Beruflich Dokumente
Kultur Dokumente
PART-I
CHAPTER:1
Introduction of the Asarwa Mills Limited.
In 1972 Bengal Tea took over Asarwa Mills and begun operation with
the goal of developing a latest technology textile mill and to foster
global market in the field of cotton yarn. In order to improve the
quality of its products as also the productivity of its plant to be
competitive in the industry, the company has been modernizing its
plants by replacing old, obsolete and worn out equipment with the
state-of-the art high speed equipment.
During last decade, the company has invested in its textile unit about
Rs. 67 crores for modernizing its spinning section including installation
of power plants of 4.1 MW.
Asarwa Mills, a technology savvy vintage unit has the most modern
equipment for spinning. It produces quality cotton yarn, synthetic and
blended yarn. It has a strong presence in both domestic and global
markets. Now Asarwa Mills has quality management system as per ISO
9001:2000.
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Working Capital Management
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These costs are not adjusted to reflect the impact of the changing value
in the purchasing power of money.
(a) High speed Air jet Eurotec looms of wider width installed.
(b) One Air Compressor of 4000 CFM installed.
(c) Electronic Jiggers equipped with inverter installed.
Innovations
(a) Manufacturing of value added fabrics.
(b) Power savings by 3000 units per day.
(c) Increase in production capacity of bleaching
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Chapter-1 Introduction
The main aim of my summer project “to study the Working Capital
Management of “Asarwa mills Ltd.”
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Working Capital Management
1.1 Meaning
According to Hogland:
All assets are converted into cash with in a short period of time & the
cash received is again invested into these assets. Hence it is known as
“Circulating Capital” or “Floating Capital.”
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Net Working Capital (NWC): It refers to the difference between
Current Assets and Current Liabilities are those outsiders, which are
expects to mature for payment within an accounting year and include
creditors (accounts payable), bills payable and outstanding expenses.
Te Net Working Capital indicates:
Liquidity Position
Advice up to what extent funds are required for working capital.
Current Assets are those assets that in the ordinary course of business
can be converted into cash within a brief period, i.e. during the
operating cycle of business and normally not exceeding one year
without undergoing diminution in value and without disrupting the
operations.
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f. Selection of appropriate sources of financing working capital viz.
Trade Credit, Bank Finance or other Short-term sources as well
as long term sources of funds.
There are no set rules or formulate to dermine the the working capital
requirements of organizations. The following are the factors, which
generally influence the working capital requirements of organizations:
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1. Inventory Policy: The inventory policy of a company also has
an impact on the working capital requirements since larger
amounts of funds tied up in Sundry Debtors.
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(a) Seasonal working capital ;the capital riquried to meet the seasonal
needs of the industry is termed as seasonal working capital
(b) Special working capital; the capital required for financing special
operation such as carrying out of special operation such as carrying out
of special jobs
The cycle begins with purchase of raw materials which are paid for
after a deal which represents the Account payable period. The
organization converts the raw materials into finished goods and then
sells it.
The lag between the purchase of raw materials and the sale of finished
goods is called Inventory period, the customers pay for the sale of
the goods after some time, the time lag between sale n the collection
of the amount is receivable period.
Level of production
Level of sales
Seasonal
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DIAGRAM SHOWING THE OPERATING CYCLE
Cash Purchase
of raw materials
Finished Goods
Thus, the funds are required only to finance all the items contained in
the operating cycle but excluding the quantum of raw materials
obtained on credit, as these will be payable at a later date. As we may
see from the above figure, the process starts with the investment of
cash for the bills receivable of cash.
Thus Asarwa is able to complete one full circle ,i.e one singal oprating
cycle, during the period of four month means in one year company is
able to complete three cycles.
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> Optimal level of current assts ^
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Working Capital Management
1. Credit period.
2. Credit standards.
4. Collection policy.
Credit Period
The main factors influencing the period of credit granted to customers
arc as
follows:
1. The normal terms of trade for the industry.
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2 The importance of trade credit as a market tool.
3. The individual credit ratings of Customer.
Credit Limits
Credit limits should then be set for each customer based on their
credit worthiness. The organization should consider in this regard:
1. Customer payment record: is the customer a prompt payer?
2. Financial signals: is there evidence of the customer running up
losses or having liquidity problems.
Credit Standards
The five determinants of credit worthiness of a customer are as follows:
(a) Capacity
Capacity is defined as the ability of the enterprises to honor payment
commitments, which depends upon its ability to generate cash-flows with
which the bills are to be paid. Capacity to pay is measured by debt-
services coverage ratio.
(b) Capital
Capital is defined as the net worth which provides that important
cushion to the business to absorb shocks corning front both internal
and external environment when regular cash flows arc adversely
affected.
(c) Condition
Condition refers to economic and other factors that are beyond the
control of the
organization and that may affect its ability to pay debts.
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(d) Character
Character of a business (and that of the entrepreneur) rest on such
traits as honor. Trust worthiness and commitment. A business may
have all the good ratios, regular cash flows and solid capital base, but
may still turn out to be a bad customer because ii doesn't keep
commitments. How a business will react when all other C's have turned
worse, determines its character.
(e) Collateral
Collateral refers to assets that are pledged for security m a credit
transaction At Aasarwa mill all the above five determinants of credit
worthiness are taken into consideration while granting credit. Credit
Period depends on the credit ratings of the customer and credit limits
depend on the past dealing with the customer. The cash discount
varies from customer to customer.
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LIQUIDITY MANAGEMENT
Liquidity
Liquidity is the ability of the organization to meet its cash obligation
when theyare due and to exploit sudden opportunities in the market.
The ultimate result of
illiquidity is bankruptcy. A measure of liquidity should indicate the
level at
solvency and the financial flexibility of the organization the following
are the
measures of liquidity.
• Current Ratio
Quick/Acid Test Ratio.
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• Net Working Capital Ratio - a superior Liquidity
measure Net Liquidity Ratio (NLR) Sales Cash
Conversion Cycle (SCCC)
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MANAGEMENT OF ACCOUNTS PAYABLE
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In AML the entire stocks, of the items in category "A" must be closely
monitored and controlled, the monitoring and control say, 10% of the items
of category "C" could be considered enough to serve the purpose. And in
the case of "B" category of items, the monitoring and control of say 25%
of the item alone may be taken as sufficient.
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SOURCES OF WORKING CAPITAL FINANCE
FUND BASED LIMITS
CASH CREDIT:-
The cash credit facility is similar to the overdraft arrangement. It is the most
popular method of bank finance for working capital in India. Under the cash
credit facility, a borrower is allowed to withdraw funds from the bank up to the
sanctioned credit limit. Cash credit limits are sanctioned against the securities of
current assets. Though funds borrowed are repayable on demand, banks usually
do not recall such advances unless they are compelled by adverse circumstances.
It is the most flexible arrangement from the borrower's point of view.
PROCEDURE:-
• Availability of limits.
• Drawing power to be taken in to account before availing PC.
• Contracts to be furnished with validity period. •
• Request letter along with contract for disbursal of PC.
• Contract is duly endorsed and returned n=by the bank.
• Disbursement of PC and conorganizationing due date.
• Bank commission, charges and interest against PC.
Under this finance the borrower can obtain credit from a bank against
its bill. The banks purchase or discount the borrower's bills. The
amount provided under this agreement is covered within the overall
cash credit or overdraft limit. Before purchasing the bills, the bank
satisfies itself as to the creditworthiness of the drawer. Though the
term bill purchased implies that the bank becomes owner of the bills.
When a bill is discounted, the borrower is paid the discounted amount
of the bill. The banks collect the full amount on maturity.
PROCEDURE:-
• Formal application to Bank which contains :
• Purpose of Loan
• Required Loan amount
• Security to be offered —
LETTER OF CREDIT:-
Suppliers, insist that the buyer should ensure that his bank will make
payment if he fails to honor its obligation. This ensured through a
letter of credit arrangement. A bank opens a letter of credit in favor of
a customer to facilitate his purchase of goods. If the customer does
not make the pay to the supplier within the credit period, the bank
makes the payment under the letter of credit arrangement. Bank
charges the customers for opening the letter of credit. The letter from
the bank guaranteeing that the buyer's payment to the seller will be
received on time and for the correct amount. In the event that the
buyer is unable to make payment on the purchase, the bank will be
required to cover the full or remaining amount of the purchase.
Step 1:- Seller draws the bill of exchange and submits the same,
along with all the required documents.
Step 2:- Seller's bank thereupon scrutinized all documents, carefully
stipulated in the
letter of credit has been fully and perfectly compiled with. On being
fully satisfied to this effect, seller's bank releases the fully payment of
the bill to seller by crediting the amount to the documents for
reimbursement of the entire amount of seller's bank.
stamping Act.
BANK GUARANTEE:
A guarantee from a lending institution ensuring that the liabilities of the debtor
will be met. In other words, if the debtor fails to settle a debt, the bank will cover
it. A bank guarantee enables the customer (debtor) to acquire goods, buy
equipment, or draw down loans, and thereby expand business activity.
PROCEDURE:-
1. Probability.
2. Liquidity.
3. Efficiency.
4. Inter – Firm Comparison.
5. Indicates Trend.
6. Useful of Budgetary Controls.
7. Useful for Decision Making.
1. Profitability Ratios.
2. Liquidity Ratios.
3. Assets Turnover Ratios.
4. Finance Structure Ratios.
5. Valuation Ratios.
1. Liquidity Ratios:
Current Ratio.
Quick Ratio or Acid-test Ratio.
Net Working Capital.
Bank Finance Gap Ratio.
1.1. Current ratio
Current ratio indicates the firm’s ability to pay its current liabilities, i.e.
day-to-day financial obligations.
It shows the strength of credit, strength of working capital
& capacity to carry on effective operations.
High ratio i.e. more than 2:1 indicates sound solvency
position.
Graph: 1.1
Graph: 1.2
In 2004-05, Working Capital is Rs. 1159.84 Lacs and in
2005-06 is Rs. 3745.09 Lacs and it is further increased in
2006-07 is Rs. 6446.72 which shows increasing trend in
Working Capital.
This ratio implies favorable position for the firm in which
company can work more efficiently and utilized working
Capital.
Company should try to control the Receivable level that will
help in controlling the Bad debt as well as credibility of the
company.
1.4. Bank Finance Gap Ratio
Method 1:
75% (Current Assets – Current Liabilities)
2004 – 2005: 75% (7033.42 – 3822.08) = 2408.51
2005 – 2006: 75% (7259.35 – 3514.26) = 2808.82
2006 – 2007: 75% (11719.07 – 5272.35) = 4835.04
Method 2:
75% (Current Assets) – Current Liabilities.
2003 – 2004: 75% (7033.42) – 3822.08 = 1452.99
2004 – 2005: 75% (7259.35) – 3514.26 = 1930.25
2005 – 2006: 75% (11719.07) – 5272.35 = 3516.95
Method 3:
75% (Current Assets – Core Current Assets*) – Current
Liabilities.
2003 – 2004: 75% ( 7033.42 – 4246.82) – 3822.08 = -1732.13
2004 – 2005: 75% (7259.35 – 4130.11) – 3514.26 = -1167.33
2005 – 2006: 75% (11719.07 – 8781.35) – 5272.35 = -3069.06
2. Profitability Ratios:
A profit margin ratio shows the relationship between profit & sales.
Three popular profits margin ratios are:
Graph: 2.1
Graph: 3.3
The ratio shows the increasing trend, which means that total
long-term debt is increasing year by year compare, to Capital
Employed.
This ratio establishes relationship between Long-term Debt
and Net Worth.
A higher ratio means that outside creditors have a larger
claim than the owners of the business.
In India, the general norm of debt-equity ratio is 2 for 1
rupee of equity.
Debt Equity Ratio = Total Long-term Debt
Net Worth
Graph: 4.3
PROFITABILITY
Gross Profit (%) Gross Profit/Sales 18.53 22.04 22.75
Net Profit (%) Net Profit/Sales 2.53 2.43 1.81
ASSET TURNOVER
Total Assets Sales/Total Assets 1.38 1.38 2.42
Net Working Capital Sale/Net working Capital 2.65 3.28 3.58
Inventory COGS/Average Inventories 3.05 2.00 2.46
Credit Sales/Average
Debtors Debtors 2.67 3.05 3.28
FINANCE STRUCTURE
LongTerm Debt/Total
Debt Capital Employed 0.58 0.45 0.45
Total Longterm Debt/Net
Debt Equity worth 1.40 0.82 0.81
Interest Coverage EBIT/Interest 1.24 2.22 2.33