Project Report of Anand Malode 1

8/6/2019 Project Report of Anand Malode 1

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I. EXECUTIVE SUMMARY

The term working capital has several meanings in business and

economic development finance. Working capital means a businesss

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), accountspayable (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 firms 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 Ucodenim Ltd. 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.
http://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Accounts_receivable


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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 2010 the inventory period for Raymond Ucodenim Ltd. has

increased tremendously from 106 days in 2009 to 272 days in 2010.

This is also supported by the decline in the inventory turnover ratio to

a meager of 1.34 times in 2010. Since the company is in the textile

industry therefore the inventory varies according to seasonal and

festive demands.
http://en.wikipedia.org/wiki/Cash_managementhttp://en.wikipedia.org/wiki/Cash_management


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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 (2009)

to 2.33:1 in the year 2010.

Current liabilities have increased by 34.67% from the last year 2009.

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 2010 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

2009-2010, the cash ratio has fallen from 2.46:1(2009) to 1.73:1 in

2010.

Hence better cash management is needed at Raymond Ucodenim 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.


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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 firms short-term or currentassets and current liabilities. Net working capitalrepresents the excess

of current assets over current liabilities and is an indicator of the firms

ability to meet its short-term financial obligations.

From a financing perspective, working capital refers to the firms

investment in two types of assets. In one instance, working capital

means a businesss 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 firms 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 companys 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.


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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 ofliquidity, 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 (currentliabilities), which may have bad repercussions to the future of the

company.
http://en.wikipedia.org/w/index.php?title=Valuation_metric&action=edithttp://en.wikipedia.org/wiki/Current_assetshttp://en.wikipedia.org/wiki/Current_assetshttp://en.wikipedia.org/wiki/Current_liabilitieshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Profithttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Accounts_payablehttp://en.wikipedia.org/w/index.php?title=Valuation_metric&action=edithttp://en.wikipedia.org/wiki/Current_assetshttp://en.wikipedia.org/wiki/Current_assetshttp://en.wikipedia.org/wiki/Current_liabilitieshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Profithttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Accounts_payable


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Business Uses of Working Capital:

Just as working capital has several meanings, firms use it in manyways. 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 firms 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.


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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 firms 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.


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III. COMPANY PROFILE

Raymond Ucodenim Ltd. 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, Raymonds is the largest manufacturer of engineering files &

tools in the country. The company has entered into global tie-ups andthis is expected to add additional revenues to Raymond Ucodenim Ltd.

over the next two years. Recognized as the most respected Textile

Company of India, Raymond Ucodenim Ltd. 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

Ucodenim Ltd. 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.


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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.

Today the mill has turned into a Rs. 1400 crores conglomerate and is

Indias 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 Ucodenim Ltd. 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.


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Raymond Ucodenim Ltd. continues to achieve enhanced customer

satisfaction through ongoing innovation. Internationally renowned

menswear designers today, style their latest collections fromRaymond- the fabric in fashion.

About the company:

Raymond Ucodenim Ltd. is the worlds 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 & woolblended 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.


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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 Ucodenim Ltd. 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 suiting 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.
http://www.raymondindia.com/grp_sisk.asphttp://www.raymondindia.com/grp_sisk.asp


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World-class facilities:

Raymonds 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 Ucodenim Ltd. 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 Ucodenim Ltd. 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.


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Vapi Plant:

Raymond Ucodenim Ltd. 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 Ucodenim Ltd. 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 Ucodenim Ltd. has formed many subsidiaries like Raymond

Ucodenim Ltd. 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 Ucodenim Ltd. 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.


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Advantage of integrated business:

Raymond Ucodenim Ltd. 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 Ucodenim Ltd. 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 Ucodenim Ltd. 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 Ucodenim Ltd. 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 Ucodenim Ltd. 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

Raymonds presence in the global market. The Chinese venture could

help Raymond Ucodenim Ltd. through sourcing of raw material and


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intermediate products for the companies manufacturing facilities in

India and marketing its products in Chinese market.

Details of all Raymond Ucodenim Ltd. products areenlisted below:

Raymond Ucodenim Ltd.

Incorporated in 1925, Raymond Ucodenim Ltd. Limited has five

divisions comprising of Textiles, Denim, Engineering Files & Tools,

Aviation and Designer Wear.

Raymond Ucodenim Ltd. Textile is India's leading

producer of worsted suiting fabric with over 60%

market share. Raymond Ucodenim Ltd. Textiles is the

worlds third largest integrated manufacturer. Raymond Ucodenim Ltd.

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.


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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 Ucodenim Ltd. 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.

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 Ucodenim Ltd. UCO Denim is a Joint Venture between

Raymond Ucodenim Ltd. Indias 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 Ucodenim Ltd.UCO is in a best position to develop an optimal and flexible service to

meet global requirements of large international brands.

IV. OBJECTIVES AND SCOPE OF THE PROJECT


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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.


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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.
http://en.wikipedia.org/wiki/Cash_conversion_cyclehttp://en.wikipedia.org/wiki/Materialhttp://en.wikipedia.org/wiki/Return_on_capitalhttp://en.wikipedia.org/wiki/Return_on_capitalhttp://en.wikipedia.org/wiki/Return_on_equityhttp://en.wikipedia.org/wiki/Cash_conversion_cyclehttp://en.wikipedia.org/wiki/Materialhttp://en.wikipedia.org/wiki/Return_on_capitalhttp://en.wikipedia.org/wiki/Return_on_capitalhttp://en.wikipedia.org/wiki/Return_on_equity


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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.

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.
http://en.wikipedia.org/wiki/Cost_of_capitalhttp://en.wikipedia.org/wiki/Asset#Current_assetshttp://en.wikipedia.org/wiki/Cashhttp://en.wikipedia.org/wiki/Cash_and_cash_equivalentshttp://en.wikipedia.org/wiki/Cash_and_cash_equivalentshttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Debtorhttp://en.wikipedia.org/wiki/Cash_managementhttp://en.wikipedia.org/wiki/Just_In_Timehttp://en.wikipedia.org/wiki/Economic_order_quantityhttp://en.wikipedia.org/wiki/Economic_order_quantityhttp://en.wikipedia.org/wiki/Economic_production_quantityhttp://en.wikipedia.org/wiki/Credit_(finance)http://en.wikipedia.org/wiki/List_of_Latin_phrases#Vhttp://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Cost_of_capitalhttp://en.wikipedia.org/wiki/Asset#Current_assetshttp://en.wikipedia.org/wiki/Cashhttp://en.wikipedia.org/wiki/Cash_and_cash_equivalentshttp://en.wikipedia.org/wiki/Cash_and_cash_equivalentshttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Debtorhttp://en.wikipedia.org/wiki/Cash_managementhttp://en.wikipedia.org/wiki/Just_In_Timehttp://en.wikipedia.org/wiki/Economic_order_quantityhttp://en.wikipedia.org/wiki/Economic_order_quantityhttp://en.wikipedia.org/wiki/Economic_production_quantityhttp://en.wikipedia.org/wiki/Credit_(finance)http://en.wikipedia.org/wiki/List_of_Latin_phrases#Vhttp://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Discounts_and_allowances


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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.


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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


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operation for the same has to be conducted during the whole year

resulting in working capital blockage during off-season.

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 apowerful reason for reducing or even skipping dividends in cash

(resolved by payment of bonus shares).


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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.

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 receivablefactoring. 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


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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 banksand 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 companiesare 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


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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 owners 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 owners personal assets to the

firms success, putting important household assets, such as the

owners 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


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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 fromemployees, 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 offinance 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-


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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 andformal 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:


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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.

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:


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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:


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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 employees accrued

wages. For large firms, the accrued wages held by the firm constitute

an important source of financing. In case of Raymond Ucodenim Ltd.

Limited, this would amount to wages and salaries of about 6000

employees and workers.


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VI. STATEMENT OF WORKING CAPITAL

PARTICUL

ARS

For the year ended

Changes In W-cap

Increase Decrease

2004 2009 2010 2004-05 2009-06 2004-05 2004-05

Current

Assets

Inventories

29490.66 28756.59

31904.16 3147.57 734.07

Sundry

Debtors

24614.52 22627.6724846.74

2219.07 1986.85

Cash and

Bank2675.92 1324.83

2503.171178.34 1351.09

Other Current

Assets1887.79 2277.72

3315.06389.93 1037.34

Loans and

Advances12122.14 12206.35

14442.0684.21 2235.71

Total Current

Assets 70791.03 67193.1677011.19

9818.03 3597.87

CurrentLiabilities

Acceptances89.75 42.17

45.092.92 47.58

Sundry

Creditors10491.99 11009.37

16427.41517.38 5418.04

Advances

against sales449.05 459.52

560.3510.47 100.83

Due to

Subsidiary

Cos

137.82 207.25177.84

69.43 29.41

Deposits

from Dealers

and Agents

4874.25 5134.955318.21

260.7 183.26


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Overdrawn

Bank

Balances186.60 484.16

1125.67 297.56 641.61

Other

liabilities 1491.91 1689.99

2044.72

198.08 354.73

Interest

accrued but

not due315.87 477.20

528.05 161.3350.85

Provisions 8373.15 5605.176770.84

1165.67 2767.98

Total Current

Liabilities 26410.39 25109.7826227.34

1117.56 1300.61

Net Working

Capital(CA CL)

44380.64 42083.38 50783.858700.47

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 shelvesbefore being sold. Obviously, average stock-holding periods will be

influenced by the nature of the business.


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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 firms

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


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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 firms 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.


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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 companys 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.


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The inventory of a manufacturing concern usually includes:

Raw material

Work-in-Progress

Finished goods

Inventory management at Raymond Ucodenim Ltd.

The inventory of Raymond Ucodenim Ltd. 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:

Particulars Raw Material WIP Finished Goods

Stores

& Spares


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Component

s

i. Wool (Australia)

(Fine micron, coarse)

ii. Polyester

(Reliance Ltd.)

iii. Viscose (Locally)

iv. Yarn (RSM)

(Rajasthan)

v. Camel hair

(Locally)

vi. Soya bean fiber

(Locally)

__ Fabric Oils,Lubricants

etc.

At its peak Fine micron-Julyand

Stored for the entire

year

Wedding andfestive

Seasons.

Stable: April-August

And Dec-Jan.

Valuation

Method Specific Identification WeightedAverage

Weighted Average

Cost or marketvalue

Whichever is less.

Weighted

Average

Value as in

March 2010(Rs.Crores)

20 68-70

110

(In accordance withAS-2

Including Excise

duty)

8-9

Managed by Production&

Planning dept.

Production&

Planning

dept.

Production andPlanning

Dept, Warehouse

dept & Marketingdept.

_

Ratios:

Ratio used for

evaluationFormula used Ratio for the financial year

ended

2010 2009 2004


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Inventory

Turnover

ratio

(Times)

COGS

Average Inventory 1.34 3.432.84

Inventory

Period

(Days)

365

Inventory Turnover Ratio 272 106129

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 companys 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 managements efficiency in turning over the

companys inventory, which can be compared with other companies in

the same field. It also suggests how adequate a companys 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 inventoryturnover rate thats 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


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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 companys working capital is

usually tied up in inventory, how the inventory position is managed has

an important and direct effect on earnings.

For Raymond Ucodenim Ltd. the inventory turnover ratio has

increased from 2.84 times (2004) to 3.43 times (2009), but showed a

major decline in the year 2009-06 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 (2009) 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 2010 the inventory period has increased

tremendously from 106 days in 2009 to 272 days in 2010. This is also

supported by the decline in the inventory turnover ratio to a meager of

1.34 times in 2010. Since the company is a textile industry thereforethe inventory varies according to seasonal and festive demands.

Current ratio:


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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 Ucodenim Ltd.. was 2.68:1 in 2004. The

current ratio stood at 2.68:1 for the year ended 2009.If we compare

current ratio of 2009 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


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received prompt payments from debtors. Other current assets have

decreased by 25%.

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 (2009) to 2.33:1 in the

year 2010.

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 Ucodenim 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 2010 as

in the year 2009. 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.


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VIII. CASH MANAGEMENT

There are four primary motives for maintaining cash balances.

Transactions MotiveTransactions Motive -- to meet payments arising in the ordinary

course of

business.

Speculative MotiveSpeculative Motive -- to take advantage of temporary

opportunities

Precautionary MotivePrecautionary Motive- to maintain a cushion or buffer to meetUnexpected cash needs

Compensating motiveCompensating 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.


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Raymond Ucodenim Ltd. ltd. has invested about Rs. 600 crores

(approx.), which stands as their core investment. In order to diversify

its riskthe 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 byinvesting in Mutual funds.

Raymond Ucodenim Ltd. 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 companys 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).


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Ratios:

Ratio used for

evaluationFormula used Ratio for the financial year

ended

2010 2009 2004

Cash Ratio Cash & Book Balances + Current

Investments

Current Liabilities

1.73 2.46 2.35

Sales to Cash

Ratio Sales_

Cash

51.34 84.19 37.15

Cash Profit

RatioCash Profit * 100

Sales

17.72 18.68 22.75

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 2010 2009 2004

Net sales(Net ofexcise)

132275.51

111534.44

99431.64


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IX. RECEIVABLES MANAGEMENT (DEBTORS)

Cash flow can be significantly enhanced if the amounts owing to abusiness 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 graduallylose 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.


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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 acustomer.


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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 borrowers 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 firms 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,


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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 firms ability to use

this collateral for any other borrowing. This may be a concern if

accounts receivable are the firms primary asset.


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Receivables (Debtors) Management At Raymond:At Raymond Ucodenim Ltd. the sales process is as follows:


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Raymond Ucodenim Ltd. 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 thisfacility 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


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UTI Bank.

Kotak Mahindra Bank

At present Raymond Ucodenim Ltd. 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 dont burden

the company at all .The rates are roughly around 6.25 % for with

recourse and varies from 10 % to 16 %.


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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 Ucodenim 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

collection policy of the company. The company never writes off any party 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.

Collections Disbursements

Marketable securities

Investment

CONTROL THROUGH INFORMATION

REPORTING

= Funds Flow= Information Flow


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Ratios:

Ratio usedfor

evaluation Formula usedRatio for the financial

year ended

2010 2009 2004

DebtorsTurnover

Ratio(times)

Net Sales

Avg. Debtors

5.50 4.72 3.70

CreditPeriod

365

Debtors Turnover Ratio

66 77 99

Interpretation:

Debtors Turnover Ratio:

The debtors turnover ratio has been gradually increasing over the

years from 2004 to 2009, from 3.70 to 4.72 respectively. This indicates

that the credit period has declined from 99 days (2004) to 77 days

(2009). This implies that for the year ended 2009 debtors on an

average are collected in a period of 77 days. A turnover ratio of 4.72

(2009) signifies that debtors get converted into cash (4.72)

approximately 5 times in a year.

Raymond Ucodenim 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


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interest costs. In order to keep up with the industry credit standards

Raymond Ucodenim Ltd. has been gradually reducing its credit period.

For the previous year the debtors 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 2010 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, debtors 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 Ucodenim Ltd. the inventory turnover ratio hasincreased from 2.84 times (2004) to 3.43 times (2009), but showed a

major decline in the year 2009-06.

In the year 2010 the inventory period has increased tremendously

from 106 days in 2009 to 272 days in 2010. This is also supported by


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more than the increase in the current assets, hence there is a decline

in the cash ratio.

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 Ucodenim 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

Ucodenim 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.

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


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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 Ucodenim 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:


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There is no particular benchmark value or range that can be

recommended as suitable for all government departments. However, if

the departments in Raymond Ucodenim Ltd. tracks its own working

capital ratio over a period of time, the trends-the way i

Documents

Project Report of Anand Malode 1