1

CHAPTER I
PROFILE OF COMPANY

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BRIEF HISTORY OF THE COMPANY
The company was established on 3.2.1976 as a Pvt. Ltd. Company under the name
of Bathinda Chemicals & Banspati Mills Pvt. Ltd. with Registers of companies Punjab,
Himachal Pradesh & Chandigarh, at Jalandhar. The company initially started solvent
extraction with the capacity of 40 TPD (tones per day) and started processing of Rice
Bean.
In 1979, the capacity of the solvent was doubled to 80 TPD and a 12 TPD
Hydrogenation Plant was installed for producing oil which was financed by PSIDC.
In 1980, the company increased its capacity by installing refinery and oil mill
from its own sources and the capacity of solvent extraction plant was raised upto 100
TPD.
In 1985 the company changed to Bathinda Chemicals Pvt. Ltd. It was converted
into a seemed Public Ltd. Company on 2.1.1989. The company further increased the
capacity of solvent extraction from 100TPD to 150 TPD by raising term loan of Rs. 80
Lacs from PSIDC in the year 1990. In Aug 1991, the company was sanctioned Rs. 120
Lacs from PSICD for installation of fresh solvent extraction plant of 200 TPD and the
capacity of Hydrogenation Plant was raised from 12 TPD to 25 TPD.
With the delicensing of Vanaspati Ghee in New Industrial policy announced on
25.7.199, the company stopped manufacturing hard oil and the Hydrogenation Plant of
company was modified. So as to facilitate the manufacturing of Vanaspati.

ACTIVITY
The company is mainly producing Vanaspati Ghee and Refined-edible oil for
human consumption the products of the company are being marketed in the packets of 15
kg, 5lt, 2lt, 1lt/kg and kg in the North and East (Indian State) the company is having a

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well knitted dealers networks for marketing products and having its sale depots situated in
the states of U.P., Punjab, Haryana, J&K, Rajasthan & H.P besides the union territory of
New Delhi.
The company is marketing its products under the brand name of Rishi Shakti
and star vegetable oil and Murli refined oil and the same got a very good response
from the different sections of the consumers.

RAW MATERIAL
The raw materials of the company are Cotton Seeds, Mustard Seeds, Sun Flower
Seeds, Palm Oil, Soyabean Seeds, Paddy Rice Bean and Film Oil.

PROMOTERS AND THEIR BACKGROUND

BCL was promoted by Mr. Dwarka Dass Mittal whose age is now about 65 years
and he is matric pass and is having business experience of about 35 years. He has been a
director of De oiled Solvent Industry Pvt. Ltd. Kotkapura in the early years of his career.
Regarding organization profile, the management pattern of BCL shows a high
degree of appreciation. Management believes in dignity of labor and increase the morale
and confidence to put the maximum efforts to achieve the objectives by coordinating all
the operational functions of the organization.

PROCESS OF MAKING OIL

Refined oil and Vanaspati Ghee is prepared from soyabean oil, palm oil, cotton
seed oil, rice oil etc. In all types of oil, mainly free fatty acid, color pigments, gums,
waxes etc are present as impurities which are removed during the manufacture of refined
oil. The process of making oil is completed in to different stages.

1. CRUSHING OF SEEDS:When the seeds are crushed, oil of upto 40% is produced and a joint product around
59% to 82% is produced depending upon type of seeds losses during the process arise
between 0.25% to 1.5% by product believes .25 to 1% are produced.

2. REFINING OF SEEDS:The dried oil which is free from all impurities is undergone operation in refinery
plant. The whole process description of making of oil is mainly divided in the three
stages:-

a. Neutralization.
b. Bleaching.
c. Deodorization.
These stages help in removing the odoriferous matters and collectively these three
stages are called as pre-hydrogenation stage.

a) NEUTRALISATION:In the neutralizer vessel crude oil is heated upto 60 to 80 c. After adding caustic lye &
phosphoric acid, it is washed with water and is kept for 4 to 5 hours. Heavy particle i.e.
crams get settled under the oils is transferred for bleaching.

b) BLEACHING:The oil is pumped to the places which consist of mild steel vessel with dish ends
provided with heating coils, agitators & arrangement for evaluation the vessel is heated
upto 120 to 140 degree centigrade through steam oil. After adding bleaching earth upto

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2.5% to 3% it is settled upto 2 hours to remove odors present in this oil fit is pass for third
stage.

c) DEODRAIZATION:The purpose of this operation is to eliminate objectionable odor and flower caused by
volatile constituents which can be removed by steam distillation. The oil is charged in the
Deodorized vessel & heated upto 250 c through vacuum FFA (free fatty acid) is removed.
After this process the oil is processed through the BAL filter system. This is the refined
oil.

3. VANASPATI OIL:In the Vanaspati plant, the purpose of the process is the hydrogenation of oils. All the
same process of refining the oil are charged into the Auto clave vessel and many types of
oils i.e. mustard oil, palm oil, cotton seed oil, filli oil etc are mixed and are heated upto
170 degree centigrade. Nickel catalyst is added in it and it is started with the gear box and
motor system. After sometime, the hydrogenation oil, now the oil has been converted into
Vanaspati Ghee. After this process the Vanaspati is filtered to the post bleacher. Bleaching
earth upto 1% is added in it and Vanaspati is filtered second time through the filter press
then. The temperature of Vanaspati is ready and is sent to the packing division

4. PACKING OF VANASPATI OIL:The Vanaspati is stored in the vessel that is called Choran and Vitamin Ad is added
in it. Then it is packed in the tins, canes and pouches and is stored in the storeroom for
reducing the temperature from 65 to 5 degree centigrade. Now the Vanaspati is ready for
sale in the market.

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PURCHASE CONTROL
AN INTRODUCTION
The purchasing has wider meaning than mere buying. Purchasing is the most important
function of material management. A substantial part of enterprises finance is blocked in
materials. Its function is to produce materials, supplies, services machines and tools at the
most favorable terms consistent with maintaining the desired standard of quality.
Purchasing is the most important function of material management as the moment
an order is placed for the purchase of material a substantial part of the companys
finance is committed which affects cash flow position of the company.

Purchasing programmed should be framed so that the requirements are procured

as and when needed and at a reasonable price. Thus it size of a business concern
permits, there should be separate purchasing department and the responsibility for
purchasing all types of material should be entrusted to this department. Following
are the basic objectives behind establishing a separate purchasing department.
1.

To procure proper quality of material so that production goes on

uninterruptedly.

2.

To develop well supplies relationship which will ensure the best terms of
supply of material?

3.

To ensure the supply of material at the time it is needed by production

department.

4.

Scheduling of purchase by keeping in view of short term and long term

production policies of the concern.

5.

The wastages of material due to spoilage, obsolescence, duplication etc. are

kept at minimum.

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PURCHASE PROCEDURE OF RAW MATERIAL
The raw material for production in BCL are seeds of different types like cotton seeds,
mustard seeds, soyabean seeds, sunflower seeds and raw oils like mustard oil, soyabean,
cotton seed oil and rice bean oil. The purchase of different seeds is done in their
respective seasons. So purchasing is whole year process that is why, a separate
department raw material department has been maintained which requires specific
attention and control. This department ensures that the seeds are procured at minimum
cost, is of best quality and is supplied to the company as and when needed with minimum
wastage of time and efforts.

For purchasing raw material daily purchase/sale contact intimation slip is used whose
specimen is shown here.

In BCL, purchase is made through commission agents. These are called arties who
charge commission for their services. The steps followed for procuring seeds are as
under:-

1. BARGAINS FOR PURCHASE OF RAW MATERIAL:The purchase of R.M is made through authorized commission agents from parties directly
through telephone. Bargains are written for different type of purchase bargain contains
quantities of commodities to be purchased and their rates. It also contains whether it is
F.O.R. or Ex mill purchase. When the purchase of material is on F.O.R basis then all the
expenses of purchase are born by the seller upto the factory of BCL. When the purchase is
on Ex-mill basis. Then the expenses of purchase are born by the BCL from the place of
purchase upto factory.

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2. RECEIPT OF MATERIAL:When the season starts the seeds are arrived at the main gate of the factory through
different types of vehicles like tempos, trucks, trolleys etc. truck drivers note his truck
number to the security guard cat the main gate the security guard takes the vehicle in
factory turn by turn on priority basis.

3. WEIGHTMENT OF MATERIAL:a)

Weightment in case of seeds:

When seeds through the vehicles are taken in the factory premises, their weightment is
done at the weightment bridge situated near the main gate gross weight is filled in the
respective material receipt and vehicle is sent to Godown for unloading of seeds. At the
go downs truks are unloaded by the labourers and vehicle is sent back to the weightment
bridge for weighing the weight of empty vehicle weightment is done and net weight is
calculated by deducting weight of empty vehicles from the gross weight. All this is done
to determine the shortage in leans it of various types of seeds. When the material is
received at the gate 3 copies of material receipt are prepared. Performa of material receipt
is shown here. One copy of material receipt is kept at the gate as a record, second is given
to the driver of the vehicle and the third is attached with the bill and sent to account
department for payment.

b) Weightment in case of crude oil:

In case of crude oil also just oil tankers are weighted and gross weight is measured. Then
oil of tanker is unloaded and empty tankers are weighted and deducted from gross weight
and net weight of oil is determined.

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4. PAYMENT:a) Payment of freight:
The accounts department is responsible for making payments of freight. Payment of
freights is made only when the vehicle is unloaded and material receipt is issued to them,
payment of freights is made on quantity basis.

Payment is calculated on the material receipt at the fixed per metric ton. Payment of
shortage of material is deducted from the drivers. Where the amount of freight exceeds
Rs. 20,000. A TDS is deducted at the rate prescribed at that time i.e. at the rate of 2% +
surcharge. Drivers may himself recover payment of shortage from the party.

b) Payment of seeds:
The accounts department is responsible for the payments of all types of material like seeds
and oils. Payment is made on the basis of terms and conditions made at the times of
purchasing the material.

Purchases of seeds are made on 2 bases: one is at lump sum rate through the different
commission agents and the other is based on oil contents in the seed through the
commission agents and directly from the parties. In case of lump sum rate, payment of
material is made on the basis of quantity received in the factory multiply by the bargain
rate.

In case of purchase based on oil contents a sample is sealed and a sample number is written
on it. After that it is analyzed in laboratory and a lab analysis report is issued by the

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laboratory Incharge lab analysis report shows the name of the party, oil, date of analysis,
tanker number date etc.

All payments are made at the due dates. These dates depend upon the market conditions
prevailing on different states from where the material is purchased. When the payment is
made before the due date, an amount of cash discount is deducted on the basis of days. For
e.g. if due date is after 7 days then after deducting the cash discount, it can be made with in
5 days all payments are made through demand drafts. Payment sheet is maintained by the
accounts department which keeps the record of payment due or paid.

c) Payment of crude oil:

In case of crude oil payment is made on the basis of FFA (gums) and
Contents of co lour (FFA-Fatty free assets). In case FFA and contents of

colour are

more include oil, the oil is of poor quality. And if FFA and contents of colour are less then
crude oil is of better quality samples of oil is received and these are sealed in small
bottles. Then analysis is done in laboratory and a lab report is prepared and FFA and
contents of colour are checked and payment is calculated on this basis and is made on due
date.

DOCUMENTS TO BE USED FOR PURCHASE OF SEEDS

1) PURCHASE BOOK: - It is used for recording purchase of different seeds.
2) MATERIAL RECEIPT: - It is used for determining the net weight of seeds. It contains
various columns upgrading particulars and weight. In particulars vehicle no., Name of
Supplier, Commodity and Quantity are recorded. In weight total fare, packing and net
weight are recorded the Performa of material receipt is shown here 3 copies of

11
material receipt are prepared first is kept at the weight-ment Bridge. Second is
attached with bill and sent to Accounts Departments and third is sent to party.
3) LAB ANALYSIS REPORT: - Lab analysis report is used for recording the details of
oil contents checked in samples of seeds this report shows the Name of Party,
Numbering of Tankers, Date of Analysis etc. Specimen of the Lab analysis report used
in BCL.

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PURCHASE PROCEDURE FOR THE ITEMS OF STORES
Stores refers to the direct and the indirect materials purchased for stock purpose to be
issued to different jobs, work order or departments as and when required for the purchase
for the items of stores the company BCL follow following procedure so that adequate
quantities of stores has to be maintained in the company to meet the emergency situation: Purchase Requisition or Indenting.
Inviting Quotations.
Purchase Order
Receipt and Inspection of Bill.
Checking and passing of bill for payment.
1) Purchase Requisition or Indenting: - A purchase requisition is a form used as a formal
request to the purchasing department to purchase material this form is prepared by the
storekeeper for regular stock materials and by the departmental lead for special
material not stocked as regular items. In BCL lead of department requiring specific
item of spares make an indent and send it to store purchase department. The purchase
requisition is generally prepared in triplicate but in BCL the indenting department
prepares 4 copies of the same out of 4 copies 2 copies are sent to the purchase
department and 1 is sent to stores department and 1 is sent to stores department and 1
is kept by the Head of Department himself the Performa of store department is shown
here. The indents contain the details about the item required. Quantity required, Date
of Purchase etc. Regular Purchase requisitions are prepared when the item of
materials reach at the ordering levels i.e. the levels at which the order for
replenishment should be placed this is done with a view to avoid the shortage of
materials and make available uninterrupted supply of materials to jobs or departments.

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2) Inviting Quotations: - A source of supply of materials must be selected after the
receipt of the purchase requisition. The purchase department usually maintains for
every group of materials a list of the suppliers names and addresses. Quotations may
be invited from these suppliers by issuing tenders to them. On receipt of the quotation
from the suppliers, a comparative statement of various quotations received should be
prepared and the desirable suppliers should be selected. In BCL, in case of purchase
of item whose value is more than Rs. 5000/- quotations are invited. If the value of
material to be purchased is below Rs. 5000/- quotations, then quotations are not
invited, then the enquired are made simply made on telephone from the supplier.
While selecting the supplier to whom order is to be given for the purchase of
materials, the purchase department of BCL keep in mind (i) Manufacturing capacities
(ii) reliability of the suppliers (iii) financial condition of the supplier (iv) the
management of the supplying firm (v) the terms of delivery and payments etc. thus
this concern select that suppliers from whom material is purchased who is dependable
and capable of supplying material of uniform quality at right time and at reasonable
prices.
3) Purchase Order: - After receiving the enquiries, the store department makes a
comparison as on rated and quality & issue the purchase order is the written
authorization to the supplier to supply the particular material. It is the evidence of the
contract between the buyer and the supplier that binds both the buyer and supplier to
the terms under which the order is placed the supplier bound to supply material
according to the terms and conditions of the purchase order and the purchase is
required to accept delivery of and make payments for materials as agreed upon. Thus
in this concern follow up of orders ensures smooth purchase of materials and also safe

14
guards against the closure of the factory due to the non-receipt of materials. Performa
of the purchase order in BCL is shown here.
4)

Receipt And Inspection Of Material:- In BCL, the work of receiving the goods is
entrusted to the storekeeper when the material is received at the gates, entry is made at
the main gate of the concern and 3 copies of the Inward Gate Pass are issued. One
copy is sent to stores and one is retained at the gate then the head of department check
the material regarding its quantity, quality and physical condition. Only then the give
his approval to the store purchase department. In case the receives material is not
according to the standard required then these goods are rejected and sent back to the
supplier. In such case three copies of Outward Gate Pass are prepared. One is sent to
the supplier One is kept at gate and one is kept in stores specimen of outward and
inward Gate Pass is shown here which contains S.No. Particulars, Quantity and
Remarks regarding that particular good or material. Thus, these documents provide a
complete record of the all material received and rejected.

5) Checking And Passing Of Bill For Payment: - When store purchase department
receive the approval from the Head of Departments submits the bill to Accounting
Department along with the order to check both the authenticity as well as the
arithmetical accuracy the quantity and price mentioned is checked as per order.
Having thus verified the bills in all respects, the accounts section certifies and passes
the bill for the payment and on this basis the cashier make the payment. Payment is
made according to the terms agreed in any particulars order. While making the local
payment concern make the payment through cheques and payment outside the city is
made by the Demand Draft. So, this is the purchase procedure for the items of stores
which the BCL follow for the smooth functioning of the concern and to perform
functions effectively.

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CHAPTER II
OUTLINE OF THE STUDY

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OUTLINE OF THE STUDY
The management of working capital is very important. It involves the study of day to day
affairs of the company. The motive behind the study is to develop an understanding about
the working capital management in the running business organization and to help the
company in developing the efficient working capital management. So it helps in future
planning and control decisions.

OBJECTIVES OF THE STUDY

The objectives of the study are as follows:
To analyze the working capital management of the company.
To determine the operating cycle of the unit.
To know the future need of working capital in the running organization.
To find out how the working capital needs are fulfilled.
To find out whether BCL is maintaining the satisfactory level of working capital.

Also to study the following aspects of the working capital management:

a.

Cash management

b. Receivable management
c. Inventory management

SCOPE OF THE STUDY

The study is conducted at "BCL - BATHINDA" for 6 weeks duration. The concept of
working capital i.e. both gross and net working capital is used. To get the proper
understanding of the concepts, balance sheet and profit & loss a/c have been studied the

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scope of study is limited upto availability of financial records and information provided
by employees the study is related to period of last three years.

RESEARCH METHODOLOGY
Collection of data from various department of BCL to analyze the working capital
management of BCL.
Collection of information

(1) Primary data personal interview with senior officials and from finance and accounts
department.
(2) Secondary data -it is available within the company itself (annual reports). Certain
required visits have also been made at the requisite offices.

The tools used for analysis are: Operating Cycle analysis

Ratio Analysis
Common size statement
Schedule of changes in working capital.

The overall position of BCL is studied and analyzed

Suggestions are given on the basis of findings for better understanding of working
capital management.

REPORT WRITING AND PRESENTATION

Report Encompasses - Charts, diagrams

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LIMITATIONS OF THE STUDY
Since this was not the season of cotton purchase and hence the practical process of
procurement of cotton could not be studied.
As the receipts from debtors is directed to the corporate office and hence not much
information regarding the receivable management could be obtained.
Investment of funds are also made by corporate office, so it becomes difficult to
know that how much investment is made in different ways for continuous
availability of funds.

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CHAPTER III
WORKING
CAPITAL
MANAGEMENT

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MEANING OF WORKING CAPITAL
In simple words working capital means those funds that a business require for carrying
out its day to day operations which includes funds for the purchase of raw material,
payment of wages and other day to day operations of business. In other words, working
capital refers to that firm's Capital, which is required for short - term assets or current
assets. Funds thus invested in current assets keep revolving last and being constantly
converted into cash and this cash flow is again converted into other current assts. Hence it
is known as circulating or short - term capital.

CONCEPT OF WORKING CAPITAL

1.

Gross Working Capital

It is simply called working capital refers to the firm's investment in current assets so the
total current assets of the firm are known as gross working capital.

2.

Net Working Capital

It represents the difference between current assets and current liabilities. Net working
capital may be positive or negative. Positive net working capital is that when current
assets are more than current liabilities. In brief we can say that working capital is too
much necessary for the smooth functioning and proper utilization of fixed assets. Gross
working capital and net working capital of BCL for the last three years are as follows:
(In crores)
Particulars

2011-12

2012-13

2013-14

Gross Working Capital

71.36

98.45

90.49

Net Working Capital

65.69

91.91

83.48

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TYPE OF WORKING CAPITAL
1. Permanent Working Capital:
As the operating cycle is a continuous process so the need for working capital also
arises continuously. But the magnitude of current assets needed is not always same; it
increases and decreases over time. However there is always a minimum level of current
assets. This level is known as permanent or fixed working capital.

2. Temporary Working Capital:

The extra working capital needed to support the changing production and sales
activities, is called variable or functioning or temporary working capital. This can be
shown in the following diagram:-

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NEED FOR WORKING CAPITAL
The need for working capital cannot be overemphasized. The need of working capital
arises due to the time gap between production and realization of cash from sales. So the
working capital or investment in current assets becomes necessary need for working
capital. It arises due to following reasons:-

A.

OPERATING CYCLE

"Operating cycle is the time duration requires for converting sales into cash after the
conversion of resources into inventories."

First of all a firm purchase Raw Material, then after some processing it is converted into
work-in-progress and after this further processing is done to convert work-in-progress in
finished goods. After the raw material is converted into finished goods, sales are made.
Sales are no always full cash sales; there are credit sales also. These credit sales after
some period are converted into cash. So the whole process takes the time. This time taken
is known as the length of operating cycle. So operating cycles includes:-

1.

Raw Material conversion period (RMCP)

2.

Work-in -progress conversion period (WIPCP)

3.

Finished goods conversion period (FCP)

4.

Debtors Conversion period (DCP)

So operating cycle can be known as following:-

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If the length of the operating cycle has short length period then less working capital is
required. So working capital requirement is directly related with operating cycle.
Operating cycle may be of two types:

1.

Gross Operating cycle

2.

Net operating cycle

1.

Gross Operating Cycle

Gross Operating cycle is the total time period from the conversion of Raw Material into
finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP

2.

Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to us
for payment to them. So this reduces our requirement of working capital. This also affects
the operating cycle. Operating cycle's length reduces with so many days as provided by

24
the creditors to us. The difference between gross operating cycle and period allowed by
the creditors for payment is known as net operating cycle.
NOC = GOC-CPP

B.

WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS

FOR FUTURE:-

These needs may be of Raw Material or Finished Goods. Sometimes because of non
availability of Raw Material or due to seasonal availability of Raw Material some
advances stock of Raw Material becomes necessary for company. In the similar way due
to sudden arise of demand of finished goods in future more finished goods are kept in
stock. For both reasons more working capital is required because funds will be involve in
these safeties stock.

DETERMINENTS OF WORKING CAPITAL: Followings are the main determinants of working capital.

1. Nature and Size of Business:

The working capital of a firm basically depends upon nature of its business. Since BCL is
a manufacturing unit and has a continuous business cycle and hence the working
capital requirement is large as compared to the trading concerns. The size of business
also determines working capital requirement and it may be measured in terms of scale of
operations. Since BCL has a greater scale of operation so it requires larger amount of
working capital.

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2. Manufacturing Cycle:
The manufacturing cycle also creates the need of working capital. Manufacturing cycle
starts with the purchase and use of Raw Material and completes with the production of
finished goods. If the manufacturing cycle will be longer more working capital will be
required or vice versa. BCL has a manufacturing cycle of 4-6 days that varies
depending upon the type of yarn. The manufacturing cycle being small, so the
working capital required due to this factor is less.

3. Seasonal variation:
In BCL raw material is not available throughout the year. They have to buy raw
material in bulk during the season to ensure an uninterrupted flow and process them
during the year. Generally, during the busy season, a firm requires large working capital
than in the slack season.

4. Production Policy:
Production policy also determines the working capital level of a firm. Whether the
concern has a steady or a fluctuating production policy is the issue that matters. As BCL
has seasonal availability of raw material but the production policy is stable which
means that the production procedure is carried out throughout the year due to the
working capital requirement is high.

5.

Firm's Credit Policy:

The firm's credit policy directly affects the working capital requirement. If the firm has
liberal credit policy, hence the more credit period will be provided to the debtors so this
will lead to more working capital requirement. BCL has a creditor's conversion period

26
of 6 days which is quite good and hence the working capital requirement due to this
factor is small.

6. Sales Growth:
Working capital requirement is directly related with sales growth. If the sales are growing,
more working capital will be needed due to arises need of more Raw Material, Finished
goods and credit sales. BCL has a sale increase of almost Rs. 40 crores, which means
that the working capital requirement will be more due to more production.

7.

Price Level Changes

Changes in the price level also effects the working capital requirements. Generally, the
rising prices will require the firm to maintain larger amount of working capital as more
funds will be required to maintain the same current assets.

As in the previous year there has not been much change in any of wage rates or
cotton prices and hence as such there was not much change in the working capital
requirement due this price level change.

8. Condition of Supply
The inventory of raw material, spares and stores depends on the condition of supply.

Since in BCL in the supply of cotton is seasonal and as the spares are imported and
has to be stocked so the working capital requirement is more as compared to other
industries.

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9. Other Factors:
Certain other factors such as operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facilities, time
lag Etc. also influence the requirement of working capital in BCL. So these are the main
determinants of working capital. The importance of influence of these determinants on
working capital may differ from firm to firm.

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MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT
The management of working capital is concerned with two problems that arise in
attempting to manage the current assets, current liabilities and the inter relationship that
asserts between them.

The basic goal is working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital
is maintained i.e. it is neither inadequate nor excessive. This is so because both
inadequate as well as excessive working capital position is bad for business.

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MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT
There are two major decisions management relating to working capital management: 1.

What should be ratio of current assets to sales?

2.

What should be the appropriate mix of short term financing and long term
financing for financing these current assets?

1.

Current Assets In Relation To Sales:- If the firm can forecast accurately the
factors, which effect the working capital, the investment in current assets, can be
designed uniquely. When uncertainty characteristics the above factors, as it
usually does the investment in current assets cannot be specified uniquely. In case
of uncertainty, the outlay on current assets should consist of base Component
meant to meet normal requirement and a safety component meant to cope with
unusual requirement. The safety component depends upon low conservative or
aggressive in the current assets policy of a firm. If the firm purchases a very
conservative current asset policy it would carry a high level of current assets in
relation to sales. If a firm adopts a moderate current assets policy it would carry
moderate level of current assets in relation to sales, finally is a firm follows a
highly aggressive current assets policy, it would carry a low level of current assets
in relation to sales.

2.

Determining a Short Term and Long Term Financing Mix for Financing of
current assets:- There are three approaches in this regard, which are discussed
below:

30

Hedging Approach

This approach is also called matching approach. In this approach there is a proper
matching of expected life of asset with the duration of fund. Usually, according to this
approach long-term sources are used for financing permanent current assets and fixed
assets & short-term sources are used for financing temporary current assets:

Time

Conservative Approach
In this approach there is more reliance on long-term financing in comparison to
short-term financing. Even some part of the temporary current comparison to
finance from long-term sources because long-term sources are less risky in
comparison to short-term.

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Aggressive Approach
In this approach there is more reliance on short term financing and even a part of
permanent current assets is financed from short-term finance.

In BCL, the current assets are financed from short term sources as well as long term
sources, so they follow conservative approach.

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CHAPTER IV
WORKING
CAPITAL
ANALYSIS

33
WORKING CAPITAL ANALYSIS
OPERATING CYCLE ANALYSIS
Operating cycle refers to the time period which starts from the raw material purchases and
ends with realization of receivable. So it is total time gap between raw material purchases
to total debtors' collection. This is also known as working capital cycle. Operating cycle is
therefore expressed in terms of months or weeks or days. The higher the operating cycle
period, higher the working capital requirement. It comprises of raw material conversion
period, WIP conversion period, FG conversion period and debtors' conversion period and
creditors period.
OC = RMCP + WIPCP + FGCP + DCP-CPP
Where,
OC

Operating Cycle

RMCP =

Raw Material Conversion Period

WIPCP

Work In Process Period

FGCP

Finished Goods Conversion Period

DCP

Debtor Collection Period

CPP

Creditors Payment Period

34
(1)

Raw Material Conversion Period (RMCP)

Average Raw Material Stock

=

-----------------------------------------------

360

Raw Materials consumed during the year

(In crores)

PARTICULARS

2011-12

2012-13

2013-14

Opening Stock of Raw Material

Closing Stock of Raw Material

47.95
38.41

38.41
51.95

51.9
50.22

Average Stock

43.18

45.18

51.06

Raw Materials consumed

RMCP

90.92
171

105.15
155

110.15
167

35
2)

Work in Progress Conversion Period (WIPCP)

Average stock in progress
=

--------------------------------------

360

Cost of Production
(In crores)
PARTICULARS

2011-12

2012-13

2013-14

Opening Stock of WIP

Closing Stock of W1P

1.05
0.99

0.99
1.60

1.61
1.14

Average Stock
Cost of Production

1.02
123.6

1.30
158.45

1.38
188.68

WIPCP

36
3)

Finished Goods Conversion Period (FGCP)

Average Finished Good Inventory
=

--------------------------------------------

360

Cost of Goods Sold

(In crores)
PARTICULARS

2011-12

2012-13

2013-14

Opening Stock of FG

6.31

5.78

3.13

Closing Stock of FG
Average Stock

5.91
6.11

3.13
4.45

1.22
2.18

Cost of Goods Sold

128.27

166.33

195.59

17

FGCP

37
4)

Debtors Conversion Period (DCP)

Average Debtors
=

-------------------------- x

360

Credit Sales
(In crores)
PARTICULARS

2011-12

2012-13

2013-14

Opening Debtors

25.81

18.54

29.60

Closing Debtors

18.54

29.60

31.24

Average Stock

22.17

24.07

30.42

Credit Sales

144.48

184.08

229.28

55

47

48

DCP

38
5)

Credit Conversion Period (CCP)

Average Creditors
=

--------------------------------

360

Credit Purchases
(In crores)
PARTICULARS

2011-12

2012-13

2013-14

Opening Creditors

0.55

2.79

0.89

Closing Creditors

2.79

0.89

1.80

Average Creditors

1.67

1.84

1.35

Credit Purchases

80.92

108.54

108.49

CCP

39
GROSS OPERATING CYCLE
Year
2011-12
2012-13
2013-14

RMCP
171
154
167

WIPCP
3
3
3

FGCP
17
10
4

DCP
55
47
48

GOC
246
214
222

40
NET OPERATING CYCLE
Year
2011-12
2012-13
2013-14

GOC
246
214
222

CCP
7
6
4

NOC
239
208
218

41
ANALYSIS
It is claimed that gross operating cycle of BCL was decreasing in the last two years. It
was 246 days in 2011-12 an then it falls to 214 days in 2013-14. But comparatively this
year, this period has increased to 222 days. This is due to the increase of RMCP from 154
days in 2013-14 to 167 in 2013-14, coming down of FGCP from 10 days in 2013-14 to 4
days in 2013-14 and increase of DCP from 47 days in 2013-14 to 48 days in 2013-14.
Even the CCP has also reduced by 2 days.

42
ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS
OF THE HISTORICAL DATA
There are number of devices to analyze working capital like ratio analysis, common size
statement etc. We will discuss them one by one as follows:

I.

RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making decisions.
The main ratios related with working capital are as above:

LIQUIDITY RATIOS
Liquidity refers to the ability of a concern to meet its current obligations as and when
these become due. It measures short-term solvency of the firm. To measure the liquidity
of a firm, the following ratios can be calculated.

CURRENT RATIO - It may be defined as the relationship between current assets and
current liabilities. This ratio is also known as working capital ratio and measures the
ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and
has the ability to pay its current obligations.
A current ratio of 2:1 is considered to be satisfactory.
Current Assets
Current Ratio =

---------------------Current Liabilities

43
Current Ratio of BCL
Year

Current Assets

Current Liabilities

Current Ratio

2011-12

71.36

5.66

12.6

2012-13

98.44

6.54

15.05

2013-14

90.49

7.21

12.55

ANALYSIS
The current ratio of the unit is above the standard and it guarantees the payment of dues
in time. The current ratio of the company has been considerably high because they had
made are investment in inventories, and also there has been increase in the debtors and
loans and advances which is the main reason for the high ratio of current assets.

Inventories are high because of seasonal availability of raw material but the ratio has
decreased as compared to previous year.

44
LIQUID RATIO - This ratio is also known as quick ratio or acid test ratio. It is a more
rigorous test of liquidity than the current ratio. It is based on those current assets which
are highly liquid. Inventory and prepaid expenses are excluded because they are deemed
to be least liquid component of current assets. A high quick ratio is the indication that the
firm is liquid and has the ability to meet its current liabilities in time and on the other
hand low ratio represents liquidity position is not good.
Quick Ratio =

Quick Assets =

Quick or Liquid Assets

-----------------------------Current Liabilities
Current Assets - Inventory - Prepaid Expenses

Quick Ratio of BCL

Year

Quick Assets

Current Liabilities

Quick Ratio

2011-12

25.36

5.66

4.48

2012-13

40.9

6.54

6.25

2013-14

40.83

7.21

5.66

45
ANALYSIS
According to rule of thumb, it should be 1:1. In all the above years it has been very high
than the rule of thumb and is also increasing due to the increasing debtors and loans and
advances but a slight decrease than previous year.

ABSOLUTE LIQUID RATIO - Absolute liquid ratio shows the relationship between
liquid assets that include cash, bank and marketable securities.

Absolute Liquid Assets

Absolute Liquid Ratio

----------------------------Current Liabilities

Absolute Liquid Ratio of BCL

Year

Absolute Liquid Assets

Current Liabilities

Absolute Liquid Ratio

2011-12

0.93

5.66

0.16

2012-13

0.23

6.54

0.035

2013-14

0.94

7.21

0.13

ANALYSIS
The acceptable standard for this ratio is 0.5:1. Thus, we can say that in all the years, it is
below the standard due to very less cash and bank balance maintained because major cash
receipts and payments are handled by corporate office. It is very less in 2004-05,20052006 and even in 2013-14 its decreasing as no idle cash is kept with the unit.

46

WORKING CAPITAL TURNOVER RATIO - Working capital turnover ratio indicates

the velocity of the utilization of net working capital. This ratio measures the efficiency
with which the working capital is being used by a firm.
Sales
Working Capital Turnover Ratio = ------------------------Net Working Capital

Working Capital Ratio of BCL

Year

Sales

Net Working Capital

Working Capital Turnover

2011-12

144.48

65.69

ratio
2.20

2012-13

184.08

91.90

2.02

2013-14

229.28

83.48

2.75

47

ANALYSIS
This ratio indicates the number of times the working capital is turned over in the course of
a year. A high working capital ratio indicates the effective utilization of working capital
and less working capital ratio indicates less utilization. This ratio has reduced from earlier
but still stock is major part of net working capital and their is a slight increase in 2013-14.

48
II.

COMMON SIZE STATEMENT ANALYSIS

This analysis is mainly to see the composition of working capital. Its purpose is to see the
%age of each asset to the total asset and %age of each liability to total liability.

COMMON SIZE STATEMENT

(In crores)
PARTICULARS

2011-12

2012-13

2013-14

AMT

AMT

AMT

Inventories

46.00

64.46

57.54

58.45

53.66

59.30

S. Debtors

18.54

25.98

29.61

30.07

31.24

34.52

Cash & Bank

0.93

1.30

0.23

0.23

0.93

1.03

Loan & Advances

5.89

8.25

11.06

11.23

4.65

5.14

TOTAL

71.36

100

98.44

100

90.49

100

S. Creditors

2.79

49.29

0.89

13.60

1.80

25.68

Advances

0.63

11.13

0.44

6.72

0.36

5.14

Other Liabilities

2.22

39.22

5.18

79.2

4.49

64.05

Security Deposits

0.02

0.35

0.03

0.45

0.36

5.14

TOTAL

5.66

100

6.54

100

7.01

100

CURRENT ASSETS

CURRENT LIABILITES

49
Analysis 2013-14
A big portion of current assets are involved in inventories near about 59% and sundry
debtors about 35%. The shares of loan and advances have also decreased with the figures
about 5%. Although the share of cash and bank balances have raised from .23% last year
to 1% this year.

On the other hand sundry creditors at 25.68% and other liabilities at 64% from the major
portion of current liabilities.

So altogether we may say that in 2013-14, current assets have increased due to increase in
inventories, debtors and loans and advances as compared to previous year. While on the
side of current liabilities though this has also increased due to increase in sundry creditors
and security deposits but this increase is compensated by increase in assets.

Hence the working capital requirement of yr 2013-14 is the highest as compared to last 3
year.

50
Schedule of changes in working capital (2011-12)

Particulars

Opening

Closing

Effect on working capital

Increase
Decrease

Current assets
Inventories
Debtors
Cash & bank
Loans& advances
Total

46.00
18.54
0.93
5.89
71.36

57.54
29.61
0.23
11.06
98.44

11.54
11.07

Current liabilities
Creditors
Advances
Other liabilities
Security deposit
Total
Working capital (C.A-C.L)

2.79
0.63
2.22
0.02
5.66
65.70

0.89
0.44
5.18
0.03
6.54
91.90

1.90
0.19

Net increase in working capital

26.2

Total

91.90

0.70
5.17

2.96
0.01

26.2
91.90

29.87

29.87

51
Schedule of changes in working capital (2013-14)

Particulars

Opening

Closing

Current assets
Inventories
Debtors
Cash & bank
Loans& advances
Total

57.54
29.61
0.23
11.06
98.44

53.66
31.24
0.93
4.65
90.49

Current liabilities
Creditors
Advances
Other liabilities
Security deposit
Total
Working capital (C.A-C.L)

0.89
0.44
5.18
0.03
6.54
91.90

1.80
0.36
4.49
0.36
7.01
83.48

Net increase in working capital

Total

91.90

Effect on working capital

Increase
Decrease
3.88
1.63
0.7
6.41

0.91
0.08
0.69
0.33

8.42

8.42

91.90

11.53

11.53

52

CHAPTER V
CASH MANAGEMENT

53
CASH MANAGEMENT
Cash management refers to management of cash balance and the bank balance and also
includes the short-term deposits. The cash is important current asset for the operation of
the business. Cash is the most liquid and can be used to make immediate payments. The
term cash includes coins, currency and cheques held by the firm and balances in its bank
accounts. Sometimes near- cash items such as marketable securities of bank item deposits
are included in cash.

A financial manager is required to manage the cash flows (both inflows and outflows)
wising out of the operations of the firm. For this he will have to forecast the cash inflows
from sales and outflows for costs etc. This will enable the financial manager to identify
the timings as well as amount of future cash flows. Cash management does not end here
and the financial manager may also be required to identify the sources from where cash
may be produced on a short-term basis or the outlets where excess cash may be invested
for a short term.
Cash is the basic input needed to keep the business running on continuous basis. Cash
Shortages will simply disturb the firm's manufacturing operations where excessive cash
will simply remain idle. Thus, firm should keep sufficient cash neither more nor less.
Hence, a major function of the financial manager is to maintain a sound cash position.
Cash management is one of the key areas of working capital management. Cash
management is concerned with the managing of:
Cash inflows and outflows of the unit
Cash flows within the unit
Cash balance held by the unit at a point of time by investing surplus
cash.

54
MOTIVES FOR HOLDING CASH
Transaction Motive
It means a firm holds cash to conduct its business in the ordinary course, so enough cash
for smooth business is required for transaction motive, as it is needed to make payments
for purchases, wages and salaries, taxes, dividends etc.

Precautionary Motive
Under this motive cash is held to meet contingencies in future. There may be so many
reasons due to which the emergency of cash arises. These reasons can be:
i.

Sudden rise in the demand which leads to more production

ii.

Due to inflation

iii.

Due to any mis happening in future like loss by fire theft etc. the cash is held for
precautionary motive in advance. This cash may be held as marketable securities
that are highly liquid and low risky.

Speculative Motive
The speculative motive relates to holding of cash for investing in profit making
opportunity as and when arises. The opportunity may arise in securities, in material
purchasing or in any other type. By holding cash for speculative motive, the firm can
choose most profitable opportunity.

In BCL, it holds cash only for transaction motive. Speculation and precautionary motives
cash is held by corporate office. If the BCL requires some more cash to meet any future
contingency then it informs about it to corporate office and corporate office sends cash
BCL as per requirement. But the BCL has to give the reasons for extra cash to corporate

55
office. The Firm should evolve strategies regarding the following four facets
of cash management:

1.

1.

Cash Planning

2.

Managing the cash flow

3.

Optimum cash level

4.

Investing surplus cash

CASH PLANNING

Cash planning is a technique to plan and control the use of cash. Cash planning help to
anticipate future cash flows and reduces the possibility of idle cash. Cash planning may
be done on daily, weekly and monthly basis. Cash budget is the most significant device to
plan for and control cash receipt and payments. The unit under the study makes cash
planning through following tools:
Cash Budget
Rolling cash flow statement
Daily cash flow statement

The cash budget is a summary statement of the firm's expected cash inflows and outflows.
The cash budgets are prepared by the firm on monthly and yearly basis. Their estimates
show the requirement of cash in the unit.

Another device used for cash planning is six monthly rolling cash flow statement
prepared on monthly basis. This statement shows the projections of inflows and outflows
of cash during the next six months. This statement can help in taking various decisions, if
the unit wants to make any capital payment, these statements can tell when there is

56
surplus of cash and payments can be made during the month. Daily cash flow statement is
prepared to see the daily cash position. There estimations are sent to corporation office at
Ludhiana so that needed cash is obtained at right time.

2.

MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and
outflows without any loss to the unit and without impairing its goodwill in the market.
These are made at head office Ludhiana so the main source of cash inflows to BCL is the
cash credit limit, which is as follows:
Banks

Main Limit (in lakhs)

Sub-limit transfer to BTI Unit

limit

% share

(in lakhs)

Canara Bank

3950

31%

200

State Bank of India

3600

28%

50

Bank of Baroda

1200

9%

State Bank of Patiala

1800

14%

UTI Bank

600

5%

Punjab National Bank

600

5%

Corporation Bank

300

2%

HDFC Bank

550

4%

Standard Chartered Bank

200

2%

12800

100%

Total

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for
fulfilling day-to-day requirements of working capital. The daily bank-position of sublimits is faxed to H.O. for monitoring daily bank position. In case of drawn in sub-limits

57
the funds get transferred from main limits. The interest rate paid for this is near about
10%. The cash credit limits are sanctioned by the bank against the hypothecation stocks
and fluctuating assets as security.

The unit can withdraw from these limits as and when needed. The amount received from
the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash
management the surplus funds are transferred to other units if those units need cash thus
increasing the overall profitability.

Main outflow of the unit is on raw material cost. Different types of raw material are
purchased from different states. Normally cotton is purchased during peak season when
good quality cotton is available, generally payment for cotton is made when cotton is
received in the mill, and credit period depends upon the states from which cotton is
purchased.

Cash outflows also arise on account of purchase of stores, spares and ail other material
normal credit for these products is mainly 30 to 60 days and full credit period is used.

3.

DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the
optimum level, the cost of excess cash and danger of cash deficiency should be matched
to determine optimum level of cash balances. The unit always keep 2.50 lacs for the
routine expenses, around the days of wages the amount is approx. 10 lacs per day is kept

58
in hand, thus the unit maintains the appropriate amount of cash balance and meets the
firms obligations as and when they due.

4.

INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to
maintain high level of assets during cotton season, which falls between October to March.
During April to September the company gets its cash credit limits reduced in the
respective banks. The company has very good system of managing its current assets. The
current assets of the unit are managed at corporate level and the unit seeks funds
according to their requirements calculated on day-to-day basis. Hence there are no idle
funds at unit level.

As the funds are monitored / controlled at corporate level, therefore, it becomes the prime
responsibility of H.O. to have a good policy of investing idle funds in an appropriate
security keeping in view the requirement of funds in the future and liquidity of the
security in which the investment is being made.

59

CHAPTER VI
RECEIVABLE
MANAGEMENT

60
RECEIVABLES MANAGEMENT
Accounts receivables are simply extension of credit to the firm's customers, allowing
them a reasonable period of time in which to pay for the goods. Most firms treat accounts
receivables as a marketing tool to promote sales and profits. Every firm must develop a
credit policy that includes setting credit standard, defining credit terms and employing
methods for timely collection of receivables. The receivables (including the debtors and
the bills) constitute a significant portion of working capital and are an important element
of it. The receivables emerge whenever goods are sold on credit and customers
receivables are created when a firm sells goods or services to its customers and accepts,
instead of the immediate cash payment the promise to pay within specified period. Thus,
receivables are a type of loan extended by the seller to the buyer to facilitate the purchase
process.

Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up
the sale, which ultimately results in pushing up the profits earned by the firm. At same
time selling goods on credit result in blocking of funds in accounts receivables.
Additional funds are required for operating needs of business, which involves extra costs
in terms of interest. Moreover, increase in receivables also increase chances of bad debts.
The creation of accounts receivables is beneficial as well as dangerous. Receivables
Management generally means what type of credit policy a firm should adopt so that sales
and profits can be promoted on die one hand and funds can be economically utilized on
the other hand.

So the receivables management must be attempted by adopting a systematic approach and

considering the following of receivables management:

61
(1)

THE CREDIT POLICY

(2)

CREDIT CONTROL

1. CREDIT POLICY
It may be defined as the set of parameters and principles that govern the extension
of credit to the customers. This requires the determination of
(i)

The credit standard i.e. The conditions that the customers must meet
before being granted credit and

(ii)

The credit terms i.e. the terms and conditions on which the credit is
extended to the customers.

These are discussed as follows:

The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of
the customers. Therefore, to be on a safer side, it must set credit standard which should be
applied in selecting customers for credit sales. The credit standards of a firm represent the
basic criteria for the extension of a credit to customer.

So the credit standard is the combination of three Cs

These are:
a. Character of a person It refers to the customers willingness to pay.
b. Capacity of a person It refers to the customers ability to pay. It is evaluated by
financial position of the firm.
c. Condition of a person It refers to the economic conditions which effect the
customers ability to pay.

62
Credit Terms
The credit terms refers to the set of stipulation under which the credit is extended to the
customers. The credit terms may relate to the following:
(a) Credit Period The credit period is an important aspect of the credit policy. It refers
to the length of time customers are allowed to pay for their purchases. It may
differ from one market to another market. The credit period generally varies from
15 days to 60 days. In some cases the credit period may be zero and only cash
sales are made. It refers to the time duration in terms of net date e.g. if a firms
credit terms are net 30; it means the customers are expected to pay within 30
days from the date of sales. As much the credit period will be shorter, it will be
beneficial for a firm. But the firm has to lengthen its credit period to increase
sales. But one must compare the cost of extended credit with the incremental
profits. If this cost is less then it will be beneficial for company to increase the
credit period.
(b) Discount Terms It is reduction in payment offer to customer to induce them to
repay credit obligation within a specified period of time. In practice credit terms
would include:
(i) The rate of cash discount
(ii) The cash discount period
(iii)

The net credit period

1. CREDIT POLICY OF BCL

BCL not directly make sales. Sales are made by corporate office directly. So the sales
process is centralized. As the sales process, the corporate office also collects debtors
directly. Corporate office just receives the amount from the debtors. But it does not have

63
any record of outstanding debtors. It sends the credit note to BCL after receiving amount
against any debtors. So record for outstanding debtors is maintained by BCL itself. BCL
sends fortnightly reports to corporate office that records the data about the outstanding
debtors for different periods. In these reports debtors outstanding for one month or six
months are shown separately. In this way, corporate office comes to know about age
segments of different customers. Corporate office may avoid selling goods to those
customers who have not paid for a long period.

CREDIT POLICY VARIABLES

1. Credit Standards - BCL provides credit to customers after getting information about
that customer. For this market research is done by marketing department to know
about reputation of customer in the market and financial position of him. From the
records of customers having BCL and from financial record of those customers, the
ability to pay is checked. Thus customer is only known after getting information about
him and then credit is provided.

2. Credit Terms
(a) Credit Period- For different products BCL provide different credit period. These
credit terms are according to the nature of product which are following:
For Tyre Cord

45 days

To customer of cotton yarn

15 days

Sale to agents

10 days

(b) Cash Discount

In case of cotton yarn
Advance payment

1% C.D. prior to material dispatch

64
After 48 hours

0.85%

With in Week

0.50%

15 days credit

Interest free

Afterwards

18% p.a. interest chargeable

2. CREDIT CONTROL
The next important step in the management of receivables is the control of these
receivables. Following are the directions for controlling the receivables.

(1) The Collection Procedure The overall collection procedure of the firm should
neither be too lenient nor too strict. A strict collection policy can affect the
goodwill and damage the growth prospects of the sales. If a firm has a lenient
credit policy, the customer with a natural tendency towards slow payments may
become slower to settle his accounts. One possible way of ensuring early
payments from customers may be to charge interest on over due balances.

(2) Monitoring of receivables To control the level of receivables, the firm should apply
regular checks and there should be a continuous monitoring system. For this,
number of measures are available as follows:
(i)

A common method to monitor the receivables is the collection period or

number of days outstanding receivables.

(ii)

Another technique available for monitoring the receivables is known as

ageing schedule. Ageing schedule down book debts according to the length
of time of which they have been outstanding. The ageing schedule
provides more information about collection experience. It helps to shot out

65
the slow paying debtors.

The Performa of the ageing schedule prepared by the BCL is as follows:

AGEING SCHEDULE
Age Classification

Amount(in lakhs)

0 15 days

1267.20

15 30 days

341.96

31 60 days

406.32

61 90 days

555.00

91 120 days

154.41

121 180 days

41.41

More than 180 days

370.38

CREDIT CONTROL
Collection efforts made by BCL:
Due to cut-throat competition BCL has to make credit sales. To collect the funds Oswal
group has adopted a decentralized method. Oswal group has established its collection
centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from
the debtors and send it to corporate office. The number of collection centers in a
particular city depends upon the number of customers to minimize the bad debts and to
accelerate the collections. 1.5% commission is also paid to agents and 0.75 % in case of
tyre cord to collect debtors. This percentage is only on the basis of the realization amount.

66
ANALYSIS OF EFFICIENCY OF RECEIVABLES
MANAGEMENT IN BCL

Debtors Turnover Ratio (DTR)

This ratio indicates the number of times average debtors are turned over during a year.
The higher the value of debtor turnover ratio more liquid is the debtors. Similarly low
debtor turnover ratio implies less liquid debtors.
Sales
Debtors turnover ratio =

---------------Avg. Debtors

Year

Sales

Avg. Debtors

DTR

2011-12

144.48

22.17

6.52

2012-13

184.08

24.07

7.64

2013-14

229.28

30.42

7.54

Debtor Conversion Period (DCP)

The average no. of days for which a firm has to wait before its receivables is converted
into cash.
360
DCP =

-----DTR

67
Year

DTR

DCP

2011-12

6.52

360/6.52 = 55

2012-13

7.64

360/7.64 = 47

2013-14

7.54

360/7.54= 48

Analysis
The DTR ratio in 2011-12 was 6.52 times which has been increased to 7.64 in 201112and 7.54 in 2013-14. And regarding DCP, it was 55 days in 2004-05, which has
decreased to 47 in 2011-12and 48 in 2013-14.

Thus high DTR ratio indicates more efficient management of debtors because it means
less collection period of debtors. Debtor's collection period has been decreasing from last
two years that shows management is taking step to collect the dues.

So we can conclude receivable management of BCL quiet sufficient.

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CHAPTER VII
INVENTORY
MANAGEMENT

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INVENTORY MANAGEMENT
Inventory constitutes the most significant part of current assets. Approximately 60% part
of current assets is inventories. So the proper management of inventory is required for
successful working capital management. As the larger amount of funds is involved in the
inventories, so it must be carried with care for proper utilization of funds.

Nature of Inventories
In inventories we include:
a. Raw Material: There are those basic inputs that are converted into work-inprogress through the manufacturing process.
b. Work-in-Progress: These inventories are semi-manufactured products. Further
processing has to be done of these products.
c. Finished Goods: These are completely manufactured products. These products
are those that are ready for sale.

Another type of inventory which is not directly related with production but facilitate in
production process are supplies. Cleaning material, oil, fuel, electric tube etc are the
supplies.

OBJECTIVES OF INVENTORY MANAGEMENT

There are so many objectives of inventory management. These objectives may differ from
firm to firm. The main objectives of inventory management are:
To make adequate investment in inventories so that funds can be best utilized.
Smooth production in present and future.
Smooth and uninterrupted sale processes.

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Minimize the cost related with inventories.
To take advantage of price fluctuations.

INVENTORY MANAGEMENT TECHNIQUES

For inventories management the two questions must be answered: How much should be ordered?
When should it be ordered?

To get answer of these two questions we use two techniques which are as follows:

1)

ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to
know how much we must order in single time. So that all the cost related with inventory
are minimum. Determining an optimum inventory level involves two types of costs (a)
Ordering Cost and (b) Carrying cost. The EOQ is that inventory level, which minimizes
the total of ordering and carrying costs.
a. Ordering Costs - All these costs which are incurred in placing one order. It
includes; requisition, transportation, receiving, inspecting, clerical and staff
services. Ordering costs are fixed per order. Therefore they decline as the order
size increases.

b. Carrying Costs - Cost incurred during the period inventory is lying in the stores is
called carrying cost. It includes storage, insurance, handling, and taxes. Carrying
costs vary with inventory.

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To calculate economic order quantity there is formula:

EOQ

2AO/C

Annual requirement

Ordering cost per order

Carrying cost of inventory

Where,

2)

REORDER POINT

Reorder point is that inventory level at which an order should be placed to replenish the
inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage
(c) EOQ.

Lead Time is the time normally taken in replenishing inventory after the order has been
placed.

Average Usage is the inventory used on average daily basis or average weekly basis.
So, Reorder Point

Lead Time x Average Usage

If the firm also maintains safety stock then the reorder point will be:
Reorder Point =

(Lead Time x Average Usage) + Safety Stock

So when the inventory of reorder point will be in store then the order will be placed for
purchase of inventory. In this way, the production process will not stop because the
inventory will be available for that period.

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INVENTORY MANAGEMENT IN BCL
Inventory Management of BCL is good. BCL has a different stores department. All the
inventories except raw material purchases are handled by stores department. Stores
department does its work very efficiently.

INVENTORY PLANNING
For the planning of inventory requirement, budgets are prepared by different departments
as per requirements. The material issued during the budget period will not be more than
the budget. This rule is strictly followed. For cotton, requirements are planned in
consultation with production department. Stores department have nothing to do with it.

PURCHASE OF RAW MATERIAL

As in BCL raw material is cotton. First of all the requirement for cotton are determined by
the production department than this requirement is sent to commercial departments.
Commercial departments send these requirements to corporate office in detail. Then
corporate office directs the cotton purchase office to purchase cotton in bulk not only for
BCL but also for the other units of Oswal Group. Cotton is generally received in lots so
one lot consists of 55 or 110 bales. As the cotton has seasonal availability, so the
purchasing of cotton is made within the period of October to march. For the other months,
cotton is purchased within these months. That is the reason BCL has high investment in
cotton.

DAILY REQUIREMENT OF COTTON

For production daily requirement of cotton is 250 bales and when the full capacity of 3 rd
unit gets started then the average requirement of cotton bales will reach to 365 bales.

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The total daily production is 50000kg/day.

STORAGE CAPACITY OF BCL

Regarding Raw Material Inventory, BCL has 10 godowns. The capacity of 10 godowns is
45000 bales approximately.

If capacity of store is exhausted in unit then it has private storage facility to store cotton.
Regarding Finished goods Inventory, BCL has four godowns. Two godowns are for unit
I for domestic and export purpose, one godown is for unit II and its expansion, at last
remaining one godown is with Unit-III. These godowns do not have electric fitting
because cotton is highly inflammable.

ISSUING OF INVENTORY
When any department requires any inventory, it sends its requirement to stores
department. The maximum time within the requirement must be met is 72 hours.
Material is issued on the basis of monthly weighted average method.

INSPECTION OF INVENTORIES
Inspection of inventory is made at the end of month randomly. The stock taking of all the
items is not possible keeping in view number of items.

SAFETY STOCK OF INVENTORIES

For the continuous production process, safety stock of inventories is maintained. In case
of cotton atleast 15 days requirements must be in hand every time. For other inventories
stock is maintained according to supply period and as per their requirement.

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INVENTORY CONTROL
Inventory control is done by budgets. As the budgets are prepared for the planning
purpose. Total requirements for inventory during financial period are determined by
budget. When the material is issued to any department then the total amount of material
issue is deducted from the budget of that good and balance is calculated, only this balance
quantity of inventories will be issued during the remaining financial period. These records
are maintained on daily basis. For different units, the records are prepared separately.

For inventory control not any ABC analysis or VED analysis is done. The company also
doesnt follow standardized system of inventory like EOQ. In case of raw material as the
input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the
cotton season. In case of spares & stores, the inventory is easily available in market;
therefore, the same is procured on requirement basis. The company always maintains
stock of critical items, the failure / non-availability of which can cause less of production.
As all the units of group are in spinning the stock of critical items, where the high value is
involved in financial terms, the inventory is maintained in single unit. This could save lot
of money which can be utilized in another area and it also helps to maintain inventory at
optimum level.

So we can say that overall inventory management of BCL is quite satisfactory.

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ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN BCL

INVENTORY TURNOVER RATIO

It indicates the number of times the stock has been turned over during the period and
evaluates the efficiency with which the firm is to manage inventory.

Cost of Production
Inventory (Raw Material) Turnover Ratio = ---------------------------------Average Raw Material Stock

Year

Cost of Production

Avg. Stock of RM

ITR

2011-12

123.6

43.18

2.86 times

2012-13

158.4

45.18

3.50 times

2013-14

188.68

51.06

3.69 times

ANALYSIS
The inventory turnover ratio has increased from 2.86 times in 2011-12 to 3.50 times. It is
due to efficient inventory management because in 2005 even unit -3 has started
production and as such inventory is moving more frequently.
INVENTORY TO WORKING CAPITAL RATIO
This ratio is usually calculated to study the liquid financial position of business
enterprises.
Inventory
Inventory to working capital ratio

-------------------Working Capital

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Year

Inventory

Working Capital

Ratio in %age

2011-12

46.00

71.36

64.46

2012-13

57.54

98.45

58.44

2013-14

53.66

90.49

59.30%

ANALYSIS
Too high and too low investment in inventory is not good for company. In 2011-12 it was
64.46% of gross working capital that has been decreased to 58.44% in 2011-12and
58.44% in 2013-14. As it has reduced but still inventories constitute a large part of gross
working capital because raw material is available seasonably which shows more blockage
of money.

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CHAPTER VIII
FINDINGS,
SUGGESTIONS
&
CONCLUSION

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FINDINGS
BCL is expanding in terms of quality. It has initiated the production of two new types
of yarns -Lycra and Slub.

BCL has a well established R & D Deptt which provides checks at

all stages of

production to ensure qualitative yarn manufacturing.

The liquidity position of BCL is good enough although absolute liquid ratio being
below the standard due to the fact that all cash is maintained at corporate office
,Ludhiana and is provided timely when demanded .so there remains no need of
maintaining even the standardized amount of absolute liquid assets.

They have a good inventory policy in terms of stores which facilitates economy in
operation in case of default of machine. That is, the store items of critical nature and
involving high value are maintained in a single unit to avoid blockage of large amount
in stores.

Working capital financing decision is taken at corporate office. The funds are raised
from cash credit, short term loans, bills discounted, pre export credit etc.

The exports of the unit have been reduced slightly from the previous year due to
certain inter-unit adjustment with regard to proportion of domestic sale and export
sale from sales tax point of view.

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The company is enjoying the facility of 'Anywhere Banking' on his CC limit resulting
in to saving in Demand Draft commission, convenience to customers, quick receipt
of payment and saving in transit time for making payment.

The operating cycle of BCL is very high due to the high raw material conversion
period because its raw material cotton is a seasonal product and has to be purchased
for the whole year in advance.

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SUGGESTIONS
Management should make the proper use of inventory control techniques like fixation
of minimum, maximum and ordering levels for all the items for less blockage of
money.
The unit should also adopt proper inventory control like ABC analysis etc. This
inventory system can make the inventory management more result oriented. The EOQ
can be followed in stores.
The corporate office makes the investments of surplus funds and the unit is not
generally involved while taking decisions with regard to structure of investment of
surplus funds. The corporate office should involve the units so as to better ascertain
the future requirements of funds and accordingly the investments are made in
different securities.
The company should consider all the factors while determining working capital
requirement so that it may not have any difficulty later on.

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CONCLUSION
On studying the working capital management of BCL we can conclude that the working
capital management of BCL is fair enough. BCL has sufficient funds to meet its current
obligation at time when arise which is due to its high profitability and efficient
management of funds.

Cash management and receivables management are also satisfactory because of

centralized control on them. Cotton for the all units of OSWAL group is purchased by
corporate office in bulk which is also the best way to achieve economy. Safety measures
for inventories are also quiet sufficient in BCL. Overall, the working capital management
policy of BCL is quite efficient and works as an advantage to the unit in enhancing its
goodwill.

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BIBLIOGRAPHY

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd.

Khan M.Y and Jain P.K, Financial management; Tata Me Graw Hill.

Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc Graw Hill.

Annual Reports of BCL.