Dr.

Ambedkar Institute of Management Studies and Research

A Project report on WORKING CAPITAL MANAGEMENT IN

Prepared by: MRUNAL GODBOLE

MBA SEM II

JULY AUGUST 2012

1

CERTIFICATE
This is to certify that Mr.Mrunal Vijay Godbole of Dr. Ambedkar Institute of Management Studies & Research, Nagpur has done a Summer Internship project with our organization for a period of 45 days, from 2 June to 17 July 2012. His topic of project was WORKING CAPITAL MANAGEMENT IN SIMPLEX CHEMOPACK PVT. LTD We wish him all the best for his career.

(Prafulla Wasimkar) HR, Manager

ACKNOWLEDGEMENT
I am indeed highly obliged to Mr. Damodhar Sarda for giving me this opportunity to do this summer internship project. I owe thanks to many people who helped and supported me during the project. My deepest thanks to Professor, Mr. Vijay Joshi for giving such a good project and his outstanding support, guidance and encouragement throughout, which helped me to complete this project. I am thankful to all other faculty members and administrative staff of Dr. Ambedkar Institute of Management Studies & Research, Nagpur for their valuable help during the project. Finally I am thankful to all the people who helped and supported me directly or indirectly in this project.

(Mrunal Godbole)

INDEX
SR.NO. CHAPTER PAGE NO

OVERVIEW OF PLASTIC INDUSTRY 1. 5-14

2.

INTRODUCTION OF WORKING CAPITAL MANAGEMENT

15-17

3.

ABOUT SIMPLEX CHEMOPACK PVT.LTD.

17-23

4.

RESEARCH METHODOLOGY

24-26

WORKING CAPITAL MANAGEMENT IN

5.

SIMPLEX CHEMOPACK PVT. LTD.

27-46

6.

ANALYSIS OF SOURCES OF WORKING CAPITAL

47-48

7.

WORKING CAPITAL CONTROL BY THE COMPANY

49-50

9.

CONCLUSIONS & SUGGESTIONS

51-53

OVERVIEW OF PLASTIC INDUSTRY

The Indian plastics industry is expanding at a phenomenal speed and also among the fastest growing sectors in the country. It is expected that this industry's turnover may rise to Rs 1,000 billion (Rs 100,000 crore) in 2012, according to Plastindia Foundation. It is believed that this industry plays a very significant role in the Indian economy. The demand for plastic is consistently rising as global firms from different sectors like automobiles, electronics, telecommunications, food processing, packing and healthcare have established large production bases in India. It is helping the country become one of the fastest growing markets across the globe. The coming few years are likely to provide unprecedented opportunities to the plastic industry. It would lead to stronger investments, market growth, upgrading of quality standards, strengthening of international participation, adoption of world class technology coupled with manufacturing practices. Plastindia Foundation, an apex forum of India's plastics industry, also estimated that the demand potential will jump to 12.5-million metric tons. It is noteworthy that India's plastics processing sector is set to grow from 69,000 machines to 150,000 machines by 2020. India's demand for plastics in irrigation alone is projected to surpass 2.5 million tons by 2015. It is also likely that this industry will employ nearly 4 million people in 2012 and 7 million people by the year 2015. As per CRISIL report, the global plastic trade may reach 140 million metric tons during 2012 and also offers an attractive opportunity for India, although the country has a small share in world export volumes. Industry experts feel that this industry should consolidate and strengthen capacity, upgrade facilities, bring improvement in productivity and also raise the use of critical plastic applications. Reports suggest that although India has the lowest per capita consumption across the globe, although it has the highest plastic recyclers. India recycles 60% from both industry and urban waste as against the world average of just 20- 25%. The bottom line is that the different industry bodies and associations should

come forward and make efforts to promote the image and growth of the Indian plastic industry. It will create opportunities that will display the industrys capabilities and also create awareness at the same time. The industry awaits some economic reforms from Centre. The Indian plastic industry has taken great strides. In the last few decades, the industry has grown to the status of a leading sector in the country with a sizable base. The material is gaining notable importance in different spheres of activity and the per capita consumption is increasing at a fast pace. Continuous advancements and developments in polymer technology, processing machineries, expertise, and cost effective manufacturing is fast replacing the typical materials in different segments with plastics. On the basis of value added, share of India's plastic products industry is about 0.5% of India's GDP. The export of plastic products also yields about 1% of the country's exports. The sector has a large presence of small scale companies in the industry, which account for more than 50% turnover of the industry and provides employment to an estimate of about 0.4 million people in the country. Approximately Rs 100 billion are invested in the form of fixed assets in the plastic processing industry

Size of the Industry

Today in India there are about 22000 plastic processing units and 150 plastic processing machinery manufacturers. In the year 2006, the value of world plastic export was US$ 375 billion and the share of India was less than 1% with exports of worth US$ 3.187 billion. The per capita consumption of plastic products in India is growing and is moving towards 8% GDP growth.

Percentage In World Market

Market Capitalization

HISTORY OF PLASTIC INDUSTRY

Indian plastic industry has made significant achievements in the country ever since it made a promising beginning with the start of production of polystyrene in 1957. The industry is growing at a rapid pace and the per capita consumption of plastics in the country has increased several times as compared to the earlier decade. The chronology of production of polymers is summarized as under

1957 - Polystyrene 1959 - LDPE 1961 - PVC 1968 - HDPE 1978 - Polypropylene Currently, the Indian plastic industry is highly fragmented with an

estimate of around 25,000 firms and over 400,000 employees. The top 100 players of Indian plastic industry account for just 20% of the industry turnover. Barring 10 to 15% of the firms that can be categorized as medium scale enterprises, most of the units operate on a small scale basis. The immense potential of Indian plastic industry has motivated Indian manufacturers to acquire technical expertise, achieve superior quality standards and build capacities in different facets of the booming plastic industry. Substantial developments in the plastic machinery sector coupled with matching developments in the petrochemical sector, both of which support the plastic processing industry, have facilitated the plastic processors to develop capacities to cater both the domestic as well as overseas exports.

Market capitalization

Typically, in an emerging market, demand growth for plastics is 2 to 2.5 times the GDP growth. Sadly this is not the case in India where the growth at times has been lower than the GDP growth. The per capita consumption of plastics in India at 5kg is much lower than that of China which averages 25kg. But India could see very soon improvement in the production of Plastic. India today represents range of highly promising opportunities for growth of plastics producers worldwide. The fragmented plastics industry in India is beginning to consolidate, governmental regulations and trade barriers are coming down due to India's recent admission to the WTO, and some large North American plastics manufacturers have already begun doing business here.

Size of the industry

Today in India there are about 22000 plastic processing units and 150 plastic processing machinery manufactures. The machinery units supply over 2500 machineries per annum. In 198, the All India Plastic Industries Association was incorporated to solve various issue related to import duty of polymers. Role of Plastic Industry in the Indian Economy 2005 4.7 Million Tonnes 2.5 Million Rs. 35,000 Crores US$ 1900 Millions 2015 18.9 Million Tonnes 9.5 Millions Rs. 1,33,245 Crores US $ 10215 Millions

@ 15% CARG, Consumption of Plastic Polymers

Employment In Plastic Industry (Direct+ Indirect)

Plastic Industrys Turnover

Export of Plastic Products @ 30% CARG

Contribution of Polymers and Plastic Products to the Rs. 6200 Exchequer Crores

Rs. 15990 Crores

Domestic and Export Share

In the year 2006, the value of world plastic export was US$ 375 billion and the share of India was less than 1 % with exports of worth US$ 3.187 billion. During this same period the percentage of growth in export was 21%. During this trend of growth in exports, the exports of plastic raw material increased from 55% to 60% of the total export of plastic goods, while the export of processed plastic goods was a negative growth from 45% to 9%. According to recent reports of analysts, the industry is said to be losing an opportunity of USD 300 million through value addition on the raw materials that are exported. Indian Plastic Industry today is symbolizing a promising industry and at the same time creating new employment opportunities for people in the country. The per capita consumption of plastic products in India is growing and is moving towards 8% GDP growth.

Top leading Companies

Finolex Industries Ltd. It can produce 90,000 metric tons of pipes each year. Plastiblends India Limited is renowned as India's pioneer Masterbatches manufacturer.

The most prominent plastic companies in India is the AGA Group International, established in 2004 in Ambala City, Haryana

Corporate Resource Group is one of the leading suppliers, exporters and manufacturers of plastic instruments and pipettes in India.

ACRY Plus company exports, manufactures and supplies acrylic plastics sheets, polycarbonate sheets, polycarbonate multi-wall sheets and PVC foam sheets.

Kay Kay Global Suppliers was founded in 1993 at Ambala Cantt

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Latest developments

The Indian Plastic industry is at the verge of high growth rate over about 10%12% which is contributed by high growth rates, in turn, from the end-user industries. This trend has mainly been driving the automotive sector, since the economy is already showing signs of recovery from the downturn.

As the Plastic industry is heavily dependent on automotive sector, launching of new cars in the small segments are expected to drive the demand for plastics. India is likely to dominate the rest of the worlds Plastic with the domestic per capita consumption set to double by 2012. As the domestic Indian Plastic Industry expects for the investment of nearly $80 billion over the next four years.

Indian government has identified the petrochemicals industry as a high priority sector, as it is owing to the fact that plastics play an important role in providing the basic necessities for everyday use, while it is conserving the scarce natural resources.

Plastic plays a significant role in the key sectors of the economy, including agriculture, water management, automobiles, transportation, construction, telecommunication and electronics, besides defense and aerospace, computers and power transmissions.

As of now the Indian Plastic industry has enormous potential for growth as polymer use in India is far below the world level. With increasing competition in the global market and the constant drive to improve our living standards, the scope for use of plastics is bound to increase manifold and make the production double in the coming years

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Exports
In the calendar year 2006, the value of world plastic export was US$ 375 billion. However the share of India was less than 1 % with exports of worth US$ 3.187 billion. The percentage of growth in export was 21 %. During this trend of growth in exports, the export of plastics raw material increased from 55 % to 60 % of the total export of plastic goods, while the export of processed plastic goods has registered a negative growth from 45 % to 9 %. According to recent reports, the industry is said to be losing an opportunity of USD 300 million through value addition on the raw materials that are exported. The top 10 trading partners for Indian plastic industry are

USA UAE Italy UK Belgium Germany Singapore Saudi Arabia China Hong Kong The Indian plastic exports were valued at about US$ 532 million during FY

2004 (1st half FY2005 exports US $ 295 million). With significant capacity additions leading to over-capacity in domestic markets during FY2001 and beyond, polymer exports have increased considerably. However, due to the lower competitiveness of the plastic products industry, polymers have been exported directly.

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Products

The major plastic products that India export are -

Raw Materials - PVC, polypropylene, polyethylene, polystyrene, ABS, polyester chips, urea / phenol formaldehyde, master batches, additives, etc

Packaging - PP / HDPE woven sacks / bags / fabrics, poly-lined jute goods, box strapping, BOPP tapes, a range of plastic sheeting / films (of PVC, PP, HDPE, nylon, FRP, PTFE, acrylic, etc.), pouches, crates, bottles, containers, barrels, cans, carboys, shopping / carrier / garbage bags.

Films - Polyester film, BOPP film, mesh, metalized / multilayer films and photo films

Consumer Goods - Toothbrushes, cleaning brushes, hair brushes, nail / cosmetic brushes, combs, molded furniture (chairs, tables, etc.) house ware, kitchenware, insulated molded house ware, microwave re-heat able containers, mats and mattresses, water bottles, gifts and novelties, a range of stationery items like files, folders, mathematical instruments, etc.

Writing Instruments - Pens, ball pens, markers, sign pens, refills, etc.

Travel ware - Molded luggage, soft luggage, a range of bags like school bags / ladies handbags, wallets, etc.

Leather Cloth / Artificial Leather Floor Coverings - Vinyl floor coverings and linoleums

Foam Boards Drip Irrigation Systems / Components Pipes & Pipe Fittings - Made of PVC, HDPE, PP, FRP, nylon

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Water Storage Tanks Toys and Games Engineering Plastics - Auto components, parts for
various machinery / equipment in telecommunications, railways, electronics, etc.

Electrical Accessories FRP / GRP Products - Safety helmets / equipment, pipes, storage tanks, etc.

Sanitary Fittings - Cisterns, toilet seats, bathroom fittings, etc.

Construction - PVC profiles, doors, windows, etc.

Tarpaulins Laminates Fishnets / Fishing Lines Cordage / Ropes / Twins Eyewear - Lenses, spectacle frames, goggles, etc.

Laboratory Ware Surgical / Medical - Disposable syringes, blood / urine bags, I.V. sets, etc.

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Introduction of Working Capital Management

Capital requirement of a business can be fixed capital and working capital. Fixed capital is the part of resources invested in fixed or profit or profit earning assets of the business, which makes the business work. Working capital is that portion of total capital of a business, which is employed in short term operations. There is no universally accepted definition for the term working capital. The one, which is widely accepted, is that working capital represents the excess of current assets over current liabilities . Working capital is an integral part of the overall corporate finance. Working capital is important for efficiently carrying out the day to day operations of every organization. In all concern, the problem of effective working capital management is of paramount significance, as considerable amount of funds are invested in the form of various current assets. in the absence of proper and efficient management of working capital , it would efficiency . Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. Working capital refers to that part of firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors, and inventories. In other words working capital is the amount of funds necessary to cover the cost of operating the enterprise. Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence. Working capital is defined as the excess of current assets over current liabilities and provision. But as per accounting terminology, it is the difference between the inflow and outflow of funds. In annual survey of industries (1956), working capital if defined to include stocks
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to be difficult to achieve the basic objective of its organization

of materials , fuels, semi finished goods including work in progress and finished goods and by-products; cash in hand and bank and the algebraic sum of sundry creditors as represented by : 1) 2) 3) Outstanding factory payments e.g. rent, wages, interest and dividend. Purchase of goods and services. Short-term loans and advances and sundry debtors comprising amounts. The term working capital is often referred to circulating capital which is frequently used to denote assets which are engaged with relative speed from one from to another i.e. starting from cash from debtors, the accounting principles board of AICPA, defines the working capital as under: working capital is represented by current assets over current liabilities and identifies the relatively liquid portions of the total enterprise capital which constitutes a margin of maturing obligations within the ordinary operating cycle of the business.

Objectives of working capital:

Every business needs some amount of working capital. It is needed for following purposes For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc. To provide credit facilities to customers etc.

16

Types of working capital:

Working capital be divided into two categories1. Permanent working capital: It refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities.

2. Temporary working capital: The amount of such working capital keeps on fluctuating from time to time on the basis of business activities.

Advantages of working capital:

It helps the business concern in maintaining the goodwill. It can arrange loans from banks and others on easy and favorable terms. It enables a concern to face business crisis in emergencies such as depression. It creates an environment of security, confidence, and overall efficiency in a business. It helps in maintaining solvency of the business.

Disadvantages of working capital:

Rate of return on investments also fall with the shortage of working capital. Excess working capital may result into over all inefficiency in organization. Excess working capital means idle funds which earn no profits. Inadequate working capital cannot pay its short term liabilities in time.

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ABOUT SIMPLEX CHEMOPACK PVT.LTD.

Simplex Group Of Companies is one of the leading Manufacturers of PP woven bags in India, well equipped with advanced technology and efficient manufacturing facilities under one roof. We at present are exporting our products to North America, Africa, Middle East, South East Asia and Europe. The Unit is well equipped, technically and infrastructurally as a fully integrated system to convert PP/HDPE granules from tapeline to fabric to printed woven bag i.e. PP (Poly-Propylene).The manufacturing facility is located at the Heart of India i.e. Nagpur. The company processes around 8000 M.Tons of PP/HDPE granules per annum and supply bags and fabrics to various industrial segments for packing of diversified industrial materials such as Cement, Fertilizers, Resins, Chemicals, Paper, Textiles, Food grains, Sugar, Cattle feed etc. Simplex Chemopack ensures that all its products are made from the finest raw materials. We apply stringent quality checks to assure that they successfully face the challenges of weather. Every product manufactured by us passes through various quality checks under the vigilance of our skilled and quality conscious professionals. The quality of the product is checked from the first to the last stage of production. We are DNV accredited ISO 9001: 2008 manufacturing company. Simplex Chemopack offers fast and timely services matched with competitive prices. The company comprises of experienced and outstanding staff sincerely devoted to provide the best work. Prompt replies, smoother communication, quality consistency, delivery on time and feedback from end users are few services which are dealt with extra care. It is the quality of the product and the attitude of the company towards the customers that has helped the company in scaling such great heights. We believe that our progress is linked to customer's concern and support..

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Board of Directors
Admin. Assistant. (1) CEO Fin & Admin Mgr. (1) Operations Mgr. (1) Internal Audit

Accountant (1)

Human Resources Officer (1)

Snr. Credit Officer (1)

Admin.& Acc. Ass. (2)

Credit Off . Wnk. (3)

Messenger/Cleaner (1)

Outreach Off. North (2)

Outreach Off Coastal (2)

(2)
Credit Office. Assistant(1)

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HISTORY OF SIMPLEX CHEMOPACK PVT.LTD.

Mr. Damodar Sarda, a true entrepreneur and visionary person has dedicated himself in this plastic industry for more than 2 decades (20 years). He initially started with production of Reprocessing granules by buying scrap from woven sack manufacturers. Parallel to it, he also started manufacturing Nylon Ropes by acquisition of an existing company. Diversification took him into polythene bags and liners in a couple of years time. Seeing the opportunity and growth in plastics industry, he acquired Simplex Chemopack Pvt. Ltd. to start with manufacturing of woven sacks and Shree Gajanan Plastics Pvt. Ltd. to manufacture PET bottles and Jars. Always having a passion to work with latest technology, he always upgraded plant and machinery of every factory to international standards to compete in the market. Dedicated to work in Plastic Packaging throughout our life, we entered into Flexible Packaging through Gaurav Multilayers Pvt. Ltd. and are making PVC Shrink sleeves/labels and will be venturing into laminates soon. His dedication for work has brought the company to this stage that today Simplex Group manufactures 3 times more than what was acquired, has stabilized itself into the market and always has the hunger to perform more. He always states, For Growth and Success in the industry today, customer satisfaction in a delightful manner is the only way to achieve that goal.

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MANAGEMENT PHILOSOPHY

SCPL management philosophy is based on responsibility and mutual respect. People who come to SCPL want to work here because we have created an environment that encourages creativity and achievement. SCPL aims to become a leader in Plastic Pioneering Industry. The mainstay of our strategy will be to offer a level of client focus that is superior to that offered by our competitors. To help achieve this objective, SCPL seeks to attract highly motivated individuals that want to work as a team and share in the commitment, responsibility, risk taking and discipline required to achieve our vision. Part of attracting these special individuals will be to build a culture that promotes both uniqueness and bias for action. While we will be realistic in setting goals and expectations, SCPL will also be aggressive in reaching its objectives. This success will in turn enable SCPL to give its employee above average compensation and innovative benefits or rewards, key elements in helping us maintain our leadership position in the worldwide market place.

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PRODUCTS OFFERINGS :-

Woven PP/HDPE Bags Flat and Circular PP Woven Fabric FIBC`s Fibrillated/Sewing Yarn Geotextiles Gusseted Bags PP Bags with Liner BOPP Bags

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Infrastructure

Extrusion plants at Simplex - the manufacturing process, are state-ofthe-art Star linger. This ultimate extrusion technology comes alive in the experienced hands of our workforce to process over 25,000 kgs. of virgin polymer every day. Producing impeccable high tensile strength tapes with optimum elongation - a pre requisite for perfect fabric. Precision winding being the key to weave fine fabrics, all tapes are wound by new generation inverter controlled winders to produce even bobbins. Quality checks begin from the very initial stages of Tape-making. Every lot produced is checked for its Denier, Strength, Elongation and Color . If Liner plant is a luxury, Our buyers deserve this luxury. This over qualified plant ensures that we produce liners with zero pinholes, fish eyes or any other extrusion flaw . At Simplex Chemopack pvt.ltd, microprocessor controlled Form-fit Liner Machine

cuts, seals and form-fits the liner in a dust-free clean room environment conforming to ISO Level-7 (< 10,000 PPM). Be it Glued, Tabbed or Flanged-in, well executed process eliminates liner twisting inside the bag . The vital facility of coating - the essential prerequisite for making FIBCs is a 1.5 meter wide coating plant laminating both circular and flat fabric in thicknesses ranging from 15 to 80 microns. A unique fabric cleaning device, designed and developed in-house, is mounted on the coating machine to avoid any foreign particle going in-between fabric and the coating.

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Research Methodology

Research is the purposeful investigation. The simple meaning is to search for the fact answer to question and solution to problem. It is an organized inquiring of facts. It clarified doubtful facts, it correct the ideas or facts. Research is also based on imperial evidence and observation experience for formulating conclusion to establish new theories. Research is known as critical investigation of any problem. The general procedure for research is first we have to understand any problem then collect the data and made hypothesis and tries to make acceptable solution for the problem. Sources of data collection are essential to form conclusion in any field. Data is raw material for research and researcher by using, which one can solution to the problem. The main sources of data collection Primary Data Sources Secondary Data Sources

Primary Data Sources: This is the first kind of data, which called as raw data. This data generate as first hand data which have to collect personally by using various data collection method like interviews, observation, survey and questionnaires. For the purpose of this project word primary data is collected from interview and openended question to related people.

Secondary Data Sources: Secondary Data is readymade data for researcher. Such type of data is readily available

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because other person collects it before the time of current study for prior study. This data saves and provide the right direction to the researchers for the project work. Secondary data is collected from website, e-mail, digest books, journals, internet, annual report, company literature and other financial statement published by the company in the last five years. 1.Data required was collected from the annual reports and other financial statements published by the company in the during last five years. 2.Reference of text book relating to working capital. General introduction to a specific topic has been elaborated referring to the textbook having specialization in the relevant subject. 3.Collection of information was through published in the news paper, magazines and browsing the web in the internet. 4.Ratios are directly calculated from the balance sheet of the company and then cross checked with the management. 5.Standard could not be taken, as the same was not available for all the ratios. 6.Only few important key ratios have been taken for the financial analysis. 7.The information collected from the above sources were primarily compile to suit the research study. 8.After compilation of these information and data they were tabulated for better understanding and for future reference. 9.Once the data collected were tabulated in the required format the findings were explained or justified wherever necessary and deviations if any. 10.Similarly conclusions and suggestions were made from the above findings. Research methodology is a very organized and systematic way through which a particular case or problem can be solved efficiently. It is a step by step logical process, which involves
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Defined a problem

Objective of research

Sources of the data

Methods of data collection

Tabulation of data

Data analysis and processing

Conclusion and recommendation

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Working capital management

IN

Simplex Chemopack Pvt. Ltd.

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1. Nature & size of business

It affected with the nature of business. Size of business is another influencing factor. As size increases, the working capital requirement is also more and vice versa. Business may be small or large. In small business, company need high working capital because, small business is relating to trading of goods, for starting small business, you need very small fixed capital but need high working capital for paying day to day expenses. But in large business, we require more fixed capital than working capital for purchasing fixed asset. the nature of business is Plastics Intermediate goods manufacturing. For Plastics intermediate products manufacturing various raw material are required. Most of the items have more than 15 days lead time; hence on an average more than 15 days raw material inventory is maintained .in addition to the raw material lot of stores and spares items are required. customers of the company are also large in numbers spread over all over the India and some abroad countries . since the company comes under core sector and manufactures specific quality plastics goods mainly used in packing of goods , the product requires several high value input items . Production is made as per the specific requirement of the customers. Chemical properties as well as dimension of the product differ from customer to customer. most of the sales are on credit basis. Credit period ranges from 30 to 90 days, which varies from customer to customers. This leads to investment in huge investment debtors.

2 . Production/Manufacturing Cycle :
Manufacturing cycle means the process of converting raw material into finished product. Long manufacturing cycle will create the situation in which we require large amount of working capital. Suppose, we have to construct the building, for constructing colony of buildings, it may consume the time more than 5 years, so according to this we need working capital The time lapse between feeding of raw material into the machine and obtaining the finished goods out from the machine is what is described as the length of manufacturing process. It is otherwise known as conversion time. Longer this time period, higher is the volume and value of work-in-progress and hence higher the requirement of working capital and vice versa. In the day to day business world to
28

accept or ask for advanced payment from the customer when the firm engaged in manufacturing the product heavy machinery and equipment .

3. Business Cycle Fluctuations

1. Trade cycle refers to the periodic turns in business

opportunities from extremely peak levels, via a slackening to extremely tough levels and from there, via a recovery phase to peak levels, thus completing a business cycle. There are 4 phases of trade cycle. There are two main part of business cycle, one is boom and other is recession. In boom, we need high money or working capital for development of business but in recession, we need only low amount of working capital. a. Boom Period more business, more production, more working capital. b. Depression period less business, less production, less working capital. c. Recession period slackening business, stock pile-up, more working capital. d. Recovery period recouping business, stock speedily converts to sales, less working capital. In Simplex Chemopack Pvt. Ltd though much fluctuations are not observed but due to increase Plastics intermediate products manufacturing companies competition has increased to a great extent, resulting in a threatening challenge to the existing companies due to this company has reduced its selling price as well as increased its credit period allowed to its customer leading to abnormal increase in receivables .

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4. Production Policy:
Production policy is also main determinant of working capital requirement. Different company may different production policy. Some companies stop or decrease the production level in off seasons, in that time, company may also reduce the number of employees or decrease the purchasing of new raw material, so, it will certainly decrease the amount of working capital but on the side, some company may continue their productions in off season, in that case, they need definitely large amount of working capital. a. Seasonality of Production Agriculture and food processing and preservation industries have a seasonal production. During seasons, when production activities are in their peak, working capital need is high. b. Seasonality in supply of raw materials This also affects the size of working capital. Industries that use raw materials which are available during seasons only, have to buy and stock those raw materials. They cannot afford to buy these items in a phased way, since either supplies would get reduced or prices would be higher. Also, from the point of view of quality of raw materials, it pays to buy in bulk during the seasons. Hence the high level of working capital needed when season exists for raw materials. c. Seasonality of demand for finished goods In case of products like umbrella, rain-coats and other seasonal items, the demand is high during peak seasons. But the production of these items has to be continuous throughout the year to meet the high demand during peak seasons. Thus, working capital requirement would be higher.

30

In the Simplex Chemopack Pvt. Ltd production as well as sales are more less or less evenly spread throughout the year. however in rainy season inventory of certain raw materials is increased for storage purpose to avoid deterioration in the quality of the materials due to rains.

5.

Credit Policy :
Credit policy is relating to purchasing and selling of goods on credit basis.

If company purchases all goods on credit and sells on cash basis or advance basis, then it is certainly company need very low amount of working capital. But if in company, goods are purchased on cash basis, and sold on credit basis, it means, our earned money will receive after sometime and we require large amount of working capital for continuing our business 1. Credit terms greatly influence working capital needs. If terms are: i. ii. iii. iv. buy on credit and sell by cash, working capital is lower buy on credit and sell on credit, working capital is medium buy on cash and sell on cash, working capital is medium buy on cash and sell on credit, working capital is higher.

Prevailing trade practices and changing economic condition do generally exert greater influence on the credit policy of concern. e. A liberal credit policy if adopted more trade debtors would result and when the same is tightened, size of debtors gets slim. f. Credit periods also influence the size and composition of working capital. When longer credit period is allowed to debtors as against the one extended to the firm by its creditors, more working capital is needed and vice versa. g. Collection policy is another influencing factor. A stringent collection policy might not only deter away some credit customers, but also force the
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existing customers to be prompt in settling dues resulting in lower level of working capital. The opposite holds well with a liberal collection policy. h. Collection procedure also influences the working capital needs. A decentralized collection of dues from customers and centralized payments to suppliers shall reduce the size of working capital. Centralized collections and centralized payments would lead to moderate level of working capital. But with centralized collections and decentralized payments, the working capital need would be the highest In Simplex Chemo pack pvt. ltd. Credit terms allowed to the customers are more liberal as compared to the credit term available from their creditors. Much importance does not seem to given to the credit worthiness aspect. As a result receivables are increasing continuously without comparative increase in sales.

6. Growth and expansion :

Growth and expansion industries need more working capital than those that are static it is therefore necessary for a company to have a sound planning of working capital on a continuous basis, especially when the firm is growing . In Simplex Chempack Pvt. Ltd. There is marginal growth in the level of operations due to increase in number of products produced. Some portion of this growth is compensated by the fall in sales of old products. This has contributed to increase in working capital to some extent.

7. Profits :
Companies differ in their capacity to generate profits from business operations. in fact the level of profits earned by a company depends on such factors as quality of the products, marketing management , monopoly power of the firm in the market etc. it is quite obvious that a firm enjoying a dominant position in the market , producing a high quality product , and exerting remarkable marketing efforts will have a large amount of profit . Higher profit margin undoubtedly contributes to the working capital pool because
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net profit itself is a source of working capital. the cash profits can be determined by adjusting the non cash item such as depreciation, accumulated expenses and losses written off and outstanding expenses etc in the net profit .normally ,even if the net profit are earned abundantly, the whole amount of profits may not be utilized for meeting the working capital requirements. The way the profits are appropriated determines the contribution of net profits to the working capital needs of a firm . the availability of cash generated from operations depends upon. A) Corporate taxation. B) Dividend policy. C) Depreciation policy of a firm.

A ) Corporate Taxes: Corporate taxes are to be paid out of profits . tax liability to a firm is unavoidable and therefore adequate provision must be made by finance manager to meet this obligation. The manager must perform tax-planning function efficiently so that the firm enjoys maximum tax concession and incentives . it should be noted that the higher the tax liability ,the more is the working capital requirement and vice versa. Since the profits of Simplex Chemopack Pvt. ltd are marginal the tax liability is also very low. Therefore more funds are not needed to meet this obligation . hence as far as tax liability is concerned working capital requirement is negligible. B) Dividend/Retention Policy : Dividend policy also effect working capital requirement. Company can distribute major part of net profit. But, if there is no reserve, we have to invest large amount in working capital because, lacking of reserve will affect on adversely on fulfill our liabilities. In that case, we have to yield working capital by taking short term loan for paying uncertain liability. Simplex Chemopack Pvt. Ltd paid dividend first time in the business in 2005-2006.

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c) Depreciation policy :
Depreciation policy of firm has a profound influence on the working capital of a firm . depreciation is atax deductable item. The higher the amount of depreciation the lower is the tax liability and more is the amount of cash profit . higher depreciation also means that the net profit are low and hence low dividends. Depreciation if therefore an indirect way of retaining the available profits and consolidating the firms working capital position .the method of depreciation used by Simplex Chemopack Pvt. Ltd is straight-line method except for vehicle . it means excluding depreciation for vehicles , it is same each year . due to this quantum of depreciation is less in the beginning but it will remain same during the life of the assets . this way it will be advantages in the long run.

8) Inflation:
If there is increasing trend of products prices, we need to store high amount of working capital, because next time, it is precisely that we have to pay more for purchasing raw material or other service expenses. Inflation and deflation are two major factors which decide the next level of working capital in business. Under inflationary conditions generally working capital increases, since with rising prices demand reduces resulting in stock pile-up and consequent increase in working capital.it should be noted that the effects of rising prices would be different in different companies.some companies may be adversly affected by inflation ;some other may not. Normally , an experienced firm can withstand the pressures of inflation than a newcorner or sick unit.

9) Operating Efficiency :
Another important determinant of working capital is the operating efficiency of the firm relates to the optimum utilization of all its resource at minimum costs. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization improves profitability and helps

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the releasing on working capital. Simplex Chemopack Pvt.Ltd company is running its operations efficiently by utilizing around 85% of its production capacity. Also other resources such as materials, labour and capital are utilized in a reasonably efficient manner.

Assessment of working capital and its analysis & Interpretation

a) Assessment of working capital of the company The period of accounting of Simplex Chemopack pvt. Ltd. For five years under is as under. These periods are as per the accounting period followed by the company for preparation of profit &loss account balance sheet.

01.04.2005 to 31.3.2006 01.04.2006 to 31.3.2007 01.04.2007 to 31.3.2008 01.04.2008 to 31.3.2009 01.04.2009 31.3.2010

12 month 12 month 12 month 12 month 12 month

For assessment of working capital require by the company in different period all the current liabilities on those dates are also added . total of current liabilities is deducted from the total of current company. assets to get the working capital of the

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Sr.n o 1 A

particulars Current assets Inventories Raw materials Consumable, stores & spares Semi finished goods Finished goods Total inventories Receivables Cash & bank balance Loans & advances Total current assets(tca) Current liabilities Acceptances Sundry creditors Interest & commitment charges Other current liabilities & Provisions Total current liabilities(tcl) Nwc (tca-tcl) Less : margin 25% of tca Max.permissible bank finance Actual borrowings for wc Working capital Gap/additional margin

2006

Amount Rs. in crores 2007 2008

2009

2010

2.225 1.562 1.965 7.327 13.079 5.908 1.315 8.24 28.326 .234 3.491 .612

7.017 .892 2.214 8.227 18.350 6.009 1.820 13.826 40.005 3.155 6.665 .467

10.162 .924 3.762 7.627 22.475 7.046 1.890 14.078 45.489 3.230 1.852 1.188

4.537 .325 3.787 7.940 16.589 7.581 2.331 16.432 42.933 2.267 1.690 1.071

7.014 1.190 4.419 12.866 25.489 12.169 2.964 17.881 58.503 4.266 1.611 1.980

B C D

2 A B C

7.673 12.01 16.316 7.82 9.234 1.699 7.535

9.204 19.491 20.514 10.001 10.513 1.055

10.380 16.650 28.839 11.372 17.467 2.520

9.808 14.836 28.097 10.733 17.364 1.218

12.069 19.926 38.577 14.626 23.951 3.939

3 4 5 6

9.458

14.947

16.146

20.012

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Assessment of working capital of Simplex Chemopack pvt.ltd. During the last five years

YEARWISE CURRENT ASSETS VS CURRENT LIABILITIES

V A L U E R S. C R O R E

60 50 40 30 20
Current Assets Current Liabilities

10
0 2006 2007 2008 2009 2010

Year

Control Measures for Regulating Working capital-

For regulating of working capital of the company in order to keep it at optimum level over a period certain control measures are required to be implemented. These measures help the company in keeping its Working Capital at the desired level in Simplex Chemopack pvt. Ltd. Also certain measures can help in optimization.

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These measures are stated as under : 1. Average monthly consumption of raw material by the company is around RS.4.067 crores. Raw material inventory, as on 31.03.2006 i.e. at the end of last accounting year under the study is rs 48.814 crores which is 19 days consumption during the period under study raw material inventory is showing slightly decreasing trend . similar control measures should be continued to keep it at the optimum level. 2. Average monthly consumption of consumable, stores & spares is around RS. 1.5 crores whereas consumable, stores & spares inventory as on 31.03.2006 is RS 8.017 crores . this is mainly due to the fact that this category contain insurance spares , which are lying in the stock since long and the number of item in this category . all the items are not required every time also, certain item in this category are non moving .

company can reduce investment in stores and spares by disposing off the non moving items and close monitoring of inventory level of all the items. In this regard following points are worth consideration.

a)

Company can review the movement of all the items every six months and

identify the non moving items. b) All possibilities of alternative use of such non moving items should be explored. c) Usage of all major items purchased should be reviewed after receipt of the material and whether it was really required should be ascertained. This system should be followed in order to bring cost consciousness among all the employees. d) Action for disposal of those non moving items which cannot be used, should be strengthened. e) Purchase requisition for the items to be procured should be cleared after through security by stores to verify whether the item required (which can be used in its place) is available.

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4. Receivables as on 31.03.2009 are Rs. 12.169 crores , whereas average monthly sales are around Rs 12.2 crores i.e. receivables are less than or equal to one month sales it means that on an average we are allowing 30 to 40 days credit to our customers. This is a highly sign. Credit as well as collection policy should be made more effective to control the receivable. 5 . whatever funds are available as a result for reduction in investment of funds in the current assets can be suitably utilized in such a way that all the current liabilities are paid whenever they are due. This will improve the creditworthiness of the company. Also it will improve companys images in the eyes of its creditors, bankers, suppliers etc. to sum up , following measures may be adopted/continued :

Measures applied for control of raw material inventory should be continued. Alternate usage of non-moving stores and spares should be explored or the same should be disposed off on priority. Generation of non-moving items should be restricted by controlled procurement reason due to items become non-moving should be analyzed in detail. Periodically. Action plan should be prepared and suitable action be initialized to overcome the causes wherever possible. Indenters, wherever they are responsible should be made accountable for items procured by them lying non moving. Credit as well as collection policy should be made more effective to control the receivables. Working capital policy of the company Before formulation a working capital policy, a finance manager may consider two importance issues which are: 1. Ratio of current assets to sales, and 2. Overall ratio of short term financing to long term financing.

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The working capital policy may be: 1. Aggressive & 2. Moderate of conservative.

Features of each of these policies are as under: 1. Aggressive working capital policy : It signifies an aggressive current assets policy as well as aggressive current asset financing policy. By aggressive policy we mean that the would carry a low level of current assets in relation to sales. an aggressive working capital policy is highly risky and also associated with high return.

2. Conservative working capital policy : Conservative policy means a firm to maintain high level of current assets in relation to sales. An overall conservative working capital reduces the risk and also reduces the rate of return. 3. Moderate working capital policy : It reflects a judicious combination of conservative current assets policy and an aggressive financing policy or a combination of aggressive current assets policy and a conservative financing policy.

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Conservative Moderate

Aggressive

Current Assets

Sales turnover

Working capital policy of Simplex Chemopack pvt.ltd is analyzed as under.

Accounting year No of months Sales(rs. crores) Annualized sales Current assets Current liabilities Net working capital (C.A-C.L.)

01.04.05 to 31.03.06 12 6.689 92.412 28.326 12.01 16.316

01.04.06 to 31.03.07 12 6.009 94.959 40.005 19.491 20.514

01.04.07 to 31.03.08 12 7.046 112.650 45.489 16.650 28.839

01.04.08 to 31.03.09 12 7.581 123.297 42.933 14.836 28.097

01.04.09 to 31.03.10 12 12.169 145.278 58.503 19.926 38.577

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The graph pertaining to working capital policy of the company is as under Graph showing working capital policy of Simplex Chemopack pvt. ltd

In crores
C u r r e n t a s s e t s
70 60 50 40 30 20 10 0 30 60 90 120 150

Sales (in crores)

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Current ratio:
Current ratio measures the relationship between current assets and current liabilities. This ratio highlights the firms ability to meet its short term liabilities from its short term assets. the standard for this ratio is 2:1. However one should not rely on it blindly. The current ratio should be subject to qualitative test. It should be remembered that this ratio is subject to the influence of many financial forces, which may depress or retrieve it. Dramatically overnight. it is represented as follows.

Current assets CURRENT RATIO = Current liabilities (RS. In crores)

Year

Current assets

Current liabilities

Ratio

2006 2007 2008 2009 2010 Combined average

28.326 40.005 45.489 42.933 58.503 215.256

12.01 19.491 16.650 14.836 19.926 82.913

2.36 2.05 2.73 2.89 2.94 2.59

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INTERPRETATION: The current ratio of the company is more than the standard ratio of 2:1 hence the liquidity position is higher .this shows that the company can easily fulfill the short term obligation in time, give regular payments of salaries, wages and other day to day expenses and can exploit favorable market condition like purchase its requirements in bulk when prices are lower in the market. QUICK RATIO: This ratio established a relationship between quick assets and quick liabilities. Quick assets can be immediately converted into cash , so this ratio gives a more immediate indication of the firms ability to settle its current debts . this is more stringent test of liquidity than the current assets. The firm should have a quick ratio in proportion of 1:1 which is considered as the standard. Where this is not so, a substantial. Ash Ledged is usally maintained. It accesses how liquid the firm would be, if so business operation come to an abrupt hal. This is written as

Quick ratio =

Quick assets Quick liabilities

(Rs in Crores) year 2006 2007 2008 2009 2010 Combined average Quick assets 15.247 21.655 23.014 26.344 33.014 119.274 Quick liabilities 12.01 19.491 16.650 14.836 19.926 82.913 ratio 1.27 1.11 1.38 1.78 1.66 1.44

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INTERPRETATION: The quick ratio of the company is very good. It shows that the company has enough strength to pay off its obligation and indicated and indicated that company is not very much depended upon short term funds to finance the current assets.

Working capital turnover ratio : Working capital turnover ratio indicates the velocity of the utilization of the net working. This ratio indicates that number of times the working capital is turnover in the course of time that is in one accounting year and measures the efficiency with which the working capital is being used by firm. This ratio should be always higher. This is calculated by the following formula.

Working capital turnover ratio =

sales Working capital

Working capital =

current asset -

current liabilities Rs in cr.

2005 2006 2007 2008 2009 2010 Combined average

sales 92.412 94.959 112.650 123.297 145.278 568.596

Working capital 16.316 20.514 28.839 28.097 38.577 132.343

ratio 5.66 4.63 3.91 4.39 3.77 4.30

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Interpretation :
This ratio shows the velocity of the utilization of the working capital the ratio measures the efficiency with which the working capital is being used by firm. hence higher the ratio better it is. From the above analysis is clear that the company utilizes its working capital properly and effectively. Ratios galaxy year 2006 2007 2008 2009 2010 Current ratio 2.36 2.05 2.73 2.89 2.94 Quick ratio 1.27 1.11 1.38 1.78 1.66 Working capital 5.66 4.63 3.91 4.39 3.77

6
V A L U E R S. C R O R E

5 4 3 2 1 0 2006 2007 2008 2009 2010

YEAR Current, quick & working capital ratios
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Current Ratio

Quick Ratio
Working capital ratio

Analysis of sources of working capital

Once the level of net working capital is estimated a finance manager is concerned with the method of financing the working capital. The principle sources of finance for working capital may be : Trade credit Bank credit

Long term sources raising capital from stock market, issuing long term debenture and long term borrowings. Short- term borrowing from non bank sources. The various sources of financing of working capital of Simplex Chemopack pvt ltd. Can be divided into following two categories depending upon their financial implications on the company. They are; 1. Sources on which company does not incur interest charges. 2. Sources on which interest charges are to be paid. A) Sources on which company does not incur interest charges. 1. Profit & loss account 2. Depreciation 3. deferred revenues expenditure. B) Sources on which interest charges are to be paid. 1. Borrowings from bank for working capital. 2. Term loans banks and financial institutions.

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Interest free sources: 1. Interest free sales tax loan. 2. From promoters. Interest charges incurred for financing of working capital Considering the quantum of working capital at the end of the year is the average working capital during that year and the composition of various also evenly occur during the year, annual interest charges incurred for financing of working capital can be worked out as under. Average rate of interest on the borrowed funds is 16.5% per annum.

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Working capital control by the company

The working capital control is discussed from two angles : one is the control of operating cycle and second the control of financing the working capital needs. a) Control over operating cycle of the company The requirements of working capital depend, to a great extent, on the level of companys operations and the length of operating cycle of the company. Before controlling working capital it is necessary for the finance manager the duration of operating cycle of the company. While monitoring the operating cycle, the finance should take into account the following points. 1. The time lag at the raw material stage depends on the frequency and regularity of supply of raw materials, the nature of raw material i.e. whether perishable or not, fluctuations in the prices of materials and economics of large scale purchasing. The varies from a few days to several weeks depending on the perish ability and availability of materials. In Simplex Chemopack pvt. Ltd. Based on the orders booked by marketing department, production planning department prepares production plan for production of various products required on the basis of production plan, procurement budget for various raw material items is prepared items is prepared by the materials department. Normally procurement if made on monthly basis. In case of consumable, stores & spares, consumable are treated as stock items and are procured on monthly basis like raw material. Procurement of stores & spares items, if done on the basis of specific PRs raised by the indenting departments and approval by the management. This procurement system seems to be reasonable provided the forecast made are accurate and fully achieved.

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2.

The time lag in the work in process stage depends on the length of manufacturing cycle, capacity at different processes of production, and co-ordination of various inputs.

3. The time lag in the finished goods stage depends on the methods of production and sales. The duration tends to be long when the production is uniform throughout the year, but the sales is highly seasonal. The time-lag also tends to be high when the production is seasonal and sales are uniform throughout the year . In Simplex Chemopack pvt. Ltd; production as well as sales both are uniform throughout the year, but in some cases dispatches are very slow i.e. dispatches are made after a long time from the date of production. Also ,due to non-matching of quantity to sold for particular specification and cancellation of delivery orders in certain. As far as bank credit is concerned, company first makes all possible efforts to utilize interest free sources and after that balance portion is financed by loans on which interest payment is to be made.

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CONCLUSIONS :

1.

Receivables as on 31.03.2010 are Rs . 12.169 crores , whereas average monthly sales are around Rs 12.2 crores i.e. receivables are less than or equal to one month sales it means that on an average we are allowing 30 to 40 days credit to our customers. This is a highly sign. Credit as well as collection policy should be made more effective to control the receivables.

2.

Finished goods inventory as on 31.03.2009 is RS. 16.5892 corers, whereas average monthly dispatches are around Rs.8.0 crores which is double or less equal to the average monthly dispatches. Production planning actual production as well as dispatches should be arranged in such a way that finished goods inventory is not more than 10 to 15 days dispatched i.e. around Rs. 3.0 to 4.0 crore

3.

Whatever funds are available as a result for reduction in investment of funds in the current assets can be suitably utilized in such a way that all the current liabilities are paid whenever they are due. This will improve the creditworthiness of the company . Also it will improve companys images in the eyes of its creditors, bankers, suppliers etc.

4.

The current ratio of the company is more than the standard ratio of 2:1 hence the liquidity position is higher .this sows that the company can easily fulfill the short term obligation in time, give regular payments of salaries, wages and other day to day expenses and can exploit favourable market condition like purchase its requirements in bulk when prices are lower in the market.

5.

The quick ratio of the company is very good. It shows that the company has enough strength to pay off its obligation and indicated and indicated that company is not very much depended upon short term funds to finance the current assets.

6.

Net Working capital ratio if good. Net Working capital ratio is around 25% of total net assets. So it seems that company has good working capital ratio.

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7.

Net working capital turnover ratio shows the velocity of the utilization of the working capital the ratio measures the efficiency with which the working capital is being used by firm. Hence higher the ratio better it is. From the above analysis it is clear that the company utilizes its working capital properly and effectively. Gross and net profit ratios indicate that the management of the company shareholders of the company.

8.

Net working capital turnover ratio shows the velocity of the utilization of the working capital the ratio measures the efficiency with which the working capital is being used by firm. Hence higher the ratio better it is. From the above analysis it is clear that the company utilizes its working capital properly and effectively. To conclude we can say that the company is utilizing its total working capital appropriately and efficiently

Suggestions
1. Ideal quick ratio = 1:1 the quick ratio of the company is higher it implies that extra funds are blocked in quick assets which may be employed profitability as the company other ratio are healthy which improves the credit worthiness and the ability of the company to raise the funds to meet the emergencies at short notice. Hence a quick ratio of less than 1 also doesnt any harm and may be considered. 2. The current ratio is more than 2:1 hence the company can reduce the investment in current assets judiciously and can utilize the funds so released profitability.

3. Average current period Receivables 30 40 days Purchases above 4.7 corers Creditors above 34905400 No of days credit 22 days

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4. in case of stores and spares further efforts are required to be made in the direction of alternative uses of the non- moving stores and spares against the present requirement of similar items . for such non-moving items departmental barriers should be avoided i.e. the concept that if some item is procured for a particular department cannot be issued to other department even if it is non-moving should not be considered for such item. Such concept should be limited to moving items only.

5. The level of finished goods; stock seems to be in excess. It requires to be controlled in such a way that it does not exceed 15 days dispatches as against around one month inventory maintained at present. Around 25% of the finished stock is free stock i.e. stock, which is not yet booked to any customer. Around 5% stock is non- salable for which efforts should be made for its disposal. In case it cannot be sold at all, it should be sent for warehouses. 6. Credit terms presently allowed to the customers should be reviewed to see the possibility of reducing the credit period allowed to the customers. Credit as well as collection policy should be made more effective in order to collect the receivables when due. Creditworthiness of the customers should be examined and fresh norms should be fixed for granting credit to the customers. 7. Looking into the interest cost involved in financing the working capital. The working capital policy at the company.

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