A

PROJECT REPORT

Working Capital
Management at
Raymond Ltd.
SUBMITTED BY:

Varada S. Bhate
(MMS- Finance)

UNIVERSITY OF MUMBAI
(2005-2007)

NIRANJAN LAL DALMIA INSTITUTE OF MANAGEMENT

STUDIES AND REASERCH
 MUMBAI- 401104

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND

RESEARCH

“SHRISHTI”, SECTOR-1, MIRA ROAD (E), MUMBAI- 401104

Certificate

This is to certify that Ms. Varada S. Bhate, student of Masters

in Management Studies (Finance) batch of N.L.Dalmia
Institute of Management Studies and Research has
satisfactorily completed final project on “Working Capital
Management at Raymond Ltd.” under my supervision and
guidance as partial fulfillment of requirement of Masters in
management studies, Mumbai University, 2005-2007.

Prof. Anil Gor Prof. P. L. Arya

(Project Guide) (Director)
 ACKNOWLEDGEMENT

I take immense pleasure in submitting the project on

“Working Capital Management at Raymond Ltd.”.

As this project comes to an end, I would like to take the

opportunity to thank all those persons who supported me
directly or indirectly in this project.

I would like to thank project guide Prof. Anil Gor for the
support and guidance throughout the project.

My heart full thanks to Prof. P. L. Arya, Director, NLDIMSR for

providing me his encouragement and support towards
completion of this project.

Varada S. Bhate
MMS- IV (Finance)
N.L.Dalmia Institute of Management Studies and Research
 TABLE OF CONTENTS

I. EXECUTIVE SUMMARY

II. INTRODUCTION

III. COMPANY PROFILE

IV. OBJECTIVES AND SCOPE OF THE PROJECT

 Objectives
 Scope
 Methodology

V. WORKING CAPITAL

 Management of Working Capital

 Need for adequate Working Capital
 Factors determining Working Capital requirement
 Sources of Working Capital
 Working Capital Classification

VI. STATEMENT OF WORKING CAPITAL

VII. INVENTORY MANAGEMENT

VIII. CASH MANAGEMENT

IX. RECEIVABLES MANAGEMENT (DEBTORS)

X. CONCLUSION

XI. RECOMMENDATION

XII. REFERENCES
I. EXECUTIVE SUMMARY

The term working capital has several meanings in business and

economic development finance. Working capital means a business’s
investment in short-term assets needed to operate over a normal
business cycle.

Current assets and current liabilities include three accounts which are of
special importance. These accounts represent the areas of the business
where managers have the most direct impact: accounts receivable
(current asset) ,inventory (current assets), accounts payable (current
liability).

Use of working capital is providing the ongoing investment in short-term

assets that a company needs to operate. A second purpose of working
capital is addressing seasonal or cyclical financing needs.

Working capital is also needed to sustain a firm’s growth, to provide

liquidity and to undertake activities to improve business operations and
remain competitive, such as product development, ongoing product and
process improvements, and cultivating new markets.

Raymond Limited was incorporated in 1925 and is now a Rs.1, 400 crore
plus conglomerate having varied businesses like Textiles, Readymade
Garments, Denims, Engineering Files & Tools, Aviation and Designer
Wear. The company is one of the largest players in the core worsted
fabric business with over 60% domestic market shares.
Objectives of the Project are to study working capital management
process, to study receivable management of the company and to study
the process of cash and inventory management.

Working capital management is management for the short-term current

assets and current liabilities, which is of critical importance to a firm.
Cash management is to identify the cash balance which allows the
business to meet day to day expenses, but reduces cash holding costs.

Inventory management is to identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw
materials and minimizes reordering costs and hence increases cash
flow, supply chain management. Debtors management is to identify the
appropriate credit policy.

A business’ need for working capital can come as a result of several

reasons that include increasing sales growth or seasonal growth,
customers paying slower, need to increase inventory to support sales
growth and/or adding product lines, etc.

Though there is no set of universally applicable rules to ascertain

working capital needs, but these are some of the factors which could be
considered: nature of the product, manufacturing cycle, depreciation
policy, seasonal variation, etc.

Working capital can be financed by trade credit, bank credit, cash

credit, loans, letter of credit, commercial paper, etc.
In the year 2006 the inventory period for Raymond Ltd. has increased
tremendously from 106 days in 2005 to 272 days in 2006. This is also
supported by the decline in the inventory turnover ratio to a meager of
1.34 times in 2006. Since the company is in the textile industry
therefore the inventory varies according to seasonal and festive
demands.

The current ratio is a reflection of financial strength. The current ratio

measures the ability of the firm to meets its current liabilities. Current
assets get converted into cash and provide the funds needed to pay
current liabilities. The current ratio has decreased from 2.68:1 (2005) to
2.33:1 in the year 2006.

Current liabilities have increased by 34.67% from the last year 2005.
Provisions have increased by 20.78%, thus the total current liabilities
have increased by 31.42%. Hence as the increase in the current
liabilities is much more than the increase in the current assets, the
current ratio has declined slightly.

The debtors turnover ratio has improved further in 2006 as it has

increased to 5.50 times. Hence as an effect of the increase in the
debtors turnover ratio, there is a significant improvement in the credit
period as it has reduced to 66 days from 77 days. For the year ended
2005-2006, the cash ratio has fallen from 2.46:1(2005) to 1.73:1 in
2006.

Hence better cash management is needed at Raymond ltd. The extra

money could be utilized to push sales and to pay the increase in the
current liabilities. Measures have to tightened to earn larger profits.
II. INTRODUCTION

Three Meanings of Working Capital:

The term working capital has several meanings in business and

economic development finance. In accounting and financial statement
analysis, working capital is defined as the firm’s short-term or current
assets and current liabilities. Net working capital represents the excess
of current assets over current liabilities and is an indicator of the firm’s
ability to meet its short-term financial obligations.

From a financing perspective, working capital refers to the firm’s

investment in two types of assets. In one instance, working capital
means a business’s investment in short-term assets needed to operate
over a normal business cycle. This meaning corresponds to the required
investment in cash, accounts receivable, inventory, and other items
listed as current assets on the firm’s balance sheet. In this context,
working capital financing concerns how a firm finances its current
assets.

A second broader meaning of working capital is the company’s overall

nonfixed asset investments. Businesses often need to finance activities
that do not involve assets measured on the balance sheet. For example,
a firm may need funds to redesign its products or formulate a new
marketing strategy, activities that require funds to hire personnel rather
than acquiring accounting assets.

When the returns for these “soft costs” investments are not immediate
but rather are reaped over time through increased sales or profits, then
the company needs to finance them. Thus, working capital can
represent a broader view of a firm’s capital needs that includes both
current assets and other nonfixed asset investments related to its
operations.

Working capital is a valuation metric that is calculated as current

assets minus current liabilities. Also known as operating capital, it
represents the amount of day-by-day operating liquidity available to a
business. A company can be endowed with assets and profitability, but
short of liquidity, if these assets cannot readily be converted into cash.

Current assets and current liabilities include three accounts which are of
special importance. These accounts represent the areas of the business
where managers have the most direct impact:

 accounts receivable (current asset)

 inventory (current assets), and
 accounts payable (current liability)

In addition, the current (payable within 12 months) portion of debt is

critical, because it represents a short-term claim to current assets.
Common types of short-term debt are bank loans and lines of credit.
Any change in the working capital will have an effect on a business's
cash flows. A positive change in working capital indicates that the
business has paid out cash, for example in purchasing or converting
inventory, paying creditors etc.

Hence, an increase in working capital will have a negative effect on the

business's cash holding. However, a negative change in working capital
indicates lower funds to pay off short term liabilities (current liabilities),
which may have bad repercussions to the future of the company.

Working Capital plays a vital role in all the organizations. It is a capital

for short-term current assets and current liabilities, which is of critical
importance to a firm. Lack of working capital leads to low rate of return
on capital employed. It is a cash function management, which checks
the liquidity of the business. It tests managerial efficiency.

Thus, working capital can be referred to as the “lifeblood” of the

organization as it reflects the company’s profitability, checks stability,
and it is a path for short term and long-term success.

Business Uses of Working Capital:

Just as working capital has several meanings, firms use it in many ways.
Most fundamentally, working capital investment is the lifeblood of a
company. Without it, a firm cannot stay in business. Thus, the first, and
most critical, use of working capital is providing the ongoing investment
in short-term assets that a company needs to operate.
A business requires a minimum cash balance to meet basic day-to-day
expenses and to provide a reserve for unexpected costs. It also needs
working capital for prepaid business costs, such as licenses, insurance
policies, or security deposits. Furthermore, all businesses invest in some
amount of inventory, from a law firm’s stock of office supplies to the
large inventories needed by retail and wholesale enterprises. Without
some amount of working capital finance, businesses could not open and
operate.

A second purpose of working capital is addressing seasonal or cyclical

financing needs. Here, working capital finance supports the buildup of
short-term assets needed to generate revenue, but which comes before
the receipt of cash. For example, a toy manufacturer must produce and
ship its products for the holiday shopping season several months before
it receives cash payment from stores. Since most businesses do not
receive prepayment for goods and services, they need to finance these
purchases, production, sales, and collection costs prior to receiving
payment from customers.

Another way to view this function of working capital is providing

liquidity. Adequate and appropriate working capital financing ensures
that a firm has sufficient cash flow to pay its bills as it awaits the full
collection of revenue. When working capital is not sufficiently or
appropriately financed, a firm can run out of cash and face bankruptcy.
A profitable firm with competitive goods or services can still be forced
into bankruptcy if it has not adequately financed its working capital
needs and runs out of cash.
Working capital is also needed to sustain a firm’s growth. As a business
grows, it needs larger investments in inventory, accounts receivable,
personnel, and other items to realize increased sales. New facilities and
equipment are not the only assets required for growth; firms also must
finance the working capital needed to support sales growth.

A final use of working capital is to undertake activities to improve

business operations and remain competitive, such as product
development, ongoing product and process improvements, and
cultivating new markets. With firms facing heightened competition,
these improvements often need to be integrated into operations on a
continuous basis.

Consequently, they are more likely to be incurred as small repeated

costs than as large infrequent investments. This is especially true for
small firms that cannot afford the cost and risks of large fixed
investments in research and development projects or new facilities.
Ongoing investments in product and process improvement and market
expansion, therefore, often must be addressed through working capital
financing.

Working capital management is a continuous planning process wherein

the manager has to take appropriate decisions, as and when required,
the failure of which can result in huge losses for the company. This
challenging aspect of working capital management influenced me to
choose this topic as my project.
III. COMPANY PROFILE

Raymond Limited was incorporated in 1925 and is now a Rs.1,

400 crore plus conglomerate having varied businesses like
Textiles, Readymade Garments, Denims, Engineering Files &
Tools, Aviation and Designer Wear. The company is one of the
largest players in the core worsted fabric business with over 60%
domestic market share.

The denim division has an installed capacity of 30 million meters and

produces high quality ring denims. The company currently ranks among
the top 3 producers in India. The engineering files & tools division
constitutes around 12% of the total revenues and is comparatively a
smaller division.

However, Raymond’s is the largest manufacturer of engineering files &

tools in the country. The company has entered into global tie-ups and
this is expected to add additional revenues to Raymond Limited over
the next two years. Recognized as the most respected Textile Company
of India, Raymond Limited is amongst the first three fully integrated
manufacturers of Worsted Suiting in the world.

As the flag-bearer of the multi-product, multi-divisional Raymond Group,

it enjoys over 60% share of Indian Worsted Suiting Market. It produces
25 million meters of high-value pure-wool, wool blended and premium
polyester viscose suiting in addition to half a million blankets and
shawls, all marketed under the flagship brand "Raymond" - a
worldwide trusted name since 1925.

It also produces and markets plush-velvet furnishing fabric in wide array

of designs and colors including carpeting for the niche markets of India
and Middle East. Manufacturing facilities include three world-class fully
integrated plants in India, employing state-of-the-art technology from
wool scouring to finishing stage and modern quality management (ISO
9001) as well as Environment Control Systems (ISO 14001). All the
plants are self-sufficient in terms of providing educational, housing,
recreation and spiritual support system for the employees and
connected townships.

Products are distributed through about 300 exclusive retail shops in

India and surrounding countries, 30,000 multi-brand retail outlets and
over 100 wholesale distributors. In addition to Middle East and SAARC
countries, its products are sold to discerning customers in over 60
countries including premium fashion labels all over the world.

Today the mill has turned into a Rs. 1400 crores conglomerate and is
India’s leading producer of worsted suiting fabric with 60% market
share. It is also the largest exporter of worsted fabrics and readymade
garments to 54 countries including Australia, Canada, USA, the
European Union and Japan. The Raymond group is also the leader
among ready-mades in India with a turnover of Rs. 2000 million with its
three brands – Park Avenue, Parx and Manzoni.

Customers today the world over, are looking at one-stop shops that can
fulfill all their needs. At Raymond, they offer fully finished products that
span various garment categories that has been made possible by a
seamless horizontal and vertical integration across divisions. Their
textile solutions encompass everything - from worsted suiting to denim
and shirting.

Its not just range but volume and quality that make them the textile
major that they are today. Their plants have a capacity of 31 million
meters in producing the finest worsted fabrics and wool blends. The
blends comprise of exotic fibres like cashmere, Mohair or Angora or
blends of wool with casein and bamboo or the ultimate in fine pure wool
– Super 230s.

The denim division has a capacity of 80 million meters of specialty

denims; not to mention their capabilities in producing shirting and
carded woolen fabrics. Their joint ventures with global leaders ensure
the customers that they have access to world-class products.

Six state- of- the- art textile plants and four garmenting factories in
India and Europe support their design Studios in India and Italy. Being
integrated suppliers of fabrics as well as garments, they offer their
customers total textile solutions.
Raymond continues to achieve enhanced customer satisfaction through
ongoing innovation. Internationally renowned menswear designers
today, style their latest collections from Raymond- the fabric in fashion.

About the company:

Raymond is the world’s largest producer of worsted suiting fabrics,
commanding an over 60% market share in India. With a capacity of 31
million meters, they are among the few companies in the world, fully
integrated to manufacture worsted fabrics, wool & wool blended fabrics.
They also convert these fabrics into suits, trousers and apparels that are
exported to over 55 countries in the world; including European Union,
USA, Canada, Japan and Australia amongst others.
A trendsetter and an innovator in the Indian textile market, their
expertise has been brought to bear by their in-house research &
development team. Their innovations have become milestones in the
worsted suitings industry. They mastered the craft of producing the
finest suiting in the world using super fine wool count (from 80s to 230s)
and blending the same with superfine polyester and other specialty
fibres, like Cashmere, Angora, Alpaca, Pure wool and Linen.

Raymond is amongst the few companies in the world with the expertise
to manufacture even finer worsted suiting fabric- the Super 230s. Today
they are recognized as a pioneer in manufacturing worsted suitings in
India, producing nearly 20,000 designs and colors of suiting fabrics,
which are retailed through 30,000 stores in over 400 towns across India.
From fabric to fine tailored clothing, Silver Spark Apparel Ltd. marks the
Group's foray into the global apparel market.
World-class facilities:

Raymond’s manufacturing facilities include three world-

class fully integrated plants in India, deploying state-of-
the-art technology modern quality management
systems like ISO 9001 and Environment Control
Systems (ISO 14001). All their plants are self-sufficient and provide staff
welfare measures such as education, housing, recreation and support
systems their employee.

Raymond plants are located in India at the following locations: Thane,

near Mumbai, Chhindwara in Central India and Vapi in Gujarat, near
Mumbai.

Thane Plant:
This is the mother plant and is the center of competence for world-class
manufacturing and design facilities. With decades and expertise and
finely honed skills, this plant is a treasure house of knowledge for
producing superfine worsted suiting fabrics.

Chhindwara Plant:
The Raymond Chhindwara plant, set up in 1991, is a state-of-the-art
integrated manufacturing facility located 57 kms away from Nagpur in
Central India. Built on 100 acres of land, the plant produces premium
pure wool, wool blended and polyester viscose suiting. This plant has
achieved a record production capacity of 14.65 million meters, giving it
the distinction of being the single largest integrated worsted-suiting unit
in the world.
Vapi Plant:
Raymond has increased its worsted suiting capacity by 3 million meters,
as part of the second developmental phase of the Vapi plant. After this
expansion, Raymond will have a total capacity for manufacturing 31
million meters of worsted suiting per annum. Modeled to meet
international standards, the Vapi plant has been set up on 112 acres of
lush green land with Hi-tech machinery such as warping equipment from
Switzerland, weaving machines from Belgium, finishing machines,
automatic drawing-in and other machines from Italy.

Investment Rationale Core business to add growth:

The worsted fabric business registered single digit growth over the last
two-three years. This business is likely to take off in the near future and
improved product mix and volume growth will drive growth for the main
business of the company. The company is expanding the capacity of its
worsted fabric business by 3 million meters to 28 million meters through
expansion at Vapi plant. This would yield significant improvement in the
operational margins on back of reduced labor cost. The company is also
expected to benefit from the increased outsourcing opportunity in the
worsted fabric segment.

Performance of subsidiaries to fuel profitability:

Raymond has formed many subsidiaries like Raymond Apparel Limited,
Colourplus Fashions Ltd, and Hindustan Files Limited etc. The double-
digit growth rate in these companies would significantly improve the
consolidated revenues of Raymond resulting in healthy consolidated
numbers. They expect these subsidiaries to register 12-14 % CAGR over
the next two years thereby contributing to the improved profitability of
the company.

Advantage of integrated business:

Raymond has an opportunity to take advantage of the post quota
regime through its increased scalability and ability to move up the value
chain right from yarn to retailing, through its vertically integrated
business model. The company has made capacity additions at
opportune time to take advantage of promising business situation.

Global Tie-ups to establish international presence:

Raymond has entered into joint ventures with Gruppo Zambiati of Italy
for manufacturing high value cotton shirts and cotton linen shirting
fabric. It has also entered into a joint venture with Lanificio Fedora Italy
for manufacture of blankets, shawls, and will transfer its Jalgaon unit to
the venture for its 50% stake. These tie-ups would lead to international
branding and a unique growth opportunity for Raymond.

Strong retail penetration & prime real estate value:

Raymond has one of the largest retail penetrations through its 300 odd
stores in prime locations, in 150 cities in India. It also has around 25
shops in 15 plus cities of Middle East, Sri Lanka, Bangladesh and Nepal.
The Raymond Shop retail chain occupies a space of 1 million square feet
built-up area. This is apart from around 160 acres of land at Thane a
suburb of Mumbai. The current buoyancy in the real estate rates is likely
to give significant value to Raymond for its property, which is estimated
around Rs.100 crore.
Foray in the Chinese market:
The company is planning entry into Chinese market, which impacts the
global textile business; this is a step ahead towards establishing
Raymond’s presence in the global market. The Chinese venture could
help Raymond through sourcing of raw material and intermediate
products for the companies manufacturing facilities in India and
marketing its products in Chinese market.

Details of all Raymond products are enlisted below:

Raymond Limited
Incorporated in 1925, Raymond Limited has five divisions comprising of
Textiles, Denim, Engineering Files & Tools, Aviation and Designer Wear.

Raymond Textile is India's leading producer of

worsted suiting fabric with over 60% market share.
Raymond Textiles is the world’s third largest
integrated manufacturer. Raymond Textile has developed strong in-
house skills for research & development and is thus, perceived as
pioneer and innovator.

Furnishings:
The company is known in the market for trend
setting designs in furnishings (home & office) and
product innovations.

Product portfolio:
 Plain - Hotels & Auditoriums in
India.
  Shadow Velvet - shadow effect in the plain fabric for elegant
appearance -leading hotels in India.
 Stencil – Sole producer. Shades of Plain Velvet.

 Dobby - Back-coated plush fabrics that improves the binding

strength of pile to the base fabric. Targeted at the automotive
upholstery market. Also used in office chairs and panels.

 Full Pile Jacquard - The entire fabric range is treated with

Flurogard to make it stain resistant.

Fire resistance treatment on Raymond velvet:

To cater to the specific requirements of auditoriums, theatres &
automobile industry, the facility to treat the entire product range is
available. The fabric is treated with special chemicals to impart fire
resistant property to the fabric.

Raymond Denim, set up in 1996 produces 20 million meters of

differentiated Ringspun denim per annum. The
company currently ranks among the top 3 producers
in India. Raymond Denim enjoys a substantial market
share in all parts of the world.

The company exports 55% of its production to around 20 countries

around the world and to leading denim wear brands like Levi's, Pepe,
Lee Cooper and retail brands like Zara, H&M, Gap, Tommy Hilfiger, etc.
Raymond UCO Denim is a Joint Venture between Raymond Ltd, India’s
largest textile and apparel major and UCO NV of Belgium. We produce
and market specialty ring color and stretch denim.

With a combined capacity of 80 million and manufacturing facilities

across 3 continents – US, Europe and Asia, Raymond UCO is in a best
position to develop an optimal and flexible service to meet global
requirements of large international brands.

Be: The Designer Wear division: is an exclusive pret-a-porter range that

houses designs by some of the finest Indian
designers. It offers an eclectic mix of formal; office
and evening wear for men and women, in western,
ethnic and fusion styles with
accessories. Affordability, Accessibility and
Acceptability are the three attributes that characterizes Be.

The fabric ranges from knits to woven and cottons & linens to silk, with
a spectrum of colors starting from earthy and aqua tones to bright
colors. The price range is equally exciting that starts as low as Rs. 600/-
to a maximum of Rs. 6000/-. Presently the Be: collection consists of
designer bags for women, belts inspired by traditional Indian artistry,
designer shoes by Rinaldi.

Million Air: The Aviation division - launched in 1996. Known for high
quality and reliable services, Million Air has a
fleet of three helicopters and one executive jet.
Million Airs has the distinction of achieving
overall technical reliability of 99%. Million Airs is also a member of HAI
(Helicopter Association International) & NBAA (National Business
Aviation Association), USA and has been awarded “safety Awards” by
both the organizations.

J K Files & Tools, the Engineering Files & Tools division:

J.K. Files & Tools is the world’s largest producer
of steel files with 90% market share in India and
about 30% market share in the world. J.K. Files &
Tools is also the largest producer of HSS Ground
Flute Twist Drills in India.
IV. OBJECTIVES AND SCOPE OF THE PROJECT

Objectives of the Project:

 To study working capital management process.
 To study receivable management of the company.
 To study the process of cash and inventory management.

Scope of the project:

The scope of the project includes elaborate discussion on:
 Statement of working capital.
 Inventory management
 Cash management.
 Debtors management.
The above-mentioned topics form the core part of working capital
management.

Limitations:
Not considered other current assets and their ratios, which form a part
of working capital like Stock of raw material, work in progress,
outstanding expenses, labor, etc as too many calculations may lead to
confusion.

Methodology: Acquisition of primary and secondary data.

 Primary data: The first hand data obtained from the company
sources (E.g.; information about the company.
 Secondary data: Annual reports, balance sheets, trial balance,
etc.
V. WORKING CAPITAL

Working capital management is management for the short-term current

assets and current liabilities, which is of critical importance to a firm.
Lack of efficient and effective utilization of working capital leads to earn
low rate of return on capital employed. The requirement of working
capital varies from firm to firm depending upon the nature of business,
production policy, market conditions, seasonality of operations,
conditions of supply, etc.

Working capital management entails short term decisions - generally,

relating to the next one year period - which are "reversible". These
decisions are therefore not taken on the same basis as Capital
Investment Decisions (NPV or related, as above) rather they will be
based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the
net number of days from the outlay of cash for raw material to receiving
payment from the customer. As a management tool, this metric makes
explicit the inter-relatedness of decisions relating to inventories,
accounts receivable and payable, and cash. Because this number
effectively corresponds to the time that the firm's cash is tied up in
operations and unavailable for other activities, management generally
aims at a low net count.

In this context, the most useful measure of profitability is Return on

capital (ROC). The result is shown as a percentage, determined by
dividing relevant income for the 12 months by capital employed; Return
on equity (ROE) shows this result for the firm's shareholders. Firm value
is enhanced when, and if, the return on capital, which results from
working capital management, exceeds the cost of capital, which results
from capital investment decisions as above. ROC measures are
therefore useful as a management tool, in that they link short-term
policy with long-term decision making.

Management of working capital:

Guided by the above criteria, management will use a combination of
policies and techniques for the management of working capital. These
policies aim at managing the current assets (generally cash and cash
equivalents, inventories and debtors) and the short term financing, such
that cash flows and returns are acceptable. It simply refers to
management of the working capital, or in more precise terms, the
management of current assets. A firms working capital consist of its
investment in current asset which include short term asset such as cash
and bank balance, inventories, receivables, and marketable securities.

Cash management: Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.

Inventory management: Identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw
materials - and minimizes reordering costs - and hence increases cash
flow, supply chain management ; Just In Time (JIT); Economic order
quantity (EOQ); Economic production quantity (EPQ).

Debtors management: Identify the appropriate credit policy, i.e.

credit terms which will attract customers, such that any impact on cash
flows and the cash conversion cycle will be offset by increased revenue
and hence Return on Capital (or vice versa); Discounts and allowances.

Short term financing: Identify the appropriate source of financing,

given the cash conversion cycle: the inventory is ideally financed by
credit granted by the supplier; however, it may be necessary to utilize a
bank loan (or overdraft), or to "convert debtors to cash" through
"factoring".

The term working capital may be used in two different ways:

1. Gross working capital: The gross working capital refers to the

firm’s investment in all current assets taken together.

2. Net working capital: The term net working capital may be

defined as the excess of total current assets over total current
liabilities.

A firm should maintain an optimum level of gross working capital. This

will help avoiding the unnecessarily stoppage of work or liquidation due
to insufficient working capital. Effect on profitability because over
flowing working capital implies cost. Therefore, a firm should have just
adequate level of total current assets. The gross working capital also
gives an idea of total funds required for maintaining current assets.

On other hand, net working capital refers to amount of funds that must
be invested by the firm, more or less regularly in current assets. The net
working capital also denotes the net liquidity being maintained by the
firm. This also gives an idea of buffer available to the current liability.
Need for adequate working capital:

Every firm must maintain a sound working capital position otherwise; its
business activities may be adversely affected.

The excess working capital, i.e. when the investment in working

capital is more than the required level, it may result in unnecessary
accumulation of inventories resulting in waste, theft, damage etc. Delay
in collection of receivables resulting in more liberal credit terms to
customers than warranted by the market conditions. Adverse influence
on the performance of the management.

On the other hand, inadequate working capital is not good for the
firm. It may result in the following:

 The fixed asset may not be optimally used.

 Firm growth may stagnate.
 Interruptions in production schedule may occur ultimately
resulting in lowering of the profit of the firm.
 The firm may not be able to take benefit of an opportunity.
 Firm goodwill in the market is affected if it is not in a position to
meet its liabilities on time.

Working Capital Needs:

A business’ need for working capital can come as a result of several
reasons that include the following:
  Increasing sales growth or seasonal growth.
 Customers paying slower.
 Need to increase inventory to support sales growth and/or adding
product lines.
 Desire to take discounts on purchases from vendors.
 Recent operating losses have reduced your cash reserves.
 Increased expenses due to additional marketing efforts, new
employees, office relocation, etc.

Factors determining working capital requirement:

Though there is no set of universally applicable rules to ascertain
working capital needs, the following factors may be considered:

Nature of business:
The Working capital requirement depends upon the nature of business
carried on by the organization. In a manufacturing firm the requirement
is generally high, but it also depends on the type and nature of the
product. The proportion of current asset to total assets measures the
relative requirements of working capital of various industries.

Manufacturing cycle:
Time span required for the conversion of raw materials into finished
goods is a block period. The period in reality extends a little before and
after the work-in-progress. The manufacturing cycle and the fund
requirements vary in direct proportion. The funds blocked in
manufacturing cycle vary from industry to industry. Further, even within
the same group of industries, the operating cycle may be different due
to technological considerations.
Business cycle:
Business fluctuations lead to cyclical and seasonal changes, which, in
turn, cause a shift in working capital position particularly for working
capital requirement. The variations in business conditions may be in two
directions: Upward phase when boom conditions prevail, and
Downswing phase when economic activity is marked by a decline.
During the upswing of business activity, the need for working capital is
likely to grow and during the downswing phase the working capital
requirement is likely to be less. The decline in economy is associated
with a fall in the volume of sales, which, in turn, leads to a fall in the
level of inventories and book debts.

Seasonal variation:
Variation apart, seasonally factor creates production or even shortage
problem. This is the reason as to why manufacturing concerns
producing seasonal products purchase their raw material throughout the
year and carry on the manufacturing activity. For example woolen
garments have a demand during winter. But the manufacturing
operation for the same has to be conducted during the whole year
resulting in working capital blockage during off-season.

Production policy:
While working capital requirements vary because of seasonal factors,
the impact can be minimized by suitably gearing the production
schedule. There are two choices- either the production is periodically
adjusted to meet the seasonal requirements or a steady level of
production is maintained throughout, consequently allowing the
inventories to build up in the off-season.
Scale of operations:
Operational level determines the working capital demand during a
particular period. Higher the scale, higher will be the need for working
capital. However, pace of sales turnover is another factor. Quick
turnover calls for lesser investment for inventory while low turnover rate
necessitates larger investments.

Credit policy:
The credit policy influences the requirement of working capital in two
ways:
 Through credit terms granted by the firm to its
customers/buyers of goods.
 Credit terms available to the firm from its creditors.

Growth and expansion:

It is, of course difficult to determine precisely the relationship between
the growth and volume of business and the increase in working capital.
The composition of working capital also shifts with economic
circumstances and corporate practices. However, it is to be noted that
the need for increased working capital funds does not follow the growth
in business activity but precedes it.

Dividend policy:
The payment of dividend consumes cash resources and, thereby, effects
working capital to that extent. However, if the firm does not pay
dividend but retains the profit, working capital increases. There are wide
variations in industry practices as regards the inter relationship between
working capital requirement and dividend payment. In some cases,
shortage of working capital is sometimes a powerful reason for reducing
or even skipping dividends in cash (resolved by payment of bonus
shares).

Depreciation policy:
There is an indirect effect of depreciation policy on working capital.
Enhanced rates of depreciation lower the profits and tax liability and,
thus, more cash profits. Higher depreciation means lower disposable
profits and a smaller dividend payment. Thus cash is preserved. If the
current capital expenditure falls short of the depreciation provision, the
working capital position is strengthened and there may be no need for
short-term borrowing. If the current capital expenditure exceeds the
depreciation provision, either outside borrowing will have to be resorted
to or a restriction on dividend payment coupled with retention of profits
will have to be adopted to prevent working capital position from being
adversely affected.

Price level changes:

Rising prices necessitate the use of more funds for maintaining an
existing level of activity. However, the implications of rising price levels
on working capital position may vary from company to company
depending on the nature of its operation, its standing in the market and
other relevant considerations.

Operating efficiency:
The efficient utilization of resources by eliminating waste, improved
coordination and full utilization of existing resources would increase the
operating efficiency. Efficiency of operations accelerates the pace of
cash cycle and improves the working capital turnover. It releases the
pressure on working capital by improving profitability and improving the
internal generation of funds.
Sources of working capital finance:

Working Capital Finance - Gives your business the money it

needs to grow.
Working capital finance makes it possible for the business to obtain
capital if the business has been denied for a bank loan, or if it has little
cash flow. Traditional funding through a standard bank can be difficult
to obtain, but they also don't satisfy the needs of expanding companies.
Without capital a business will have to slow down their growth, which
can hurt a business. Working capital finance makes it possible for any
business to have access to the cash it needs, when it needs it.

Working capital finance allows a company to turn their income streams

into instant capital. They can turn their accounts receivables into cash
by selling them to a lender who specializes in accounts receivable
factoring. Another method for obtaining working capital is to lease
equipment or to obtain credit from a company (for eg. Companies like
Office Depot or Lowes in US) that sells items that the business needs.
Obtaining lines of credit from a company are easier than going after a
bank loan. If at all possible obtain a line of credit from a company that
will report your business credit scores to the major business credit
bureaus. This will help build your business credit scores, so it is easier to
qualify for large bank loans.
Another popular method of working capital finance is utilizing asset-
based financing. That means that the company would use assets from
their own business to secure loans. They could pledge any commercial
real estate their business owns, business vehicles, equipment, etc.
Lending institutions approve asset-based loans quicker because the risk
isn't as high. Small companies often can obtain more cash with an
asset-based loan.

Commercial banks are the largest financing source for external business
debt including working capital loans, and they offer a large range of
debt products. With banking consolidation, commercial banks are
multistate institutions that increasingly focus on lending to small
business with large borrowing needs that pose limited risks.

Consequently, alternate sources of working capital debt become more

important. Savings banks and thrift lenders are increasingly providing
small business loans, and, in some regions, they are important small
business and commercial real estate lenders. Although savings banks
offer fewer products and may be less familiar with unconventional
economic development loans, they are more likely to provide smaller
loans and more personalized service.

Commercial finance companies are important working capital lenders

since, as non -regulated financial institutions, they can make higher risk
loans. Some finance companies specialize in serving specific industries,
which allows them to better assess risk and creditworthiness, and
extend loans that more general lenders would not make.
Another approach used by finance companies is asset-based lending in
which a lender carefully evaluates and lends against asset collateral
value, placing less emphasis on the firm’s overall balance sheet and
financial ratios. An asset-based lending approach can improve loan
availability and terms for small firms with good quality assets but
weaker overall credit. Commercial finance companies also are more
likely to offer factoring than banks.
Trade credit extended by vendors is a fourth alternative for small firms.
While trade credit does not finance permanent or long-term working
capital, it helps address short-term borrowing needs. Extending
payment periods and increasing credit limits with major suppliers is a
fast and cost-effective way to finance some working capital needs that
can be part of a firm’s overall plan to manage seasonal borrowing
needs.

Other working capital finance options exist beyond these three

conventional credit sources. Business development corporations (BDCs)
are a second alternative source for working capital loans. BDCs are
high-risk lending arms of the banking industry that exist in almost every
state. They borrow funds from a large base of member banks and
specialize in providing subordinate debt and lending to higher-risk
businesses. While BDCs rely heavily on bank loan officers for referrals,
economic development practitioners need to understand their debt
products and build good working relationships with their staffs.

Venture capital firms also finance working capital, especially permanent

working capital to support rapid growth. While venture capitalists
typically provide equity financing, some also provide debt capital. A
growing set of mezzanine funds,7 often managed by venture capitalists,
supply medium-term subordinate debt and take warrants that increase
their potential returns. This type of financing is appropriate to finance
long-term working capital needs and is a lower-cost alternative to
raising equity.

However, the availability of venture capital and mezzanine debt is

limited to fast-growing firms, often in industries and markets viewed as
offering the potential for high returns. Government and nonprofit
revolving loan funds also supply working capital loans. While small in
total capital, these funds help firms access conventional bank debt by
providing subordinate loans, offering smaller loans, and serving firms
that do not qualify for conventional working capital credit.

Many entrepreneurs and small firms also rely on personal credit sources
to finance working capital, especially credit cards and second mortgage
loans on the business owner’s home. These sources are easy to come
by and involve few transaction costs, but they have certain limits. First,
they provide only modest amounts of capital. Second, credit card debt is
expensive with interest rates of 18% or higher, which reduces cash flow
for other business purposes.

Third, personal credit links the business owner’s personal assets to the
firm’s success, putting important household assets, such as the owner’s
home, at risk. Finally, credit cards and second mortgage loans are not
viable for entrepreneurs who do not own a home or lack a formal credit
history.

Immigrant or low-income business owners, in particular, are least able

to use personal credit to finance a business. Given these many
limitations, it is desirable to move entrepreneurs from informal and
personal credit sources into formal business working capital loans that
are structured to address the credit needs of their firms.
Working capital finance may be classified into the
following:

Spontaneous source of finance:

Finance that naturally arises in the course of business is called as
spontaneous financing. For example: Trade creditors, credit from
employees, credit from suppliers of services etc.

Negotiated financing:
Financing which has to be negotiated with lenders (commercial banks,
financial institutions, and general public) is called as negotiated
financing. This kind of financing may short term or long term in nature.
Between spontaneous and negotiated sources of finance, the latter is
more expensive and inconvenient to raise. Spontaneous source of
finance reduces the amount of negotiated financing.

The working capital may be financed in either of the following

ways, keeping in view of accessibility to different sources as
well as the cost factor-

Hedging Approach to Working Capital Financing:

Under hedging approach to financing working capital requirements of a
firm each asset in the balance sheet asset side would be off set with a
financing instrument of the same approximate maturity. The basic
approach of this method of financing is that the permanent component
of current assets and fixed assets would be met with long-term funds
and the short term or seasonal variation in current assets would be
financed with short-term debt. If the long-term funds are used for short-
term needs of the firm, it can identify and take steps to correct the
mismatch in financing.

Trade credit:
Trade credit refers to the credit extended by suppliers of goods and
services in the normal course of transaction/ business/ sales. It is an
informal spontaneous source of finance. Not requiring negotiation and
formal agreement trade credit is free from the restrictions associated
with formal/negotiated source of finance/ credit. It does not involve any
explicit interest charge, however there is an implicit cost of trade credit.
As, the cost of trade credit is generally very high beyond the discount
period; the firms should avail of the discount on prompt payment.

Bank Credit:
It is the primary institutional source of working capital finance in India.
Banks in five ways provide working capital finance:

Cash credit/ Overdraft:

Under cash credit/ overdraft form the banks specify, a pre-determined
borrowing/ credit limit. The borrower can draw/ borrow upto the
stipulated credit/ overdraft limit. This form of bank financing of working
capital is highly attractive to the borrowers because, firstly, it is flexible
in that although the borrowed funds are repayable on demand, banks
usually do not recall cash advances/ roll them over and, secondly the
borrower has the freedom to draw the amount in advance as and when
required, while the interest liability is only on the amount actually
outstanding. With the emergence of new banking since the mid nineties,
cash credit cannot, at present exceed 20 % of maximum permissible
bank finance/ credit limit to any borrower.
Loans:
Under this arrangement the entire amount of borrowing is credited to
the current account of the borrower or released in cash. The borrower
has to pay interest on the total amount. The loans are repayable on
demand or in periodic installments. They can also be renewed form time
to time. As a form of financing, loans imply a financial discipline on the
part of the borrowers. From the modest beginning in the early nineties,
at least 80 % of MPBF/ credit limit must be in the form of loans in India.

Bills purchased/ discounted:

Under this arrangement, a bill arises out of a trade sale-purchase
transaction on credit. The seller of goods draws the bill on the purchaser
of goods, payable on demand or after a usance period, not exceeding
90 days. On acceptance of bill by the purchaser, the seller offers it to
the bank for discount/ purchase. On discounting the bill, the bank
releases the funds to the seller. The bill is presented by the bank to the
purchaser / acceptor of the bill on due date for payment. The bills can
also be rediscounted with the other banks / RBI.

Term loans:
Under this arrangement the banks advance loans for three to seven
years repayable in yearly or half yearly installments.

Letter of credit:
It is an indirect form of working capital financing and banks assume only
the risk, the credit being provided by the supplier himself. The
purchaser of goods on credit obtains a letter of credit from a bank. The
bank undertakes the responsibility to make the payment to the supplier
in case the buyer fails to meet his obligation.

Commercial paper:
Commercial paper is a debt instrument used for short term financing
that enables highly rated corporate borrowers to diversify their sources
of short-term borrowings and provide an additional financial instrument
to investors to a freely negotiable interest rate. The maturity period
ranges from three months to one year. Since it is short-term debt, the
issuing company is required to meet dealers’ fees, rating agency fees,
and any other relevant charges. It is a short term unsecured promissory
note issued by corporations with high credit ratings.

Inter corporate loans and deposits:

In the present corporate world, it is a common practice that the
company with surplus cash will lend other period for short period
normally ranging from 60 to 180 days. The rate of interest will be higher
than the bank rate of interest and depending on the financial soundness
of the Borrower Company. This source of finance reduces the
intermediation of funds in financing.

Public Deposits:
The period of public deposits is usually restricted to a maximum of 5
years at a time. Thus, this source can provide finance only for short
term to medium term, which could be useful for meeting working capital
needs of the company. It is therefore advisable to use the amounts of
public deposits for acquiring assets of long-term nature unless its pay
back period is very short.
Funds generated from operations:
Funds generated from operations during an accounting period increase
working capital by an equivalent amount. The two main components of
funds generated from operations are profits and depreciation. Working
capital will increase by the extent of funds generated from operations.
Deferred tax payment:
Under this arrangement the tax authorities supply the credit. This is
created by the interval that elapses between the earning of the profits
of the company and the payment of the taxes due on them.

Accrued Expenses:
For most firms accrued expenses act as a spontaneous source of short-
term finance. One such example would be that of employee’s accrued
wages. For large firms, the accrued wages held by the firm constitute an
important source of financing. In case of Raymond Limited, this would
amount to wages and salaries of about 6000 employees and workers.
 VI. STATEMENT OF WORKING CAPITAL

Changes In W-cap
For the year ended
PARTICUL Increase Decrease
ARS 2004 2005 2006 2004-05 2005-06 2004-05 2004-05
Current
Assets
Inventories 31904.1
29490.66 28756.59 6 3147.57 734.07

Sundry 24846.74
24614.52 22627.67 2219.07 1986.85
Debtors
Cash and 2503.17
2675.92 1324.83 1178.34 1351.09
Bank
Other Current 3315.06
1887.79 2277.72 389.93 1037.34
Assets
Loans and 14442.06
12122.14 12206.35 84.21 2235.71
Advances
Total Current 77011.19
Assets 70791.03 67193.16 9818.03 3597.87
Current
Liabilities
Acceptances 45.09
89.75 42.17 2.92 47.58
Sundry 16427.41
10491.99 11009.37 517.38 5418.04
Creditors
Advances 560.35
449.05 459.52 10.47 100.83
against sales
Due to
177.84
Subsidiary 137.82 207.25 69.43 29.41
Co’s
Deposits
5318.21
from Dealers 4874.25 5134.95 260.7 183.26
and Agents
Overdrawn
Bank 1125.67 297.56 641.61
186.60 484.16
Balances
Other 2044.72
1491.91 1689.99 198.08 354.73
liabilities
Interest
50.85
accrued but 528.05 161.33
315.87 477.20
not due
6770.84
Provisions 8373.15 5605.17 1165.67 2767.98
Total Current 26227.34
Liabilities 26410.39 25109.78 1117.56 1300.61
Net Working 44380.64 42083.38 50783.85
Capital 8700.47
(CA – CL) 2297.26

VII. INVENTORY MANAGEMENT

Inventory refers to the stock of products a firm is offering for sale and
the components that make up the product. It includes raw materials;
work in process (semi-finished goods). Managing inventory is a juggling
act. Excessive stocks can place a heavy burden on the cash resources of
a business. Insufficient stocks can result in lost sales, delays for
customers etc. The key is to know how quickly the overall stock is
moving or, put another way, how long each item of stock sit on shelves
before being sold. Obviously, average stock-holding periods will be
influenced by the nature of the business.

Inventory Financing:
As with accounts receivable loans, inventory financing is a secured loan,
in this case with inventory as collateral. However, inventory financing is
more difficult to secure since inventory is riskier collateral than accounts
receivable. Some inventory becomes obsolete and looses value quickly,
and other types of inventory, like partially manufactured goods, have
little or no resale value.

Firms with an inventory of standardized goods with predictable prices,

such as automobiles or appliances, will be more successful at securing
inventory financing than businesses with a large amount of work in
process or highly seasonal or perishable goods. Loan amounts also vary
with the quality of the inventory pledged as collateral, usually ranging
from 50% to 80%. For most businesses, inventory loans yield loan
proceeds at a lower share of pledged assets than accounts receivable
financing. When inventory is a large share of a firm’s current assets,
however, inventory financing is a critical option to finance working
capital.

Lenders need to control the inventory pledged as collateral to ensure

that it is not sold before their loan is repaid. Two primary methods are
used to obtain this control: (1) warehouse storage; and (2) direct
assignment by product serial or identification numbers. Under one
warehouse arrangement pledged inventory is stored in a public
warehouse and controlled by an independent party (the warehouse
operator).
A warehouse receipt is issued when the inventory is stored, and the
goods are released only upon the instructions of the receipt-holder.
When the inventory is pledged, the lender has control of the receipt and
can prevent release of the goods until the loan is repaid. Since public
warehouse storage is inconvenient for firms that need on-site access to
their inventory, an alternative arrangement, known as a field
warehouse, can be established.

Here, an independent public warehouse company assumes control over

the pledged inventory at the firm’s site. In effect, the firm leases space
to the warehouse operator rather than transferring goods to an off-site
location. As with a public warehouse, the lender controls the warehouse
receipt and will not release the inventory until the loan is repaid.

Direct assignment by serial number is a simpler method to control

inventory used for manufactured goods that are tagged with a unique
serial number. The lender receives an assignment or trust receipt for
the pledged inventory that lists all serial numbers for the collateral. The
company houses and controls its inventory and can arrange for product
sales. However, a release of the assignment or return of the trust
receipt is required before the collateral is delivered and ownership
transferred to the buyer.

This release occurs with partial or full loan repayment. While inventory
financing involves higher transaction and administrative costs than
other loan instruments, it is an important financing tool for companies
with large inventory assets. When a company has limited accounts
receivable and lacks the financial position to obtain a line of credit,
inventory financing may be the only available type of working capital
debt. Moreover, this form of financing can be cost effective when
inventory quality is high and yields a good loan-to-value ratio and
interest rate.

Factors to be considered when determining optimum stock

levels include:
 What are the projected sales of each product?
 How widely available are raw materials, components etc.?
 How long does it take for delivery by suppliers?
 Can the company remove slow movers from their product range
without compromising best sellers?

It should be noted that stock sitting on shelves for long periods of time
ties up money, which is not working.

For better stock control, the following may be considered:

 Review the effectiveness of existing purchasing and inventory
systems.

 Know the stock turn for all major items of inventory.

 Apply tight controls to the significant few items and simplify

controls for the trivial many.

 Sell off outdated or slow moving merchandise - it gets more

difficult to sell the longer the company keeps it.
 Consider having part of the company’s product outsourced to
another manufacturer rather than make it yourself.
  Review your security procedures to ensure that no stock “is going
out the back door!”

 Higher than necessary stock levels tie up cash and cost more in
insurance, accommodation costs and interest charges.

The inventory of a manufacturing concern usually includes:

 Raw material
 Work-in-Progress
 Finished goods

Inventory management at Raymond India Ltd.:

The inventory of Raymond ltd. includes the following:
 Raw material
 Work-in-Progress
 Stores and Spares
 Finished goods.
The table below gives a brief description of all the types of inventory,
the components included, the valuation methods Followed and other
relevant details:
Stores
Particulars Raw Material WIP Finished Goods & Spares

Component i. Wool (Australia)

s (Fine micron, coarse)
__ Fabric Oils,
ii. Polyester Lubricants
(Reliance Ltd.) etc.

iii. Viscose (Locally)

iv. Yarn (RSM)

(Rajasthan)

v. Camel hair
(Locally)

vi. Soya bean fiber

(Locally)
At its peak Fine micron-July Wedding and
and festive
Stored for the entire Seasons.
year Stable: April-
August
And Dec-Jan.
Valuation Weighted Average Weighted
Method Specific Identification Weighted Cost or market Average
Average value
Whichever is less.
Value as in 110
March 2006 20 68-70 (In accordance with 8-9
(Rs.Crores) AS-2
Including Excise
duty)
Managed by Production Production Production and _
& & Planning
Planning dept. Planning Dept, Warehouse
dept. dept & Marketing
 dept.

Raw material:

Wool: Tops of around 19microns and less are seasonally imported and of
around 21, 22,and 24 microns are imported throughout the year. The
ordering of the raw materials depends on the landing cost, which is the
product of the following: Price, availability, and exchange rate
fluctuations. The company gets 0.5 to 2.5% cash discount while
purchasing the raw material.

The maximum demand is during the festive and wedding season, i.e.
from the month of October onwards. The production time being 2-2.5
months, the lead-time (the time from when the order is placed to when
the material stock is actually received) being 2 months, the inventory is
accordingly ordered in the months of June –July and stored for the entire
year.

It is expected that the company should maintain 100% raw material

inventory as it accounts for only 27%(approx.) Of the ex-mill price which
turns out to be around Rs. 18-20 crores. The company maintained
safety stock costing Rs. 27 crores for the year ended March 2006. For
example, for wool it was 35 days and for polyester it was 40 days.

The pricing policy of the raw materials is done by specific identification

method, in which the raw material stock is imported, consignment wise
and the stock identification is done in the form of lots. There are no
standards or norms followed by the company in specific, as fluctuations
dominate the market.
Work-in-progress:
The work-in process inventory for the company is fairly stable
throughout the year at Rs. 68-70 crores with a minor fluctuation of
around Rs. 2-3 crores. This is mainly as the following mentioned factors
are more or less constant throughout the year:

 Machine efficiency
 Loading
 Flow

Finished goods:
The finished goods inventory at the company is very volatile. The
production is more or less in stock during the period April – August and
starts depleting somewhere in the months of September / October, it
again starts picking up in the months of December / January (which is
the peak). Exports are more or less constant, though there the
predominant exports are in the months of April – July.
Ratios:

Ratio used for Formula used Ratio for the financial year
evaluation ended

2006 2005 2004

Inventory
Turnover COGS
ratio 2.84
Average Inventory 1.34 3.43
(Times)

Inventory 365
129
Period Inventory Turnover Ratio 272 106
(Days)

Current Ratio Current assets, loans and advances

Current liabilities and provisions 2.33 2.68 2.68

Interpretation:

Inventory Turnover ratio:

This ratio measures the number of times a company’s inventory is

turned over in a year. A high turnover ratio is considered good. From
working capital point of view, a company with a high turnover requires
a smaller investment in inventory than one producing the same sales
with a low turnover.

This ratio indicates management’s efficiency in turning over the

company’s inventory, which can be compared with other companies in
the same field. It also suggests how adequate a company’s inventory is
for its business volume.

There is no standard yardstick for this ratio since inventory turnover

rates, vary from industry to industry. If a company has an inventory
turnover rate that’s above average for its industry, it will generally
mean that a better balance is being maintained between inventory and
sales volume. So there will be less risk of

 Being caught with a top-heavy inventory position in the event of

a decline in the price of raw materials, or in the market demand
for end products, and
 Wastage through materials and products standing unused for
longer periods than anticipated with consequent possible
deterioration in quality and/or marketability.

On the other hand, if inventory turnover is too high compared to

industry norms, problems could arise from shortages in inventory,
resulting in lost sales. Since much of a company’s working capital is
usually tied up in inventory, how the inventory position is managed has
an important and direct effect on earnings.

For Raymond Ltd. the inventory turnover ratio has increased from
2.84 times (2004) to 3.43 times (2005), but showed a major decline in
the year 2005-06 indicating that inventory management has to be
taken due attention. But the decline in the inventory turnover ratio
could be attributed to many reasons and not just poor inventory
management.

Inventory Period had shown a downward trend from 129 days (2004)
and 106 days (2005) corresponding to then increase in the inventory
turnover period in the same period. But there is major variation to the
earlier years. In the year 2006 the inventory period has increased
tremendously from 106 days in 2005 to 272 days in 2006. This is also
supported by the decline in the inventory turnover ratio to a meager of
1.34 times in 2006. Since the company is a textile industry therefore
the inventory varies according to seasonal and festive demands.

Current ratio:
The current ratio is a reflection of financial strength. The current
ratio measures the ability of the firm to meets its current liabilities-
current assets get converted into cash and provide the funds needed
to pay current liabilities. A current ratio can be improved by increasing
current assets or by decreasing current liabilities. Steps to accomplish
an improvement include:

 Paying down debt.

 Acquiring a long-term loan (payable in more than 1 year's time).
 Selling a fixed asset.
 Ploughing back profits into the business.

A high current ratio may mean that cash is not being utilized in an
optimal way. For example, the excess cash might be better invested in
equipment. The higher the current ratio, the greater the margin of
safety, the larger the amount of current assets in relation to current
liabilities, the more the firms ability to meet its current obligations.

The current ratio for Raymond Ltd. was 2.68:1 in 2004. The current
ratio stood at 2.68:1 for the year ended 2005.If we compare current
ratio of 2005 with 2004,we can see that the percentage of the ratio
remains same for both years but here cash bank balance has
decreased by 51%. Other current assets have increased by 20.6%
compared with 2004. And provisions has decreased by 33.05%, current
liabilities so the current ratio for both the years has remained constant
i.e. 2.68:1.

When one sees the changes in assets, cash and bank balance has
increased tremendously by 79.07 %. This is because company has
received prompt payments from debtors. Other current assets have
decreased by 25%. This is because company received less interest and
dividend in the year 2004 than in the year 2003.

The overall decrease in earning of interest and dividend was 70%. The
Current Liabilities, provisions have increased by 22.42 %. This is
because the provision made by the company such as proposed
dividend, tax on dividends, retirement benefits and excise duties has
increased by 22%.

But the current ratio has decreased from 2.68:1 (2005) to 2.33:1 in the
year 2006.
This is the result of the changes in current assets and current liabilities
or changes in the working capital. Current assets comprises of
Inventory, Debtors, Cash & Bank balances, Other Current Assets and
Loans & Advances.

The percentage of inventory held by Raymond ltd. Increased by 10%,

which is evident form the decline in the inventory turnover ratio and
the increase in the inventory period. Debtors have increased by 7%
compared to the previous year. That means sales and marketing
efforts needs a push because inventory is pilling up. Inventory has
increased and so has the debtors.
Cash and bank balances have increased drastically by 88% in 2006 as
in the year 2005. Attention has to be paid to the increase in the
amount of cash balances. Other current assets have also increased by
45.54%. Loans and advances have also increased by 37.35%. Thus the
overall current assets have increased by 17.57%. Dividend and interest
subsidy receivable has increased as compared to the last year.

Current liabilities have increased by 34.67% from the last year 2005.
Provisions have increased by 20.78%, thus the total current liabilities
have increased by 31.42%. Hence as the increase in the current
liabilities is much more than the increase in the current assets, the
current ratio has declined slightly.

The current liabilities, which include sundry creditors, have increased

from 10851.45 lakhs to 16427.41 lakhs. The overdrawn bank balances
and the interest accrued but not due component of the current
liabilities section has also increased. A new provision has been made in
the form of fringe benefit tax has also been introduced in the year
2006. The provision for excise duty has also increased.
VIII. CASH MANAGEMENT

There are four primary motives for maintaining cash balances.

Transactions Motive - to meet payments arising in the ordinary

course of
business.
Speculative Motive - to take advantage of temporary
opportunities
Precautionary Motive - to maintain a cushion or buffer to meet
Unexpected cash needs
Compensating motive - Hold cash balances to compensate banks for
providing certain services and loans.

The basic objectives of cash management are:

 To meet the cash disbursement needs.
 To minimize funds committed to cash balances.
These are conflicting and mutually contradictory and the task of cash
management is to reconcile them.

Cash Management Techniques:

The strategic aspects of efficient cash management are:
 Efficient inventory management
 Speedy collection of accounts receivables
 Delaying payments on accounts payable.

There are some specific techniques and processes for speedy

collection of receivables from customers and slowing disbursements.
Speedy Cash Collections:

 Expedite preparing and mailing the invoice

 Accelerate the mailing of payments from customers
 Reduce the time during which payments received by the firm
remain uncollected
 Prompt payment by customers
 Early conversion of payments into cash.
 Concentration Banking
 Lock Box System

Slowing disbursements:
 Avoidance of early payments
 Centralized disbursements
 Float
 Paying from a distant bank
 Cheque encashment analysis
 Accruals (goods and services accrued but not paid for)

Cash Management At Raymond Ltd:

For early conversion of its receivables into cash, some of the

incentives offered by Raymond Ltd for early payment are as
under:
 Cash discounts for payment made within the due period.
 Bonuses given to the party vary with the volume as well as value
of sales.
 One-third of advertising expenses of retailers and franchisees are
borne by the company.
Raymond ltd. has invested about Rs. 600 crores (approx.), which
stands as their core investment. In order to diversify its risk the
company has invested this amount in various instruments including
Mutual funds, debt instruments, corporate deposits, equity
markets, etc.

Amongst others alternatives the company prefers to invest an amount

of Rs.2-5 crores (or the adjusted amount after considering the daily
requirements) in mutual funds on a daily basis (temporary investment)
and play safe with their core investment amount. Another reason for
this decision is the tax-free dividend income (5%-6%) earned by
investing in Mutual funds.

Raymond Ltd. generally experiences surplus profits. Om Kotak

Mahindra ltd., DSP Meryll Lynch are the chief corporate
advisors for the company. However the Board of Directors takes the
final decision. One such decision taken by the B.O.D includes that the
company’s investment in the equity market should not exceed Rs.50
crores (keeping the volatility of the stock markets in mind).

Finally, it can be seen that the Average Rate of Return on

Investment is 5%-6%. All the decisions regarding investments and
cash management are looked after by the Finance Department
(Corporate division).
 Ratios:

Ratio used for Formula used Ratio for the financial year
evaluation ended

2006 2005 2004

Cash Ratio Cash & Book Balances + Current 1.73 2.46 2.35
Investments
Current Liabilities

Sales to Cash 51.34 84.19 37.15

Ratio Sales_
Cash

Cash Profit Cash Profit * 100 17.72 18.68 22.75

Ratio Sales

Notes:
In all the calculations involving Net Sales, the amount is taken net of
excise duties paid.
Net sales = Net sales – Excise duty

(Rs. In lakhs)
Particulars 2006 2005 2004

Net sales
(Net of 132275. 111534.4
99431.64
excise) 51 4
Cash Profit:
Cash Profit = Profit available for appropriation + Depreciation +
Miscellaneous Expenditure written off

Interpretation:

Cash Ratio:
The cash ratio measures the extent to which a corporation or other
entity can quickly liquidate assets and cover short-term liabilities, and
therefore is of interest to short-term creditors. It is also called liquidity
ratio or cash asset ratio. This ratio is the most stringent measure of
liquidity. However, it can be argued that lack of immediate cash
may not matter if the firm can stretch payments or borrow money at
short notice.

Cash ratio for Raymond Ltd. increased from 2.35:1(2004) to 2.46:1

(2005). The major reason for this burst in the increase in the current
investments and sales amount by 12% in the year 2005 as compared
to 2005, though there was a decline in the cash and bank balances.
The other reason being the decrease in the current liabilities.

For the year ended 2005, the cash ratio is 2.46 and in 2004 it was 2.35
so net result is slight increased by 17.45%. This sudden jump in the
ratio occurred because of the slight increase in the current
investments (increased by 1.58%). Another reason for this may be
attributed to a certain extent to the decrease in the current liabilities
(15.44 % decline).
For the year ended 2005-2006, the cash ratio has fallen from
2.46:1(2005) to 1.73:1 in 2006. Current investments have not
fluctuated as compared to the earlier year.
Increase in the current liabilities by 1117.56 lakhs can also be
attributed to the fall in the cash ratio. Sales have registered an
increase of 15%. The increase in the current liabilities is much more
than the increase in the current assets, hence there is a decline in the
cash ratio.

Sales to cash ratio:

This ratio indicates efficient utilization of cash input in achieving the
sales generated. Sales to cash ratio increased during the period 2004-
05 due to decrease in cash and bank balance by 51%, thereby
increasing the overall ratio from 37.15% (2004) to 84.19% (2005). But
it has shown a downward decline in 2006 to 51.34%.

The cash and bank balances have increased by 88% as compared to

the year 2005. Sales have increased by 15%. Hence as the increase in
the sales is not at par with the increase in the cash and bank balances
the ratio has been negatively affected. Hence better cash
management is needed at Raymond ltd. The extra money could be
utilized to push sales and to pay the increase in the current liabilities.

Cash Profit ratio:

Cash profit ratio measures the cash generation in the business as a
result of the operations expressed in terms of sale. The cash profit
ratio is a more reliable indicator of performance, where there are sharp
fluctuations in the profit before tax and net profit from year to year
owing to difference in depreciation charged. This ratio evaluates the
efficiency of operations in terms of cash generation and is not affected
by the method of depreciation charged. It also facilitates inter-firm
comparison of performance since different companies may adopt
different methods of depreciation.

This ratio for Raymond limited, has been 22.75 % for the year ended
2004 and decreased to 18.68 % for the year ended 2005 due to
decrease in profit. However, it should be noted that for the purpose of
evaluation of this ratio, exceptional items might also be considered. It
is still decelerating to 17.72% in the year 2006 also. Special attention
has to be given to the decline in this ratio. Measures have to tightened
to earn larger profits.
IX. RECEIVABLES MANAGEMENT (DEBTORS)
Cash flow can be significantly enhanced if the amounts owing to a
business are collected faster. Every business needs to know.... who
owes them money.... how much is owed.... how long it is owing.... for
what it is owed.

Late payments can erode profits and lead to bad debts

Slow payment has a crippling effect on business. If you don't manage

debtors, they will begin to manage your business as you will gradually
lose control due to reduced cash flow and, of course, you could
experience an increased incidence of bad debt.

The following measures will help manage your debtors:

 Have the right mental attitude to the control of credit and make
sure that it gets the priority it deserves.
 Establish clear credit practices as a matter of company policy.
 Make sure that these practices are clearly understood by staff,
suppliers and customers.
 Be professional when accepting new accounts, and especially
larger ones.
 Check out each customer thoroughly before you offer credit. Use
credit agencies, bank references, industry sources etc.
 Establish credit limits for each customer... and stick to them.
 Continuously review these limits when you suspect tough times
are coming or if operating in a volatile sector.
 Keep very close to your larger customers.
 Invoice promptly and clearly.
  Consider charging penalties on overdue accounts.
 Consider accepting credit /debit cards as a payment option.
 Monitor your debtor balances and ageing schedules, and don't let
any debts get too large or too old
 Debtors due over 90 days (unless within agreed credit terms)
should generally demand immediate attention. Look for the
warning signs of a future bad debt.

For example.........
 Longer credit terms taken with approval, particularly for smaller
orders.
 Use of post-dated cheques by debtors who normally settle within
agreed terms.
 Evidence of customers switching to additional suppliers for the
same goods.
 New customers who are reluctant to give credit references.
 Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many
reasons and therefore put on the long finger because they convince
themselves there is something more urgent or important that demands
their attention now. There is nothing more important than getting paid
for your product or service. A customer who does not pay is not a
customer.
Here are a few ideas that may help you in collecting money
from debtors:
 Develop appropriate procedures for handling late payments.
 Track and pursue late payers.
 Get external help if your own efforts fail.
 Don't feel guilty asking for money.... its yours and you are
entitled to it.
 Make that call now. And keep asking until you get some
satisfaction.
 In difficult circumstances, take what you can now and agree
terms for the remainder. It lessens the problem.
 When asking for your money, be hard on the issue - but soft on
the person. Don't give the debtor any excuses for not paying.
 Make it your objective is to get the money - not to score points or
get even.

Accounts Receivable Financing:

Some businesses lack the credit quality to borrow on an unsecured
basis and must pledge collateral to obtain a loan. Loans secured by
accounts receivable are a common form of debt used to finance
working capital. Under accounts receivable debt, the maximum loan
amount is tied to a percentage of the borrower’s accounts receivable.
When accounts receivable increase, the allowable loan principal also
rises. However, the firm must use customer payments on these
receivables to reduce the loan balance. The borrowing ratio depends
on the credit quality of the firm’s customers and the age of the
accounts receivable.

A firm with financially strong customers should be able to obtain a loan

equal to 80% of its accounts receivable. With weaker credit customers,
the loan may be limited to 50% to 60% of accounts receivable.
Additionally, a lender may exclude receivables beyond a certain age
(e.g., 60 or 90 days) in the base used to calculate the loan limit.

Older receivables are considered indicative of a customer with financial

problems and less likely to pay. Since accounts receivable are pledged
as collateral, when a firm does not repay the loan, the lender will
collect the receivables directly from the customer and apply it to loan
payments. The bank receives a copy of all invoices along with an
assignment that gives it the legal right to collect payment and apply it
to the loan. In some accounts receivable loans, customers make
payments directly to a bank-controlled account (a lock box).

Firms gain several benefits with accounts receivable financing. With

the loan limit tied to total accounts receivable, borrowing capacity
grows automatically as sales grow. This automatic matching of credit
increases to sales growth provides a ready means to finance expanded
sales, which is especially valuable to fast-growing firms.

It also provides a good borrowing alternative for businesses without

the financial strength to obtain an unsecured line of credit. Accounts
receivable financing allows small businesses with creditworthy
customers to use the stronger credit of their customers to help borrow
funds. One disadvantage of accounts receivable financing is the higher
costs associated with managing the collateral, for which lenders may
charge a higher interest rate or fees. Since accounts receivable
financing requires pledging collateral, it limits a firm’s ability to use
this collateral for any other borrowing. This may be a concern if
accounts receivable are the firm’s primary asset.
Receivables (Debtors) Management At Raymond:
At Raymond Ltd. the sales process is as follows:
Raymond has one agent for each area (state). These agents are the
delcredere agents, and receive commission of up to 2.5 % to 4%
(approx). The amount of commission however varies according to the
quality as well as the quantity of the goods. Under these agents are
the various dealers, wholesalers, retailers and franchisees.

The amount invested by the wholesalers is 4 crores and above,

therefore they are given more credit. Whereas, franchisees invest 1 to
3 crores. Retailers on the other hand invest less as compared to
wholesalers and franchisees. Retailers pay to the company either
directly or through the bank dealers (250 in number). In case of direct
payments the company keeps 12.5% as advance deposits. In case of
payment through bank dealers factoring service is being used.
The bills would be earlier discounted with the various banks. These
banks included amongst others, a few Nationalized Banks, UTI,
Standard Chartered, Bank Of India, etc. The payments are usually in
the form of demand drafts or cheques. Almost 50 % of these payments
are received through CMS (Cheque Management Services), and as this
facility is obtained free of cost from UTI bank the company is availing it
to its maximum possible benefit. This definitely very much in favors of
the company as it reduces the delay in collections, as it would
otherwise take at least 10 days for the transactions without the facility.

The company has now started using the factoring service.

The main factoring agents with which the company deals

include:
 HSBC Bank
 Standard Chartered Bank
 UTI Bank.
  Kotak Mahindra Bank

At present Raymond is using the factoring services for its 15

parties, which are as follows:
 B.R. Textiles
 Motilal Vijaysain
 Pokarna Fabrics Pvt. Limited
 R.S. Textiles
 Woollen Collections
 Shyam Brothers
 Kamdev
 Pushpak
 Rahul Textiles
 Varun Textiles
 Shantilal Raichand
 Sha Shantilal Manshalal
 Abhisekh Enterprises
 R. R. Apparels
 Fashion Apparels

The company uses with recourse as well as the without recourse

factoring facility (single channel financing) .The rates vary with
the type of facility i.e. with or without recourse as well they vary with
respect to the different banks. However these rates are recovered
entirely from the various agents and dealers. Thus they don’t burden
the company at all .The rates are roughly around 6.25 % for with
recourse and varies from 10 % to 16 %.
 The services without recourse (single channel financing) are
availed from the following banks:
 ABN AMRO Bank,
 CENTURION Bank,
 HSBC Bank,
 ICICI Bank.

The credit period given by Raymond Ltd. [(as not due)- for MIS
purpose]:
Retailers - 16 days
Franchisees - 45 to 60 to 90 days.
Wholesalers - 60 to 90 days

The provision regarding bad debts is not thought as very essential as the company as
never had any bad debts till date; this is attributed to the credit policy as well as the
Collections
collection policy of the company. The company never writes off any party Disbursements
or any amount
as bad, it tries of every possible measure to recover their payments,
when not received directly the company adjusts for the same from the
agents commission. The receivables overdue are against invoices as
well as against debit notes. When the overdue is against the invoices
aggressive actions are take by the company. The company withholds
commission for its habitual defaulters. However on an average the
credit given is for 104 days.
Marketable securities
Investment

CONTROL THROUGH INFORMATION

REPORTING
= Funds Flow Flow
= Information
 Ratios:

Ratio used
for Ratio for the financial
evaluation Formula used year ended

2006 2005 2004

Debtors
Turnover Net Sales 5.50 4.72 3.70
Ratio Avg. Debtors
(times)

Credit 365 66 77 99
Period
Debtors Turnover Ratio

Interpretation:
Debtors Turnover Ratio:
The debtor’s turnover ratio has been gradually increasing over the
years from 2004 to 2005, from 3.70 to 4.72 respectively. This indicates
that the credit period has declined from 99 days (2004) to 77 days
(2005). This implies that for the year ended 2005 debtors on an
average are collected in a period of 77 days. A turnover ratio of 4.72
(2005) signifies that debtors get converted into cash (4.72)
approximately 5 times in a year.

Raymond Ltd. is a cash rich company. The liberal policy is adopted to

augment its sales thereby not losing its key customers. It is suggested
that the company should adopt stringent credit practices for its
debtors thereby, having more funds at its disposal for investments as
well as for daily operating requirements and thus saving on the
interest costs. In order to keep up with the industry credit standards
Raymond Ltd. has been gradually reducing its credit period.

For the previous year the debtor’s turnover ratio has increased by
almost 28 % from 3.70 to 4.72 thereby reducing the collection period
to a meager 77 days. The debtors turnover ratio has improved further
in 2006 as it has increased to 5.50 times. Hence as an effect of the
increase in the debtors turnover ratio, there is a significant
improvement in the credit period as it has reduced to 66 days from 77
days.
X. CONCLUDING OBSERVATIONS

Every organization should closely watch the movement of current

assets and current liabilities after certain fixed intervals to maintain
healthy working capital in the organization. It helps to keep a record of
cash management, debtor’s management and inventory management,
which forms a major part of working capital. Managing inventory is a
juggling act. Excessive stocks can place a heavy burden on the cash
resources of a business. Insufficient stocks can result in lost sales,
delays for customers etc. The key is to know how quickly the overall
stock is moving or, put another way, how long each item of stock sit on
shelves before being sold.

For Raymond Ltd. the inventory turnover ratio has increased from
2.84 times (2004) to 3.43 times (2005), but showed a major decline in
the year 2005-06.
In the year 2006 the inventory period has increased tremendously
from 106 days in 2005 to 272 days in 2006. This is also supported by
the decline in the inventory turnover ratio to a meager of 1.34 times
in 2006.

Since the company is a textile industry therefore the inventory varies

according to seasonal and festive demands. However, it is seen that as
the inventory carrying cost is reducing because of the falling interest
rates, the company may stock more if desired. There are no norms or
standards followed by the company for the raw material, in process
and finished goods inventory due to quantity restrictions and price
fluctuations.
The current ratio is a reflection of financial strength. The current
ratio measures the ability of the firm to meets its current liabilities-
current assets get converted into cash and provide the funds needed
to pay current liabilities. The current ratio has decreased from
2.68:1 (2005) to 2.33:1 in the year 2006.This is the result of the
changes in current assets and current liabilities or changes in the
working capital. Current assets comprises of Inventory, Debtors, Cash
& Bank balances, Other Current Assets and Loans & Advances.

The cash ratio measures the extent to which a corporation or other

entity can quickly liquidate assets and cover short-term liabilities, and
therefore is of interest to short-term creditors. It is also called liquidity
ratio or cash asset ratio. For the year ended 2005-2006, the cash
ratio has fallen from 2.46:1(2005) to 1.73:1 in 2006. Current
investments have not fluctuated as compared to the earlier year.

Increase in the current liabilities by 1117.56 lakhs can also be

attributed to the fall in the cash ratio. Sales have registered an
increase of 15%. The increase in the current liabilities is much more
than the increase in the current assets, hence there is a decline in the
cash ratio.

Raymond Ltd. is a cash rich company. The liberal policy is adopted to

augment its sales thereby not losing its key customers. It is suggested
that the company should adopt stringent credit practices for its
debtors thereby, having more funds at its disposal for investments as
well as for daily operating requirements and thus saving on the
interest costs. In order to keep up with the industry credit standards
Raymond Ltd. has been gradually reducing its credit period.
Overall it can be concluded that the company has a defensive
approach as it believes in maintaining its sales in this competitive
environment. The ratio has been improving and so have been the
sales, thus showing the efficient management of the company.

XI. RECOMMENDATIONS

The goal of working capital management is to ensure that a firm is able

to continue its operations and that it has sufficient ability to satisfy
both maturing short-term debt and upcoming operational expenses.

Cash management:
Here Raymond ltd. already is holding the cash so the goal is to
maximize the benefits from holding it and wait to pay out the cash
being held until the last possible moment. The goal for cash
management here is to shorten the amount of time before the cash is
received. Firms that make sales on credit are able to decrease the
amount of time that their customers wait until they pay the firm by
offering discounts.

By offering an inducement, the 3% discount (for e.g.), Raymond ltd.

will able to cause their customers to pay off their bills early. This
results in the firm receiving the cash earlier. The goal here is to put off
the payment of cash for as long as possible and to manage the cash
being held. By using a JIT inventory system, a firm is able to avoid
paying for the inventory until it is needed while also avoiding carrying
costs on the inventory. JIT is a system where raw materials are
purchased and received just in time, as they are needed in the
production lines of a firm.
Approaches to Working Capital Management:
The objective of working capital management is to maintain the
optimum balance of each of the working capital components. This
includes making sure that funds are held as cash in bank deposits for
as long as and in the largest amounts possible, thereby maximizing the
interest earned. However, such cash may more appropriately be
"invested" in other assets or in reducing other liabilities.

Working capital management takes place on two levels:

 Ratio analysis can be used to monitor overall trends in working
capital and to identify areas requiring closer management.
 The individual components of working capital can be effectively
managed by using various techniques and strategies.

When considering these techniques and strategies, departments

need to recognize that each department has a unique mix of
working capital components. The emphasis that needs to be placed
on each component varies according to department. For example,
some departments in Raymond ltd. have significant inventory levels;
others have little if any inventory.

Furthermore, working capital management is not an end in

itself. It is an integral part of the department's overall
management. The needs of efficient working capital management
must be considered in relation to other aspects of the department's
financial and non-financial performance.

Financial ratio analysis calculates and compares various ratios of

amounts and balances taken from the financial statements. The main
purposes of working capital ratio analysis are:
 To indicate working capital management performance; and
 To assist in identifying areas requiring closer management.
Three key points need to be taken into account when analyzing
financial ratios:

 The results are based on highly summarized information.

Consequently, situations, which require control, might not be
apparent, or situations, which do not warrant significant effort,
might be unnecessarily highlighted.
 Different departments face very different situations.
Comparisons between them, or with global "ideal" ratio values,
can be misleading.
 Ratio analysis is somewhat one-sided; favorable results mean
little, whereas unfavorable results are usually significant.

However, financial ratio analysis is valuable because it raises

questions and indicates directions for more detailed
investigation.

The following ratios are of interest to those managing working

capital:

 Working capital ratio;

 Liquid interval measure;
 Stock turnover;
 Debtors ratio;
 Creditors ratio.

There is no particular benchmark value or range that can be

recommended as suitable for all government departments. However, if
the departments in Raymond ltd. tracks its own working capital ratio
over a period of time, the trends-the way in which the liquidity is
changing-will become apparent.

Stock turnover ratio:

The figure produced by the stock turnover ratio is not important in
itself, but the trend over time is a good indicator of the validity of
changes in inventory policies.

In general, a higher turnover ratio indicates that a lower level of

investment is required to serve the department. Most departments do
not hold significant inventories of finished goods, so this ratio will have
only limited relevance.

Debtor turnover ratio:

The debtor ratio does not solve the collection problem, but it acts as an
indicator that an adverse trend is developing. Remedial action can
then be instigated.

Creditors ratio:
There is no need to pay creditors before payment is due. Raymond
ltd’s objective should be to make effective use of this source of free
credit, while maintaining a good relationship with creditors.

Getting the right mix of inventory is necessary because:

Costs of carrying too much inventory are:

 Opportunity cost of foregone interest;
 Warehousing costs;
 Damage and pilferage;
 Obsolescence;
 Insurance.
Costs of carrying too little inventory are:

Stockout costs:
 Lost sales.
 Delayed service.

Ordering costs:
 Freight.
 Order administration.
 Loss of quantity discounts.

Making frequent small orders can minimize carrying costs but this
increases ordering costs and the risk of stock-outs. Risk of stock-outs
can be reduced by carrying "safety stocks" (at a cost) and re-
ordering ahead of time. The best ordering strategy requires balancing
the various cost factors to ensure the department incurs minimum
inventory costs.

Analytical review of inventories can help to identify areas where

inventory management can be improved. Slow moving items, continual
stockouts, obsolescence, stock reconciliation problems and excess
spoilage are signals that stock lines need closer analysis and control.

However, it is important to keep an overall perspective. It is not cost-

effective to closely manage a large number of low value inventory
lines, nor is it necessary. A usual feature of inventories is that a small
number of high value lines account for a large proportion of inventory
value.
The "80/20" rule (PARETO) predicts that 80% of the total value of
inventory is represented by only 20% of the number of inventory
items. Those high value lines need reasonably close management. The
remaining 80% of inventory lines can be managed using "broad-brush"
strategies.

The overall management philosophy of Raymond Ltd. can affect the

way in which inventory is managed. For example, "Just In Time" (JIT)
production management organizes production so that finished goods
are not produced until the customer needs them (minimizing finished
goods carrying costs), and raw materials are not accepted from
suppliers until they are needed. Thus, JIT inventory strategies reduce
bottlenecks and stock holding costs.

In summary:
There is a trade-off to be made between carrying costs, ordering costs,
and stockout costs.
 This is represented in the Economic Reorder Quantity (ERQ)
model.
 Inventories should be managed on a line-by-line basis using the
80/20 rule.
 Analytical review can help to focus attention on critical areas.
 Inventory management is part of the overall management
strategy.

Pre-sale strategies include:

 Offering cash discounts for early payment and/or imposing
penalties for late payment.
 Agreeing payment terms in advance.
 Requiring cash before delivery.
 Setting credit limits.
 Setting criteria for obtaining credit;
 Billing as early as possible
 Requiring deposits and/or progress payments.
Post-sale strategies include:
 Placing the responsibility for collecting the debt upon the center
that made the sale.
 Identifying long overdue balances and doubtful debts by regular
analytical reviews.
 Having an established procedure for late collections, such as a
reminder, letter, cancellation of further credit, telephone calls,
use of a collection agency, legal action.

Payments management:
While it is unnecessary to pay accounts before they fall due, it is
usually not worthwhile to delay all payments until the latest possible
date. Regular weekly or fortnightly payment of all due accounts is the
simplest technique for creditor management.

Electronic payments (direct credits) are cheaper than cheque

payments, considering that transaction fees and overheads more than
balance the advantage of delayed presentation. Some suppliers are
reluctant to receive payments by this method, but in view of the
substantial cost advantage (and the advantages to the suppliers
themselves) departments may wish to encourage suppliers to accept
this option. However, electronic payments are likely to be used in
conjunction with, rather than as a replacement for, cheque payments.

Good cash management requires regular forecasts. In order for these

to be materially accurate, they must be based on information provided
by those managers responsible for the amounts and timing of
expenditure. Capital expenditure and operating expenditure must be
taken into account. It is also necessary to collect information about
impending cash transactions from other financial systems, such as
creditors and payroll.
Balance Management:
Those responsible for balance management must make decisions
about how much cash should at any time be on call in the
Departmental Bank Account and how much should be on term deposit
at the various terms available. There are various types of
mathematical model that can be used. One type is analogous to the
ERQ inventory model. Linear programming models have been
developed for cash management, subject to certain constraints. There
are also more sophisticated techniques.

Cash receipts should be processed and banked as quickly as possible

because they cannot earn interest or reduce overdraft until they are
banked, information about the existence and amounts of cash receipts
is usually not available until they are processed.

Where possible, cash floats (mainly petty cash and advances) should
be avoided. If, on review, the only reason that can be put forward for
their existence is that "we've always had them", they should be
discontinued. There may be situations where they are useful, however.
For example, it may be desirable for peripheral parts of departments to
meet urgent local needs from cash floats rather than local bank
accounts.

Internal Control:
Cash and cash management is part of a department's overall internal
control system. The main internal cash control is invariably the bank
reconciliation. This provides assurance that the cash balances recorded
in the accounting systems are consistent with the actual bank
balances. It requires regular clearing of reconciling items.
 Good management of working capital is part of good
financial management. Effective use of working capital will
contribute to the operational efficiency of Raymond Ltd.
 Optimum use will help to generate maximum returns.
 Ratio analysis can be used to identify working capital
areas, which require closer management.
 Various techniques and strategies are available for managing
specific working capital items.
 Debtors, creditors, cash and in some cases inventories are
the areas most likely to be relevant to departments.
XII. REFERENCES:

 Annual report of Raymond Limited for 2005-06

 M Y Khan & P K Jain, Financial Management, Tata McGraw-Hill
Publishing Company Limited, Third Edition.
 Paper on “working capital finance” by Seidman.
 Prasanna Chandra, Financial Management- Theory and
Practice, Tata McGraw-Hill Publishing Company Limited, Fifth
Edition.
 Ravi Kishore, Financial Management, Fourth edition.
 Working Capital management-by Hrishikesh Bhattacharya.

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