by operations any be summarized as follows:

Net income + items reducing Net Income which do not affect Working capital + Non-operating Losses - Non –operating Gains - Items increasing Net Income which do not affect working capital.

Increase in Long-term liabilities:A second source of funds is long –term borrowing. A positive change in the long-term borrowings is a source of fund whereas a negative change is a use of fund.

Increase in share capital:

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If a firm has issued share capital during the period, the amount for which the shares were sold is a source of funds.

Sale of fixed assets(Non Current Assets)This will be another source of funds equal to the proceeds from the sale.

4.6 USES OF FUNDS

Truncations that decrease working capital are classified as uses of funds.Typical uses of working capital include:

Purchase of fixed Assets: (Non Current Assets)

One of the major uses of funds is the purchase of non-current assets, principally land, building, machinery investment, and intangible assets. Non-current assets accounts are not affecting only by purchases, but also by the amount of depreciation taken the year and the sale or dispositions of assets during the year.

Dividends:The declaration of cash dividends to be paid at a later date is also a use of funds. Working capital is reduced at the time the declaration is made because a current liability, dividends payable, is incurred and recorded at that time.

Decrease in long-term liabilities:

Funds may be used to pay-off long-term liabilities, so a decrease in long-term liability is a use of funds.

4.7 CHANGES IN WORKING CAPITAL32

In determine changes in working capital, only those accounts are considered which determines the working capital and the accounts not include in working capital (i.e., non-working capital accounts ) at the same time.

Truncations that involve only working capital accounts or non-working capital may be ignored in determining the changes in working capital. For example: If a cash payment is made to creditors, working capital is not affected because cash (and current assets) and creditors (and current liabilities) decrease by equal amounts. Likewise, if shares are exchanged for a machine, capital does not change because no working capital accounts are involved in exchange. Transactions like transfer from long-term assets to current assets or current liabilities viz sale of fixed assets, transfer of a long-term assets to a creditor satisfying a current debt, etc increase the working capital. Whereas transactions like transfer from current assets to long-term assets or long-term liabilities viz purchase of fixed assets, debentures payable paid from cash, etc decrease the working capital.

4.8 WORKING CAPITAL CYCLE AND KEY RATIOS:

Working Capital Cycle refers to the period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a customer. This cycle or loop starts at the cash and marketable securities account, goes though the current accruals accounts as direct labour and materials are purchased and used to produce inventory, which is in turn sold and generates accounts receivable, which are finally collected to replenish cash. The major point to notice about this cycle is that the turnover (or velocity) of resources through this loop is very high as compared to the other inflow and outflow of the cash account.

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Debtors

Cash

Raw material purchase

Finished goods

`

Production Used to purchase

Process

Generates

Used to

Purchase

Collection

Process

External

Via Sales Financing

Generates Return on

Capital

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Accrued Director Labour

Cash and Marketable

Accrued Fixed Operating

Accounts Receivable Suppliers of Capital Fixed Assets

Inventory

Each of the boxes in the above diagram can be seen as a tank through which funds flow. These tanks, which are concerned with day-to-day activities, have funds constantly flowing into and out of them.

The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within the business. Good management of working capital will generate cash, will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm’s profit.

There are two elements in the business cycle that absorb cash- Inventory (Stocks and working-in-process) and Receivables (debtors owing you money). The main sources of cash payable (your creditors) and Equity and Loans.

All the above periods’ are measured in days to calculate the final Working Capital Cycle or the Cash Conversion Cycle. Each component of working capital (namely inventory, receivables and payables) has two dimensions- TIME and MONEY. When it comes to managing working capital- TIME IS MONEY. If you can collect money due from debtors more quickly or reduce inventory levels relative to sales, the business will generate more cash or it will need to borrow less money to fun working capital. Similarly, if terms with suppliers can be improved e.g. getting longer credit or an increased credit limit, then free finance to help fund future sales can be created.

Table 2. Key Ratios, their formulas and interpretation

The key ratios, their formulae and their interpretation, which are important in measuring the Working Capital Utilization, are given in the table below:-

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RATIO FORMULA RESULT INTERPRETATIONInventory turnover (in days)

Average stock*365/Cost of Goods sold

= X days On average, the value of the entire stock is turned over x days. Obsolete stock. Slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.

Receivables ratio (in days)

Debtors*365/Sales

= X days It take on an average x days to collect monies due on the debtors. One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.

Current Ratio

Total Current Assets/Total Current Liabilities

= X times Current Assets are assets that can readily turn in to cash or will do so within 12 months in the course of business. Current liabilities are amount which are due to pay within the coming 12 months. CR less than1 times e.g. 0.75 means that one could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.

Quick Ratio

(Total Current Assets- Inventory )/Total Current Liabilities

= X times Similar to the Current Ratio but takes accounts of the fact that it may take time to convert into cash.

Working Capital Ratio

(Inventory + Receivables - Payables)/Sales

As % sales

A high percentage means that working capital needs are high relative to your sales.

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4.9 ESTIMATING WORKING CAPITAL REQUIREMENTS

In order to determine the amount of working capital needed by the firm, a number of factors viz.production policies, nature of business, length of manufacturing process, credit policy, rapidity of turn-over, seasonal fluctuations. Etc. are to be considered by the Finance Manager. a finance Manager can apply any of the following techniques for assessing the working capital requirements of a firm.

Techniques for Assessment of the working Capital Requirements

Following is a brief explanation of the various techniques for assessment of a firm’s working capital requirements:

1. Components of Working Capital Approach: since working capital is the excess of current assets over current liabilities, an assessment of the working capital requirements can be made by estimating the amounts of different constituents of working capital e.g., inventories, accounts receivables, cash , accounts payable etc.

2. Percent of Sales Approach: this is a traditional and simple method of estimating working capital requirements. According to this method, on the basis of past experience between sales and working capital requirements, a ratio can be determined for estimating the working capital requirements in future. For example, if the past experience shows the working capital has been 30% of sales and it is estimated that the sales for the next year would amount to rupees one lac, the amount of working capital requirement can be assessed as Rs. 30,000. The basic criticism of this method that it presumes a linear relationship between sales and working capital. This is not true in all cases and method is not universally acceptable.

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3. Operating Cycle Approach:

According to this approach, the requirement of working capital depends upon the operating cycle of the business. Working capital is required because of the time gap between the sales and their actual realization in cash. This time gap is technically termed as ‘operating cycle’ of the business.

In case of a manufacturing company, the operating cycle is the length of time necessary to complete the following cycle of events:

(i) Conversion of cash into raw material;(ii) Conversion of raw material into WIP(iii) Conversion of WIP into finished goods (iv) Conversion of finished into accounts receivables, and (v) Conversion of accounts receivables into cash.

This cycle will be repeated again and again.

The operation cycle of a manufacturing business can be shown as in the following chart.

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ACCOUNTS RECEIVABLES

FINISHED GOODS

WORK-IN- PROGRESS

RAW MATERIAL

CASH

Operating Cycle of a Manufacturing Business

In the case of a ‘trading firm’ the operating cycle will include the length of time required to convert (i) cash into inventories (ii) inventories into accounts receivables, and (iii) accounts receivables into cash.

In case of a ‘manufacturing firm’, the operating cycle includes the length of time taken for (i) conversion of case into debtors, and (ii) conversion of debtors into cash.

Estimation of the Amount of different Components of Working Capital

Since working capital is excess of current assets over current liabilities, the forecast for working capital requirements can be made only after estimating the amount of different constituents of working capital. The procedure for estimating the amount of each of the constituents of working capital and the information required for the purpose, are discussed below:-

1. Inventories. The term ‘inventories’ includes stock of raw material, work-in-progress and finished goods. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity

The estimation of each of them will be made as follows:(a.) Stock of Raw Material. The average amount of raw material to be kept in

stock will depend upon the quantity of raw materials required for production during a particular period and the average time taken in obtaining a fresh delivery. Suitable adjustment may have to be made to provide for contingencies and seasonal factors.

(b.) Work-in-progress. The cost of work-in-progress includes raw material, wages and overheads. In determining the amount of work-in-progress, the time period for which the goods will be in the courses of production process, is most important.

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(c.) Finished Goods. The period for which the finished goods have to remain in the warehouse before sales in an important factor for determining the amount locked up in finished goods.

1. Sundry Debtors. The amount of funds locked up in Sundry Debtors will be computed on the basis of credit sales and the time-leg in collecting payment. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); Discounts and allowances.

2. Cash and Bank Balances. The amount of money to be kept as cash in hand or cash at bank can be estimated on the basis of past experience. Every businessman knows the amount that he will require for meeting his day-to-day payments.

3. Sundry Creditors. The leg in payment to suppliers of raw material goods, etc., and the likely credit purchases to be made during the period will help in estimating the amount of creditors.

4. Outstanding Expenses. The time-leg in payment of wages and other expenses will help in estimating the amount of outstanding expenses.

4.10 WORKING CAPITAL MANAGEMENT

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Working capital management of all aspects o both current assets and current liabilities, so as to minimizing return on assets. Even profitable companies fail if they have inadequate cash flow. Liabilities are settled with cash, not profits. The primary objective of working capital management is to ensure that sufficient cash is available to:

Meet day-to-day cash flow needs,

Pay wages and salaries when they fall due,

Pay creditors to ensure continued suppliers of goods and services,

Pay government taxation and providers of capital-dividends and interest, and

Ensure long-term survival of the business entity.

Poor working capital management can lead to:

Over capitalization (an therefore waste though under utilization of resources and hence poor returns), and

Overtrading (trying to maintain a level of sales which is higher than working capital can sustain-for businesses which extend credit terms, more sales means more debtors and higher working capital demands).

Basically Working Capital Management is the process to shorten the working capital cycle as much as possible with the most efficient use of the available resources. This can be done by reducing the inventory conversion period and receivable collection period or by increasing the payable deferral period.

4.11 OPTIMUM LEVEL OF WORKING CAPITAL

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The conventional definition of Working Capital, in terms of the difference between current assets and current liabilities is somewhat confusing. Working capital is really what a part of long-term finance is locked and used for supporting current activities consequently, larger the amount of working capital so derived, greater the proportion of long-term capital sources siphoned off to short-term activities. It is difficult to say whether this is right or wrong. A relatively large amount of working capital according this definition may produce a false sense o security at a time when cash resources may be small or when these may be provided increasingly by long-term fund sources in the absence of adequate profits. So the impossibility is that current assets which are relied upon to yield cash must themselves to be supported by long-term funds until they are converted into cash. Strategies that utilize investment or financing with working capital accounts often offer a substantial advantage over other techniques. Several strategies may be formulated to address the uncertainty regarding the levels of its future cash flow and the costs that may engender. Among these strategies are some that involve working capital investment or financing suck as holding additional cash balances beyond expected needs, holding a reserve o short-term marketable securities, or arranging for the availability of additional short-term borrowing capacity.

One of the major features of this world is uncertainty (risk), and it is this feature that gives rise to many of the strategies involving working capital accounts. Moreover, a firm’s net working capital position is not only important from an internal standpoint; it is also widely used as a measure of the firm’s risk. Risk deals with the profitability that a firm will encounter financial difficulties. Such as the inability to pay bill on time. All other things being equal, the more net working capital a firm, the more likely that it will be able to meet current financial obligations. Many loan agreements with commercial banks and other lending institutions contain a provision requiring the fir to maintain a minimum level of net working capital position likewise; bond indentures also often contain such provisions. With the liquidity-

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profitability dilemma solidly authenticated in the financial scheme of the management, concerted efforts are made to ensure the ability of the firm to meet those obligations which mature within a twelve month period. Keeping all the factors in mind, management decides the levels of current assets, despite the fact that sales dictate some fluctuations in short-term assets investment. Excessive current assets are usually not advisable because they are generally not considered to be the “Earning Assets” o the firm. The yield from short-term assets is usually quite high. So, management may be considered to be aggressive or conservative according to investment in current vs. long-term assets.

Not all Companies and businesses are similar. Different industries have different optimum working capital profiles, reflecting their methods of doing business and what they are selling. Businesses like supermarket with a lot of cash sales and few credit sales should have minimal trade debtors, some seasonal business like travel agencies will receive their money at certain times of the year although they may incur expenses receive their monies at certain times of the year, although they may incur expenses throughout the year at a fairly consistent level. Some finished goods, notably foodstuffs have to sell within a limited period because of their perishable nature. The size nature of firm’s investment in current assets is a function of a number of different actors, including following:

the type of products manufactured and the length of the operating cycle,

the sales level, as higher sales require more investment in inventories and receivables.

Inventory policies, e.g. the amount of safety stock maintained,

Credit policies,

Efficiency in Management of current assets.

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Some companies are inherently better placed then others. Insurance companies, for instance, receive premium payments up front before having to make any payments. However, insurance companies do have unpredictable outgoing as claims come in. normally a big retailer like WAL-Mart has little to worry about when it comes to accounts receivable, as customers pay for goods on the spot. Inventories represent the biggest problem for retailers, who must perform rigorous inventory forecasting or they risk being out of business in a shot-tem. Manufacturing companies, like Shree Cement, incur substantial up-front costs for materials and labor before receiving payments. Much of the time they eat more cash than they generate.

4.12 WOKING CAPITAL FINANCING & POLICIES

Working capital is taken to be the life-blood of a business. That is way, working capital management of a firm is considered to be one of the most important tasks of financial managers. A decision regarding the volume of current assets has its own importance no doubt, but the question of financing is in fact the key area o working capital management. Since the management is very much concerned with proper financial structure, these and other funds must be raised judiciously.

Various sources of Working Capital financing are bank borrowings, public deposit, trade credit, long- term borrowing and equity capital. Of the different sources, bank credit has been a major source of working capital in India and abroad. Frequently, current assets are financed from short-term loans. Larger the percentage of funds obtained from short term funds, the more aggressive (and risky) is the firm’s working capital policy and vice versa. A company’s need for financing is equal to the sum of its fixed assets and current assts. Current Assts can be divided into the following two categories:

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Permanent current assets,

Fluctuating current assets.

Fluctuating current assets are those which are affected by the seasonal o cyclical nature of a company’s sales. For example, a firm must make lager investment in inventories and receivables during peak selling periods than during other periods of the year.

Permanent current assets are held to meet the company’s long-tem needs e.g. safety stocks of cash and inventories.

4.13 TANDON, CHORE, KANNAN AND CERTAIN OTHER COMMITTEES RECOMMENDATION

 

Financing of working capital had always been an exclusive domain of commercial banks. Too much emphasis on security by the banks directed the flow of credit to affluent section of society with the result that economic resources of the country were concentrated in a few hands. Projects promoted by technically qualified entrepreneurs with no tangible security to offer found it difficult to raise finance for the working capital required by them from banks. With the nationalisation of the banks an entirely new breed of entrepreneurs made a demand on bank credit. Small sector and other segments of priority sector were to be the major beneficiary of nationalisation and were preferred claimants of credit. This resulted in an unexpected demand on lendable funds of banks and naturally called for a reform in the policies of

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banks to orient them to the new developmental role assigned to the banking industry.

 

Another important factor which called for reforms was the inbuilt weakness in the cash credit system linked with emphasis on security. The limits were directly fixed on the basis of security available in the account which in many cases resulted in double finance. Banks also had no control over the level of advances at any particular time. It was not related to how much a bank can lend at a particular time but was linked to the decision of the borrower to borrow at that time. A major part of credit limits sanctioned by the bank remained unutilised and there was a strong tendency within the banks to oversell the credit. It was noted as at the end of June, 1974 that total limits sanctioned by the banking industry was far in excess of its total deposits. Bank could afford this overselling as 43% of the limits sanctioned by them remained unutilised. Any unexpected demand within the sanctioned limits could prove disastrous and had the capacity to put the entire banking industry out of gear. The fear was proved true in late 1973 when a sudden demand on bank credit was made due to unprecedented rate of inflation and the banks had to arbitrarily freeze the credit limits of their borrowers.

 

In view of such a situation obtaining at that time, Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit with the following terms of reference :

 

To suggest guidelines for commercial banks to follow up and supervise credit from the point of view of ensuring proper end-use of funds and keeping a watch on the safety of the advances and to suggest the type of operational data and other information that may be obtained by banks periodically from such borrowers and by the, Reserve Bank of India from the lending banks,

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To make recommendations for obtaining periodical forecasts from borrowers of (a) business/production plans, and (b) credit needs,

To make suggestions for prescribing inventory norms for different industries both in the private and public sectors and indicate the broad criteria for deviating from these norms,

To suggest criteria regarding satisfactory capital structure and sound financial basis in relation to borrowings,

To make recommendations regarding the sources for financing the minimum working capital requirements,

To make recommendations as to whether the existing pattern of financing working capital requirements of cash credit/overdraft system etc., requires to be modified, if so, to suggest suitable modifications, and

To make recommendations on any other related matter as the Group may consider relevant to the subject of enquiry or any other allied matter which may be specifically referred to it by the Reserve Bank of India.

 

Based upon these terms of reference the Group attempted to identify the various constituents of working capital that could be financed by the banks and suggested norms for build up of inventory. Far reaching recommendations on the style of lending and improvement in the present system of Cash Credit were also made. These recommendations were mostly accepted by Reserve Bank and were referred to banks for implementation in late 1975. Many modifications have since been suggested by 'Chore Committee'. Nevertheless

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the basis of the recommendations of Tandon Committee have been retained. The recommendations of the group related to four important aspects as discussed in the following paragraphs.

 

Article I. Level of Current Assets 

Working capital requirement of any unit is directly related to the level of current assets with the unit. As the main emphasis by the banks had been on security, the limits were sanctioned on the basis of the value of inventory held by the unit and no attempt whatsoever was made to assess the requirement of the unit. The Group analysed the inventory build up of various units and classified the inventory as under

 

Flabby inventory comprising finished goods, raw materials and stores held because of poor working capital management and inefficient distribution.

Profit- making inventory representing stocks of raw materials and finished goods held for realising stock profits.

Safety inventory providing for failures in supplies, unexpected spurt in demand etc., in effect, an insurance cover.

Normal inventory based on a production plan, lead time of supplies and economic ordering levels. Normal inventories will fluctuate primarily with change in production plan. Normal inventory also includes reasonable factor of safety.

 

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Some excessive inventory may also have to be built up sometimes due to factors beyond the control of management as in case of bunched imports etc. Flabby and profit-making inventory are both non-productive and should be discouraged. Normal inventory includes an element of safety and it should be the endeavour of any management not to hold any excess inventory over its normal requirements. To arrive at this normal level of inventory, 'Tandon Group' suggested norms for 15 different kind of industries covering a major part of all industries in the country and the norms related to

 

Raw materials Stocks in process/semi-finished goods Finished goods Receivables

Which together make for bulk of the current assets of any unit.

 

Reserve Bank also appointed various "Committees of Direction" to make recommendations regarding any changes to be brought in the norms suggested by the Group. 'Committee of Direction' had also recommended norms for other industries not included in the initial report of the Group. With the passage of time it was felt by trade and industry that these norms have become outdated and needed immediate review in the changing economic scenario. An ‘In House Group’ under the chair personship of Ms I.T.Vaz, Executive Director, Reserve Bank of India, was constituted in January 1993 to review the need for continuing with the norms for holding of inventory/ receivables as also allocation of credit to industry by fixing Maximum Permissible Bank Finance (MPBF) based on such norms.

 

As per the recommendations of the 'In House Group' accepted by Reserve Bank of India, the banks have been given discretion to decide the levels of holding of individual items of inventory and of receivables, which should be

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supported by bank finance after taking into account the production/processing cycle of an industry as also other relevant factors.

 

The other factors will include the financial parameters of the borrower. Banks now have the freedom to decide the levels of holding of each item of inventory as also of receivables which would represent a reasonable build up of current assets for being supported by Bank finance. Reserve Bank will not prescribe detailed norms for each item of inventory as also of receivables; but only advise the overall levels of inventory and receivables for different industries for the guidance of the banks to serve as broad indicators. Banks may also frame suitable guidelines for accepting the projections made by borrowers relating to 'Sundry Creditors (Goods)', an item included in 'other current liabilities'. The above guidelines would apply to borrowers enjoying aggregate fund-based working capital limits of Rs. 1 crore. and above from the banking system.

4.14 METHODS OF LENDING

Like many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon.

The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporates in the light of methodology recommended by the Group.

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As per the recommendations of Tandon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods:

First Method of Lending:

Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs

Second Method of Lending:

Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.

Third Method of Lending:

Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as

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representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.(This method was not accepted for implementation and hence is of only academic interest).

As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the level of current assets. The classification of assets and balance sheet analysis, therefore, assumes a lot of importance. RBI has mandated a certain way of analysing the balance sheets. The requirements of this break-up of assets and liabilities differs slightly from that mandated by the Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more detailed and accurate picture of the affairs of a corporate. The corporates are required by all banks to analyse their balance sheet in this specific format called CMA data format and submit to banks. While most qualified accountants working with the firms are aware of the method of classification in this format, professional help is also available in the form of Chartered Accountants, Financial Analysts for this analysis.

4.15 RECENT RBI GUIDELINES REGARDING WORKING CAPITAL FINANCE

The following recent changes have been made by RBI in the guidelines for bank lending for working capital purposes and by way of term loans. These measures are set out below:-

I. Lending Norms for Working Capital(a.) Banks would henceforth decide the levels of holding of individual items

of inventory as also of receivables, which should be supported by bank finance, after taking into account the production/processing cycle of an industry as well as other relevant factors. RBI would no more prescribe detailed norms for each item o inventory as also of receivables; it would

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only advise the overall levels of inventory and receivable for different industries to serve as broad indicators for guidance of banks.

(b.) Banks would be free to sanction ad hoc credit limits to borrowers, where considered necessary and charging of additional interest for this purpose is no longer mandatory.

(c.) Other aspects of the lending discipline, viz., maintenance of minimum current ratio, submission and use of data furnished under quarterly information system etc.,would continue, though with certain modification, which would make it easier for smaller borrowers, to comply with these guidelines.

II. Treatment of loan installments for assessment of working capital purposes

Hitherto term loan installment falling due for repayment in the next twelve months were treated as part of current liabilities for assessment of maximum permission bank finance (MPBF). In terms of current policy, which was implemented in stages, such instalments are not required to be treated as an item of current liabilities for the limited purposes of assessing MPBF. These instalments continue to be treated as current liabilities for other purposes including for calculation of current ratio.

III. Export Credit

(i) In order toensure that the credit requirements of exporters are promptly met and their additional credit requirements out of firm orders/ confirmed letters of credit, not taken into account while fixing their regular credit limits, the banks were advised in December 1992 to sanction such additional credit limits, even in excess of maximum permissible bank finance (MPBF).

(ii) Borrowing units engagedin export activities need not bring in anycontribution from their long-term sources towards financing that portion of current assets as is represented by export receivables.

(iii) Banks were also advised not to apply the Second Method of Lending for assessment of MPBF to those exporter borrowers, who had to their credit

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export of not less than 25 percent of their total turnover during the previous accounting year provided their aggregate fund-based working capital limits from the banking system were less than Rs. 1 Crore.

(iv) Withdrawal of Maximum Permissible Bank Finance (MPBF) limits. In recent years consistent efforts are being made by Reserve Bank to provide flexibility alongwith discipline in respect of bank credit. As such during 997-98 consistent with the policy of liberalization banks were allowed full operational freedom to evolve their own methods of assessing the working capital requirements of the borrowers within the prudential guidelines and exposure norms already prescribed and all instructions relating to MPBF were withdrawn. At the same time effective from October 21, 1997, for all borrowers with working capital credit limits from the banking system of Rs. 10 crore and above, the loan component was fixed at a uniform minimum level of 80%. In case of borrowers with working capital credit limit of less than Rs. 10 crore, banks may persuade them to go in for the ‘loan system’ by offering more incentives in the form of lower rate of interest on the loan component as compared to cash credit component.

Both expected profitability and risk increase as the proportion of short-term debt increase. The company’s net working capital position and current ratio would depend on the financing policy chosen in summary, a firm can adopt any of the following policies for financing its working capital needs:-

(1)Matching Approach to Asset Financing:

In this approach, the maturity structure of the firm’s liabilities is made to correspond exactly to the life of its assets. This is illus

(2)Conservative Approach to Asset Financing:

(3)Aggressive Approach to Asset Financing:

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5 RESEARCH PROBLEMS

The main aim of this project was to study the complete process of Working Capital Financing, both at BSL Limited in general. Every organization carriers out the entire exercise of analysis of last year’s performance, assessment of working capital requirements, and creation of CMA and other documents for the purpose of obtaining bank borrowing at the end of every financial period. Forecasting the levels of different components o current assets and current liabilities becomes very crucial, as on their basis the final working capital requirements are calculated.

CHAPTER 5

RESEARCH DESIGN

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5.1 GENERAL METHODOLOGY

The methodology followed in completion of this project study could be enumerated as follow:

Analyzing relevant figures

Study of the complete process of Working Capital Financing using the literature and by the way of discussions with the organizational guide,

Preparing assumptions for the estimation of figures for year

Using formulae to calculate the absolute values of current assets and current liabilities and their justification,

Linking of all the statements to arrive at a final estimation of the working capital requirements and the Maximum Permissible Bank Finance (MPBF)

Creation of CMA and other supporting documents,

Complete documentation of the project study.

5.2 SOURCES OF DATA:

The major sources of data in project study wee past year’s financial statements and information gathered from my guide. The entire set of information and data was available within the organization, without any need for collecting data from outside.

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5.3 DATA COLLECTION POCEDURE:

Information was taken directly from the finance Department. Figures and financial statements for the past 3 years were made available from annual reports. Literature pertaining to the bank norms and other relevant documentation was taken from the organizational guide for reference purposes.

CHAPTER 6

PROCESS OF WORKING CAPITAL FINANCING

The process of working capital financing from banks is a very comprehensive one. It consists of a number of steps starting from assessing the fund requirements to the step of auditing by the Bank and Auditors. A firm can get the financing done from a single Bank or a Consortium o Banks. Generally a firm has to go for a consortium of Banks because every bank has

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a limit up to which it can fund the working capital requirements of a firm in a specific industry.

This is because investing money in a single industry is much riskier than diversified investments. Banks have to adhere to the norms laid down for limits of industry exposure (investment) as well as company exposure. Other steps include the preparation of Credit Monitoring Arrangement (CMA) in which the future cash flow are projected and accordingly the various requirements are assessed, which further consolidates into the working capital requirements in the following year.

Then there is preparation of other supporting documents, applying to the bank o the lead bank in case of consortium of banks, then appraisal and sanction by the bank (or banks as the case may be), creation of security, disbursement of funds and finally monitoring and auditing by the Banks and the auditors. In appraisal of the loan application by any bank, the most important part is to award a credit to the firm, on the basis of which the final for every firm to maintain a high credit rating.

These ratings also help the firm in issuing other instruments like Commercial Paper, Debentures, etc. also, monitoring by banks constitutes an important step.

The drawing power of a firm is decided on the basis of the stock levels, as Cash Credit limit is given after hypothecation of inventory and stocks. So, the drawing power of a firm keeps on changing according to the levels of the stock. Therefore reporting of financial position becomes very important. It is important from the company’s performance on a regular basis. The whole sequence of Working Capital financing is shown in the following flowchart:

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PROCESS FLOW CHART FOR WORKING CAPITAL FINANCING

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Assessing Working Capital Requirement

Preparing Application, CMA & other Supporting Documents

Applying to Bank/Consortium

Single Bank Consortium Bank

CHAPTER 7

7.1 ASSESSING WORKING CAPITAL REQUIRREMENT

The money required for day to day use in a business organization contribute to the working capital requirements o the firm. Examples of such activities are payment of electricity bill, salaries & wages, mining compensation, purchase of raw material, payment of excise and sales tax,

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Financing Appraisal by lead Bank

Circulation of appraisal to member Banks

Holding of consortium meeting &appraisal of limits

by member Banks

Sanction by member Banks

Appraisal & sanction by single Bank

Agreement & Creation of security

Disbursement of Funds

Monitoring of financial progress by Banks

Inspection by Bank and Auditors

payment of factory and office expenses like telephone bills, travelling expenses and computer expenses etc.

Working Capital Requirements (WCR) may be defined as the difference between operating assets (consisting of prepaid, inventory and receivable). These accounts represent spontaneous uses and sources of funds over the firm’s operating cycle.

WCR = A/R+INV+PREPAIDS-A/P

All the current assets like raw materials, stock in progress, finished goods, stores & spares, debtors, loans and advances and cash & bank balances, constitute the Gross Working Capital. Whereas, the difference between current assets and current liabilities given the Net Working Capital (NWC). It is generally agreed that greater the current assets relative to the level of current liabilities, the more liquid the company is.

NWC = CA-CL

Another term Net Liquid Balance (NLB) is defined as the difference between current financial assets such as cash and marketable securities and current discretionary or non spontaneous financial liabilities such as notes payable and current maturities of long-term debt.

NLB = CASH+MKT SECURITIES – NOTES PAYABLE – CURRENT

MATURITIES OF LONG TERM DEBT.

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The absolute NLB may be used as a measure of a firm’s liquidity. If the measure is negative, it indicates a dependence on outside financing and is indicative of the Minimum borrowing line required. A negative NLB does not itself suggest that the firm is going to its debt obligations.

From the above equations, the relationship between WCR, NLB and NWC can be represented as:

NWC = WCR + NLB

Out of the above, Working Capital Requirement is the most appropriate approach to calculate the real requirements of a firm because the traditional NWC figure includes accounts that are directly relaxed to the operating cycle. For example, the marketable securities account, and the notes payable balance should be viewed as balances that result from internal financial decision and policies, not balances resulting from the operating cycle of the firm. They should therefore by exclude from consideration. This approach is consistent with the decomposition of net working capital into net liquid balance and working capital requirements.

FORMULAE FOR COMPUTATION O CURRENT ASSETS AND CURRENT LIABILITIES

Working capital requirements of a firm is calculated as the difference between the current assets and current liabilities. The levels of the various components of current assets like raw material, stock-in-process, finished goods, other consumable spares, receivables, advances to suppliers and other

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current assets, are decided by considering the levels of past years and peak level in the last year. Also, financing of the various levels in based on judgmental decisions by financial analysts.

Formulae for calculating the requirements of different components of current assets can be given as:

Raw material inventory

(Budgeted Requirement* cost o Raw Material per unit* Average inventory Holding Period in months)/12

Finished Goods Inventory

(Total Cost of Sales* Average Inventory Holding Period in months)/12

Sundry Debtors

(Budgeted Credit Sales* Price of finished goods pr unit* Average debt collection period in months)/12

Sundry Creditors

(Budgeted Credit Purchase* Cost of Raw Material per unit* Average payable period in months)/12

7.2 PREPARING CMA, APPLICATION & OTHER SUPPORTING DOCUMENTS

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At the time of fresh sanction, sanction for review with modifications in the existing limits, and also for modification in any of the stipulated terms and conditions, borrowers are required to furnish the following forms:

Form No. І: This includes particulars of existing/proposed limits/facilities/finance from: (a) each bank (b) each financial institution; for working capital credit requirement. This form is applicable to all borrowers irrespective of the size of the finance required.

Form No. II: This includes operating statement with additional particulars required under the Desirable Bank Finance method.

Form No. III: This includes analysis of the balance sheet with additional particulars required as per the bank norms.

Form No. IV: This includes comparative statement of current assets and current liabilities.

Form No. V: This includes a Cash Budget with all the current year projections.

Form No. VI: This includes a report on financial indicators.

The above forms are combines to prepare Credit Monitoring Arrangement (CMA). It is a comprehensive document consisting of the company’s performance in the past 3 years along with estimations for the current year (the year for which loan is required) and projections for the next yea. This CMA is a consolidation of the Profit & Loss statement, Balance sheet and Cash flow statement showing the sources and uses of funds. This document is very descriptive, consisting of all the information about the levels of current assets (inventory holdings, receivables, and other current assets),

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current liabilities (creditors, statutory & other liabilities). Also, details are given about the holding levels of current assets during the past 3 years and peak level during the last year, so as to justify the estimated levels for the current year. A complete bifurcation of sales, production, expenses on labour, salary & allowances, administrative expenses are also given at the end, which mainly includes the prices taken for raw material, power, fuel, stores & maintenances and other expenses.

For obtaining the bank credit limits, working capital requirements are estimated and on that basis with requisite supporting data, application is given to the bank.

For the purpose of bank financing, minimum current ratio requirement is 1.33:1. If the current ratio is lower than 1.33 then the bank charges a higher rate of interest or assesses the bank borrowing at a lower level, so as to achieve the current ratio of 1.33 (as by reducing the bank borrowing, current liabilities get reduced, which is the denominator in the calculation of current ratio, hence leading to a higher ratio).

7.3 APPLICATION TO SINGLE BANK CONSORTIUM OF BANKS

Now as per the amount of the bank borrowings required, the firm can apply to a single bank or to a consortium of banks. A firm has to apply to a consortium of Banks because as per the norms every bank has a limit up to which they can provide funding to a specific industry, as investing money in a single industry is much riskier than diversified investments. For all this, banks have to adhere to the norms laid down for the limits of industry exposure

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(investment) as well as company exposure. So, whenever the borrowing requirements of a firm exceed the lending limits of a bank then it has to approach a consortium of two or more banks. Once of the banks out of the consortium are chosen as the lead bank by the company. Generally the bank with the highest share in the sanctioned loan is chosen. The lead bank is responsible for the primary appraisal of the loan application and then circulates the appraisal to the member banks. The application along with CMA & other supporting documents are sent to all the member banks of the consortium which is then appraised and loan amount is accordingly sanctioned.

7.4 APPRAISAL BY SINGLE BANK/LEAD BANK

After the bank/consortium of banks receive the application for funding of working capital requirements, a comprehensive process o appraisal is carried out. In case of a consortium of banks, the lead bank bears the responsibility of primary appraisal and then passing the information to member banks. Borrowers are categorized on the basis of their requirements in the following manner and accordingly the process of appraisal is carried out.

CATERGORISATION OF BOROWERS

(i) For Non-SSI borrowers requiring working capital finance over Rs. 2 lacs and up to Rs. 100 lacs from the banking system. From the banking system, for such small-scale borrowers, a method of perceiving W/C credit requirement is applied.

(ii)For Non-SSI borrowers requiring working capital finance over Rs. 100 lacs and up to Rs. 500 lacs, and SSI borrowers requiring working capital finance over Rs. 200 lacs but up to Rs.500 lacs from the banking system,

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for this segment of borrowers are pre-supposed to have a better data base of their operations and of financial health and, size of the limit to these borrowers demands a high level of bank-exposure, a relatively detailed analysis and supervision is proposed.

(iii) For all borrowers requiring working capital finance over Rs. 500 lacs and up to Rs. 1000 lacs (for both SSI as well as Non-SSI borrowers) from the banking system. The borrowers requiring the above said size o limit are either corporate of likely to graduate to corporate-constitution in near future and, as such, are believed to have a better data-base of their operations. Moreover, the aggregate of the limits under the above said size puts the bank’s exposure as a whole at a substantial level. Therefore, the

(iv) For all borrowers requiring working capital finance over Rs. 1000 lacs (for both SSI and Non-SSI borrowers) from the banking system, the borrowers, requiring this size of limit, (i) are in upper strata of the economy, (ii) are predominantly corporate, and therefore, are statutorily required to maintain various financial data base and statements as peer the requirements prescribed under the relevant statutes/Acts apart from being statutorily subjected to at least annual audits, (iii) have in-built systems to maintain easily and promptly retrievable wide data-base to facilitate in depth analysis and understanding level of inventory and/or receivables but suffer more from cash deficits arising from time to time. Further, because o the mammoth size of the finance required by such borrowers, the banks are more required to vigil their funds-managing ability to timely resource the funds-availability as well as to conceive a proper funds-development.

7.5 SANCTION BY SINGLE BANK /MEMBER BANKS OF CONSORTIUM

After the consortium meeting, the bank/member banks sanction the loan to the applicant. Each of the member banks send a sanction letter to the borrower in which the limit of the loan and the interest applicable as per the credit rating awarded by

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that particular bank is mentioned. All the terms and conditions of the borrowing are also mentioned in the sanction letter.

7.6 AGREEMENT & CREATION OF SECURITY

AFTER the sanction letter from the Banks is received by the borrower, an agreement is prepared which includes all the terms & conditions of the deal, along with the interest rate that will be charged on the borrowing. Also, other rules and norms to which a borrower has to adhere to are mentioned in this agreement. An agreement is a comprehensive document consisting of rights with the lending banks and duties of the borrower to be fulfilled during the currency of the borrowing. Generally banks have the right to enhance the rate of interest anytime during the year. The borrower also has to offer some property, goods, debt-book, movables or immovable for mortgage as securities to the bank. The properties offered as security should be absolute property free from prior charges. In respect of security created by way of hypothecation/pledge/mortgage, the borrower has to maintain a sufficient quantity and market value of goods, book-debts. Movables and other assets and also all immovable properties given as security at all times, to provide margins of security required by the bank from time to time. In respect of credit opened or guarantees or indemnities issued by the bank on behalf of the borrower, he has to deposit sufficient cash or other security as margin money as stipulated by the bank. Banks are given charge of the security on PARI PASSU basis which indicates that all the banks in the consortium have first hand charge on the borrower’s assets kept as security. It means that all the banks providing funds equal right on the property of the borrower. In case of any default, they can claim the assets in proportion of the outstanding to them by the borrower. Machineries of the borrower hypothecated and charged to the bank are treated as movable property, and not as an immovable property and it has to bear the name of the bank indicating that the said machineries are hypothecated and charged to the bank.

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7.7 DISBURSEMENT OF FUNDS

Indian Banks follow Line of credit System (LCS) for disbursement of working capital funds. Under LCS, the borrower’s working capital credit requirement is assessed at an outer limit i.e. the maximum limit which is flexible enough to be used in one or more of the following forms as selected by the borrower in lieu of his requirements from time to time. In other words, the Line of Credit is not a credit facility per se, but, is an outer limit for total (funded and non-funded) working capital finance. Within this outer limit, various types of working capital funded and non-funded credit facilities with appropriate limits shall be made available to the borrower.

7.8 INSPECTION BY BANK AND AUDITORS

The company has maintained proper records showing full particulars including details and situation of fixed assets. The company has not granted any loan to companies firms or other parties covered in the register maintained under section 301 of the companies act, 1956 the provision of clause 4 (iii) (b) to clause 4 (iii) (d) of the companies. All the payments of loans are not dues. The BSL Ltd. is not dealing in our training in shares, securities, debenture and other investment.

WORKING CAPITAL FINANCING AND MANAGEMENT AT BSL LIMITED

The textile industry is one, which is characterized by high working capital requirement. This arises principally on account of a long production-to-market cycle time and high debtors arising out of strong competition. The ability to manage the entire cycle from raw material procurement of receivables management holds the key to better working capital management.

BSL used two modes for financing its working capital requirement:

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Tem loans

Working capital loans

Term loans: loans taken from any financial institution and banks with monotonies period of 2 years & in 32 outerly equal period installments.

Working capital loans: in forms of cash credit limits, packing credit limit & foreign bill discounting limit etc. since the company is engaged in export so the packing credit limit utilization is high. The packing credit limit is given for 180 days by bank. The company also used gold card limit.

Letter of Credit (LC): this limit is commonly used to finance international trade. At BSL Ltd., LC is used for domestic purchase/import o consumable stores and spares/packing materials/coal and certain capital items on an ongoing basis for modification/replacement of parts of the machinery.

8. WORKING CAPITAL EQUIEMENT AT BSL LIMITED

RAW MATERIAL STORAGE PERIOD

RAW MATEIAL CONSUMED/AVERAGE RAW MATEIAL

RAW MATEIAL CONSUMED = OPENING + PURCHASE – CLOSING

AVERAGE RAW MATERIAL = OPENING STOCK+CLOSING STOCK

2

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8279.32/1239.19 = 6.68 TIMES

IN DAYS = 365/6.68 = 55 DAYS

WIP CONVERSION PERIOD

COST OF GOODS SOLD/AVERAGE WIP COST OF GOODS SOLD

= OPENING + PURCHASE – CLOSING

AVERAGE IP = OPENING + CLOSING / 2

12319/999.81=12.32 TIMES

IN DAYS = 365/12.32 = 30 DAYS

FINISHED GOODS STORAGE PEIOD

COST OF GOODS SOLD/AVERAGE FINISHED GOODS

COST OF GOODS SOLD = OPENING + PURCHASE – CLOSING

AVERAGE INISHED GOODS = OPENING + CLOSING / 2

12319/1788.1 = 6.9 TIMES

IN DAYS = 365 / 6.9 = 53 DAYS

DEBTORS COLLECTION PERIOD

= CREDIT SALES / AVERAGE DEBTORS

AVERAGE DEBTORS = OPENING (DEBTORS + B/R) + CLOSING (DEBTORS + B/R) / 2

18133.98 / 2654.48 = 6.83 TIMES

IN DAYS = 365 / 6.83 = 54 DAYS

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CREDITORS PAYMENT PERIOD

= CREDIT PURCHASE / AVERAGE CREDITORS

AVEAGE CEDITORS = OPENING (CEDITORS + B/P) + CLOSING (CREDITOS + B/P) / 2

7956.54 / 849.195 = 9.37 TIMES

IN DAYS = 365 / 9.37 = 39 DAYS

OPERATING CYCLE DAY =

55 + 30 + 53+ 54 – 39 = 153

NO. OF OPERATION = 365 / 153 = 2.38

WORKING CAPITAL REQUIREMENT =

COST OF GOODS SOLD / NO. OF OPERATION

= 18133.98 / 2.38 = 7619.32 CRORE RS.

9. CEDIT RATINGS OF THE COMPANY

Another reason for such a low cost o funds is the rating enjoyed by the company. BSL Limited enjoys the highest rating for both short-term and long term loans. Credit rating is done by an external agency, CARE (Credit Analysis Research Egencey) has awarded them the rating BBB – minus for working capital loans.

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Again the company was consistent in achieving these grading from CARE for the last one year. One of the most important challenges facing the management is to keep these ratings at the highest level.

10. RESULTS & CONCLUSIONS

From the analysis of company’s performance in the past few years it is clear that BSL Limited has adopted very innovative techniques for the financing and management of working capital. The company has been able to maintain a Current Ratio. Also, with the help of strict credit policies they have been able to bring down the receivables collection period. The inventory turnover period has increased by better management. Working capital management helps predict day operation of business. Mismanagement or adequate management becomes a leading cause of business failure or success.

COMPANY’S VALUE

Leadership: The courage to shape a better future.

Passion: to build BSL in global Market.

Integrity: A world class textile solution.

Accountability If it is to be, it’s up to me.

Innovation: Production of new fabric.

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Quality: Higher’s standard of quality in today’s competitive environment.

11. SWOT ANALYSIS

The overall evaluation of a company’s strength, weaknesses, opportunities, and threat’s is called SWOT ANALYSIS. It involves monitoring the external and internal marketing enviorment.To identifies the companies peripheral opportunities and threats as well as its in house strength’s and weakness.

The company’s needs to equilibrium strengths and weakness against opportunities and threats.

Is the company an overall strong competitive position? If any company analyzes his SWOT, that it can continue to pursue its current business or corporate level strategy, profitable and company can also turn weakness into strength n threat in to the opportunities.

9 .1 A SWOT ANALYSIS IS THE KEY TO A SUCESSFUL INDUSTRY

STRENGTHS:-

Availability of world class technology

ISO 9002 certification for outstanding export performance

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Strategic location for raw material, Logistic activities

100% self Reliability in energy consumption

Cost competitiveness in variable expenses

WEAKENESSES:-

Brand BSL <still to be endorsed in Global Market>

Product range needs to be expanded to match the growing needs

A dependency factor of specific customer & markets still exists

Agency business still accounts a bulk of total sales.

OPPORTUNITIES:-

Large untapped potential exists in the global market

Management focus for a more diverse product range for silk sector & new fabric in fashion

Growing domestic textile industries

THTREATS:-

Scarcity o semi skilled labour is a problem area

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Small players in the market lead to price wars

Competition tuff in domestic market

12. BIBLOGRAPHY

www.bslltd.com

www.injbhilwara.com

www.blackwellpublishing.com/books

www.financialexpress.com

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SN Maheshwari [MANAGEMENT ACCOUNTING & FINANCIAL MANAGEMENT]

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