SUMMER TRAINING REPORT ON

WORKING CAPITAL MANAGEMENT

IN VARDHMAN POLYTEX LIMITED

Submitted To: VARDHMAN POLYTEX LIMITED In partial fulfillment of requirement for the award of degree in
MASTER OF BUSINESS ADMINISTRATION SUBMITTED BY: GARIMA RIMT INSTITUTE OF ENGINEERING & TECHNOLOGY MANDI GOBINDGARH(2009-10)

PREFACE
This report prepared during the summer training is lifes greatest treasure. The training management. experience provided knowledge about the working capital

The study aims to analyze the extent to which volume of working capital has been effectively and efficiently utilized in this unit. The report is divided into various parts for the close analyses of different components of working capital. The last part deals with the conclusion and suggestions to improve the working capital management.

ACKNOWLEDGEMENT
The fulfillment of work requires dedication. It also calls for guidance and co-operation from seniors. This report is the outcome of six weeks training that I received in the Vardhman Polytex Limited, Bathinda. This project work would not have been possible without the kind assistance and guidance of many persons whom indeed were helpful, cooperative and kind during the entire course of my project. I express my heartfelt appreciation for all those concerned. It gives me immense pleasure to acknowledge my deep sense of gratitude and sincere thanks Mr. Rajiender Pal for agreeing for the training and to my revered guide Mr. Sandeep Goyal for his guidance, support and affection throughout the course of this work. In last, I express my sincerest thanks and indebtedness to the esteemed organization for granting me the grand privilege of working on a project under team of experts in the field of finance.

CONTENTS
CHAPTER ONE CHAPTER TWO CHAPTER THREE : TEXTILE INDUSTRY AN OVERVIEW : THE PROFILE : OUTLINE OF THE STUDY CHAPTER FOUR Objectives of the study Scope of the study Research methodology Limitations of the study

: WORKING CAPITAL MANAGEMENT Introduction to working capital Dimensions of working capital Concept of working capital Types of working capital Needs of working capital Sources of working capital Determinants of working capital Meaning of working capital management Major decisions in working capital management.

CHAPTER FIVE

: WORKING CAPITAL ANALYSIS Operating cycle analysis Ratio analysis Common size statement Schedule of changes in working capital

CHAPTER SIX CHAPTER SEVEN CHAPTER EIGHT CHAPTER NINE

: CASH MANAGEMENT : RECEIVABLES MANAGEMENT : INVENTORY MANAGEMENT : FINDINGS, SUGGESTIONS & CONCLUSION

BIBLIOGRAPHY

SYNOPSIS
WORKING CAPITAL MANAGEMENT OF V.P.L (BTI) REFERENCE OF THE CONCERN:A unit of Oswal group of industries having turnover about Rs.255 crore in the year 2008-2009 Registered Office: -CHANDIGARH ROAD, LUDHIANA

Corporate Office
341 K-1, Mundian Khurd P.O. Sahabana Chandigarh Road Ludhiana - 141123 Punjab - INDIA Tel. : 0161-2685301-305 Fax : 0161-5052439 email : info@oswalgroup.com Business: - Manufacturing of varied quality of yarn. Branches: - DELHI and LUDHIANA Bankers: 1) 2) 3) 4) 5) 6) 7) 8) 9) Canara Bank State Bank Of India Bank of Baroda State Bank of Patiala UTI Bank Ltd. State Bank of Indore Punjab National Bank Corporation Bank HDFC Bank

CHAIRMAN: - MR.ASHOK OSWAL. As well as managing director having experience of more than 30 years.. PRODUCTS-:

100% Cotton Yarn

NE 10s-40s, Carded & Combed, Single & Multifold, Dyed, Processed

Polyester / Cotton Blended Yarns

NE 10s-40s, Carded & Combed, with a capability to offer any blend. 100% Acrylic Yarn for Mink Blanket & Hosiery (Both Grey/Dyed)

Worsted Spun Yarn

Dyed Yarn

Capacity of Dyeing 100% Cotton Yarn, Acrylic, Polyester

We at Oswal Group will achieve a turnover of Rs. 500 Crore by strengthening its core compet- encies and capacities in Textiles and diversified businesses to create value for its stake- holders.

YARN Textile is the basic & one of the most important industry of India. Yarn is vital ingredient and link in the entire value chain of textiles. Yarn accounts for major share out of total textile exports of our country.

Oswal Group has acquired core competence in yarn manufacturing and it is regarded as one of the leading, progressive and reliable yarn manufacturer in the textile industry. The promoters including Shri Ashok Oswal, Chairman & Managing Director has long experience of about three decades in textiles & enjoys good representation among business associates both in India and abroad.

Yarn facilities Oswal Groups Cotton yarn & Polyester yarn both grey and dyed have dominant position in the market. The Quality of its products is comparable with the top competitors both in domestic as well as international market.

Cotton Yarn: - Carded & Combed 10s to 40s cotton yarn. Polyester Yarn: - 20 to 40s in different blends. Dyed Yarn: - Cotton & Polyester yarn (Reactive Dyeing). Fancy Yarn: - Elite compact yarn, Slubs yarn, multi-count / multi-twist yarn, core spun yarn.

Others: - Acrylic yarn, Double & Multi fold yarn TECHNOLOGY-: The unit commenced its production in the year 1984 with moderate capacity of 8, 000 spindles at that time. There after the unit continued to add capacity which became 25, 000 spindles in 1990, 37, 500 spindles in 1984, 50, 000 spindles in 2001, 75, 000 spindles in 2005, 1, 05,000 spindles in 2008. The total 1, 05,000 spindles are installed in five different sheds in the same premises at Bathinda. The unit has very strong process control & working system called SOP. Besides, a number of developmental tools like Quality Circle, Kaizen, 5S & TQM are implemented for the last couple of years The group uses combination of reputed imported & indigineous technologies which are modern & sophisticated. The technologies include

Reiter - Switzerland Trutzschler - Germany Schlaforst AutoConer - Germany Muratec Process Coner - Japan LMW India KTTM RXI - India Amsler for Slubs - Switzerland Suzuki for Slubs & Corespun Japan Luwa for Humidification Switzerland

Wartsila Captive Power Plant - Finland

FABRIC Oswal Group is primarily engaged in yarn business since its inception. Then gradually looked for other avenues to integrate the value stream of textile manufacturing for the need of business growth. Having a core competency in textiles, conversion of yarn to fabric was a major focus area for this Group. The opportunity in niche market for premium shirting fabric is ever flourishing. To grab this segment with bountiful of future business potentials; Oswal Group forays into fabric business through an Austrian Joint Venture. Oswal F. M. Hmmerle Textiles Limited was established in 2006 as a joint venture of F.M.Hmmerle Textilwerke GmbH & Co KG, Dornbirn, Austria (Est.1836) and Oswal Group, India. Prior to this a MOU was signed in 2005 between these two organizations. Due to a lot of common ground between the companies, both in their corporate philosophy and in the areas of products and services, now new fabric business of Oswal Group will be able to provide new impetus for growth.

Oswal Group is one among such names which possesses the higher degree of excellence in its textile business. The company established itself as a profound mentor by manufacturing and exporting magnificent textile products since 2003. We strictly adhere to rigid quality control procedures throughout our manufacturing process in order to ensure a flawless production. Our products are manufactured in completely conducive environment by employing the best technology. Through our Total Quality Management (TQM), we effortlessly display our worth at the quality front and therefore we are confident to make a big stride in this endeavor.

GARMENTS Oswal Group operates the garment division under the name of Amkryon. Amkryon n was established on November 1999 under the able leadership of Mr. Adish Oswal. Amkryon's manufacturing facility is located in Ludhiana, which is the hub of kitting and knitted garments. The product range includes T-Shirts, Shirts, Trousers, Cargo, Shorts, and Jackets, for Children, Ladies and Gents. The manufacturing plant is equally balanced for Knitted and Woven Garments and is well laid out with lots of open spaces and good working conditions. We have good team of dedicated professionals for all areas of operations. We have been of providing third party shipments of all kinds of garments whether in Fine Knits or Wovens for the world renewed brands like Dockers, Wal-Mart, and Arrow (USA) Gap, etc. Besides, we are also engaged in manufacturing of garments for our Own Brand AOS and manufacturing for leading Indian Brands like Provouge, Life Style and Bare etc. We have tied up with Giny & Jony Apparels Ltd., for manufacturing of children garments and export to DVH Inc, (USA).

TEXTILE INDUSTRY-AN OVERVIEW

Cotton textile in India is a well-established manufacturing industry and employ more workers than any other sector. In Indian textile mills, yarn is spun, woven into fabrics, and processed under one roof. The textile industry occupies a unique place in our country. Textile industry is providing one of the most basic needs of people and maintaining sustained growth for improving quality of life. It has a unique position as a self-reliant industry. From the production of raw materials to the delivery of finished products, with substantial value-addition at each stage of processing; it is a major contributor to the countrys economy. India accounts for 25 percent of the world installed capacity of spindles and is one of the largest exporters of yarns in international market. It has second highest spindlage in the world after China with an installed capacity of 38.60 million. India has several advantages in the textile sector, including abundant availability of raw material and labour. It is the second largest player in the world cotton trade. It has the largest cotton acreage, of about nine million hectares and is the third largest producer of cotton fiber in the world. The textile industry is also labour intensive, thus India has an advantage.

PROFILE OF THE GROUP

The industrial hub of the northern region - Ludhiana nestles the corporate Headquarters of the Oswal Group of industries. The Oswal Empire expands from Anshupati Textiles Limited to Vinayak Textile Mills both situated in Ludhiana to Vardhman Polytex Limited in Bathinda . The Company has entered into a joint venture agreement with F.M. Hammerle Group, Austria for setting up a Rs.255 crore green field project for manufacture of quality yarn & piece dyed shirting fabric with annual capacity of 12 million meters. For this purpose, a new company in the name of 'Oswal F.M. Hammerle Textiles Ltd.' has set-up a plant at Village Kagal, Distt. Kolhapur (Maharashtra). Vardhman Poly holds 76% stake in the said joint venture company and 24% equity is held by F.M. Hammerle Group. Oswal group is earning laurels by selling yarn of international quality both indigenously and exporting it to several countries. Its market share is increasing day by day.

HISTORY OF THE COMPANY: M/s Punjab Mohta Polytex limited was set up in 1983 and started production in 1984. In1987; it was taken over by Vardhman group and was named Vardhman Polytex Limited. But after the family settlement in 2002, the unit came under Oswal group. The group has very good potential and high presence in the textiles industry with well set manufacturing set up for 100% cotton, Polyester cotton, Acrylic and other blended yarns. New qualities of yarn added are Lycra ,Slub yarn and Viscose yarn. All the group units are well equipped with machinery imported from Europe, Japan, China and many other countries. Continuous efforts are always being made to further improve the quality and match the industry standard to meet the demand of its customers. After the family settlement, in January 2003, the company is ushering under the newly formed Oswal Group. The company has set up a state of the art technology-spinning project at Focal Point Ludhiana with an installed capacity of 24,288 spindles in January, 2004. Further, a new state of the art Dye House has been installed at the same site with an installed capacity of 13 MT / day which has been increased to 15 MT/day. The company has also set up a state of the art technology-spinning project at Bathinda with an installed capacity of 25,344 spindles for the manufacture of Cotton yarn/Blended yarn, which has started its commercial production in May, 2005. Thereafter, the company has expanded its capacity at Focal Point, Ludhiana with an installed capacity of 25,315 spindles for the manufacture of Cotton yarn/Blended yarn which has started its commercial production in October, 2006. In 2006, the Company has joined hands with one of the leading European shirting fabric manufacturer namely F.M. Haemmerle estd. 1836 for setting up of a green field project of dyed yarn shirting fabric. The said project has been undertaken in the newly formed subsidiary company namely "Oswal F. M. Haemmerle Textiles Ltd." at Kolhapur (Maharashtra) with annual capacity of 12 million meters. The dyed yarn shirting fabric plant of OSWAL GROUP is one of the best plant in India with latest state-of-art machinery and equipments. The commercial production is started in the mid of year 2008-09. In 2008, the Company completed another expansion of 30,000 spindles at its existing location in Bathinda and with this expansion, the total spinning capacity with OSWAL GROUP stands increased to 1,65,872 spindles.

Vision: We at Oswal Group will achieve a turnover of Rs 1,000 crore by the year 2012 by strengthening its core competencies and capacities in Textiles and diversified businesses to create value for its Stakeholders. Mission: Oswal Group on a learning curve will expand capacities in Textiles and reinforce Customer-delight by manufacturing world-class quality using state-of-the-art technology. Core values

Total Customer Delight Competing with the best Total Quality People High Product Quality is a Way of Life Continued Improvement through Innovation and Creativity State of Art Technology with ultra-modern R&D Facilities Respect of Every Oswal Group Parivar Member Achieving Excellence through Culture Integration Change is a Way of Life Act as responsible corporate citizen and discharge our social responsibilities

Quality policy Quality is built into the company's products to not only meet customer requirements continuously, but exceed them. The company will achieve this through an interface with the market place, access to state of the art technology, continuous R&D, Process Development and adoption of innovative manufacturing and marketing strategies.

The quality policy is integrated with the company's main objectives:

To remain market leader in quality. Increase market share with focus on niche segments. Improve productivity Cost reduction Reduction in percentage of seconds.

The management is committed to provide resources and comply with all requirements needed for fulfillment and continual improvement of quality management system.

Quality culture is created throughout the organisation through training and motivation of people at all levels. The quality policy is implemented through a network of systems and procedures understood and followed throughout the company.

COMPANY STRUCTURE

OSWAL GROUP

VARDHMAN POLYTEX LIMITED

OSWAL F.M HAMMERLE TEXTILE LIMITED

VARDHMAN POLYTEX LTD.,BATHINDA (SPINNING)

VTM,LUDHIANA (SPINNING & DYEING)

ANSHUPATI, LUDHIANA (SPINNING )

A.M.KRYON, LUDHIANA (READYMADE GARMENTS)

ANSHUPATI TEXTILES LIMITED, based at Ludhiana (Punjab), was setup in 1991 with an
installed capacity of 8000 spindles to manufacture Grey/Dyed Acrylic Yarn, Fancy yarn. The Acrylic Yarn is used in the manufacturing of Hosiery & Knitted Garments. This Unit also manufactures the Acrylic Yarn which is used in manufacturing of Mink Blankets. Presently it has the capacity of 12000 spindles. The quality yarn in this unit is manufactured using technology imported from Europe, which is fully backed with ultra modern R&D equipment for consistent quality. The yarn manufactured from this unit has demand both in domestic and international market. The present capacity in terms of production is approximately 7.5 ton/Day.

VINAYAK TEXTILE MILLS, The Company has setup this Unit in 2004 at Ludhiana with an
installed capacity of 25000 spindles. The Unit has latest state-of-the-art-technology imported from Rieter (Switzerland), Murata (Japan) & Uster (Switzerland). The Company has also installed a Dye House at the same location having capacity of 13.2 MT per day with latest machinery imported from Fongs (China).Company under this unit is manufacturing 100% cotton yarn with vast range of count selection varies from NE 20 to 40 both in carded and combed varieties.Presently,It has installed capacity of 50000 spindles. The present production capacity is around 30-mt/Day and 13-mt dyeing /day.

Oswal F. M. Hammerle Textiles Limited is a joint venture company promoted by Oswal Group,
primarily engaged in textile manufacturing right from spinning to garmenting in India. OFMHTL is a flag-ship company of Oswal Group and is aiming to cater the market of premium shirting segment by providing finest quality top of the line shirting fabrics for dress wear. OFMHTL is a joint venture between F. M. Hmmerle, Austria and Oswal Group, who has a formidable presence in global textile business since long. By clearly defining assignments in the management of the company, Dr. R. Mittal is Group CEO responsible for entire business, A. K. Joshi, Unit Head for managing the entire Unit, B. Ghosh, Manufacturing Head, Dr. A. Thakare is TQM Head, and G. Natarajan, Chief Engineer, a strong synergy exists between the individual departments with a dynamic approach also in plant operations.

As a matter of fact during the last two years, in other words between 2006 and 2007, some 66 million USD has been invested into this new project so far. This has meant not only the entire complement of machines has been commissioned, but also emphasis was focused on new storage facilities, information systems, logistics and an intensive and comprehensive personnel training program. Manufacturing capacity is 12 million meters per annum in Premium Quality Shirting Fabric for dress wear. Our product is made from 100% Giza cotton and that too with VAT dyeing. Primarily our yarn count range is from 40s Ne to 80s Ne in single and from 2/80s Ne to 2/140s Ne in two ply yarn for 180 ~ 200 average GSM of finished fabric.

VARDHMAN POLYTEX LIMITED, a unit based at Bathinda(Punjab) The company has

completed its expansion project and with this, the total capacity of the company has increased to over 1 lakh spindles making it one of the largest in Northern India. with Present installed capacity of 1,04,592 spindles, is manufacturing 100% cotton yarn, Polyster cotton yarn, lycra, slub and viscose yarn with vast range of count selection varies from NE 10 to 40 both in carded and combed varieties. The Unit is situated in the hub of COTTON BELT and derives the advantage of procuring its basic raw material of best quality at lower cost from nearby locations. the Company has also set up an independent Cotton Purchase Office in Bathinda for the selection & procurement of Cotton to meet out its requirement in all the Units The company had been awarded the Export House status by the Government of India. The present capacity in term of production is around 65000 Kg/da. CURRENT SET UP: Presently the Company has its corporate office situated at Chandigarh Road, village Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are looked after by qualified technocrats/professional at plant/work as well as at corporate office having experience in their respective fields of management. Presently Mr.Ashok Goyal is the Chief Executive of Vardhman Polytex limited.

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

Bathinda (VPL)

1,04,592

65000kg/Day

Cotton, synthetic, Blended yarn, lycra, slub Acrylic Yarn

Ludhiana (Anshupati Textile) Ludhiana (VTM) (spinning & dyeing)

7.50 MT/Day

30-MT/Day 100% Cotton yarn 13-MT dyeing/Day

HIGHLIGHTS OF VPL- BATHINDA

COMPUTERISATION
Presently the unit is operating under SAP. The system work completed & come into working from April 2007. This system is well structured keeping in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The Server for this is situated at LUDHIANA. The feature of system is that data related to all units are available at different units & branches. Each department can access data related to different units at their own site subject to authorization. Personal computers have also been provided separately for each department like administration, costing, R&D, Maintenance as well as the production areas.

RESEARCH AND DEVELOPMENT

VPL has a well-established R&D department to assure quality and supervise yarn manufacturing from the very first stage of raw material procurement i.e. cotton purchasing to the final stage of finished goods manufacturing i.e. yarn. All the stages have pre-established standards and the output of every step is tested in comparison to these standards in the ultra modernized machines like HVI-(Higher Volume Instrument), AFIS, UT-3- (Uster Tester) and the deviations reported at the earliest .All of this machinery is totally imported and checks for the various parameters of yarn like Its strength, elongation, trash, length, color, fineness, moisturizer etc is done. At the End, fabric produced is also tested and graded so that the quality could be assured and Contamination is reduced. VPL also has a Process Developmental Cell to improve processes and gain efficiency.

I.S.O. CERTIFICATION
The unit had been awarded ISO-9002 certificate by Bureau of India standards. The ISO certification is an assurance of good quality of the product. At present, unit had been awarded ISO-9001 2000 by bureau of India Standard.

PROCUREMENT OF COTTON
The raw material required for yarn manufacturing is cotton and the cotton requisite of VPL is sent to the corporate office which purchases it by its COTTON PURCHASE OFFICE located in Bathinda .The selectors of COTTON PURCHASE OFFICE visits the local cotton markets in the towns of Punjab, Haryana, Rajasthan where they with

the help of cotton brokers enter in the agreement with Ginning factory owners. Along with the selector of CPO, ginning factory owner goes to the cotton market and selects the cotton in the unit of bales. After ginning this cotton is dispatched and payment made with the help of commission agent.

MARKETING For Marketing of different product, the unit is having a modern marketing department headed by experienced team that 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 VPLs having the export and domestic ratio is 18:82. The unit is having different channels for distribution of its products. 1. 2. 3. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur. Branches at Delhi and Ludhiana. Direct Dispatches are also made by the units.

PRODUCTION The unit is producing difference types of yarn both for Domestic consumption and Export purpose. The production department is headed by G.M (Tech).The department has four units. The unit I is related to the production of cotton yarn and Lycra. The unit II is for the production of cotton yarn, slub & unit-II expansion is for the production of Polyester, Cotton yarn, blended yarn & unit III partially Polyester & 100% Cotton yarn . Unit IV is related to the production of cotton yarn. EXPORTS The exports at the group level started in 1985-86 due to increased govt. attention during that period. For promoting the export govt. has also assigned the export house status to the group in the late eighties. Export and Domestic ratio of VPL is 18:82. Company has been awarded with 2 star EXPORT HOUSE Certificate. VPL exports yarn to countries like BANGLADESH, HONGKONG, KOREA, MALAYSIA, PHILLIPINES, SINGAPORE, SRI LANKA, VIETNAM, PORTUGAL Etc. INDIGENEOUS CUSTOMERS

The indigenous customers of VPL, Bathinda; are industries like RAYMOND, SURYA LAKSHMI, and cities like DELHI AND LUDHIANA in the North, TRIPURA in the South etc. COMPETITORS VPL is in tough competition with VARDHMAN GROUP; NAHAR GROUP, LUDHIANA; TRIDENT etc.

ORGANISATION STRUCTURE
It shows the various hierarchical level of the organisation. It is a department line oragnisation which is divided into various department headed by their respective department heads. All department operate under the ultimate control of Chief Executive Mr. Ashok Goyal. The order flow directly from unit head of different departmental heads down the line to respective department subordinates. Account organisation structure is followcontrol and commercial

ORGANISATION STRUCTURE
A.G.M (Accounts and Commercial)

Accounts

Costing and Commercial

Finance Executive I Staff (S4)

Finance Executive II A.M Costing Staff (S3) Executive (Commercial) Assistance Executive A.G.M Commercial

Staff (S2)

Staff (S1)

Staff (S1)

Assistance Officer Junior Assistance Officer Waste Raw Material

Assistance Supervisior Junior Assistance Officer Yarn Sales

S.W.O.T ANALYSIS
Due to seasonal avialability of raw material is purchased in bulk during the month between October to March so the most part of current asstes is covered by inventories. Liquidity ratios of VPL are too high because of maintaining more inventory stock of raw material.

Raw material is purchased by corporate office for all the units in bulk to get the advantages of bulk purchasing. The cost of raw material fluctuates depending upon the availability of crop in the particular season, so it affects the finished product price. The operating cycle of VPL is very high due to the high raw material conversion period because raw material is a seasonal product. They have adopted the advanced computerized accounting system Like SAP and Advanced Tally Program. Now VPL has increased its share in the Foreign Market and also has been increasing in domestic market.

 For filling its fund requirement VPL depends upon the Canara bank & State bank of India. It holds the cash only for transaction purpose. Corporate office holds the cash for major receipts & payments. EOQ technique is not followed by VPL for purchasing cotton because cotton is a seasonal product. Also EOQ is not followed in stores.

Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.

1. MIXING The different varieties of cotton are issued as per product mix from the raw material section in bales. The different varieties of cotton and different lots are mixed together as per the requirement of end product and standard recommended mixings. The material is conditioned in mixing for 24 hours.

2. BLOW ROOM In this process, the cleaning and opening of fibers is done in a sequence of beaters. Main purpose is to reduce tuft size, remove the trash particles and foreign matter etc, which often comes in the bales. 3. CARDING In this process, further cleaning of fibers is done and the fibers are opened into single fibers extent i.e. the main purpose is further removal of trash in cotton and the industrialization and parallelization of fibers. From the carding machine, the material is delivered in the form of sliver. 4. DRAW FRAME The purpose of this process is to reduce the wt/yard in the card sliver 6 to 8 end of card slivers are doubled together in this process to reduce variations and further drafting is done to reduce the wt/yard of delivered sliver. Two passages are given at the draw frame stage. In case of combed counts, the card sliver is fed to the precombing draw frame. The purpose of combing draw frame is to reduce the wt/yard variations in the card sliver and to parallelize the fibers. Singles passage is given at the precombing stage.

5. LAP FORMER 20-25 precombed draw slivers are fed together to produce a lap sheets of fibers, which is wound on the spools.

6. COMBERS The laps prepared on lap former are fed to combers. The main purpose of combing process is to remove the short fibers from the material in the form of noil. The average noil percentage carries from 15% to 18%. The material is delivered in the form of sliver. 7. SPEED FRAME The finisher draw frame sliver is fed to the speed frames for conversion into the roving form. In this process the wt/yard of the sliver is reduced, slight twist is given to the fleece and the material delivered in the form of roving, wound on the plastic bobbins.

8. RING FRAME The roving is fed to ring frame for conversion into yarn. In the process, the weight / yd of roving are reduced as per requirement of ultimate user and the delivered yarn is wound on the plastic bobbins. 9. WINDING In this process, the yarn is wound on paper cones to produce bigger package, as per requirement of the market. The weight / package vary from 1.2 kilograms to 2.1 Kilograms. During the process, in addition to the formation of bigger packages, the yarn faults are also removed with help of electronic yarn cleaner. 10. DOUBLING In the case of type cord the process is same up to cone winding. After cone winding the yarn is fed into Cheese Winding. In the process 2 ply or 4 ply is to be done as per requirement. After the yarn is fed into ring doubling and required T.P.I. is given in 2 ply or 4 ply yarn. In the next process in assembly cheese winding is get the package in the package in the required from to be fed into T.F.O. in T.F.O. final yarn is prepared in the form of cheese and required T.P.I. is given to the final yarn in process. 11. . PACKING In this process, the cones / cheese are packed in bags or cartoons as per the requirement of the market. In addition to the packing the material is checked thoroughly to avoid mixing of different materials.

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. So it helps in future planning and control decisions. OBJECTIVES OF THE STUDY The objectives of the study are as follows: a. b. c. To analyze the working capital management of the company. To determine the operating cycle of the unit. To know the future need of working capital in the running organization. To find out how the working capital needs are fulfilled. To find out whether VPL is maintaining the satisfactory level of working capital. Cash management Receivable management Inventory management

Also to study the following aspects of the working capital management:

SCOPE OF THE STUDY The study is conducted at VPL BATHINDA for 6 weeks duration. The concept of working capital i.e. both gross and net working capital is used. To get the proper understanding of the concepts, balance sheet and profit & loss a/c have been studied. The scope of study is limited up to availability of financial records and information provided by employees. The study is related to period of last three years. RESEARCH METHODOLOGY Collection of data from various department of VPL to analyze the working capital Collection of information

management of VPL. department. (1) Primary data personal interview with senior officials and from finance and accounts

(2) Secondary data it is available within the company itself (annual reports). Certain required visits have also been made at the requisite offices. The tools used for analysis are :Operating Cycle analysis Ratio Analysis Common size statement Schedule of changes in working capital. The overall position of VPL is studied and analyzed Suggestions are given on the basis of findings for better understanding of working capital management.

LIMITATIONS OF THE STUDY Since this was not the season of cotton purchase and hence the practical process of As the receipts from debtors is directed to the corporate office and hence not much Investment of funds are also made by corporate office, so it becomes difficult to

procurement of cotton could not be studied. information regarding the receivable management could be obtained. know that how much investment is made in different ways for continuous availability of funds.

MEANING OF WORKING CAPITAL:In simple words working capital means those funds that a business require for carrying out its day to day operations which includes funds for the purchase of raw material, payment of wages and other day to day operations of business. In other words, working capital refers to that firms Capital, which is required for short term assets or current assets. Funds thus invested in current assets keep revolving last and being constantly converted into cash and this cash flow is again converted into other current assets. Hence it is known as circulating or short term capital.

DIMENSIONS OF WORKNG CAPITAL

The basic goal of the working capital management is to manage the current assets and liabilities of the firm in such a way that a satisfactory level of working capital management is maintained. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. In this context, working capital management is three dimensional in nature: a) b) c) Dimension 1 is concerned with the formulation of policies with regard to profitability, risk and liquidity. Dimension 2 is concerned with the decisions about the composition and level of current assets. Dimension 3 is concerned with the decisions about the composition and level of current liabilities.

CONCEPT OF WORKING CAPITAL

1.

Gross Working Capital

It is simply called working capital, which refers to the firms investment in current assets. So the total current assets of the firm are known as gross working capital.

2.

Net Working Capital

It represents the difference between current assets and current liabilities. Net working capital may be positive or negative. Positive net working capital is that when current assets are more than current liabilities. But when current liabilities become more than current assets than it is negative working capital. In brief we can say that working capital is too much necessary for the smooth functioning and proper utilization of fixed assets. Gross working capital and net working capital of VPL for the last three years are as follows: (In crores)
Particulars Gross Working Capital Net Working Capital 2006-2007 79.22 71.15 2007-2008 111.96 95.36 2008-2009 83.81 67.15

From the above we can say that the working capital requirement of VPL has decreased in 2008-09 as compared to previous years.

TYPE OF WORKING CAPITAL 1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working capital also arises continuously. But the magnitude of current assets needed is not always same; it increases and decreases over time. However there is always a minimum level of current assets. This level is known as permanent or fixed working capital. 2. Temporary Working Capital:

The extra working capital needed to support the changing production and sales activities, is called variable or functioning or temporary working capital. This can be shown in the following diagram:-

Amount of Working Capital Temporary capital

Permanent Capital Time

NEED FOR WORKING CAPITAL

The need for working capital cannot be overemphasized. The need of working capital arises due to the time gap between production and realization of cash from sales. So the working capital or investment in current assets becomes necessary need for working capital. It arises due to following reasons:-

A.

OPERATING CYCLE
Operating cycle is the time duration requires for converting sales into cash after the conversion of

resources into inventories. First of all a firm purchase Raw Material, then after some processing it is converted into workin progress and after this further processing is done to convert workinprogress in finished goods. After the raw material is converted into finished goods, sales are made. Sales are not always fully cash sales; there are credit sales also. These credit sales after some period are converted into cash. So the whole process takes the time. This time taken is known as the length of operating cycle. So operating cycle can be shown as following:-

So operating cycles includes:1. 2. 3. 4. Raw Material conversion period (RMCP) Workin progress conversion period (WIPCP) Finished goods conversion period (FCP) Debtors Conversion period (DCP)

If the length of the operating cycle has short length period then less working capital is required & vice versa. So working capital requirement is directly related with operating cycle. Operating cycle may be of two types 1. 2. Gross Operating cycle Net operating cycle

1.

Gross Operating cycle Gross Operating cycle is the total time period from the conversion of Raw Material into finished

goods and finished goods into sales and then sales into cash. GOC =RMCP + WIPCP + FCP + DCP 2. Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to us for payment to them. So this reduces our requirement of working capital. This also affects the operating cycle. Operating cycles length reduces with so many days as provided by the creditors to us. The difference between gross operating cycle and period allowed by the creditors for payment is known as net operating cycle. NOC = GOC CPP

B.

WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

NEEDS FOR FUTURE:These needs may be of Raw Material or Finished Goods. Sometimes because of nonavailability of Raw Material or due to seasonal availability of Raw Material some advances stock of Raw Material becomes necessary for company. In the similar way due to sudden arise of demand of finished goods in future more finished goods are kept in stock. For both reasons more working capital is required because funds will be involve in these safeties stock.The same applies to VPL as they have to maintain stock due to seasonal variation.

Sources of working capital

1) Permanent or fixed: - Shares. - Debentures. - Public deposits. - Ploughing back of profits. - Loans from financial institutions. 2) Temporary or variable: - Commercial banks. - Indigenous bankers. - Trade creditors. - Installment credit. - Advances. - Accrued expenses. - Commercial paper. - Accounts receivable.

DETERMINENTS OF WORKING CAPITAL: Followings are the main determinants of working capital.
1. Nature and Size of Business :

The working capital of a firm basically depends upon nature of its business .Since VPL is a manufacturing unit and has a continuous business cycle and hence the working capital requirement is large as compared to the trading concerns. The size of business also determines working capital requirement and it may be measured in terms of scale of operations. Since VPL has a greater scale of operation so it requires larger amount of working capital. 2. Manufacturing Cycle:

The manufacturing cycle also creates the need of working capital. Manufacturing cycle starts with the purchase and use of Raw Material and completes with the production of finished goods. If the manufacturing cycle will be longer more working capital will be required or vice versa. VPL has a manufacturing cycle of 4-6 days that varies depending upon the type of yarn. The manufacturing cycle being small, so the working capital required due to this factor is less. 3. Seasonal variation:

In VPL raw material is not available throughout the year. They have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the year. Generally, during the busy season, a firm requires large working capital than in the slack season. 4. Production Policy:

Production policy also determines the working capital level of a firm. Whether the concern has a steady or a fluctuating production policy is the issue that matters. As VPL has seasonal availability of raw material but the production policy is stable which means that the production procedure is carried out throughout the year due to which the working capital requirement is high. 5. Firms Credit Policy:

The firms credit policy directly affects the working capital requirement. If the firm has liberal credit policy, hence the more credit period will be provided to the debtors so this will lead to more working capital requirement.

VPL has a creditors conversion period of 13 days which is quite good and hence the working capital requirement due to this factor is small. 6. Sales Growth: Working capital requirement is directly related with sales growth. If the sales are growing, more working capital will be needed due to arises need of more Raw Material, Finished goods and credit sales. However there is a decrease in sale of almost Rs 8 crores,as merchant export shifted to Anshupati textile Ltd.& Rs.appreciation, but still the working capital requirement is more due to more production. 7. Price Level Changes: Changes in the price level also effects the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of current assets. Due to change in wage rates & as the cotton prices has shown huge change, there has been much change in the working capital requirement of VPL due to these price level changes. 8. Condition of Supply: The inventory of raw material, spares and stores depends on the condition of supply. Since in VPL, the supply of cotton is seasonal and as the spares is imported more as compared to other industries. 9. Other Factors: Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, time lag Etc. also influence the requirement of working capital in VPL. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. and has to be stocked so here the working capital requirement is working capital as more funds will be required to maintain the same

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 of working capital management is to manage current assets and current liabilities of a firm in such a way that a satisfactory 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 relating to working capital management: 1. 2. What should be ratio of current assets to sales? 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 do, 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 if a firm follows a highly aggressive current assets policy, it would carry a low level of current assets in relation to sales.

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 longterm sources are used for financing permanent current assets and fixed assets & short-term sources are used for financing temporary current assets:

Temporary current assets Short term financing A S S E T S

term financing Permanent current assets Long term financing

Fixed Assets Time CONSERVATIVE APPROACH In this approach there is more reliance on long-term financing in comparison to short-term financing. Even some part of the temporary current is compared to finance from long-term sources because longterm sources are less risky in comparison to short-term Temporary Current Assets A S S E T S 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 A S S E Permanent current assets T S Fixed Assets Time

Short term financing

Long term financing

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

WORKING CAPITAL ANALYSIS

OPERATING CYCLE ANALYSIS
Operating cycle refers to the time period which starts from the raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to total debtors collection. This is also known as working capital cycle. Operating cycle is therefore expressed in terms of months or weeks or days. Higher the operating cycles 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.

OC = RMCP + WIPCP + FGCP + DCP CPP Where, OC=OPERATING CYCLE RMCP = raw material conversion period WIPCP = work in process period FGCP = finished goods conversion period DCP = debtor collection period CPP = creditors payment period 1.Raw Material Conversion Period (RMCP) = Average Raw Material Stock

X 360 (In crores)

Raw Materials consumed during the year

PARTICULARS Opening Stock of Raw Material Closing Stock of Raw Material 2006-07 51.95 50.22 2007-08 50.22 69.63 2008-09 69.63 46.47

Average Stock Raw Materials consumed RMCP

51.085 133.96 137

59.93 129.79 166

58.05 168.57 124

(2) =

Work in Progress Conversion Period (WIPCP) Average stock in progress X 360 (In crores)
PARTICULARS Opening Stock of WIP Closing Stock of WIP Average Stock Cost of Production WIPCP 2006-07 1.61 1.59 1.60 184.54 3 2007-08 1.59 2.17 1.88 177.60 3.81 2008-09 2.17 2.77 2.47 231.85 3.84

Cost of Production

(3) =

Finished Goods Conversion Period (FGCP) Average Finished goods inventory Cost of goods sold
PARTICULARS Opening Stock of FG Closing Stock of FG Average Stock Cost of Goods Sold FGCP 2006-07 3.13 1.22 2.18 197 4

X 360 (In crores)

2007-08 1.22 7.63 4.43 179.89 8.86 2008-09 7.63 3.97 5.8 246.43 8.47

(4) =

Debtors Conversion Period (DCP) Average Debtors X 360 (In crores)

PARTICULARS Opening Debtors Closing Debtors Average Debtors Credit Sales 2006-07 16.23 19.97 18.10 229.28 28.42 32.18 2007-2008 19.97 15.46 17.72 198.15 21.14 2008-2009 15.46 14.42 14.94 254.31

Credit Sales

(5) =

Credit Conversion Period (CCP) Average Creditors X 360

Credit Purchases (In crores)

PARTICULARS Opening Creditors Closing Creditors Average Creditors Credit Purchases CCP 2006-07 .89 1 .80 1.35 108.48 4.46 2007-08 1.80 2.65 2.22 148.69 5.37 2008-09 2.65 1.67 2.16 144.50 5.38

GROSS OPERATING CYCLE

Year RMCP 2006-07 137 2007-08 166 2008-09 124

WIPCP 3 3.81 3.84

FGCP 4 8.86 8.47

DCP 28.42 32.18 21.14

GOC 179.39 206.49 157.45

NET OPERATING CYCLE Year 2006-07 2007-08 2008-09 GOC 179.39 206.49 157.45 CCP 4.46 5.37 5.38 NOC 174.39 201.12 152.07

ANALYSIS It is claimed that gross operating cycle of VPL has decreased in 2008-09. It was 206 days in 2007-08 an then it decreases to 157 days in 2008-09. The main reason of decreasing gross operating cycle was more availability of raw material in the stores. But as compare to 2006-07, the period of 2007-08 has shown up down from 179 days to 206 days & this was due to the reduction in all the conversion periods i.e. falling of RMCP from 155 days in 2006-07 to 137days in 2007-08, coming down of FGCP from 9 days to 4 days . Even the CCP has also reduced by 1day.

ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS OF THE HISTORICAL DATA There are number of devices to analyze working capital like ratio analysis, common size statement etc. We will discuss them one by one as follows: I .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. The main ratios related with working capital are as above: LIQUIDITY RATIOS Liquidity refers to the ability of a concern to meet its current obligations as and when these become due. It measures short-term solvency of the firm. 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. A current ratio of 1.5:1 for manufacturing industries is considered to be satisfactory. Current Ratio = Current Assets Current Liabilities Current Ratio of VPL Year 2006-07 2007-08 2008-09 ANALYSIS The current ratio of the unit is above the standard and it guarantees the payment of dues in time. Although the company ratio is decreasing as a result of less amount of cash in hand & bank balance & also due to low amount of debtors, but still the current ratio of the company has been considerably high because they had made over investment in inventories, and also there has been increase in loans and advances which is the main reason for the high ratio of current assets. Inventories are high because of seasonal availability of raw material. Current assets of the unit appears to be on higher side reason because of main credit limit for the group stands in corporate office books. unit has been allocated sub limits to the extent of the Rs. three crores only. Current Assets 79.22 111.96 83.81 Current Liabilities 8.07 16.60 16.66 Current Ratio 9.81 6.74 5.03

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

Quick Ratio of VPL Year 2006-07 2007-08 2008-09 ANALYSIS According to rule of thumb, for manufacturing industries it should be .62:1. In all the above years it has been very low than the rule of thumb but as compare to previous years this year it has shown more downfall because of much increase in current liabilities as compare to increase in current assets. ABSOLUTE LIQUID RATIO Absolute liquid ratio shows the relationship between liquid assets that include cash, bank and marketable securities. Absolute Liquid Ratio Current Liabilities Absolute Liquid Ratio of VPL Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio = Absolute Liquid Assets 6.71 Quick Assets 25.34 39.78 1 6.60 16.66 0.40 Current Liabilities 8.07 2.39 Quick Ratio 3.14

2006-07 2007-08 2008-09 ANALYSIS

0.23 0.93 0.43

8.07 16.60 16.66

.0028 .0056 .0025

The acceptable standard for this ratio is 0.5:1. Thus, we can say that in all the years, it is below the standard due to very less cash and bank balance maintained because major cash receipts and payments are handled by corporate office. It is very less in 2006-07, 2007-08 and even in 2008-09 its decreasing as no idle cash is kept with the unit. 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= Net Working Capital Working Capital Ratio of VPL Year 2006-07 2007-08 2008-09 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. This ratio has reduced from earlier but still stock is major part of net working capital. II COMMON SIZE STATEMENT ANALYSIS This analysis is mainly to see the composition of working capital. Its purpose is to see the %age of each asset to the total asset and %age of each liability to total liability. Sales 229.28 198.15 254.31 Net Working Capital 71.15 103.36 67.15 3.78 Working Capital Turnover ratio 3.22 1.91 Sales

COMMON SIZE STATEMENT (In crores)

PARTICULARS

2006 07 AMT %

2007 08 AMT %AMT

2008-09

CURRENT ASSETS Inventories S. Debtors Cash & Bank Loan & Advances TOTAL CURRENT LIABILITES S. Creditors Trade creditors Capital creditors Advances Other Liabilities Security Deposits TOTAL 1.80 24.97 8.8 58.94 1.67 17.09 53.66 16.23 0.94 4.65 75.48 71.09 21.50 1.24 6.16 100 80.08 19.97 0.22 16.20 116.47 68.75 17.14 0.18 13.90 100 53.45 15.46 0.25 15.68 84.84 63.00 18.22 0.29 18.48 100

0.38 4.99 0.04 7.21

5.28 69.20 0.55 100

0.33 5.76 0.45 14.93

2.21 38.58 .27 100

1.28 6.64 0.18 9.77

13.10 67.96 1.84 100

Analysis 2008-09 A big portion of current assets are involved in inventories near about 63.00% and sundry debtors about 18.22%. The share of loan and advances has also increased with the figures about 18.48%. Although, the share of cash and bank balances has increased from 0.11% last year to.0.29% this year. On the other hand, Sundry creditors hold 17.09% and other liabilities at 67.96 current liabilities. So altogether we may say that in 2008-09 assets have decreased due to decrease in inventories and loans and advances increase as compared to previous year. While on the side of current liabilities though this has also increased due to increase in sundry Creditors & other liabilities but this increase is compensated by increase in current assets. from the major portion of

Hence, the working capital requirement of yr 2008-09is the highest as compared to last 3 years. Schedule of changes in working capital (2008-09) Particulars Current assets Inventories Debtors Cash & bank Loans& advances Total Current liabilities Creditors Advances Other liabilities Security deposit Total Working capital (C.A-C.L) Net increase in working capital Total Opening Closing Effect on working capital Increase Decrease 26.63 1.26 0.03 0.52

80.08 15.46 0.22 16.20 119.26

53.45 14.2 0.25 15.68 83.58

2.65 0.33 5.76 0.04 8.78 110.48 110.48

1.67 1.28 6.64 0.18 9.77 73.81 36.67 110.48

0.98 0.95 0.88 0.14

27.39 29.39

29.39

CASH MANAGEMENT Cash management refers to management of cash balance and the bank balance and also includes the short-term deposits. The cash is important current asset for the operation of the business. Cash is the most liquid and can be used to make immediate payments. The term cash includes coins, currency and cheques held by the firm and balances in its bank accounts. Sometimes near- cash items such as marketable securities of bank item deposits are included in cash. A financial manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the firm. For this he will have to forecast the cash inflows from sales and outflows for costs etc. This will enable the financial manager to identify the timings as well as amount of future cash flows. Cash management does not end here and the financial manager may also be required to identify the sources from where cash may be produced on a short-term basis or the outlets where excess cash may be invested for a short term. Cash is the basic input needed to keep the business running on continuous basis. Cash shortages will simply disturb the firms manufacturing operations where excessive cash will simply remain idle. Thus, firm should keep sufficient cash neither more nor less. Hence, a major function of the financial manager

is to maintain a sound cash position. Cash management is one of the key areas of working capital management. Cash management is concerned with the managing of: Cash inflows and outflows of the unit Cash flows within the unit Cash balance held by the unit at a point of time by investing surplus cash.

MOTIVES FOR HOLDING CASH Transaction Motive It means a firm holds cash to conduct its business in the ordinary course. So enough cash for smooth business is required for transaction motive, as it is needed to make payments for purchases, wages and salaries, taxes, dividends etc. Precautionary Motive Under this motive cash is held to meet contingencies in future. There may be so many reasons due to which the emergency of cash arises. These reasons can be: (i) (ii) (iii) and low risky. Sudden rise in the demand which leads to more production Due to inflation Due to any miss-happening in future like loss by fire theft etc. the cash is held for

precautionary motive in advance. This cash may be held as marketable securities that are highly liquid

In VPL, it holds cash only for transaction motive. Precautionary motives cash is held by corporate office. If the VPL requires some more cash to meet any future contingency then, it informs about it to corporate office and corporate office sends cash to VPL as per requirements. But the VPL has to give the reasons for extra cash to corporate office. The firm should evolve strategies regarding the following four facts of cash management: (1) (2) (3) (4) 1. Cash Planning Managing the cash flow Optimum cash level Investing surplus cash CASH PLANNING

Cash planning is a technique to plan and control the use of cash. Cash planning help to anticipate future cash flows and reduces the possibility of idle cash. Cash planning may be done on daily, weekly and monthly basis. Cash budget is the most significant device to plan for and control cash receipt and payments. The unit under the study makes cash planning through following tools: Cash Budget Rolling cash flow statement Daily cash flow statement

The cash budget is a summary statement of the firms expected cash inflows and outflows. The cash budgets are prepared by the firm on monthly and yearly basis. Their estimates show the requirement of cash in the unit. Another device used for cash planning is six monthly rolling cash flow statement prepared on monthly basis. This statement shows the projections of inflows and outflows of cash during the next six months. This statement can help in taking various decisions, if the unit wants to make any capital payment, these statements can tell when there is surplus of cash and payments can be made during the month.

MANAGING CASH FLOWS Significant part of cash management is the management of cash flow both inflows and outflows without any loss to the unit and without impairing its goodwill in the market. These are made at head office Ludhiana so the main source of cash inflows to VPL is the cash credit limit, which is as follows:

Banks

Main Limit (in lacs) SANCTIONED BASED LIMIT OUT STANDING AS ON 31ST MARCH

Sub-limit transfer to BTI Unit (in lacs)

Canara Bank State Bank of India State Bank of Patiala Punjab And Sind Bank

6600 4782 2350 1250

09 6448 4496 2109 970

220 50

Bank of Baroda Punjab National bank Axis Bank Corporation Bank TOTAL

1593 1200 1000 500 19275

1544 875 879 258 17579

25 295

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for fulfilling dayto-day requirements of working capital. The daily bank-position of sub-limits is faxed to H.O. for monitoring daily bank position. In case of drawn in sub-limits the funds get transferred from main limits. The interest rate paid for this is near about 10%. The cash credit limits are sanctioned by the bank against the hypothecation stocks and fluctuating assets as security. The unit can withdraw from these limits as and when needed. The amount received from the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash management the surplus funds are transferred to other units if those units need cash thus increasing the overall profitability. Main outflow of the unit is on raw material cost. Different types of raw material are purchased from different states. Normally cotton is purchased during peak season when good quality cotton is available, generally payment for cotton is made when cotton is received in the mill, and credit period depends upon the states from which cotton is purchased. Cash outflows also arise on account of purchase of

stores, spares and all other material normal credit for these products is mainly 30 to 60 days and full credit period is used. 2. DETERMINING OPTIMUM BALANCE An efficient finance manager always aims at preparing the cash and bank balance at the optimum level. The cost of excess cash and danger of cash deficiency should be matched to determine optimum level of cash balances. The unit always keep 4.50 to 5 lacs for the routine expenses, around the days of wages the amount is approx. 10 lacs per day is kept in hand, thus the unit maintains the appropriate amount of cash balance and meets the firms obligations as and when they due. 3. INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to maintain high level of assets during cotton season, which falls between Octobers to March. During April to September the company gets its cash credit limits reduced in the respective banks. The company has very good system of managing its current assets. The current assets of the unit are managed at corporate level and the unit seeks funds according to their requirements calculated on dayto-day basis. Hence there are no idle funds at unit level. As the funds are monitored / controlled at corporate level, therefore, it becomes the prime responsibility of H.O. to have a good policy of investing idle funds in an appropriate security keeping in view the requirement of funds in the future and liquidity of the security in which the investment is being made.

RECEIVABLES MANAGEMENT Accounts receivables are simply extension of credit to the firms customers, allowing them a reasonable period of time in which to pay for the goods. Most firms treat accounts receivables as a marketing tool to promote sales and profits. Every firm must develop a credit policy that includes setting credit standard, defining credit terms and employing methods for timely collection of receivables. The receivables (including the debtors and the bills) constitute a significant portion of working capital and are an important element of it. The receivables emerge whenever goods are sold on credit and customers receivables are created when a firm sells goods or services to its customers and accepts, instead of the immediate cash payment the promise to pay within specified period. Thus, receivables are a type of loan extended by the seller to the buyer to facilitate the purchase process. Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up the sale, which ultimately results in pushing up the profits earned by the firm. At same time, selling goods on credit

result in blocking of funds in accounts receivables. Additional funds are required for operating needs of business, which involves extra costs in terms of interest. Moreover, increase in receivables also increase chances of bad debts. The creation of accounts receivables is beneficial as well as dangerous. Receivables Management generally means what type of credit policy a firm should adopt so that sales and profits can be promoted on the one hand and funds can be economically utilized on the other hand.

OBJECTIVE OF RECEIVABLES MANAGEMENT

Receivables management is the process of making decisions relating to investment in trade debtors. Investments in receivables are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost considerations also. There is a risk of bad debts too.. The objective of receivable management is to promote sales and profits until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit. So the receivables management must be attempted by adopting a systematic approach which considers the following: (1) (2) THE CREDIT POLICY CREDIT CONTROL

1.

CREDIT POLICY

It may be defined as the set of parameters and principles that govern the extension of credit to the customers. This requires the determination of (i) (ii) customers. (iii) Collection efforts determine the actual collection period. These are discussed as follows: The Credit Standard: The credit standard i.e. the criteria to decide the type of customers to whom goods could be sold on credit. The credit terms i.e. the duration of credit and terms of payment by

When a firm sells on credit, it takes about the paying capacity of the customers. Therefore, to be on a safer side, it must set credit standard which should be applied in selecting customers for credit sales. The firm follows the criteria in selecting customers for the purpose of credit extension. So the credit standard is the combination of three Cs These are: (a) (b) (c) Credit Terms The credit terms refers to the set of stipulation under which the credit is extended to the customers. The credit terms may relate to the following: (a) Credit Period The credit period is an important aspect of the credit policy. It refers to the length of time for which credit is extended to customers. It may differ from one market to another market. E.g. if a firms credit terms are net 30; it means the customers are expected to pay within 30 days from the date of sales. As much the credit period will be shorter, it will be beneficial for a firm. But the firm has to lengthen its credit period to increase sales. But one must compare the cost of extended credit with the incremental profits. If this cost is less then it will be beneficial for company to increase the credit period. (b) Discount Terms It is reduction in payment offer to customer to induce them to repay credit obligation within a specified period of time. In practice credit terms would include: (i) (ii) (iii) The rate of cash discount The cash discount period The net credit period Character of a person- It refers to the customers willingness to pay. Capacity of a person- It refers to the customers ability to pay. It is evaluated by financial position of the firm. Condition of a person- it refers to the economic conditions which affect the customers ability to pay.

For e.g. Credit terms may be expressed as 2/5, net 20. This means that 2% discount will be granted if the customer pays within 5 days, if he does not avail the offer he must make payment within 20 days.

I.

CREDIT POLICY OF VPL

VPL not directly make sales. Sales are made by corporate office directly. So the sales process is centralized. As the sales process, the corporate office also collects debtors directly. Corporate office just receives the amount from the debtors. But it does not have any record of outstanding debtors. It sends the credit note to VPL after receiving amount against any debtors. So record for outstanding debtors is maintained by VPL itself. VPL sends fortnightly reports to corporate office that records the data about the outstanding debtors for different periods. In these reports debtors outstanding for one month or six months are shown separately. In this way, corporate office comes to know about age segments of different customers. Corporate office may avoid selling goods to those customers who have not paid for a long period. CREDIT POLICY VARIABLES 1. Credit Standards

VPL provides credit to customers after getting information about that customer. For this market research is done by marketing department to know about reputation of customer in the market and financial position of him. From the records of customers, the ability to pay is checked. Thus customer is only known after getting information about him and then credit is provided.

2. (a)

Credit Terms Credit Period For different products VPL provide different credit period. These credit terms 15 days

are according to the nature of product which is following -: To customer of cotton yarn In case of cotton yarn Advance payment/someday within 48 hours Within Week 15 days credit 1 % C.D. prior to material dispatch 0.85 % 0.50 % Interest free (b) Cash Discount

Afterwards 3.

18 % p.a. interest chargeable

Interest @ 18 % p.a., if payment is not made within the prescribed limits. CREDIT CONTROL

The next important step in the management of receivables is the control of these receivables. Following are the directions for controlling the receivables. (1) The Collection Procedure The overall collection procedure of the firm should neither be too lenient nor too strict. A strict collection policy can affect the goodwill and damage the growth prospects of the sales. If a firm has a lenient credit policy, the customer with a natural tendency towards slow payments may become slower to settle his accounts. One possible way of ensuring early payments from customers may be to charge interest on overdue balances. (2) Monitoring of receivables To control the level of receivables, the firm should apply regular checks and there should be a continuous monitoring system. For this, number of measures is available as follows: (i) (ii) A common method to monitor the receivables is the collection period or number of days outstanding receivables. Another technique available for monitoring the receivables is known as ageing schedule. Ageing schedule down book debts according to the length of time of which they have been outstanding. II CREDIT CONTROL

Collection efforts made by VPL: Due to cut-throat competition VPL has to make credit sales. To collect the funds Oswal group has adopted a decentralized method. Oswal group has established its collection centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from the debtors and send it to corporate office. The number of collection centers in a particular city depends upon the number of customers to minimize the bad debts and to accelerate the collections.1.5% commission is also paid to agents and 0.75 % in case of tyre cord to collect debtors. This percentage is only on the basis of the realization amount.

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT

Debtors Turnover Ratio (DTR)

This ratio indicates the number of times average debtors are turned over during a year. The higher the value of debtor turnover ratio more liquid is the debtors. Similarly low debtor turnover ratio implies less liquid debtors. Debtors turnover ratio Avg. Debtors Year 2006-07 2007-08 2008-09 Sales 229.28 198.15 254.31 14.94 Avg. Debtors 18.10 17.72 17.02 12.66 11.18 DTR = Sales

Debtor Conversion Period (DCP) The average no. of days for which a firm has to wait before its receivables is converted into cash. DCP DTR = 360

Year 2006-07 2007-08 2008-09

DTR 12.66 11.18 17.02

DCP 360/12.66 = 28.43 360/11.18 = 32.20 360/17.02 = 21.15

Analysis

The DTR ratio in 2006-07was 12.66 times which has been decreased to 11.18 in 2007-08 and 17.02 in 2008-09. And regarding DCP, it was 28 days in 2006-07, which has increased to 32 in 2007-08 and 21 in 2008-09. Thus little difference in DTR ratio indicates inefficient management of debtors because it means more collection period of debtors. Debtors collection period has been increasing from last two years that shows management is at back foot to collect the dues. So we can conclude receivable management of VPL quiet sufficient.

INVENTORY MANAGEMENT
Inventory constitutes the most significant part of current assets. Approximately 60% part of current assets is inventories. So the proper management of inventory is required for successful working capital management. As the larger amount of funds is involved in the inventories, so it must be carried with care for proper utilization of funds.

Nature of Inventories
In inventories we include:

a) b) c)

Raw Material: These are those basic inputs that are converted into work-in-progress through the manufacturing process. Work-in-Progress: These inventories are semi-manufactured products. Further processing has to be done of these products. Finished Goods: These are completely manufactured products. These products are those that are ready for sale.

Another type of inventory which is not directly related with production but facilitate in production process are supplies. Cleaning material, oil, fuel, electric tube etc are the supplies. OBJECTIVES OF INVENTORY MANAGEMENT There are so many objectives of inventory management. These objectives may differ from firm to firm. The main objectives of inventory management are: To make adequate investment in inventories so that funds can be best utilized. Smooth production in present and future. Smooth and uninterrupted sale processes. Minimize the cost related with inventories. To take advantage of price fluctuations.

INVENTORY MANAGEMENT TECHNIQUES For inventories management the two questions must be answered: 1) How much should be ordered? When should it be ordered? ECONOMIC ORDER QUANTITY (EOQ)

To get answer of these two questions we use two techniques which are as follows: Economic order quantity provides the answer of our first question. By this we come to know how much we must order in single time. So that all the cost related with inventory are minimum. Determining an optimum inventory level involves two types of costs (a) Ordering Cost and (b) Carrying cost. The EOQ is that inventory level, which minimizes the total of ordering and carrying costs. Ordering Costs

All those costs which are incurred in placing one order. It includes; requisition, transportation, receiving, inspecting, clerical and staff services. Ordering costs are fixed per order. Therefore they decline as the order size increases. Carrying Costs Cost incurred during the period inventory is lying in the stores is called carrying cost. It includes storage, insurance, handling, and taxes. Carrying costs vary with inventory. To calculate economic order quantity there is formula: EOQ = Where, A O C 2) = = = Annual requirement Ordering cost per order Carrying cost of inventory 2AO/C

REORDER POINT

Reorder point is that inventory level at which an order should be placed to replenish the inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage (c) EOQ Lead Time is the time normally taken in replenishing inventory after the order has been placed. Average Usage is the inventory used on average daily basis or average weekly basis. So, Reorder Point Reorder Point = = Lead Time x Average Usage If the firm also maintains safety stock then the reorder point will be: (Lead Time x Average Usage) + Safety Stock So when the inventory of reorder point will be in store then the order will be placed for purchase of inventory. In this way, the production process will not stop because the inventory will be available for that period. INVENTORY MANAGEMENT IN VPL Inventory Management of VPL is good. VPL has a different stores department. All the inventories except raw material purchases are handled by stores department. Stores department does its work very efficiently. INVENTORY PLANNING

For the planning of inventory requirement, budgets are prepared by different departments as per requirements. The material procurement during the budget period is regularly monitored so that it does not exceed budget allocation. This rule is strictly followed. For cotton, requirements are planned in consultation with production department. Stores department have nothing to do with it. PURCHASE OF RAW MATERIAL As in VPL raw material is cotton. First of all the requirement for cotton are determined by the production department than this requirement is sent to commercial departments. Commercial departments send these requirements to corporate office in detail. Then corporate office directs the cotton purchase office to purchase cotton in bulk not only for VPL but also for the other units of Oswal Group. Cotton is generally received in lots so one lot consists of 55 or 110 bales. As the cotton has seasonal availability, so the purchasing of cotton is made within the period of October to March. For the other months, cotton is purchased within these months & stored in warehouse. That is the reason VPL has high investment in cotton. DAILY REQUIREMENT OF COTTON For production daily requirement of cotton is 400 bales. The total daily production is 68000kg/day. STORAGE CAPACITY OF VPL Regarding Raw Material Inventory, VPL has 17 godowns. The capacity of 17 godowns is 45000 bales approximately. If capacity of store is exhausted in unit then it has private storage facility to store cotton. Regarding Finished goods Inventory, VPL has five godowns. Two godowns are for unit I for domestic and export purpose, one godown is for unit II and its expansion, one godown is assigned to unit-III.& the last remaining one is for unit IV. These godowns do not have electric fitting because cotton is highly inflammable. ISSUING OF INVENTORY When any department requires any inventory, it sends its requirement to stores department. The maximum time within the requirement must be met is 72 hours. Material is issued on the basis of monthly weighted average method. INSPECTION OF INVENTORIES

Inspection of inventory is made at the end of month randomly. The stock taking of all the items is not possible keeping in view number of items. INVENTORY CONTROL Inventory control is done by budgets as the budgets are prepared for the planning purpose. Total requirements for inventory during financial period are determined by budget. When the material is issued to any department then the total amount of material issue is deducted from the budget of that good and balance is calculated, only this balance quantity of inventories will be issued during the remaining financial period. These records are maintained on daily basis. For different units, the records are prepared separately. For inventory control not any ABC analysis or VED analysis is done. The company also doesnt follow standardized system of inventory like EOQ. In case of raw material as the input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the cotton season. In case of spares & stores, the inventory is easily available in market; therefore, the same is procured on requirement basis. The company always maintains stock of critical items, the failure / non-availability of which can cause less of production. As all the units of group are in spinning the stock of critical items, where the high value is involved in financial terms, the inventory is maintained in single unit. This could save lot of money that can be utilized in another area and it also helps to maintain inventory at optimum level. So we can say that overall inventory management of VPL is quite satisfactory.

ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT INVENTORY TURNOVER RATIO It indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which the firm is to manage inventory. Inventory (Raw Material) Turnover Ratio = Cost of Production

Average Raw Material Stock Year 2006-07 2007-08 2008-09 ANALYSIS The inventory turnover ratio has decreased from 3.61 times in 2006-07 to 2.96 times. It is due to increase in inventory because even unit-IV has started production. INVENTORY TO WORKING CAPITAL RATIO This ratio is usually calculated to study the liquid financial position of business enterprises. Inventory to working capital ratio Working Capital = Inventory Cost of Production 184.54 177.60 231.85 Avg. Stock of RM 51.08 59.93 58.05 ITR 3.61 times 2.96 times 3.99 times

Year 2006-07 2007-08 2008-09 ANALYSIS

Inventory 53.66 58.08 53.45

Working Capital 71.15 103.36 67.15

Ratio in %age 0.75 0.56 0.79

Too high and too low investment in inventory is not good for company. In 2006-07 it is 0.75% of gross working capital that has been decreased to 0.56% in 2007-08 and huge of 0.79% in 2008-09. As it has increased ,so inventories constitute a large part of gross working capital because raw material is available seasonably which shows more blockage of money.

120 Rupees in Crore 100 80 60 40 20 0 200506 200607 200708 200809

C. Assets C. Liability

Year

300 Rupees in Crore 250 200 150 100 50 0 2005-06 2006-07 2007-08 2008-09 Year Sale Working Capital

45 40 35 30 25 20 15 10 5 0 2005-06 2006-07 2007-08 2008-09 Year

Rupees in Crore

Liquid Assets C. Liability

18 16 14 12 10 8 6 4 2 0 2005-06 2006-07 2005-06 2008-09 Year

Rupees in Crore

A.Liquid Assets C. Liability

300 250
Rupees in Crore

200 150 100 50 0 2005-06 2006-07 2007-08 2008-09

year

Sale Debtor

FINDINGS
Due to seasonal availability of raw material is purchased in bulk during the months between Liquidity ratios of VPL are too high because of maintains more inventory stock of raw material. Raw material is purchased by corporate office for all the units in bulk to get the advantages of October to March so the most part of current assets is covered by inventories.

bulk purchasing. The cost of raw material fluctuates depending upon the availability of crop in the particular

season, so it affects the finished product price. The operating cycle of VPL is very high due to the high raw material conversion period because

raw material is a seasonal product. They have adopted the advanced computerized accounting system. Now VPL has increased its share in the domestic market by reducing the exports. For filling its fund requirement VPL depends upon the Canara bank and State bank of India. It holds the cash only for transaction purpose. Corporate office holds the cash for major receipts

& payments. EOQ technique is not followed by VPL for purchasing cotton because cotton is a seasonal

product. Also EOQ is not followed in stores.

SUGGESTIONS
Many operations of the unit along with decision are centralized that is the power is with the head office Ludhiana. Due to which quick decisions regarding the amendments in working capital handling got postponed. Sometimes they are ignored altogether due to long procedure. 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 unit should also adopt proper inventory control like ABC analysis etc. this inventory system

can make the inventory management more result oriented. The EOQ can be followed in stores. 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 are made by the corporate office and the unit is not generally

involved while taking decisions with regard to structure of investment of surplus funds. The corporate office should involve the units so as to better ascertain the future requirements of funds and accordingly the investments are made in different securities.

CONCLUSION

By conducting the study about working capital management it is find out that working capital management of VPL is too good. VPL has sufficient funds to meets its current obligation every time which is due to sufficient profits and efficient management of VPL.

Cash management and receivable management are too much good because of centralized control on these. Raw material for the all units of OSWAL group is purchased by corporate office in bulk which is the best way. Safety measures for inventories are also quiet sufficient in VPL. Overall the working capital management of VPL is very much efficient.

BIBLIOGRAPHY

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd. Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc Graw Hill. Van Horne, Jame C; fundamentals of Financial Management. Rustagi R.P.;Principles of Financial management. Annual reports of VPL.