PGDM-(AICTE)

Reliance Retail has total 24stores in Orrisa.The overall most probably dump and
shrinkage items in those stores are as follows-

FRESH FRUITS & VEG ONION

FRESH FRUITS & VEG APPLE RED DELICIOUS(KG)
STAPLES GOLDENDOVE AROMATIC RICE 1KG
STAPLES Hy Kabuli Chana
DAIRY ANIK GHEE 1LTR TIN
BEVERAGES RED LABEL TEA LEAF 950GM
PROCESSED FOOD SMITH & JONES MASALA NOODLES 300GM
BEVERAGES STANDARD HORLICKS 500GM JAR
STAPLES HY LONG GRAIN BASMATI RICE SS

Onion-
Reason of dump-

• Excess delivery of stock from DC.

• Improper handling of of stock by the store worker.
• Customers always prefers which are available in the upper bay and which are
looks fresh, so the old stocks are get damaged.
Prevention-

• Stock should be delivered from the DC according to the selling quantity or

according to the store requirement.
• Stock shod is kept in the proper bay which will be easily get available to the
customers’ by the store workers.
• Fresh onions should be kept separately.
• Damaged stock should be removed from the bay immediately.
• Stock should keep according to the FIFO (First in first out) method in the store.
• Daily overlook should be made by the store manager

APPLE RED DELICIOUS (KG)-

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Reason of dump-

• The quantity of stock which are available in the store are not matched with the
GRN (Goods Received Note) quantity
• Mishandling by the store worker while putting the stock in the bay.
• Availability of excess stock according to the requirement.

Prevention-

• Proper checking of stock whether the quantity is matched with the GRN
quantity or not.
• Stock should be available according to the requirement.
• Stock should be handled properly by the store worker while putting the stock
in the bay.

GOLDENDOVE AROMATIC RICE 1KG—

Reasons of dump-

• Improper storing of stock in the bay.

• Stocks are not kept according to there expiry date.

Prevention-

• Stock should be keep properly in the bay.

• Stock should be keep according to the FEFO (First Expiry First Out) in the bay.

Hy Kabuli Chana—

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Reasons of dump—

• Expiry date is only for 90 days.

• Stocks are not kept on there proper bay.

Prevention-

• Stock should be handled by the store worker while keeping them in the bay and
while selling them to the customers.
• Stock should be kept on the FEFO method on the bay.

ANIK GHEE 1LTR TIN---

Reasons of dump-

• Improper handling of stock.

• Duration is 12 month.

Prevention—

• Stock should be kept according to the FEFO method in the bay.

• It should store in the right bay for easy availability to the customers.

RED LABEL TEA LEAF 950GM----

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Reasons of dump—

• Improper handling of of stock by the store worker.

• Customers always prefer which are available in the front bay and which are easily
available, so the stocks which are kept in the Back Bay are get damaged.

Prevention—

• Handling should be maid properly by the store worker.

• Stock should be kept in FEFO method and in front bay for easy availability to the
customers.
• Each and every quantity stocks should be available in on place.

STANDARD HORLICKS 500GM JAR—

Reasons for dump—

• Not kept in the proper bay, so dump occurs if jars are broken.
• Excess amounts of stocks are kept in small bay.
• All stocks are not kept in one place.
• Stock should not keep according to the quantity wise.

Prevention—

• Should keep in a safe space.

• Stock should be kept according to the FEFO method.
• Selling should be made according to the FEFO method also.
• Stock should be properly counted by the staffs so that no stocks are kept in any
other place in the store.

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• Each and every quantity stocks should be available in on place.

HY LONG GRAIN BASMATI RICE SS—

Reasons of dump---

• Excess amount of stocks are available

• Stocks are getting damaged with in a short time period.
• Mishandling is made while keeping the stock in the store and also while selling it
to the customers.
• Stocks available in the stores are not matched with the stocks in GRN.
• Stocks are kept for a long period of time.

Prevention—

• Stocks should be kept according to the required quantity in the store.

• Proper handling of stocks should be there by the store workers in the time of
selling.
• Stocks should be matched with the GRN quantity.

WORKING CAPITAL

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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
o adequate supply of raw materials for processing;
o cash to pay for wages, power and other costs;
o creating a stock of finished goods to feed the market demand regularly; and,
o 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.

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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:

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o Stock of Cash

o Stock of Raw Material

o Stock of Finished Goods

o Value of Debtors

o 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.

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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.

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

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• 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.

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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

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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 he 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 results 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.

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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

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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

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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.

WORKING CAPITAL MANAGEMENT

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.

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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

o Growth may be stunted. It may become difficult for the enterprise to undertake
profitable projects due to non-availability of working capital.

o Implementation of operating plans may become difficult and consequently the

profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be achieved due to non
availability of the working capital.

o The business may fail to honour its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.

o 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.

o Non-availability of stocks due to non-availability of funds may result in

production stoppage.

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o 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

o Excess of working capital may result in unnecessary accumulation of inventories.

o It may lead to offer too liberal credit terms to buyers and very poor recovery
system and cash management.

o It may make management complacent leading to its inefficiency.

o 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.

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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.

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. Supplier’s Credit

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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. Promoter’s Fund

It is advisable to finance a portion of current assets from the promoter’s funds. They are
long-term funds and, therefore do not require immediate repayment.
These funds increase the liquidity of the business.

Management of Inventory

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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 re-ordering
costs and quantity discounts etc.

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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:-

o To ensure continuous supply of materials, spares and finished goods.

o To avoid both over-stocking of inventory.
o To maintain investments in inventories at the optimum level as required by the
operational and sale activities.
o To keep material cost under control so that they contribute in reducing cost of
production and overall purchases.
o To eliminate duplication in ordering or replenishing stocks. This is possible with
the help of centralizing purchases.
o To minimize losses through deterioration, pilferage, wastages and damages.
o To design proper organization for inventory control so that management. Clear
cut account ability should be fixed at various levels of the organization.
o To ensure perpetual inventory control so that materials shown in stock ledgers
should be actually lying in the stores.
o To ensure right quality of goods at reasonable prices.
o To facilitate furnishing of data for short-term and long term planning and control
of inventory
Management of cash

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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
firm’s manufacturing operations while excessive cash will simply remain ideal without
contributing anything towards the firm’s 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 firm’s 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.

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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

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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.”

Important Terms ---

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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-in-progress) and Receivables (debtors owing you money). The main sources of
cash are Payables (your creditors) and Equity and Loans.

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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 or 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 You increase your
or amount) from suppliers 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.

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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:

o Pressure on existing cash

o Exceptional cash generating activities e.g. offering high discounts for early cash
payment
o Bank overdraft exceeds authorized limit
o Seeking greater overdrafts or lines of credit
o Part-paying suppliers or other creditors
o Paying bills in cash to secure additional supplies
o 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).

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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 is owing.... for what it is owed.

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.

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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.........

o longer credit terms taken with approval, particularly for smaller orders
o use of post-dated checks by debtors who normally settle within agreed terms
o evidence of customers switching to additional suppliers for the same goods
o new customers who are reluctant to give credit references
o Receiving part payments from debtors.

Profits only come from paid sales.

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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 demand 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:

o Who authorizes purchasing in your company - is it tightly managed or spread

among a number of (junior) people?
o Are purchase quantities geared to demand forecasts?
o Do you use order quantities which take account of stock-holding and purchasing
costs?
o Do you know the cost to the company of carrying stock?
o 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.
o How many of your suppliers have a returns policy?
o Are you in a position to pass on cost increases quickly through price increases to
your customers?
o If a supplier of goods or services lets you down can you charge back the cost of
the delay?
o Can you arrange (with confidence!) to have delivery of supplies staggered or on a
just-in-time basis?

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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!).

Remember, a good supplier is someone who will work with you to

enhance the future viability and profitability of your company

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital
utilization.

Ratio Formulae Result Interpretation

Stock Average Stock = x On average, you turn over the value of your
Turnover * 365/ days entire stock every x days. You may need to

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break this down into product groups for

effective stock management.
Cost of Goods Obsolete stock, slow moving lines will extend
(in days)
Sold overall stock turnover days. Faster production,
fewer product lines, just in time ordering will
reduce average days.
It takes you on average x days to collect
monies due to you. If you’re official credit
Receivables terms are 45 day and it takes you 65 days...
Debtors * 365/ =x
Ratio why?
Sales days
(in days) One or more large or slow debts can drag out
the average days. Effective debtor management
will minimize the days.
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
Payables Creditors * 365/
=x discount this will decline. If you simply defer
Ratio Cost of Sales
days paying your suppliers (without agreement) this
(in days) (or Purchases)
will also increase - but your reputation, the
quality of service and any flexibility provided
by your suppliers may suffer.
Current Assets are assets that you can readily
turn in to cash or will do so within 12 months
in the course of business. Current Liabilities
are amount you are due to pay within the
Total Current
coming 12 months. For example, 1.5 times
Current Assets/ =x
means that you should be able to lay your
Ratio Total Current times
hands on $1.50 for every $1.00 you owe. Less
Liabilities
than 1 times e.g. 0.75 means that you could
have liquidity problems and be under pressure
to generate sufficient cash to meet oncoming
demands.

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(Total Current
Assets - Similar to the Current Ratio but takes account
=x
Quick Ratio Inventory)/ of the fact that it may take time to convert
times
Total Current inventory into cash.
Liabilities
(Inventory +
Working
Receivables - As % A high percentage means that working capital
Capital
Payables)/ Sales needs are high relative to your sales.
Ratio
Sales
Current Assets are assets that you can readily
turn in to cash or will do so within 12 months
in the course of business. Current Liabilities
are amount you are due to pay within the
Total Current
coming 12 months. For example, 1.5 times
Current Assets/ =x
means that you should be able to lay your
Ratio Total Current times
hands on $1.50 for every $1.00 you owe. Less
Liabilities
than 1 times e.g. 0.75 means that you could
have liquidity problems and be under pressure
to generate sufficient cash to meet oncoming
demands.
(Total Current
Assets - Similar to the Current Ratio but takes account
=x
Quick Ratio Inventory)/ of the fact that it may take time to convert
times
Total Current inventory into cash.
Liabilities
(Inventory +
Working
Receivables - As % A high percentage means that working capital
Capital
Payables)/ Sales needs are high relative to your sales.
Ratio
Sales

Other working capital measures include the following:

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• 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.

DATA ANALYSIS AND INTERPRETATION ( for east zone )

(Rs in cores)

2006/7 2007/8

A: CURRENT ASSETS:

Inventories: 634.96 686.65

Sundry debtors: 34.13 60.65

Cash and bank balance: 3686.53 3516.46

Other current assets: 212.4 236.46

Loans and advances: 406.42 541.10

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……………………………………………………………………………..

TOTAL: 5041.33 4974.08

B: CURRENT LIABELITIES:

Sundry creditors:

a) On capital a/c: 102.09 272.78

b) on others: 260.74 324.94

Other liabilities 424.64 557.94

Security deposit: 74.66 162.69

Book over draft 9.98 …….

Provisions: 346.49 222.57

… …………………………………………………………

TOTAL: 1218.61 1540.40

WORKING CAPITAL (A-B): 3822.72 3433.68

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RESEARCH OBJECTIVES

• To know about the Dump & Shrinkage percentage in reliance retail, Orissa.

• To recognize the procedure to reduce the dump & shrinkage percentage in the
retail sector. .

• To study the reasons due to which it is lacking.

• To calculate the working capital for the year ended 2006-2008.

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RESEARCH METHODOLOGY

The Research methodology for the present study is outlined below:-

(A) Developing a Research Design:

• Problem Definition
• Type of research adopted
• Method used in the research

(B) Sampling Design:

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• Type of approach followed

• Sample size

(C) Data Collection:

• Basic method adopted
• Questionnaire-Design & Construction

(D) Analysis & Interpretation:

• Developing a research design

Significance of Research
“All progress is born of inquiry. Doubt is often better than overconfidence. For it
leads to inquiry leads to invention” is a famous Hudson Maxim in context of with the
significance of research can be understood. Increased amounts of research make progress
possible. Research includes scientific and inductive thinking and prompted the
development of logical habits of thinking and organization. The role of research in
several fields of applied economics, whether related to business or to the economy as a
whole, ahs greatly. Increased in modern times. The increasingly complex nature of
business and government has focused attention on the use of research and solving
operational problems. Research, as and aid to economic policy, has gained assed
importance, both for government and business. Research provides the basis for nearly all
government policies in our economic system. Research has its special significance in
solving various operational and planning problems of the business and industry. Research
is equally important for social scientists in studying social relationship and in seeking
answers to various social problems.
• To philosophers and thinkers, research methodology, research may mean
a source of livelihood.
• To philosophers and thinkers, research may be development of new
ideas and insights.

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• To literate men and women, research may mean the development of new
styles and creative work.
• To analysis and intellectuals, research may mean the generalization of
new theories.

“Research methodology is a way to systematically solve the

research
Problem. It may be understood as a studying how research is
dined
Scientifically.”
In it way study the various steps that are generally adopted by a
researcher problem along with the logic behind them. It is necessary for the
researcher to know not only the research methods/techniques but also the
methodology. Researchers not only need to know and develop certain indices or
tests, how to calculate the mean, the median or the standard devotion or chi-
square, how to apply particular research techniques. The scope of research
methodology is wider than that of research methods but also consider the logic
behind the methods following order concerning various steps provides a useful
procedural guideline regarding the research process.

• Formulating the research problem.

• Extensive literature survey.
• Developing the hypothesis.
• Preparing the research design.
• Collecting the data.
• Execution of the project.
• Analysis of data.

Hypothesis Testing:

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Generalization and Interpretation

Preparation of the report of presentation of the results, i.e. formal write-up of conclusion
reached.

Research methodology:
Research in common parlance refers to search for knowledge. One can also define
research as scientific and systematic search for pertinent information on specific topics.
In fact, research is an art of scientific investigation.
According to Clifford Woody, “Research comprises defining and refining a problem.
Formatting hypothesis or suggested solution: and at last carefully testing the conclusion:
to determine whether they fit the formulating hypothesis.

Objectives of Research:
The purpose of research is to discover answers to questions through the
application of scientific procedures. The main aim of research is to find out the truth
which is hidden and which has not been discovered as yet. Though each research study
has its own specific purpose, we may think of research objectives as falling into a number
of following broad grouping:
• To gain familiarity with a phenomenon or to achieve new insights into (studies
with this object in view are know as descriptive research studies).
• To portray accurately the characteristics of a particular individual, situation or a
group (studies with this object in view are know as descriptive research studies).
• To determine, with which something occurs or with which it associated with
something else (studies with this object in view are know as diagnostic research
studies).
• To test a hypothesis of a casual relationship between variables (such studies are
know as hypothesis sting research studies).

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Types of Research:
The basic types of research are as follows:
(1) Descriptive v/s Analytical:
Descriptive research includes surveys and fact-finding enquires of
different kinds. The major purpose of descriptive research is description of
the state of affairs, as it exists at present. In social science and business
research we quite often use the term Ex post facto research for descriptive
research has no control over the variables; he can only report what has
happened or what is happening.

(2) Applied v/s Fundamental:

Research can either be applied (or action) research or fundamental (or
basic or pure) research. Applied Research aims at finding solution for an
immediate problem facing a society or an industrial / business
organization, whereas fundamental research is mainly concerned with
generalization and with the formulation of a theory. “Gathering
Knowledge’s sake is termed ‘pure’ or ‘basic research’.

(3) Quantitative v/s Qualitative:

Quantitative research is based on the measurement of quantity or amount.
It is applicable to phenomenon that can be expressed in terms of quantity
phenomenon, i.e. phenomenon relating to or involving quality or kind. For
instance, when we are interested in investigating the reasons for human
behavior (i.e. why people think or do certain things), we quite often talk of
‘Motivation Research’, an important type of qualitative research. The type
of research aims at discovering the underlying motives and desires, using
in depth interviews for the purpose.

(4) Conceptual v/s Empirical:

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Conceptual research is that related to some abstract idea (s) or theory.

Philosophers and thinkers to develop new concepts or to reinterpret
existing ones generally use it. On the other hand, empirical research relies
on experience or observation alone, often without due regard for system
and theory. It is data based research, coming up with conclusion, which is
capable of being verified, by observation or experiment. We can also call
it as experimental type of research.

(5) Some other types of research:

All other types of research are variation is one or more of the above stated
approaches, based on either the purpose of research, or the time required
to accomplish research, or the environment in which research is done, or
on the basis of some other similar factor, from the point of view of item,
we can think or research either as one time research of longitudinal
research. In the former case the research is confined to single time-period,
whereas in the latter is carried on over several time-period. Research can
be field-setting research of laboratory research or simulation research,
depending upon the environment in which is to be carried out. Research
can as well be understood as clinical or diagnostics research. Such
researchers follow case-study methods or in depth usually go deep into the
causes of things or events that interest us, using very small samples and
very deep probing data gathering devices. The objectives of exploratory or
it may be formalized. The objectives of exploratory research is the
development of hypothesis rather than their testing; whereas formalized
research studies are those with substantial structure and with specific
hypothesis to be tested. Historical research is that utilized historical
sources like documents remain, etc. to study events or ideas of the past,
including the philosophy of persons and groups at any remote point of
time. Research can also; be classified as conclusion-oriented and decision-
oriented. While doing conclusion-oriented research, a researcher is free to
pick up a problem, redesign the enquiry as he proceeds and is prepared to

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conceptualize as he wished. Decision maker and the researcher in the case

are not free to embark on research according to his own inclination.
Operations research is an example of decision-oriented research since it is
scientific methods of providing executive departments with a quantitative
basis for decisions regarding operations under their control.

What is a Research Problem?

A research problem, in general, refers to some difficulty, which a researchers
experiences in the context of either a theoretical or practical situation and wants to obtain
a solution for the same.

Selecting the Problem:

The research problem undertaken for study must be carefully selected. The task is
a difficult one, although is may not appear to be so. Nevertheless, every taken from a
researcher must find out his own salvation for research problems cannot be borrowed. A
problem must spring from the researcher’s mind like a plant springing from its own see.
We have to see ourselves and enable him to prescribe for us the right number by
cooperating with him. Thus, a research guide can at the most only help a researcher
choose a subject. However, the following points may observe by a researcher in selecting
a research problem or a subject for research.
(a) Subject that is overdone should not be normally chosen, for it will be a difficult
task to throw any new light in such case.
(b) Controversial subject should not become the choice of an average researcher.
(c) To narrow or too vague problems should be avoided. The subject selected for
research should be familiar and feasible so that the related research material or
sources of research are within one’s reach. Even that it is quite difficult to supply
definitive ideas concerning how a researcher should obtain for his research.
(d) The importance of the subject, the qualification and the training of a researcher,
the cost involved, at a time factor are few other criteria that must also be
considered in selecting a problem.

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(e) The selection of problem must be preceded by a preliminary study. This may not
be necessary.
(f) When the problem requires the conduct of a research closely similar to one that
has already been done. But when the field of inquiry is relatively new and does
not have available a set of well-developed techniques, a brief feasibility study
must always be undertaken.

Research Design:

The formulated problem that follows the task of defining the research problem
that follows the task of defining is the preparation of the design of the research project,
popularly known as the ‘research design’. “A research design is the arrangement of
conditions for collection and analysis of data is a manner that aims to combine relevance
to the research purpose with economy in procedure”.

Features of a good design:

A good design is often characterized by adjectives like flexible, appropriate,
efficient and economical and so on. Generally, the design which minimizes bias and
maximizes the reliability of the data collected and analyzed is considered a good design.
The design that gives the smallest experimental error is supposed to be the best design in
many investigations.
A research design appropriate for a particular research problem, usually involves
the consideration of the following factors:
• The means of obtaining information.
• The availability and skills of the researchers and his staff, if any

• The objectives of the problem to be studied.

• The availability of time and money for the research work.

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Developing a Research Plan:

Research plan must contain the following items:

(1) Research objectives should be clearly stated in a line or two, which tells exactly
what it is that the researcher expects to do.
(2) The problem to be studied while researcher must be explicitly stated so that one
may know what information is to be obtained for solving the problem.
(3) Each major concept which researcher wants to measure should be defined in
operational terms in context of the research project.
(4) The plan should contain the method to be used in solving the problem. An overall
description of the approach to be adopted is usually given and assumption, if any,
of the concerning method to be used are clearly mentioned in the research plan.
(5) The plan must also state the details of the techniques to be adopted. For instance,
if interview method if too used, an account of the nature of the contemplated
interviews procedure should be given. Similarly, if test are to be given, the
condition under which they are to be used. If public records are to be consulted as
sources of data, the fact should be recorded in the research plan. Procedure for
quantifying data should also be written about in all details.
(6) A clear mention of the population to be studied should be made. If the study
happens based, the research plan should state sampling plan i.e. how the samples
is to be identified. The method of identifying the sample should be such that
generalization form the sample to be original population is feasible.
(7) The plan must also contain the method to be used in processing the data statistical
and other to be used must be indicated in the plan. Such methods should not be
left until the data have been collected. This part of the plan may be reviewed by
experts in the field for they can often suggest changes that result in substantial
saving of time and feasible.
(8) Result of pilot test, if any should be reported. Time and cost budgets for the
researcher project should also be prepared and laid down it.

Sampling Design:

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Census and Sample Survey:

All items in any field of inquiry constitute a Universe or Population. A population
complete enumeration of all in the population is known as a census inquiry.

Steps in Sampling Design:

(1) Type of Universe:

The first step in developing any sample design is to clearly define the set
of objects, called technically called the Universe, to be studied. The
Universe can be finite or infinite. In finite universe the numbers of items is
certain, but in case of an infinite universe the number of the number of
items if infinite.

(2) Sampling List:

A decision has to be taken concerning a sampling unit before selecting

sampling. Sampling unit may be geographical one such as state, district,
village etc. it may be a social unit as family, club, school etc. or it may be
an individual.

(3) Source List:

It is known as ‘sampling frame’ which sample is to be drawn. It contains the name of all
items of a universe. It is extremely for the source list to be as representative of the
population as possible.

(4) Size of Sample:

This refers to the number of items to be selected from the universe to constitute a sample.
This is a major problem before a researcher. The size of sample should neither be

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excessively large, nor too small. It should be optimum. Cost too dictates the size of
sample that we can draw. As such, budgetary constraint must invariably be taken
consideration when we decide the samples size.

(5) Parameters of Interest:

For instance, we may be interested in estimating the proportion of person with some
characteristics in the population of in knowing some average or the measure concerning
the population. There may also be important sub-groups in the population about whom
we should like to make estimates. All this impact upon the sample design we would
accept.

(6) Budgetary Constraint:

Cost consideration from practical point of view, have a major impact upon decision
relating to not only the size of a non-probability sample.

(7) Sampling Procedure:

Finally, the researcher must decide the type of sample he will use. There are several
sample designs (explained in the pages that follows) out of which the researcher must
select that design which for a given sample size and for a given cost, has smaller
sampling error.

RECOMMENDATION:

• First and forecast important things that there must be regular feedback.
• Taking by the consumers about Reliance retail..

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• Reliance Retail Ltd. should focus on small cities to increase there sails.
• Image of the Reliance Retail in small towns and cities is not so good as
compression to Bigbazar & Subhiksha so Reliance Retail also focus to create
awareness.
• After the filing the application form by the customer the investigation process has
taken to must time because of this customer fall well so HDFC should increase of
in this case of services.
• After purchasing goods from Reliance retail store some of the customers are not
satisfied with the after sales service
• Customers believe towards the Reliance Retail in major cities attractiveness but
as compare to the minor cities.
• The Reliance Retail Ltd. should adopt surrogate advertising to create awareness
about the facility services provided by it.
• Reliance Ltd should be in close contact with the competitor’s strategy and
chances in the product facilities must be done regularly to fight the competitor’s
brand.

Questionnaire for Customer

Name: Age: Contact no.:

Income level: (a) Less than 5000 (b) Between 5000 to 15000 (c) More than 15000

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Q1. Do you purchase goods from Reliance Retail stores regularly or occasionally?

(a) Regularly (b) Occasionally

Q2. How long you are using goods from Reliance Retail store?

(a) Less than 1 year (b) 1 to 2 year (c) More than 2 year

Q3. Do you recognize new products of Reliance Retail store?

(a) Yes (b) No

Q4. Which new feature do you like most in Reliance Retail store?
(a) Packaging (b) Taste

Q5. Any suggestion regarding new product packaging of Reliance Retail store.?
………………………………………………………………………………………
……………………………………………………………………………………………
…………
………………………………………………………………………………………………

Q6. Which Retail store you like to purchase goods when Reliance Retail store is not
available?
…………………………………………………………….

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Q7 How long you are using ……………………………………………………?

(a) Less than 1 year (b) 1 to 2 year (c) more than 2 year

Q8. Before ……………………………………………Reliance Retail from which stores

you purchase your product?

………………………………………………….

Q9. What is the reason of switch over to Reliance Retail Storey?

………………………………………………………………………………………
……………………………………………………..
…………………………………………………………………………

Q10. Will you like to change your brand?

(a) Yes (b) No

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Thanks for giving your valuable time and views.

BIBLIOGRAPHY

1. Financial Management……..Prasanna Chandra

2. Financial Management…….I.M.Pandey

3. Research Methodology by C.R. Kothari.

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4. Annual Report of Reliance retail east zone

5. Auditors Report, Directors Report and Investors Report.

6. www.Reliance Retail.com
7. www.google.com
Source:
EIU, AT Kearney analysis
TSMG Analysis
The India retail story, Images F&R Research, India Retail Forum2008, businesWorld.

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