working capital management for videocon appliance ltd. by rupesh lahoti
DESCRIPTION
a project report on working capital management of videoconTRANSCRIPT
1
A
SUMMER PROJECT REPORT ON
”WORKING CAPITAL MANGEMENT”
VIDEOCON APPLIANCES LTD
(REFRIGERATER DIVISION), AURANGABAD.
SUBMITTED TO
Vishwakarma Institute of Management Pune University, In partial fulfilment of the requirement for the award of the
Degree of the Master of Business Administration (auto)
2007-08 Guided by Submitted by Mrs. V.Hake Rupesh lahoti.
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It is my pleasure to place on record my sincere gratitude towards my guide
Mr. Dhiraj Jain (HRD Dept.) Videocon Appliances Limited, who spent his
precious time providing continuous ideas and expert guidance to my Report work,
it was his direction and encouragement at every moment and step that motivated
me to steer the research work confidently and successfully.
I am also thankful to our Venerable Principal, Dr. SHARAD JOSHI
whose encouragement, moral support and provide the valuable guidance, which
has been a source of inspiration to me.
I am especially thankful to Mrs.V.Hake who has to provide me valuable
guidance, which is helpful to fulfillment my Report I am also thankful to my
friends who directly or indirectly helped me lot.
I am indebted to my respected parents because of whose blessing I have
been able to carry out this work successfully.
MMrr.. RRuuppeesshh LLaahhoottii
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Sr. No. Particulars Page No. 1 2 3 4 5 6 7 8 9
10 11 12 13 14 15
Company Profile � Value & Philosophy � History � Group Profile � Vision & Mission
Basic Accounting Terminology Introduction Objective Behind The Study Working Capital An Introduction
� Types of Working Capital Principle of Working Capital Management Factors Determining of Working Capital
� Sources of Working Capital Methods of Calculation of Require of Working Capital
� Working Capital Cycle � Components Of Working Capital � Management of Working Capital
Evaluation of Working Capital
� Statement of Working Capital Requirement
� Statement of Operating Cycle � Statement of Change In Working Capital Cash Management Finding Suggestion. Limitation. Conclusion. Bibliography.
04 06 06 07 08 11 20 22 23 24 27 29 31
33 33 35 36 37
38 39 40 41
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Company Profile
The Late Shri. Nandlal Madhavlal Dhoot
Founder, The Videocon Group
(26 February 1932 - 26 April 1993)
A man of Ideas. A man of Substance.
Shri Nandlal Madhavlal Dhoot, the founder of the Videocon Group, completed
his education in Ahmednagar and Pune. He was a successful sugarcane and cotton
cultivator. As a next logical step to vertical integration, he boldly took upon an
entrepreneurial venture by importing machinery from Europe to set up the Gangapur
Sakhar Karkhana (Sugar Mill) in 1955. Those were the times when the village did not
even have electricity. Thus was unleashed an Industrial Revolution.
In 1984, the Dhoot family launched Videocon International Limited with an
avowed purpose of producing world class Colour Television set thought technical tie- up
with Toshiba Corporation of Japan.
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Videocon group companies have won prestigious approval and certificate from
India and abroad. These includes the approval from VDE testing and Certificate Institute
–Germany, the British Standard, the CE approval for exporting to Europe and the ISO
9002 certification.
The Videocon Group is ever evolving group continuing to sty trends in every
sphere of its activity. The group enjoys an unassailable leadership position interactive
T.V, Co lour T.V.; high ended audio system, VCD, VCR, air-conditioners, washing
machine Tran chillers as well as no-frost refrigerator. After firmly entrenching itself in a
field of consumer electronic and home appliances. The group has boldly venture into
business that are crux of nation mainly petroleum and power .The group has further
ventured to leverage its strengths to boosts progress of the nation.
Videocon sprawling state of the art facility is spread across 18 locations in India.
The latest inclusion is the Rs.400 crore. Ultra modern and environmental friendly
manufacturing facility set up at Banglore. It houses state of the art robot machineries.
Robotic machineries and India. Do you see a disconnect there? Not anymore.
The inertia of diversification was catalyzed with the inspection of Videocon
Appliance ltd. In 1988. The company manufactured advanced washing machines and has
thus changed the lives of millions of women. The company has revolutionized the A.C.
market by creating superior quality A.C. 1992 Videocon breathed new life into the
refrigerator market by introducing India’s first No frost refrigerator. The refrigerator
plant follows the international quality to ensure defect free products with a total
production capacity of more than 1.5 million refrigerator per year. Videocon Refrigerator
is amongst largest selling branch in the market place.
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Values & Philosophy
The die was cast. Over the years, Nandlalji's path-breaking attitude found
expression in a myriad ways, earning him the well-deserved reputation of the pioneer of
industrial activity in Marathwada India.
In early 80's Nandlalji initiated his three sons - Venugopal, Rajkumar and Pradeep
into business. Through a technical tie up with Toshiba Corporation of Japan, he launched
India's first world-class color Television: Videocon. Today, Videocon is household name
across the nation- India's No. 1 brand of Consumer Electronics & Home Appliances,
trusted by over 50 million people to improve their quality of life.
History
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Group ProfileGroup ProfileGroup ProfileGroup Profile
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Vision & Mission
Videocon’s mission: a reflection of continuity and change
Videocon’s mission expression has been crafted to envelope both extant and emerging realities:
“To delight and deliver beyond expectation through ingenious strategy, intrepid entrepreneurship, improved technology, innovative products, insightful marketing and inspired thinking about the future.”
A breakdown of the statement above reveals a ‘means and end’ approach, where the end
is articulated at the beginning with the means linked to it.
“To delight and deliver beyond expectation…”: the end
This segment not only underlines the importance of the ultimate goal - customer
satisfaction (‘delight’) and ultimate target - the customer, but also of intermediate
processes and principals, which have contributed to building a robust, dependable
Videocon value chain (‘deliver’). As a result of its focus on developing loyal customers
and reliable associates, Videocon is able to exceed expectations.
“…Through ingenious strategy…” the means
In the cutthroat world of today, it is only by taking recourse to advance planning and
strategy that a business can hope to survive. Although textbook strategy has its uses,
reproducing it in verbatim for the real world would be foolish because of the absence of
textbook conditions. Thus, there is a need for a bounded rationality, spontaneity and
improvisation that is flexible enough for scenarios both imaginable and unimaginable.
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Videocon’s ingenious maneuvers are actually flexi-strategy that abstracts from shifting
ground conditions and decides game plans, or sometimes changes the rules of the game.
“…Intrepid entrepreneurship…” the means
An enterprise with the odds stacked against it makes great business sense. This is because
higher the obstacles, lower the number of players likely to be active in that field - thus,
fetching extraordinary returns. The only requirement is a bold and confident attitude
willing to brave the odds. Videocon’s foray into oil and gas is a bold and intrepid
endeavor that arises from immense faith on the surefooted competence of the company’s
in-house managerial talent.
“…Improved technology…” the means
Technology is no more a premium input; it has become the bare minimum in recent
years. Rapid advances have only fuelled this phenomenon. Videocon is extremely
vigilant in shunting out dated technology and replacing it with the best-in-class offers of
the times.
“…Innovative products…” the means
Product development, innovation and customizations are the tools Videocon uses to stay
ahead of the competition. This is because a continuous stream of innovative products
excites the market and enhances brand recall. A strategy that Videocon banks on a lot,
especially on the domestic front.
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“…Insightful marketing…” the means
The market share battle scene has long shifted from technology and processes to the
psyche of the customer. This means that those with deeper insights into the elusive mind
of the buyer are likely to dominate. Videocon is reinforcing marketing strengths to read
better the pulse of the market and help create products that map perfectly into customer
preferences.
“…Inspired thinking about the future.” the means
The future is unpredictable, but not doing anything about it is fraught with grave risk.
Videocon extrapolates future trends on the basis of current changes in technology and
preferences as well as sheer gut feel. Fine-tuned business instincts are worth their weight
in gold, lots of it. The company has perfected its practice almost into an art form with
some calculated gambles like oil and gas proving to be absolute money-spinners.
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Basic Accounting Terminologies
Introduction
Every human being consciously engages himself in some meaningful activity.
Although the measure of success may vary in each case one has to be careful and
cautious at every stage in his life. Bookkeeping and accountancy is a science, which has
attracted the attention all such human activities. Accounting enables a person to assess
the risk appropriate steps.
Account an account denotes a summarized record of transactions pertaining to one
person, one kind of asset, or one class of income, or one class of income or loss.
Assets properties of every description owned by a person will be called assets for
example land and building, plant and machinery, cash balance, bank balance etc.
Bad debts which are irrecoverable and written off from debtors A/C as a loss are
termed as bad debts.
Casting means the totaling of the books of account casting has to be done of the ledger
accounts and also of a journal.
Creditor a creditor is a person to whom we owe some thing. He is the person to whom we
have to pay.
Capital the dictionary meaning of the term capital is wealth capital is the total account
invested in business the capital of a business is the claim of the owner to the business is
the claim of the owner to the business.
Debtor is person who owes something he is the person who has to pay to other person.
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Drawing is the total amount withdrawn by a trader from his business for meeting
personal expenses. Trader becomes a debtor of business by the amount withdrawn by him
from business for private purpose.
Discount it is an allowance or a concession allowed by the receiver of benefit to the
giver of benefit. It is normally allowed to the customers, debtors, and retailers’ etc. the
discount may be classified in two ways.
1) Cash discount.
2) Trade discount.
Cash discount it is discount allowed to customer as an inducement to make payment
immediately. Cash discount is closely related to cash receipt and cash payment. When
cash is received, discount is allowed is a loss to a business while cash discount received
is a gain to him.
Trade discount it is an allowance made by a wholesaler to a retailer in order to enable
the retailer to sell the articles at list prices and earn a reasonable margin of profit. The
amount of trade discount is deducted from the invoice; therefore, it has no connection as
to the receipt and payment of cash. Hence, trade discount does not appear in the books of
accounts.
Entry the term entry refers to the recording of a transaction in the books of account. It is
the primary record of a transaction in the books called journal or any other subsidiary
journal.
Expenses the effort made by business to obtain the revenues are termed as expenses. It
is the amount spent on manufacturing and selling of goods and services.
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Folio it means the page number of the book of original entry or of the ledger by writing
folio i.e. page number, one can easily find out on what page the original entry is made
and on what page the entry is made in the main book.
Goods commodities in which a trader deals are called as goods.
Insolvent a person is said to be insolvent when his liabilities are more than asset
Insolvency when the liabilities of a firm are greater than its assets, it is referred to as
insolvency indicating the liabilities of a business to meet all its liabilities. Such a business
firm is said insolvent.
Journal is the book 0f accounts in which business transaction are first recorded. It is a
book of prime entry or first entry.
Liabilities debts owed by a person are called liabilities. Liabilities represent the total
amount to creditors. Debts arise because, goods may be purchased out but payment may
not be made at the time of purchasing the goods. Therefore the total amount payable to
creditors will be the liabilities.
Narration it is a brief explanation or description on to a journal entry it is given on the
line just below the journal entry within the brackets.
Posting transaction entered in the original books of entry are also to be recorded in the
ledger on the basis of the entry made in the original book is called posting.
Purchases the goods bought for resale or manufacture and resale are called purchases.
Purchases may be classified as
1) Cash purchase
2) Credit purchase
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Revenue it represent the accomplishment of the enterprise until the company has been
successful in selling its products, no revenue is realized. Revenue is the amount that adds
to the capital.
Sales the goods sold by a business for cash or on credit are called sales. The sales may
be classified as;
1) Cash sales
2) Credit sales
Solvent a person is said to be solvent when his assets are equal to or more than his
liabilities.
Stock goods unsold lying with a business on any given date are called as stocks.
Transactions a transaction are an exchange of money or moneys worth between two
parties. It is dealing between two parties. It is dealing between two or more persons.
The transactions are classified on the basis of exchange of goods and service they may
be.
1) Barter transactions.
2) Monetary transactions.
Monetary transactions are classified in they two types.
1) Cash transactions.
2) Credit transactions.
Book keeping is defined as the process of analyzing, classifying and recording
transaction in a systematic manner to provide the information about the financial affairs
of the business concerns.
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Accounting is a wider concept, which includes book keeping accounting, is involved
not only maintaining records, but also balancing of accounts, interrupting the balances,
preparation of summaries, drawing conclusions from the summaries knowing the results
of financial transactions etc.
Classification of accounts.
Accounts are classified in to four types
1) Personal accounts.
2) Real accounts.
3) Nominal accounts.
Personal accounts DEBIT THE RECIVER AND CREDIT THE GIVER
Real accounts DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT
Nominal accounts DEBIT EXPENSES AND LOSSES AND CREDIT GAINS OR
INCOMES.
Journal is derived from the French word “jour’ which means a day journal is the book
of original entry or primary entry. It is book of daily record first of all the business
transactions are recorded in the journal and subsequently they are posted in the ledger.
Ledger “ a group of accounts is known as ledger” a ledger is the principle book of
account a journal is meant for passing the entries of business transaction. A ledger is a
bound book. It contains many pages, which are called folios. These pages are
consecutively numbered. For each account a separate page is kept. Every ledger has an
index. It is generally an alphabetic index one page is allotted for each alphabet. All the
accounts commencing with that particular alphabet are indicated on that particular page
only. The page number on which the particular account appears is shown in the index.
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This facilities appear is shown against the account in the index. The facilities immediate
reference.
Ledger posting
After the transaction has been analyzed into its debit and credit elements in a journal,
each such debit and credit elements must be transferred in a journal accounts. The
process of transfer of entries from journal to ledger account is called ledger posting.
Trial balance
After posting the transaction to respective ledger accounts they are balanced and then a
trial balance is drawn. A trial balance is a statement, which shows the list of accounts
showing debit balances and list of accounts showing credit balance. If double entry
principles are strictly followed the total of the entire debit balances must agree with the
total of all the credit balance.
Trade discount
The amount of trade discount is deducted from the bill itself. Therefore, a trade discount
does not appear in the books of accounts. If a trade discount is given in the transaction,
the amount of such a trade discount is deducted from the gross value of purchase and
only the net value (arrived at after allowing a trade discount) is recorded in the purchase
books.
Debit note
A debit note is sent to the supplier when the goods purchased from him are returned. A
debit note is a statement sent by the buyer to the supplier stating the full details of the
good returned. It is sent along with the goods. It intimates the supplier that his account
has been debited by the value of the good returned to him.
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Credit note
A credit note is sent to the customers when we receive goods returned from them. It gives
the full details of the good returned by the customer. Credit notes are generally is printed
in red ink. Transaction is recorded in this book on the basis of credit notes.
Trial balance
The dictionary for accountants written is “ a list or abstract of the balance or of total
debits and total credits of the accounts in a ledger, the purpose being to determine the
equality of posted debits and credits and to establish a basic summary for financial
statements”.
Subsidiary books (sub division of journal)
If all the business transaction were recorded in one and the same journal, the journal
would be bulky and cumbersome. It would be very difficult to make clerks to work on the
same journal at one and the same time. Instead of recording all the transaction in on and
the same journal, they are recorded in separate journals meant for the purpose.
Therefore, in order to meet the requirements of modern business, the original journal is divided into the following
� Purchase book � Sales book
� Purchase return book
� Sales return book
� Cash book
� Bills receivable book.
� Bills payable book.
� Journal proper.
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Final accounts
The final accounts are prepared to find out the profit or loss and to know the financial
position of the business. These account consist of
� The trading account
� The profit and loss account
� Balance sheet
Trading account
A trading account is prepared to find out the gross profit or gross loss in the
business done during the year. The gross profit is the difference between the cost of
good sold and the sale proceed without any deduction of indirect expenses. Hence, in
the trading account it is necessary to include all items of expenses directly affecting
the cost of good sold. The cost of good sold includes the purchase price of the good
sold plus buying and bringing expenses and the expenses of conversion of raw
material into saleable finished goods.
Profit and loss account
Profit and loss account is another summary account, which is prepared after
preparation of trading account. Trading account does not disclose the net income or
loss. There are other expenses in order to ascertain the profit or not loss.
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Balance sheet
A balance sheet is a statement of the financial position of a business on a given date.
It is a snapshot of the financial condition of the business. The balance sheet is not
account; it is only a statement showing asset and liabilities of the business. It is
important to note that the balance sheet always balances. The total value of the assets
is always equal to the capital and liabilities.
We can define balance sheet as “a statement of financial position of any economics
unit as at a given moment of time, its assets, at cost, depreciated cost or another
indicated value, its liabilities and its ownership equities”
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Introduction
Working Capital is so much in use in common parlance and is so much
misunderstood even among the professional managers the controversy and confusion
persists.
While an accountant will regard working capital as current assets minus current
liabilities and call is as net working capital. But the finance managers concern is to find
fund for each item of current assets as such costs and risks that the evolving financial
structure remains balanced he two.
When one ask a production controller; what is working capital? His answer is
very simple and straightforward. To him working capital is the fund needed to meet day-
to-day working expenses. Is there any difference between the statement of he accountant,
finance manager and production controller? In the ultimate analysis he late may be true,
but according to accountant or the finance manager I is the very working expense that get
blocked in current assets along he productive distributive line if an enterprise and net
working capital is that liquidity which takes care if he working expenses if he line gets
extended due to any reason.
Working capital may be regarded as he life blood of a business; its effective
provision can do much o ensure the success of a business while its inefficient
management can lead not only o loss of profit but also o ultimate downfall of what
otherwise might be considered as a promising concern. Much has been right made of he
long term planning in he use of working capital is immeasurable.
A study of working capital is of major impotence to internal and external analysis
because of is close relationship with the current day-to-day operation of a business.
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Working capital consist of broadly of hat portion of he assets of a business which are
used in, o elated o current operations and represented at any one time by the operating
cycles of such items as against receivables, inventories of raw material, stores, work in
process and finished goods, need notes of bill receivable and cash.
When current liabilities and provision exceeds current assets the differenced is
referred to as negative working capital. This situation does not generally exits in a
business firm because this is generally a situation of crises. , This has been admirably
summed up Brown and Heward, who compare it with a river which is always their, but
whose water level is constantly changing.
The blockage of funds, which was eventual, becomes routine and inevitable due
to globalization waves through out the world. Modern economic theory has introduced a
concept of ‘Global Village’, which makes he cut throat competition more servers.
In his current scenario managing the day-to-day affaires has become the challenging task.
Now a day it may be somewhat easy to erect a company or industry, as several loan
schemes at subsidized rates are available. Bu at the same time managing industry by
feeding them regularly with aw material and labour is assumed to be difficult and critical
task.
Hence working capital, which was initially, emerges, as a convenience now has
become a compulsion for an industrial undertaking.
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Objective behind the Study of Working Capital & Research Methodology
Working capital management is very important in modern business. The analysis of working capital is also very useful for short-term management of funds. The following are objective of study:
1) To make. Items wise analysis of the elements or component of working capital to
identify the items responsible for change in working capital.
2) To calculate of working capital for last Four Year.
Scope & Limitation of the Study
1. The Study is limited to Four Years (2002-03 to 2005-06) performance of
the Company.
2. The data used in this study have been from published annual reports only.
As per the requirement and necessary some data are grouped and sub
grouped.
3. For making a clear-cut opinion, Ratio technique of financial management
has been used.
Data & Methodology Of The Study:
The data of videocon appliances Ltd. For the Year 2002-03 to 2005-06 used in
this study have been taken from secondary sources e.g. Published annual report of the
company. Editing, classification and tabulation of the financial data, which are collected
from the above-mentioned sources, have been done as per the requirement of the study.
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Working Capital an Introduction
Meaning:
Working capital could be defined as the portion of assets used in current
operations. The movements of the funds from capital to income and profits and back to
working capital are one of the most important characteristics of the business. This
cyclical operation is concerned with utilization of the funds with the hope hat will return
with an additional amount called income. If the operations of the company are to run
smoothly, a proper relationship between fixed capital and current capital has to maintain.
Sufficiently liquidity is important and must be achieved and maintained to provide that
funds to pay off obligation as they arise.
The adequacy of cash and other current assets together with their efficient
handling, virtually determine the survival o demise of the company. A businessman
should be able to judge the accurate requirement of working capital and should be quick
enough to raise the enquired funds to finance he working capital needs.
Working capital is also called as net current assets, “it is the excess of current assets over
current liabilities.” All organization has to carry working capital. It is important from the
point of view of both liquidity and profitability. Poor management of working capital
means that funds that unnecessarily tied up in idle assets hence educing liquidity and also
reducing ability to invest in productive assets such as plant and machinery. So affecting
profitability.
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The term working capital refers to current assets, which may be defined as:
i) Those which are convertible into cash or equivalents with the period of one
year and
ii) Those which are required to meet day to day operations,
The fixed as well as current assets, both requires investment of ‘Funds’. So the
management of working capital and fixed assets apparently seem to involve it type of
consideration but it is no so. The management of working capital involve different
concept and methodology than the techniques used in fixed assets management.
Types of working capital
The type, kinds of a thing are depending upon the different utilization of working
capital. It prominently works in the direction of performing different functions in
different situation and in the context of divergent variables. So following are some
important types of working capital.
.
Net Working Capital Gross Working
Capital
Permanent Working capital
Temporary Working Capital
Types Of Working Capital
Balance Sheet Working Capital
Cash Working Capital
Negative Working Capital
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1) Net Working Capital:
Term Net working capital can be define in two way
i) It is the difference between current assets and current liabilities.
ii) Amount left for operational requirement.
2) Gross Working Capital:
Gross working capital means the total current assets.
3) Permanent Working Capital:
It is the minimum amount of the current assets, which are needs to conduct the
business even during the dullest season of the year. This amount varies from year to
year depending upon the growth of a company and stage of the business cycle in
which it operates. It is the amount of funds required to produce the goods and
services, which are necessary to satisfy demand at a particular point.
It represents the current assets, which are required on a continuing basis over the year.
It is maintain as the medium to carry on operation at any time. Permanent working
capital has following features:
i) It is classified on the basis of the time factor.
ii) Its size increase with the growth of the business.
iii) It constantly shifted from one assets o another and continues to remain in the
business process.
4) Temporary Working Capital:
It represents the additional assets, which are required at different times during the
operating year. Seasonal working capital is the additional amount of current assets
26
particularly cash, receivables, and inventory which is required during the more active
business seasons of the year. It is the temporary investment in the current assets and
possesses he following features:
a) It is not always gainfully employed, though is May also shift
from one asset to another as permanent working capital does.
b) It is particularly suited to business of seasonal on cyclical
nature.
5) Balance Sheet Working Capital:
The balance sheet working capital is one, which is calculated from the items
appearing in the balance sheet. Gross working capital, which is represented by the
excess of current assets over current liabilities, is example of the balance sheet
working capital.
6) Cash Working Capital:
It is one, which is calculated from the items appearing in he Profit and Loss
Account. It shows the real flow of money or value at a particular time and considered
to be most realistic approach in working capital management. It is the basic of he
operation cycle concept, which has assumed a great importance in financial
management in recent year. The reason is that the cash working capital indicates he
adequacy of he cash flow which is an essential pre requisite of a business.
7) Negative Working Capital:
It emerges when current liabilities exceeds current assets, such a situation is
absolutely theoretical and occurs when a firm is nearing a crisis of some magnitude.
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Principles of Working Capital Management:
There are some principles of sound working capital management policy. They are
as follows:
1) Principle of Risk Variation:
Risk here refers to inability of a firm to meet its obligation when they become due
for payment. Large investment in current assets with less dependence on a short term
borrowing increase liquidity, reduces dependence on short term borrowing increases
liquidity, reduces risk.
On the other hand less investment in current assets and greater dependence on
debt increase the risk, reduces liquidity and increases profitability. In other word these is
a definite inverse relationship between he degree of risk and profitability.
A conservative management prefers to minimize risk by maintaining a higher level of
current assets or working capital while a liberal management should be to establish a
suitable trade off between profitability and risk.
2) Principle of Cost of Capital:
The various sources of rising of working capital finance have different cost of
capital and the degree of risk involved. Generally higher the risk lower is the cost and
lower the risk higher is the cost. A sound working capital management should always try
to achieve a proper balance between these two.
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3) Principle of Equity position:
According this principle, the amount of working capital invested in each
component should be adequately justified by a firm’s equity position. Every rupee
invested in the current assets should contribute to he net worth of he firm.
4) Principle of Maturity of Payment:
This principle is concerned with planning he sources of finance for working
capital. According to this principle, a firm should make every efforts o related maturity of
payment to its flow of internally generated funds. Maturity pattern of various current
obligations is an impotent factor in risk assumptions and risk assessment.
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Factors determining working capital
1) Nature or character of Business:
The working capital requirement of a firm basically depends upon he nature of its
business. Public utility undertaking like Electricity, Water Supply, and Railways need
vary limited working capital because they offer cash sales only and supply services, not
products and as such no funds are tied up in inventories and receivables.
On the other hand trading and financial firms require less investment in fixed assets but
hey have o invest large amount in current assets like inventories, receivables and cash. So
they need large amount of working capital.
2) Production cycle:
Another factor, which has a bearing on the quantum of working capital, is the
production cycle. The term ‘production or manufacturing cycle’ refers to the time
involved in he manufacturing of goods. It coves he time span between the procurement of
raw material and the completion of he manufacturing process leading o he production of
finished goods.
In other words, there is sometime gap before raw material becomes finished goods. To
sustain such activities that need for working capital is obvious. The longer time span
(production cycle) the large will be he tied up funds and therefore, larger is working
capital need and vise versa.
3) Production Policy:
In certain industry he demand is subject to wide fluctuations due to seasonal
variations. The requirement of working capital in such case, depend upon he production
policy. He production can be either kept steady by accumulating inventories during slack
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period with a view to meet high demand during peak season of he production could be
curtailed during he slack season and increased during he peak season. If policy is o keep
production steady by accumulating inventories it will require higher working capital.
4) Credit Policy:
The credit terms granted o customers have a bearing in the magnitude of working
capital by determining he level of book debts. The credit sales result in higher book debs.
Higher book debts mean more working capital. On the other hand, if liberal credit terms
are available from he supplies of goods trade need less working capital.
The working capital requirement of a business are thus, affected by term of purchase and
sale, and he ole given to credit by a company in its dealing with creditors and debtors.
5) Growth and Expansion:
The working capital requirement of concern increase with he growth and
expansion of its business activities. Although, It is difficult to determine he relationship
between he growth in he volume of business and he growth in he working capital of a
business, yet it may be concluded hat for normal rate of expansion in he volume of
business. We may have retained profits to provide for me working capital but in fast
growing concern, we shall require lager amount of working capital.
6) Seasonal Variation:
In certain industry raw material is no available throughout the year. They have to
buy raw material in bulk during the season to ensure uninterrupted flow and process them
during the entire year. So a huge amount is blocked in form of row material during he
peak season, which gives more requirements for working capital and less requirement
during he slack season.
31
7) Earning Capacity:
Some firm have more earning capacity than others due o quality of thee products,
monopoly condition etc. Such firms with high earning capacity may generate cash profits
from operations and contribute o their working capital.
8) Dividend Policy:
The dividend policy of a concern influence on he requirement of the working
capital. A firm that maintains a steady high ate of cash dividend irrespective of its profits
level needs more working capital than the firm that retains large part of its profits and
does not pay at high ate of cash dividend.
9) Other Factors:
Certain other factors such as operating efficiency, management ability,
irregularities in supply, import policy, assets structure, importance of labour, banking
facilities etc, also influence he requirement of working capital.
Sources Of Working Capital
Mainly there are two sources of working capital:
i. Permanent or Fixed working capital
ii. Temporary or variables working capital
In any concern, a part of the working capital investments are as investment in
fixed assets. This is so because there is always a minimum level of current assets, which
are copiously required by he, enterprise to carry out its day-to-day business operation and
this minimum cannot be expected to educe at any time. This minimum level of current
assets need long term working capital, which is permanently blocked.
32
Similarly, some amount of working capital may be required to meet the seasonal
demands and some special exigencies such as rise in prices, strikes, etc. this gives rise to
short term working capital which is required for day to day transaction also.
The fixed proportion of working capital should be generally financed from the fixed
capital sources while he temporary or variable working capital equipment may be met
from he short term sources of capital.
The various sources for financing working capital are as follows:
Sources Of Working Capital
Long term Sources
1) Shares 2) Debentures 3) Public Deposits 4) Ploughing back of
Profits 5) Loans from Financial
institution
Short Term sources
1) Commercial Banks 2) Indigenous Banks 3) Trade Creditors 4) Installment Credit 5) Advances 6) Account
receivable Credit 7) Accrued Expenses 8) Differed Income 9) Commercial Paper
33
Methods of Calculation of Required Working Capital
The methods of calculation of required working capital are as follows:
Working Capital Cycle:
The working capital cycle is also known as operating cycle. It refers to the
duration between he firm’s payment of cash for raw material, entering into production
and inflow of cash from debtors and realization of receivables. Simply speaking,
operating cycle is the duration between he outflow of cash and inflow of cash and this
may be evidenced from he following working capital cycle.
The above and network diagram may offer a clear picture of a complete working
capital i.e. it is a cash phenomenon. In the diagram, raw material, stock refers to material
only. In work in process, components involve are aw material, wages, and overhead more
specifically manufacturing overheads. Finished stock consists components of material,
wages and overheads inclusive of factory, office and administration and selling and
distribution. Debtors include material, wages, overheads and profits. Credit involves for
the components of raw material, etc. something a contingency margin is also given while
estimating the working capital requirement.
Receivables
Finished Goods
Raw Material Work In Process
Cash
34
The operating cycle consists of he following events, which continues throughout
he life of a firm remaining engaged in commercial activities.
Avg. Stock of Raw Material 1) Raw Material Holding Period =
Avg. Cost of Consumption per day Avg. Stock of Work In Process
2) Work in Process Holding Period = Avg. Cost of Production per day Avg. Stock Of Finished Goods 3) Finished Goods Holding Period = Avg. Cost of Goods Sold per day Avg. Book Debt 4) Receivables Collection Period = Avg. Credit Sales per day Avg. Trade Creditors 5) Creditors Collection Period = Avg. Credit Purchased per day In the form of a simple equation working capital cycle or operating cycle can be represented as bellow:
O = R+W+F+D-C
Where, O = Operating Cycle (In Days) R = Raw Materials Holding Period
W = Work in Process Holding Period F = Finished Goods Holding Period D = Receivables Collection Period C = Creditors Collection Period. Total Operating Cost
Working Capital Required = Number of Operating Cycle
35
Components of Working Capital:
Current Assets:
i) Stock of Raw Material (for…month consumption) ii) Work In Process (for…Month)
a) Raw Materials b) Direct Labour c) Overheads
iii) Stock of Finished Goods (for…month sales) a) Raw Materials b) Labour c) Overheads
iv) Sundry Debtors or Receivables (for…month sales) a) Raw Materials b) Labour c) Overheads
v) Payments in Advance (if any) vi) Balance of Cash (required to meet day-to-day Expenses) vii) Any Other (if any)
Less: Current Liabilities:
i) Creditors (for…month purchase of raw materials) ii) Outstanding Expenses (for month) iii) Others (if any)
Working Capital (CA – CL) Add: Provision/ Margin for contingencies Net Working Capital Required
Amount
------ ------
------
------
----- ----- -----
------- ------- -----
---------
-----
----------
36
Management of working capital:
Working capital, in general practice, refers to he excess of current assets over current
liabilities. Management of working capital therefore, is concerned with problems that
arise in attempting to mange he current assets, current liabilities, and interrelationship
that exists between them. In other word it refers to all aspects of administration of both
current assets and current liabilities.
The basic goal of working capital management is o manage the current assets and
current liabilities of a firm in such way that a satisfactory level of working capital is
maintain, i.e. neither inadequate nor excessive. This is so because both inadequate as well
as excessive working capital position are bad for the business. Inadequacy of working
capital, may lead the firm insolvency and excessive working capital implies idle funds,
which earn no profit for the business. Working capital management policies of he firm
have a great effect on its profitability, liquidity and structural health of he organization. In
this context, working capital management is three-dimensional nature:
1) Dimension I is concerned with the formulation of he policy with regard to
Profitability, risk and liquidity.
2) Dimension II is concerned with the decision about he composition and level of
current assets.
3) Dimension III is concerned with the decision about he composition and level of
current liabilities.
37
This dimension aspect of he working capital has been more clearly and precisely Explains by the following diagram.
Profitability, Risk & Liquidity
Dimension I Dimension III Dimension II
Composition & Level of current assets
Composition & level Of current Liabilities
Evaluation of working capital
The working capital management needs attention of all the financial. Manger as working
capital management is important for avoiding unnecessary blockage of fund. Like that
liquidity is important at it refer to the short-term financial strength of company.
It is very important to have proper balance in regard to the liquidity of the firm. For
assessing the appropriate working capital and liquidity position the following tables are
relevant.
38
Table I - Statement Of Working Capital Requirement
Particulars 2002-03 2003-04 2004-05 2005-06
A) Current Assets: - i) Inventories ii) Sundry Debtors iii) Cash & Bank Balance iv) Other Current Assets v) Loans & Advances
B) Current Liabilities: i) Current Liabilities ii) Provisions
Working Capital (A-B) Add: Provision for Contingencies Net Working Capital Requirement
2371923131 2129611335 150096788 7045660 573879754 5232556668 1677427019 38395374 1715822393 3516734275
-- 3516734275
2408949822 2141497697 170250276 50999449 441160933 5212858177 1915816994 35425889 1951242883 3261615294
-- 3261615294
2598543332 2118827972 162214670 12278799 278628907 5170473680 1525006973 41057949 1566064922 3604408758
-- 3604408758
2883150119 3158308150 142323543 15608656 467120093 6666510561 1088482082 86616306 1175098388 5491412173
-- 5491412173
Graphical Representation of Working Capital Requirement
Working Capital Requirement
0
1000000000
2000000000
3000000000
4000000000
5000000000
6000000000
2002-03 2002-04 2002-05 2002-06
Year
Wo
rkin
g C
apit
al (
in R
s.)
Working CapitalRequirement
39
Table II -Statement of Operating Cycle Of Videocon Appliances Ltd.
From 2002-03 To 2005-06 Components 2002-03 2003-04 2004-05 2005-06
Raw Material Conversion Period 67.91 61.62 64.82 69.16
WIP Conversion Period 32.53 27.60 26.48 25.75
Finished Goods conversion Period 4.46 3.65 2.99 3.29
Debtors Conversion Period 78.51 70.55 68.84 82.81
Total Operating Cycle 183.41 163.42 163.13 181.01
Less: Creditors Conversion Period 63.90 60.63 58.93 44.66
Operating Cycle (In Days) 120 103 104 136
Operating Cycle (Times) 3.05 3.55 3.50 2.68
Graphical Representation of Operating Cycle
Operating Cycle (in Times)
00.5
11.5
22.5
33.5
4
2002-03 2002-04 2002-05 2002-06
Year
Op
erat
ing
Cyc
le (
Tim
es)
Operating Cycle (inTimes)
40
Table III - Statement of Changes in Working Capital
Effect on Working Capital
Particulars
Previous
Year
Current Year
Increase Decrease
A) Current Assets: - i) Inventories ii) Sundry Debtors iii) Cash & Bank
Balance iv) Other Current
Assets v) Loans &
Advances Total Current Assets:
B) Current Liabilities: i) Current Liabilities ii) Provisions
Total Current Liabilities:
Working Capital (A-B)
Net Increase Or Decease In Working Capital
2598543332 2118827972 162214670 12278799 278628907 5170473680 1525006973 41057949 1566064922 3604408758 1887003415
2883150119 3158308150 142323543 15608656 . 467120093 6666510561 1088482082 86616306 1175098388 5491412173
284606787 1039480178 3329857 188491186 436524891
19891127 45558357 1887003415
5491412173 5491412173 1952432899 1952432899
41
Observation And Summary
Training in a huge company like VIDEOCON, which is fast growing company in
the field of home appliances. It is noticed that functioning in the company is carried out
very systematically and technically.
As the today world is of competitive world and all are going globally, so very company
has special attention to survive and grow in a market and it is observes that the VAL is
doing it level best to survive.
It is observed that VIDEOCON firmly believe on human and ethical value so,
being a soft management they treat employee as a very important and appreciating assets
of continuous growing.
Not only this company that strive to ensure organization growth by raising strength of
employees and providing various facilities for every individual to raise his\ her full
potential.
Table I: -
It is observed that current asset decrease up to 2004-05 as compare to 2002-03 but in the
year 2005-06 it had been increase from 517.04cr to 666.65cr and the current liabilities
has been increase from 2002-04. It decreases in 2004-05 and again it increases 2005-06.
It shows fluctuation in every year. Working capital of videocon appliances ltd at only in
the 2003-04 it decreases reaming year i.e. 2004-05 and 2005-06 it increase it means that
in the year 2003-04 working capital falls down which shows the current liabilities
increasing in greater percentage as compare to current asset.
In the 2003-04 working capital also shows the negative trend due to the
increase in the current liability in the condition of the year 2004-05 and 2005-06 are
increased it shows the positive trend.
42
Table II: -
As per the table II it is clear that the operating cycle of VAL improved regularly
their position from the 120 to 103 days between the 2002-03 to 2004-05 but in the year
2005-06 it is of the 136 days it shows that in inefficient utilization of working capital in
the year 2003-04 the operating cycle is 120days. It means the working capital is 3.05
times used in the financial year, in the year 2003-04 operating cycle is used 103 days. It
means the working capital is 3.55 times used in the year.
In the year 2004-05 operating cycle is used 104 days so working capital is
3.5 times used in year. In the year 2005-06 operating cycle is 136 days, which is
maximum period among the four year as it is the highest time, consuming cycle so the
working capital is used only 3 times and also observe that in year 2003-04 operating
cycle of minimum period among the 4 periods it shows an efficient utilization of working
capital.
Table III: -
Statement of changes in the working capital is prepared to show the changes in
the working capital between the two balance sheet dates. This statement is prepared with
the help of the current asset and current liabilities derived from the 2 balance sheets
So,
43
i) An increase in current asset increases working capital
ii) A decrease in current assets decreases in working capital
iii) An increase in current liabilities decreases working capital.
iv) A decrease in current liabilities increase working capital
It is worth noting that schedule of changes in working capital is prepared only from
current assets and current liabilities and the other information is not of any use for
preparing this statement.
From the table 2 it is observe that the debtor’s collection period had been decreases
regularly from 2002-03 to 2004-05 every year it indicates fast collection of debtor.
Operating cycle decreases regularly from 120 to103 days in year 2002-03 to 2004-
05 but in year 2005-06 it suddenly increases to 136 days from the above study it is clear
that the operating cycle in terms of no of days is increased which is not favorable sign.
There are 2.68 operating cycle in year so there will be apportionment of higher
cost to each operating cycle to decrease in no of operating cycle there is tremendous
decrease in net working capital in the year 2005-06 due to increase in current liabilities.
The company should look in to the proper current liabilities.
44
WORKIN CAPITAL CYCLE
A firm requires many years to recover initial investment in fixed assets. On
contrary the investment in current asset is turned over many times a year.
Investment in such current assets is realized during the operating cycle of the
firm.
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 get money to
Move faster around the cycle (e.g. collect dues from debtors more quickly)
Or reduce the amount of money tied up (e.g. reduce inventory levels relative
To sales), the business will generate more cash or it will need to borrow less
Money to fund working capital. As a consequence, you could reduce the
45
Cost of bank interest or you'll have additional free money available to
Support additional sales growth or investment. Similarly, if you can
Negotiate improved terms with suppliers e.g. get longer credit or an
Increased credit limit; you effectively create free finance to help fund future
Sales. It can be tempting to pay cash, if available, for fixed assets e.g.
computers, plant, vehicles etc. If you do pay cash, remember that this is now
longer available for working capital. Therefore, if cash is tight, consider other
ways of financing capital investment - loans, equity, leasing etc. Similarly, if you
pay dividends or increase drawings, these are cash outflows and, like water
flowing downs a plughole, they remove liquidity from the business
46
CASH MANAGEMENT: Cash management is one of the key areas of WCM. Apart from the fact
That it is the most liquid asset, cash is the common denominator to which all
Current assets, that is, receivables & inventory get eventually converted into
Cash. Cash is oil of lubricate the ever-turning wheels of business: without it the
process grinds to a shop. Motives for holding cash with reference to cash
management are used in two senses: It is used broadly to cover currency and
generally accepted equivalents of cash, such as cheques, drafts and demand
deposits in banks. It includes near-cash assets, such as marketable securities &
time deposits in banks.
The main characteristic of these is that they can be readily sold & converted
Into cash. They serve as a reserve pool of liquidity that provides cash
Quickly when needed. They provide short term investment outlet to excess
Cash and are also useful for meeting planned outflow of funds.
47
CASH IS MAINTAINED FOR FOUR MOTIVES:
A. Transaction motive:
Transaction motive refer to the holding of cash to meet routine cash
Requirements to finance the transactions which a firm carries on in a variety Of
transactions to accomplish its objectives which have to be paid for in the Form of
cash. E.g. payment for purchases, wages, operating expenses, Financial
charges like interest, taxes, dividends etc. Thus requirement of Cash balances to
meet routine need is known as the transaction motive and Such motive refers to
the holding of cash to meet anticipated obligations Whose timing is not perfectly
synchronized with cash receipts?
B. Precautionary motive:
A firm has to pay cash for the purposes which can not be predicted or
Anticipated. The unexpected cash needs at the short notice may be due to:
Floods, strikes & failure of customer slow down in collection of current
receivables Increase in cost of raw material Collection of some order of goods as
customer is not satisfied the cash balance held in reserves for such random and
unforeseen fluctuations in cash flows are called as precautionary balance. Thus,
precautionary cash provides a cushion to meet unexpected contingencies. The
more unpredictable are the cash flows, the larger is the need for such balance.
48
C. Speculative motive:
It refers to the desire of the firm to take advantage of opportunities which present
themselves at unexpected moment & which are typically outside the normal
course of business. If the precautionary motive is defensive in Nature, in those
firms must make provisions to tide over unexpected Contingencies, the
speculative motive represents a positive and aggressive.
Approach. The speculative motive helps to take advantages of: An opportunity to
purchase raw material at reduced price on payment Of immediate cash. A
chance to speculate on interest rate movements by buying securities when
interest rates are expected to decline. Make purchases at favorable price. Delay
purchase of raw material on the anticipation of decline in prices.
OBJECTIVES OF CASH MANAGEMENT:
I. To meet the cash disbursement needs in the normal course of business firms
have to make payment of Cash on a continuous and regular basis to the supplier
of goods, employees and so son. Also the collection is done from the Basic
objective is to meet payment schedule that is to Have sufficient cash to meet the
cash disbursement needs of the Firm.
II. To minimize the funds committed to cash balances
First of all if we keep high cash balance, it will ensure prompt payment
Together with all the advantages. But it also implied that the large funds will
49
Remain idle, as cash is the non-earning asset and firm will have to forego
Profits. On the other hand, low cash balance mean failure to meet payment
Schedule. Therefore we should have optimum level of cash balance.
FACTORS DETERMININING CASH NEEDS:
1) Synchronization of cash - need for the cash balances arises from the Non-
synchronization of the inflows & outflows of cash. First need in Determining cash
needs is, the extent of non-synchronization of cash Receipts & disbursements.
For this purpose cash budget is to be Prepared. Cash budget point out when the
firm will have excess or Shortage of cash.
2) Short cash period reveals the period of cash shortages. Every Shortage of
cash whether expected or unexpected involves a cost Depending upon the
security, duration & frequency of shortfall & how The shortage is covered.
Expenses incurred as a shortfall are called Short costs.
50
There are following costs included in the short cash Transaction cost: this is
usually the brokerage incurred in relation to The some short-term near-cash
assets like marketable securities.
Borrowing costs: these include interest on loan, commitment charges & other
expenses relating to loan. Loss of cash discount: that s a loss because of
temporary shortage of cash. Cost associated with deterioration of credit rating.
Penalty rates: By a bank to meet a shortfall in compensating balances.
1) Excess cash balance - cost associated with excessively large cash
A balance is known as excess cash balance cost. If large funds are
Idle the implication is that the firm has missed the opportunity to
Invest those funds and has thereby lost interest. This loss of interest
Is primarily the excess cost.
2) Procurement & Management cost cost associated with establishing
And operating cash management staff and activities. They are
Generally fixed and accounted for by salary, handling of securities
Etc.
51
3) Uncertainty the first requirement in cash management is
Precautionary cushion to cope with irregularities in cash flows,
Unexpected delays in collection &disbursements, defaults and Unexpected cash
needs.
Impact can be reduced through: Improved forecasting of tax payments, capital
expenditure, dividends
Etc. Increased ability to borrow through overdraft facility.
DETERMINING THE CASH NEEDS:
Cash needs can be determined though preparing cash budget, for year,
Month, week etc. Cash reports, providing a comparison of actual development
with forecast Figures are helpful in controlling and revising cash forecasts on a
continual Basis the important cash reports are
The daily cash reports
Daily treasury reports
The monthly cash report
Monitoring collection and receivables:
The Finance Manager must control the levels of cash balance at various Points
in the organization. This task assumes special importance on Account of the fact
that there is generally tendency amongst divisional Manager to keep cash
balance in excess of their needs. Hence a finance Manager must devise a
52
system whereby each division of organizationRetains enough cash to meet its
day-to-day requirements without having
Surplus balance on hand. For this methods have to be employed to:
Speed up the mailing time of payment from customers
Reduce the time during which payments received by the firm remain
Uncollected and speed up the movement funds to disbursement banks.
For this purpose following can be helpful:
1 Prompt billing often there is time lag between the dispatches of goods
Or provision of service and the sending of bills. By preparing and
Sending the bills promptly, a firm can ensure earlier remittance. It
Should be realized that it is in the area of billing that the company
Control is high and there is a sizeable opportunity to free up cash.
For this treasure should work with controller and others in:
Accelerating invoice data
Mailing bills promptly
Identifying payment locations.
2 Expeditious collections of cheques - expediting collecgion of cheques
Is important and there are to methods 1. Concentration banking,
2. Lock box method
Concentration banking: (decentralized collection) key Elements are, the major
bank account of the company is wet Up with a concentration bank, generally
situated in the same Place where the company is head quartered.
53
Customers are Advised to mail their remittances to collection centre close tog
Them. Payments collected in different collection centers are Deposited in local
banks which in turn transfer them to the Concentration banks Lock box method:
Silent features are as follows A number of post office boxes are rented by the
company In different locations Customers are advised to mail there remittances
to the Lock boxes. Banks are authorized to picked up the cheques from the
Lock boxes and deposit them in the companies account. Controlling
payables/disbursements: by proper control of Payables Company can manage
cash resources. This involves Payment should be made as and when it fall due.
Centralized disbursement payables and their Disbursements may be centralized.
This helps in Consolidating the funds at head office scheduling Payments,
reducing unproductive bank balance and Investing surplus funds more
effectively. Proper synchronization of inflows and outflows helps a Company to
get greater mileage from cash resources. Float: when firm issues cheques they
reduce the balance in Their books, but balance in banks book is not reduced till
the Payment is made by bank. This amount of cheques issued by
The firm but not paid for by the bank is referred to as payment
Float. When the cheques are deposited with bank the firm Increases the balance
in its books. The balance in the bank s Book however is cleared.
54
The amount of cheques deposited By the firm in the bank but not cleared is
referred to as Collection float. Difference between payment float and Collection
float is called as net float. When the net float is Positive the balance in the books
of bank is higher than the Balance in the books of firm. When the firm enjoys the
positive Float (net) it may issue cheques even if it have an overdrawn Bank
account in its books. Such an action is referred to as Playing the float it is
considered risky. Accruals: accruals can be defined as current liabilities that
Represent a service or goods received by a firm but not yet Paid for. For
example remuneration to employee s that render Services in advance and
receive payment later. In a way, they Extend credit to the firm for a period at the
end of which they Are paid. Weekly is more important as compared to monthly.
Other examples, rent to lessons, taxes to government.
OPTIMAL CASH BALANCE
It a firm maintains a small cash balance, it has to sell its marketable Securities
more frequently than if it holds a large cash balance. Hence Trading or
transaction costs will tend to diminish if cash balance becomes Larger. However,
the opportunity costs of maintaining cash rise as the cash Balance increases.
55
From the figure, the total costs of holding cash are at a minimum when the
Size of the cash balance is C. This represents optimal cash balance.
Deployment of surplus funds: Company s often has surplus funds for short period
of time before they are Required for capital expenditure, loan repayment or some
other purposes. The one end they are invested in term deposit in bank and on
other end is Invested in equity shares. They can be invested in several options
like Units of the unit 1964 scheme: This is the most important mutual fund
Scheme in India. It has the following features-
It is an open ended scheme as it accepts funds from investors & also permits
To withdraw their investments.
The units have face value of Rs. 10.00/- The sale & purchase price of units
Are not squarely based on the net asset per unit, as should be the case for
A truly open ended scheme.
56
DEBTORS MANAGEMENT.
Assessing the credit worthiness of customers
Before extending credit to a customer, a supplier should analyze the five Cs
Of credit worthiness, which will provoke a series of questions? These are:
Capacity: will the customer be able to pay the amount agreed within
The allowable credit period? What is their past payment record? How
Large is the customer's business capital. What is the financial health?
Of the customer? Is it a liquid and profitable concern, able to make
Payments on time?
Character: Does the customer’s management appear to be committed
To prompt payment? Are they of high integrity? What are their
Personalities like?
Collateral: what is the scope for including appropriate security in?
Return for extending credit to the customer?
Conditions: what are the prevailing economic conditions? How are
These likely to impact on the customer’s ability to pay promptly?
57
Whilst the materiality of the amount will dictate the degree of analysis
Involved, the major sources of information available to companies in
Assessing customer’s credit worthiness is:
Bank references. These may be provided by the customer’s bank to
Indicate their financial standing. However, the law and practice of
Banking secrecy determines the way in which banks respond to
Credit enquiries, which can render such references uninformative,
Particularly when the customer is encountering financial difficulties.
Trade references. Companies already trading with the customer
May be willing to provide a reference for the customer. This can be
Extremely useful, providing that the companies approached are a
Representative sample of all the clients’ suppliers. Such references
Can be misleading, as they are usually based on direct credit
Experience and contain no knowledge of the underlying financial
Strength of the customer.
Financial accounts. The most recent accounts of the customer can
Be obtained either direct from the business, or for limited companies,
From Companies House. While subject to certain limitations past
58
Accounts can be useful in vetting customers. Where the credit risks
Appears high or where substantial levels of credit are required, the
Supplier may ask to see evidence of the ability to pay on time. This
Demands access to internal future budget data.
Personal contact. Through visiting the premises and interviewing
Senior management, staff should gain an impression of the efficiency
And financial resources of customers and the integrity of its
Management.
Credit agencies. Obtaining information from a range of sources
Such as financial accounts, bank and newspaper reports, court
Judgments, payment records with other suppliers, in return for a fee,
Credit agencies can prove a mine of information. They will provide a
Credit rating for different companies. The use of such agencies has
Grown dramatically in recent years.
Past experience. For existing customers, the supplier will have
Access to their past payment record. However, credit managers
Should be aware that many failing companies preserve solid
Payment records with key suppliers in order to maintain supplies, but
They only do so at the expense of other creditors. Indeed, many
59
Companies go into liquidation with flawless payment records with key
Suppliers.
General sources of information. Credit managers should scout
Trade journals, business magazines and the columns of the business
Press to keep abreast of the key factors influencing customers'
Businesses and their sector generally. Sales staffs who have their
Ears to the ground can also prove an invaluable source of
Information.
Credit terms granted to customers
Although sales representatives work under the premise that all sales
Are good (particularly, one may add, where commission is involved!),
The credit manager must take a more dispassionate view. They must
Balance the sales representative's desire to extend generous credit
Terms, please customers and boost sales, with a cost/benefit
Analysis of the impact of such sales, incorporating the likelihood of
Payment on time and the possibility of bad debts. Where a customer
Does survive the credit checking process, the specific credit terms
Offered to them will depend upon a range of factors. These include:
Order size and frequency: companies placing large and/or frequent
Orders will be in a better position to negotiate terms than firms
60
Ordering on a one-off basis.
Market position: the relative market strengths of the customer and
Supplier can be influential. For example, a supplier with a strong
Market share may be able to impose strict credit terms on a weak,
Fragmented customer base.
Profitability: the size of the profit margin on the goods sold will
Influence the generosity of credit facilities offered by the supplier. If
Margins are tight; credit advanced will be on a much stricter basis
Than where margins are wider.
Financial resources of the respective businesses: from the
Supplier’s perspective, it must have sufficient resources to be able to
Offer credit and ensure that the level of credit granted represents an
Efficient use of funds. For the customer, trade credit may represent
An important source of finance, particularly where finance is
Constrained. If credit is not made available, the customer may switch
To an alternative, more understanding supplier.
Industry norms: unless a company can differentiate itself in some
Manner (e.g., unrivalled after sales service), its credit policy will
Generally be guided by the terms offered by its competitors.
Suppliers will have to get a feel for the sensitivity of demand to
61
Changes in the credit terms offered to customers.
Business objectives: where growth in market share is an objective,
Trade credit may be used as a marketing device (i.e., liberalized to
Boost sales volumes).
The main elements of a trade policy are:
Terms of trade: the supplier must address the following questions:
Which customers should receive credit? How much credit should be?
Advanced to particular customers and what length of credit period
Should be allowed?
Cash discounts: suppliers must ponder on whether to provide
Incentives to encourage customers to pay promptly. A number of
Companies have abandoned the expensive practice of offering
Discounts as customers frequently accepted discounts without
Paying in the stipulated period.
Collection policy: an efficient system of debt collection is essential.
A good accounting system should invoice customers promptly, follow
Up disputed invoices speedily, issue statements and reminders at
Appropriate intervals, and generate management reports such as an
Aged analysis of debtors. A clear policy must be devised for overdue
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Accounts, and followed up consistently, with appropriate procedures
(Such as withdrawing future credit and charging interest on overdue
Amounts). Materiality is important. Whilst it may appear nonsensical
To spend time chasing a small debt, by doing so, a company may
Send a powerful signal to its customers that it is serious about the
Application of its credit and collection policies. Ultimately, a balance
Must be struck between the cost of implementing a strict collection
Policy (i.e., the risk of alienating otherwise good customers) and the
Tangible benefits resulting from good credit management
Problems in collecting debts
Despite the best efforts of companies to research the companies to whom
They extend credit; problems can, and frequently do, arise. These include
Disputes over invoices, late payment, deduction of discounts where
Payment is late, and the troublesome issue of bad debts. Space precludes
A detailed examination of debtor finance, so this next section concentrates
Solely on the frequently examined method of factoring.
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Factoring an evaluation
Key elements:
Factoring involves raising funds against the security of a company's trade
Debts, so that cash is received earlier than if the company waited for its
Credit customers to pay. Three basic services are offered, frequently
Through subsidiaries of major clearing banks: Sales ledger accounting, involving
invoicing and the collecting of Debts; Credit insurance, which guarantees against
bad debts; Provision of finance, whereby the factor immediately advances about
80% of the value of debts being collected.
There are two types of factoring service:
Non-recourse factoring is where the factoring company purchases the
Debts without recourse to the client. This means that if the client’s debtors
Do not pay what they owe, the factor will not ask for his money back from
The client.
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Recourse factoring, on the other hand, is where the business takes the
Bad debt risk. With 80% of the value of debtors paid up front (usually
Electronically into the clients bank account, by the next working day), the
Remaining 20% is paid over when either the debtors pay the factor (in the
Case of recourse factoring), or, when the debt becomes due (non-recourse
Factoring). Factors usually charge for their services in two ways:
Administration fees and finance charges. Service fees typically range from
0.5 - 3% of annual turnover. For the finance made available, factors levy a
Separate charge, similar to that of a bank overdraft.
Advantages
Provides faster and more predictable cash flows; Finance provided is linked to
sales, in contrast to overdraft limits, Which tend to be determined by historical
balance sheets? Growth can be financed through sales, rather than having to
resort to External funds;
The business can pay its suppliers promptly (perhaps benefiting from Discounts)
and because they have sufficient cash to pay for stocks, The firm can maintain
optimal stock levels; Management can concentrate on managing, rather than
chasing Debts; The cost of running a sales ledger department is saved and the
Company benefits from the expertise (and economies of scale) of the Factor in
credit control
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Disadvantages
The interest charge usually costs more than other forms of short-term Debt; the
administration fee can be quite high depending on the number of Debtors, the
volume of business and the complexity of the accounts; By paying the factor
directly, customers will lose some contact with The supplier. Moreover, where
disputes over an invoice arise, having The factor in the middle can lead to a
confused three-way Communication system, which hinders the debt collection
process;
Traditionally the involvement of a factor was perceived in a negative
Light (indicating that a company was in financial difficulties), though
Attitudes are rapidly changing.
FINDINGS
In entire Study of Project it has been observed that the overall performance of
the company in all sectors has been remarkable. The year 2005 -2006 has yet another
eventful year for Videocon Appliances. In this year Company has achieved story
financial results registering a growth in sales and increase in Profitability
This has been possible because of Strong working capital management and
Focused efforts of company to explore and expand their markets.
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SUGGESTIONS
Company has to maintained Proper records showing full particulars including
Quantitative details and situation of fixed assets.
Company has to restructure the Procedure of Verification of inventory should
Be reasonable and adequate in relation to the size of the company and nature of
Business.
It is important for company that company has to give guarantees for loans
Taken by others from banks or financial institutions are not prejudicial to the
Interest of the company.
The company has not defaulted in repayment of dues to a financial institution
Or bank.
LIMITATIONS
The time span available is constituted limitation of the entire Project.
The time allocated for present study was only so days, and it is very difficult To cover all
the aspects of the project within such a short period. Working capital Management is so
vast topic and it is very difficult to cover All aspects of working capital management in a
project report.
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CONCLUSION
In entire Study of Project we can conclude that the Company will have to
Adopt systematic method for proper records of accents.
Further company will have to re-develop the procedure for inventory
Management. Company has to make separate Provision for internal assessment.
Videocon appliances . is one of the leading industrial group in India as
per that they have to develop their marketing strategies.
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BIBILOGRAPHY
Finacial Mangement
Study material, Intermediate Level
By S.N.Inamdar
Advance financial management
Text and cases by Prasanna Chandra
Himalaya Publishing House
FINANCIAL JOURNALS OF ICFAI
Published by ICFAI PRESS
Web Site: - www.videoconworld.com www.google.com
Annual Report of Videocon : - 2003 - 06