working capital management of a manufacturing company(project report,m.b.a)

WORKING CAPITAL MANAGEMENTOF

Sathe Synthetics

PROJECT REPORT

Submitted in partial fulfillment of the requirement for the award of Two year full time, Masters in Business Administration.

By Karan veer Singh

DEPARTMENT OF MANAGEMENT

LOVELY PROFESSIONAL UNIVERSITY

PHAGWARA

(2009-2011)

Acknowledgement

Whatever we do and whatever we achieve during the course of our limited life is

just not done only by our own efforts, but by efforts contributed by other people

associated with us indirectly or directly. I thank all those people who contributed to

this from the very beginning until its successful end.

I sincerely thank Mr. Subodh kr. Teotia (Personnel manager, Sathe Synthetics,

Ghaziabad), person of amiable personality, for assigning such a challenging

project work which has enriched my work experience and getting me acclimatized

in a fit and final working ambience in the premises of Sathe Synthetics.

I acknowledge my gratitude to Mr. Nitin Dhir (Lovely Professional University),

for his extended guidance, encouragement, support and reviews without whom this

project would not have been a success.

Last but not the least I would like to extend my thanks to all the employees at

Sathe Synthetics, Ghaziabad (prop. Rakesh fuel pvt. Ltd.) and my friends for their

cooperation, valuable information and feedback during my project.

KARAN VEER SINGH

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY

2. INDUSTRY PROFILE

3. ABOUT THE COMPANY

a. Company profile

b. Mission & Vision

c. Company Leadership

d. Company Products

e. SCOT Analysis of Sathe synthetics

4. OBJECTIVES OF THE STUDY

5. REVIEW OF LITERATURE

6. RESEARCH METHODOLOGY

7. WORKING CAPITAL MANAGEMENT

a. Introduction

b. Working Capital Analysis

c. Nature & importance of working capital

d. The importance of Good Working Capital

e. Working Capital Cycle

8. OPERATING CYCLE OF SATHE SYNTHETICS

a. Gross operating cycle

b. Net operating cycle

9. SCHEDULE CHANGE IN WORKING CAPITAL & ANALYSIS

10.WORKING CAPITAL RATIOS OF SATHE SYNTHETICS

a. Receivable Ratio

b. Payable Ratio

c. Inventory Ratio

d. Current Ratio

e. Quick Ratio

f. Working capital turnover ratio

11. ANALYSIS OF THE STUDY

a. Analysis of various components

b. Inventory

c. Sundry Debtors

d. Cash & Bank Balance

e. Current Liability

f. Provision Analysis

12. CONCLUSION

13. SUGGESSATIONS & RECOMMENDATIONS

14. BIBLIOGRAPHY & REFRENCES

15. ANNEXURES

Executive Summary

The project on Working Capital Management has been a very good experience. Every

manufacturing company faces the problem of Working Capital Management in their day-to-day

processes. An organization’s cost reduced and the profits increased only if it is able to manage its

Working Capital efficiently. At the same time, the company can provide customer satisfaction

and hence can improve their overall productivity and profitability.

This project is a sincere effort to study and analyze the Working Capital Management of

Sathe Synthetics, GZB. The project focused on making a financial overview of the company by

conducting a Working Capital analysis of SATHE group for the years 2005 to 2009 and Ratios &

various components of working capital & format emphasizing on Working Capital.

The internship is a bridge between the institute and the organization. This made me to be

involved in a project that helped me to employ my theoretical knowledge about the myriad and

fascinating facets of finance. Moreover, in the process I could contribute substantially to the

organization’s growth. The experience that I gathered over the past two months has certainly

provided the orientation, which I believe will help me in shouldering any responsibility in future.

INDUSTRY PROFILE

HISTORY OF THE INDIAN TEXTILE INDUSTRY:

The human need is to eat well for to be alive and shelter to protect them from discomforts of

nature and a place to live in. Human beings also need something to cover their body to protect

from diverse climates and to add the appearance. Earlier there was a time when the human being

known nothing about the cloth to wear. The human beings first use plant barks, leaves and

animal skin to wrap around them. Then as the development of brain took place, they started to

explore other possibilities and invent more in this area. There is constant search for clothing and

it led to the knowledge of sources from vegetation i.e. Cotton and from animals i.e. wool, which

could be knitted and woven to manufacture clothes to wear.

The commercial development of man-made fiber began late in the 19 th Century, experienced

much growth during the 1940’s, expanded rapidly after world War – II and in the 1970’s was

still the subject of extensive Research and Development.

The spinning and weaving both are very common and attached with each other in all parts of the

world. We talk of the ancient times, when maximum work like weaving of the clothes was done

manually, but all the things were being done for the right perspectives. From time to time in this

world development had taken place, which has been found to be a continuous process. Similarly

considering the developments in the Spinning and Weaving lot of improvements has come-up.

Because earlier too was the Cotton crop was grown by the farmers, but its end use was not done

in an effective way, which seems good. So much thick fiber was produced and accordingly its

impact for the fabric preparation.

APPARATUS USED FOR SPINNING & WEAVING DURING PRE-INDEPENDENCE

Before Independence we talk of the political leaders like Mahatma Gandhi, who had always

insisted to use Khadi Clothes and even self-spinning and weaving. It is also called as self-

dependence for all needs. Such a good initiatives had come-up at India level amongst the

followers of the Leader – Mahatma Gandhi. On the other side too such initiatives had been

proved very good and had attracted many other western countries to follow such practices and

show their excited ness. Though in case we talk of the English rule before the Independence i.e.

1947, it was not appreciated by the English Rulers, but after the freedom these leaders had got

very good appreciation particularly for the self spinning and weaving and in an overall manner

this sector of Spinning and Weaving was industrialized even after the independence too on the

basis of Indian cotton growers.

It is needless to mention here that throughout India, cotton grower’s belts are available and after

independence, even English people take their raw material from here and had established

themselves with the Spinning and weaving industries. Overall In India no such preferences for

the Spinning and Weaving industries were made, however the Library research reveals that the

first Cotton mill had been established in India during 1854 named as Bombay Spinning and

Weaving company. Though the Cotton industry had progressed a lot, but in case we say that

India alone is heading this world, it is wrong. Though in India Textile Machine manufacturers

are there and one or two decades ago they were the market leaders, but with the help of the other

parts/people of world i.e. Germany, Switzerland etc., India had made a very good recognition in

the yarn market.

Because Indian Industrial Organizations have also initiated towards the most modernized

machinery produced by Schlafhorsts – Germany, Luwa – Humidification systems, Switzerland.

This is just the example of the development, that in India too the most modern machinery is

being installed. However, it is an evident that the Indian yarn is always running on the

development trend since its Inception of first unit in Bombay, but its position in the international

market has not appeared so good. Because many other countries like China as Cotton Textiles

has went ahead. Though till today India has achieved a lot in the Textile Industry and almost

700 Textile units are working successfully, because India is having at present more than 20

Million spindles and a weaving capacity of more than 2.5 Lac looms and the total output value of

the same is around Rs.1500 Cores, employing more than 10 Lac of workers directly. The

invention and production of manmade thirty three fibers that is synthetic fibers like Nylon,

Acrylic fibers, Polyester Fiber, Viscose, S.Sament yarns, Mélange yarn, etc., which ultimately

had given a good blow to grow for the Cotton Textile Industry and know occupy a major part of

consumer acceptance. About 50 countries have been importing such material from India and the

description of the Spinning and weaving industry had remained incomplete without referring to

the woolen industry.

COMPANY PROFILE

Sathe Synthetics

Introduction

Company was started in 1995 as Production capacity of 40 tons per month of p.p. multifilament

yarn in various deniers of FDY ranging from 210 deniers to 1200 deniers in all colors

& naturals. The company is the largest P.P. Yarn manufacturer in the country.

Our Mission- We work with a mission to become world leader in narrow fabrics and

webbings products by successfully adopting latest manufacturing techniques and offering

innovative range of products that are used for various applications.

The company Sathe Synthetics (Prop. Rakesh fuel PVT. LTD) divided in two units, situated in

Ghaziabad and other one is in Sikandrabad. The company is governed and controlled by three

brothers and partners named as-

Mr. Ravi Mohan – DIRECTOR GENERAL, HEAD OF TECHNICAL & MAINTENANCE DEPARTMENT

Mr. Rajeev Mohan – FINANCE DECISION MAKER, HEAD OF SALES AND MARKETING

NAME OF AUTHORITY DESIGNATION

MR. ARUN SINGH GENERAL MANAGER

MR. SUBODH KR. TEOTIA PERSONNEL MANAGER

MR. ASHOK AGARWAL STORE MANAGER

MR. HARISH GUPTA HEAD MARKETING (PURCHASE)

MR. ASHA RAM ACCOUNTS HEAD Mr. Rakesh Mohan – DIRECTOR, NEW OPPORTUNITIES FOR COMPANY

PRODUCT RANGE: - Sathe Synthetics Flat & Twisted

Range FDCRIMP

Uses - For FDY Swing Thread

Use of Crimp Yarn

FDY 210 Deniers YARN 110/1 Belt UndergarmentsFDY 330 Deniers YARN 110/2 Lasses SocksFDY 440 Deniers YARN 120/1 Tape LassesFDY 600 Deniers YARN 120/2 Filter cloth TieFDY 840 Deniers YARN 130/1 Fabrics And many more

thingsFDY 1000 Deniers YARN 130/2 HousosryFDY 1200 Deniers And many more

things

PRESENT CAPACITIES

Presently the group has following production capacity and product range at its different manufacturing facilities.

Location Installed Capacity

(spindles)

Production Capacity

Product Range

Sathe synthetics, Ghaziabad 10500 10Tons / Day POLYPROPYLENE MULTIS.SAMENT YARN

UNI-2, Sikandrabad 8000 6.5 Tons/Day POLYPROPYLENE MULTIS.SAMENT YARN, &

NON-WOVEN FABRICS

USTERIZED CERTIFICATION The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/ Switzerland on April 10, 2007. Sathe synthetics, Ghaziabad / India fulfill all conditions for using the brand USTERIZED and will be checked regularly at once per year basis.

PRODUCTION The unit is producing different types of yarn both for Domestic consumption and Export purpose. The production department is headed by General Manager (G.M.). The SATHE SYNTHETICS has two units. The unit- I is concerned with the production of POLYPROPYLENE MULTIFILAMENT YARN. The unit-II expansion is concerned with production of POLYPROPYLENE MULTIFILAMENT YARN & NON WOVEN FABRICS. Production capacity of unit –I is 10 ton per day and unit-II is 6.5 tons per day.

MARKETING For Marketing of different product, the unit is having a modern marketing department headed by experienced team which covers all the activities for conversion of finished goods into cash. It keeps vigil on the market feed-back on the level competition, market, trend, changing customer needs and modifications. The marketing department deals with domestic sales, while export department of the group manages export sales. The SATHE SYNTHETICS, Having the export and domestic ratio is 34:66. The unit is having different channels for distribution of its products.

1. Selling agents at Ghaziabad, Delhi, Mumbai and Lucknow. 2. Branches at Delhi and Utter Pradesh.3. Direct Dispatches are also made by the units.

ORGNISATION STRUCTUREA chart showing the organizational structure of SATHE SYNTHETICS, Ghaziabad is given on the next page. It shows the various hierarchical levels of the organization. It is a department line organization which is divided into various department headed by their respective department heads. All departments operate under the ultimate control of Chief Executive Sh. Rakesh Mohan. The orders flow directly from unit head to different departmental heads down the line to respective department subordinates.

GREY CHIPS

PPP*P*/PE*/NYLON

Manufacturing Process Flow Chart of S.S

100% COTTON CARDED/COMBED YARN

EXTRUDER

POLYMER-MENT

SCREEN-S.STER

METERING-S.STER

SPINNERETTE DIE-PLATE

MULTIFILAMENT YARN

QUENCHING (FAST COLLING)

SPIN FINISH APPLICATION

TAKE UP/WINDER FDY/HE/POY

D-TEX M/C

TWISTING

TWISTING

DESPATCH

GREY-CHIPS PP*/PE*/NYLON

MASTER-BATCH

(COLOURED CHIPS)

PACKING

MANUFACTURING PROCESS IN SATHE SYNTHETICS , GHAZIABAD

Poy Spinning

Polyester Polypropylene chips are fed in the feeding hopper with the help of electric hoist

and are conveyed from feeding hopper to DPG from where they are further conveyed to the

Storage Silos with the help of compressed air. From the Silos, the chips enter the blender for

proper blending to avoid variation.

Control Room

The chips, after blending, are stored in a Wet Chips Hopper.

The level of chips in this hopper is automatically controlled from where these are

transferred to the drying system through rotary air lock. Rotary air lock does not allow the air to

leak during the chips entry from WCH to drying system. Dryer system dries the chips with the

help of hot air to control the moisture level of the chips to make it suitable for spinning. From the

dryer, chips enter the Dry Chips Hopper before feeding to the Extruder.

Production Lines

From the Dry Chips Hopper, chips are conveyed to the extruder where chips are melted

and mixed to give homogenous molten polymer with the help of electrical heaters. The same is

thereafter filtered through continuous polymer filter.

After filtration, the melt is distributed to 4 nos. of spinning beams via manifold. The temperature

of the spinning beams and manifold is maintained by special type of heat transfer media. Melt is

purified by means of metallic and sand filters before being extruded to filament through

spinnerets.

The extruder has a capacity to melt and deliver 800 kgs of chips/hr. at high pressure up to

250 bars. Molten polymer in spinning beam is extruded through the spinnerets via polymer

pump. The speed of polymer pump is controlled by production computers to ensure uniform flow

of melt to produce quality of yarn. The speed of polymer pump may be changed to produce

different kind of deniers.

Quality Control Polymer melt passing through the spinnerattes comes out in the form of yarn at a

temperature of 280-290 ° C. The yarn is then cooled to solidify in the cooling chamber and after

the cooling, finish oil is applied to yarn to lubricate the same for further processing. The yarn is,

thereafter, taken on the winder for winding on paper tubes. The speed of the winder is controlled

by the computers and can be varied as per the process requirement to produce different kind of

deniers. The POY thus produced is checked on automatic machines called Tensorapid and Uster

Tester-3 for checking of thickness and uniformity properties.

Packaging

Twisting

POY is thereafter transported from the POY department to texturising section. It is then

taken on creel and fed to the texturising machines and heaters. After the necessary heat setting

and cooling, the texturised yarn is collected on paper tubes and thereafter, packed in corrugated

boxes and sent to the market.

FINAL PRODUCT OF SATHE SYNTHETICS

Sathe SyntheticsAddress:D-27, Industrial Area, Kavi Nagar Ghaziabad-201001, (U.P.)Phone: 91-120-2700336, 2700386Fax: 91-120-2703172

E-mail: [email protected] Person: Mr. L.C. Sharma

SCOT Analysis of Sathe Synthetics

Strengths

Experienced promoters with over 40 years of experience in the industry

Successfully implemented various expansion schemes in the past with in-house expertise

Consistently achieved capacity utilization over 90% in respect of POY in the past.

Products are well accepted in the market

With the implementation of the proposed project, the company will reap the benefits of

economies of scale due to optimum utilization of the existing facilities.

Satisfactory organizational set-up with experienced and well-qualified employees.

Strong marketing network with low selling and distribution costs

Challenges

The prices of raw materials and finished goods move in tandem with international prices,

which, in turn, have positive correlation with the prices of petrochemical products.

A major portion of the manufacturing capacity originates from second hand equipment.

S.S adopts the technology of spinning POY from polyester chips which are an intermediate

and may put S.S at a comparatively disadvantages position due to relatively higher cost vis-à-vis

the other players who manufacture POY directly from PTA/DMT/MEG. Company is taking

planning to putting up its own captive poly- condensation facility.

Opportunities

With no major capacity increase being created in the recent past / being planned in the near

future, the existing players are well positioned to take advantage of the emerging scenario where

demand is expected to exceed supply.

Potential growth in exports of POY / PFY. With quantitative restrictions on textile exports

being dismantled under the aegis of World Trade Organization (WTO) from 2005, it is expected

that low cost producers like India will benefit.

With tariffs proposed to come down in India over a period of time, it is expected that raw

material costs will be comparable to those prevailing in the international markets.

Potential growth in domestic demand for POY due to increase in share of non-cotton fabric.

Threats

Likely expansion by large players like Reliance Industries, Indo Rama Synthetics, Century

Enka Ltd., etc.

India has concluded / is in the process of concluding Free Trade Agreements (FTA) with a

number of countries like Sri Lanka, Thailand, China, etc. This will lead to lower tariffs all round

and may affect Indian textile units, including S.S.

Post WTO, when India would be exposed to international competition. S.S’s position is

expected to be vulnerable vis-à-vis those companies with global size and modern facilities.

OUTLINE OF THE STUDY

The management of working capital is very important. It involves the study of day-to-day affairs

of the company. The motive behind the study is to develop an understanding about the working

capital management in the running business organization and to help the company in developing

the efficient working capital management. Therefore, it helps in future planning and control

decisions.

OBJECTIVES OF THE STUDY

The objectives of the study are as follows:

To analyze the working capital management of the company.

To determine the gross and net operating cycle of the unit.

To know the future need of working capital in the running organization.

To render recommendations for the effective management of working capital.

SCOPE OF THE STUDY

The study is conducted at “SATHE SYNTHETICS, Ghaziabad” for 6 weeks duration. The study

of W.C. management is purely based on secondary data and all the information is available

within the company itself in the form of records. To get proper understanding of this concept, I

have done the study of the balance sheets, profit and loss A/C’s, cash accounts, trial balance, and

cost sheets. I have also conducted the interviews with employees of accounts and finance

department and stores department. So, scope of the study is limited up to the availability of

official records and information provided by the employees. The study is supposed to be related

to the period of last five years.

REVIEW OF LITERATURE

1- The research done by Pass C.L., Pike R.H., “An overview of working capital management

and corporate financing”,(1984) describes that over the past 40 years major theoretical

developments have occurred in the areas of longer-term investment and financial decision

making. Many of these new concepts and the related techniques are now being employed

successfully in industrial practice. By contrast, far less attention has been paid to the area of

short-term finance, in particular that of working capital management. Such neglect might be

acceptable were working capital considerations of relatively little importance to the firm, but

effective working capital management has a crucial role to play in enhancing the profitability

and growth of the firm. Indeed, experience shows that inadequate planning and control of

working capital is one of the more common causes of business failure.

2- The research done by Herrfeldt B., “How to Understand Working Capital Management”

describes that“Cash is king”--so say the money managers who share the responsibility of

running this country's businesses. And with banks demanding more from their prospective

borrowers, greater emphasis has been placed on those accountable for so-called working

capital management. Working capital management refers to the management of current or

short-term assets and short-term liabilities. In essence, the purpose of that function is to make

certain that the company has enough assets to operate its business. Here are things you

should know about working capital management.

3- The research done by, Samiloglu F. and Demirgunes K., “The Effect of Working Capital

Management on Firm Profitability: Evidence from Turkey” (2008) describes that the effect of

working capital management on firm profitability. In accordance with this aim, to consider

statistically significant relationships between firm profitability and the components of cash

conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed

manufacturing firms for the period of 1998-2007 has been analysed under a multiple

http://scialert.net/asci/author.php?author=K.&last=Demirgunes

http://scialert.net/asci/author.php?author=F.&last=Samiloglu

regression model. Empirical findings of the study show that accounts receivables period,

inventory period and leverage affect firm profitability negatively; while growth (in sales)

affects firm profitability positively.

4- The research done by, Appuhami, Ranjith B A, “The Impact of Firms' Capital Expenditure

on Working Capital Management: An Empirical Study across Industries in Thailand” ,

International Management Review,(2008), The purpose of this research is to investigate the

impact of firms' capital expenditure on their working capital management. The author used

the data colleted from listed companies in the Thailand Stock Exchange. The study used

Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a

proxy for working capital measurement and developed multiple regression models. The

empirical research found that firms' capital expenditure has a significant impact on working

capital management. The study also found that the firms' operating cash flow, which was

recognized as a control variable, has a significant relationship with working capital

management.

5- The research done by, Hardcastle J., “Working Capital Management”,(2007) describes that

Working capital, sometimes called gross working capital, simply refers to the firm's total

current assets (the short-term ones), cash, marketable securities, accounts receivable, and

inventory. While long-term financial analysis primarily concerns strategic planning, working

capital management deals with day-to-day operations. By making sure that production lines

do not stop due to lack of raw materials, that inventories do not build up because production

continues unchanged when sales dip, that customers pay on time and that enough cash is on

hand to make payments when they are due. Obviously without good working capital

management, no firm can be efficient and profitable.

6- The research done by, Thachappilly G., “Working Capital Management Manages Flow of

Funds”,(2009) describes that Working capital is the cash needed to carry on operations

http://www.suite101.com/profile.cfm/gopinathan

during the cash conversion cycle, i.e. the days from paying for raw materials to collecting

cash from customers. Raw materials and operating supplies must be bought and stored to

ensure uninterrupted production. Wages, salaries, utility charges and other incidentals must

be paid for converting the materials into finished products. Customers must be allowed a

credit period that is standard in the business. Only at the end of this cycle does cash flow in

again.The research done by, Beneda, Nancy; Zhang, Yilei, “Working Capital Management,

Growth and Performance of New Public Companies”.

7- The research done by, Dubey R.,“Working Capital Management-an Effective Tool for

Organisational Success” (2008) describes that The working capital in a firm generally arises

out of four basic factors like sales volume,technological changes,seasonal , cyclical changes

and policies of the firm.The strenghth of the firm is dependent on the working capital as

discussed earlier but this working capital is inteslf dependent on the level of sales volume of

the firm.The firm requires current assets to support and maintain operational or functional

activities.By current assets we mean the assets which can be converted readily into cash say

within a year such as receivables,inventories and liquid cash.If the level of sales is stable and

towards growth the level of cash,receivables and stock will also be on the high.

8- The research done by, McClure B., “Working Capital Works” describes that Cash is the

lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund

operations, reinvest and meet capital requirements and payments. Understanding a company's

cash flow health is essential to making investment decisions. A good way to judge a

company's cash flow prospects is to look at its working capital management (WCM). Cash is

king, especially at a time when fund raising is harder than ever. Letting it slip away is an

oversight that investors should not forgive. Analyzing a company's working capital can

provide excellent insight into how well a company handles its cash, and whether it is likely to

have any on hand to fund growth and contribute to shareholder value.

9- The research done by, Gass D., “How To Improve Working Capital Management” (2006)

"Cash is the lifeblood of business" is an often repeated maxim amongst financial managers.

Working capital management refers to the management of current or short-term assets and

short-term liabilities. Components of short-term assets include inventories, loans and

advances, debtors, investments and cash and bank balances. Short-term liabilities include

creditors, trade advances, borrowings and provisions. The major emphasis is, however, on

short-term assets, since short-term liabilities arise in the context of short-term assets. It is

important that companies minimize risk by prudent working capital management.

10- The research done by, Maynard E. Rafuse, “ Working capital management: an urgent need to

refocus” Management Decision, (1996) Argues that attempts to improve working capital by

delaying payment to creditors is counter-productive to individuals and to the economy as a

whole. Claims that altering debtor and creditor levels for individual tiers within a value

system will rarely produce any net benefit .Proposes that stock reduction generates system-

wide financial improvements and other important benefits .Urges those organizations seeking

concentrated working capital reduction strategies to focus on stock management strategies

based on “lean supply-chain” techniques.

11- Impact of Working Capital Management Policies on Corporate Performance—An

Empirical Study

Sushma Vishnani, Bhupesh Kr. Shah (2007)

It is felt that there is the need to study the role of working capital management policies on

profitability of a company. Conventionally, it has been seen that if a company desires to

take a greater risk for bigger profits and losses, it reduces the size of its working capital in

relation to its sales. If it is interested in improving its liquidity, it increases the level of its

working capital.

However, this policy is likely to result in a reduction of the sales volume, therefore of

profitability. Hence, a company should strike a balance between liquidity and profitability. In

this paper an effort has been made to make an empirical study of Indian Consumer

Electronics Industry for assessing the impact of working capital policies & practices on

profitability during the period 1994–95 to 2004–05. The impact of working capital policies

on profitability has been examined by computing coefficient of correlation and regression

analysis between profitability ratio and some key working capital policy indicator ratios.

12- Working Capital and Financial Management Practices in the Small Firm Sector

Michael J. Peel, Nicholas Wilson (2008)

MICHAEL J. PEEL IS A LECTURER IN accountancy and finance at Cardiff Business

School, University of Wales and Nicholas Wilson is Professor of Credit Management at the

University of Bradford, England. Very little research has been conducted on the capital

budgeting and working capital practices of small firms. The purpose of this paper is to present

the results of a preliminary study on the working capital and financial management practices of a

sample of small firms located in the north of England. In general, the results of the survey

indicated that a relatively high proportion of small firms in the sample claimed to use

quantitative capital budgeting and working capital techniques and to review various aspects of

their companies' working capital. In addition, the firms which claimed to use the more

sophisticated discounted cash flow capital budgeting techniques, or which had been active in

terms of reducing stock levels or the debtors' credit period, on average tended to be more active

in respect of working capital management practices. It hoped that the issues raised would

stimulate further theoretical and empirical contributions on this neglected and important area of

small business research.

RESEARCH METHODOLOGY

The term research refers to the systematic method consisting of enunciating the problem ,

formulating a hypothesis collecting the data , analyzing the facts and reaching the certain

conclusions either in the form of solution towards the concern problem or in certain

generalization for some theoretical formulation .

Research Methodology is a way to solve systematically the research problem .It may be

understood as a science of studying how research is done scientifically.

Time Period of the study:

The present study was undertaken during Six weeks from 14th June - 26th July.

Research Design:

Descriptive research procedure is used for describing the recent situations in the organization and

analytical research to analyze the results by using research tools.

Descriptive Research:

Descriptive research, also known as statistical research, describes data and characteristics

about the population or phenomenon being studied. Descriptive research answers the

questions who, what, where, when and how...

Although the data description is factual, accurate and systematic, the research cannot describe

what caused a situation. Thus, Descriptive research cannot be used to create a causal

relationship, where one variable affects another. In other words, descriptive research can be said

to have a low requirement for internal validity.

In short descriptive research deals with everything that can be counted and studied. But there

are always restrictions to that. Your research must have an impact to the lives of the people

around you. For example,finding the most frequent disease that affects the children of a town.

The reader of the research will know what to do to prevent that disease thus, more people will

live a healthy life.

Data Source & Collection Methods:

There are two types for collecting data

1. Primary data

2. Secondary data

Secondary Data:

Secondary data are those which have already been collected by someone else and

which have already been passed through the statistical process. The Secondary data consist of

reality available compendices already complied statistical statements. Secondary data consists of

not only published records and reports but also unpublished records.

Here we done the analysis on basis of secondary data, which included-

Balance sheet of company

Profit and loss A/C of Sathe Synthetics

Cost sheets, & Trail balance of five years

Purpose:

The purpose of this paper is to properly analysis of the working capital management of

Sathe synthetics, Ghaziabad over the period 2005-2009.

Tools used:

I used the different tools to analyze the working capital management of Sathe Synthetics -

Analysis through Working capital ratios

Analysis through Schedule change in working capital

Analysis through Gross operating cycle & Net operating cycle

Analysis through Various components of working capital

LIMITATIONS OF THE STUDY

As central purchase office, purchase raw material and central marketing yarn make sales.

Information that is so more detailed cannot be received about these.

Cash from debtors a collected by the corporate office through commission agents. So

efforts for collection of debtors cannot be clearly known from SATHE SYNTHETICS,

Ghaziabad.

Investment of funds are also made by corporate office, so it becomes difficult to know

that how much investment is made in different ways for continuous availability of funds.

THEORETICAL BACKGROUND

OF WORKING CAPITAL MANAGEMENT

MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT

The management of working capital is concerned with two problems that arise in

attempting to manage the current assets, current liabilities and the inter relationship that asserts

between them.

The basic goal is working capital management is to manage current assets and current

liabilities of a firm in such a way that a satisfactory of optimum level of working capital is

maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate as well

as excessive working capital position is bad for business.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-

1. What should be ratio of current assets to sales?

2. What should be the appropriate mix of short term financing and long term financing

for financing these current assets?

1. Current assets in relation to sales:-

If the firm can forecast accurately the factors, which effect the working capital, the

investment in current assets, can be designed uniquely. When uncertainty characteristics the

above factors, as it usually does the investment in current assets cannot be specified uniquely. In

case of uncertainty, the outlay on current assets should consist of base component meant to meet

normal requirement and a safety component meant to cope with unusual requirement. The safety

component depends upon low conservative or aggressive in the current assets policy of a firm. If

the firm purchases a very conservative current asset policy it would carry a high level of current

assets in relation to sales. If a firm adopts a moderate current assets policy it would carry

moderate level of current assets in relation to sales, finally is a firm follows a highly aggressive

current assets policy, it would carry a low level of current assets in relation to sales.

SATHE SYNTHETICS is following current assets policy showing moderate level of

current assets in relation to sales as is evident from ratio analysis.

2. Determining a Short Term and Long Term Financing Mix for Financing of current

assets:-

There are three approaches in this regard, which are discussed below:

HEDGING APPROACH: -

This approach is also called matching approach. In this approach there is a

proper matching of expected life of asset with the duration of fund. Usually, according to this

approach, long-term sources are used for financing permanent current assets and fixed assets &

short-term sources are used for financing temporary current assets:

term financing

ASSETS Time

CONSERVATIVE APPROACH: -

Permanent current assets

Temporary current assetsShort term financing

Long-term financing

A

S

S

E

T

In this approach there is more reliance on long-term financing in comparison to short-term financing. Even some part of the temporary current comparison to finance from long-term sources because long-term sources are less risky in comparison to short-term sources.

Temporary Current Assets

Short-term financing

Permanent Current Assets Long-term financing Fixed Assets Time

AGGRESSIVE APPROACH

In this approach there is more reliance on short term financing and even a part of permanent current assets is financed from short-term finance.

Temporary current assets Short term financing

Permanent current assets Long term financing

Fixed Assets

Time

A

S

S

E

T

A

S

S

E

T

In SATHE SYNTHETICS, the current assets are financed from short term sources as well as long term sources, so they follow conservative approach.

WORKING CAPITAL ANALYSIS

1. OPERATING CYCLE ANALYSIS

Operating cycle refers to the time period which starts from the raw material purchases

and ends with realization of receivable. So it is total time gap between raw material purchases to

total debtors’ collection. This is also known as working capital cycle. Operating cycle is

therefore expressed in terms of months or weeks or days. The higher the operating cycle period,

higher the working capital requirement. It comprises of raw material conversion period, WIP

conversion period, FG conversion period and debtors’ conversion period and creditors period.

The basic reason for calculating operating cycle is to find out the means for reducing the duration

of operating cycle because if duration of operating cycle will be less than working capital

requirement will be less.

OC = R + W + F + D – C

Where,

R = raw material conversion period W = work in process period

F = finished goods conversion period D = debtor collection period

C = creditors payment period

(1) Raw Material Conversion Period (RMCP)

= Average Raw Material Stock

Average Raw Materials consumed during the year

PARTICULARS 2008-09 2007-08 2006-07 2005-06 2004-05

Average raw

material stock

33065118 33352213.5 20819151 13076062.5 9471720.12

Raw material

consumed

during the year

314166.03 213093.45 107464.04 218371.65 121729.46

RMCP 105.25 156.52 193.73 59.88 77.80

2009 2008 2007 2006 20050

50

100

150

200

250

105.25

156.52

193.73

59.8877.8

RMCP

(2) Work in Progress Conversion Period (WIPCP)

= Average stock in progress

Average Cost of Production

PARTICULARS 2009 2008 2007 2006 2005

Average stock in

progress

7834151.50 8313099.5 5586013 4818821.5 3634639.5

Avg. Cost of

production

190952.86 211273.02 194248.64 180015.22 136824.55

WICP 41.03 37.93 28.75 26.77 26.56

2009 2008 2007 2006 20050

5

10

15

20

25

30

35

40

45 41.0337.93

28.7526.77 26.56

WICP

(3) Finished Goods Conversion Period (FGCP)

= Average finished goods inventory

Average Cost of goods sold

X 360X 360

PARTICULARS 2009 2008 2007 2006 2005

Average

finished goods

inventory

14911159 13149905.5 5004497 6396225 5858384.5

Cost of goods

sold

1955523.98 1648540.72 1398222.17 1260173 989215.18

FGCP 7.63 7.98 3.58 5.08 5.92

2009 2008 2007 2006 20050

1

2

3

4

5

6

7

8

97.63 7.98

3.58

5.085.92

FGCP

(4) Debtors’ Conversion Period (DCP)

= Days in year company operating

Debtors’ turnover

PARTICULARS 20009 2008 2007 2006 2005

Days in year

company operating

360 360 360 360 360

Debtors’ turnover 21.66 22.89 18.41 15.82 18.38

DCP 16.62 15.72 19.55 22.76 19.59

2009 2008 2007 2006 20050

5

10

15

20

25

16.62 15.72

19.55

22.76

19.59

DCP

(5) Credit Conversion Period (CCP)

= Days in year company operating

Creditors’ turnover

PARTICULARS 2009 2008 2007 2006 2005

Days in year

company operating

360 360 360 360 360

Creditors’ turnover 27.15 26.02 39.50 22.77 23.30

Avg. consumption

period OR CCP

13.26 13.84 9.11 15.81 16.14

X

2009 2008 2007 2006 20050

2

4

6

8

10

12

14

16

18

13.26 13.84

9.11

15.81 16.14

CCP

GROSS OPERATING CYCLE FOR SATHE SYNTHETICS:

YEAR RMCP WICP FGCP DCP GOC

2009 105.25 41.03 7.63 16.62 170.53

2008 156.52 37.93 7.98 15.72 217.84

2007 193.73 28.75 3.58 19.55 245.61

2006 59.88 26.77 5.08 22.76 114.49

2005 77.80 26.56 5.92 19.59 129.87

2009 2008 2007 2006 20050

50

100

150

200

250

300

170.53

217.84245.61

114.49129.87

GOC

NET OPERATING CYCLE: -

YEAR GOC CCP OR APP NOC

2009 170.53 13.26 157.27

2008 217.84 13.84 204.31

2007 245.61 9.11 236.5

2006 114.49 15.81 98.68

2005 129.87 16.14 113.73

2009 2008 2007 2006 20050

50

100

150

200

250

157.27

204.31

236.5

98.68113.73

NOC

ANALYSIS

It claimed that gross operating cycle of SATHE SYNTHETICS is increasing in year 2004-05 and

in the year 2005-06 it decreasing up to certain extent. In year 2004-05, it is 129.87 days then it

decreased to 114.49 days in year 2005-06 due to contraction in raw material. In 2006-07, it is on

the highest point of 245.61 days. The main reason of increasing gross operating cycle in 2006-07

is due to more availability of raw material in the stores. In year 2006-07 the company purchased

a bulk of raw material due to market variations the GOC is increased. However, when we came

to year 2007-08 the GOC for S.S has shown a significant decrement of 204.31 days from the

year 2006-07 to 245.61. When in next year 2008-09, it came out to be 170.53 days. The GOP for

satisfactory as it Varies as the market requirements and changes in form of meet the customer’s

requirements largely.

But when we came to the NOC of Sathe Synthetics it we can see that Creditor’s payment period

OR Average payment period of S.S is on a average of 15 days in each (5) five years so does not

make more effect on GOC. Therefore, it is somehow near of the GOC.

That is why the company’s NOC 113.73, 98.68, 236.5, 204.31, and 157.27 in the years 2005,

2006, 2007, 2008 and 2009. Therefore, we can say that there is a significant change in the NOC

of the Sathe Synthetics.

1. RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making decisions. It only

means of better understanding of financial strengths and weaknesses of a firm. The main

emphasis has been on calculating the ratios related to a working capital management.

LIQUIDITY RATIOS: -These are the ratios which measures the short term solvency or

financial position of a firm. In other words, it refers to the ability of a concern to meet its current

obligations as and when these become due. To measure the liquidity of a firm, the following

ratios can be calculated.

CURRENT RATIO: – It may be defined as the relationship between current assets and current

liabilities. This ratio is also known as working capital ratio and measures the ability of the firm to

meet current liabilities. High current ratio indicates firm is liquid and has the ability to pay its

current obligations in time as and when they become due.

A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is

considered to be satisfactory.

Current Ratio = Current Assets

Current Liabilities

2009 2008 2007 2006 20050

1

2

3

4

5

6

7

8

9

6.24

4.04

7.92

5.26

3.33 CR

ANALYSIS

The current ratio of the Sathe synthetics is above the standard and it guarantees the payment of dues in time. The current ratio of the company has been considerably high because they had made over investment in inventories, which is the main reason for the high ratio of current assets. Inventories are high because of seasonal availability of raw material. The overall position of current ratio for Sathe synthetics is satisfactory.

YEAR CURRENT ASSETS CURRENT

LIABILITIES

CURRENT RATIO

2009 115612673.56 18528617.22 6.24

2008 141934492.00 35172584.20 4.04

2007 97761075.20 12343214.74 7.92

2006 72335450.22 13758132.09 5.26

2005 72171734.06 21676428.69 3.33

The current ratio of dye house has shown a remarkable increment from 3.33 in 2004-05 to 5.26 in 2005-06 and then to 7.92 in 2006-07. Initially in 2004-05, the ratio was not satisfactory but it is quite satisfactory for the years after 2008-09 and especially for the year 2006-07.

LIQUID RATIO –This ratio is also known as quick ratio or acid test ratio. It is a more rigorous test of liquidity than the current ratio. It is based on those current assets which are highly liquid. Inventory and prepaid expenses are excluded because they are deemed to be least liquid component of current assets. A high quick ratio is the indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand low ratio represents liquidity position is not good.

Quick Ratio = Quick or Liquid Assets

Current Liabilities

Quick Assets = Current Assets – Inventory – Prepaid Expenses

YEAR LIQUID ASSETS CURRENT LIABILITIES

LIQUID RATIO

2009 71845029.56 18528617.22 3.88

2008 74081279.00 35172584.20 2.11

2007 56583851.20 12343124.74 4.58

2006 50693352.22 13758132.09 3.68

2005 45231614.06 21676428.69 2.09

2009 2008 2007 2006 20050

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

3.88

2.11

4.58

3.68

2.09 LR

Analysis

According to rule of thumb, it should be 1:1. For Sathe synthetics, the liquid ratio present a uneven change over the past four years. It was 2.09 in 2004-05 and increased to 4.58 in 2006-07 and then to 2.11 in 2007-08. The decrement in the ratio is not satisfactory, however the ratio 2.11 in 2007-08 is more than the rule of thumb but it should be quite more than the rule of thumb.

.

WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio measures the efficiency with which the working capital is being used by a firm.

Working Capital Turnover Ratio = COGS OR Sales

Net Working Capital

YEAR SALES NET WORKING CAPITAL

WCTR

2009 703988634.61 97084056.34 7.25

2008 593474659.66 106761907.80 5.56

2007 503359979.46 85417950.46 5.89

2006 453662278.70 453662278.70 7.74

2005 356117465.20 50495305.37 7.05

2009 2008 2007 2006 20050

1

2

3

4

5

6

7

8

9

7.25

5.56 5.89

7.747.05

WCTR

ANALYSIS

This ratio indicates the number of times the working capital is turned over in the course of a

year. A high working capital ratio indicates the effective utilization of working capital and less

working capital ratio indicates less utilization. For Sathe synthetics, the ratio is quite same for the

past five years. It is 7.05 in 2004-05, 7.74 in years 2005-06 and in2006-07 there was a slight

change came over here and the ratio decreased to 5.89. And in the next year in 2007-08 the ratio

stand at 5.56 For Sathe synthetics, the ratio is increasing once more in the very next year in

2008-09, It shows increment to 7.24. the ratio of the company is satisfactory.

STOCK TURNOVER RATIO

This ratio tells the story by which stock is converted into sales. A high stock turnover ratio

reveals the liquidity of the inventory i.e., how many times on an average, inventory is turned

over or sold during the year.

STOCK OR INVENTORY TURNOVER RATIO = COGS OR SALES

AVERAGE STOCK

YEAR SALES AVERAGE STOCK

STR or ITR

2009 703988634.61 55810428.5 12.61

2008 593474659.66 23981268.5 24.75

2007 503359979.46 31409661 16.03

2006 453662278.70 24291109 18.68

2005 356117465.20 18964744.11 18.78

2009 2008 2007 2006 20050

5

10

15

20

25

30

12.61

24.75

16.0318.68 18.78

STR

ANALYSIS: -

By analyzing the five-year data it seen, that it follows an uneven trend. We see that from the year

2005 to 2006 & 2006 to 2007, it moves on a slow pace means, the ratio is increased in very

nominal figures i.e. (.10) times and (2) times, which has been rectified in the year 2008.

In 2008 there is a huge increase in inventory due to this ratio the company maintains is very high

in 2008 and the company is required to take measures to lower down this ratio as it affects the

working capital cycle of company and the flow of cash in the company. In 2009, we saw

company take measure to lower down its ratio which is good for company because a low stock

turnover ratio reveals undesirable accumulation of obsolete stock.

DEBTORS’ TURNOVER RATIO: -

DEBTORS’ TURNOVER RATIO = CREDIT SALES

AVERAGE DEBTORS’

YEAR CREDIT SALES AVERAGE DEBTORS’

DTR

2009 703988634.61 32503373 21.66

2008 593474659.66 25923481.52 22.89

2007 503359979.46 27348823.87 18.41

2006 453662278.70 28677098.13 15.82

2005 356117465.20 19374123.96 18.38

2009 2008 2007 2006 20050

5

10

15

20

2521.66

22.89

18.4115.82

18.38

DTR

ANALYSIS

Generally a low debtor’s turnover ratio implies that it considered congenial for the business as it

implies better cash flow. The ratio indicates the time at which the debts are collected on an

average during the year. Needless to say that a high Debtors Turnover Ratio implies a shorter

collection period which indicates prompt payment made by the customer.

Now if we analyze the five year data we can say that it holds a good position while receiving

its money from its debtors. The ratios are in variation trend, which implies that recovery

position is good and company should maintain these positions.

CREDITORS’ TURNOVER RATIO: -

Actually this ratio reveals the ability of the firm to avail the credit facility from the suppliers

throughout the year. Generally a low creditor’s turnover ratio implies favorable since the firm

enjoys lengthy credit period.

CREDITORS’ TURNOVER RATIO = NET CREDIT PURCHASE

AVERAGE CREDITORS’

YEAR CREDIT PURCHASE

AVERAGE CREDITORS’

CTR

2009 567750535.58 20914713.21 27.15

2008 505412322.46 19426820.02 26.02

2007 421557817.32 10672311.95 39.50

2006 358037616.35 15724391.01 22.77

2005 300672597.42 12906200.48 23.30

ANALYSIS

Actually, this

ratio reveals

the ability of

the firm to

avail the credit

facility from

the suppliers

throughout the

year.

Generally, a low creditor’s turnover ratio implies favorable since the firm

enjoys lengthy credit period.

Now if we analyze the three years data we find that in the year 2007 the ratio was very high

which means that its position of creditors that year was not good only in the year 2007, when we

turn ahead the other years creditor’s turnover ratio is in pretty good position.

In the all four years it has followed, a decreasing trend, which is very good, sign for the

company. Therefore, we can say it enjoys a very good credit facility from the suppliers.

ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING CAPITAL

2009 2008 2007 2006 20050

5

10

15

20

25

30

35

40

45

27.15 26.02

39.5

22.77 23.3

CTR

PARTICULARS 2005-06 2006-07 INCREASE DECREASE

CURRENT ASSETS:

Inventories 21642098.00 41177224.00 19535126

S. debtors 30359548.69 22158429.16 8201119.53

Cash & Bank Balances

3407307.32 2297697.88 1109609.44

Loans & Advances

16926496.21 32127724.16 15201227.95

Total current assets (A)

72335450.22 97761075.20

CURRENT LIABILITIES:

S. creditors 11585162.05 9759461.84 1825700.21

Provisions 2072970.04 2483662.90 410692.86

Security deposits & Retention money

100000 100000 ----- ------

Total current liabilities (B)

13758132.09 12343124.74

Working capital (A-B)

58577318.13 85417950.46 36562054.16 9721421.83

Net increase in working capital

26840632.33 26840632.33

85417950.46 85417950.46 36562054.16 36562054.16

ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING CAPITAL

PARTICULARS 2007-08 2008-09 INCREASE DECREASE

CURRENT ASSETS:

Inventories 67853213 43767644 24085569

S. debtors 27508864 37497882 9989018

Cash & Bank Balances

3665403.60 6891449.29 3226045.69

Loans & Advances

42907011.40 27455698.27 15451313.13

Total current assets (A)

141934492.00 115612673.56

CURRENT LIABILITIES:

S. creditors 29094178.20 12735248.22 16358929.98

Advance from customers

2439050 722054 1716996

Provisions 3539356.00 4971315.00 1431959

Security deposits & Retention money

100000.00 100000 ----- -----

Total current liabilities (B)

35172584.20 18528617.22

Working capital (A-B)

106761907.8 97084056.34 31290989.67 40968841.13

Net Decrease in working capital

9677851.46 9677851.46

106761907.8 106761907.8 40968841.13 40968841.13

FOR YEARS 2006 AND 2007:

As we have a look on the schedule of changes in working capital for the Sathe synthetics over

the years 2005-06 and 2006-07, we find that, among current assets, inventories, loans and

advances have shown increment from year 2005-06 to year 2006-07. The sundry debtors and

cash & bank balances have decreased in the same years. Among the current liabilities, the sundry

creditors and other liabilities have decreased and provisions were increased. Therefore, the

overall net working capital has increased.

FOR YEARS 2007-08 AND 2008-09:

Among the current assets, debtors and cash & bank balances have increased and inventories and

loans & advances have shown decrement. The total current assets have increased. Among the

current liabilities, sundry creditors and other liabilities have decreased which made a positive

effect on networking capital and it increases, on the other hand, the provision increased which

not directly but overall made a good effect on company. Therefore, the net working capital has

also increased.

ANALYSIS OF VARIOUS COMPONENTS OF WORKING CAPITAL

INVENTORY ANALYSIS

Inventory is total amount of goods and materials. Inventory means stock of three:-1. Raw materials2. Semi finished goods.3. Finished goods.Position of inventory in Sathe synthetics: -

PARTICULARS 2009 2008 2007 2006 2005Raw material 28833211 37297025 29407402 12230900 13921225W.I.P 5912280 9756023 6270176 4901850 4735793Finished goods 9022153 20800165 5499646 4509348 8283102TOTAL 43767644 67853213 41177224 21642098 26940120

2009 2008 2007 2006 20050

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

STOCK

INTERPRETATION:

By analyzing the 5 years data we see that the inventories are increased/decreased year by year. We can look increasing pattern in inventories. We can see that inventories are grown in 06-07 and 07-08 respectively from previous year in figures it increases up to19535126 in2007 and inyear2008 it increases to 26675989 in comparison of 2007. By this growth we can say that the company is growing. A company uses inventory when they have demand in market and Sathe Synthetics is having a demand in industry market. That is biggest reason for increase inInventories. From other point of view we can say that the liquidity of firm is blocked ininventories but to stock is very good due to uncertainty of availability of raw material in time.

SUNDRY DEBTORS ANALYSIS

Debtors or an account receivable is an important component of working capital and fall underCurrent assets. Debtors will arise only when credit sales made.Position of Sundry Debtors in Sathe synthetics

PARTICULARS 2009 2008 2007 2006 2005DEBTS O/S FOR A PERIOD OF SIX MONTHS

0.00 203547.00 118028.00 85124.00 262290.00

OTHER DEBTS

37497882.00 27305317.00 22040401.16 30274424.69 26732357.57

TOTAL 37497882.00 27508864.00 22158429.16 30359548.69 26994647.57

2009 2008 2007 2006 20050

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

DEBTORS

INTERPRETATIONIn the table and figure, we see that there are continuous variations in the debtors of Sathe

Synthetics in five (5) successive years. A simple logic is that debtors increase only when sales

increase and if sales increases it is good sign for growth. We can see that in the year 2006-07 the

Debtors are at minimum level. Moreover, in next two years in 2008 & 2009 the debtors are

continuously increasing.

We can say that it is a good sign as well as negative also. Company policy of debtors is very

good but a risk of bad debts is always present in high debtors. When sales are increasing with a

great speed the profit also increases. If company decreases the Debtors, they can use the money

in many investment plans. So, this variation is good from the firm prospect

CASH AND BANK BALANCE ANALYSIS

Cash called the liquid asset and vital current assets; it is an important component of

Working capital. In a narrow sense, cash includes notes, bank draft, cheque etc.

Position of Cash and Bank Balance in Sathe synthetics: -

PARTICULARS 2009 2008 2007 2006 2005Cash & Bank 6891449.29 3665403.60 2297697.88 3407307.32 6617777.19TOTAL 6891449.29 3665403.60 2297697.88 3407307.32 6617777.19

2009 2008 2007 2006 20050

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

CASH & BANK

INTERPRETATION

If we analyze the above table and chart we find that it follows an increasing trend. In the year

2005, it had maintained a huge amount of cash and bank balance which has decreases in the year

2006, 2007 and 2008. Although company’s cash position in the year2006, 2007 & 2008 was not

sound so, this is not a very good sign for company. The analysis shows that the fix deposits of

company are rapidly fallen in the year as 42.3% in 06- 07 respectively from year 2005 that is

why company is have minimum balance in 2007 in comparison of all. Through analysis, we got

that company is utilizing the fixed cash for exploding the Projects that is good for growth.

LOANS AND ADVANCES ANALYSIS

Loans and Advances here refers to any to amount given to different parties, company, employees

For a specific period of time and in return they will be liable to make timely repayment of that

Amount in addition to interest on that loan.

PARTICULARS 2009 2008 2007 2006 2005LOANS & ADVANCES

27455698.27 42907011.40 32127724.16 16926496.21 11619189.30

TOTAL 27455698.27 42907011.40 32127724.16 16926496.21 11619189.30

2009 2008 2007 2006 20050

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

50000000

LOANS & AD...

INTERPRETATION

If we analyze the table and the chart we can see that it follows an increasing trend which is a

Good sign for the company. We can see that the increase of loans and advances are increases

year by year except the year 2009. In the year 2008 there is more than Rs 4 crore given as loan,

due to this a lot of amount was blocked. But it used for expansion of business.

The increasing pattern shows that company is giving advances for the expansion of plants and

Machinery which is good sign for better production. Although company’s cash is blocked but

This is good that company is doing modernization of plan competitors in market.

CURRENT LIABILITIES ANALYSIS

Current liabilities are any liabilities that are incurred by the firm on a short term basis or current

Liabilities that has to be paid by the firm within one year.

CREDITORS: -

PARTICULARS 2009 2008 2007 2006 2005SUNDRY CREDITORS

12735248.22 29094178.20 9759461.84 11585162.05 19863619.97

TOTAL 12735248.22 29094178.20 9759461.84 11585162.05 19863619.97

2009 2008 2007 2006 20050

5000000

10000000

15000000

20000000

25000000

30000000

CREDITORS

INTERPRETATION

If we analyze the above table then we can see that it follow an uneven trend in the sundry

creditors and other liabilities. In 2006 it decreased by 75% and in 2007 it further decreased by

more then100%. In 07-08 it was increased because of growth in other liabilities. This is done

because in the year2008 company purchased a bulk of raw material due to market variations.

When company has minimum liabilities it creates a better goodwill in market. High current

liabilities indicate that company is using credit facilities by creditors.

PROVISIONS ANALYSIS

Position of Other Provisions in Sathe synthetics

PARTICULARS 2009 2008 2007 2006 2005PROVISIONS 4971315.00 3539356.00 2483662.90 2072970.04 1812808.72TOTAL 4971315.00 3539356.00 2483662.90 2072970.04 1812808.72

2009 2008 2007 2006 20050

1000000

2000000

3000000

4000000

5000000

6000000

PROVISIONS

INTERPRETATION

From the above table we can see that provision shows a growing trend and the huge amount is

Being kept in these provisions. Though the profits of the company are increased, income tax is

Also increased. Therefore, there is a great need of maintaining proper provisions, which is good

that company is creating in time. The provisions are increasing as the tax increases. Although

company is paying more income tax that is why because company also earning more. This is

good sign for Company.

By conducting the study about working capital management, I found out that working

capital management of SATHE SYNTHETICS is good. SATHE SYNTHETICS has

sufficient funds to meet its current obligation every time, which is due to sufficient

profits and efficient management of SATHE SYNTHETICS.

Raw material for all the units of SATHE SYNTHETICS purchased by corporate office in

bulk, which is a major problem for the company as it increases the inventory cost.

Company is cash rich but as there are expansion and diversification plans under the

pipeline, company is not utilizing these funds. For meeting the working capital needs and

capacity expansion needs, it has borrowed from banks.

Lack of advertisement can be considered to be a weak point for the Sathe Synthetics.

The amount of stock is increasing per year, which is a good sign, as it would help them in the tough competition coming ahead.

Firm profitability can be increase by shortening accounts receivables and inventory periods.

SUGGESTIONS

Management should make the proper use of inventory control techniques like fixation of

minimum, maximum and ordering levels for all the items for less blockage of money.

The company should also adopt proper inventory control like ABC analysis etc. This

inventory system can make the inventory management more result oriented. The EOQ

should also follow in stores.

The company should train its work force properly, which would enable the company to

utilize its resources properly and in the interim help in minimizing wastage, and hence

result in the expansion of its market share.

Due to competition, prices are market driven and for earning more margin company

should give the more concentration on cost reduction by improving its efficiency.

The investments of surplus funds made by the corporate office and the units are not

generally involved while taking decisions with regard to structure of investment of

surplus funds. The corporate office should involve the units to better ascertain the future

requirements of funds and accordingly the investments made in different securities.

The company is losing its overseas customers due to decrease in exports so; the sufficient

amount of exports should the maintained.

Company’s Average debtor collection period of company is 19 days. Therefore, it would

be the one of the positive point for company and company should maintain it for future.

Measures to Improve Working Capital Management at SATHE SYNTHETICS:

The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer and actions by competitors. So, the effect of unforeseen demands of working capital should be factored by company. This was one of its reasons for the variation of its revised working capital projection from the earlier projection.

It pays to have contingency plans to tide over unexpected events. While market-leaders can manage uncertainty better, even other companies must have risk-management procedures. These must be based on objective and realistic view of the role of working capital.

Addressing the issue of working capital on a corporate-wide basis has certain advantages. Cash generated at one location can well be utilized at another. For this to happen, information access, efficient banking channels, good linkages between production and billing, internal systems to move cash and good treasury practices should be in place.

An innovative approach, combining operational and financial skills and an all-encompassing view of the company’s operations will help in identifying and implementing strategies that generate short-term cash. This can be achieved by having the right set of executives who are responsible for setting targets and performance levels. They could be then held accountable for delivering, encouraged to be enterprising and to act as change agents.

Effective dispute management procedures in relation to customers will go along way in freeing up cash otherwise locked in due to disputes. It will also improve customer service and free up time for legitimate activities like sales, order entry and cash collection. Overall, efficiency will increase due to reduced operating costs.

Working capital management is an important yardstick to measure a company operational and financial efficiency. This aspect must form part of the strategic and operational thinking. Efforts should constantly be made to improve the working capital position. This will yield greater efficiencies and improve customer satisfaction.

WEBSITES:-

Lazaridis, Ioannis and Tryfonidis, Dimitrios, Relationship between Working Capital Management

and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, Vol. 19, No. 1, January-June 2006. Available at SSRN: http://ssrn.com/abstract=931591

http://papers.ssrn.com/sol3/papers.cfm? abstract_id=931591&rec=1&srcabs=966188

http://www.emeraldinsight.com/Insight/ViewContentServlet? contentType=Article&S.Sename=/published/emeraldfulltextarticle/pdf/2910030202.pdf

BOOKS AND JOURNALS

Anand, M. 2001. “Working Capital performance of corporate India: An empirical survey”, Management & Accounting Research, Vol. 4(4), pp. 35-65

Berryman, J. 1983. “Small Business Failure and Bankruptcy: A survey of the Literature”, European Small Business Journal, 1(4), pp47-59

Bhattacharya, H. 2001. Working Capital Management: Strategies and Techniques, Prentice Hall, New Delhi.

Grablowsky, B. J. 1976. “Mismanagement of Accounts Receivable by Small Business”, Journal of Small Business, 14, pp.23-28

Grablowsky, B. J. 1984. “Financial Management of Inventory”, Journal of Small Business Management, July, pp. 59-65

Shields, Patricia and Hassan Tajalli. 2006. Intermediate Theory: The Successful Student Scholarship. Journal of Public Affairs Education. Vol. 12, No. 3. Pp. 313-334.

http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&S.Sename=/published/emeraldfulltextarticle/pdf/2910030202.pdf

http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&S.Sename=/published/emeraldfulltextarticle/pdf/2910030202.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931591&rec=1&srcabs=966188

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931591&rec=1&srcabs=966188

http://ssrn.com/abstract=931591

ANNEXURES

BALANCE SHEET AS ATPARTICULARS 2008-09 2007-08 2006-07 2005-06 2004-05SOURCES OF FUNDSSHRI GANESH JI 52.25 52.25 52.25 52.25 52.25SHRI LAXMI JI 51.00 51.00 51.00 51.00 51.00SHARE CAPITAL 19901000.00 19901000.00 19901000.00 19901000.00 19901000.00RESERVE AND SURPLUS

345519604.82 29625127.98 15253853.53 21829192.29 20785949.94

LOAN FUNDSSECURED LOANS 72686105.58 88539002.13 94535519.74 55323395.23 54399581.72DEFERED TAX LIABILITY

3383097.00 3449412.00 3080483.00 662332.00 ---------

UNSECURED LOANS

43486673.00 46947616.00 28872233.00 15703501.00 14408414.70

TOTAL 173976583.65 188462261.36 171643192.52 113419523.77 109495049.61APPLICATION OF FUNDSFIXED ASSETSA: GROSS BLOCK 178453951.93 172240571.18 164888412.68 126570061.76 123370584.96B: less DEPRICIATION

101561424.62 90540217.62 78663170.62 71729938.62 64380715.62

C: NET BLOCK 76892527.31 81700353.56 86225242.06 54840123.14 58989869.34D:CURRENT ASSETSINVENTORY 43767644.00 67853213.00 41177224.00 21642098.00 26940120.00SUNDRY DEBTORS 37497882.00 27508864.00 24338099.04 30359548.69 26994647.57CASH IN HAND & BANK

6891449.29 3665403.60 2297697.88 3407307.32 6617777.19

LOANS AND ADVANCES

27455698.27 42907011.40 32127724.16 16926496.21 11619189.30

E:CURRENT LIABILITIESSUNDRY CREDITORS

12735248.22 29094178.20 9759461.84 11585162.05 19863619.97

ADVANCE FROM CUSTOMERS/DLR’S

822054.00 2539050.00 100000.00 100000.00 --------------

PROVISIONS 4971315.00 3539356.00 2483662.90 2072970.04 1812808.72(D-E)NET CURRENT ASSETS

97084056.34 106761907.80 85417950.46 58577318.13 50495305.37

MISCELLANEOUS EXPENSES

--------- --------- -------- 2082.50 9874.90

TOTAL 173976583.65 188462261.36 171643192.52 113419523.77 10945049.61

PARTICULARS 2008-09 2007-08 2006-07 2005-06 2004-05(A) INCOME1: NET SALES 703988634.6

1593474659.66

503359979.46

453662278.70

356117465.20

2: OTHER INCOME 436106.42 3913796.87 172310.00 13234.00 33965.73TOTAL 704424741.0

3597388456.53

503532289.46

453675512.70

356151430.93

(B) EXPENSES1:RAW MATERIAL,FINISHED GOODS & WORK IN PROGRESS

591836104.58

478736333.46

402022691.32

36335638.35 284721845.65

2:MANUFACTURING EXPENSES

68743029.05 76058287.24 69929616.64 64805480.37 49256838.95

3:SALARY & OTHER EMP.BENEFITS

4115744.00 3845617.00 3348712.00 3336648.00 2678327.00

4: ADMINISTRATIVE EXPENSES

3232698.41 3229712.90 3352674.68 2742302.31 2066811.17

5: SELLING EXPENSES

4646428.28 4114634.84 3276473.48 3183784.89 1610635.56

6: FINANCIAL EXPENSES

13455947.36 13038713.28 7292587.41 6731948.84 4803871.78

7: OTHER EXPENSES 446187.51 324537.36 731402.50 38487.59 42963.408:DEPRICIATION 11021207.00 11877047.00 6933232.00 7349223.00 10608658.72TOTAL 697497346.1

9591224883.08

496887390.03

451523513.35

355789952.72

PROFIT BEFORE TAX

6927394.84 6163573.45 6644899.43 2151999.35 361478.70

DEFERRED TAX -66315.00 368929.00 2418151.00 662332.00PROVISION FOR FBT 99521.00 90342.00 56529.41 0.00

PROVISION FOR TAXATION

1999712.00 1333028.00 745557.78 446425.00 58160.00

PROFIT AFTER TAX 4894476.84 4371274.45 3424661.24 1043242.35 303318.70PROFIT AS PER LAST YEAR BALANCE SHEET

18406627.98 14035353.53 10610692.29 9567449.94

CARRIED TO CURRENT YEAR BALANCE SHEET

23301104.82 18406627.98 14035353.53 10610692.29 303318.70

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED

working capital management of a manufacturing company(project report,m.b.a)

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