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1. Introduction 1.

1 Introduction
The life blood of business, as is evident, signified funds required for day-to-day operations of the firm. The management of working capital assumes great importance because shortage of working capital funds is perhaps the biggest possible cause of failure of many business units in recent times. There it is of great importance on the part of management to pay particular attention to the planning and control for working capital. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient money flow to satisfy both maturing shortterm debt and upcoming operational expenses.

1.2 Objective of the study:


The following are the main objective which has been undertaken in the present study: 1. To determine the amount of working capital requirement and to calculate various ratios relating to working capital. 2. To make an item wise study of the components of the working capital. 3. To suggest the steps to be taken to increase the efficiency in management of working capital

1.3 Study design and methodology:


Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, Punj Lloyd. The secondary data were collected from the Annual Report of Punj Lloyd, Punj Lloyd website, etc.

1.3 Limitations:
There may be limitations to this study because the study duration (capstone project) is very short and its not possible to observe every aspect of working capital management practices. Though some data was provided to me, but due to company secrecy policy I am unable to put in my project

1.5 Literature review Working Capital


Introduction Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called Long term Funds or Fixed Capital. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called Short- term Funds or Working Capital. The Working Capital can be categorized, as funds needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without adequate supply of raw materials for processing;

cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and, the ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Working capital cycle involves conversions and rotation of various constituents Components of the working capital. Initially cash is converted into raw materials. While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronization among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business. These characteristics have certain implications: Decision regarding management of the working capital has to be taken frequently and on a repeat basis. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too. The difference between the present value and the book value of profit is not significant. The working capital has the following components, which are in several forms of current assets: Stock of Cash Stock of Raw Material

Stock of Finished Goods Value of Debtors Miscellaneous current assets like short term investment loans & Advances

A number of definitions have been formulated: perhaps the most widely acceptable would be; WORKING CAPITAL represents the excess of CURRENT ASSETS over CURRENT LIABILITIES The same may be designated in the following equation: Working capital= current assets current liabilities: Funds thus invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Thus it is known as revolving or circulating capital or short term capital. These are two concepts of working capital: a. Gross Working Capital. b. Net Working Capital. Gross working capital is the total of all current assets. Net working capital is the difference between current assets and current liabilities. Though the later concept of working capital is commonly used it is an accounting concept with little sense to say that a firm manages its net working capital. What a firm really does is to take decisions with respect to various current assets and current liabilities. The constituents of current assets and current liabilities are shown in table A.

Cash Flow Analysis


Cash flow analysis is a method of analyzing the financing, investing, and operating activities of a company. The primary goal of cash flow analysis is to identify, in a timely manner, cash flow problems as well as cash flow opportunities. The primary document used in cash flow analysis is the cash flow statement. Since 1988, the Securities and Exchange Commission (SEC) has required every company that files reports to include a cash flow statement with its quarterly and annual reports. The cash flow statement is useful to managers, lenders, and investors because it translates the earnings reported on the income statementwhich are subject to reporting regulations and accounting decisionsinto a simple summary of how much cash the company has generated during the period in question. "Cash flow measures real money flowing into, or out of, a company's bank account," Harry Domash notes on his Web site, WinningInvesting.com. "Unlike reported earnings, there is little a company can do to overstate its bank balance." The cash flow statement A typical cash flow statement is divided into three parts: cash from operations (from daily business activities like collecting payments from customers or making payments to suppliers and employees); cash from investment activities (the purchase or sale of assets); and cash from financing activities (the issuing of stock or borrowing of funds). The final total shows the net increase or decrease in cash for the period. Cash flow statements facilitate decision making by providing a basis for judgments concerning the profitability, financial condition, and financial management of a company. While historical cash flow statements facilitate the systematic evaluation of past cash flows, projected (or pro forma) cash flow statements provide insights regarding future cash flows. Projected cash flow statements are typically developed using historical cash flow data modified for anticipated changes in price, volume, interest rates, and so on.

To enhance evaluation, a properly-prepared cash flow statement distinguishes between recurring and nonrecurring cash flows. For example, collection of cash from customers is a recurring activity in the normal course of operations, whereas collections of cash proceeds from secured bank loans (or issuances of stock, or transfers of personal assets to the company) is typically not considered a recurring activity. Similarly, cash payments to vendors is a recurring activity, whereas repayments of secured bank loans (or the purchase of certain investments or capital assets) is typically not considered a recurring activity in the normal course of operations. In contrast to nonrecurring cash inflows or outflows, most recurring cash inflows or outflows occur (often frequently) within each cash cycle (i.e., within the average time horizon of the cash cycle). The cash cycle (also known as the operating cycle or the earnings cycle) is the series of transactions or economic events in a given company whereby: 1. Cash is converted into goods and services. 2. Goods and services are sold to customers. 3. Cash is collected from customers. Reasons for Creating a Cash Flow Budget Think of cash as the ingredient that makes the business operate smoothly just as grease is the ingredient that makes a machine function smoothly. Without adequate cash a business cannot function because many of the transactions require cash to complete them. By creating a cash flow budget you can project your sources and applications of funds for the upcoming time periods. You will identify any cash deficit periods in advance so you can take corrective actions now to alleviate the deficit. This may involve shifting the timing of certain transactions. It may also determine when money will be borrowed. If borrowing is involved, it will also determine the amount of cash that needs to be borrowed. Periods of excess cash can also be identified. This information can be used to direct excess cash into interest bearing assets where additional revenue can be generated or to scheduled loan payments.

Cash Flow is not Profitability People often mistakenly believe that a cash flow statement will show the profitability of a business or project. Although closely related, cash flow and profitability are different. A cash flow statement lists cash inflows and cash outflows while the income statement lists income and expenses. A cash flow statement shows liquidity while an income statement shows profitability. Many income items are also cash inflows. The sales of crops and livestock are usually both income and cash inflows. The timing is also usually the same as long as a check is received and deposited in your account at the time of the sale. Many expense items are also cash outflow items. The purchase of livestock feed (cash method of accounting) is both an expense and a cash outflow item. The timing is also the same if a check is written at the time of purchase. However, there are many cash items that are not income and expense items, and vice versa. For example, the purchase of a tractor is a cash outflow if you pay cash at the time of purchase. If money is borrowed for the purchase using a term loan, the down payment is a cash outflow at the time of purchase and the annual principal and interest payments are cash outflows each year.

2. Company Profile 2.1 Punj Lloyd group


Punj Lloyd Group is a diversified global conglomerate providing Engineering & Construction services in Oil & Gas, Infrastructure and Petrochemicals, and with interests in Defense, Aviation, Marine and Upstream sectors. With a turnover of US $2.6 billion, the Groups three brands - Punj Lloyd headquartered in India, Sembawang Engineers & Constructors in Singapore, and Simon Carves in the United Kingdom, each with its own subsidiaries and joint ventures, converge to offer complementary services, rich experiences and the best practices from across the globe. 16 international offices and entities across the Middle East, the Caspian, Asia Pacific, Africa, South Asia, China and Europe, have established Punj Lloyd as a proven and reputable Group. Having built projects across the world, the Group continues to provide integrated design, engineering, procurement, construction and project management services for the energy, infrastructure and petrochemical sectors. From pipelines, tanks and terminals to refineries, power plants to renewable, airports, rail transit systems to expressways, the Group can offer EPC solutions across a wide spectrum of businesses.

A dynamic enterprise, the Group explores and pursues the enormous opportunity in markets globally. Partnering with the best in their own arenas, Punj Lloyd brings technology and quality to clients worldwide and reiterates its belief of delivering the best, in services and manufacturing. An excellent track record for successful completion of projects within tight schedules, lends credibility to the Group, encouraging clients to trust it with repeat orders. The skilled multicultural workforce has the experience of working in different geographies and diverse terrain, empowering the Group to aggressively pursue its vigorous plans. The Groups key strengths are its varied experience, rich knowledge of local conditions, high standards of health, safety, quality and environment, accolades and recognitions from industry bodies and clients, its ability to manage operations in diverse industries and economies, longterm relationships with world-class clients and ability to mobilise financial resources. The huge fleet of equipment Punj Lloyd owns gives the company an edge over its competitors.

2.2 The business segments of Punj Lloyd


As shown in Table 1, Punj Lloyd Ltd. (Punj Lloyd or the Company) operates in four major segments: Oil and Gas, Civil and Infrastructure, Petrochemicals and Power. Table 1 gives the figures.
1 R EV EN U E S AN D ORD E R B AC KL OG : B Y BU SINE S S SE GME N T
I N R S CR OR E

Segments

Oil & Gas

Civil & Infrastructure

Petrochemicals

Power

Total

Total Revenue (200910) Percentage Share Of which, Top 15 revenue earners

7,233.76

3,007.37

1,017.64

457.13

11,715.90

61%

26%

9%

4%

100%

2.3 Oil & Gas The oil & gas business contributes to 61% of Punj Lloyds total revenues and about 58% of Punj Lloyds top 15 revenue earning projects in 2009-10. This business offers services in process

engineering, pipelines, both onshore and offshore, and tankages. The segment earned revenues of Rs. 7,234 crore during the year and as on 31 March 2010, has an order backlog of Rs. 10,515 crore. In 2009-10, Punj Lloyd won the Strategic Gas Transmission Project for Qatar Petroleum, valued at Rs. 3,636 crore and involved laying two new 36 dia pipelines and 24 Core FOC laying. This is the largest project that the Company has undertaken in the oil & gas business till date. The Companys capabilities in the oil & gas sector are also well recognised in India. In 2009-10, the Company has won big ticket projects both for the refineries as well as for pipelines. Some of the projects that Punj Lloyd has been awarded are highlighted in Table 2 below.
2 MA JOR P R OJEC T S : A W AR DE D AN D UN DE R E XE CU T IO N F OR 2009-10 : OI L & G AS
C RO RE IN RS

Project Delayed Coker Unit Sulphur Block for Bina Refinery Project Motor Spirit Quality Upgradation EPC Contract for Pipeline Heated and Insulated Gas Pipeline: Three Sections Dense Phase Ethylene and Butane Pipelines between Ras Laffan and Mesaieed EPC for 21 Storage Tanks Offsite and Utilities Construction of Two Gas Pipelines in Libya

Client IOCL, Vadodara Bharat Oman Refinery, Bina IOCL, Barauni Gujarat State Petronet Ltd. Cairn India Ltd. Ras Laffan Olefins Company Ltd, Qatar Eastern Bechtel Co. Ltd., Abu Dhabi Yemen LNG, Yemen Sirte Oil Company of Libya

Contract Value 590 590 649 239 141 191 140 322 1,349

In tankage, the Company has the expertise to execute a complete EPC project for tank farms and terminals, including cryogenic storage. Punj Lloyd is one of the few companies in the world having its own design capabilities and construction expertise for cryogenic and floating roof tanks. Among the projects under execution during the year, the EPCC 8 packages for IOCL Panipat is worth separate mention. The Rs. 350 crore project is for the design and construction of offsites and storage facilities for the naphtha cracker project at IOCLs Panipat refinery. Unlike other projects, here all kinds of storage equipment are being manufactured at site, including spheres, moulded bullets, atmospheric tanks and propylene and ethylene cryogenic tanks. Some of the other major projects that have been executed are detailed below:

Two orders for New Doha International Airport fuel system; contract value Rs. 608 crore.

Two order for mechanical work, including steel, equipment and pipeline fabrication and erection for Abu Dhabi Polymers Company (Borouge); contract value Rs. 762 crore.

Offshore Projects in Oil & Gas During 2009-10, this business unit (in association with our wholly owned subsidiary, PT Sempec of Indonesia) was executing an offshore EPC project, with a contract value of Rs. 1,289 crore, involving four well head platforms, pipelines, flexibles, cable laying and SBM, etc, for ONGC at Heera. Subsequently, in April 2009, Punj Lloyd has successfully commissioned and handed over the first of the four offshore wellhead platforms to ONGC for it to commence drilling and production operations. Heera is the first of Punj Lloyds offshore platform projects in India and the successful technical execution of the project has established the Companys credentials in offshore. It also completed the Uran Trombay Gas Pipeline (the UTG pipeline), where a substantial part of the project was offshore. The project scope included 24 km of 20 dia pipeline and terminal work and was completed before time. During 2009-10, Punj Lloyd bid for a US$ 130 million project in Thailand, as well as for the ZADCO block in Abu Dhabi. It has also submitted bids to ONGC with a combined value of more than US$ 2.5 billion. In the offshore business, Punj Lloyd identifies two issues critical to success: equipment and the skills to effectively deploy them. Punj Lloyd has acquired sophisticated equipment and machinery over the past few years, especially during 2009-10. Pipe-laying barges are used to lay sections of the pipeline at various water depths; the Company has acquired two such barges, one operating in depths up to 60 metres; the other can lay pipes in depths of 150 metres. Punj Lloyd is one of the few companies in the world that has such sophisticated equipment. In 2009-10, the Company also acquired an accommodation and crane barge. Punj Lloyd has a long term growth objective of being able to graduate to deep water offshore work, both in India and abroad, especially in the gulf region.

2.4 The Civil, Infrastructure & Power business of Punj Lloyd comprises two elements (Civil Engineering, Building & Power, and Roads & Other Infrastructure). Together, they have contributed Rs. 3,465 crore of topline to Punj Lloyd during the year ended 31 March 2010, with a residual order book of Rs. 7,645 crore as on that date (Table 4). Civil & Infrastructure work is executed through three entities: Punj Lloyd Ltd. (which mainly executes projects in India), Sembawang Engineers and Constructors Pte Ltd. (SEC) and Sembawang UAE. Power There are two parts to the power business: thermal and conventional and nuclear power. During the year, the power business segment of Punj Lloyd generated revenues of Rs. 457 crore, with an order backlog of Rs. 1,219 crore as on 31 March 2010. Thermal and Conventional Power During the year, Punj Lloyd is executing the complete EPC, including civil work of balance of plant (BOP) package for 2 x 250 MW Chhabra Thermal Power Project in Rajasthan; the order value of the project is Rs. 823 crore. The first unit was expected to be completed by July 2011. Punj Lloyd has also been awarded the EPC for BOP at the 2 x 270 MW Govindwal Sahib Power project in the Tarn Taran district of Punjab. Punj Lloyd has already started the engineering work for the project, which is valued at Rs. 1,005 crore. On the business development front, the power segment has entered into an agreement with General Electric (GE) to work together in Indian and international markets, with Punj Lloyd as the EPC contractor for the entire plant (including turbine) and GE as the equipment and technology supplier. Over the next few years, Punj Lloyd wishes to migrate from being an EPC player of BOP in power plants to a full EPC player.

Nuclear Power

India will need to develop its nuclear power generation capability if it is to meet its growing demand for power. The power shortage for 2009-10 is estimated at 11.0%8. Currently, only 4,120 MW (2.8%) of Indias total generation is met through nuclear power. The country proposes to add another 3,380 MW of generation capacity by the end of the 11th Plan period9; have 20,000 MW of nuclear power by 2020 and targets 25% of its electricity supply to come from nuclear power by 205010. This will not be possible without Private Public Partnerships (PPPs); though, currently, the sole authority supervising Indias civil nuclear programme is the Nuclear Power Corporation of India Ltd (NPCIL). Punj Lloyd recognises that this area offers long term growth opportunities for its engineering and construction businesses. Punj Lloyd envisages that, over a period of time, the following business opportunities will arise for the Company in the nuclear power generation business: In EPC. Decommissioning of Nuclear Power Plants and nuclear waste management; using the experience of Simon Carves Ltd (UK), which has 3.5 million man hours of experience in nuclear de-commissioning, spent-fuel management and engineering advisory services. In Nuclear Fuel and Consultancy. In Components. In Operations & Maintenance.

The team is establishing relationships with leading global nuclear technology providers for EPC jobs, as well as exploring qualification opportunities jointly with the appropriate international EPC majors. Punj Lloyd has also been issued the pre-qualification (PQ) documents for civil work contract for the Pressurised Heavy Water Reactors (PHWR) of 700 MW each, worth Rs. 650 crore at Kakarpara in Gujarat. 2.5 Petrochemicals

In 2009-10, the petrochemicals segment generated revenues of Rs, 1,018 crore, with an order backlog of Rs. 2,526 crore as on 31 March 2010 (Table 6). Simon Carves Simon Carves Limited, UK (SC) Simon Carves Limited provides comprehensive Engineering, Procurement, Construction and Commissioning (EPCC) services the across the global process industry sector, focusing on petrochemicals and renewables, especially bio- fuel manufacture. Its expertise lies in the following areas: Polymers and Petrochemicals, which have been designed and supplied over 80 manufacturing facilities to its customers worldwide. Chemicals, with its own acid technology and through strategic licensor relationships for other technologies: SCL has built over 350 chemical manufacturing facilities worldwide; the company has extensive experience in the Pharmaceutical and Agro chemical markets particularly in Europe having worked closely in partnership with AstraZeneca over a long period of time. Nuclear Power, where it has been involved in the design and build of new installations in the UK particularly fuel fabrication, waste treatment and processing. In 2009-10, Simon Carves generated revenues of 169 million (2007-08: 177 million). At 31 March 2010, the Punj Lloyd Group reorganised its holding structure of Simon Carves Limited. Simon Carves Singapore Pte. Ltd. is now the parent company. There will be no effect on Simon Carves Limited, and is a reflection of the Group wide focus on projects in Asia and the Middle East. The Abu Dhabi office becoming the global headquarters of Simon Carves will allow it to exploit opportunities in the Middle East and Asia.

3. Working Capital Analysis 3.1 Working Capital


Introduction Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called Long term Funds or Fixed Capital.

Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called Short- term Funds or Working Capital. The Working Capital can be categorized, as funds needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without adequate supply of raw materials for processing; cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and, the ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Working capital cycle involves conversions and rotation of various constituents Components of the working capital. Initially cash is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result, they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital.

While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronization among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business. These characteristics have certain implications: Decision regarding management of the working capital has to be taken frequently and on a repeat basis. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too. The difference between the present value and the book value of profit is not significant. The working capital has the following components, which are in several forms of current assets: Stock of Cash Stock of Raw Material Stock of Finished Goods Value of Debtors Miscellaneous current assets like short term investment loans & Advances

A number of definitions have been formulated: perhaps the most widely acceptable would be; WORKING CAPITAL represents the excess of CURRENT ASSETS over CURRENT LIABILITIES

The same may be designated in the following equation: Working capital= current assets current liabilities : Funds thus invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Thus it is known as revolving or circulating capital or short term capital. These are two concepts of working capital: a. Gross Working Capital. b. Net Working Capital. Gross working capital is the total of all current assets. Net working capital is the difference between current assets and current liabilities. Though the later concept of working capital is commonly used it is an accounting concept with little sense to say that a firm manages its net working capital. What a firm really does is to take decisions with respect to various current assets and current liabilities. The constituents of current assets and current liabilities are shown in table A.

3.2 Constituents of Current Assets and Current Liabilities


Current Assets Inventories Raw materials and components, Work in progress, Finished goods, other. Trade Debtors. Loans and Advances. Investments. Cash and Bank balance.

Current Liabilities Sundry Creditors. Trade Advances. Borrowings. Provisions.

The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below: Nature of Enterprise The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise. Manufacturing/Production Policy Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. Working Capital Cycle In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods

through work in progress with progressive increment of labor and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. Operations The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. Market Condition If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. Credit Policy The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables.

Business Cycle Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at the time of depression i.e. when there is a down swing of the cycle, business

contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal. Availability of Raw Material If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same. Growth and Expansion Growth and expansion in the volume of business result in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. Earning capacity and Dividend Policy Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend. Price Level Changes Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. Manufacturing Cycle The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working

capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion. Other Factors Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital. Component of Working Capital Basis of Valuation Stock of raw material Purchase cost of raw materials Stock of work in process at cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash working expenses.

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper

assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.

3.3 Working capital management


Introduction Working Capital Management refers to management of current assets and current liabilities. The major thrust of course is on the management of current assets .This is understandable because current liabilities arise in the context of current assets. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons: Investment in current assets represents a substantial portion of total investment. Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are responsive to variation in sales. However, this relationship is not as close and direct as it is in the case of working capital components. The importance of working capital management is effected in the fact that financial manages spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of time of financial managers. The problem of working capital management is one of the best utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths of the merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations.

Consequences of under assessment of working capital Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. The business may fail to honor its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, over assessment of working capital also has its own dangers. Consequences of over assessment of working capital Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency.

Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit.

The working capital in certain enterprise may be classified into the following kinds. 1. Initial working capital. The capital, which is required at the time of the commencement of business, is called initial working capital. These are the promotion expenses incurred at the earliest stage of formation of the enterprise which include the incorporation fees, attorney's fees, office expenses and other expenses. 2. Regular working capital. This type of working capital remains always in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses. 3. Fluctuating working capital . This capital is needed to meet the seasonal requirements of the business. It is used to raise the volume of production by improvement or extension of machinery. It may be secured from any financial institution which can, of course, be met with short term capital. It is also called variable working capital. 4. Reserve margin working capital. It represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the running life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition etc. In this case greater amount of capital is required for maintenance of the business. 3.4 Financing Working Capital Now let us understand the means to finance the working capital. Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature,

they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds: I. Suppliers Credit At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc. ii. Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the required business level. The loans are available for creating the following current Assets: Stock of Raw Materials Stock of Work in Process Stock of Finished Goods Debtors

Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities. iii. Promoters Fund

It is advisable to finance a portion of current assets from the promoters funds. They are longterm funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business. Important Terms 3.5 Working Capital Cycle Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-inprogress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans. Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit r an increased credit limit; you effectively create free finance to help fund future sales.

If you....... Then...... Collect receivables (debtors) faster, you release cash from the cycle Collect receivables (debtors) slower, your receivables soak up cash Get better credit (in terms of duration or amount) from suppliers, you increase your cash resources Shift inventory (stocks) faster, you free up cash Move inventory (stocks) slower, you consume more cash It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business. More businesses fail for lack of cash than for want of profit. Sources of Additional Working Capital Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).

3.6 Estimating working capital needs 1. Liquidity vs. Profitability: Risk Return Trade Off.

The firm would make just enough investment in current assets if it were possible to estimate working capital needs exactly. Under perfect certainty, current assets holdings would be at the minimum level. A larger investment in current assets under certainty would mean a low rate of return of investment for the firm, as excess investment in current assets will not earn enough return. A small invest in current assets, on the other hand, would mean interrupted production and sales, because of frequent stock-cuts and inability to pay to creditors in time due to restrictive policy.

As it is not possible to estimate working capital needs accurately, the firm must decide about levels of current assets to be carried. 2. The Cost Trade Off:

A different way of looking into the risk return trade off is in terms of the cost of maintaining a particular level of current assets. There are two types of cost involved:I. Cost of liquidity II. Cost of illiquidity If the firms level of current assets is very high, it has excessive liquidity. Its return on assets will be low, as funds tied up in idle cash and stocks earn nothing and high levels of debtors reduce profitability. Thus, the cost of liquidity increases with the level of current assets. The cost of illiquidity is the cost of holding insufficient current assets. The firm will not be in a position to honor its obligations if it carries to little cash. This may force the firm to borrow at high rates of interests. This will also adversely affect the credit-worthiness of the firm and it will face difficulties in obtaining funds in the future. All this may force the firm into insolvency. Similarly, the low levels of stock will result in loss of sales and customers may shift to competitors. Also, low level of debtors may be due to right credit policy which would impair sales further. Thus the low level of current assets involves cost that increase as this level falls.

3.7 Policies for financing current assets

The following policies for financing current assets in Punj Lloyd:Long term financing: The sources of long term financing include ordinary shares capital, preference share capital debentures, long term borrowings from financial institutions and reserves and surplus. It manages its long term financing from capital reserve, share premium A/C, foreign project reserve, bonds redemption reserve and general reserve.

Short term financing: The short term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short term finance include working capital funds from banks, public deposits, commercial paper, factoring of receivables etc. Punj Lloyd manages secured loans as:1) Loans and advances from banks 2) Other loans and advances: (i) Debentures/bonds (ii) Loans from State Govt. (iii) and 3) Interest accrued and due on loans (a) From State Govt. (b) From financial institutions bonds and other (c) packing credit Punj Lloyd manages unsecured loans as:1) Public deposits 2) Short term loans and advances: (1) From banks (a) Commercial papers (2) From others (a) From companies Loans from financial institutions(secured by pledge of PSU bonds bills accepted guaranteed by banks)

(b) From financial institutions 3) Other loans and advances (a) From banks (b) From others (i) from govt. of India (ii) from state govt. (iii) from financial institutions

(iv)from foreign financial institution (v) post shipment credit exim bank (vi)credit for assets taken on lease 4) Interest accrued and due on (a) Post shipment credit (b) Govt. credit (c) State Govt. loans (d) Credits for assets taken on lease (e) Financial institutions and others (f) Foreign financial institutions (g) Public deposits Spontaneous financing:-

Spontaneous financing refers to the automatic sources of short term funds arising in the normal course of a business. Trade Credit and outstanding expenses are examples of spontaneous financing. A firm is expected to utilize these sources of finances to the fullest extent. The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long term and short term sources of finances.

What should be the mix of short and long term sources in financing current assets? Depending on the mix of short and long term financing, the approach followed by a company may be referred to as: 1. matching approach 2. conservative approach 3. aggressive approach Matching approach The firm can adopt a financial plan which matches the expected life of assets with the expected life of the source of funds raised to finance assets. Thus, a ten year loan may be raised to finance a plant with an expected life of ten year; stock of goods to be sold in thirty days may be financed with a thirty day commercial paper or a bank loan. The justification for the exact matching is that, since the purpose of financing is to pay for assets, the source of financing and the asset should be relinquished simultaneously. Using long term financing for short term assets is expensive as funds will not be utilized for the full period. Similarly, financing long term assets with short term financing is costly as well as inconvenient as arrangement for the new short term financing will have to be made on a continuing basis. When the firm follows matching approach (also known as hedging approach) long term financing will be used to finance fixed assets and permanent current assets and short term

financing to finance temporary or variable current assets. However, it should be realized that exact matching is not possible because of the uncertainty about the expected lives of assets. The firm fixed assets and permanent current assets are financed with long term funds and as the level of these assets in increases, the long term financing level also increases. The temporary or variable current assets are financed with short term funds and as their level increases, the level of short term financing also increases. Under matching plan, no short term financing will be used if the firm has a fixed current assets need only.

Conservative approach A firm in practice may adopt a conservative approach in financing its current and fixed assets. The financing policy of the firm is said to be conservative when it depends more on long term funds for financing needs. Under a conservative plan, the firm finances its permanent assets and also a part of temporary current assets with long term financing. In the period when the firm has no need for temporary current assets, the idle long term funds can be invested in the tradable securities to conserve liquidity. The conservative plan relies heavily on long term financing and, therefore, the firm has less risk of facing the problem of shortage of funds. The conservative

financing policy is shown below. Note that when the firm has no temporary current assets, the long term funds released can be invested in marketable securities to build up the liquidity position of the firm.

Aggressive Approach A firm may be aggressive in financing its assets. An aggressive policy is said to be followed by the firm when it uses more short term financing than warranted by the matching plan. Under an aggressive policy, the firm finances a part of its permanent current assets with short term financing. Some extremely aggressive firms may even finance a part of their fixed assets with short term financing. The relatively more use of short term financing makes the firm more risky. The aggressive financing is illustrated in fig below.

Short term vs long term financing: A Risk Return Trade off A firm should decide whether or not it should use short term financing. If short term financing has to be used, the firm must determine its position in total financing. This decision of the firm will be guided by the risk return trade off. Short term financing may be preferred over long term financing. For two reasons: 1. The cost advantage 2. Flexibility But short term financing is more risky than long term financing. Cost: short term financing should generally be less costly than long term financing. It has been found in developed countries like USA, the rate of interest is related to the maturity of debt. The relationship between the maturity of debt and its cost is called the term structure of interest

rates. The curve, relating to maturity of debt and interest rates, is called the yield curve. The yield curve may assume any shape, but it is generally upward sloping. The justification for the higher cost of long term financing can be found in the liquidity preference theory. This theory says that since lenders are risk averse, and risk generally increases with the length of lending time (because it is more difficult to forecast the more distant future), most lenders would prefer to make short term loans. The only way to induce these lenders to lend for longer periods is to offer them higher rates of interest. The cost of financing has an impact on the firms return. Both short and long term financing have a leveraging effect on shareholders return. But the short term financing ought to cost less than the long term financing; therefore, it gives relatively higher return to shareholders. It is noticeable that in India short term loans cost more than the long term loans. Banks are the major suppliers of the working capital finance in India. Their rates of interest on working capital finance are quite high. The main sources of long term loans are financial institutions which till recently were not charging interest at differential rates. The prime rate of interest rate charged by financial institutions is lower than the rate charged by banks. Flexibility: it is relatively easy to refund short term funds when the need for funds diminishes. Long term funds such as debenture loan or preference capital cannot be refunded before time. Thus, if a firm anticipates that its requirement for funds will diminish in near future, it would choose short term funds. Risk: although short term financing may involve less cost, it is more risky than long term financing. If the firm uses short term financing to finance its current assets, it runs the risk of renewing borrowing again and again. This is particularly so in the case of permanent assets. As discussed earlier, permanent current assets refer to the minimum level of current assets which a firm should always maintain. If the firm finances it permanent current assets with short term debt, it will have to raise new short term funds as debt matures. This continued financing exposes the firm to certain risks. It may be difficult for the firm to borrow during stringent credit periods. At times, the firm may be unable to raise any funds and consequently, it operating

activities may be disrupted. In order to avoid failure, the firm may have to borrow at most inconvenient terms. These problems are much less when the firm finances with long term funds. There is less risk of failure when the long term financing is used. Risk returned trade-off: Thus, there is conflict between long term and short term financing. Short term financing is less expensive than long term financing, but, at the same time, short term financing involves greater risk than long term financing. The choice between long term and short term financing involves a trade-off between risk and return. Handling Receivables (Debtors) Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know, who owes them money, how much is owed, how long it owes, for what it is owed etc. Late payments erode profits and can lead to bad debts. Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: 1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc.

6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your larger customers. 9. Invoice promptly and clearly. 10. Consider charging penalties on overdue accounts. 11. Consider accepting credit /debit cards as a payment option. 12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old. Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects: weak credit judgement poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction.

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 checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references Receiving part payments from debtors.

Profits only come from paid sales. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Managing Payables (Creditors) Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do you use order quantities which take account of stock-holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy?

Are you in a position to pass on cost increases quickly through price increases to your customers?

If a supplier of goods or services lets you down can you charge back the cost of the delay?

Can you arrange (with confidence!) to have delivery of supplies staggered or on a justin-time basis?

There is an old adage in business that if you can buy well then you can sell well . Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!). 3.7 Management of Inventory Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques. Needs to hold inventories:There are three general motives for holding inventories: Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation.

Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.

Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in reordering costs and quantity discounts etc.

Objective of Inventory Management:The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it. The following are the objectives of inventory management: To ensure continuous supply of materials, spares and finished goods. To avoid both over-stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sale activities. To keep material cost under control so that they contribute in reducing cost of production and overall purchases. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. To minimize losses through deterioration, pilferage, wastages and damages. To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization.

To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores.

To ensure right quality of goods at reasonable prices. To facilitate furnishing of data for short-term and long term planning and control of inventory

3.9 Management of cash & Receivables Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain ideal without contributing anything towards the firms profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm. Need to hold cash The firms need to hold cash may be attributed to the following three motives:The Transaction Motive: The transaction motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends, etc. The Precautionary Motive: A firm is required to keep cash for meeting various contingencies. Though cash inflows and outflows are anticipated but there may be variations in these estimates. For example a debtor who pays after 7 days may inform of his inability to pay, on the other

hand a supplier who used to give credit for 15 days may not have the stock to supply or he may not be in opposition to give credit at present. Speculative Motive: - The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. The opportunities to make profit changes. The firm will hold cash, when it is expected that interest rates will rise and security price will fall. Components of working capital are calculated as follows: 1) Raw Materials Storage Period=Average stock of raw materials/Average cost of raw material consumption per day. 2) W-I-P Holding period=Average w-i-p in inventory/Average cost of production per day. 3) Stores and spares conversion period= Average stock of Stores and spares/ Average consumption per day. 4) Finished goods conversion period= Average stock of finished goods/Average cost of goods sold per day. 5) Debtors collection period=Average book debts/Average credit sales per day. 6) Credit period availed=Average trade creditors/Average credit purchase per day. Management of Receivables A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales.

The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables. Needs to hold cash: Receivables management is the process of making decisions relating to investment in trade debtors. Certain investments in receivables are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost consideration also. Further, there is always a risk of bad debts too. Thus, the objective of receivable management is to take a sound decision as regards investments in debtors. In the words of Bolton, S.E., the need of receivables management is to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

3.10. Financial Analysis and Representation of Data


3.10 Income Statement 31-Mar10(12) Profit / Loss A/C Net Sales (OI) Rs mn 68879.50 %OI 100.0 0 Material Cost 23817.61 34.58 16253.63 31-Mar09(12) Rs mn 44885.68 %OI 100.0 0 36.21 5873.55 26.23 31-Mar08(12) Rs mn 22388.47 %OI 100.00

Increase Inventories

Decrease 0.00

0.00

0.00

0.00

4.97

0.02

Personnel Expenses Manufacturing Expenses Gross Profit Administration

5701.88 23901.47 15458.54

8.28 34.70 22.44 11.69

3475.74 15043.77 10112.54 4968.23

7.74 33.52 22.53 11.07

2365.63 8805.23 5339.09 3186.30

10.57 39.33 23.85 14.23

Selling 8049.85

and Distribution Expenses EBITDA Depreciation and Amortisation EBIT Interest Expense Other Income Pretax Income Provision for Tax Extra Ordinary 6213.88 1942.80 676.67 4947.75 1736.79 and 0.00 9.02 2.82 0.98 7.18 2.52 0.00 4010.44 1132.81 531.88 3409.51 1195.08 0.00 8.93 2.52 1.18 7.60 2.66 0.00 1308.18 1001.16 666.31 973.33 357.49 0.00 5.84 4.47 2.98 4.35 1.60 0.00 7408.69 Depletion 1194.81 10.76 1.73 5144.31 1133.87 11.46 2.53 2152.79 844.61 9.62 3.77

Prior Period Items Net Net Profit Adjusted Net Profit Dividend - Preference Dividend - Equity 3210.98 3210.98 0.00 91.05 4.66 4.66 0.00 0.13 2214.43 2214.43 0.00 121.38 4.93 4.93 0.00 0.27 615.85 615.85 0.00 78.38 2.75 2.75 0.00 0.35

3.11 Balance Sheet 31-Mar10 %BT 31-Mar09 %BT 31-Mar08 %BT

Equity Capital Preference Capital Share Capital Reserves and Surplus Loan Funds Current Liabilities Provisions Current Liabilities and Provisions Total Liabilities and Stockholders Equity (BT) Tangible Assets Net Intangible Assets Net Net Block Capital Work In Progress Net Fixed Assets Investments Inventories Accounts Receivable Cash and Cash Equivalents Other Current Assets Current Assets Loans & Advances Miscellaneous Expenditure

606.96 0.00 606.96 25482.63 29378.54 24006.21 1463.05 25469.26

0.74 0.00 0.74 31.03 35.78 29.23 1.78 31.02

606.89 0.00 606.89 23538.82 13676.48 13635.10 726.78 14361.89

1.14 0.00 1.14 44.24 25.71 25.63 1.37 27.00

522.52 0.00 522.52 10519.67 15186.40 11895.09 297.40 12192.48

1.34 0.00 1.34 26.95 38.91 30.48 0.76 31.24

82117.61

100.0 0

53201.63

100.0 0

39027.15

100.00

0.00 0.00 10722.77 1236.54

0.00 0.00 13.06 1.51

0.00 0.00 9894.34 928.48

0.00 0.00 18.60 1.75

8312.98 199.23 8512.21 40.34

21.30 0.51 21.81 0.10

11959.31 9933.47 29502.87 15235.62 3589.26 924.05 49251.81 10973.02 0.00

14.56 12.10 35.93 18.55 4.37 1.13 59.98 13.36 0.00

10822.82 7277.56 15051.48 9639.67 2144.23 812.47 27647.86 7452.31 0.00

20.34 13.68 28.29 18.12 4.03 1.53 51.97 14.01 0.00

8552.55 3177.97 11628.36 5615.05 3379.01 590.42 21212.84 6083.67 0.00

21.91 8.14 29.80 14.39 8.66 1.51 54.35 15.59 0.00

Other Assets Total Assets (BT) 82117.61 100.0 0 53201.63 100.0 0 39027.15 100.00

3.12 Ratio Analysis


As on Working Capital Working Capital to Sales (x) Working Capital Days (days gross sales) Receivables (days gross sales) Creditors (days cost of sales) FG Inventory (days cost of sales) RM Inventory (days consumption) 0.40 133.80 80.70 ---0.30 113.90 78.40 70.20 0.10 -0.40 151.90 91.50 86.50 0.10 -31-Mar-10 31-Mar-09 31-Mar-08

Cash Flow Indicator Operating Cash Flow/Sales (%) -9.40 -5.20 -8.20

Following steps have been taken to control inventory: An inventory monitoring cell is constituted at the corporate office.

The purchases were controlled by the materials management group reporting to the Director of Finance.

The company provided for weekly meetings between material planning, production control and purchase departments for better matched material availability.

Monthly review of total inventory at the level of chief executives of plants and corporate management is introduced.

Inventory control is dovetailed with the budgeting system. Top 100 inventory items are identified for closer scrutiny and control

Key Working Capital Ratios The following, easily calculated, ratios are important measures of working capital utilization. Ratio Stock Turnover (in days) Formula Average Stock * 365/ Cost of Goods Sold Result = x days Interpretation On average, you turnover the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. Receivables Debtors Ratio days) (in 365/ Sales * = x days It takes you on average x days to collect monies due to you. If youre official credit terms are 45 day and it takes you 65 days... why? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. Payables Ratio (in days) Creditors * = x days 365/ Cost of Sales (or On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will

Purchases)

decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.

Current Ratio

Total Current Assets/ Total Current Liabilities

= x times

Current Assets are assets that you can readily turn in to cash or will do so within 2 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 time e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.

Quick Ratio

(Total Current Assets Inventory)/ Total Current Liabilities -

= x times

Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Working Capital Ratio

(Inventory + Receivables - Payables)/ Sales

As % Sales

A high percentage means that working capital needs are high relative to your sales.

Other working capital measures include the following: Bad debts expressed as a percentage of sales.

Cost of bank loans, lines of credit, invoice discounting etc. Debtor concentration - degree of dependency on a limited number of customers.

Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors. When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cash flow forecasts.

Calculation of current assets to fixed asset ratio A firm needs current and fixed assets to support a particular level of output. However, to support the same level of output the firm can have different levels of current assets. As the firms output and sales increases, the need for current asset increases. Generally the current assets do not increase in direct proportion to output; current assets may increase at a decreasing rate with input. This relationship is based upon the notion that it takes a greater proportional investment in current assets when only a few units of output are produced than it does later on when the firm can use its current assets more efficiently. The level of the current assets can be measured by relating current assets to fixed assets. There are three policies:1) conservative current assets policy: CA/FA is higher. It implies greater liquidity and lower risk. 2) aggressive current assets policy: CA/FA is lower; it implies higher risk and poor liquidity. 3) moderate current assets policy:

CA/FA ratio falls in the middle of conservative and aggressive policies.

In case of Punj Lloyd, the ratio of current assets to fixed assets is: 2009-10 (Rs mn) Current Assets Fixed Assets CA/FA 49251.81 11959.31 4.12 2008-09 (Rs mn) 27647.86 10822.82 2.55 2007-08 (Rs mn) 21212.84 8552.55 2.48

3.13. Cash Flow Analysis


Cash flow analysis is a method of analyzing the financing, investing, and operating activities of a company. The primary goal of cash flow analysis is to identify, in a timely manner, cash flow problems as well as cash flow opportunities. The primary document used in cash flow analysis is the cash flow statement. Since 1988, the Securities and Exchange Commission (SEC) has required every company that files reports to include a cash flow statement with its quarterly and annual reports. The cash flow statement is useful to managers, lenders, and investors because it translates the earnings reported on the income statementwhich are subject to reporting regulations and accounting decisionsinto a simple summary of how much cash the company has generated during the period in question. "Cash flow measures real money flowing into, or out of, a company's bank account," Harry Domash notes on his Web site, WinningInvesting.com. "Unlike reported earnings, there is little a company can do to overstate its bank balance." The cash flow statement

A typical cash flow statement is divided into three parts: cash from operations (from daily business activities like collecting payments from customers or making payments to suppliers and employees); cash from investment activities (the purchase or sale of assets); and cash from financing activities (the issuing of stock or borrowing of funds). The final total shows the net increase or decrease in cash for the period. Cash flow statements facilitate decision making by providing a basis for judgments concerning the profitability, financial condition, and financial management of a company. While historical cash flow statements facilitate the systematic evaluation of past cash flows, projected (or pro forma) cash flow statements provide insights regarding future cash flows. Projected cash flow statements are typically developed using historical cash flow data modified for anticipated changes in price, volume, interest rates, and so on. To enhance evaluation, a properly-prepared cash flow statement distinguishes between recurring and nonrecurring cash flows. For example, collection of cash from customers is a recurring activity in the normal course of operations, whereas collections of cash proceeds from secured bank loans (or issuances of stock, or transfers of personal assets to the company) is typically not considered a recurring activity. Similarly, cash payments to vendors is a recurring activity, whereas repayments of secured bank loans (or the purchase of certain investments or capital assets) is typically not considered a recurring activity in the normal course of operations. In contrast to nonrecurring cash inflows or outflows, most recurring cash inflows or outflows occur (often frequently) within each cash cycle (i.e., within the average time horizon of the cash cycle). The cash cycle (also known as the operating cycle or the earnings cycle) is the series of transactions or economic events in a given company whereby: 4. Cash is converted into goods and services. 5. Goods and services are sold to customers. 6. Cash is collected from customers. Reasons for Creating a Cash Flow Budget

Think of cash as the ingredient that makes the business operate smoothly just as grease is the ingredient that makes a machine function smoothly. Without adequate cash a business cannot function because many of the transactions require cash to complete them. By creating a cash flow budget you can project your sources and applications of funds for the upcoming time periods. You will identify any cash deficit periods in advance so you can take corrective actions now to alleviate the deficit. This may involve shifting the timing of certain transactions. It may also determine when money will be borrowed. If borrowing is involved, it will also determine the amount of cash that needs to be borrowed. Periods of excess cash can also be identified. This information can be used to direct excess cash into interest bearing assets where additional revenue can be generated or to scheduled loan payments. Cash Flow is not Profitability People often mistakenly believe that a cash flow statement will show the profitability of a business or project. Although closely related, cash flow and profitability are different. A cash flow statement lists cash inflows and cash outflows while the income statement lists income and expenses. A cash flow statement shows liquidity while an income statement shows profitability. Many income items are also cash inflows. The sales of crops and livestock are usually both income and cash inflows. The timing is also usually the same as long as a check is received and deposited in your account at the time of the sale. Many expense items are also cash outflow items. The purchase of livestock feed (cash method of accounting) is both an expense and a cash outflow item. The timing is also the same if a check is written at the time of purchase. However, there are many cash items that are not income and expense items, and vice versa. For example, the purchase of a tractor is a cash outflow if you pay cash at the time of purchase. If money is borrowed for the purchase using a term loan, the down payment is a cash outflow at the time of purchase and the annual principal and interest payments are cash outflows each year.

Cash Flow Statement of Punj Lloyd


Year ended March 31, 2010 Cash Flows used in Operating Activities (Net Profit before Taxation) Adjustments for Depreciation/Amortization Loss / (Profit) on Sale / Discard of Fixed Assets (Net) Loss / (Profit) on Sale of Non Trade Long Term Investments (Net) Loss / (Profit) on Liquidation of Subsidiaries & ISP Business (Net) Interest Income Dividend on Long Term Investments Unrealised Foreign Exchange Fluctuation (Net) Interest Expenses Amortisation of Foreign Currency Monetary Items Translation Differences Bad Debts/ Advances Written Off Unspent Liabilities and Provisions Written Back Provision for Doubtful Receivable Operating Profit before Working Capital Changes Movements in Working Capital: (Increase) in Inventories (Increase) in Sundry Debtors (Increase) / Decrease in Other Current Assets (Increase) in Margin Money Deposits (Increase) in Loans and Advances Increase in Current Liabilities and Provisions Cash Used in Operations Direct Taxes Paid Net Cash Used in Operating Activities Cash Flows Used in Investing Activities Purchase of Fixed Assets (Including Capital Work in Progress) Purchase of Investments Cash Outflow on Acquisition of Subsidiaries Proceeds from Sale of Investments Proceeds from Sale of Fixed Assets Outflow for Misc. Expenses Dividend Received Interest Received Net Cash Used in Investing Activities Cash Flows from Financing Activities Inflow in Share Capital Share Issue Expenses 72 338,371 (106,475) (7,945,806) (1,499,010) (150,814) 203,155 1,581,986 2 109,873 (7,700,614) (4,995,765) (3,832,746) 404,186 787,558 (1) 345 288,615 (7,347,808) Year ended March 31, 2009

1,770,765 (402,479) 95,320 118,810 (98,322) (2) 503,313 2,207,606 (346,902) (189,719) 80,181 3,751,927 (16,093,979) (5,692,411) 337,988 (578,904) (3,389,536) 15,198,031 (6,466,884) (1,227,020) (7,693,903)

1,462,386 30,163 (363,901) (276,689) (345) 277,499 1,292,129 76,481 (132,684) 52,882 7,252,755 (3,729,198) (8,720,340) (314,941) (479,708) (2,420,500) 4,052,425 (4,359,507) (823,518) (5,183,025)

Increase in Premium on Issue of Share Capital Increase in Short-Term Working Capital Loans Repayment of Long-Term Borrowings Proceeds from Long-Term Borrowings Interest Paid Dividend Paid Tax on Dividend Paid Net Cash from Financing Activities Net Increase / (Decrease) in Cash and Cash Equivalents (A+B+C) Exchange Fluctuation Translation Difference Cash and Cash Equivalents at the Beginning of the Year Cash Outflow due to Disposal of a Branch and a Subsidiary Cash Inflow due to Acquisition of Subsidiaries Cash and Cash Equivalents at the End of the YearComponents of Cash and Cash Equivalents Cash on Hand (Including Cheque on Hand Rs. Nil) Balance with Banks On Current Accounts On Cash Credit Accounts On EEFC Accounts On Fixed Deposits Less : Margin Money Deposits Total

6,972 9,372,124 (1,965,863) 12,114,172 (2,152,226) (121,372) (20,628) 17,233,251 1,838,734 (1,152,203) 6,347,013 (66,270) 24,762 6,992,036 109,388

11,068,258 2,124,550 (7,424,358) 4,379,446 (1,270,907) (78,378) (13,320) 9,017,187 (3,513,646) (94,755) 9,955,414 6,347,013 77,115

3,359,582 98,771 25,082 4,529,206 (1,129,993) 6,992,036

2,506,307 52,264 400,279 3,862,137 (551,089) 6,347,013

3.14 Cash Flow of Jobs 3.14.1 Monthly cash flow of a Job


PARTICULARS Last period Actual CASH OUTFLOWS CHARGED WAGES Budgeted Mar-11 Actual Budgeted

Charged wages SOCIAL COST ON WAGES Employer Cont EPF- wages SALARIES OF HIRED EMPLOYEES INTER-DIVISION COSTS (FROM TWO DIVISIONS) INTRA-DIVISION COSTS (FROM TWO DEPARTMENTS) TEMPORARY WORKERS SUB CONTRACTORS AND CONSULTANTS Sub contractors and consultants COSTS AFFILIATED COMPANIES MATERIAL Consumables CENTRAL SALES TAX CST- MH CST- CG CST- GJ CST- RJ CST- HR CST- PJ CST- JK CST- TN CST- WB CST- AP CST- MP CST- OR

3844065

4200000

555395

420000

76623

588000

58800

780224

1595833

159583.3

3598385

52727

CST- UP CST- BH RENTAL COST OF SCAFFOLDING CHARGED RENTAL COSTS CHARGED INTEREST EXPENSES SITE COST Accommodation Conveyance LC/BG bank charges 352030 22764 61941.94 450000 41666.7 20833.3 16846.8 5 Site consumables and safety gadgets Equipment hired Food and site allowance Fuel and services Insurance cost workmen compensation Local taxes IT costs Medical services Printing and stationery Vehicle hired Telephone and internet Temporary shed/ warehouse TRAVELLING Hotel cost- domestic Ticket cost- domestic 101087 150453.7 83333.3 83333.3 13713 8333.33 8333.33 700 4714 16346 180651 26805 83333.3 41666.7 408333.3 41666.7 41666.7 274 130 8333.33 4166.67 40833.33 4166.67 4166.67 942741 86029 83817 30312 20833.3 3500000 1578333 50000 958333.3 2756 2083.33 350000 157833.3 5000 95833.33 45000 4166.67 2083.33

Other cost- domestic Other site costs Courier and postage Transportation and octroi Engineering services Testing and inspection Repair and maintenance Training and seminar expenses Uniform and Dress Power and water Charity and donation Client entertainment Commission and brokerage CHARGED SALARY INCLUDING SOCIAL COST CHARGED SALARY Charged salary SOCIAL COST ON SALARY Employer Cont EPF- salary Employer Cont ESIC- salary MISCELLANEOUS PROJECT COST OUTPUT TAX CHARGED OTHER COST

36923 25051 4609 4500 811257 9484 11105

41666.7 100 20833.3 83333.3 666666.7 133333.3 125000 110

4166.67

2083.33 8333.33 66666.67 13333.33 12500

2197 26655 17413 300

112500 83333.3 41666.7

11250 8333.33 4166.67

1094348

1458333

97201

145833.3

45463

240000

24000

208333.3

20833.33

TOTAL CASH OUTFLOW

12448993

17002166

739252. 9

1679383

CASH INFLOWS Cash payment received TOTAL CASH INFLOW 5468330 5468330 24312500 24312500 0 2431250 2431250

NET CASH FLOW

-6980663

7310334

-739253

751866.7

Projected Cash Flows from individual projects (in Rs.) Job Job start no. date Job completio n date Cash Outflows Budgeted project expenses 47 Jun-10 May-11 20402600 12448993. 4 Actual Project cost Cash Inflows Estimate job 2917500 0 Actual earned 8972765.2 1 30 -38.7420 Budgeted Margin (%) Actual Margin (%)

d value of revenue

3.15 Job Cash flow Analysis & Interpretation The monthly cash flows from this project show varied results as cash inflows occur only in the months of October, December, January and March. The other months do not show any cash inflows as no payment is received on these months from the client. As there is no cash inflow these months show negative net cash flows. In spite of payment being received march shows a negative net cash flow as the inflows are not enough to cover the cash outflows. Barring few expenses it can be seen that the budgeted costs for most of the listed expenses are extremely high. This shows that funds are not optimally utilized as most of the funds are lying idle. Some expenses are projected at extremely high expected rates as they are more than thrice or four times of the actual costs. The cash position of the project is mostly negative even if the actual costs are well within the limits of the budgeted costs. Though the net monthly cash flows are mostly negative it does not mean that the company is in immediate need of cash which can be funded by short term borrowings as the budgeted costs are quite higher and the companys financial position assures that it can meet the expenses at the stipulated time as and when required. The budgeted costs that are set aside by the company are quite high and it can be reduced by carefully considering certain costs, like, power and fuel costs, repairs and maintenance costs etc. which are projected at four to five times their actual expenses made. Overall this project was a failure as we see that the company incurred a heavy loss of around 38% though the budgeted margin was expected around 30%. This tells us the budgets made for this project were highly inflated. The job order might have looked lucrative but it yielded unfavorable results due to poor forecasts made in this regard.

6.Conclusion
Let us summarize our discussion on the structure and financing of current assets. The relative liquidity of the firms assets structure is measured by current to fixed assets or current asset to total asset ratio. The greater this ratio, the less risky as well as the less profitable will be the firm and vice versa. Similarly, the relative liquidity of the firms financial structure can be measured by short-term financing to total financing ratio. The lower this ratio the less risky as well as profitable will be the firm and vice-versa. In shaping its working capital policy, the firm should keep in mind these two dimensions: relative asset liquidity (level of current assets) and relative financing liquidity (level of short term financing) of the working capital management. A firm will be following a very conservative working capital policy if it combines a high level of current assets with a high level of long term financing (or low level of short term financing). Such a policy will not be risky at all but would be less profitable. An aggressive firm on the other hand would combine low level of current assets with a low level of long term financing (or high level of short term financing). This firm will have high profitability and high risk. In fact, the firm the firm may follow a conservative financing policy to counter its relatively liquid asset structure in practice. The conclusion of all this is that the considerations of assets and financing mix are crucial to the working capital management.

7.Recommendations
There is a great need for effective management of working capital in any firm. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analyzed to determine the working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance current assets by short-term sources only. Keeping in view the constraints of the company, a judicious mix of short and long term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.

9.Bibliography
1. Financial Management by Khan & Jain 2. Financial Management by Prasanna Chandra 3. Financial Management by I.M.Pandey 4. Annual Reports of Punj Lloyd 5. Auditors report, Directors report & Investors report 6. www.punjlloydgroup.com 7. www.google.com