Submitted to: Dr. S.V.

Ramana Rao









Presented By:
Nikita Gupta (86)
Sravya Palukuru (88)
Shruthi Gundu (76)
Rajiv Krishna (78)
Lok Prashanth (90)
INTRODUCTION: WORKING CAPITAL
A measure of both a company's efficiency and its short-term financial health. The
working capital is calculated as:

Working Capital: Current Assets- Current Liabilities

The working capital ratio (Current Assets/Current Liabilities) indicates whether a
company has enough short term assets to cover its short term debt. Anything below
1 indicates negative W/C (working capital). While anything over 2 means that the
company is not investing excess assets. Most believe that a ratio between 1.2 and
2.0 is sufficient.


Company Profile
CMD of Reliable Texamill Ltd. Mr. Shyam Lal
RTL commenced production in 2005
It manufactures synthetic blended yarn which is a raw material for other textile
weaving mills and also for handlooms and power looms.
The company is situated in an industrially less developed area in Northern state.
The synthetic yarn originates with the mixing up of the different fibers i.e.
acrylic. Polyester and Viscose as per the blend proposed to be manufactured.

COMPANY BACKGROUND
The company has licensed capacity of 80000 spindles and existing installed
capacity of 26390 spindles (this includes 6210 spindles added during FY
2007-08).
The average capacity utilization of the company was 81% during FY 2006-
07 and 85% during FY 2007-08.
In the year 2005-06, the company could generate net sales of Rs. 191.13
lakh, and incurred a net loss of Rs. 57.11 Lakh. The acute power shortage
was the dominant reason.
RTL has since been able to increase its sales to Rs. 973.32 Lakh in 2006-07
and to Rs. 1,203.61 Lakh in 2007-08 as against the estimated sales of Rs.
1,767.55 Lakh. It produced 1,315 tons of yarn in 2007-08 against 1,182 tons
during the previous year.
The management of RTL has distributed the lower actual sales to the
sluggish market conditions that prevailed during the second half of the year
2007-08, forcing the company to keep its production at low level, and also to
a certain extent due to the company manufacturing substantial quantity of
yarn of lesser counts and blends of lower value to suit the market conditions.
After incurring a loss in the first year, the company made a net profit before
depreciation of Rs. 32.42 Lakh in 2007-08.Power cuts, high input costs and
increased administrative expenses on account of expansion resulted in poor
profitability.
RTL has not so far paid any tax and dividends. Its tax Liability is expected
to be nil for quite some time as it enjoys tax benefits being a new unit
located in an industrially less developed area.

PRODUCTION FACILITIES
The companys existing production facilities are considered adequate for
operating the spinning mills at the enhanced installed capacity.
The production process for obtaining the main product, viz.. The synthetic
yarn , originates with the mixing up of the different fibers i.e. acrylic,
polyester and viscose as the blend proposed to be manufactured.
The annual consumption of these fibers generally depend on the product mix
manufactured during the particular year; the actual consumption during the
years 2006-07 and 2007-08 being about 1,973 tons and 2,303 tons, valued
respectively at Rs. 713.11 Lakh and Rs.902.30 Lakh.
Because of the frequent power cuts, the company built up adequate captive
power generating capacity by installing one more set of 860 kVA diesel
power generator.

RTL is now planning to replace two sets of 250 kVA by the purchase of one
imported SKODA set of 869 kVA at a cost of Rs. 47.70. The new set is
expected to be more economical from the point of view of diesel
consumption and usage for longer period.

Competition and Selling
The companys end products cater to the needs of large and medium scale
manufactures of fabrics and also handlooms and power looms
The major accounting , for 80-85 percent of sales.
The remaining 15-20 percent is sold to small dealers and traders.
About 65 percent of the companys sales are being affected on credit terms
ranging from 45 to 60 days depending on market conditions.
Its four branches located in different parts of the country manage the selling
operations of the company.
The company has been finding it difficult to realize its dues within the
normal credit period allowed to customers.
The company however, allows a discount ranging between 2 to 2 and half
per cent for sales on demand/cash basis.

Expansion
After starting commercial production in 2005 it had planned for installation
of 20,000 additional spindles
Since the company incurred a loss in the very first year, The company
attempted a modest expansion programme involving installation of
additional 6,210 spindles during 2007-08
The expansion programme was completed with a capital expenditure of
about Rs.276 lakhs against the estimated of Rs.253 lakhs

FUTURE PROSPECTS
The prices of the basic raw material, viz., viscose/polyester fibers, are lower
in the international market than in India.
While the prices of viscose/polyester fibers have increased substantially
during the last 2 years i.e., 2006-07 and 2007-08, the prices of RTLs end
products have, more or less, remained at the same level. The company has
not been able to absorb in the selling prices, the increased cost of inputs.
With the consumer preference during the recent years having shifted to
blended fabrics and the companys products being of good quality and well
accepted in the market.
RTL produced 1182 tons and 1315 tons of yarn during the years 2006-07
and 2007-08 resp.
In 2008-09, it has planned production of 1758 tones.
RTLs production plan for 2008-09 has been devised keeping in view the
changes in the market conditions and other factors.
RTL has planned to manufacture more quantities of yarn in blends of higher
value during the period 2008-09. Those blends are expected to be more
acceptable in the market.
The company has projected its energy costs at about 3.4 % of the total cost
of production. The other expenses have been estimated in line with the past
experience.
RTL had depended on trade credit for meeting its working capital needs and
the trade credits forms about 1/3
rd
of the current liabilities.
The normal credit period allowed by the suppliers is 45 days.
In the past, creditors did not object to RTLs stretching of payment to them.
In view of the credit squeeze, they are likely to pressurize hard for early
payment of dues.
Questions and Answers
Q 1.critically evaluates RTLs performance and financing of its operations.
In the year 2005-2006, The Company has faced a Net loss of RS.57.11 lakh.
This loss is due to power cuts and teething troubles.
In the year 2006-07 the company has generated a Net profit of Rs.24.48
lakh.
This increase in profits is due to enhanced capacity of the spindles, Effective
usage of Raw materials.
RTL is received in the market and is supposed to enjoy a premium over the
yarn manufactured by other leading manufacturer in the country.

Q 2 How has the company managed its working capital in the past?
Illustrate with appropriate calculations.
RTL has dependent on quiet substantially on trade creditors for meeting its
working capital need.
Trade credit forms one third of the current liability. ( In 2007, 32% is the
trade creditors in total current liabilities. Again in 2008 it is 30%.But they
projected in 2009 the percentage should decreases to 8%.)
About 65% of the companys sale are being affected on credit terms ranging
from 45-60 days depending on the market conditions.
The company is allowing 2- 2.5 % discount for sales on demand or cash
basis.
The normal credit period allowed by the suppliers is 45 days.
However, a discount of 2 % for payments within 15 days of the purchase
date is allowed.
Refer Excel sheet for further Calculations.
Working Capital Calculations

Working Capital = Current Assets-Current Liabilities

Year 2007 2008 2009
Current Assets 580.03 757.47 913.59
Current Liabilities 625.95 805.78 866.16
Working Capital -45.92 -48.31 47.43


Debt Turnover Ratio

Debt Turnover Ratio = Net Sales/ Avg Receivables

Year 2007 2008 2009
Net Sales 973.32 1208.61 2185.94

Q 3-What are RTLS plans to improve its working capital management?
Show the calculation of operating cycle to justify your answer.
RTL planned to replace two sets of 250 kVA by the purchase of one
imported SKODA set of 869 KVA at a cost of Rs.47.70.
It planned to undertake an expansion Program for installation of another
20000 additional spindles. This expansion Program was completed with a
capital expenditure of about Rs.276 lakh against estimated cost of Rs.253
lakh.
It also has planned to manufacture more quantities of yarn in blends of
higher value during the period 2008-2009.
Average receivables 293.25 269.48 303.19
Debt Turnover Ratio 3.31907928 4.48497106 7.20980243


Average payable period = 365/ Debt Turnover Ratio

Year 2007 2008 2009
Average payable period 109.970256 81.3829109 50.6255204


Creditor Turnover ratio

Creditor Turnover ratio = Net Purchases/ Avg Payables

Year 2007 2008 2009
Net Purchase 685.94 933.67 1649.36
Average Payable 200.94 239.16 70.79
Creditor Turnover ratio 3.41365582 3.90395551 23.2993361

Q 4- do you accept the financial plan prepared by RTL? What modification
would you suggest in the plan and why?
The financial plan of the firm is to increase the sales by producing high
quality yarn and also increase the production.
Many factors are supporting their plan
1. The power supply in the state is showing signs of improvement.
2. Consumers prefer good quality blended fabrics and RTL is known for its
premium product.
So, if the company goes for increasing its production then the company will
get more number of customers.
Scope for Modification
They may go for importing their basic raw materials from the international
markets as prices of polyester and fibers are lower in international market.
In domestic market they are procuring raw material at a high price. They
may go for strategic supplier relationship management.
They have scope for increasing their production capacity up to 80,000
spindles as they are currently using 26390 spindles.
From the future perspective, they can also go for one more diesel power
generator so that they can maximize capacity utilization.