Working capital management of Himshree foods

8/11/2019 Working capital management of Himshree foods

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Working capital also gives investors an idea of the company's underlying operational

efficiency. Money that is tied up in inventory or money that customers still owe to the

company cannot be used to pay off any of the company's obligations. So, if a

company is not operating in the most efficient manner (slow collection), it will show

up as an increase in the working capital. This can be seen by comparing the working

capital from one period to another; slow collection may signal an underlying problem

in the company's operations (Investopedia.com)

Working capital management is the process of managing activities and processes

related toworking capital.This level ofmanagementserves as a check andbalances

system to ensure that the amount of cash flowing into the business is enough to

sustain thecompany'soperations.This is an ongoing process that must be evaluated

using the current level of assets and liabilities. Working capital management may

involve implementing short-term decisions that may or may not carry over from one

earningsperiod to the next (Businessdictionary.com).

1.3 Introduction to Himshree Foods Pvt. Ltd.

Himshree Foods Pvt. Ltd. Is one of the first manufacturers found within SAARCnations. Himshree is an organization formed by merger of two big manufacturing

industries, Gandaki and Everest in 2056 B.S. It is fully established in 1982 and started

manufacturing stick noodles. Then after, it also manufactured instant noodles, both

white and brown. Himshrees products consist of brown noodles like AAHA, AAHA

50, A-One and FEWA with flavors like vegetable, chicken and mutton as well.

Himshrees only product of white noodles is RARA which is of chicken flavor.

Himshree exports its products in two neighboring countries: China and India. In

China, monthly export of noodles is 15,000 packets approximately, but its export to

India is a little less than China. However, Himshree products are considered as

qualitative products inside and outside national boundaries.

Within four years of its establishment, Himshree was successful to achieve Barcelona

Food Award in 1986 A.D. Himshree has been focusing on providing its valuable

customers with quality products and it has been successful on achieving standard of

the product. To maintain the standard of the product, Himshree has imported

manufacturing plant from Suzuki Company, a world renowned machinery and
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equipment brand. This machine is one of the best machines and has a capacity of

producing 10000 outputs per day. Even when a machine operates slower than its

actual capacity is able to produce 6000 outputs in a day. In order to bring quality in its

product, Himshree has equal emphasis on packaging as well. It imports noodles

packing plastic from Switzerland which makes noodles edible for 9 months after

packing. Also, all the raw materials necessary for manufacturing noodles passes

through laboratory tests to qualify as production input Himshree follows the

International Standard stated in ISO 9001:2000 in order to produce eco friendly

products and to meet its corporate social responsibilities (kanchan-

himalayancountrynepal.blogspot).

1.4

Statement of Problem

Working capital management is the determinant of success or failure of the business

organization both lower as well as higher working capital positions are dangerous

from the business point of view. Excessive working capital means idles, which earns

low profit for the firm, purity of working capital not only impairs but also results in

production interruption and inefficiencies. Thus the main problem is how to maintain

the optimal level of working capital in manufacturing enterprises. Working capital

management is linked with the continued existence of enterprise. Regardless of

excellent products, effective marketing, efficient production and optimum fixed assets

management, management has lost the control of its firm because of liquidity.

The main problem to which this study focuses on is how working capital management

has been done in Himshree foods Pvt. Ltd. This study focus to solve the following

questions:

Is there proper investment in current assets appropriate to total sales level?

What is the factor affecting element of working capital?

Is there sound liquidity position in the industry?

What is the current situation of the industry?


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1.5 Objective of the study

The fundamental objective of the study is to analyze the Working Capital

Management of Himshree Foods Pvt. Ltd. The specific objectives of the study are as

follows:

To analyze the Working Capital Policy used in Himshree Foods Pvt. Ltd.

To analyze the variables affecting Working Capital of Himshree Foods Pvt.

Ltd.

To analyze liquidity position and turnover position

To suggest the appropriate working capital management based on results of

analysis.


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CHAPTER 2

LITERATURE REVIEW

2.1 Working Capital Management

Samuels, (2006), argues that funds management is the planning, controlling and the

effective utilization of funds. Money can be earned not only through manufacture and

distribution but also through the management of all its assets that it employees. The

best funds management policy is through funds budgets. A company can decide on

the funds that it will have available for short-term investment at a particular time

depending on the nature of business and season. If a business is seasonal or trade is

cyclical, funds budgets will show when the surplus funds that will be available and

what length of time will elapse before they are required. Some companies will borrow

money in case of deficit spending to satisfy their seasonal needs.

Kakuru, (2000) argues that every organization must establish funds management

policies or guidelines to ensure that it has optimal funds balance at any time when it

requires it. This can be achieved by implementing the following funds management

policies. The organization must ensure that it speeds up funds inflows through

efficient credit policy. For example timely preparation and delivering of customer

invoices, making customers to pay their outstanding by allowing funds discounts.

This will enable the firm to keep in a liquid position and carry on its operations

efficiently.

Firms hold funds for primary reasons but although the first two of these are generally

satisfied by holding actual funds (a checking account balance, the last two

requirements may be meet, instead by holding highly liquid marketable securities.

The main reasons can be explained according to Bodil (1995) as below.

Funds inflows and out flows are somewhat unpredictable with the degree of

predictability varying among firms and industries. Therefore firms need to hold some

funds (or more often marketable securities) in reserve for random, unforeseen

fluctuations in inflows and outflows. These safely stock of funds are called the

precautionary balance and the less predictable the firms funds flows the larger the

necessary funds balance.


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Funds balance may also be held to enable the firm to take advantage of any bargain

purchases that might arise; these funds are defined as speculative balances. For

example reduction in the price of raw materials, any profitable short-term investment

that may happen, the firm should maintain such balance to take advantage of the

investment opportunities that may arise Campsey (2005).

Lending institutions such as banks, makes money by lending out funds that have been

deposited with it. So the larger its deposits, the better the bank profit position. If a

bank is providing services to a customer, it generally requires the customer to leave a

minimum balance on deposit to help offset the cost of providing the service Campsey

(2008).

Funds balances are necessary in business operations because payments must be made

in funds and the receipts are deposited in the funds account. These funds balances are

associated with routine payments and collections are known as transaction balances

Knott (2008).

Although a carefully prepared funds budget is a necessary starting point for managing

the firms funds, there are other elements of a good funds management programs. The

primary funds management activities are performed jointly by the firm and its mainbank, but the financial manager is responsible for the effectiveness of the funds

management programs.


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Khazi (2002), points out the relationship between funds management and profitability

by giving the effect of excess and shortage of funds. Holding excess funds means that

there is an opportunity cost in form of a return foregone because of holding it. On the

other hand funds shortage will disrupt the firms operation for instance failure to

acquire inventory for sale, inputs and meeting customers orders. Such situation

requires that an organization must design an appropriate funds management policy to

ensure that the best is derived from every single coin held at any period of time.

Management of small scale and medium businesses should establish and strengthen

the internal controls over funds and other financial resources to reduce on

mismanagement and misappropriations. The internal controls to be established among

others may include; segregation of duties, approval and authorization, physical

controls, accuracy and arithmetic, supervision of lower employees, and daily banking

of funds received to reduce on theft and mismanagement of funds resources Wilkes

(2006).

Organizations should hold funds to keep the liquidity level balanced so as to

maximize profitability. However, care must be taken to avoid excess funds because

of its effect such as theft, misappropriation and misallocation and still fore going a

return that could have been earned through investing the funds resources elsewhere in

profitable ventures.


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CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter elaborates the entire design of the study and how it will be carried out. It

will also explain how the study will be conducted, the area of the study, sample size

and sampling technique. It will also indicate how the data will be collected and

analyzed as well as the limitations of the study.

3.2 Research Design

The research will involve a cross sectional study using both qualitative and

quantitative research centered on working capital management practices. The

techniques will be designed in a way that would best suit quick collection of relevant

data. The data will be systematically collected and presented to give exploratory

analysis to particular phenomena with emphasis to cover the extent of the problem.

3.3 Study Population

The study will be carried out among the staff and customers of Himshree Foods Pvt.

Ltd. who will be drawn from production, marketing, stores and accounts department.

Management will also be targeted for the study research.

Both simple random and purposive sampling techniques will be used to select the

required respondents so as to minimize bias. Judgmental sampling will be used to

choose the respondents to form a sample that represents the study population.

3.4 Sample Design

3.4.1 Sampling method

The researcher will use simple random sampling techniques when selecting the

respondents for the study. The respondents will involve among others employees,

management and clients.


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3.4.2 Sample size

The study will encompass a representation of a sample of 30 respondents from

Himshree Foods Pvt. Ltd. who among others will be the employees from different

departments, management and clients who will be chosen for the study. This sample

size will be taken with consideration of time constraints, convenience and funds

among others. A special caution will be taken to ensure gender equality to avoid or

minimize biased results.

Table 1: Sample Size Distribution

Department No of Respondents

Production 15

Marketing and distribution 7

Management 2

Accounts 2

Clients 4

Total 30

3.5 Sources of Data

There will be mainly two major sources of data namely;

Primary data which we will get from selected respondents by use of self

administered questionnaires, interviews and observations.

Secondary data will be the other source of data which we will get from related

literature like accounting records of Himshree Foods Pvt. Ltd., published text books

and internet.


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3.9 Timeframe

Activity Week

1

Week

2

Week

3

Week

4

Week

5

Week

6

Week

7

Week

8

Topic

selection

Literature

review

Proposal

preparation

and

submission

Collection

of data

Data

processing

and

analysis

Data

presentation

and

analysis

Prepare

presentation

Draft final

report

Report

Submission

Thesis

Defense

Documents

Working capital management of Himshree foods