EXECUTIVE SUMMARY

Project ~ Working Capital

EXECUTIVE SUMMARY
Working capital nowadays has been identified as a major thrust area by almost all the firms throughout world in order to manage the current assets and consequentially current liabilities.

Working capital refers to the capital which is used to carry out the day to day operation of a business. Every business needs funds for two purposes, for its establishment and to carry on its day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as Plant, machinery, and building, furniture etc. Funds are also needed for short-term purposes i.e. for the purchase of raw material, payment of wages and carry on day-to-day operations of business etc. These funds are known as working capital. The above idea of Working capital suggests that lifeline of a business is cash. Cash flows in a cycle into, around and out of a business. 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. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-inprogress) and Receivables (debtors owing you money). The main sources of cash are Payables (creditors) and Equity and Loans. 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.

For similar reasons optimization of working capital came into existence as an exhaustive project at Goodfrey Philips India which started in beginning of year 2009.

The project conducted for optimization of working capital is a live project at GOODFREY PHILIPS INDIA, Chandigarh under the name Working Capital. The project basically deals with analysis of credit terms of suppliers, supplying different items at all the seven sites of

GlaxoSmithKline involved in production as well as packaging of different products of the company. Apart from analyzing the credit terms of suppliers for the company standard norms for holding the inventory of raw materials, packaging materials was also analyzed to determine the opportunities for reducing the working capital. A few more aspects of working capital have also been studied to fulfill the objectives of the study.

Project ~ Working Capital

INTRODUCTION

1. INTRODUCTION
India in a large and growing economy with rapidly expanding financial service sector. Managing working capital is a matter of balance. A company must have sufficient cash on hand to meet its immediate needs while ensuring that idle cash is invested to the organizations best possible advantage. To avoid tipping the scale, it is necessary to have clear and accurate reports on each of the components of working capital and awareness of the potential impact of outside influences. WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES In the analysis for GOODFREY PHILIPS INDIA, Chandigarh, it was found that the working capital has increased which could be mainly due to increased sales. The Gross Operating Cycle declined significantly but the reduction was nullified due to the reduction in inventory conversion period. This is why we see that Net operating Cycle for last two years is almost identical. The main areas of emphasis were work in progress conversion period and creditors conversion period. Debtors conversion period reduced but work in progress and creditors conversion period increased. Few suggestions that are recommended for better management of working capital are reducing inter-corporate deposits and loans, reducing finished goods inventory, increment in creditors payment period etc. The company uses Operating Cycle Method to calculate its Working Capital method. Thus, good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a company, optimum use will help to generate maximum returns. Every business needs investment to procure fixed assets, which remain in use for a long 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. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term 5

Project ~ Working Capital debt and upcoming operational expenses. 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 (i) adequate supply of raw materials for processing;

(ii) cash to pay for wages, power and other costs; (iii) creating a stock of finished goods to feed the market demand regularly; and, (iv) 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.

LITERATURE REVIEW

Project ~ Working Capital

2. LITERATURE REVIEW
In intention to discover the relationship between efficient working capital management and firms profitability(Shin & Soenen, 1998) used net-trade cycle (NTC) as a measure of working capital management. NTC is basically equal to the CCC whereby all three components are expressed as a percentage of sales.

The reason by using NTC because it can be an easy device to estimate for additional financing needs with regard to working capital expressed as a function of the projected sales growth. This relationship is examined using correlation and regression analysis, by industry and working capital intensity. Using a Compustat sample of 58,985 firm years covering the period 1975-1994, in all cases, they found, a strong negative relation between the length of the firm's net-trade cycle and its profitability. In addition, shorter NTC are associated with higher risk-adjusted stock returns. In other word, (Shin & Soenen, 1998) suggest that one possible way the firm to create shareholder value is by reducing firms NTC.

The study of (Shin & Soenen, 1998) consistent with later study on the same objective that done by (Deloof, 2003) by using sample of 1009 large Belgian non-financial firms for the period of 1992-1996. However, (Deloof, 2003) used trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle as a comprehensive measure of working capital management. He founds a significant negative relation between gross operating income and the number of days accounts receivable, inventories and accounts payable.

Thus, he suggests that managers can create value for their shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. He also suggests that less profitable firms wait longer to pay their bills.

In other study, (Lyroudi & Lazaridis, 2000) use food industry Greek to examined the cash conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its relationship with the current and the quick ratios, with its component variables, and investigates the implications of the CCC in terms of profitability, indebtness and firm size. The results of their 8

study indicate that there is a significant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also positively related to the return on assets and the net profit margin but had no linear relationship with the leverage ratios.

Conversely, the current and quick ratios had negative relationship with the debt to equity ratio, and a positive one with the times interest earned ratio. Finally, there is no difference between the liquidity ratios of large and small firms.

Project ~ Working Capital

COMPANY PROFILE

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3. COMPANY PROFILE
Godfrey Phillips India, with 75 years of active industry experience, take pride in our ability to create profit and value for the society without compromising on our core ethical systems and following adopted best practices at all times. We are a people centric, market-driven, socially responsible company, constantly evolving to find better and newer ways to provide customer satisfaction and empowering our stakeholders. With our proven ability to understand emerging trends and issues effecting peoples lives, we have been able to direct our efforts in realizing our core philosophy of Making a better world for a better tomorrow." Celebrating seventy five years of commitment to excellence

Over the years, Godfrey Phillips India, has amassed goodwill by conforming to ethical business practices at all times and acting as a catalyst for social change. Witness to dramatic changes in technology, commerce, and society, we have promoted innovative business models, to stay ahead of the competition. Due to this persisting endeavor to excel, innovate and win, we have grown to become one of the largest companies in its class, with sales of over 2,600 crores. Over the years, we have built an extensive network of distributors and retail outlets. We already hold the faith of 500 distributors and have successfully nurtured 800,000 retail outlets, with offices in eight locations across the country. Social Commitments Our commitment to our people and society at large is an extension of our heritage and business principles, which are to conduct ourselves ethically at all times, contribute towards economic development, while improving the quality of life for our workforce, and thereby their families, local communities and the society.

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Project ~ Working Capital VISION AND VALUES

Vision
To become a leading tobacco player in India and beyond. To sustain and enhance our position as one of Indias most prominent business organizations, while leveraging our proven competencies to diversify our reach across the globe. With our deep-rooted belief systems and expertise in business, we hope to create sustainable shareholder value without ever compromising on our ethical value systems, as laid down in the company guidelines. Our work environment- invigoratingly challenging - provides ample opportunity to our work force to continuously stretch to innovate and grow in life. We motivate our employees to think radically and create path breaking solutions confronting the new milieu.

Values
Passion for winning The passion to win and never be setback by defeat is organically integrated in all our employees. They are inspired by example to stretch their limits by adopting a positive attitude, being selfmotivated, while relentlessly pursuing and capturing opportunities. Our ethical system percolates down to every level of management, equipping our managers to take on even the most challenging situations with utmost positivity. Treating complaints with gravity, identifying internal and external customer needs, proactively fulfilling them and working towards zero grievances is our common goal. Together, we endeavor to deliver the right quality at the right time and price.

THE MANAGEMENT Godfrey Phillips India is a Company committed to innovation and continuous improvement which can be seen in the Company employees; from the top management to the factory level. 12

Godfrey Phillips Indias management represents the optimum mix of professionalism, knowledge and experience. They are the guardians to the Company, and protectors of the shareholders interest.

PARTNERS

Philip Morris
Altria Group Inc is the parent Company of Philip Morris, Philip Morris USA and Philip Morris Capital Corporation. Altria Group owns 100% of the outstanding stock of Philip Morris USA, Philip Morris and Philip Morris Capital Corporation. Philip Morris, the owner of some of the world's most respected brands including Marlboro, is one of the largest shareholders in Godfrey Phillips India and has an agreement with the Company to provide technological services and assistance in all areas of business. In 1968 Philip Morris Finance Corporation, a wholly owned subsidiary of Philip Morris Inc., U.S.A. acquired full ownership of Godfrey Phillips Ltd., London, U.K., which was the Holding Company of Godfrey Phillips India Ltd. till the issue of shares to the Indian public during 1975. As a result of acquisition of Godfrey Phillips Ltd., London, U.K. as above, Philip Morris Inc. through its wholly owned subsidiary, Philip Morris Finance Corporation became the Holding Company of Godfrey Phillips India Ltd. After the public issue in 1975, offer for sale to Indian public in 1979 and a rights issue in 1981 the shareholding of Philip Morris Finance Corporation in Godfrey Phillips India Ltd. came down to the present level of 25%. Philip Morris Inc. joined hands with the K. K. Modi Group in 1979. ACHIEVEMENTS & AWARDS Recent Awards
y

Guldhar Factory was awarded the Greentech Foundation Gold Award in 2009 and 2010 for Outstanding Achievement in Environment Management. These awards are the most 13

Project ~ Working Capital coveted awards in the corporate world for outstanding achievements in the field of Environment Management.
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Andheri Factory won the Greentech Safety Silver Award in recognition of excellence in safety management.

The Indian National Suggestion Scheme Association (INSSAN) presented awards to Andheri factory, Mumbai team for its best suggestions/ideas during the various conventions held on different topics and places for a record 14th consecutive year in a row in 2010.

Previous Awards
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Won Golden Peacock Award 2007 for excellence in Product Innovation category for Four Square.

Tipper won Golden Peacock Award for the best product innovation in the year 2003 and then again in 2006 for innovative product and service. It has also won the Silver medal at the Monde Selection Brussels, World Selection of Quality 2006.

The Indian National Suggestion Schemes' Association (INSAAN) presented awards to Andheri factory for its best suggestions/ideas during the various convention held on different topics and places for the record 11th consecutive year in a row.

The Guldhar factory won The 'Greentech Environment Excellence Awards' and Greentech Safety Awards', in the year 2006. These awards are the most coveted awards in corporate world for outstanding achievements in the field of environment management.

The pack design of Jaisalmer, the premium King Size cigarette of the Company, won the coveted PFFCA (Paper, Film & Foil Converters Association) Star Award, felicitating the pack for its excellence in design, development and creativity in packaging.

North Pole has also won the Golden Peacock award for innovative packaging in 2005.

FINANCIALS If the success of a Company is judged by the satisfaction level of its employees, then the economic stability of a Company is judged by the satisfaction and belief levels of its shareholders.

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It is their belief and faith in the system, their passion about the organization that inspires the Company to sail through difficult period and face challenges. Godfrey Phillips India as a Company is dedicated to the interests of all those who have invested their faith in it. The Company strives to maximize growth in revenue while equally managing the cost of doing business. Thereby, it continuously seeks to create greater value for the shareholders.

BRANDS

FS1 FS1 is the premium line of cigarettes launched by Four Square. Each Turkish Blend cigarette in the FS1 pack attributes its distinct taste and aroma to Luxury Long Leaf blended with the finest Indian handpicked tobaccos. It is designed to give the Ultimate Taste Experience. FS1 comes in 3 variants Full Flavour, Extra Smooth and Regular. Four Square Four Square is a well established and leading cigarette brand in India. Launched way back in 1964, the brand commands trust and reputation amongst its consumers and is known for its innovative ways to meet the changing consumer preferences. Today, the Four Square franchise has a wide portfolio of variants that are available in both Kingsize and Regular-size segments, namely - Four Square Kings, Four Square Special, Four Square Premier, Four Square Fine Blend and Four Square Rich Gold. In its relentless pursuit to provide value to customers and leveraging advancements in technology, the brand has many firsts to its credit like introducing innovative pack designs with a tactile look and feel, and applying digital means to communicate with and delight consumers.

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Project ~ Working Capital Marlboro Godfrey Phillips India has an arrangement with Philip Morris to manufacture and distribute their brands, including the iconic Marlboro brand of cigarettes. Available at select cities in India at approximately 65,000 retail outlets, the brand has 7 variants including the recently launched Marlboro Gold Advance. Red & White Enjoying an iconic stature and a strong emotional bond with its loyal consumers, Red & White is one of the fastest growing regular filter brands. With a presence in markets such as those of Punjab, Haryana and Delhi, it is available as a R&W Filter, R&W Plain, R&W Super and R&W Premium. The brand continues to retain its iconic popularity as Red & White peene walon ki baat hi kuch aur hai still resonates strongly with consumers and is one of the most memorable ad-lines in India. North Pole An innovative brand from the stable of Godfrey Phillips India, it is the largest selling menthol cigarette in India. Cavanders Cavanders is one of the oldest and most trusted brands from the house of Godfrey Phillips India. Associated with a unique taste and value proposition, Cavanders has always enjoyed a strong emotional connect with consumers owing to its unique positioning of "Friendship". The brand is available in a host of variants ranging from Cavanders Gold Leaf and Magna in the plain segment to Cavanders Gold, Cavanders Special and Cavanders Magnum filter in the Regular size filter and Cavanders Magna filter in the Micro filter segment. Through the variants stated, Cavanders has a foothold across the length and breadth of India.

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Tipper Tipper is a brand driven by innovation, superiority of imagery and offering. The new Tipper Filter variant has been able to attract a significant share of Tipper's erstwhile micro consumers. DIVERSE BUSINESS

Pan Vilas Pan Masala The quest for the perfect pan masala comes to an end with Pan Vilas. The delicately balanced blend and the rich trove of finest ingredients give Pan Vilas an unmatched and lingering taste. The brand goes a step further to ensure quality and establish trust by using a natural alternate to banned Magnesium Carbonate and applying the best worldwide technology in manufacturing. It is a treat for those discerning people who can go to any length for the elusive perfect taste. Thus Shauq badi cheez hai aptly captures the brands ethos of passionate indulgence It has been launched in the four key markets of India in early 2010. Pan Vilas is manufactured at Baramati, a state-of-the-art plant that employs some of the worlds most advanced food processing technologies. Our success in meeting strict test launch metrics and the overwhelming response to Pan Vilas from both consumers and the trade industry has further given Godfrey Phillips India the confidence to introduce a national rollout in 2010-11. Tea The Godfrey Phillips India group offers an extensive range of fine teas from a team of highly talented master blenders. The teas have been crafted to cater to a variety of palates, segments and markets. The young tea buds and tender leaves are delicately hand plucked, tested for freshness and quality using the most advanced technology to make each blend special.

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Project ~ Working Capital Symphony Premium Teas : The premium range offers an exquisite assortment of original brews and flavours. Available in three variants- Assam Tea, Darjeeling Tea and Green Tea, the premium range has been developed to offer a superior brew each time. INTERNATIONAL BUSINESS

Our foray into international markets and success with new business ventures has been part of an endeavor to realize our vision of becoming a leading player in India and beyond. Today, we collaborate with some of the top players in the international tobacco industry to assist them in marketing their products and providing various professional and expert services including contract manufacturing, cut tobacco, smoke analysis and various other consultancy services. Many countries from the Middle East to West Africa, South East Africa, South East Asia, East Europe, Australia, South America, Southeast Asia and Central America have been added on to our portfolio of exporting cigarettes as well as cut tobacco. Our brands Force 10, Jaisalmer, Originals and Ultima are already making substantial inroads in their respective markets. Our International Division is continually making efforts to forge new global contacts to facilitate tea exports. Our primary tea brand, Tea City has already made a successful entry into the export market. Under the brand, we offer Indian teas from various origins such as Assam, Darjeeling, Dooars, Terai, Nilgiris and South India to meet the requirements of cup quality. We also export Bulk and Specialty teas to Germany, USA, Japan, UAE, Kazakhstan & Iran with the objective to expand our consumer base horizontally as well as vertically across segments. We persistently work towards understanding our consumers and their distinct taste palates in order to develop the most customized blends as well as specialized teas like organic tea, flavors in packets & tea bags.

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The success of our International Division can aptly be credited to the superior, state- of- art infrastructure that supports it, which begins right from the superior quality leaf ensured by our Leaf Division to the end product from our Manufacturing units. In order to become a leading player in the tobacco industry, we have constantly been upgrading and improving our systems and processes through better R&D practices, upgraded manufacturing facilities and a better understanding of consumer and market needs. CORPORATE SOCIAL RESPONSIBILITY

The World Business Council for Sustainable Development defines CSR as "the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large." We, at Godfrey Phillips India not only recognize the importance of being a responsible corporate citizen but our identity as a cigarette manufacturing Company and our success in it imposes even a greater responsibility upon us to take it further. Being cognizant of this fact, we strive to be active and committed participants in enhancing the community we work, live and do business in. Besides strong internal responsible marketing policies that govern all our actions, we have undertaken several initiatives like Godfrey Phillips Bravery Awards, Blood Donation Drive, Women Empowerment projects, Godfrey Phillips WHITE, various GAP (Good Agricultural Practices) and support programs for tobacco farmers, environmental management besides many philanthropic and charitable gestures which is a part of the Company culture.

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Project ~ Working Capital Godfrey Phillips Bravery Godfrey Phillips Bravery Awards aims to instil amongst citizens a culture of selfless conduct. The Bravery awards were instituted in 1990 to acknowledge and reward the unsung heroes of everyday life. These awards have been initiated to bring to notice the uncommon spirit of the common man, and appreciate the extraordinary, yet little known acts of physical valor, social service and humanitarian deeds, while inspiring others to follow suit. The Godfrey Phillips Bravery Awards have saluted more than 1200 individuals over the years. The awards are present over 16 states - Orissa, Chhattisgarh, Uttaranchal, Delhi, Haryana, Punjab, Rajasthan, Uttar Pradesh, Maharashtra, Madhya Pradesh, Gujarat, Andhra Pradesh, Karnataka, West Bengal, Goa and Himachal Pradesh. Owing to the gravity of the awards, a meticulous judging process, external to the organization, has been followed since the initiation of the awards to ensure authenticity. The entries to the awards are required to be attested by gazetted officers or police officers. These entries are then judged by a panel of eminent personalities including senior bureaucrats, Director Generals of Police and senior officers of the Armed Forces, who select the winners based on certain parameters. The candidates are rated on the basis of personal risk, situational intensity and selflessness in case of the Physical Bravery category, while determination, foresight, selflessness and perseverance in case of Social Acts of Courage and the Mind of Steel categories. Environment Management As a conscientious corporate citizen, we realize our responsibility towards the conservation of the environment. Along with the growth of our business we remain committed towards minimizing the impact of our business on the environment. To this effect, we have adopted a host of policies that use only such methods which have been proven to be environmentally safe. The facilities comply with international quality standards like ISO 9001:2008 ( and ISO 14000,) and the high standards of environment-friendly manufacturing are brought about entirely due to the recommendations of the motivated factory personnel. The ISO 14001:2004 (Environment Management System) certification of our plants is a proof of our commitment towards environmental control. Both the factories have taken up environment friendly initiatives like 20

recycling of water, rainwater harvesting, solar power system etc. They have developed steam heated hot water generator system to replace the electrical system, and have various automation and interlocking systems to save power. Both the factories (Mumbai factory was also recertified with ISO 9001:2008 and) are also certified for OHSAS 18001:2007 which is our commitment towards Occupational Health and Safety. The new upcoming manufacturing factory in Rabale, near Mumbai was registered with IGBC for green factory building. Guldhar Plant is the first cigarette manufacturing unit in India to have been accredited with Social Accountability (SA) 8000:2001. The safety, well being and health of our associates is also core to our business philosophy, which explains our consistent efforts towards reducing work related injuries and occupational illnesses. For this, we follow all the statutory regulations regarding Health, Safety and Environmental norms, which have helped Godfrey Phillips India establish an incident-free workplace. The committed employees have also established an industry record by winning the INSAAN Awards (The Indian National Suggestion Scheme Association, given for the best suggestions made by a factory worker in the year) for the past 14 years running. Guldhar Factory was awarded the Greentech Foundation Gold Award in 2009 and 2010 for Outstanding Achievement in Environment Management. These awards are the most coveted awards in the corporate world for outstanding achievements in the field of Environment Management. It also received the Eco Friendly Award 2009 from Ghaziabad Management Association for implementing Best Environment Management Practices. We also enable our farmers with GAP or Good Agricultural Practices by undertaking their training and imparting them with technical know-how. Our efforts in this regard have been recognized as the Tobacco Institute of India felicitates our farmers each year for their breakthroughs.

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Project ~ Working Capital Social Accountability M/s International Tobacco Company is only the second tobacco company in the world to have received the Social Accountability Certification, SA 8000: 2001 in 2006, which is proof of its commitment to social responsibility in all aspects of our business. The production facility at M/s International Tobacco Company Limited, Ghaziabad has set the highest standards in social accountability by following current best industry practices and norms including the guidelines set by Social Accountability International. A system audit conducted by a third party company-Chess Management-confirmed that the company was successful in meeting all its statutory responsibilities with regards to society proving the resilience of its internal value systems.

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WORKING CAPITAL

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Project ~ Working Capital

4. WORKING CAPITAL
5.1 DEFINITION:
According to Ralph Kennedy and Steward Mc Muller a study of working capital is of major importance to internal and external analysis because of its close relationship with the current day to day operations of business.

5.2 MEANING:
Working capital refers to the funds invested in current assets i.e. investment in stocks, sundry debtors, cash and other current assets. Current assets are essential to use fixed assets profitably. For example a machine cannot be used without raw material. Thus it is obvious that certain amount of funds is always tied up in raw materials, work in progress and finished goods. However, the business also enjoys credit facilities from its suppliers who may supply raw materials on credit and the firm may not pay all the expenses immediately. Therefore, certain amount of funds is automatically available to finance the current assets requirements. However the requirements for current assets are usually greater than the amount of funds payable through current liabilities. In other words, current assets are to be kept at a higher level than the current liabilities.

5.3 THEORETICAL FRAME WORK

Every business needs funds for two purposes for its establishment and to carry out its day to day operations. Working capital refers to that part of the firms capital, which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Working capital is the amount of funds to cover the cost of operating the enterprise. The goal of working capital management is to manage the current assets and current liabilities of the firm in such a way that a satisfactory level of working capital is maintained. Working capital is the difference between the inflow and outflow of funds. Working capital is also known as revolving or circulating or short term capital. CONCEPTS OF WORKING CAPITAL 24

There are two concepts of working capital (a) Gross working capital (b) Net working capital (a) Gross working capital Gross working capital refers to the firms investment in current assets. Current assets are the assets, which can be converted into cash within an accounting year and include cash, shortterm securities, debtors (accounts receivables or book debts), bills receivables and stock (inventory). (b) Net working capital Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable and outstanding expenses. Net working capital can be positive or negative. A positive working capital will arise when current assets exceed current liabilities. A negative working capital will occur when current liabilities are in excess of current assets. List of current assets and current liabilities CURRENT ASSETS         Cash in hand Cash at bank Bills receivables Sundry debtors Stock Prepaid expenses Accrued income Short term investments 25 CURRENT LIABILITIES Bills payable Sundry creditors Accrued expenses Short term loans Dividend payable Bank overdraft Provision for taxes

Project ~ Working Capital

CLASSIFICATION OF WORKING CAPITAL Working capital may be classified in two ways. (a) On the basis of concept: Gross Working Capital Net Working Capital (b) On the basis of time: Permanent or Fixed Working Capital Regular Working Capital Reserve Working Capital Temporary or Variable Working Capital Seasonal Working Capital Special Working Capital Types of Working Capital Working capital can be divided into two categories on the basis of time: 1. Permanent Working Capital This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. In other words, it represents the current assets required on a continuing basis over the entire year. Tandon Committee has referred to this type of working capital as core current assets. The following are the characteristics of this type of working capital: 1. Amount of permanent working capital remains in the business in one form or another. This is particularly important from the point of view of financing. The suppliers of such working capital should not expect its return during the life time of the firm. 2. It also grows with the size of the business. In other words, greater the size of the business, greater is the amount of such working capital and vice-versa. Permanent working capital is permanently needed for the business, and therefore, it should be financed out of long-term funds. This is the reason why the current ratio has to be substantially more than one. 2. Temporary Working Capital 26

The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. In other words, it represents additional current assets required at different times during the operating year. For example, extra inventory has to be maintained to support sales during peak sales period. Similarly, receivables also increase and must be financed during period of high sales. On the other hand, investment in inventories, receivables, etc., will decrease in periods of depression. Suppliers of temporary working capital can expect its return during off season when it is not required by the firm. Hence, temporary working capital is generally financed from short-term sources of finance such as bank credit. MEASURING THE WORKING CAPITAL Working capital is very essential to maintain the smooth running of business. No business can run successfully without an adequate amount of working capital. However it must also be noted that working capital is a means to run the business smoothly and profitably and not an end in itself. Thus concept of working capital can be conducted through a number of devices such as 1. 2. 3. Ratio analysis Funds flow analysis Budgeting

1. RATIO ANALYSIS A ratio is a simple arithmetic expression of the relationship of one number to another. The technique of ratio analysis can be employed for measuring short term liquidity or working capital position of a firm. Several ratios like current ratio, quick ratio, inventory turnover ratio, receivable turnover ratio, payables turnover ratio, working capital turnover ratio, cash position ratio etc. 2. FUNDS FLOW ANALYSIS Funds flow analysis is a technical device designated to study the sources from which additional funds are derived and the use to which these sources are put. It is an effective management tool to study changes in the financial position (working capital) of a business

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Project ~ Working Capital enterprise between beginning and ending financial statements dates. The funds flow analysis consists of: (a) Preparing schedule of changes in working capital (b) Statement of sources and application of funds.

3. WORKING CAPITAL BUDGET Working capital budget, as a part of total budgeting process of a business, is prepared estimating future long term and short term working capital needs and the sources to finance them, and then comparing the budgeted figures with the actual performance for calculating variances, if any, so that corrective actions may be taken in the future. Its main objective is to ensure availability of funds as and when needed, and to ensure effective utilization of these resources. The successful implementation of working capital budget involves preparing separate budgets for various elements of working capital, such as, cash, inventories and receivables. OBJECTIVES OR NEED OF WORKING CAPITAL The need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. It requires: 1. For the purchase of materials, components and spares. 2. To pay wages and salaries. 3. To incur day- to- day expenses and overheads such as fuel, power and office expenses etc. 4. To meet the selling costs as packing, advertising etc. 5. To provide credit facilities to the customers. 6. To maintain the inventories of raw materials, work in progress, stores and spares, and finished stock. IMPORTANCE OF WORKING CAPITAL Working capital is just like the heart of the business. If it becomes weak; the business can hardly prosper and survive. It is an index of solvency of a concern. Its proper circulation provides to the business the right amount of cash to maintain in business. Without adequate 28

amount of working capital, production interruption may take place and results in reduction of profit. Just as circulation of blood is very necessary in human body to maintain life, smooth flow or circulation of working capital is necessary for the health of the enterprise. The prime object of management is to make profit. Whether or not this is accomplished in most business depends largely in the manner in which the working capital is administered.

KEY AREAS OF WORKING CAPITAL Generally in the working capital management there are three important areas. Those are: 1. Cash management 2. Receivables management 3. Inventory management ADVANTAGES OF ADEQUATE WORKING CAPITAL Working capital is the life blood of the business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the business. The main advantages of maintaining adequate amount of working capital are as follows: y y y y y y y y Good solvency position in the business Goodwill, it is easy to get loans Cash discounts Regular supply of raw materials Regular payment of salaries, wages and other day to day commitments Exploitation of favorable market conditions Ability to face crisis Quick and regular return on investment

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Project ~ Working Capital y High morale

Every business concern should have adequate working capital to run its business operations. It should not have either redundant/ excess or shortage of working capital.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL 1. Excessive working capital means idle funds which earn no profit for the business and hence the business cannot earn a proper rate of return on its investment. 2. Where there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, wastage and losses. 3. Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts. 4. It may result in overall inefficiency in the organization. 5. When there is excessive working capital, relations with banks and other financial institutions may not be maintained. 6. Due to low rate of return on investments the value of shares may also fall. 7. The redundant working capital gives rise to speculative transactions.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL 1. A concern, which has inadequate working capital, cannot pay its short time liabilities in time. Thus it will loose its reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discount etc. 3. It becomes difficult for the firm to exploit favorable market conditions and undertake projects due to lack of working capital.

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4. The firm cannot pay day to day expenses of its operations and it creates inefficiencies, increase costs and reduces the profits of the business. 5. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds. 6. The rate of return on investments also falls with the shortage of working capital. FACTORS DETERMINING THE WORKING CAPITAL REQUIRMENTS A firm should plan its operations in such a way that it should have neither too much nor too little working capital. The working capital requirements are determined by a wide variety of factors. 1. Nature and size of business: Working capital requirements of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Whereas public utilities have a very limited need for working capital and have to invest abundantly in fixed assets. Their working capital requirements are nominal because they may have cash sales only and supply services but not products. Working capital needs of most manufacturing concerns fall between too extreme requirements of trading firms and public utilities. Such concerns have to make adequate investments in current assets depending upon the total assets structure and other variables. The size of the business that is measured in terms of scale of operations also has an impact on the working capital needs. As BHPVs scale of operations is large, the firm needs more working capital then small firm does. 2. Manufacturing cycle: The manufacturing cycle comprises of the purchase and use of raw material in the production of finished goods. As the firms manufacturing cycle is lengthy the working capital requirement of the firm is large. 3. Sales growth:

31

Project ~ Working Capital The working capital needs of firm increase as its sales grow. Current assets will have

to be employed before growth takes place. A growing firm needs to invest funds in fixed assets in order to sustain its growing production and sales. This in turn increase investment in current assets to support enlarged scale of operations, a growing firm needs funds continuously. I. Demand conditions: The business variations such as seasonal and cyclical fluctuations in the demand for products and services affect the working capital requirements. When there is an upward swing in the economy, sales will increase. Correspondingly, the firms investment in inventories and book debts will also increase. During boom, additional investments in fixed assets may be made by some firms to increase their productive capacity. These act as further additions to working capital. 4. Production policy: To reduce working capital problems arising due to changes in demand for the firms products, a steady production policy may be maintained. If the firms productive capacities can be utilized for manufacturing varied products, it can have the advantage of diversified activities and solve its working capital problems. Price level changes: Generally, rising price levels will require a firm to maintain higher amount of working capital. However companies which can immediately revise their product prices with rising price levels will not face a severe working capital problem. 5. Operating efficiency and performance: The operating efficiency of the firm relates to the optimum utilization of resources at minimum costs. The use of working capital is improved and the pace of cash cycle is accelerated with operating efficiency .Better utilization of resources improves profitability and thus helps in decreasing the pressure on working capital. A high net profit margin contributes towards the working capital pool. In fact, the net profit is a source of working capital to the extent it has been earned in cash. A firm can enhance its working capital funds by saving taxes through appropriate tax planning. 6. Firms credit policy: 32

The credit policy of the firm affects working capital by influencing the level of book debts. The credit terms to be granted to customers may depend upon norms of the industry to which the firm belongs. The firm should be discretionary in generating credit terms to its customer. Depending upon the individual case different terms may be given to different customers .A liberal credit policy with out rating the credit worthiness of customers will be detrimental to the firm and will create a problem for collecting funds later on. Slack collection procedures result in increase of book debts. The firm should follow a rationalized credit policy based on the credit standing of customers and other relevant factors.

NEED OF WORKING CAPITAL

1. 2. 3. For the purchase of raw material components and stores For the payment of wages and salaries. To incur day-to-day expenses and overhead costs such as fuel, power and office expenses. 4. 5. 6. To meet the selling cost as packing, advertising etc. To provide credit facility to the customers. To maintain the inventories of raw material, work-in-progress, stores and spares and finished stock. 7. 8. To meet the requirement of anticipated needs of future. To face business crisis in emergencies such as depression, because during such periods, generally, there is much pressure on working capital.

33

Project ~ Working Capital

SCOPE AND OBJECTIVES OF STUDY

34

5. SCOPE OF STUDY
The above project was conducted keeping in mind the components of Working capital mentioned above i.e. inventory, receivables, and payables and further, credit terms with suppliers; project Working Capital took its shape. The project Working Capital was started at Chandigarh plant of GOODFREY PHILIPS INDIACH Ltd. early this year with an idea of standardization of credit period across sites, scrutinizing the inventory holding period of raw materials, packaging materials and finished goods and estimating the working capital thus released through these initiatives.

The study was conducted with following broad and specific objectives:

Main objectives of the study are:  To study the Indian banking system and products, services of Goodfrey Philips India.  To study in general the working capital management procedure in Goodfrey Philips India.  To analyze working capital in Goodfrey Philips India.  To know how the working capital is being financed.  To know the various methods to be followed by Goodfrey Philips India for inventories and accounts receivables.  To give suggestions, if any, for better working capital management in Goodfrey Philips India.

35

Project ~ Working Capital

METHODOLOGY

36

6. METHODOLOGY
The methodology adopted for studying the objectives was surveying the existing and potential customers of Goodfrey Philips India in the city of Patiala. The study was conducted in one part.

Research Plan The research study is exploratory in nature. The established objectives were kept in mind during the study, however no hypothesis was formed as the study was more in the form of descriptive design attempting to analyze the attitude of respondents towards the project.

Data Collection: The Core finding of the study is based upon the information collected through secondary data i.e. information will be collected from financial statements of the Goodfrey Philips India.

MODE OF DATA COLLECTION The study is based on Secondary data which includes

Secondary Data Secondary Data was gathered from books and journals and Financial Statements on Goodfrey Philips India.

Sample Plan Universe: The universe of the study was Goodfrey Philips India, Leela Bhawan, Patiala.

37

Project ~ Working Capital

DATA ANALYSIS

38

7. DATA ANALYSIS
Financial ratio analysis is a study of ratios between various items or group of items in financial statement and the turnover ratios. Ratio analysis is the powerful tool of financial analysis. In financial analysis, ratio analysis is used as an index or yardstick to measure the performance of the firm. Working capital is that part of total capital which is important in current assets. To get better insights about the working capital position of the firm ratio analysis has been utilized.

To determine the Working Capital position of the firm following ratios have been analyzed:          Current ratio Absolute liquid ratio Quick ratio Current asset turnover ratio Working capital turnover ratio Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio Inventory to working capital rate

Current ratio, Quick ratio and absolute liquidity ratio are regarded ad liquidity ratios. The liquidity aspect is essential for both the creditors as well as management of a business enterprise. These ratios are used to judge firms ability to meet short term obligations. These ratios give an insight about present cash solvency of the firm and its ability to remain solvent in the event of adversities.

39

Project ~ Working Capital 2008 1) Current Ratio

 

= 1.06

C.A = Stock + Debtors + Cash & Bank & other C.A = 23806.07+ 2306.20 + 815.87 = 26928.14 C.L = liability + loan & Adv = 16840.69 + 8544.64 = 25385.3 2) Quick Ratio (Acid Test Ratio)
 

= 0.12

Liquid Asset = Debtor + Cash = 2306.20 +815.87 = 3122.07 3) Absolute liquid Ratio
 

= = 0.032 4) Current Asset Turnover Ratio

 

= 3.353

5) Working Cap. Turnover Ratio Sale = 90293.20 40

Working Cap. = C.A C.L = 26928.14 25385.33 = 1542.81 = = 58.5 6) Inventory Turnover Ratio =
 

= 4.63

7) Debtor Turnover Ratio

   

= 46.5

2009 Current Ratio = C.A = Inventories +Dr +Cash = 41243.266 C.C = C L + Short term advances = 33027.5 =41243.266/33027.5 = 1.24 2) Quick Ratio/Acid Test Ratio 41

Project ~ Working Capital =



= L.A = 4795.81/33027.5 = 0.14 3) Absolute Liquid Ratio (Cash Ratio) =

  

= 1760.49/33027.5 = 0.05 (2009) 4) Current Asset Turnover Ratio

= 226905.15/41243.266 = 5.5 2009 5) Working Capital Ratio = = = 27.61 2009 6) Inventory Turnover Ratio = = = 6.2
   

2009 7) Debtors Turnover Ratio

42

= =

2010 Current Ratio = C.A = Inventories + Dr + cash + Bank Bal = 44353.57 C.L = C.L + Short term Loan & Advances = 30864.63 44353.57/30864.63 = 1.43 2010 Quick Ratio/Acid Test Ratio =


= L.A = Dr. + Cash & Bank = 8338.99 = 8338.99/30864.63 = 0.27 2010 3) Absolute Liquid Ratio (Cash Ratio) = =
  

= 0.11

4) Current Asset Turnover Ratio

43

Project ~ Working Capital

= 5.8

5) Working Capital Ratio = = =

   

= 19.33

6) Inventory Turnover Ratio = = = = 7.2 7) Debtors Turnover Ratio =



=


= = 65.48

44

CURRENT RATIO The current ratio is very popular financial ratio which is used to measure the ability of a firm to meet its current liabilities. Current assets are converted into cash for the payment of current liabilities. Apparently higher is the current ratio, greater is the short term solvency. Current ratio is given by the formula:

2008 1.06

2009 1.24

2010 1.43

CURRENT RATIO

1.43 1.24 1.06 2010 2009 2008

A current ratio of 2:1 is generally considered to be acceptable. As the firm has a current ratio (2.63:1) better than acceptable ratio (2:1), the firm is well within a position to meet its current liabilities.

45

Project ~ Working Capital Current Assets The idea of the current assets turnover is to ascertain the contribution of the current assets to sales. The relationship indicates efficiency or otherwise utilization of current assets to attain the maximum turnover sales.

2008 Current Assets Current Liabilities 26928.145 25385.33

2009 41243.266 33027.5

2010 44358.57 30864.63

Current Assets

33027.5

30864.63

25385.33

41243.266 26928.145

44358.57

2008

2009

2010

46

QUICK RATIO (ACID TEST RATIO)

Quick ratio is much more exacting measure than the current ratio. By excluding inventories, it concentrates on really liquid assets, with value fairly certain. Quick Assets consist of only cash and near cash assets. Inventories are deducted from current assets on the belief that these are not near cash assets. Quick ratio is given by the formula:

2008 0.12

2009 0.14

2010 0.27

QUICK RATIO (ACID TEST RATIO)

0.12 0.14 0.27

2008

2009

2010

A quick ratio of 1:1 is considered as acceptable. A higher ratio of 2.03:1 ensures the ability of the firms quick assets to meet its current liabilities.

47

Project ~ Working Capital Liquid Assets

2008 Liquid Assets Current Liabilities 3122.07 25385.33

2009 4795.81 33027.5

2010 44353.57 30864.63

Liquid Assets

30864.63

33027.5 25385.33 3122.07 2008 4795.81 2009

44353.57

2010

48

ABSOLUTE LIQUID RATIO This ratio measures the absolute liquidity of the business. This ratio considers only the absolute liquidity of the business and is calculated as:

Cash + Marketable Securities _________________________ Current Liabilities

2008 0.032

2009 0.05

2010 0.11

ABSOLUTE LIQUID RATIO

0.11 0.05 0.032 2009 2008 2010

The acceptable standard for this ratio is 0.5:1

Activity ratios are also called as turnover ratios or performance ratios. These ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios usually indicate the frequency of sales with respect to its assets

49

Project ~ Working Capital Cash+ Manlcetable Sec 2008 Cash+Manlcetable Sec Current Liabilities 815.87 25385.33 2009 1760.49 33027.5 2010 3409.96 30864.63

Cash+ Manlcetable Sec

33027.5

30864.63

25385.33

815.87 2008

1760.49 2009

3409.96

2010

50

CURRENT ASSET TURNOVER RATIO The idea of the current assets turnover is to ascertain the contribution of the current assets to sales. The relationship indicates efficiency or otherwise utilization of current assets to attain the maximum turnover sales. Sales _________________________ Current Assets

2008 3.353

2009 5.5

2010 5.8

CURRENT ASSET TURNOVER RATIO

5.8 5.5 3.353

2008

2009

2010

51

Project ~ Working Capital Net sale 2008 Net Sale Current Assets 90293.20 26928.145 2009 226905.15 41243.266 2010 260766.27 44358.57

Net sale

44358.57 41243.266 260766.27

26928.145 90293.2 2008

226905.15

2009

2010

52

WORKING CAP. TURNOVER RATIO

Net working capital turnover ratio indicated the velocity of the utilization of working capital. A higher ratio indicates the effective utilization of working capital and a low ratio indicate otherwise.

2008 58.5

2009 27.61

2010 19.33

WORKING CAP. TURNOVER RATIO

58.5 27.61 19.33

2008

2009

2010

The above Working capital turnover ratio suggests that the working capital is being utilized efficiently.

Working capital is segregated into Inventory turnover, Debtors turnover and creditors turnover

53

Project ~ Working Capital Cost sale or sales 2008 Cost sale or sales (Net) Working Capital 90293.20 1542.81 2009 226905.15 8215.766 2010 260766.27 13488.394

Cost Sale
Cost sale or sales (Net) Working Capital

226905.15

260766.27

90293.2

1542.81

8215.766 13488.394

2008 2009 2010

54

INVENTORY TURNOVER RATIO

This ratio is also known as stock turnover ratio and establishes the relationship between the cost of goods sold during the year and average inventory held during the year. It is calculated as follows:

Sales Average Inventory

2008 4.63

2009 6.2

2010 7.2

INVENTORY TURNOVER RATIO

7.2 6.2 4.63

2008

2009

2010

55

Project ~ Working Capital Net Sales 2008 Net Sale Avg. Inventory 90293.20 19467.82 2009 226905.15 36447.45 2010 260766.27 36231.015

Net Sales

36231.015 36447.45

260766.27 19467.82 226905.15

90293.2

2008

2009

2010

56

DEBTORS TURNOVER RATIO

In case firm sells goods on credit, the realization of sales is delayed and the receivables are created. The cash is realized from these receivables later on. The speed with which these receivables are collected affects the liquidity position of the firm. The debtors turnover ratio throws light on the collection and credit policies of the firm. The debtors turnover ratio is calculated as follows: Sales Average Accounts Receivable

2008 65.48

2009 74.75

2010 65.48

DEBTORS TURNOVER RATIO

65.48

74.75

65.48

2008

2009

2010

57

Project ~ Working Capital Sale 2008 2009 2010

Net Sale

90293.20

226905.15

260766.27

Avg. Account Rec.

1937.90

3035.32

3982.175

Sale

3982.175 3035.32

260766.27 226905.15 1937.9

90293.2

2008

2009

2010

58

CONCLUSION

59

Project ~ Working Capital

CONCLUSION
Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are accounts payable, bills payable, bank overdraft, and outstanding expenses. The goal of working capital management is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained. The majority of Indian companies maintain relatively lower cash/bank balances. Marketable securities are yet to emerge as a popular means of cash management. The excess cash is deployed to retire short term debt/ in short term bank deposits. Though there is a notable decline over the years but yet inventory constitutes an important part of total current assets. Debtors/ receivables also constitute an important part of current assets. The collections are required to be as quick as possible and thus corporates offer cash discounts for the purpose. Accounts payables and short term loan/ advances are major components of current liabilities. The project Working Capital cardinally focuses on inventory and credit terms for the creditors and debtors. The approach followed in the project is to reduce the inventory so as to adhere to the standard norms of the inventory holding thereby releasing the working capital out of it. Secondly to revise the credit terms in such a way so as to make them uniform across all the sites. Thus releasing the working capital at the sites where the credit terms were proposed to be revised. BANK RECONCILIATION Bank reconciliation is a process under which each month bank sends the company a statement detailing the activity that has taken place in the account during the month. The bank statement shows the balance at the beginning of the month, the deposits, the cheques paid, and other debits

60

and credits during the month, and the balance at the end of the month. As part of on job training bank reconciliation has been performed.

SERVICE TAX AUDIT Service tax is levied on specified taxable services and the responsibility of payment of the tax is cast on the service provider. System of self-assessment of Service Tax Returns by service tax assesses has been introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are expected to be filed half yearly. Under service tax audit I was assigned the job of internal tax auditors. As part of internal tax audit following tasks were performed. The concerned documents were checked for fulfillment of certain criteria such as

   

Service tax number on the bill Description of the service being provided Classification of service type Service tax being charged is as per the prescribed regulation

ISSUING C - FORMS The C-form allows companies to avail lower tax rates for Interstate sales. Here's how it works when a company sells goods to a customer in another state, the customer is supposed to give company a C- form, which allows company a to pay just 4% central sales tax. Without a C-form the tax burden on company is for a local sale as high as 12.5%. As part of training C- Forms were issued and the records were maintained for the companys own use as well as for transferring the data to the concerned government authorities.

ISSUING A.R.E FORMS:

Application for Removal of Excisable Goods was issued for goods being exported as part of one of the assignments done at the company.

61

Project ~ Working Capital

RECOMMENDATONS

62

RECOMMENDATONS
The result of the live project done at GOODFREY PHILIPS INDIA is presented in the form of following recommendations:

Working capital can be improved by: 1. Reducing the inventory holding period of items.

1.

Increasing the credit period of Creditors..

3. Decreasing the credit period of Debtors.

63

Project ~ Working Capital Pertaining to the above three major prerequisites of the project following key focus areas have been suggested.

KEY FOCUS AREAS OF THE PROJECT: 1) Inventory: Strategic Stock Review Quality Clearance Norms FG Stock Inventory Review over Plan General Stores Min-Max Level Reviews Review of non-moving inventory

2) Trade Payables: Increased Credit Period Category wise Common Suppliers Payment days Calculation of Payment due date Standardization Settlement of Pending Advances

3) Trade Receivables: Review of Credit Period & Credit Limits Review of payment terms Review of No. of Clearance days

Credit period of raw material suppliers to be checked for standardization Credit period of same supplier to be checked for standardization across all locations General PO terms to be checked for revision for Simplification Inventory holding to be validated for checking against the norms FG quality clearance time to be reviewed for reduction Upward revision of credit limit of suppliers post discussions Credit period of same raw material supplied by different supplier to be standardized at same site in case they differ

64

 If more than one supplier supply raw material at same site then their credit period should be same  If more than one supplier supply raw material at same site then their credit period should be same

As it is mentioned above in the project report tat cash management serves to be an important part of working capital management an attempt was made to understand the cash budgeting (Funds forecasting and budgeting) of GOODFREY PHILIPS INDIACH, Chandigarh which is as follows:

FUNDS FORECASTING AND BUDGETING AT GOODFREY PHILIPS INDIA, CHANDIGARH

The principal aim of budgeting as a tool is to predict the cash flows over a given period of time is to ascertain whether at any point of time there will be excess or shortage of cash. So is the purpose of cash budgeting done at GOODFREY PHILIPS INDIA, Chandigarh. The first element of cash budgeting at Chandigarh is selection of period of time to be covered by the budget. It is referred to as planning horizon. The planning horizon means the time span and the sub periods within the time span over which the cash flows are to be projected. At GOODFREY PHILIPS INDIA, Chandigarh the sub period taken for the purpose of budgeting is a time span of one month which is further used to consolidate it for quarterly and then annual budgeting. The second element of cash budgeting is to determine the factors that have a bearing on cash flows. The items included in cash budget are only cash items; non cash items such as depreciation and amortization are excluded. The factors that generate cash flows are generally divided into two broad categories: Operating and Financial. Cash flows generated by the operations of the firm are known as operating cash flows while the others are termed as financial cash flows. At GOODFREY PHILIPS INDIA, Chandigarh as per the limits of the project only operating cash flows have been considered. The operating cash flow items which are require to be considered are mentioned as below:

65

Project ~ Working Capital

OPERATING CASH FLOW ITEMS Inflows/Cash receipts

Cash Sales Collection of accounts receivable Disposal of fixed assets

Outflows/Disbursements
Accounts payable Purchase of raw materials Wages and Salary Factory expenses Administrative and selling expenses Maintenance expenses Purchase of fixed assets

As is mentioned in the table above the operating cash flow items which are used at GOODFREY PHILIPS INDIA for the purpose of budgeting are mentioned in the template attached. This template is used for obtaining the inputs for the cash flow items from the various departmental heads on monthly basis. The major heads in the template are receipts, payments for purchase of raw materials, packaging materials, freight, employee salaries, electricity expenses and provision for taxation.

After the time span of the cash budget is decided, the final step is the construction of the budget. Post receiving inputs from various departments the budget is constructed.

66

SUGGESTIONS

67

Project ~ Working Capital

SUGGESTIONS
The management of the working capital is equally important as the management of long-term financial investment. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. The various possible steps that Goodfrey Philips India, Chandigarh may take to improve its working capital management are as follows:

y y

The company should look indigenous suppliers for its raw material and spare parts requirements and reduce its lead time. The company is increasing its installed capacity and its production too each year but the increase in production is not in proportion to installed capacity. Thus, the two must be matched.

y y y y y y

Availing more credit from its suppliers.00 Prompt collection from its debtors. Moving towards zero working capital. Improvement in Inventory Conversion Period, mainly reduction in Work in Progress. Reduction in loans and inter-corporate deposits and utilizing the money to pay off debts and loans taken by the company. Given the working loan of Rs. 56,84,50,000 and interest thereon is Rs. 4,40,80,000 in 2009 which is almost 7.75%. So, the company might consider some other sources of cheaper loans.

The company can maintain separate books of accounts for their manufacturing and trading businesses for more clarity and transparency in operations.

68

LIMITATIONS OF THE STUDY

Due to constraints of time and resource, the present study is likely to suffer from certain limitations. Some of these are mentioned here under, so that the findings of the study may be understood in a proper perspective. The limitations of the study are:-

1.

Employees of the Bank were unwilling to share information due to data privacy.

2.

The research was carried out in only one branch of Goodfrey Philips India. As much financial information not fetch out properly.

3.

Proportional representation was not given to the various strata of the population as the secondary data in this regard was not fully available.

69

Project ~ Working Capital

70

BIBLIOGRAPHY

71

Project ~ Working Capital

BIBLIOGRAPHY
y Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. y Eljelly, A. 2004. Liquidity-Profitability Tradeoff: An empirical Investigation in Emerging Market, International Journal of Commerce & Management, 14(2), 48 - 61 y Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. y Howorth, C., & Westhead, P. (2003). The focus of working capital management in UK small firms. Management Accounting Research 14, 94-111. y Lamberson, M. (1995). Changes in working capital of small firms in relation to changes in conomic activity. Mid-American Journal of Business, 10(2). y Lazaridis, I., & Tryfonidis, D. (2006). Relationship between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 19(1), 26-35. y Lyroudi, K., & Lazaridis, Y. (2000). The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens, from http://ssrn.com/paper=236175 y Moyer, R. C., Mcguigan, J. R., & Kretlow, W. J. (2003). Contemporary Financial Management (Ninth ed.). United States of America: Thomson. y Shin, H. H., & Soenen, L. (1998). Efficiency of working capital management and corporate profitability. Financial Practice and Education, 8(2), 37-45. y Raheman, A. & Nasr, M. (2007) Working capital management and profitability case of Pakistani firms. International Review of Business Research Papers, 3 (1), 279-300. y y Sanger, J. S. (2001). Working capital: a modern approach. Financial Executive, 69. Smith, K. V. (1980). Profitability and liquidity trade off in working capital management. In Reading on the Management of Working capital (pp. 549-562). St. Paul: West Publihing Co. y Solawu, R. O. (2006). Industry Practice and Aggressive Conservative Working Capital Policies in Nigeria. European Journal of Scientific Research, 13(3). y Weinraub, H. J. & Visscher, S. (1998). Industry practice relating to aggressive conservative working capital policies. Journal of Financial and Strategic Decisions,11(2). 72 An

Padachi, K. (2006). Trends in working capital management and its impact on firms performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58.

Peel, M. L. & Wilson, N.(1996). Working capital and financial management practises in small firm sector. International Small and Business Journal, 14(2), 52-68.

73

Project ~ Working Capital

ANNEXURE
As at 31.3.201 0 As at 31.3.200 9

Schedule Number SOURCES OF FUNDS Shareholder's funds Share capital Reserves and surplus Loan funds Secured Deferred tax liabilities (net) TOTAL APPLICATION OF FUNDS Fixced assets Gross block Less: Depreciation and amortization 12

1 2 3

1039.88 65611.8 6

66651.7 4

1039.88 56804.8 7

57844.7 5

11455.4 3 97.17 78204.3 4

9528.71

67373.4 6

4 42742.1 7 18143.0 3 24599.1 4 7296.99 31896.1 3 19485.5 7 35220.8 8 15411.2 19809.6 8 6169.91 25979.5 9

Net block Capital work-in-progress and advances on capital account

Investments Deferred tax assets (net) Current assets, loans and advances Inventories Sundry debtors Cash and bank balances Loans and advances

20985.7 235.87

6 7 8 9

36014.5 8 4929.03 3409.96 10041.4 4

36447.4 5 3035.32 1760.49 9347.36 74

54395.0 1 Less: Current liabilities and provisions Current liabilities Provisions 10 11 20823.1 9 6749.18 27572.3 7 26822.6 4 78204.3 4

50590.6 2

23680.1 4 6738.18 30418.3 2 20172.3 67373.4 6

Net current assets Total Notes to the accounts

Schedul e Number Income Gross sales Less : Excise duty Net sales Other income Expenses Raw and packing materials manufactured and other goods Manufactured and other expenses Depreciation and amor Increase/(decrease) in excise duty on finished goods Profit before taxtion provision for taxation- current tax deferred tax charge/(credit) fringe benefit tax Profit after taxation Balance brought forword from previous year Available for appropiation

As at 31.3.2010 260766.3 122378.9 138387.4 6526.02 144913.4

As at 31.3.200 9 226905.2 113695.6 113209.5 5540.23 118749.8

13

14 15 4

56640.22 3390.97 992.94 128173.8 16739.57 4552.96 333.04 15.1 11838.47 40307.99 52146.46

48272.59 2802.63 1940.86 102159.1 16590.64 5333 400.95 768.23 10890.36 33959.15 44849.51

75

Project ~ Working Capital

APPROPRIATIONS Proposed dividend Corporate dividend tax Transferred to general reserve Surplus carried to balance sheet Basic and diluted earnings per share (Face value of share Rs. 10 each) Notes to the accounts

2599.7 431.78 1500 47614.46

2599.7 441.82 1500 40307.99 Rs. 104.73

Rs. 113.84 16

For the year ended 31.3.2010 A. CASH FLOWS FROM OPERATING ACTIVITIES Net profit tax Adjustments for : Depreciation and amaortization Interest income from: Subsidiary companies Debts, deposits, Loans etc. Dividends from other long term investments Interest income from long term Investments Profit on redemption/sale of other long term investments Profit on sale of other current investments Exchange Lass /(gain) Exchange (gain) / Lass on foregin currency borrowings Provisions for wealth-tax Interest expense -fixed loans other Provisions for decline in value of Investments (Written back)/ made Fixed assets written off Loss on sale of fixed assets

For the year ended 31.3.2009

16739.57 3390.97 387.13 252.52 161.9 2230.04 214.84 11.01 1119.25 17 633.64 56.33 166 124.04 100.87

16590.64 2802.63 324.14 196.85 194.64 4.32 2653.41 172.25 0.16 1594.06 24 434.49 151.69 330 153.47 44.41 76

197.82 Operating profit before working capital changes Adjustments for: Trade and other receivables Inventories Trade and other payables Cash generated from operations Interest received Direct taxes paid Net cash from operating activities B. CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets Proceeds from sale of fixed assets Purchase of investments Proceeds from sale of investments Dividends from long term other investments Interest received from other long term investments loans and deposits received back Interest received from other long term investments Net cash used in investing activities C. CASH FLOWS FROM FINANCING ACTIVITIES Term loan availed Repayment of long term borrowings Repayment of working capital borrowings Interest paid Divided paid Corporate divided tax paid Net cash used in financing activities NET (DECREASE) /INCREASE IN CASH AND CASH EQUIVALENTS Opening cash and cash equivalents Cash and bank balances Closing cash and cash equivalents Cash and bank balances 16541.75 3062.92 432.87 2905.72 5535.77 11005.98 532.43 4160.46 3628.03 7377.95

1988.98 18579.62 2048.08 12641.38 7329.26 7360.2 11219.42 384.53 6467.51 6082.98 5136.44

9675.09 142.67 188769.6 192880.6 135027 4111.01 149494.5 161.9 50 86.16 5123.35

13701.52 58.48 14467.44 197.9 12.96 655 136.014 1826.27

5469.6 2068.12 355.51 605.24 2593.03 441.82 594.12

1064.61 1338.82 576.56 2596.44 441.82 6018.25

1660.48 1760.49 3409.96

944.46 815.87 1760.49 77

Project ~ Working Capital Effect of exchange rate changes on exchange earner foreign currency bank balances currency bank balance

11.01

0.16

Schedule Numer SOURCES OF FUNDS Shareholders' Funds Share Capital Reserves and Surplus Loan funds Secured Defferred tax liabilities (net) TOTAL APPLICATION OF FUNDS Fixed assets Groos block Less: Depreciatiob Net block Capital work-in-Progress and advances on Capital account Investments Current assets, loans and advances Income accured on investments Inventories Sundry debtors Cash and bank balances Loans and advances Less: Current Liabilities and provisions Current Liabilities provisions

As at 31.3.2008

As at 31.3.2007

1 1039.88 2 48956.03 3

1039.88 49995.91 40775.14

41815.02

10338.08 12 165.08 60499.07

6073.35 355.44 48243.81

4 26025.48 12835.84 13189.64 23109.02 11248.76 11860.26

2147.42 5

15337.06 32957.48

794.6

12654.86 24626.57

6 7 8 9

11.9 23806.07 2306.2 815.87 8544.64 35484.68

12.72 15129.58 1569.61 1427.6 7342.47 25481.98

10 16840.69 11 6439.46 78

23280.15 Net Current assets Total 12204.53 60499.53

14519.6 10962.48 48243.81

Schedule For As at Numer 31.3.2008 31.3.2007 INCOME Gross sales Less: Excise duty Net sales Other income EXPENSES Raw and packing materials manufacturing and other goods Manufacturing and other expenses Depreciation Incdrease/(descrease) in exicse duty on finished goods 182461.8 92168.56 90293.2 5171.81 95465.01 159676.8 83528.33 76148.46 3359.85 79508.31

13

14 15 4

34438 40204.23 1977.49 1871.53 78491.25 16973.76 16973.76 5174.41 190.36 767.3 11222.41 27278.26 38500.67

30803.51 34621.44 1906.58 1105.51 66226.02 13282.29 240.59 13522.88 4071 52.52 639.98 8810.42 23009.36 31819.78

Profit taxation and exceptional items Exceptional items-Refer note 14 Profit before Taxation Provision for taxation- Current tax deferred tax credit fringe benefit tax Profit after taxation Balance brought forward from previous year Available for appropriation APPROPRIATIONS Proposed divided Corporate divided tax Trasferred to general reserve Surplus carried to balance sheet

2599.7 441.82 1500 33959.15 38500.67 Rs. 107.92 16

2599.7 441.82 1500 27278.26 31819.78

Basic and diluted earnings per share (Face value of share- Rs. 10 each Notes to the accounts

Rs. 84.73

79

Project ~ Working Capital For the year ended 31.3.2008 A CASH FLOWS FROM OPERATING ACTIVITIES Net profit before tax Adjustments for: Depreciation interest income from: Subsidiary companies Debts, deposits Loans etc. Dividends from long term investments interest income from other long term investments Profit on redemption/sale of other long term investments profit on sale of Current investments Exchange gain Exchange gain on foreign currency borrowings Provisions for wealth-tax Interest expense-fixed loans other Fixed assets written off/written down Loss on sale of fixed assets Operatings profit before working capital changes Adjustments for: Trade and other receivables Inventories Trade and other payables Cash generated from operations Interest received Direct taxes paid Net cash from operatings activiities B. CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets For the year ended 3103.2007

16973.76 1977.49 297.58 168.09 93.22 25.91 2851.4 411.01 346.31 18 344.45 23.01 20.33 77.61 1732.63 15241.13 20620.99 8676.49 8551.63 2185.85 13055.28 281.16 5869.06 5587.9 7467.38

13522.88 1906.58 245.05 131.14 31.01 25.91 1885.91 344.4 0.29 11.11 17 272.77 19.51 64.37 119.63 274.96 13247.92 402.83 157.94 596 351.11 12896.81 216.71 4709.18 4492.47 8404.34

4968.26

1910.36 80

Proceeds from sale of fixed assets Purchase of investments Proceeds from sale of investments Dividends from long term other investments Interest received from other long term investments Loans and deposits made Loans and received back Interest received Net cash used in investing activities C. CASH FLOWS FROM FINANCING ACTIVITIES Term loan availed Repayment of long term borrowings Proceeds from(Repayment of) working capital borrowings Interest paid Divided paid Corporate dividend tax paid Net cash used in financing activites NET (DECREASE)/INCREASE IN CASH AND EQUIVALENTS Opening cash and cash equivalents cash and bank balances closing cash and cash equivalents cash and bank balances Effect of exchange rate changes on exchange earner foreign currency bank balances

210.63 132242.2 127173.7 108818 5068.5 107522.3 94.04 25.91 128 320 174.47 9339.71

119.02 1295.75 33.46 25.91 681 200 151.99 3356.73

4510.28 1011.79 1112.55 316.31 2592.31 441.82 1260.6

1167.2 157.84 301.86 2333.66 328.15 4288.71

611.73 1427.6

758.9 668.41

815.87

1427.6

815.87

0.29 1427.31

81