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Working Capital Management



[From 1st February 2005 to 31st March, 2005]

A Project Report submitted in partial fulfillment of the requirements

For the award of the degree of



Under the guidance of


Submitted To:
March 2005
Working Capital Management

Sr No. Particular Page
1 Introduction of the company 1–9
- Introduction
- History of the company
- Activities of the company
- Achievement of the company
- General information
- Distribution of the share holdings
- Categories of shareholder
2 Working Capital Management 11 – 27
- Introduction of working capital
- Factor affecting
- Working Capital Finance
- Working Capital Assessment
- Operating Cycle
- Ratio Analysis
3 Working Capital Analysis 28 – 47
- Management of Receivable
- Management of Inventory
- Management of Cash
4 Findings 48 -50
5 Suggestions 51 – 52
Bibliography 54 – 55
Annexure 56 – 58


Introduction of the Company

Garden Vareli group of companies, one of the leading industrial

groups in India, plays a leading role in the field of fashion fabrics. With
annual sales exceeding U.S $ 90 million, they sell their products under a
single banner of quality ‘Garden’.
Working Capital Management

Garden Silk Mills Ltd. is one of the leading & oldest manufactures
of synthetic in India. Garden Silk Mills Ltd. has been exporting their
products to European markets since late 1970s. The company has made
vertical & horizontal integration from its establishment.
The company has three production plants: one at Village Vareli,
near Kadodara junction, N.H.No.8, the second at Village Jolva, near
Bardoli, and another at Garden Mill’s Complex, Sahara Gate, Surat.
Today the company has total 293 its own retail and authorized outlets all
over India.
The company has achieved a very good brand name in Indian &
International Market of Sarees & Dress Materials.
The company has achieved sales during financial year 1997-1998
of Rs.58,871.04 lacs & Rs.46,044.16 lacs during 1998-1999.

History of the Company

The origins of the business go back to 1920 when

Mr.Amichand Shah installed the first Hattersley looms in Surat. Since
1920 the company expanded not only by increasing the production
Working Capital Management

capacity and workforce of the business but also by pioneering new

material and processes.
The present Chairman and Managing Director of Garden Silk
Mills Ltd., Mr.Praful Shah is the youngest son of Mr. Amichand Shah.
Mr.Praful Shah taken qualification in USA in 1965 after which he joined
the company, up to that date Garden Silk Mills Ltd. had activities of the
Company to include processing cloth by introducing dying, printing and
finishing processes. As a result of this, the company was able to supply
finished textiles for the first time.

In the 1970s, the company recruited fine arts graduates from

leading institutions. An art studio was set up. The company started
introducing its own design and supplying these designs to the market.
Prior to this, the designs produced had been a function of customer
demand and from this manufacturer. This was the first step in building a
vertically integrated synthetic textile manufacturer and designer.

This move in the early 1970s coincided with the opening of

the first retail shop in Surat. The extension of the policy of vertical
integration into the retailing sector had advantages of uniform pricing,
close market monitoring, improving communication between
manufacturer and consumer, and above all exerting downward pressure
on the final selling price. The dedicated retail network now extends to
some 293 authorized outlets.

In the late 1970s, the company started exporting its product

to European Markets, Given the size of the domestic market; the
proportion of products that are exported remains low at approximately
Working Capital Management

two percent. The company is in the process of further developing markets

in Africa, Central and Eastern Asia.

In 1980, the company developed a new site, Vareli, some 12

kilometers away from Surat. This has become the main manufacturing
plant and investment of more than Rs.2.0 billion has been made. Most of
this expenditure has been targeted at the expansion and modernization of
plant and equipment, particularly in the weaving and yarn preparatory
sections. As a result, the Company today has one of the most modern and
sophisticated textile plants in India.

In 1995 the company had decided to further its policy of

vertical integration by setting up a new plant, also near Surat, from
which, manufacturing of polyester filament yarn, one of its principal raw-
materials, from polyester chips, is going on. This plant had become on
stream at a cost of approximately 655 million rupees.

Activities of the Company

The company is primarily engaged in the manufacture of

synthetic textile, sarees and dress materials mainly made of polyester
yarns and certain intermediate products. Garden Silk Mills Ltd. has been,
Working Capital Management

and continues to be, the initiator of the majority of new textile varieties
woven and processed in Surat, is at present, the consumer of
approximately 50 percent of polyester yarn in India. The company
believes that designs are a key factor in its market and used to produce
some 200 different printed designs each month.

The company’s lead in different and improved fabric

construction and the emphasis it places on design together with its
modern and efficient plant is key to its future success. The company
operates in a highly fragmented market where no individual manufacturer
has a material market share. It is also the leading integrated textile
manufacturer house, which undertakes all processes from yarn
manufacture to the retailing of dress materials and sarees.

The company, and its wholly owned subsidiary, Garden

Finance are also engaged in providing to the Indian corporate sector trade
and asset finance including the discounting of Bills of exchange.

The company also has a small engineering division, which

assembles a limited range of textile manufacturing machines.

Achievements of the Company

The company was first to setup a polyester filaments yarn

project in South Gujarat. The project is capable of producing multi-
filament & micro-filament yarn having a capacity of 5,000 Tones per
Working Capital Management

annum in collaboration with NON-VAL LEASINA AG of Switzerland.

This project has a special significance for the company, as polyester
filament yarn is the basic raw material for the product manufactured by
the company. The company was also first in producing of two-for-one
Twister in India.

The company's production facilities boast of one of India's

most sophisticated textile plants at Vareli, Surat (Western India). Its
weaving plant comprising Nissan and Tsudakoma water jet looms - the
highest number of water jet looms under one roof in India - and rapier
looms, automatic shuttle change looms etc, high-tech yarn preparatory
machines viz, ziro-twist-sizing, draw-warping, texturising and twisting
machines, have a capacity of over 42 Lac meters/month of greige fabric.
The plant has an ISO 9002 certification by BVQI. The company also
markets high quality dyed and printed fabrics that it gets manufactured
from associated firms.

General Information of the Company

Board of Director

Praful A. Shah Chairman & Managing Director

Working Capital Management

Soly J. Bhesania Wholetime Director

Harshad F. Shah Wholetime Director
Shilpa P. Shah Wholetime Director
Sanjay S. Shah Wholetime Director
Rajen P. Shah
Arunchandra N. Jariwala
Alok P. Shah
Yatish Parekh
Sunil Sheth
Smita Shah
Madanlal Lankapati
Ravinder Singh Nominee of IFCI Limited

Company Secretary
Kamlesh Vyas

Natvarlal Vepari & Co.
Charted Accountants


Bank of Baroda
Allahabad Bank
State Bank of Saurashtra
Bank of India
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Registered Office
Garden Mills Compound,
Sahara Gate,

Corporate Office

Manek Mahal,
90, Veer Nariman Road,

i) Garden Mills Compound, Sahara Gate, Surat
ii) Village Vareli, Tal.Palsana, Dist.Surat
iii) Village Jolva, Tal.Palsana, Dist.Surat

Registrars & Transfer Agents

MCS Limited,
Neelam Apartment,
88, Sampatrao Colony,
Behind Federation Building, Alkapuri,
Baroda 390005.

Distribution of shareholding pattern as on 30th June,


No. of
No. of % of % of
No. of Shares Shares
Shareholders Shareholders Shareholding
Working Capital Management

Upto 5000 98.49 6796186 17.75
5001-10000 1096 0.87 879711 2.30
10001-20000 412 0.33 623913 1.63
20001-30000 136 0.11 349085 0.91
30001-40000 59 0.05 213981 0.56
40001-50000 42 0.03 198859 0.52
50001-100000 69 0.05 507057 1.32
100001 & Above 105 0.08 75.01
12667 3829056
Total 100.00 100.00
0 0

Categories of Shareholders

No. of Holding
Shares Held Strength
Working Capital Management

Promoters 19423891 50.73

Mutual Funds & UTI 3186803 8.32
Bank Financial Ins. & Insurance
639757 1.67
FIIs (including foreign bank &
275682 0.72
Private Bodies Corporate 2141945 5.59
NRI’s/OCB’s 910433 2.38
Indian Public 10248256 26.76
GDR 1360925 3.55
Others 102868 0.27
Total 38290560 100.00

Chairman &

Manage Import & Product
Organizationr Structure
Export ion
Marketi Director Director

Head of

Working Capital Management


 Introduction of Working
Working Capital Management

 Factor Affecting Capital

 Working Capital Finance
 Working Capital
 Operating Cycle
 Ratio Analysis

Introduction of Working Capital

The need for working capital to run the day to day business
activities can not be overemphasized. We will hardly find a business firm
that does not require any amount of working capital.
Working Capital Management

We know that a firm should aim at maximizing the wealth of

its shareholders. In its endeavor to do so, a firm should earn sufficient
return from its operations. Earning a steady amount of profit requires
successful sales activity. The firm has to invest enough funds in current
assets for generating sales. Current assets are needed because sales do not
convert into cash instantaneously. So that working capital is very
important concept of the firm. There are two concept of working capital –
Gross and Net.

Gross Working Capital refers to the firm’s investment in current

assets. Current assets are the assets which can be converted into cash
within an accounting year (or operating cycle) and include cash, short
term securities, debtors, bills receivables and stock.

The gross working capital concept focuses attention on two aspects

of current assets management: (a) How to optimize investment in current
assets? (b) How should current assets be financed?

The consideration of the level of investment in current assets

should avoid two danger points- excessive and inadequate investment in

current assets. It should be realized that the working capital needs of the
firm might be fluctuating with changing business activity.

Net Working Capital refers to the difference between current

assets and current liabilities. Current liabilities are those claims of
outsiders that are expected to mature for payment within an accounting
Working Capital Management

year and include creditors, bills payable and outstanding expenses. Net
working capital can be positive or negative. A positive net working
capital will arise when current assets exceed current liabilities. A negative
net working capital occurs when current liabilities are in excess of current

Net working capital is a qualitative concept. It indicates the

liquidity position of the firm and suggests the extent to which working
capital needs may be finance by permanent sources of funds. Current
assets should be sufficiently in excess of current liabilities to constitute a
margin or buffer for maturing obligation within the ordinary operating
cycle of a business. In order to protect their interests, short-term creditors
always like a company to maintain current assets at a higher level than
current liabilities. It is conventional rule to maintain the level of current
assets twice the level of current liabilities.

Factors affecting working capital

There are no set rules or formulae to determine the working capital

requirements of firms. A large no. of factors, each having a different
importance, influence working capital needs of firms. The following are
Working Capital Management

the factors that generally influence the working capital requirements of


Nature of business

Working capital requirements of a firm are basically influenced by

the nature of its business. Trading and financial firms have a very small
investment in fixed assets, but require large stocks of a variety of goods
to satisfy varied and continuous demands of their customers. In contrast,
public utilities have a very limited need for working capital and have to
invest abundantly in fixed assets.

Sales and Demand Conditions

The working capital needs of a firm are related to its sales. It is

difficult to precisely determine the relationship between volume of sales
and working capital. In practice, current assets will have to be employed
before growth takes place. It is, therefore, necessary to make advance
planning of working capital for a growing firm on a continuous basis.
Sales depend on demand condition. Seasonal fluctuation not only affect
working capital requirement but also create production problems for the

Technology and Manufacturing Policy

The manufacturing cycle comprises of the purchase and use of raw

material and the production of finished goods. Longer the manufacturing
cycle, larger will be the firm’s working capital requirements. An extended
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manufacturing time span means a larger tie-up of funds in inventories.

Thus, if there are alternative technologies of manufacturing a product, the
technological process with the shortest manufacturing cycle may be

Credit Policy

The credit policy of the firm affects the working capital by

influencing the level of debtors. The credit terms to be granted to
customers may depend upon the norms of the industry to which the firm
belongs. But a firm has the flexibility of shaping its credit policy within
the constraint of industry norms and practices. A liberal credit policy will
create a problem of collecting funds later on.

Availability of Credit

The working capital requirements of a firm also affected by credit

terms granted by its creditors. A firm will need less working capital if
liberal credit terms available to it. Similarly, the availability of credit
from banks also influence the working capital needs of the firm. A firm,
which can get bank credit easily on favorable conditions, will operate
with less working capital than a firm without such a facility.

Operating Efficiency

The operating efficiency of he firm relates to the optimum

utilization of resources at minimum costs. The firm will be effectively
contributing in keeping the working capital investment at a lower level if
it is efficient in controlling operating costs and utilizing current assets.
Working Capital Management

The use of working capital is improved and pace of cash conversion cycle
is accelerated with operating efficiency.

Price Level Changes

The increasing shifts in price level make functions of financial

manager difficult. He should anticipate the effect of price level changes
on working capital requirements of the firm. Generally, rising price levels
will require a firm to maintain higher amount of working capital. Same
level of current assets will need increased investment when prices are
increasing. However, companies that can immediately revise their
product prices with rising price levels will not face a severe working
capital problem.

Working Capital Financing

Once the level of working capital has been determined, a firm has
to concentrate how the same will be financed, i.e. a firm must have to
find out the sources of funds to finance is current assets. Different
financing policies may be adopted for this purpose.
Working Capital Management

(i) Long-term financing :

The primary sources of long-term financing are: shares ( equity
& preference ), debentures, retained earnings, debt from financial
institutions, etc.

(ii) Short-term financing :

It includes short-term bank loan, commercial papers and factoring
receivables, etc. A firm must have to arrange this type of finance in

(iii) Spontaneous financing:

It refers to automic sources of short-term funds. It includes trade
credit and outstanding expenses. Since the sources of this type of finance
are cost free, most of the firms would prefer to use it in order to finance
its current assets and try to utilize it as far as possible.

Therefore, the choice of financing current assets is between short-

term and long-term sources. It should be remembered in this respect that
short-term financing is less expensive than long-term one. But at the
same time, short-term financing involves greater degree of risk. In the
circumstances, the choice of sources between short-tem and long-term for

financing working capital of a firm has to be decided with reference to

risk return trade off. Generally, however, in view of lower cost and
flexibility, management usually finds it more convenient to finance their
working capital requirements by relying more on short-term sources than
on long term sources.
Working Capital Management

Instead of these many sources Garden Silk Mills Limited working

capital financing is made through Cash Credit from bank in the
consortium arrangement of four banks that is lead by Bank of Baroda by
providing maximum share of 40%.

Four banks in following manner give cash Credit.

Financing Working Capital of Company

Bankers Portion of Working Capital

Bank of Baroda 40 %
Allahabad Bank 30 %
State Bank of Saurashtra 20 %
Bank of India 10 %

Working Capital Assessment

1999-00 2000-01 2001-02 2002-03

Current Assets
Inventories 5631.97 5428.34 5878.52 5123.24
Sundry Debtors 6532.28 3120.00 3423.73 3797.57
Cash & Bank Balance 1248.23 1553.20 4457.39 1000.27
Other Current Assets 83.48 -
Working Capital Management

13495.9 13759.6 9921.08

Total 10101.54
6 4
Current Liabilities
Sundry Creditors 2631.58 1696.07 2575.36 2473.88
Interest accrued 81.39 47.89 16.53 22.43
Provision of tax 334.93 279.78 193.15 349.13
Proposed Dividend 459.49 574.36 574.36 957.26
Other liabilities 501.38 579.91 734.10 1681.71
Total 4008.77 3178.01 4093.50 5484.41
Net Working Capital =
9487.19 6923.53 9666.14 4436.67
C.A. – C.L.
Working Capital Management

Net Working Capital Chart


9487.19 9666.14

8000 6923.53
a 6000
s 4436.67



1999-00 2000-01 2001-02 2002-03

Operating Cycle
Operating Cycle is the time duration required to convert sales,
after the conversion of resources into inventories, into cash. The
Operating Cycle of a manufacturing company involves five phases.
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1. Conversion of Cash into Raw-Material

2. Conversion of Raw-Material into Work-in-Progress
3. Conversion of Work-in-Progress into Finished Goods
4. Conversion of Finished Goods into Receivables
5. Conversion of Receivables into Cash

Operating Cycle = R (Raw-Material Storage Period)

+ W (WIP Storage Period)
+ F ( Finished Goods Storage Period)
+ D (Debtors Collection Period)
- C (Creditors Collection Period)

Operating Cycle of the Company

No 02-03
Particular 99-00 00-01 01-02
1 Raw Material Storage Period ( Days) 31 26 27 20
2 Work in Progress Storage Period (Days) 6 3 2 2
3 Finished Goods Storage Period ( Days) 33 23 27 21
4 Debtor Collection Period ( Days) 60 35 26 26
5 Creditors Collection Period ( Days) 46 24 33 30
Length of Operating Cycle (Days) =
84 63 49 39
Working Capital Management

Operating Cycle Chart



D 60
a 49
s 40 39


1999-00 2000-01 2001-02 2002-03
Working Capital Management


 Current Ratio

The current ratio is a measure of the firm’s short-term

solvency. It indicates the availability of current assets in rupees for
every one rupee of current liability. A ratio of greater than one means
that the firm has more current assets than current liability to meet
short-term requirements. The current ratio of 2:1 is considered
Current Assets
Current Ratio = ---------------------------
Current Liabilities

Years Current Current Ratio

Assets Liabilities
99-00 13495.96 4008.77 3.36

00-01 10101.54 3178.01 3.18

01-02 13759.64 4093.50 3.36

02-03 9921.08 5721.94 1.73
3.36 3.36
D 3
s 2 1.73

1999-00 2000-01 2001-02 2002-03
Working Capital Management

 Quick Ratio
Quick ratio establishes the relationship between quick assets
and current liabilities. Generally, a quick ratio of 1:1 is considered to
represent satisfactory current financial position.
Current Assets - Inventories
Quick Ratio = ----------------------------------
Current Liabilities

Years Quick Current Liabilities Ratio

99-00 7863.99 4008.77 1.96
00-01 4673.20 3178.01 1.47
01-02 7880.92 4093.50 1.93
02-03 4797.84 5721.94 0.84
Working Capital Management

D 3
y 1.96 1.93
s 2

1 0.84

1999-00 2000-01 2001-02 2002-03

 Net Working Capital Ratio

The difference between current assets and current liabilities is

called net working capital (NWC). Net Working Capital measures the
firm’s potential reservoir of funds. It can be related to net assets or
capital employed.

Net Working Capital

Net Working Capital Ratio = ----------------------------
Net Assets
Working Capital Management

Years Net WC Net Assets Ratio

99-00 9487.19 31193.29 0.30
00-01 6923.53 31445.76 0.22
01-02 9666.14 38007.83 0.25
02-03 4436.67 43467.45 0.10


D 0.6
s 0.4
0.22 0.25


1999-00 2000-01 2001-02 2002-03

 Current Assets to Working Capital Ratio

This ratio shows the relationship between current assets and
working capital. It indicates the percentage of current assets to working

Current Assets
Working Capital Management

Current Assets to Working Capital Ratio = --------------------

Working Capital

Years Current Working Ratio

Assets Capital
99-00 13495.96 9487.19 1.42

00-01 10101.54 6923.53 1.46

01-02 13759.64 9666.14 1.42

02-03 9921.08 4436.67 2.24

2.5 2.24

a 1.42 1.46 1.42


1999-00 2000-01 2001-02 2002-03

Working Capital Management


 Management of Receivable
 Management of Inventory
 Management of Cash
Working Capital Management


The accounts receivables are generated which are collected at a

future date only when the firm grants credit against an ordinary sale of
goods or services without receiving cash. Credit sale is an essential part
of the present competitive economic system. It is granted in order to
increase the volume of sales. As such receivables which are created out of
credit sales are considered as a marketing tool for increasing sales. But
extension of credit involves cost of risk. Therefore, management should
weigh the benefits against cost. As such, the objective of receivables
management is to promote sales and profit until optimum point is

Receivables are created out of trade credit and which are collected
in the near future. The debtors have got the three distinct characteristics.

(i) It involves risk which should carefully be studied since cash sales
are risk less whereas at the time of credit sales, cash is yet to be
(ii) It is based on present economic value of goods passes immediately,
whereas, the seller expects an equivalent benefit at a latter date.
(iii) It implies futurity. The value of goods or services received by the
buyer will be payable by him at a future date.

No doubt, receivables play a significant role in the total current

assets composition since their position is next to inventories. In India,
they form about one third of total current assets.
Working Capital Management

Credit Policy
A firm’s investment in accounts receivable depends on the volume
of credit sales and the collection period. There is one way in which the
financial manager can affect the volume of credit sales and collection
period and consequently, investment in account receivables. That is
through the changes in credit policy. The term credit policy is used to
refer to the combination of three decision variables: (I)) Credit Standards,
(ii) Credit Terms, and (iii) Collection efforts, on which the financial
manager has influence.

Credit Standards are criteria to decide the types of customers to whom

goods could be sold on credit. If a firm has more slow-paying customers,
its investment in accounts receivables will increase. The firm will also be
exposed to higher risk of default.

Credit Terms specify duration of credit and terms of payment by

customers. Investment in account receivables will be high if
customers are allowed extended time period for making

Collection Efforts determine the actual collection period. The lower the
collection period, the lower the investment in accounts
receivable and vice versa.

Debtor Collection Period

It refers to the debtors converted into receivables. Debtor turnover
ratio indicates the number of times debtors turnover each year. Generally,
Working Capital Management

the higher the value of debtors’ turnover, the more efficient is the
management of credit.

Total Sales
Debtors Turnover Ratio = ----------------------
Average Debtors

365 days
Collection Period = ---------------------------------
Debtors Turnover Ratio

Years Sales Debtors Ratio Collection

99-00 40347.01 6602.79 6.11 60

00-01 44459.79 4263.42 10.43 35

01-02 45167.17 3271.87 13.80 26

02-03 52431.08 3468.61 15.12 24

Debtor Turnover Ratio

16 13.8
D 14
12 10.43
8 6.11
s 6
1999-00 2000-01 2001-02 2002-03
Working Capital Management

Collection Period Chart



D 40 35
30 26 24


1999-00 2000-01 2001-02 2002-03


Inventory management involves the ‘ development &

administration of policies, system & procedures which will minimize
total costs relative to inventory decisions and related function such as
customers service requirements, production schedules, purchasing and
Working Capital Management

Inventories constitute the most significant part of current

assets of a large majority of companies I India. On an average,
inventories are approximately 60 percent of current assets in public
limited companies in India. Because of large size of inventories
maintained by firms, a considerable amount of funds is required to be
committed to them. It is, therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid unnecessary

Nature of Inventories

Inventories are stock of the product a company is

manufacturing for sale and components that make up the product. The
various forms in which inventories exist in manufacturing company are

Raw Materials are those basic inputs that are converted into finished product
through the manufacturing process. Raw material inventories are those
units which have been purchased and stored for future production.

Work in Progress inventories are semi-manufactured products. They represent

products that need more work before they become finished product for
Working Capital Management

Finished goods inventories are hose completely manufactured products which

are ready for sale. Stocks or raw materials and work in progress facilitate
production, while stock of finished goods is required for smooth
marketing operation. Thus, inventories serve as a link between the
production and consumption of goods.

The level of three kinds of inventories for a firm depends on

the nature of its business. A manufacturing firm will have substantially
high levels of all three kinds of inventories, while a retail or wholesale
firm will have a very high level of finished goods inventories and no raw
material and work in progress inventories.

Need to hold inventories

Transactions Motive emphasizes the need to maintain inventories

to facilitate smooth production and sales operation.

Precautionary Motive necessitates holding of inventories to guard

against the risk of unpredictable changes in demand and supply forces
and other factors.

Speculative Motive influence the decision to increase or reduce

inventory levels to take advantage of price fluctuations.
Working Capital Management

A company should maintain adequate stock of materials for a

continuous supply to the factory for an uninterrupted production. It is not
possible for a company to procure raw material whenever it is needed. A
time lag exists between demand for materials and its supply. Also, there
exists uncertainty in procuring raw material in time on many occasions.
The procurement of materials may be delayed because of such factors as
strike, transport disruption or short supply. Therefore the firm should
maintain sufficient stock of raw material at a given time to streamline

Work in progress inventory builds up because of the

production cycle. Production cycle is the time span between introduction
of raw material into production and emergence of finished product at the
completion of production cycle. Efficient firms constantly try to make
production cycle smaller by improving their production technique.

Stock of finished goods has to be held because production

and sales are not instantaneous. A firm can not produce immediately
when goods are demanded by customers. Therefore, to supply finished
goods on a regular basis, their stock has to be maintained.
Working Capital Management

 Types of Inventory:-

1) Raw Material Inventory:

These are goods which have not yet been committed to production
in a manufacturing firm. They may consist of basic raw material.

2) Work-In-Process:-
This includes those materials which have been committed to
production process but have not yet been completed.

3) Finished goods:-

These are completed products awaiting sale. They are the final
output of the production process in manufacturing firms.

4) Supplies:-
A fourth kind of inventory, Supplies or what is called consumable
-stores are also maintained by the firms. These materials are of low value
& they do not enter the production process, for example oil, fuel, bulbs,
soaps etc.

5) Scrap:-
The waste of materials arising during manufacturing process is also
a part of the inventory. Even defective pieces to be disposed off are a part
of in inventory.
Working Capital Management

 Techniques of inventory Management:-

(a) Economic order quantity Model

(b) ABC Analysis

(a) Economic order quantity Model:-

Economic order quantity is that quantity order at which that total

ordinary cost and inventory cost will be the minimum cost. It is ordering
also known as Economic lot size. If orders are placed for a relatively
small quantity frequently, the company will have to place order against
and against during a year, it will have to incur a considerable costs in the
form of transportation cost & clerical expenses.

Inventory carrying cost refers to the cost of maintaining inventory

of goods thus there are two type of cost
 Cost that arise due to storing the inventory
 The opportunity cost of funds e.g. if the fund were not
locked in inventory, it would have earned interest in
bank deposit etc.
 Ordering cost includes clerical expenses and times
involved in sending enquiry & cost of placing order. It
also includes involved in sending remainder to
suppliers inspection and recording of goods received
checking involves making payment thereof, etc. so, the
larger the order lower is the ordering cost.
Working Capital Management

When inventory carrying cost and ordering cost are balanced, total
cost of ordering quantity is lowest and therefore it is called economic
order quantity.
There are basically two methods of determining EOQ
1. Graphical Method
2. Formula Method.

1. Graphical Method:

Total cost Inventory carrying cost

In Rs.

Ordering cost

EOQ Quantity

The total cost is lowest when OX quantity is ordered per orders,

So, OX is the economic order quantity. It should be remember the
economic order quantity is always obtain at the point of inter section
between inventory carrying cost line & ordering cost line.

2. Formula Method:-

EOQ = √ 2AO
A = Annual consumption
O = Ordering cost
Working Capital Management

C = Carrying cost per unit.

(b) ABC (Always Best Control) Analysis: -

In large companies the inventory consists of thousand of items and
a number of employees are employed to control them. There salaries and
other expenses run into lacs into or Rupees. In order to affect economy in
controlling such large inventory or a system known as ABC has been
widely used.
It has been found from experience that all items includes in
inventory are not of equal importance. A few items in the inventory
represent a large proportion of total value of inventory. Hence, more
attention must be developed to the control of such item. The entire items
are divided in to three parts.

Group: A: It includes those items which are very important and of high
value but form use a small proportion of total quantity of inventory.

Group: B: Items included in category B are not as important as those in

group ‘A’ but are important enough for its proper record to be

Group: C: The remaining items must be placed in category C.

Working Capital Management

 Hypothetical Example:
No. of items ( In % of Value of items (in % of total
total no. of items) value of inventory
A 10 75
B 25 20
C 65 05

100 5%
75% Group

10 35 100

Implementation of System:-

Step: 1: A list of all items must be prepared in order to determine how

many items is there, what the consumption of each of them is and
what is the price.
Step: 2: Calculate total cost by multiplying items price with number of
units of consumption.
Working Capital Management

Step: 3: Ranks must be given to each items on the basis of total value as
calculated in step 2. First rank must be allotted to the items
having highest value and this way the rank must be given in
descending order.
Step: 4: Determine the % of each item. Firstly % of no. of each item with
total number and secondly % of total value of each items with
total of all items.
Step: 5: All item must be grouped into A, B, C categories.

 Stock Turnover Ratio

Inventory turnover ration indicates the efficiency of the firm in

producing and selling its product. This ratio is percentage of inventory to
the total sales.
Total Sales
Stock Turnover Ratio = ------------------
365 days
Holding Days of Inventory = -----------------------------
Stock Turnover Ratio

Years Sales Inventory Ratio Holding Days

of Inventory
99-00 40347.01 5631.97 7.16 50
00-01 44459.79 5428.34 8.19 45
01-02 45167.17 5878.52 7.68 48
02-03 52431.08 5123.24 10.23 36
Working Capital Management

 Stock turnover Ratio

7.16 7.68
D 8
s 4

1999-00 2000-01 2001-02 2002-03

Holding Days of Inventory

50 45

40 36


1999-00 2000-01 2001-02 2002-03
Working Capital Management


Cash is the important current assets for the operations of the

business. Cash is the basic input needed to keep the business running on a
continuous basis, it is also the ultimate output expected to be realized by
selling the service or product manufactured by the firm. The firm should
keep sufficient cash, neither more nor less. Cash shortage will disrupt the
firm’s manufacturing operations while excessive cash will simply remain
idle, without contributing anything towards the firm’s profitability. Thus,
a major function of the financial manager is to maintain a sound cash

 Motives for holding cash

1. Transaction motive

The transaction motive requires a firm to hold cash to

conduct its business in the ordinary course. The firm needs cash primarily
to make payments for purchases, wages and salaries, other operating
expenses, taxes, dividends etc. The need to hold cash would not arise if
there were perfect synchronization between cash receipts and cash
payments. For transaction purpose, firms nay invest its cash in
marketable securities. Usually, the firm will purchase securities whose
maturity corresponds with some anticipated payments, such as dividends,
or taxes in the future.
Working Capital Management

2. Precautionary motive

The precautionary motive is the need to hold cash to meet

contingencies in the future. It provides a cushion or buffer to withstand
some unexpected emergency. The precautionary amount of cash depends
upon the predictability of cash flows. If cash flows can be predicted with
accuracy, less cash will be maintained for an emergency. The amount of
precautionary cash is also influenced by the firm’s ability to borrow at
short notice when the need arises. Stronger the ability of the firm to
borrow at short notice less the need for precautionary balance.

3. Speculative motive

The speculative motive relates to the holding of cash for investing

in profit-making opportunities as and when hey arises. The opportunity to
make profit may arise when his security prices change. The firm will hold
cash, when it is expected that interest rates will arise and security prices
will fall. Securities can be purchased when the interest rate is expected to
fall, the firm will benefit by the subsequent fall n interest rates an
increase in security prices.

4. Compensating Motive

Banks provide differed types of services like clearance of cheque,

transfer of fund etc. against a nominal fee or commission. Generally,
clients (firms) are required to maintain a minimum cash balance at the
bank which cannot be utilized by then for compensating balance.
Working Capital Management

 Cash Collection Instruments in India

The main instruments of collection used in India are : (i) Cheque,

(ii) Drafts, (iii) Documentary Bills, (iv) Trade Bills, and (v) Letter of
Working Capital Management

Instruments Pros Cons

1.Cheques  No charge  Can bounce
 Payable through  Collection time can
clearing be long
 Can be discounted after  Collection charge of
receipt Rs.2 per Rs.1000 with
 Low discounting chare a maximum of Rs.1000
Rs.3.50 per Rs.1000
 Requires customers
which are inter-changeable
with overdraft limits.
2.Drafts  Payable in local  Cost Rs.2 per Rs.1000
clearing subject to a max of
 Chances of bouncing Rs.1000
are  Buyers account
less debited on day
3.Documentary  Theoretically, goods are  Not payable through
Bills not released till payment is clearing
made or the bill is  Collection cost of
accepted Rs.4.50 per Rs.1000
 Low discounted charge subject to a maximum
of Rs.3.50 per of Rs.1000
Rs.1000  Long delays
4.Trade bills  No charge except stamp  Procedure is
duty cumbersome
 Can be discounted  Buyers are reluctant
 Discipline of payment to accept the due
on due date date discipline
5.Letters of  Good credit control as  Opening charges
Credit goods are released on  Transit period interest
payment of acceptance bill  Negotiation charges
 Seller forced to meet  Need bank lines to
delivery schedule because open LC
of expiry date  Stamp duty on usance
Working Capital Management

Cash Ratio

Cash is the most liquid asset, a financial analyst may

examine cash ratio and is equivalent to current liabilities
Cash Turnover Ratio = ---------------------------------
Operating Cycle Period

Years Cash Current O.S. Cash

Liabilities Period Turnover
99-00 1248.2 4008.77 84 4.34
00-01 1553.2 3178.01 63 5.79
01-02 4457.3 4093.50 49 7.45
02-03 1000.2 5721.94 39 9.36

Cash Turnover Ratio

10 9.36
8 7.45
D 7 5.79
a 6
5 4.34
1999-00 2000-01 2001-02 2002-03
Working Capital Management

Working Capital Management
Working Capital Management

The requirement of working capital is not stable in the company. It

was 9487.19 Lacs in 1999-00, 6923.53 Lacs in 2000-01, and
9666.14 Lacs in 2001-02, and 4436.67 lacs in 2002-03 . The main
reason behind it is that company came across the depression in
textile business between this period although compnay was able to
survive in the market and in the last year working capital
requirement increase with the expansion of production.

Operating cycle time is decreasing year by year. It was 84 days in

1999-00, 63 days in 2000-01, and 49 days in 2001-02, and 39 days
in 2002-03. So in last year operating cycle time is about 1.6
months, it means money realised after 1.6 months which is good in
the competitive market.

Current ratio of the company is between 1.73 to 3.36 in last four

years. The satisfectory ratio is 2:1 and the company have higher
ratio which indicates compnay can be in better position to meet
current obligation.

Quick ratio of the company is between 1.98 to 0.84 in last four

years. The satisfactory ratio is 1:1 and the company have near to it
or slightly higher ratio which is quite satisfactory.

Debtor turnover ratio was 6.11 times in 1999-00, 10.43 times in

2000-01, and 13.80 times in 2001-02, 26.23 times in 2002-03. The
receivables collection period is 60 days, 35 days, 26 days, 24 dayd
respectively. So collection days are improving day by day which is
good sign for the company.
Working Capital Management

Stock turnover ratio is 7.16 in 1999-00, 8.19 in 2000-01 and 7.68

in 2001-02 and holding days is 50 days, 45 days, 48 days
respectively. It was highest in the 2002-03 i.e 10.23 when holding
days are lowest 36 days. So some care should be taken.

Company having good management system and cash turnover rate

is 4.35 in 1999-00, 5.79 in 2000-01 and 7.45 in 2001-02, and 9.36
in 2002-03.

So I conclude that company made much improvement in 2002-03

comparing to last three year as far as working capital and its
management is concern.
Working Capital Management

Working Capital Management

Net working capital ratio is 0.10 in 2002-03 which is desirebale but

it was highest in 1999-00 i.e. 0.30. So some attention is required to
increase the ratio.

Current Assets to Working Capital ratio is one of the important

factor for the industries. The ratio is 1.46 in 2000-01 which shows
that current assets is 1.46 times than working capital. But it was
highest in 2002-03 i.e. 2.24. So it requires to take corrective

Quick ratio of the company is between 0.84 in 2002-03. The

satisfactory ratio is 1:1 and the company have lower ratio which is
not satisfactory. But it was highest in 1999-00 i.e. 1.96. So
considerable attention is by the management.

As far as cash management is concerned, cash inflow is efficiently

undertaken, but improvement in cash out flows i.e. payments &
disbursement of cash requires considerable attention. As
managerial point of view, different collection center will be
established for prompt collection and centralize payment of money
from head bank to various suppliers of materials are required.

Holding days of inventory were decreased in last year as compared

to 2001-02 i.e. 48 days. So, timely review of inventory by
production department managers required. More attention on
opening and closing stock of material of A item and high value H
item require.
Working Capital Management

So all above suggested recommendations are part of working

capital management. By throughly observing these suggestions, company
can be able to realize money quickly and break greater speed increasing
requirement of working capital.
Working Capital Management

Working Capital Management

Annexure:1: Profit & Loss A/c

Particulars 2000-01 2001-02 2002-03
Sales & Job Charges 44459.79 45167.17 52431.08
-Excise Duty 1930.04 1776.57 1285.80
Income From Financial
Operation 352.57 337.77 360.47
Other Income 195.16 726.55 444.81
Total 43077.48 44454.92 51950.56
Consumption of RM 24079.43 23611.85 29673.28
(Increase)/Decrease In Stock 273.70 424.70 307.73
Purchases 3698.66 3093.56 2216.49
Mfg. & Other Expenses 10543.71 11225.45 11376.46
Total 38595.50 38595.50 43573.96
Profit before financial 4481.98 6948.76 8376.80
charges, dep. and tax
- Financial Charges 906.26 787.05 1243.84
Profit before dep. & Tax 3575.72 6161.71 7132.76
- Depreciation 1511.38 2245.21 2407.81
Net Profit before Tax 2064.34 3916.50 4724.95
- Provision for tax
Current 2.50 3.00 163.00
Deferred 0.00 986.01 703.00
Earlier Years 0.00 0.98 0.00
Net profit after Tax 2061.84 2926.51 3858.95
+ Balance B/F 4147.37 26.27 28.42
Balance for Appropriation 6209.21 3002.78 3887.37

Annexure – 2 : Balance Sheet

Particulars 2000-01 2001-02 2002-03

Working Capital Management

Sources Of Fund
1. Shareholder Fund
Share Capital 3829.06 3829.06 3829.06
Reserve & Surplus 30224.60 26653.49 27078.95
34053.66 30482.55 30908.01
2. Loan Funds
Secured Loan 9512.75 9336.48 9939.26
Unsecured Loan 84.40 4764.55 7224.22
9597.15 14101.03 17163.48
Total 43650.81 44583.58 48071.49
Application Of Fund
1. Fixed Assets
Gross Block 39640.88 43320.78 55686.81
Less : Depreciation 16594.55 18783.39 21000.06
Net Block 23046.33 24537.39 34686.12
Less : Lease Adjs. A/C 6.89 6.89 0.00
Capital Wip 1482.79 3811.19 2657.82
24522.23 28341.69 37343.94
2. Investment 5760.96 4070.30 3284.61
3. Current Assets
Inventories 5428.34 5878.52 5123.24
Sundry Debtors 3120.00 3423.73 3797.57
Cash & Bank Balance 1553.20 4457.39 1000.27
Loan & Advances 6390.40 5915.06
Other Current Assets 0.00 0.00
16491.94 19674.70 17274.06
Less : Current Liabilities 2323.87 3325.99 4292.90
Provision 854.14 761.51 1429.04
3178.01 4093.50 5721.94
13313.93 15581.20 11552.12
4. Deferred Tax Liability 0.00 -3507.73 4210.73
5. Misleading Expenses 53.69 98.12 101.55
43650.81 44583.58 48071.49
Working Capital Management


Working Capital Management

Financial Management
By I.M.Pandey (Sixth Edition)

 Financial Management – P.N. Reddy

 Financial Management & Policy – V. K. Bhalla

 Management Accounting - By Bhagavati & Pillai (Second


 Financial Management – Prasanna Chandra

 Management Accounting – Ravi M. Kishore

Annual Report of Garden Silk Mills Limited

CMA data report for working capital


 www.GardenVareli.com

 www.CorporateInformation.com

Working Capital Management


 Introduction
 History of the Company
 Activities of the Company
 Achievement of the
 General Information
 Distribution of the
 Categories of Shareholders