Working Capital Management: A Summer Internship Report ON

WORKING CAPITAL MANAGEMENT
A SUMMER INTERNSHIP REPORT ON
Submitted to:
L.J. Institute of Engineering and Technology
In requirement of partial fulfillment of Masters of Business Administration (MBA) 2 year full time Program of Gujarat Technological University
Submitted on:16th July 2011 Submitted by:-
JIMI SHAH
Enrollment number: 107280592025 Batch No.: 2010-2012
Summer Internship Report LJ MBA
Project On Working Capital Management at Vadilal Industries Limited
Acknowledgement
The making of any project requires contribution and efforts of many people, right from its inception till its completion. Completion of this project was a journey in which I learnt lot of new things. It was not only learning but an enriching experience too. I take this opportunity to express my profound gratitude to them for extending their kind support throughout the course of the project. I would like to first express my earnest appreciation and gratitude to Mr. Archit Panchal for showing the confidence in me to take up this project, patiently resolving my queries, facilitating and providing necessary inputs and guiding me at every step of the project. I would also like to extend my special thanks to my faculty guide Prof. Bilva Singh for taking out to continuous encouragement and valuable guidance throughout the preparation and submission of the project.
Certificate
It is hereby certified that the work incorporated in the thesis submitted entitled WORKING CAPITAL MANAGEMENT submitted by JIMI SHAH comprises the result of independent and original investigation carried out me. The material which obtained (and used) from other sources has been duly acknowledged in the thesis.
Date: Place: Signature of the student
It is certified that the work mentioned above is carried out under my guidance.
Date: Place: Signature of the faculty guide
TABLE OF CONTENTS
Chapter No. Ch No.1 Ch No.2 Ch No.3 Ch No.4 Ch No.5 Ch No.6 Ch No.7 Ch No.8 Ch No.9 Ch No.10 Ch No.11 Ch No.12 Subject Page No Introduction of Industry8 Company Profile ..9 Research Methodology.17 Working Capital overview.19 Operating Cycle.24 Financial Statement....28 Financing of Working Capital31 Liquidity Ratios..45 Management of Inventory...50 Management of Receivables...................55 Management of Payables....60 SWOT Analysis......63 Conclusion .65 Bibliography...67
EXECUTIVE SUMMARY
My Project is the study of WORKING CAPITAL MANAGEMENT. The study was conducted at the head office of Vadilal industries limited, Ahmedabad. The project was of 6 weeks duration. During the project information and data was collected from the executives, staff & also made use of company records & annual reports. The data collected were then compiled, tabulated and analyzed. Working Capital Management is a very important facet of financial management due to: Investments in current assets represent a substantial portion of total investment. Investment in current assets & the level of current liabilities have to be geared quickly to change sales. In Vadilal industries limited I have studied working capital management with the help of financial statement and some other data. For this study calculation such as: Operating cycle Working capital gap MPBF Liquidity ratio Turn over ratio
SWOT analysis for Vadilal Industries Ltd was also done.
OBJECTIVES OF THE STUDY

The project on analysis of working capital management and short term financing would be of immense use to a student manager for the overall understanding if finance department in any organization. Short term financing forms an important part of corporate financing decisions. For any company, working capital and short term financing has an impact on the profitability and thus the shareholders earnings. The present study is envisaged with the following objectives: Understanding the working capital policy followed at Vadilal industries Ltd. Understanding cash and liquidity management, accounts payable, accounts receivables policy followed at Vadilal industries Ltd. Understanding various components of working capital and change in them over time. To determine the type of relationship between various constituents of current assets and working capital. To assess liquidity position of Vadilal over the given time period. To understand various avenues used by Vadilal industries Ltd to finance its working capital needs. To offer suggestions regarding better utilization of resources.
CH.NO.1:- INTRODUCTION OF INDUSTRY

The announcement of deregulation of the ice-cream industry from the small sector has caused this industry, which was characterized by several players and small time manufacturers with no real threats of existence to become the battled of many business heavy weight like Hll, Amul, Quality Walls and many more about 40% market is dominated by numerous organized player scattered all around while organized players contribute the rest 60% the estimated present market size is of scores. The contribution of fast food and specially ice cream has fuelled the growth, as more and more people are tempted to consume ice creams. In India, Ice Cream is consumed for taste and as desert. Gujarat is very big market for Ice Cream industry, which is dominated by Vadilal Ice Cream, which has market share of nearly 55% that is followed by Amul and Havmor. Ahmedabad is at 1st rank in highest per capita consumption of ice cream in India. In Gujarat people are also fond of eating ice cream at parlors.
CH.NO.2:- ABOUT THE COMPANY
W
mission:
elcome to Vadilal - a company that is 78 years young. A company stated by the late Shri Vadilal Gandhi, a company that had simple, yet straight forward
To provide quality product and service at an affordable price. Today, Vadilal is the familiar name is every Indian household. A well known umbrella brand, covering a diverse range of the product and activities, which have one thing, is common: a vibrant Present and Today, the name Vadilal conjures images of lip-smacking ice cream in a whole gamut of flavours. Vadilal spells quality, availability, variety and state-of-the-art machinery and equipment. It has, however, been a long journey for the group, which traces its origins way back to 1907, when a certain unassuming gentleman, by the name of Vadilal Gandhi, the great-grand father of Virendra R Gandhi, Rajesh R Gandhi and Devanshu L Gandhi, started a soda fountain. He passed on the business to his son, Ranchod Lal, who ran a one-man show, and with a hand cranked machine, started a small retail outlet in 1926. Eventually, Ranchod Lal's sons, Ramchandra and Lakshman, inherited the business and they were instrumental in giving a new direction to the company. The duo imparted a new vision to the venture and infused a spirit of calculated risk-taking into the company. As a result, by the 1970s, the Vadilal Company had already evolved into a modern corporate entity. "In 1972-73, the company had 8-10 outlets in Ahmedabad. Gradually, they moved from the city to other parts of Gujarat. By 1985, the company moved towards neighbouring states like Rajasthan and Madhya Pradesh. But the expansion was undertaken very methodically and they spent five to six years in spreading our business and then consolidating it" says Shri Ramchandrabhai Gandhi (Chairman).
What started as a one man show with a hand cranked Ice cream maker in a small retailer outlet has today grown to employ over 700 people. What started with the earning that could
9
easily fit into a pocket, has today risen to an annual turnover of Rs. 1250 million of which around 25% is contributing by the export. What started as a parlour with homemade Ice cream has already branched out into processed foods, chemical and specific gases, construction and real estate, forex advisory service. All their manufacturing and processing facilities are situated at strategies location where they can avail quality raw material in ample quantities- be it milk, butter and cream, fruits, nuts or vegetables. Their large scale of the economies the manufacturing cost, the benefit of which is passed on to our customers by providing them with a quality product at affordable price. Over the last 78 years times have changed and the company has grown in straight but their philosophy remains unchanged. An excellence product would be little use if it didnt have somebody to maintain that excellence and give it to the world. That is how Vadilal enterprises the marketing arm of Vadilal industries came into existence. Today companies have dynamic sales force of over 150 sales and marketing professionals. The company has effected change in its organizational structure and training inputs from time to time, in order to infuse a competitive spirit among peers and built a consolidated force of live wire professionals. Target achievement in monitored through an elaborate management information system across the rank and file. Vadilal has to challenge of time held its own in the country, even in the presence of global giants. There are mainly three sectors of Vadilal: 1) Ice-cream 2) Processed food (agro) and 3) Other ( Forex division, Real estate, and Chemicals)
10
COMPANY GENERAL INFORMATION
CHAIRMAN: Ramchandra R. Gandhi
VICE-CHAIRMAN & MANAGING DIRECTOR: Virendra R. Gandhi
MANAGING DIRECTORS: Rajesh R. Gandhi Devanshu L. Gandhi
DIRECTORS: C.M. Maniar Kshitish M. Shah Rohit J. Patel Rajesh K. Pandya
COMPANY SECRETARY: Nikhil Patel
AUDITORS: M/s. Kantilal Patel & Co. Chartered Accountants, Ahmedabad (A member Firm of Polaris International, USA)
11
BANKERS: Bank of Baroda State Bank of India State Bank of Travancore Export Import Bank of India (Exim Bank)
REGISTERED OFFICE & SHARE DEPARTMENT: Vadilal House, Shrimali Society, Nr. Navrangpura Rly. Crossing, Navrangpura, Ahmedabad 380 009 Phone: 079 26564019 to 24, Fax: 079 26564027
REGISTRAR & SHARE TRANSFER AGENT: (For Physical & Demat) MCS Limited, 101, Shatdal Complex, 1st Floor, Opp. Bata Show Room, Ashram Road, Ahmedabad 380 009. Phone: 079 26582878, 26584027, Fax: 079 26581296
12
FACTORIES: Ice-cream Division: Village Pundhra, Tal. Mansa, Dist. Gandhinagar (Gujarat) Parsakhera Industrial Area, Bareilly (Uttar Pradesh) Dudheshwar Road, Ahmedabad (Gujarat) (C&F)
Processed Foods Division: Dharampur, Dist. Valsad (Gujarat)
Forex Division: Vadilal House, Navrangpura, Ahmedabad
Web: www.vadilalmarkets.com www.vadilalgroup.com
13
VISION / MISSION To become an Indian MNC in frozen foods. To provide products and services at an affordable price without compromising the quality, - Shri Ramchandrabhai Gandhi.
14
COMPANY ACHIEVEMENT
On November, 10 2001 Vadilal Industries Ltd made a record by Making the largest Ice cream Sundae. The Ice cream was made using 4950 liters of ice cream, 125 kgs dry fruits, 255 kgs of fresh fruits and 39 liters of sauces. The length of the sundae was 20 feet and height of 9 feet.
The Bareilly plant has been awarded the coveted ISO 9001 Accreditation and HACCP certification.
Vadilal Ice Cream has achieved 25% market share among Indian Ice Cream Industry and 60% market share in Gujarat.
They have been awarded the ISO 9002 Certification for quality systems, by M/s Underwriters Laboratories Inc., USA.
Vadilal was also awarded the Certificate of merit for excellent export performance by APEDA (Agricultural and Processed Foods Export Development Authority)
Theirs is one of the largest marketing networks for industrial gases in Western India.
It has larges cold chain network in India 35 Stock points all across the country 650 distributors in different cities Ice Cream sold through 30000 retail outlets
Export House status by Govt. of India since 1994.
15
MARKET SHARE
Vadilal Ice Cream has achieved 25% market share of all over Indian Ice-Cream Industry and 60% market share in Gujarat. The Ice-cream industry in India today has a turnover of Rs.15 billion (US$330 million). A quarter of this comes from the house of Vadilal alone. But thats no surprise, considering that they have the largest range of Ice-cream in the country-120 plus flavors, in variety of more than 250 packs and forms. The range includes cones, candies, bars, small cups, big cups, family packs. Something for all tastes, preferences and brand. To make it convenient for the customer to relish complete range under one roof, they have set up a chain of Happinezz Parlors Presently Vadilal has about 88 parlors across the country that ensures amazing Ice-cream preparation for its consumers. Number of people visits these parlors daily because they know that Vadilal products contain the purest and creamiest milk, and the freshest and tastiest fruits and nuts. The company is exporting nearly 60 products in USA, Canada, UK, Kuwait, UAE, Singapore and New Zealand. The company has also started selling processed food products in domestic market. Among the products, one is Chocobar and king cone all time favorite which have today attained the generic status. Another one is kulfi traditional Indian milk sweet. Since their products are highly perishable, quick transport and proper storage are of paramount importance. Hence the refrigeration equipment and deep freezes are imported from companies, which are world leaders in their respective fields. To ensure sufficient, timely and constant Ice cream supply, they have a cold chain network comprising three manufacturing plants and C & FA agent and more than 500 distributors and 30000 retailers. The Vadilal industries Ltd is also for export department. The industry exports the process food. Vadilal also develops the chemical, gas and manufacturing activity.
16
CH.NO.3:- RESEARCH METHODOLOGY
Project Objective
The project is aimed at evaluating the financial status of the Vadilal. Studying the working capital management at Vadilal and estimating the requirement of year 2009-2010 .
Research Type
EXPLORATORY RESEARCH To gain familiarity with a phenomenon or to achieve insight into it. It is the initial research, before more conclusive research is undertaken. Exploratory research is quite informal, relying on secondary research.
Methodology
The methodology adopted for the project is explained as under: The initial step of the project was to know about the company and then evaluating the financial position of the company on the basis of liquidity ratio. The project will focus on study of overall working capital management at the organization, for which following analysis and study will be undertaken: i. ii. It includes the analysis and calculations of operating cycle of the company It includes the calculations of the Maximum permissible Banking Finance as per Tandon committee. iii. Brief Overview of cost of raising of the working capital.
Schedule
The complete project duration is of 6 weeks.
17
Scope of the Study

Mostly secondary data has been be used for the study. Some primary data was collected through direct interaction with the companys finance and accounts department. I collected the data from the secondary sources comprising Annual Reports of the firm and from internet. Various techniques of financial management e.g., ratio analysis and MBPF calculations were used in the present study. To present a broad view so far the purpose of the analysis and to make it easy to understand the concept of a few graphs and tables shall also be presented..
Limitation of the Study

The present study is limited to one Co., i.e. Vadilal industries lts., and covers a period from 2006-2010 due to limitation of time and accessibility to data base. The authenticity of the suggestions and recommendations depend upon the rationality of the data provided to me. Have to rely upon the data supplied. Executives are not ready to part with the information beyond a limit.
18
CH.NO.4:- WORKING CAPITAL - OVERALL VIEW

Working Capital management is the management of assets that are current in nature. Current assets, by accounting definition are the assets normally converted in to cash in a period of one year. Hence working capital management can be considered as the management of cash, market securities receivable, inventories and current liabilities. In fact, the management of current assets is similar to that of fixed assets the sense that is both in cases the firm analyses their effect on its profitability and risk factors, hence they differ on three major aspects:
In managing fixed assets, time is an important factor discounting and compounding aspects of time play an important role in capital budgeting and a minor part in the management of current assets.
The large holdings of current assets, especially cash, may strengthen the firms liquidity position, but is bound to reduce profitability of the firm as ideal car yield nothing. The level of fixed assets as well as current assets depends upon the expected sales, but it is only current assets that add fluctuation in the short run to a business.
To understand working capital better we should have basic knowledge about the various aspects of working capital. To start with, there are two concepts of working capital:
Gross Working Capital Net working Capital
Gross Working Capital:
Gross working capital, which is also simply known as working
capital, refers to the firms investment in current assets: Another aspect of gross working capital points out the need of arranging funds to finance the current assets. The gross working capital concept focuses attention on two aspects of current assets management, firstly optimum investment in current assets and secondly in financing the current assets. These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason the arrangement should be made quickly, and similarly
19
if some surpluses are available, they should not be allowed to lie ideal but should be put to some effective use.
Net Working Capital:
Net working capital refers to the difference between the current assets
and current liabilities. Net working capital can be positive as well as negative. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. The net working capital helps in comparing the liquidity of the same firm over time. For purposes of the working capital management, therefore Working Capital can be said to measure the liquidity of the firm. In other words, the goal of working capital management is to manage the current assets and liabilities in such a way that an acceptable level of net working capital is maintained.
20
Components of working capital and their basis of valuation

Components of working capital Stock of R.M. Stock of W.I.P Stock of finish goods Debtors Cash Basis of valuation Purchase cost of R.M. At cost or market value Cost of production Cost of sales or sales values Working Expense
Importance of working capital management:

Management of working capital is very much important for the success of the business. It has been emphasized that a business should maintain sound working capital position and also that there should not be an excessive level of investment in the working capital components. As pointed out by Ralph Kennedy and Stewart MC Muller, the inadequacy or missmanagement of working capital is one of a few leading causes of business failure. Current assets, in fact, account for a very large portion of the total investment of the firm.
Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business. There are a number of factors affecting the working capital requirement. These factors have different importance in different businesses and at different times. So a thorough analysis of all these factors should be made before trying to estimate the amount of working capital needed. Some of the different factors are mentioned here below:-
1. Nature of business: Nature of business is an important factor in determining the working capital requirements. There are some businesses which require a very nominal amount to be invested in fixed assets but a large chunk of the total investment is in the form of working
21
capital. There businesses, for example, are of the trading and financing type. There are businesses which require large investment in fixed assets and normal investment in the form of working capital.
2. Size of business: It is another important factor in determining the working capital requirements of a business. Size is usually measured in terms of scale of operating cycle. The amount of working capital needed is directly proportional to the scale of operating cycle i.e. the larger the scale of operating cycle the large will be the amount working capital and vice versa.
3. Business Fluctuations: Most business experience cyclical and seasonal fluctuations in demand for their goods and services. These fluctuations affect the business with respect to working capital because during the time of boom, due to an increase in business activity the amount of working capital requirement increases and the reverse is true in the case of recession. Financial arrangement for seasonal working capital requirements are to be made in advance.
4. Production Policy: As stated above, every business has to cope with different types of fluctuations. Hence it is but obvious that production policy has to be planned well in advance with respect to fluctuation. No two companies can have similar production policy in all respects because it depends upon the circumstances of an individual company.
5. Firms Credit Policy: The credit policy of a firm affects working capital by influencing the level of book debts. The credit term is fairly constant in an industry but individuals also have their role in framing their credit policy. A liberal credit policy will lead to more amount being committed to working capital requirements whereas a stern credit policy may decrease the amount of working capital requirement appreciably but the repercussions of the two are not simple. Hence a firm should always frame a rational credit policy based on the credit worthiness of the customer.
6. Availability of Credit: The terms on which a company is able to avail credit from its suppliers of goods and devices credit/also affects the working capital requirement. If a company
22
in a position to get credit on liberal terms and in a short span of time then it will be in a position to work with less amount of working capital. Hence the amount of working capital needed will depend upon the terms a firm is granted credit by its creditors.
7. Growth and Expansion activities: The working capital needs of a firm increases as it grows in term of sale or fixed assets. There is no precise way to determine the relation between the amount of sales and working capital requirement but one thing is sure that an increase in sales never precedes the increase in working capital but it is always the other way round. So in case of growth or expansion the aspect of working capital needs to be planned in advance.
8. Price Level Changes: Generally increase in price level makes the commodities dearer. Hence with increase in price level the working capital requirements also increases. The companies which are in a position to alter the price of these commodities in accordance with the price level changes will face fewer problems as compared to others. The changes in price level may not affect all the firms in same way. The reactions of all firms with regards to price level changes will be different from one other.
23
CH.NO.5:- OPERATING CYCLE & CASH CYCLE

Investment in working capital is influenced by the following events in the operating cycle of the firm. Purchase of Raw Material Payment of Raw Material Manufacture of Goods Sale of Finished Goods Collection of cash sales
CASH
CREDITORS
DEBTORS WORKING EXPENSE S

.
RAW MATERIAL LL
FINISHED GOODS
WIP
24
Accounts Payable Period ACCOUNTS PAYABLE PERIOD YEAR Accounts payable Total Purchase Accounts payable period 2010 1640.99 12443.04 48 2009 869.75 9479.66 33 2008 1006.09 8194.14 45 2007 441.35 6906.37 23 2006 0.00 5372.02 0.00
The firm begins with the purchase of raw material which is paid for after a delay which represents the Accounts Payable Period. Vadilal Industries ltd. takes an average of 30 days from the date of purchase of raw materials to pay the raw material supplier. Year 2006 has 0 days of accounts payable period because of 0 accounts payable. Year 2010 has longest accounts payable period of 48 days.
Inventory Period Inventory Period of Vadilal Industries Ltd. YEAR Average Inventory Annual cost of goods sold Inventory period 93 86 83 72 77 2010 4636.60 18190.33 2009 3393.02 14330.57 2008 2762.12 12123.02 2007 2105.61 10648.83 2006 1864.89 8823.77
A firm converts the raw material in to finished goods and then sells the same. The time lag between the purchase of raw material and the sales of finished goods is the Inventory
25
Period. Based on the data of the past 5 years, Vadilal industries Ltd. takes an average of 82 days between the purchase of raw materials and the sale of finished goods.
Accounts Receivables Period
YEAR Accounts Receivable Annual sales Accounts Receivable Period
2010 3321.48 18890.77 64
2009 2958.96 14792.60 73
2008 2737.01 13263.69 75
2007 2191.53 11980.76 67
2006 1954.63 10878.15 66
After a firm sells the finished goods to its costumer, costumers will pay their bills some time after sales. Time duration between the date of sales and the date of collection of receivables is the Accounts Receivable Period. For Vadilal industries Ltd., it takes on an average 69 days after the date of sales to receive the payments from its customers.
26
Operating Cycle
YEAR Inventory Period Accounts Receivable Period Less:Accounts Payables Period Operating Cycle
2010 93 64 48
2009 86 73 33
2008 83 75 45
2007 72 67 23
2006 77 66 00
109
126
113
116
143
The time that elapses between the purchase of raw material and the collection of cash for sales is referred to as the Operating Cycle. The operating cycle for Vadilal industries Ltd. is on an average 151 days. Thus, for Vadilal industries ltd., it takes almost 5 months the date of purchase of raw material to collect cash from its costumer.
27
CH.NO.6:- FINANCIAL STATEMENTS
Vadilal Industries Limited
Profit & Loss Account for the year ended 31St March 2009-10
Current Year 31st March '10 (in lacs) Income Sales Other Income Increase in stock Total Expenditure Materials consumed Manufacturing & Other Expenses Financial Expenses Depreciation Total Profit before Exceptional & prior year items Less: prior year adjustment Profit Before Tax Profit after Tax Profit Brought Forward Amount available for appropriation 12443.04 5747.29 631.90 564.97 19387.20 879.20 (0.05) 879.15 575.17 286.28 861.45 18889.88 157.44 1219.08 20266.40
Previous Year 31st March 09 (in lacs)
14790.90 141.33 833.29 15756.52
9479.66 4850.91 749.22 483.22 15563.01 202.51 17.11 219.62 108.68 283.51 392.19
28
Balance Sheet as on 31 March 2009-10
As on 31st March 10 (In Lacs) Source of Funds Shareholders funds Share capital Reserve and surplus 718.78 3239.33 3958.11 Deferred Govt. Loan Loan Funds Secured loans Unsecured loans Deferred Tax Liability 7212.29 2008.54 549.19 13760.10 Application of funds Fixed Asset Gross block Less: Depreciation Net Block Capital W.I.P. 9795.66 4558.56 5237.10 3049.90 8287.00 Investments Current Assets, Loans and Advances Inventories 5573.21 158.75 31.97
As on 31st March 09 (In Lacs)
718.78 2810.82 3529.60 35.16
5425.32 1203.54 577.68 10771.30
9379.81 4030.50 5349.31 158.81 5508.12 330.31
3699.98
29
Sundry Debtors Cash& Bank Balances Other current Assets Loans and advances
3321.48 246.56 160.76 1122.51 10424.52
2958.96 162.27 63.05 1012.28 7896.54
As on 31st March 10
As on 31st March 09
Less: Current Liabilities Provisions Current Liabilities Provisions 4680.84 491.95 5172.79 Net current assets Miscellaneous Expenditure (Total extent not written off adjusted) Total 13760.10 10771.30 5251.73 62.62 2745.86 259.38 3005.24 4891.30 41.57
30
CH.NO.7:- FINANCING OF WORKING CAPITAL
Working Capital Finance Funds available for a period of one year or less are called short-term finance. In India, short-term funds are used to finance working capital the sources of finance that are used to finance current assets are as follows.
Bank Finance and Margin Requirement The Bank finances only that portion of the asset which is not financed by the creditors, Banker finances the working capital requirement after taking the net current assets into consideration. The bank will not finance the net working capital to the extent of 100% of net current assets. It will like the company and the rest of the amount put in that some amount of the asset may be financed by the bank. The term margin money for working capital will imply the position of the current assets which are to be financed by the promoter / company. The Tandon and Chore committee are two notes worthy committees which had made important and significant recommendations in this regard .The prime importance of the margin money is that the amount to some extent should be brought in by the promoter to see that the current assets are not double financed. Thus the actual bank borrowings are, say 75% of the net current assets. The balance 25% of the contribution is to be brought in by the promoter company.
31
TANDON COMMITTEE RECOMMEDATIONS
Norms or current assets: Tandon committee defined the norms of raw material, stock in progress, finished goods, and receivables for fifteen major industries. Subsequently, more industries were covered.
MAXIMUM PERMISSIBLE BANK FINANCE: The Tandon committee had suggested three methods for determining the maximum permissible bank finance (MPBF). These methods are described below: Method 1: MPBF=0.75 (CA - CL) Method 2: MPBF=0.75 (CA) CL Method 3: MPBF=0.75 (CA CCA) CL Where, CA = Current Assets as per the norms laid down CL = Non-bank current liabilities like trade credit and provisions CCA = Core current assets which represents the permanent component of working capital. To consider the calculation of the MPBF under the three methods, let us consider the data for the Vadilal Industries Limited: CURRENT ASSETS (Rs. in Lacs) 2010 Inventories Sundry Debtors Cash & Bank Balances 5573.21 3321.48 246.56 2009 3699.98 2958.96 162.27 2008 3086.06 2737.01 146.50 2007 2438.17 2191.53 103.54 2006 1773.04 1954.63 266.13
32
Other current Assets Total
160.76 9266.01
63.05 6884.26
70.59 6040.16
41.25 4774.49
852.28 4846.08
CURRENT LIABILITIES (Rs. In Lacs) YEAR Sundry creditors Other Liabilities Bills payable Advances from Customers Due to Managing Directors Unclaimed Dividends Unpaid Matured Deposits Interest on Deposits Total 2010 2119.53 741.64 1640.99 27.76 25.33 8.92 26.39 4.14 4594.70 2009 1218.55 494.52 896.75 17.71 1.90 6.75 19.16 3.05 2658.39 2008 1266.21 427.14 1006.09 32.91 12.83 4.90 26.43 3.51 2780.02 2007 949.93 416.69 441.35 25.87 18.09 3.15 22.99 2.74 1880.81 2006 680.95 423.20 0.00 57.01 12.40 3.50 22.16 2.61 1201.83
33
Method 1: = 0.75 (CA CL) YEAR 2010 2009 2008 2007 2006 0.75 (CA CL) 0.75 (9266.01 - 4594.70) 0.75 (6884.26 2658.39) 0.75 (6040.16 2780.02) 0.75 (4774.49 1880.81) 0.75 (4846.08 1201.83) Rs. (in Lacks) 3503.48 3169.40 2445.10 2170.26 2733.18
Method 2: MPPBF=0.75 (CA) CL YEAR 2010 2009 2008 2007 2006 0.75 (CA) CL 0.75 (9266.01) - 4594.70 0.75 (6884.26) 2658.39 0.75 (6040.16) 2780.02 0.75 (4774.49) 1880.81 0.75 (4846.08) 1201.83 Rs. (in Lacks) 2354.81 2504.81 1750.10 1700.06 2432.73
34
Method 3: MPPBF=0.75 (CA CCA) CL YEAR 2010 2009 2008 2007 2006 0.75 (CA CCA) CL 0.75 (9266.01) - 4594.70 0.75 (6884.26) 2658.39 0.75 (6040.16) 2780.02 0.75 (4774.49) 1880.81 0.75 (4846.08) 1201.83 Rs. (in Lacks) 2354.81 2504.81 1750.10 1700.06 2432.73
35
WORKING CAPITAL FINANCING BY BANKS

A commercial bank is a business organization which deals in money i.e. lending And borrowing of money. They perform all types of functions like accepting deposits, advancing loans, credit creation and agency functions. Besides these usual functions, one of the most important functions of banks is to finance working capital requirement of firms. Working capital advances forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firms working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. In the case of firms with seasonal businesses, the bank may approve separate limits for peak season and non-peak Season. These advances were usually given against the security of the current assets of the borrowing firm. Usually, the bank credit is available in the following forms: Cash Credit Under this facility, the bank specifies a predetermined limit and the borrower is allowed to withdraw funds from the bank up to that sanctioned credit limit against a bond or other security. However, the borrower can not borrow the entire sanctioned credit in lump sum; he can draw it periodically to the extent of his requirements. Similarly, repayment can be made whenever desired during the period. There is no commitment charge involved and interest is payable on the amount actually utilized by the borrower and not on the sanctioned limit. Overdraft Under this arrangement, the borrower is allowed to withdraw funds in excess of the actual credit balance in his current account up to a certain specified limit during a stipulated period against a security. Within the stipulated limits any number of withdrawals is permitted by the bank. Overdraft facility is generally available against the securities of life insurance policies, fixed deposits receipts, Government securities, shares and debentures, etc. of the corporate sector. Interest is charged on the amount actually withdrawn by the borrower, subject to some minimum (commitment) charges. Loans Under this system, the total amount of borrowing is credited to the current account of the borrower or released to him in cash. The borrower has to pay interest on the total amount of
36
loan, irrespective of how much he draws. Loans are payable either on demand or in periodical installments. They can also be renewed from time to time. As a form of financing, loans imply a financial discipline on the part of the borrowers. Bills Financing This facility enables a borrower to obtain credit from a bank against its bills. The bank purchases or discounts the bills of exchange and promissionary notes of the borrower and credits the amount in his account after deducting discount. Under this facility, the amount provided is covered by cash credit and overdraft limit. Before purchasing or discounting the bills, the bank satisfies itself about the creditworthiness of the drawer and genuineness of the bill. Letter of Credit While the other forms of credit are direct forms of financing in which the banks provide funds as well as bears the risk, letter of credit is an indirect form of working capital financing in which banks assumes only the risk and the supplier himself provide the funds. A letter of credit is the guarantee provided by the buyers banker to the seller that in the case of default or failure of the buyer, the bank shall make the payment to the seller. The bank opens letter of credit in favor of a customer to facilitate his purchase of goods. This arrangement passes the risk of the supplier to the bank. The customer pays bank charges for this facility to the bank. Working Capital Loan Sometimes a borrower may require additional credit in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such credit through a Working Capital Demand Loan (WCDL) account or a separate nonoperable cash credit account. This arrangement is presently applicable to borrowers having working capital requirement of Rs.10 crores or above. The minimum period of WCDL keeps on changing. WCDL is granted for a fixed term on maturity of which it has to be liquidated, renewed or rolled over. On such additional credit, the borrower has to pay a higher rate of interest more than the normal rate of interest.
37
Security Required by the Bank
Banks generally do not provide working capital finance without adequate security. The nature and extent of security offered play an important role in influencing the decision of the bank to advance working capital finance. The bank provides credit on the basis of following modes of security: Hypothecation Under this mode of security, the banks provide working capital finance to the borrower against the security of movable property, generally inventories. It is a charge against property for the amount of debt where neither ownership nor possession is passed to the creditor. In the case of default the bank has the legal right to sell the property to realize the amount of debt. Pledge A pledge is bailment of goods as security for the repayment of a debt or fulfillment of a promise. Under this mode, the possession of goods offered as security passes into the hands of the bank. The bank can retain the possession of goods pledged with it till the debt (principal amount) together with interest and other expenses are repaid. . In case of non-payment of loan the bank may either; Sue the borrower for the amount due; Sue for the sale of goods pledged; or after giving due notice, sell the goods. Lien Lien means right of the lender to retain property belonging to the borrower Until he repays the debt. It can be of two types: 1. Particular lien 2. General lien. Particular lien is a right to retain property until the claim associated with the property is fully paid. On the other hand, General lien is applicable till all dues of the lender are paid. Banks usually enjoy general lien.
38
Mortgage Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt. In case of mortgage, the possession of the property may remain with the borrower, while the lender enjoys the full legal title. The mortgage interest in the property is terminated as soon as the debt is paid. Mortgages are taken as an additional security for working capital credit by banks. Charge Where immovable property of one person is made security for the payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge on the property and all the provisions of simple mortgage will apply to such a charge. A charge may be created by the act of parties or by the operation of law. It is only security for payment.
Regulation of Bank Credit
Till the sixties, bank credit for working capital was available easily and in convenient form to industrial borrowers. Further, the cash credit arrangement, the principal device through which such finance has been provided, is quite advantageous from the point of view of borrowers. Banks have not been concerning themselves about the soundness of the borrower or about the actual end use of the loan. Bank financing was mainly security oriented. This security oriented system tended to favor borrowers with strong financial resources irrespective of their economic function. This resulted in the concentration of economic power. Another problem was that the increase in the bank credit was not commensurate with the expansion in the level of inventory and production. This resulted in a number of distortions in financing of working capital by banks. Major Banks was nationalized in 1969 and with that, approach to lending also changed. Consequently, bank credit has been subjected to various rules, regulations and controls. The basic objective of regulation and control of bank credit is to ensure its equitable distribution to various sectors of the Indian economy. The RBI has been trying, particularly from the midsixties onwards, to bring a measure of discipline among industrial borrowers and to redirect credit to priority sectors of the economy. The RBI has been issuing guidelines and directives to the banking sectors towards this end. Important guidelines and directives have derived from the recommendations of certain specially constituted groups assigned with the task of examining various aspects of bank finance to industry.
39
Recent guidelines by RBI regarding Working Capital Finance In the past, working capital financing was constrained with detailed regulations on how much credit the banks could give to their customers. The recent changes made by RBI in the guidelines for bank credit for working capital finance are discussed below:
1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished by RBI and a new system was proposed by the Indian Banking Association (IBA). This has given banks greater freedom and responsibility for assessing credit needs and credit worthiness. The salient features of new system are: - For borrowers with requirements of upto Rs. 25 lakhs, credit limits will be computed after detailed discussions with borrower, without going into detailed evaluation. - For borrowers with requirements above Rs. 25 lakhs, but upto Rs. 5 crores, credit limit can be offered upto 20% of the projected gross sales of the borrower. - For large borrowers not selling in the above categories, the cash budget system may be used to identify the working capital needs. However, RBI permits banks to follow Tandon / Chore Committee guidelines and retain MPBF concept with necessary modifications.
2. Earlier RBI had prescribed consortium arrangements for financing working capital beyond Rs. 50 crores. Now it is not essential to have consortium arrangements. However, banks may themselves decide to form consortium so that the risks are spread. The disintegration of consortium system, the entry of term lending institutions into working capital finance and the emergence of money market borrowing options gives the best possible deal.
3. Banks were advised not to apply the second method of lending for assessment of MPBF to those exporter borrowers, who had credit export of not less than 25% of their total turnover during the previous accounting year, provided that their fund based working capital needs from the banking system were less than Rs.1 crore. RBI has also suggested that the units engaged in export activities need not bring in any contribution from their long term sources for financing that portion of current assets as is represented by export receivables.
40
4. RBI had also issued lending norms for working capital, under which the banks would decide the levels of holding of inventory and receivables, which should be supported by bank finance, after taking into account the operating cycle of an industry as well as other relevant factors. Other aspects of lending discipline, viz; maintenance of minimum current ratio, submission and use of data furnished under quarterly information system etc. would continue though with certain modifications, which would make it easier for smaller borrowers to comply with these guidelines.
Procedure for getting advances from the Bank

Realistic assessment and sanction of credit needs ,phased disbursement of loans and the post sanction supervision and follow up advances are the main facets of credit risk management by commercial banks(as also by the other financial institution PROJECT APPRAISAL Project appraisal is the process of critical examination and analytical evaluation of a loan appraisal for project to see whether funds, if lent, can be rapid out of the profit generated, within a reasonable time. It provides an analytical base for the decision making process.
Objectives To assess whether the entrepreneurs are technically and managerially equipped to execute the project and whether their antecedents like character, credit-worthiness, integrity, etc are satisfactory. To examine the technical feasibility of the process of manufacturing the product and the availability of the infrastructure facilities, raw materials, etc. To realistically determine the market demand for the proposal product and achievability of the projected sales. To assess the profitability of the project on a realistic basis and the adequacy of the cash surplus for repayment of loan within a reasonable time.
41
Banks system and procedure for Project Appraisal All the relevant factors required to be considered by the entrepreneurs while preparing the project report and to be examined by the bank officers, while appraising the project reports, are contained in various loan application forms prescribed by the banks for different quantum of advances. For example: Over Rs 2lakh and up to Rs 5 lakh; Over Rs 5 lakh and up to Rs 10 lakh; Over Rs 10 lakh (where Tandon committee norms earlier applied) These application forms well serve the purpose of check lists to verify whether all the relevant factors have been duly considered. A proper assessment of the working capital requirements by the banks depends on the realistic assessment of two main factors, viz 1) Anticipated monthly sales 2) Period of stocking of various components of inventories and terms of credit sales.
42
WHAT IS CONSORTIUM?
onsortium is a Latin word, meaning partnership, association or society and derives from censors partner, itself from con-together and sors fate, meaning owner of
means or comrade. A consortium is an association of two or more individuals, companies, organizations, or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal.
WHY A BANK CONSORTIUM?

Bank consortium means an association of more than one bank which join together to fulfill the financial requirements of any company. They share a proportionately in a pre decided manner. Such an arrangement diversifies the risk from any one bank, in other words risk of default on the part of company gets divided among the consortium members and hence a bank can finance more amount of money depending on the degree of risk it can take. Consortium banking had faded away with the demise of financial institutions. However, with the kind of revolution that has occurred in the financial system of India, this concept is regarding its popularity. According to banking sources, banks are appointing a single security trustee who will draft the terms and conditions for the entire group of banks involved in lending. Consortium lending had become past due to problem in settling non-performing assets through the corporate debt restricting (CDR) method. Disagreement among bankers used to cause the entire process to fall through. In extreme cases in the past. Even major lenders had gone ahead with the debt restricting process without the full consent of lenders. Therefore, each bank had decided to have its own terms and condition for lending to a corporate account. However, consortium banking has made a comeback after the legal procedure for settling bad accounts has been simplified and streamlines by the Reserve Bank of India and through the enactment of the securitization act. Company also has an excess to the private sources for funds in the form of bill discounting. However this source is used only to fill the transitional gaps on monthly bases. This is not any major sources of finance.
43
Given the history of VADILAL, this (bank) has been the most feasible sources for financing their requirement of working capital. Bank generally do not finance with adequate security. Company has very well fulfilled this requirement by means of hypothecation of stock and mortgage of fixed assets. Apart from this, company also uses trade credits from its suppliers in the form of sunder which are also known as account payable. As far as cost of the funds is concerned, they are well as per the running market rate and nothing extra is to be paid. However, their cost vitiates due to change in bank interest rates i.e. BPLR (benchmark prime lending rate) from time to time. Thus from all this we can say that company has quite successfully met its finance requirement for their working capital given the external and internal limitations.
44
CH.NO.8:- LIQUIDITY RATIOS

One of the most important jobs of the Finance Manager is to maintain sufficient liquidity to enable the firm to pay off its obligations when they fall due. To test a firms liquidity and solvency we commonly use current and quick ratios. Traditionally 2:1 current ratio and 1:1 quick ratio are taken as satisfactory standards for the purpose. The former indicates the extent of the soundness of the current financial position of a firm and the degree of safety provided to the creditors, the later signifies the ability of a firm to settle all its current obligations on a particular date.
Current ratio
Current ratio is a very popular ratio which define as the ratio of the companys current assets to the companys current liabilities. A higher current ratio indicates financial strength of the company& the company can look to fulfill its short term obligations.
Current Ratio
YEAR Current Assets Inventories Sundry debtors Cash & Bank balance Other current assets Loans and advances Current Liabilities Current Liabilities Provision Current ratio 2010 10482.84 5597.75 3275.69 246.56 160.76 1202.08 5234.30 4724.96 509.34 2.01 2009 7896.54 3699.98 2958.96 162.27 63.05 1012.28 3005.24 2745.86 259.38 2.63 2008 7115.62 3086.06 2737.01 146.50 70.59 1075.46 3110.35 2838.84 271.51 2.29 2007 5697.59 2438.17 2191.53 103.54 41.25 923.10 2503.65 2011.80 491.85 2.28 2006 4876.48 1773.04 1954.63 266.13 852.58 30.10 1650.56 1410.77 239.79 2.95
45
Interpretation: This ratio indicates rupees of current assets available for each rupee of current liabilities. Higher the ratio greater is the margin of safety for short term creditors or vice-versa. Here, the current ratio of company has decreased from 2.63 in the year 2009 to 2.01 in the year 2010. But the ideal ratio is 2:1 so company present year ratio is considered satisfactory. So Vadilal can prevent stock outs during peak period i.e. in the summer season. Moreover, the current ratio of Vadilal industries over the past five years was the highest in year 2005-2006 and was lowest in the year 2009-2010.
46
Quick ratio
This ratio is calculated by dividing quick assets by liquid liability. The idea of calculating this ratio is to measure the firms ability to meet its short obligation without relying on stock. QUICK RATIO
2010 Quick Assets Sundary debtors Cash and bank balance Other current assets Loan ans advances 4885.09 3275.69 246.56 160.76 1202.08 2009 4196.56 2958.96 162.27 63.05 1012.28 2008 4029.56 2737.01 146.50 70.59 1075.46 2007 3259.42 2191.53 103.54 41.25 923.10 2006 3103.44 1954.63 266.13 852.58 30.10
Liquid Liabilities Current liabilities Provision Quick ratio
5234.30 4724.96 509.34 0.93
3005.24 2745.86 259.38 1.39
3110.35 2838.84 271.51 1.33
2503.65 2011.80 491.85 1.30
1650.56 1410.77 239.79 1.88
47
Interpretation: This ratio suggests whether the cash & cash equivalents are sufficient to meet its short term liabilities. Traditionally a ratio of 0.5:1 is satisfactory level. Higher the ratio better it is, but it should not to be followed blindly as too high ratio may be result in large amounts of ideal funds. The companys ratio as present is 0.93 which has decline from 1.39 in 2008-2009. The year 2006 was the best year as far as quick ratio is concerned with the quick ratio being 1.88.
Cash ratio
Cash ratio is define as the ratio of cash, bank balances and investments to the current liabilities. It is one of the stringent measures of liquidity. CASH RATIO
YEAR Cash and bank balance Investments 2010 246.56 158.75 2009 162.27 330.31 2008 146.50 332.56 2007 103.54 331.89 2006 266.13 331.90
Total
405.31
492.58
479.06
435.43
598.03
48
Current liabilities Current liabilities Provisions Cash Ratio
5234.30 4724.96 509.34 0.07
3005.24 2745.86 259.38 0.16
3110.35 2838.84 271.51 0.15
2503.65 2011.80 491.85 0.17
1650.56 1410.77 239.79 0.36
Interpretation: Cash ratio of Vadilal industries Ltd. Took a dip in 2010 i.e. 0.07. Due to increase in current liabilities and decrease in cash and bank balances, cash ratio fell from 0.16 in the year 2009 to 0.07 to the year 2010. However, the cash ratio of Vadilal has constantly decreased since 2006 to 2010 except 2009.
49
CH.NO.9:- MANAGEMENT OF INVENTORY

Inventories are the stock of the product made for sale by the company or semi finished goods or raw materials. Inventory of finished goods which are ready for sale is required to maintain smooth marketing operation. The inventory of raw material and work in progress is required in order to maintain an unobstructed flow of material in the production line. These inventories serve as a link between the production and consumption of goods. The aspect of management of inventory is especially important in respect to the fact that in country like India, the capital block in terms of inventory is about 70% of the current assets. It is therefore, absolutely imperative to manage efficiently and effectively in order to avoid unnecessary investment in them. Although to maintain low inventories may prove to be profitable but to maintain very low inventories may prove risky on the contrary. This aspect of management if tackled in a proper way may prove to be a boon its effective and efficient management would result in the maintaining of optimum level of inventories. At this level the profitability of the organization will not be jeopardized at the cost of inventory. Now from the above stated facts it is clear that maintaining of optimum level of inventory involves huge cost, so why should keep the inventories at all. Basically there are three main reasons for which inventories are stocked and they are:1. Transaction Motive: This motive lays emphasis on maintaining of inventories in order to maintain a smooth and unobstructed supply of materials for the sales and production operations. 2. Precautionary Motive: This motive emphasizes on the stocking goods in order to guard against the uncertainties of future i.e. unpredictable changes in the forces of demand, supply and other forces. 3. Speculative Motive: This motive influences the decisions regarding the increase or decrease in the level of inventory in order to take advantage of price fluctuations. A company should maintain adequate stock of materials for a continuous supply to the factory for an uninterrupted production. It is not possible for a company to procure raw material instantaneously whenever needed. A time lag exists between demand and supply of material. Also, there exists an uncertainty in procuring raw material in time at many occasions. The procurement of materials may be delayed because of factors beyond companys control e.g. transport disruption, strike etc. Therefore, the firm should keep a sufficient stock of raw material at a time to have streamline
50
Other factors which may incite us to keep stock of inventories is the quantity discounts, expected rise is price. The work in process inventory builds up because of the production cycle. Production cycle is the time span between the introduction of raw material in to the production and the emergence of finished goods at the completion of production cycle. Till the production cycle completes, the stock of work in process has to be maintained. Efficient firms constantly try to make the production cycle smaller by improving their production techniques. The stock of finished goods has to be held because production and sales are not instantaneous. A firm can not produce immediately when goods are demanded by customers. Therefore to supply finished goods on regular basis, their stock has to maintain for sudden demand of customers, in case the firm sales are seasonal in nature, substantial finished goods inventory should be kept to meet the peak demand. Failure to supply products to customer, when demanded, would mean loss of the firms sales to the competitors. The basic objective in holding raw material inventory is separate purchase and production activities and in holding finished goods inventory is to separate production and sales activities. If raw material inventory is not held, purchase would have to be made regularly at the time of usage. This would mean production interruptions and high cost of ordering. A sufficiently large inventory has to be maintained of finished goods so as to meet the fluctuating demands. If a close link is maintained between the sales and the production department then an organization can do with a small inventory also. In the process, inventory is also necessary because production can not be instantaneous. But it should be seen that the size of production cycle should be small.
Objectives of Inventory Management

In the modern business world there is practically nothing that is done without objective. The objective is also one that would help the organization in reaching its goals in a better way. Hence it can be inferred that the importance given to management of inventory in the business world is not devoid of a concrete reasons behind it. The two main reasons behind all this are, firstly, to maintain a inventory big enough that the production and sales operation are carried on without any hindrance and secondly, to minimize the investment in inventory, in order to maximize the profits. Both, excessive as well as
51
inadequate inventory level is not good. They are the two danger points that a company should try to avoid and should always try to maintain optimum level of inventory. The excessive investment in the inventory has the following drawbacks: Unnecessary tie up of firms fund and loss of profit. Excessive carrying cost. The risk of liquidity. The over investment of funds in inventory eat up the precious funds which could have been put to some profitable use. The carrying cost incurred, can not be ignored, this is the cost of storage, handling insurance, recording and inspecting. These all costs incurred in order to have large inventories impair the profitability of the firm. Another danger of carrying excessive inventory is the deterioration, obsolescence and pilferage of raw materials. Maintaining inadequate inventory is also dangerous. The consequences of under investment in inventory are Production hold ups; Failure to meet commitment If the inventory of finished goods is not adequate than the demand of customer is peak periods may be left unmet and it the under investment is in the area of raw materials that is likely that the production process may be held up frequently. The aim of inventory management thus should be to avoid excessive and inadequate level of inventory and to maintain sufficient inventory for smooth production and sales operation efforts should be made to place an order at the right time to right source to acquire right amount at the right price and for right quantity. The aspects of a effective inventory management should take care of are as: Ensure continuous supply of material to facilitate uninterrupted production. To maintain sufficient stocks of raw material in the periods of short supply and evident price rise. To maintain sufficient inventory of finished goods for smooth sales operation. Minimize carrying cost and time. Control investment and keep it to the optimum level.
52
Evaluation of Inventory Management

In this section of this chapter, a attempt has been made to judge the efficiency of inventory management in Vadilal Industries by examine Inventory turnover ratio.
Inventory Turnover ratio

Inventory turnover ratio measures how fast the inventory is moving through the firm and generating sales. It defined as the ratio of net sales of the firm to the average inventory of the firm.
YEAR Cost of goods sold Inventory Average Inventory Inventory Turnover ratio
2010 18190.33 5573.21 4636.60 3.92
2009 14330.57 3699.98 3393.02 4.22
2008 12123.02 3086.06 2762.12 4.39
2007 10648.83 2438.17 2105.61 5.06
2006 8823.77 1773.04 1864.89 4.73
53
Interpretation: There has been a significant increase in the net sales of the firm with a corresponding increase in the inventory level and the annual cost of goods sold. As a result, the inventory ratio has decreased from 4.73 in the year 2006 to 3.92 in the year 2010. Therefore, it is signal to the firm to handle its inventory more efficiently.
54
CH.NO.10:-MANAGEMENT OF RECEIVABLES
Trade credit, the tool which as a bridge for movement of goods through production and distribution stages to customer, is a force in the present day business and a essential device. Trade credit is granted with a motive of protecting the sale from ones, competitors and attaching more of the potential customers. Trade credit is said to be extended to a customer when a firm sell its services or goods and does not receive the payment for them immediately. Thus trade credit creates receivable which refer to the amount which a firm is expected to collect in near future. The book debt or receivable which arise a result of trade credit have the following features: It involves a element of risk and hence should never to be fiddled with. As credit sale leave a sum to be recovered in future and future can never be the certainty, hence it is risky. It is based on economic value, while for the buyer, the economic value in goods passes immediately at the time of purchase, while the seller expects an equivalent value to be received later on. It represents futurity. The cash payments for the goods or services received by the buyer will be made in future.
The management of receivable gain more importance in the view of the fact that more than one third of the total current assets is blocked in the form of trade debtors. The interval between the date of sale and the date of payment is financed by working capital. Thus trade debtors represent the investment. As substantial amount are tied up as trade credit hence it requires careful analysis and proper management.
55
Goals of Management Receivables
As all other aspects of management, this also aims at the maximization of wealth by a beneficial trade off between liquidity risk and profitability. The main aim of management is not to maximize sales or minimize bad debt risk but in a way it is to expand sale to the extent that the bad debt risk remained within the limits. So in a effort to maximize the wealth, the goals of management of receivable are: To obtain optimum value of sales To control the cost of credit and keep it to the minimum level. To maintain investment in debtors at optimum level.
Sales maximization is not the purpose of credit management but an effective and efficient credit management helps in expanding sales and acts as a marketing tool. A good and well administered credit means profitable credit accounts. In order to maximize the wealth of the firm, the cost involved in the credit and its management has to be controlled within the acceptable limits. These costs can brought to zero level but that would adversely affect the sales, therefore the objective should be to kept receivable to the minimum level. A dynamic credit policy and its management will help to optimize the sale at a minimum cost. Debtors involve funds, which have an opportunity cost. Therefore the investment in debtors should be never being excessive. Extending liberal credit pushes the sale and results in higher profitability but the increase in level of investment in debtors result in increased cost. Thus we are to bring the investment at an optimum level by doing trade off between the costs and benefits. The level of debtors to a large extent depends on external factors such an industry norms, level of activity, seasonal variations etc. But there is lot of internal factors which affects the firm credit policy. These factors include credit terms, standard, limits and collection procedures. The internal factors should be well administered to optimize the investment in debtors.
56
Performance Evaluation of Management Receivables
Evaluation of the performance of the credit department is a difficult task. There is no yardstick to compare with the actual performance. Yet a successful receivable management must ensure a comparatively slow growth of receivable as against sales, as factory collection period and receivable task over minimum bad debts losses and effective use of capital invested in receivable. To what extent the concern has been successful in their efforts, can be gauged by their actual performance. 1. Composition of Receivable: It helps in showing the point where receivable are concentrated most. 2. Ageing of accounts receivable: To have a detail idea of a quality of accounts receivable through agency schedule. 3. Average collection period: To measure the effectiveness of collection efforts. 4. Relationship between debtors and sales: To know growth rate and also co-efficient of correlation and determination. 5. Receivable as percentage of sales ratio: To examine the level of investment is receivable
AVERAGE COLLECTION PERIOD

Average collection period explains how many days of credit; a company is allowing to the customer, a higher collection period indicates towards a liberal and inefficient credit and collection performances shorter the collection period the better the credit management and liquidity of accounts receivable.
AVERAGE COLLECTION PERIOD

YEAR Receivables Total sales Average collection period 2010 3321.48 18890.77 64 2009 2958.96 14792.60 73 2008 2737.01 13263.69 75 2007 2191.53 11980.76 67 2006 1954.63 10878.15 66
57
Interpretation: The average collection period of Vadilal has increased from 66 days in the year 2006 to 73 days in the year 2009 and decreased to 64 days in last year. The average collection period of 5 years is 69 days.
Debtor Turnover Ratio

This ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Debtor Turnover Ratio (Times) 2010 2009 2008 18890.77 14792.60 13263.69 3321.48 2958.96 2737.01 5.68 5 4.84
YEAR Total Sales Average Debtors Debtor Turnover Ratio
2007 11980.76 2191.53 5.47
2006 10878.15 1954.63 5.57
58
Interpretation:
Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. The average debtor turnover ratio of Vadilal industries of 5 years is 5.30 times.
59
CH.NO.11:- MANAGEMENT OF PAYABLES

A substantial part of purchase of goods and services in business are on credit terms rather than against cash payment. While the supplier of goods and services tends to perceive credit as a lever for enhancing sales or as a form of non-price instrument of competition, the buyer tends to look upon it as a loaning of goods or inventory. The suppliers credit is referred to as Accounts payable, Trade Credit, Trade Bill, Trade Acceptance, commercial drafts of bills payable depending on the nature of the credit. The extent to which this buy-now, pay- later facility is provided will depend upon a variety of factors such as the nature, quality and volumes of items to be purchased, the prevalent practices in the trade, the degree of competition and the financial status of the parties concerned. Trade credits or Payables constitutes a major segment of current liabilities in many business enterprises. And they primarily finance inventories which form a major components of current assets in many cases.
TYPES OF TRADE CREDITS Trade credits or Payables could be of three types : Open Accounts, Promissory notes and Bills Payables. Open Account or open credit operates as an informal arrangement wherein the supplier, after satisfying himself about the credit-worthiness of the buyer, dispatches the goods as required by the buyer and sends the invoice with particulars of quantity dispatched, the rate and the total price payable and the payment terms. The buyer records his liability to the supplier in his books of accounts and this is shown as Payables on open account. the buyer is then expected to meet his obligations on the due date.
The promissory notes is a formal document signed by the buyer promising to pay the amount to the seller at a fixed or determinable future times. Where the client fails to meet his obligations as per open credit on the due date, the supplier may require a formal acknowledgment of debt and a commitment of payment by a fixed date. The promissory note is thus an instrument of acknowledgment of debt and a promise to pay. The supplier may even stipulate an interest payment for the delay involved in payment.
60
Bills payable or commercial drafts are instrument drawn by the seller and accepted by the buyer for payment on the expiry of the specified duration. the bill or draft will indicate the banker to whom the amount is to be paid on the due date, and the goods will be delivered to the buyer against acceptance of the bill. The seller may either retain the bill present it for payment on the due date or may raise funs immediately thereon by discounting it with the banker. The buyer will then pay the amount of the bill to the banker on due date.
Evaluation of Payables Management: ACCOUNTS PAYABLE PERIOD

ACCOUNTS PAYABLE PERIOD YEAR Accounts payable Total Purchase Accounts payable period 2010 1640.99 12443.04 48 2009 869.75 9479.66 33 2008 1006.09 8194.14 45 2007 441.35 6906.37 23 2006 0.00 5372.02 0.00
The firm begins with the purchase of raw material which are paid for after a delay which represents the Accounts Payable Period. Vadilal Industries ltd. takes an average of 30 days from the date of purchase of raw materials to pay the raw material supplier. Year 2006 has 0 days of accounts payable period because of 0 accounts payable. Year 2010 has longest accounts payable period of 48 days.
61
Creditor Turnover Ratio

It indicates the speed with which the payments are made to the trade creditors. It establishes relationship between net credit annual purchases and average accounts payables. Accounts payables include trade creditors and bills payables.
Creditors Turnover Ratio (Times) YEAR 2010 Total Purchase 12443.04 Average Creditors 3760.52 Creditor Turnover 3.31 Ratio
2009 9479.66 2115.30 4.48
2008 8194.14 2272.30 3.61
2007 6906.37 1391.28 4.96
2006 5372.02 680.95 7.89
Interpretation: The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditors turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. The average creditors ratio of 5 years is 4.85 times.
62
CH.NO.12:-SWOT ANALYSIS
Strength:The company is concentrating on the international market as well as external market also. and the products which are exported by the company are highly demanded in wastern countries. and hence it enjoys a near monopoly in its export business plus dominating area.. Even in the domestic market Vadilal is in strong position.The company also enjoys a good reputation among its customers due to The finer quality of products Strong distribution network Innovative idea of product Holding good market share in ice-cream industry
(a) Vadilal Industries Ltd. is one of the largest ice-cream manufacturing companies in the country. The company is having excellent market share in Western India viz. Gujarat and Rajasthan and in certain states of northern India viz. Uttar- Pradesh and Uttaranchal .In the last few years, the company has also made expansion of its market share by entering into states like Bihar, Jharkhand, Orissa, Punjab, Haryana , Chandigarh etc by improving the distribution network.
63
(b) The manufacturing units are located in Gujarat and Uttar Pradesh for uninterrupted supply of Ice-creams, which are well complimented by large distribution network.
in last union budget the government has taken various measures by way of reducing excise duty in ice cream and proceeded food.
Weakness: Companies still require to maintain its inventory management. There is no proper lay out facility at their plant Company fails in advertisement of frozen desert Inefficient advertisement
Opportunities: The company is also engaged in agro based food processing sector which is one of the major thrust areas of the new central govt. There is a huge overseas market for a food processing company. Expansion of domestic market for ice-creams and processed foods. Enlarge distribution network in small cities/towns.
Threats: Increased competition due to entry of players like Amul and other local Brands with their low priced products. Any change in govt. policies and import/export policies may affect the company. Threat from china market in the proceed food division. Amuls marketing through cooperative channel is biggest threat against Vadilal
64
CONCLUSION
Vadilal being a growing enterprise is on the expanding mode. This is even favored by the growing market for its product and hence companys funds requirements are always on up swing. There are differences and some of them are substantial. Whether it is their inventory management policy or receivable management policy. Certain things are objectionable. Competition in the ice-cream market is growing and thus there is a constant pressure on the profit margin of the company. Hence to remain profitable. Company must reduce its operating cost to the maximum possible extent. An efficient management of the working capital will automatically ensure it. Company should also try to explore various other options for financing which includes money market instruments primarily. One thing which I would like to mention at this point of time is that working capital cannot be managed in isolation. Various other functional departments have an effect over it. It is in fact a backline work in isolation; it has to be a comprehensive growth of the company as a whole. In this line, I would like to mention one of my observations which I have made in my 45 days training. Company prepares two categories of product. 1. ICE-CREAM 2. FROZEN DESERT
The basis difference between the two is that, frozen desert is prepared from skimmed milk powder and vegetable oil, while ice-cream is prepared from milk. Certainly there is a huge difference in the taste of both the products. However, USP of frozen desert is that it is a health friendly product as compared to ice-cream which contains lot of calories. People are less aware of this fact. And they compare this product with ice-cream only. Despite of the fact that it is no where written on the packaging that it is ice-cream. Therefore on the taste parameter, consumer rate it is a low product.
65
In these one and a half months of my summer training I have learned a lot not just on any particular aspect, rather it has been a fruitful learning experience for me in all the spheres of corporate life. Apart from just reinforcing the academic learning it has taught me how to work in an environment which is full of uncertainties. I hope that I can make full use of what I have learned in Vadilal in my professional career.
66
Bibliography
www.vadilalgroup.com www.bseindia.com www.wikipedia.com Financial management by I. M. PANDEY Financial management by Prasanna Chandra
67

Working Capital Management: A Summer Internship Report ON

Transféré par

Informations du document

Description originale:

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Working Capital Management: A Summer Internship Report ON

Transféré par

Droits d'auteur :

Formats disponibles

WORKING CAPITAL MANAGEMENT

A SUMMER INTERNSHIP REPORT ON