INDUSTRIAL TRAINING REPORT ON WORKING CAPITAL MANAGEMENT IN ALCON WIRES & CABLES INDUSTRIES In partial fulfillment of the requirement

for the award of the degree of BACHELOR OF BUSINESS ADMINISTRATION (Session 2008-2011)

Submitted by: 1

HIMANSHU KAPOOR Roll No. Submitted to: Department of BBA

DECLARATION

I hereby declare that the project done by me is true to my knowledge. The project duration was of 5 months (20/01/11 to 20/06/11).The information collected by me is authentic and is done through data analysis and interpretation and I have a thorough knowledge of the project. The content of this report is based on the information collected from the Finance & Accounts Division, Alcon Wires & Cables Industries, Rajpura & also from the Annual Report. All calculations are done as per the methodology of, Alcon Wires & Cables Industries , Rajpura.

Place: Rajpura Date:

ACKNOWLEDGEMENT
I am indebted to the Company and HRD Department, who have given me a distinct opportunity to enlarge my dexterity and sphere of knowledge, which I have gained during my five months training program. It was indeed a great pleasure to have a training program in the Alcon Wires & Cables Industries, at Rajpura , Here I learnt the practical utilization of the knowledge in my respective field of Finance and also got the real picture of the formal and informal culture of the eminent manufacturing unit. I am extremely thankful to Mr. Kuldeep Singh (A/Cs. & Fin.) for his valuable guidance. This project bears the imprint of Managers/ Officers of the A/C s & Finance department. I shall remiss in my duty if I do not thank them, I pay my regards to:for their assistance, co-operation and encouragement offered by them.

I also express my gratitudes to those of my colleague trainees who have sacrificed their valuable time for assisting me directly and indirectly in my report making.

About The Organization

About Alcon Cables.................................................................................... 1-5 Major product Manufacturing process. 5 8

INTRODUCTION ABOUT PROJECT

Conceptual Framework or Working Capital Management.. Principles of Working Capital. Determinants of Working Capital Management of Cash... Management of Accounts Receivables and Factoring. Management of Inventory Objective of working capital.. Need of working capital. Review of literature..
RESEARCH METHDOLOGY

10 16 17 20 24 29 35 36 41

Research Design. Sampling Technique..

SUGGESTIONS & CONCLUSION.

42 42

60

LIMITATION Bibliography..

61 63

Contents COMPANY PROFILE

ALCON WIRES & CABLES INDUSTRIES is an established brand name in the field of Electrical Wires and Cables. The Company was established in the year 1987 & immediately started manufacturing world-class products at most reasonable rates. The company has most modern manufacturing facilities and infrastructure at its plant. It uses sophisticated machines and equipments to manufacture and is further fortified by training of its people by reputed technocrats. Company has excellent access to international /domestic marketing network. Company is always interested in undertaking product improvement and R & D assignments. ALCON WIRES & CABLES is a premier manufacturer and supplier of power cables and fire retardant cables. For more information about manufacturer and supplier of power cables and fire retardant cables visit www.alconcables.com. Prestigious Approvals : ALCON WIRES & CABLES is having relevant quality licenses. From the day of inception, the company is approved by Bureau of Indian Standards & all our products are certified with ISI mark. To name our international approvals, UKAS has approved us for ISO 9001-2000 & CSA had approved us for products required under CSA & UL standards. The company is also having various approvals from government departments and private domestic as well as international consultants. ALCON WIRES & CABLES products meet the stringent requirements of the customers. In this liberalized economy, to operate globally, parameters of quality, delivery, and customer satisfaction are most important. Polaris has achieved all above & therefore from modest beginning, ALCON WIRES & CABLES has grown into one of leading manufacturer of control cables / power cables / instrumentation cables / house wires & flexible wires.

PRODUCT RANGE LT PVC Power Cables with and copper conductors as per IS : 1554(Part-1) 1988 amended upto date. Single core upto 1000 sq.mm. Multicore upto 630 sq. mm. Copper Control Cables 1.5 & 2.5 sq. mm. upto 61 cores. Copper Mining Cables 1.1 KV Grade as per IS : 1554 (Part-1) 1988. Copper Mining Cables 3.3 KV grade as per IS: 1554 (Part- 11) 1988. FRLS Power Control Cables. LT XLPE Power Cables as per IS : 7098 (Part-1) 1988. Special cables as per Customers Specification. House wiring with heat resistant PVC Insulation. Flexible wires and submersible cables.

OUR SATISFIED CUSTOMERS

Bharat Heavy Electrical Limited Haridwar , Hyderabad.

The Road Ahead

According to the 11th planning commission (2007-2012) of India, the highest priority sector is the Power. The estimated requirement of cables in India is $20 billion over the period of next 5 years. According to leading analysts the House / Building wire segment is pegged at $2 billion annually, growing at the rate of 10 % p.a., of this 40% is the organized sector & the rest is unorganized. Ambition: To develop marketing presence to tap the Building / Industrial wire segment to cater to the needs of a burgeoning real estate.

To tap markets across the globe. To consolidate position as a reputed L.T. Control, Power Cables & Instrumentation Cables manufacturer in India. To expand further to countries in the US, Europe, Middle East and Africa

Plan of Action:

WORKING CAPITAL MANAGEMENT - AN INTRODUCTION 7

Financial Management of business firms involves;

The Management of Long Term Assets - Capital Budgeting The Management of Long Term Capital Management of Capital Structure The Management of Short Term Assets and Liabilities

Working Capital Management

Working Capital, also called net Current Assets, is the excess of Current Assets over Current Liabilities. All organizations have to carry working capital in one form or the other. The efficient management of working capital is important from the point of view of both liquidity and profitability. Poor management of working capital means that funds are unnecessarily tied up in idle assets hence reducing liquidity and also reducing the ability to invest in productive assets such as plant and machinery, so affecting the profitability. Working Capital Management (WCM) is the process of planning and controlling the level and mix of the current assets of the firm as well as financing these assets. WCM requires financial managers to decide what quantities of cash, other liquid assets, accounts receivables and inventories the firm will hold at any point of time. Moreover financing of these current assets is also very important and crucial decision. In the management of working capital the firm is faced with two key questions. First, given the level of sales and the relevant cost considerations, what are the Optimal amounts of current assets? Second, given these optimal amounts, what is the most economical way to finance these working capital investments? Existence of working capital is imperative in any firm. The fixed assets, which usually require a large chunk of total funds, can be used at an optimum level only if supported by sufficient working capital, and second, the working capital involves investment of funds of the firm. If the working capital level is not properly maintained and managed, then it may result in unnecessary blocking of scarce resources of the firm. The in---sufficient working capital on the other hand, put different hindrances in smooth working of the firm.

Therefore, the working capital management needs attention of all the financial managers. The working capital management includes the management of the level of individual current assets as well as the management of total working capital. However, each individual current asset has unique characteristics, which the financial manager must consider in deciding how much money should be invested in each of these current assets. In other words, he must decide the level of all the current assets i.e., Cash and Bank balance, Marketable Securities, Receivables and Inventories. Managing current assets may require more attention than managing fixed assets. The financial manager cannot simply decide the level of the current assets and stop there. The level of investment in each of the current assets varies from day to day, and the financial manager must therefore, continuously monitor these assets to ensure that the desired levels are being maintained. Too large an investment in current assets means tying up funds that can be productively used elsewhere (or it means added interest cost if the firm has borrowed funds to finance the investment in current assets). Excess investment may also expose the firm to undue risk e.g., in case, the inventory cannot be sold or the receivables cannot be collected. On the other hand, too little investment also can be expensive. For example, insufficient inventory may mean that sales are lost as the goods that a customer wants are not available. The result is that the financial managers spend a large chunk of their time managing the current assets because level of these assets changes quickly and a lack of attention paid to them may result in appreciably lower profits for the firm. In the working capital management, a financial manager is faced with decisions involving some of the considerations as follows: 1. 2. 3. What should be the total investment in working capital of the firm? What should be the level of individual current assets? What should be the relative proportion of different sources to finance the

working capital requirements?

MANAGEMENT OF WORKING CAPITAL

Working capital, in general practice, refers to the excess of current assets over current liabilities. Management of working capital therefore. Is concerned with the problem that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them.

CONCEPTUAL FRAMEWORK OF WORKING CAPITAL MANAGEMENT CONCEPT OF WORKING CAPITAL The management of Working Capital Management is similar to that of fixed assets in the sense that in both cases the firm analysis their effects on its return and risk, but there is a difference between Fixed Capital and Working Capital as in Fixed Capital time element plays an important role as compared to Working Capital. Working capital is type of capital requires for daily payments In any organization there is always need for two type of capital. 1. 2. Fixed Capital Working Capital

There are two concepts of working capital;

(i) Balance Sheet Concept

This concept of working capital is divided into two parts;

(a) Gross Working Capital

Gross Working Capital , simply called as working capital, means the total current assets. The gross Working Capital concept focuses attention on two aspects of current assets management; (I) Optimum investment in current assets and (II) Financing of current assets, investment in current assets should be just adequate, not more not less, to the needs of the business firm. It includesCash and Bank balance Bills Receivable

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Sundry Debtors Short Term Loans and Advances Inventories Temporary investments of surplus funds Prepaid expenses Accrued incomes etc.

Gross Working Capital = Total Current Assets (b) Net Working Capital
The term Net Working Capital can be defined in two ways; (i) (ii) The most common definition of net working capital (NWC) is the difference between current assets and current liabilities Alternate definition of NWC is that portion of current assets which is financed with long-term funds.

Net Working Capital, being difference between current assets and current liabilities, is a qualitative concepts (a) (b) It indicates the liquidity position of the firm and Suggests the extent to which working capital needs nay be finance by permanent sources of funds. It includesBills Payable Sundry Creditors Accrued or outstanding expenses Short Term Loans, Advances and Deposits Dividend payable Bank Overdraft Provision for taxation, if it does not amount to appropriation of profits

Net Working Capital = Current Assets Current Liabilities

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Net working capital can be positive or negative. So, In conclusion, it may be said that, both, Gross and Net, concepts of working capital are important aspects of the working capital management. The net concept of working capital may be suitable only for proprietor form of organizations such as sole-trader or partnership firms. But the gross concept is very suitable to the company form of organization where there is a divorce between ownership, management and control.

(ii)

Operating cycle or Circular Flow Concept

Working capital refers to that part of firms capital which is required for finacing shortterm or current assets such as cash, marketable securities, debtors and inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital. The circle starts with the purchase of raw material and other resources and ends with the realization of cash from the sale of finished goods. It Involves purchase of raw material and stores, its conversion into stock of finished goods through work-in-progress, conversion of finished stock into sales. Debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on.

Gross Operating Cycle = RMCP + WICP + FGCP +RCP

RMCP = Raw Material Conversion Period WICP = Work-in-Progress Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period

Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferal Period

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WORKING CAPITAL CYCLE OR OPERATING CYCLE

Cas h Raw Materia l

Debtors

Finished Goods WIP

13

Principles of Working Capital Management / Policy

Principles of Working Capital Management

Principle of Risk Variation

Principle of Cost of Capital

Principle of Equity Position

Principle of Maturity of Payment

1. Principle of Risk Variation Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current assets with less dependence on short-term borrowings increases liquidity, reduces dependence on short- term borrowings increases liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investment in current assets with greater dependence on short-term borrowings increases risk, reduces liquidity and increases profitability

.
2. Principle of Cost of Capital

The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost. A sound working management should always try to achieve a proper balance between these two.
3. Principle of Equity Position This principle is concerned with planning the total investment in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in the current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios

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1. Current assets as percentage of total assets

2. Current assets as a percentage of total sales

4. Principle of Maturity of Payment This principle is concerned with planning the sources of finances for working capital. According to this principle, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time.

DETERMINANTS OF WORKING CAPITAL

The working capital needs of a firm are determined and influenced by various factors. The determination of working capital requirement is a continuous process and must be undertaken on a regular basis in the light of the changing situations. The following factors are relevant in determining the working capital needs of the firm:

1.) Basic Nature of Business

The working capital requirement is closely related to the nature of the business of the firm. In case of a retail shop or a trading firm, the amount of working capital required is .small enough. Most of the transactions are undertaken in cash and the length of the operating cycle is generally small. The trading concerns usually have smaller needs of working capital, however, in certain cases, large inventories of goods may be required and consequently the working capital may be large. In case of financial concerns (engaged in financial business) there may not be stock of goods but these firms do have to maintain sufficient liquidity all the times. In case of manufacturing concerns, different types of production processes are performed. One unit of raw material introduced in the production schedule may take a long period be- fore it is available as finished goods for sale. Funds are blocked not only in raw materials but also in labor expenses and overheads at every stage of production. The

15

operating cycle is usually a longer one and sales are made generally on credit terms. So, in case of manufacturing concerns, there is a requirement of substantial working capital.

2.) Business Cycle Fluctuations

Different phases of business cycle i.e., boom, recession, recovery etc. also affect the working capital requirement. In case of boom conditions, inflationary pressure appears and business activities expand. As a result, the overall need for cash, inventories etc. increases resulting in more and more funds blocked in these current assets. In case of recession period however, there is usually dullness in business activities and there will be an opposite effect on the level of working capital requirement. There will be a fall in inventories and cash requirement etc.

3.) Seasonal Operations

If a firm is operating in goods and services having seasonal fluctuations in demand, then the working capital requirement will also fluctuate with every change. In a cold drink factory, the demand will certainly be higher during summer season and therefore, more working capital is required to maintain higher production, in the form of larger inventories and bigger receivables. On the other hand, if the operations are smooth and even through out the year then the working capital requirement will be constant and will not be affected by the seasonal factors.

4.) Market Competitiveness

The, market competitiveness has an important bearing on the working capital needs of a firm. In view of the competitive conditions prevailing in the market, the firm may have to offer liberal credit terms to the customers resulting in higher debtors. Even larger inventories may be maintained to serve an order as and when received; otherwise the customer may go to some other supplier. Thus, the working capital tends to be high as a result of greater investment in

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inventories and receivable. On the other hand, a monopolistic firm may not require larger working capital. It may ask the customers to pay in advance or to wait for some time after placing the order.

5.) Credit Policy

The credit policy means the totality of terms and conditions on which goods are sold and purchased. A firm has to interact with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goods etc., and two, the credit policy relating to credit which it extends to its customers. In both the cases, however, the firm while deciding its credit policy, has to take care of the credit policy of the market. For example, a firm might be purchasing goods and services on credit terms but selling goods only for cash. The working capital requirement of this firm will be lower than that of a firm, which is purchasing cash but has to sell on credit basis.

6.) Supply Conditions

The time taken by a supplier of raw materials, goods etc. after placing an order, also determines the working capital requirement. If goods are received as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory of that good. Otherwise, larger inventories should be kept e.g., in case of imported goods. It is often seen that the shopkeepers may not be keeping stock of all items, but whenever there is a demand, they procure from the wholesaler/producer and supply it to their customers. Thus, the working capital requirement of a firm is determined by a host of factors. Every, consideration is to be weighted relatively to determine the working capital requirement. Further, the determination of working capital requirement is not once a while exercise, rather a continuous review must be made in order to assess the working capital requirement in the changing situation. There are various reasons, which may require the review of the working capital requirement e.g., change in credit policy, change in sales volume etc.

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MANAGENMENT OF CASH
Cash management refers to management of cash balance and the bank balance and also includes the short-term deposits. The term cash may be used in two different ways. One it may include currency, cheques, drafts, demand deposits held by a firm i.e., pure cash or generally accepted cash equivalents. Second, in a broader sense, it also includes near cash assets such as marketable securities and short-term deposits with banks. A financial manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the firm. For this he will have to forecast the cash inflows from sales and outflows for costs etc. This will enable the financial manager to identify the timings as well as amount of future cash flows. Cash management does not end here and the financial manager may also be required to identify the sources from where cash may be procured on a short-term basis or the outlets where excess cash may be invested for a short term. In most of the firms, the financial manager who is responsible for cash management also controls the transactions that affect the firm's investment in marketable securities. In case of excess cash, marketable securities are purchased; and in case of shortage of cash, apart of the marketable securities is liquidated to procure enough cash. All these issues are important to the financial manager for several reasons. For example, a judicious management of cash, near cash assets and marketable securities allows the firm to hold the minimum amount of cash necessary to meet the firms obligations as and when they arise. As a result, the firm is not only able to meet its obligations, but also is in a position to take advantage of the opportunity of earning a return and thereby increasing the profitability of the firm.

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MOTIVES FOR HOLDING CASH

Though cash is the most liquid asset, but it does not earn any substantial return for the business. Nobody earns any income on the cash balance or currency being maintained, however, some interest income may be earned on short-term deposits. But still everybody and every firm maintain some cash balance. What is the reason? Why the firm still keeps some cash balance? It has been suggested that there are four primary motives for holding cash. These are as follows:

1.

Transaction Motive:
Cash is required for meeting demand for cash flow arising out of day-to-day transactions. In order to meet the obligations for cash flows arising in the normal course of business, every firm has to maintain adequate cash balance. A firm requires cash for making payments for purchase of goods and services. Suppliers of goods are paid in cash, employees are paid in cash, and all general operating expenses are also payable in cash. Interest on borrowings, taxes to government and dividends to shareholders are also payable in cash. These cash outflows are met out of cash inflows arising out of cash sales or recovery from the debtors. However, the inflows may not always be equal to cash outflows. In case the expected outflows are more than the expected inflows, then the deficiency together with some cash for safety margin must be arranged. Further, as the inflows and outflows are not fully' and exactly synchronized, a firm is always required to maintain a minimum cash balance with it. The necessity of keeping minimum cash balance to meet payment obligations arising out of expected transactions is known as transactions motive for holding cash. The amount of cash a firm must hold to meet the transaction requirements is largely dependent upon the level of sales.

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2.

Precautionary Motive:
The precautionary motive for holding cash is based on the need to maintain sufficient cash to act as a cushion or buffer against unexpected events. In spite of making best efforts, the future cash flows cannot be ascertained with 100% accuracy. One never knows about the happening of natural calamities or sudden increase in the cost of raw materials or any other factor such as strike, lockout etc. Therefore, a firm should maintain larger cash balance than required for dayto-day transactions in order to avoid any unforeseen situation arising because of insufficient cash. , The necessity of keeping cash balance to meet any emergency situation or unpredictable obligation is known as precautionary motive for holding cash. The more is the possibility of these contingencies, the bigger is the amount required as a precautionary motive. The amount of cash, a firm must holds for transaction and precautionary depends upon

i) ii) iii)

Degree of predictability of its cash flows, Its willingness and capacity to take risk of running short of cash, and Available immediate borrowing powers.

A firm wishing absolutely to avoid or minimizing the risk, will tend to have larger cash balance in order to meet all demands. In contrast, a firm willing to assume some risk for the sake of higher returns will tend to invest its cash balance in earning assets.

1.

Speculative Motive:
Cash may be held for speculative purposes in order to take advantage of potential profit making situations. A firm may come across an unexpected opportunity to make profit, which is not usually available in normal business routine. Some cash balance may be kept to take advantage of these windfalls e.g., an opportunity to purchase raw materials at a heavy discount, if paid in cash. The motive to keep cash balance for these purposes is obviously speculative in nature. The firm's desire to keep some cash balance to capitalize an opportunity of making an unexpected profit is known as speculative motive.

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The speculative motive provides a firm with sufficient liquidity to take advantage of unexpected profitable opportunities that may suddenly appear (and just as suddenly disappear if not capitalized immediately).

2.

Compensation Motive:
Commercial banks require that in every current account, there should always be a minimum cash balance. This amount remains as a permanent balance with the bank so long as the current account is operative. This minimum balance is generally not allowed by the bank to be used for transaction purposes and therefore, it becomes a sort of investment by the firm in the bank. In order to avail the convenience of current account, the minimum cash balance must be maintained by the firm and this provides the compensation motive for holding cash. Out of different motives, the transactions motive is the most obvious one and is found in every firm. Even the precautionary motive is common and a firm maintains cash balance both for the transactions motive and the precautionary motive. However, the speculative motive is a subjective one and may differ from one firm to another. Generally, the speculative motive is the least important component of a firm's preference for liquidity. The transactions and the precautionary motives account for most of the reasons why a firm holds cash balance. The compensation motive may be a compulsion and the firm may not have many options.

Management of Cash at Alcon Wires & Cables Industries, Rajpura

In order to have proper control over inflow and outflow of cash, following information and monitoring system is in place:

A Cash Budget for the quarter with week wise breakup is prepared and sent to
Corporate Office for perusal. A monthly Cash Budget is prepared with detailed breakup of all the inflow and outflow. Accordingly the monitoring of actual cash inflows and outflows vis a vis

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the projected is done and necessary corrective action is taken if required. The corrective action can be selling more on Cash basis incase there is more required of funds or in case of lesser inflow from the debtors.

BALANCE SHEET AS AT 31ST MARCH , 2010

LIABILITIES PARTNER'S CAPITAL SECURED LOANS SCHEDU LE A B AMOUNT ASSETS SCHEDU LE AMOUNT E 10163861 .38 11469092 4.6

15187571 .34 FIXED ASSETS 48725584 CURRENT ASSETS, LOANS & ADVANCES

UNSECURED LOANS CURRENT LIABILITIES PROVISIONS

C D

9256896. 53 51684734 .1

41023427 .55

21921798 7.8

MANAGEMENT OF RECEIVABLES
The term receivables are defined as debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business. When a company makes an ordinary sale of goods and does not receive payments, the firm grants trade credit and creates the accounts receivables, which could be collected in future. Receivables credit also called as trade credit management. Therefore accounts receivables represent an extension of credit to customers, allowing them a reasonable period of time a reasonable period of time in which to pay for the goods, which they have received.

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The sale of goods on credit is an essential part of the modern competitive economic system. In fact credit sales and therefore receivables are treated as a marketing tool to aid the sale of goods. However, extension of credit also involves risk and cost. Management should weigh the benefits as well as cost to determine the goal of receivables management. In the receivables management the costs and benefits includes

COSTS
Collection Cost Capital Cost Delinquency Cost Default Cost

Collection Cost: The collection cost involves the administrative costs incurred in
collecting the receivables from the customers to whom credit sales have been made. Included in this category of costs are additional expenses on creation of separate credit department and costs on having extra staff for credit control.

Capital Cost: The increased level of accounts receivables is an investment in assets.

The customers have to finance thereby involving a cost. There is a time lag between the sale of goods to and payment by the customers. Meanwhile the firm has to pay to employees and to purchase raw material and to do day-to-day working. Therefore the firm has to arrange for additional funds to meet its own obligations while waiting for customers.

Delinquency Cost: Another cost called as delinquency cost is also involved in

receivables management. This arises out of the failure of the customers to meet their obligations when payment on credit sales due after the expiry of the period of the credit. The important components of this cost are:

Blocking of funds for an extended period Cost associated with the steps that have to be initiated to collect the

overdue, such as reminders and other collection efforts. 23

Cost of Default by Customers: Finally if the firm may not be able to recover the
overdue because of the inability of the customers. Such debts are treated as Bad Debts and have to be written off as they cannot be realized.. Such costs are known as default costs.

BENEFITS
Apart from the cost, another factor that has a hearing on accounts receivables management is the benefit emanating from credit sales. The benefits are the increased sales and profits anticipated because of a more liberal policy. When firms extend trade credit, i.e. invest in receivables; they intend to increase the sales level. The impact of a liberal policy of trade credit is likely to have two forms. First, it is oriented to sales expansion and second one is the increase in Profits.

Management of Receivables at Alcon Wires& Cables, Rajpura

Receivables constitutes more than 75% of the total current assets at Alcon Wires&

Cables. Therefore a comprehensive monitoring and strict control over Receivables are
must. There is a separate section for Monitoring and Control of Receivables at the Unit.

RECEIVABLES MANAGEMENT
The Unit has well laid down Credit Policy to regulate the various credit terms, discounts and incentives for each product separately. This policy also categorically put

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the maximum ceiling on the Credit Limits sanctioned to each and every Dealer/ Customer. These limits are fixed based on number of quantitative and qualitative factors i.e. financial position of the Dealer, Sales trend, Quality of his account and also the reconciliation frequency in addition to lot of other factors. The Receivable management starts at the point of dispatch itself. No dispatch of material can take place to a particular dealer if his dues are exceeding the Credit policy days or amount. Moreover if the limits are going to be crossed including the proposed supply of the day, even then the dispatch to the party is stopped till the required payment is received from the party.

Monitoring of receivables
Online credit monitoring system is in place. It ensures collection of dues strictly as per the credit policy otherwise no fresh dispatch to the party can take place. Periodic reports are prepared and circulated fortnightly showing the followings; Statement of Overdue bills- Product wise and Partywise (As per Sales Note) Aging analysis of Overdue bills Partywise (As per Credit Policy) Aging analysis of outstanding bills Partywise Receipts are adjusted bill wise on FIFO basis.

Collection Procedure
Collection against EPD sales is only accepted through DD/Local Cheque. Incase the payment is not received on due date, a statement is generated and send to marketing for recovery of Cash discounts.

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Incase of credit sales, if a cheque is not honoured on presentation interest is recovered @ 17.5% for the days of delayed receipt i.e. Fresh receipt of payment minus the original receipt of payment.

MIS System
The Unit is having a well laid down system of Periodical reporting through the MIS being generated by the Credit Monitoring and Control section. The various reports being generated have varying periodicity as per the laid down procedures and monitoring is done accordingly. The details of reports generated are given as under:

1.

Daily reports
Daily sales, product wise, and collection report. This report also has Month to Date figures along with comparative figures for the previous month.

2.

Periodic (Weekly) Reports

Party wise summary of overdue bills. Party wise aging analysis of dues.

Party wise aging analysis of over due bills.

3.

Monthly Reports
Statement of Account of all parties to ensure monthly balance confirmation. Age wise analysis of overdue debtors. Aging analysis of total outstanding of major parties. Status on debtors. Ageing analysis of Debtors (Exports)

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MANAGEMENT OF INVENTORIES
It is already noted that the purpose of carrying inventory is to uncouple the operations of the firm i.e., to make each function of the firm independent of other functions so that delays in one area do not affect the production and sales activities. As the production shut down results in increased costs and because the delays in delivery can result in loosing the customers, the management and control of inventory is an important dimension of the duties of the financial manager. Inventory management assumes significance in any firm and it is of great concern to any financial manager. He in fact, is the decision maker in the whole process of inventory management. Any firm will like to hold higher levels of inventory. This will enable the firm to be more flexible in supplying to the customers and will find ease in its production schedule. Most of the customers may require immediate delivery and higher inventories may help meeting their demands, and hence there would be less and less chances of sales being disrupted. But there is always a cost involved in the inventories. This cost includes the capital cost of the stock and the costs of storing and carrying etc. On the other hand, holding lower level of stock than required may result in stock-outs. The cost of stock-out may be sales loss or customer's dissatisfaction. The stock- outs may also result in delays or hold-ups in the production process. Given the benefits of holding inventories and costs of stock-outs, a firm will be tempted to hold maximum possible inventories. But this is costly too, because the funds block in Inventory always have an opportunity cost While achieving the objective of optimum level of inventory, a financial manager has to reconcile the differing viewpoints of production department, marketing department and the finance department. No doubt, most of the decisions relating to inventories are

27

taken by purchase department in consultation with the production department, still the financial manager should ensure that the inventories are properly controlled and he should stress the need for the consideration of financial implications of inventory management. . Thus, the objective of inventory management is to determine the optimum level of inventory i.e., the level at which the interest of all the departments are taken care of. The inventory management seeks to maximize the wealth of the shareholders by designing and implementing such policies, which attempt to minimize the cost of procuring and maintaining the inventories. Every firm, big or small, trading or manufacturing has to maintain some minimum level of inventories. There are different motives for maintaining inventories, and these are more or less the same as the motives for holding cash. The motives for holding inventory may be enumerated as follows:

1) Transactionary Motive: Every firm has to maintain some level of inventory to

meet the day to day requirements of sales, production process, customer demand etc. This motive makes the firm to keep the inventory of finished goods as well as raw materials. The inventory level will provide smoothness to the operations of the firm. 2) Precautionary Motive: A firm should keep some inventory for unforeseen circumstances also. For example, the fresh supply of raw material may not reach the factory due to strike by the transporters or due to natural calamities in a particular area. There may be labor problem in the factory and the production process may halt. So, the firm must have inventories of raw materials as well as finished goods for meeting such emergencies.

3) Speculative Motive: The firm may be tempted to keep some inventory in order
to capitalize an opportunity to make profit e.g., sufficient level of inventory may help the firm to earn extra profit in case of expected shortage in the market.

28

REASONS AND BENEFITS OF INVENTORIES

While determining the optimal level of inventories, the financial manager must consider the necessity of holding inventory and costs thereof. The optimum level of inventory is a subjective matter and depends upon the features of a particular firm. The following are some of the benefits or reasons for holding inventories:

1 Trading Firm:

In case of a trading firm, there may be several reasons. If the

firm has some stock of goods then the sales activity can be undertaken even if the procurement has stopped due to one reason or the other. Otherwise, if stock is not there, there is a likelihood that the sales will stop as soon as there is an interruption in procurement. Moreover, it is not always possible to procure the goods whenever there is a sales opportunity, as there is always a time gap required between the purchase and sale of goods. Thus, a trading concern should have some stock of finished goods in order to undertake sales activities independent of the procurement schedule. Similarly, a firm may have several incentives being offered in terms of quantity discount or lower price etc., by the supplier of goods. The benefits can be availed and goods may be purchased even if there is no immediate sales order. In case of trading concern, the inventory helps in de-linking the sales activities from purchase activity and also to capitalize on a profitable opportunity.

2.Manufacturing Firm: A manufacturing firm should have inventory of not only

the finished goods, but also of raw materials and work-in-progress for obvious reasons as follows:

i) Uninterrupted production schedule: Every manufacturing firm must

have sufficient stock of raw materials in order to have the regular and uninterrupted production schedule. If there is stock-out of raw material at any

29

stage of production process, then the whole production process may come to a halt. This may result in customer dissatisfaction, as the goods cannot be delivered in time. Moreover, the fixed costs will continue to be incurred even if there is not production. The firm may also have to incur heavy cost to restart the production schedule. Further, sufficient work-in-progress would let the production process run smoothly. In most of the manufacturing concerns, the work-in-progress is a natural outcome of the production schedule. The work-in-progress helps in fulfillment of some sales orders even if the supply of raw material has stopped.

ii) Independent sales activity : Inventory of finished goods is required not

only in a trading concern, but manufacturing firms should also have sufficient stock of finished goods. The production schedule is generally a time consuming process and in most of the cases goods cannot be produced just after receiving orders. Every manufacturing concern therefore, maintains a minimum level of finished goods in order to deliver the goods as soon as the order is received.

COSTS OF INVENTORY
Every firm maintains some stock of raw materials, work-in-progress and finished goods depending upon the requirement and other features of the firm. Holding inventory, no doubt benefits it, yet it must also consider various costs involved in holding inventories. Had these costs not there, there would not have been any problem of inventory management and every firm would have maintained a higher level of inventories. The cost of holding inventories may include the followings:

I. Carrying cost: This is the cost incurred in keeping or maintaining an inventory of

one unit of raw material or work-in-progress or finished goods. Two basic costs are associated with holding a unit in inventory. These are

i.

Cost of storage: This means and includes the cost of storing

one unit of raw material by the firm. This cost may be in relation to rent of space occupied by the stock, the cost of people employed for the

30

security of the stock, cost of infra-structure required e.g., air conditioning etc., cost of insurance, cost of pilferage, warehousing costs, handling cost etc.

ii.

Cost of financing: This cost includes the cost of funds

invested in the inventories. The funds used in the purchase/production of inventories have an opportunity cost i.e., the income which could have been earned by investing these funds elsewhere. Moreover, if the firm has to pay interest on borrowings made for the purchase of materials/goods, then there is an explicit cost of financing in the form of interest. It may be noted that the, total carrying cost is entirely variable and rise in direct proportion to the level of inventories carried. The total carrying cost move in the same direction as the annual average inventory.

iii

Cost of Ordering: The cost of ordering includes the cost of

acquisition of inventories. It is the cost of preparation and execution of an order, including cost of paper work and communicating with the supplier. There is always minimum cost involved whenever an order for replenishment of goods is placed. The total annual cost of ordering is equal to the cost per order multiplied by the number of order placed in a year. The ordering cost may have a fixed component which is not affected by the order size; and a variable component which changes with the order size. For example, transportation charges may be payable per unit subject to a minimum charge per trip. The carrying cost and the cost of ordering are the opposite forces and collectively they determine the level of inventories in any firm. The carrying cost considerations require that the firms should maintain the inventories at the lowest level and should be replenished as frequently as possible. This will result in lowering of the total carrying cost. But this also requires frequent order to be replaced and therefore, results in increasing the total cost of ordering. A financial manager has to achieve a trade-off between the carrying cost and the cost of ordering.

31

iv

Cost of Stock-outs (A hidden cost): A stock-out is a situation when the

firm is not having units of an item in store but there is a demand for that either from the customers or the production department. The stock-outs refer to demand for an item whose inventory level has already reduced to zero or insufficient level. It may be noted that the stock out does not appear if the item is not demanded even if the inventory level has fallen to zero. There is always a cost of stock-out in the sense that the firm faces a situation of lost sales or back orders. Further that stock-out of some item may result in lost sales of not only that out of stock item, but also for other related items. Stock-outs are quite often expensive. If the inventory item is finished goods, the customer may buy the goods from someone else. This will result in profit lost on such lost sales. Even if the customer is willing to wait until the goods arrive, some goodwill is definitely lost. Stock out of raw materials of work-in-progress can cause the production process to stop. This will be expensive because employees will be paid for the time not spent in producing goods. Some production processes are so expensive to shut down that the management will go to great lengths to avoid to running out of materials.

On the basis of the above discussion, the whole theory of inventory management can be summarized as follows: Maintaining sufficient stock of raw materials ensuring continuous supply to Maintaining sufficient supply of finished goods for achieving smooth sales Minimizing the total annual cost of maintaining inventories production process for uninterrupted production: schedule. operations, and

32

Management of Inventories at Alcon Wires& Cables, Rajpura

The investment in inventories is around 15 to 17% of the total current assets. The level of Stores & Spares inventories is quite significant i.e. 1/3rd of the total inventories. The complete Stores Accounting is done through online computer through a separate module called Material Management System. All the Stores items have been well classified in ABC analysis. All high consumption value items are strictly reviewed by the management in order to save on the inventory carrying costs. In addition to it Maximum Level, Minimum Level, Reorder Levels of A and B category of items are well laid down and all the purchasing is done accordingly. Any deviation to this is reported under exception reporting. Another important aspect of inventory control at Alcon Cables is the monitoring of Slow Moving and Non Moving items of inventory. Each concerned section head is responsible for monitoring the stocks of items/spares which has not moved for long. Normally the items under this category are Insurance Spares only. PVC stocks are one of the major components of Raw Material inventory. PVC is being purchased from Gujarat, since the quality is best suitable technology, which the Unit is currently having. PVC stocks are always monitored very strictly and are normally in the range of 20-30 days. But during the raining season since the availability of PVC reduces, efforts are made to stock more depending upon the financial position of the Unit.

OBJECTIVE OF WORKING CAPITAL

To fix an optimum level of Working Capital for the business in order to To ensure effective procurement and deployment of funds. To analyze the various components of working capital. To find the short term financial position of the company. maximize the profits.

33

 To know about the movement of funds of the company.

NEED OF WORKING CAPITAL

The need for working capital to run the day-to-day business activities cannot be overemphasized. We will hardly find a business which does not require any amount of working capital. Indeed firms differ in their requirements of the working capital. Given the objective of financial decision making to maximize the shareholders wealth, it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depend, among other things, upon the magnitude of the sales. A successful sales program is, in other words, necessary for earning profits by any business enterprise. However, sales do not convert into cash instantly; there is invariably a time=lag between the sale of goods and the receipt of cash, .There is therefore, a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Therefore, sufficient working capital is necessary to sustain sales activity. Technically, this is referred to as the operating or cash cycle. The operating cycle can be said to be at the heart of the need for working capital. The continuing flow from cash to suppliers, to inventory to accounts receivable and back into cash is what is called the operating cycle. In other words, the term cash cycle refers to the length of time necessary to complete the following cycle of events:1. Conversion of cash into inventory;(cash get converted into inventory by purchase of

raw materials, conversion of raw materials into work-in-progress, finished goods and finally the transfer of goods to stock at the end of the manufacturing process); 2. 3. Conversion of inventory into receivables;(as credit sales are made to customers) Conversion of receivables into cash;(as receivables are collected)

The need for working capital arises due to the time gap between production and realization of cash from sales. There is a operating cycle involved in the sales and realization of cash. There are time gaps in purchase of raw materials and production;

34

production and sales; and sales and realization of cash. Thus, working capital is needed for the following purposes; For the purchase of raw materials, components and spares. 1. 2. 3. 4. To pay wages and salaries. To incur day-to-day expenses and overhead costs such as fuel. power and office expenses, etc. To meet the selling costs as packing, advertising. Etc. To maintain the inventories of raw material. Work-in-progress. Stores and spares and finished stock.

TYPES

OR

CLASSIFICATION

OR

KINDS

OR

WORKING

CAPITAL Working capital may be classified in two ways; (a) (b) On the basis of concepts On the basis of time

(a) On the basis of concept: Working capital is classified as gross working capital
and net working capital as discussed earlier. On the basis of time, working capital may be classified as;

a)

Temporary or variable working capital Temporary Working Capital

Permanent Working Capital (Fixed Working Capital)

35

(TIME) (AMOUNT OF WORKING CAPITAL)

Figures showing Variable Working Capital Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet tie seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research. Etc.

b)

Permanent or fixed working capital;

Temporary of Variable Working Capital

Fixed Working Capital

(TIME) (AMOUNT OF WORKING CAPITAL) 36

Figures showing Fixed Working Capital

Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and ;for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work in process finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of capital is permanently blocked in current assets. As the business grows, the requirements of permanent working capital also increase due to the increase in current assets, The permanent working capital can Amount of Working Capital further be classified as regular working capital and reserve working capital required to receivables and from receivables to cash and so on. Reserve working is the excess amount over the requirement for regular working capital which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression. etc.

37

Kinds of Working Capital

On the basis of Concept

On the basis of Time

Gross Working

Net Working Capital Permanent or Fixed Working Capital Temporary or Variable Working Capital

Regular Working Capital

Reserve Working Capital

Seasonal Working Capital

Special Working Capital

38

REVIEW OF LITERATURE

According to the need of the Project Report. I have pursued Secondary Data collection methods. I have used the following statements and documents for data collection purpose; House Journal of Alcon Wires& Cables. Current year as well as previous year Financial Statements.

Internal LAN SYSTEM

39

RESEARCH METHDOLOGY
Research methodology in common practice refers to a search for the knowledge. One can also define research as a scientific and system search for pertinent information on a specific topic. In fact it is an art of scientific investigation.

Research Design:- It is descriptive in nature. Data Collection:-It is through the secondary data collection method.

Sampling method:In this study, convenience sampling technique was used to collect the data.

Sources of data collection:The sources of data collection were balance sheets, annual reports, invoices and various internet websites.

40

Alcon Cables Pvt.Ltd, Rajpura (Accounts & Finance Department)

RATIO ANALYSIS FOR CONTROLLING WORKING CAPITAL

The analysis of working capital can be conducted through a number of devices. Such as: 2. 3. 4. Ratio Analysis Funds Flow Statement Budgeting

The following types of ratios can be calculated for this purpose:

1)Current Ratio: It is calculated by dividing the total of current assets by current liabilities. This ratio shows the ability of a firm to pay its current obligations

2).Inventory Turnover Ratio: This ratio measures the velocity of conversion of stock
into sales. The study of their relationship helps in ensuring that funds are not tied up unnecessary. THE COMPANY IS MAINTAINING MINIMUM STOCK IN THE RANGE OF 2-3 DAYS. THE RATIO HAS INCREASED DUE TO INCREASE IN STOCK, SO TO AVOID OVERSTOCKING COMPANY SHOULD INCREASE ITS SALES.

3).Debtor Turnover Ratio: This ratio indicates the number of times the debtors are
turned over during a year. The credit policy of a firm can be known from this ratio. THE DEBTOR TURNOVER RATIO IS BEING DECREASING BECAUSE THE COMPANY HAS SHIFTED THEIR SALES FROM CREDIT BASIS TO CASH BASIS AND THEREFORE THE DEBTORS ARE DECREASING.

41

4).Working Capital Ratio: This ratio indicates the velocity of the utilization of
working capital. This ratio measures the efficiency with which the working capital is being used by a firm.

Sales To Fixed Assets: This ratio reveals any decline in the production power of
fixed assets.

FUNDS FLOW ANALYSIS

Funds flow analysis is a technical device designated to study the sources from which additional funds were derived and the use to which these sources were put. The funds flow analysis consists of: (i) Preparing schedule of changes in working capital, and (ii) Statement of sources and application of funds.

42

Sourcing of Working Capital

Permanent or Fixed
1. Shares 2. Debentures 3. Public deposits 4. Ploughing back of profits 5. Loans from Financial Institutions

Temporary or Variable
1. Commercial Banks 2. Indigenous Bankers 3.Trade Creditors 4. Installment Credit 5.Advances 6.Accounts Receivables 7. Accrued Expenses 8. Commercial Paper

Another important aspect of working capital management is to decide the pattern of financing the current assets and one of the major problem in working capital management is the decision whether to finance the working capital with one source or the other. The firm has to decide about the sources of funds, which can be availed to make investment in current assets. Breaking down working capital needs into permanent and temporary components over time provides a useful by-product in terms of financing choice. The permanent component is predictable insofar as it is linked up to expected change in sales or cost of goods sales over time. The temporary component is also predictable in general as it follows the same pattern every year. So, the two components of working capital need to be financed accordingly, for which the different sources of funds can be grouped as follows:

i) Long Term Sources which provide funds for a relatively longer period. Under
this category the main sources are the share capital, retained earnings, debentures and long tern borrowings.

43

ii) Short Term Sources, which usually provide funds for a short period, say up to
one year or so. In this category, the main sources are bank credit, public deposit, commercial papers, factoring etc.

iii) Transactionary Sources, which provide funds to a business through the

normal business operations e.g., credit allowed by suppliers and outstanding labor and other expenses. To the extent the firm delays or postpones the payments, the funds are available to it and that too generally at no cost. These are also called spontaneous sources of finance. For example, as the firm acquires its inventories, the supplier often makes the trade credit available spontaneously or on demand. The trade credit varies directly with the firm's purchases of inventory items. In turn, The inventory purchases are related to the anticipated sales. Thus, a part of the financing needed by the firm is spontaneously provided in the form of trade credit. In addition, wages and salaries payable, accrued expenses, accrued interest and taxes also provide valuable sources of spontaneous financing. It has been noted earlier that the net working capital is the excess of total current assets over total current liabilities. Thus, a part of total current assets is funded by current liabilities and only the remaining portion of current assets, known as net working capital, is to be arranged for. Therefore, the financial manager has to arrange funds for making investment in net working capital only. Different long term and short term source~ of funds are available to a firm and all these sources are different from one another with respect to their nature and characteristics. The working capital requirements of a firm can be financed by all or any combination of these sources. It may be noted that both the permanent and temporary components are predictable yet they differ on at least one dimension i.e., the permanent component of working capital is similar to an investment in fixed assets because it has to be replenished over time and thus requires financing for the long term. Consequently, it can be argued that this component should be financed with long term sources- either debt or equity or a

44

combination of the two, depending upon the financing mix the firm chooses to use for financing long term assets. A part of permanent working capital may be financed by current liability also depending upon the trade-off between risk of having current liabilities and the cost associated with long term financing. The temporary component of working capital should be financed. With pre-arranged lines of short- term credit and the current liabilities. There are different approaches to take this decision relating to financing mix of the working capital as follows:

HEDGING

APPROACH

(ALSO

KNOWN

AS

MATCHING

APPROACH)
There is another critical dimension of the financing decision relating to the maturity structure of the debts. How should the decision be made as to whether to use short term or current debt or long-term debts? This is critically important to the financial success of the firm. Basically, the hedging principle is one, which guides a firms debt maturity financing decisions. The hedging principle states that the financing maturity should follow the cash flow characteristics of the assets being financed. For example, an asset that is expected to provide cash flows over a period of say, 5 years, then it should be finance with a debt having similar pattern of cash flow requirements. The hedging approach involves matching the cash flows generating characteristics of an assets with the maturity of the sources of financing used to finance it. The Hedging Approach to working capital financing is based upon the concept of bifurcation of total working capital needs into permanent working capital and temporary working capital. As the name itself suggests, the life duration of current assets and the maturity period of the sources of funds are matched. The general rule is that the length of the finance should match with the life duration of the assets. That is why the fixed assets are always financed by long-term sources only. So, the permanent working capital needs are financed by long-term sources. On the other hand, the temporary working capital needs are financed by short-term sources only. In Other words, the core or fixed working capital is financed by long term sources of funds

45

while the additional or fluctuating working capital needs are financed by the short-term sources. For example, a seasonal expansion in inventories should be financed with short-term loan or liabilities. The rationale of the hedging principle is straightforward. Funds are needed for a limited period say for purchase of additional inventory, and when that period is over, the cash needed to repay the loan will be generated by the sale of extra inventory items. Obtaining the needed funds from a long terms source would mean that the firm would still have the fund after the inventories had already been sold. In this case, the firm would have excess liquidity, which it either holds in cash or marketable securities until the seasonal increase in inventories occurs again. The result of all this would be to lower the profits of the firm. The financing mix as suggested by the hedging approach is a desirable financing pattern. However, it may be noted that the exact matching of maturity period of current assets and sources of finance is always not possible because of uncertainty involved.

CONSERVATIVE APPROACH
As the name itself suggests, under this approach the finance manager does not undertake risk. As a result, all the working capital needs are primarily financed by longterm sources and the use of short-term sources may be restricted to unexpected and emergency situation only. The working capital policy of a firm is called a conservative policy when all or most of the working capital needs are met by the long-term sources and thus the firm avoids the risk of insolvency.

AGGRESSIVE APPROACH
A working capital policy is called an aggressive policy if the firm decides to finance a part of the permanent working capital by short-term sources. So, the short term financing under aggressive policy is more than the short term financing under the hedging approach. The aggressive policy seeks to minimize excess liquidity while meeting the short-term requirements. The firm may accept even greater risk of insolvency in order to save cost on long term financing and thus in order to earn greater return.

46

WORKING CAPITAL MANAGEMENT AT Alcon Wires& Cables, RAJPURA Constituents of Working Capital at Alcon Wires& Cables, Rajpura CURRENT ASSETS 1. 2. 3. 4. 5. 6. 7. Raw Materials Work in Process Finished Goods Stores and Spares Receivables Cash and Bank balance Other Current Assets including Pre-paid expenses, Short Term

deposits etc.

CURRENT LIABILITIES 47

1. 2. 3.

Sundry Creditors Bank Borrowings Accrued or Unpaid expenses

Average holding period at various stages is as under:

o o o o o Raw Material Stores WIP Finished Goods Receivables 30-45 days 04-06 months 02-03 days 03-07 days 30-45 days

Average credit period allowed by various suppliers is 30 days

The Units working capital requirements are met by the following sources;
o o o Long Term Sources Banks Trade Creditors

Punjab National Bank (PNB) is the sole banker for meeting the Units working capital requirements. PNB has sanctioned the following limits to meet the working capital requirements of the Unit.

Fund Based Limits 48

Fund based limits are those where outflow of Banks funds is immediately on demand. Working Capital Demand loan (WCDL), Packing Credit Loan (PC), Cash Credit (CC), Cheque Discounting, Bill Discounting, DD Documentary, DD Clean, FOBNLC and ABC (Against Bills for Collection) are the parts of the Fund based limits. The Bank reviews these limits every year. The Unit submits various reports to the bank from time to time according to their laid down rules & regulations. To avail these working capital limits, the company has to submit the Stock Statement on monthly basis by the 10th of every month. This statement gives the details of the Raw material; Work in process, Finished Stock, Debtors and Creditors.

Non-Fund Based Limits

Non-Fund Based limits means those limits in which fund is not involved directly. Fund based limits are in the form of Bank Guarantee (Letter of Guarantee) and Letter of Credit. Working capital limits are subject to review and renewal by the banks every year. A detailed renewal proposal would, therefore, be necessary and fresh limits will be fixed by the bank depending upon the past performance and future projections. All the financial papers as discussed earlier will have to be submitted every year to the bank for renewal of facilities already sanctioned. Any enhancement in credit limits, if required, must be sought at this juncture.

Techniques of Financial Appraisal by Commercial Banks:

One of the foremost considerations for granting of credit facilities for any project is the financial position of a concern. Banks employ various techniques for financial appraisal. Financial appraisal revolves round two important financial statements, which

49

are required to be submitted to the bank with the loan application. These financial statements are: Balance Sheet Profit & Loss a/c The assessment of working capital requirements is directly dependent on the level of current assets and current liabilities of any concern. Any enterprise whether industrial, trading or other acquires two types of assets to run its business;

Fixed Assets Current Assets

The later are floating in nature and keep changing during the course of business. It may be noted here that there may not be any fixed ratio between the fixed assets and floating assets, as their requirements would differ depending upon the nature of the project. Assessment of working capital may involve two aspects as under: The level of current assets required to be held by any unit, which is adequate for its day-to-day functioning The day to day business operations of a concern of nay nature and size involves many successive steps and final working results would depend on the effective combination of all these steps. The steps in general may include: Acquisition and storage of raw material and other stores and spares required for Actual production process when the raw material is subjected to different Storage of finished goods awaiting sales. manufacture of any product. processes to bring it to final shape of finished goods.

All these steps put together form an operating cycle. We start from cash to buy raw material etc. and after completing all the steps end up with the cash. The intervening period required for completion of this entire process is the Operating Cycle. The operating cycle may thus be defined as the intervening period from the time the

goods or services enter the business till their realization in cash. 50

CONCEPT OF MARGIN
Margin in relation to working capital has two concepts, which need to be clearly understood. One concept of providing margin by way of liquid surplus i.e. from longterm liabilities. The other concept of margin as applicable to working capital limits is related to the value of security charged to the bank as cover for these limits. The banks would not grant financial accommodation to 100% of the values of goods and they would fix a certain margin on the value of security that must be provided but the borrower and the bank will finance the balance amount. The percentage of margin fixed on any security is dependent on its nature. I have made an attempt to define various components of working capital and explain the most acceptable principles involved in calculating them for overall assessment of working capital.

Months raw material requirements

Every production unit will be required to maintain a minimum level of raw material in stock to ensure continuous production. The level of stock may differ form unit to unit and inter alias depends on nature of the raw material, its availability wit particular emphasis on lead time involved in procuring it, price level, consumption pattern etc. From the past records, it is possible to find out the average stocking period of raw material.

Weeks/ months stores and spares

51

The calculation for requirement of these items may be done in a similar manner

as in case of raw materials. The average period of stocking required by the unit is generally done on the basis of past performance.

Weeks stocks in process

Stocks in process is an item representing goods remaining in semi-finished form awaiting certain further processing before these can be finally converted to finished goods. The requirement of blockage of funds in these stocks will depend upon the processing period involved in the manufacturing.

Months finished goods

The stocking period of finished goods may also be different for different types of units and will mainly depend upon the market conditions.

Weeks/ months receivables representing credit sales

All the sales by any unit may not be against cash in which case the unit would not require any funds to be locked under this head. A part of the sales might be affected on credit in which case the outstanding under debtors/ bills receivables will form a part of total working capital required by the unit.

One months manufacturing and administrative expenses

The unit has to meet the running, manufacturing and establishment expenses during the period of manufacture and necessary provision for funds required for this purpose I necessary

Credit available on purchases:

52

Any unit against cash may not purchase all the goods and the concern may avail credit for few purchases. The credit available from the market will reduce the requirements of the unit for working capital.

Advance Payment Received

Advance payment for sales may sometimes be received which means that additional funds are available with the unit thereby reducing its working capital requirements. Any such advance payments that are received by the unit must be accounted for while determining the actual requirement.

PROVISION RELATED TO EXPORT CREDIT

Export credit limits (both pre- shipment and post- shipment) would be allowed to continue to be granted in the existing forms. The bifurcation of credit limit into loan and cash credit components would be affected after including Export Credit limits. A bank that is authorized to deal in foreign exchange can handle exports. SBI, its associates, all nationalized banks and important scheduled banks have been granted foreign exchange license by RBI. There may, however, Still be a few small banks, which do not have FEX license and may not be able to handle export documents directly. All the branches of a bank authorized to deal in foreign exchange may not be directly handling export documents. The branches of banks are divided in three categories as under for this purpose: Category A branches, which maintain position and Nostro, accounts (foreign currency accounts with foreign banks) and can directly handle all types of foreign exchange business. Category B branches which do not maintain position and nostro accounts but are authorized to handle foreign exchange business directly. The realization of export documents are received by such branches through foreign currency accounts of category A branches.

53

Category C branches which cannot undertake foreign exchange business on their own and have to route it either through Category A branches or through category B branches.

PROCEDURE TO GET WORKING CAPITAL FROM BANK

Submission of documents
1) 2) 3) 4) 5) 6) 7) 8) 9) CMA Data Justification Note Any other document Request letter Approval From Bank Execution of documents by the company Acceptance from bank is taken Form 8 & form 13 are submitted to ROC Release of limits by bank after a formal request to them

EXPLANATION 1) Credit Monitoring Arrangement (CMA) Data

Credit Monitoring Arrangement Data is given to the bank in the prescribed format for taking working capital facilities and for revision of Working Capital facilities. The CMA Data is given to bank with various supporting figures and calculations.

The CMA Data is comprised of following statements 54

Operating Statements giving details of projected Sales, Cost of sales and profit.
Projected Fund Flow Statement & Projected Cash Flow Statement Comparative Statement of Current Assets & Liabilities Balance Sheet & its analysis with the ratios calculation. Computation of maximum permissible Bank Finance for working capital or details of limits sanctioned and their utilization. These statements are given along with the following annexure: Projected statement of raw material consumption. Details of long-term loans & details about the period of interest liability. Details of deposits from public & details of Shareholders etc. Quantitative details of production, sales and stock.

2) Justification Note for the Projections

If fresh working capital is needed a note of justification for the given projections is given. If the existing working capital is to be renewed a note of justification for past actual and future projections is given.

3) Other documents required by the bank

Any other documents if required by the bank are also provided.

4) Request letter
Along with the above documents a letter requesting the bank to get the working capital facilities sanctions as per submitted documents is given. In addition to these bank requests Financial Institutions to give their report (Appraisal Note) on the above subject this data is confidential and is not to be shown to the company. If the bank is satisfied with the approval note it approves the working capital facilities.

55

After approval of the facilities by the bank the company has to execute certain documents, the documents are stamped /signed by the competent authority of the company and verified /counter signed by the bank officials. Side by side the company submits form-8 & form-13 to the registrar of companies in the prescribed form with required fee within stipulated time. From the date of signing the documents by the bank the company can use the working capital facilities as per the sanction limits.

Procedure to get working capital from Bank Submission Of Documents Approval from Bank Execution of Documents by the Company Acceptance from Bank is taken Form 8 & 13 are submitted to ROC Release of limits by Bank

56

The documents to be submitted to Bank

Continuous performance related documents:

The stock statement is to be submitted to bank on the monthly basis by the 10 of next month. This statement comprises of raw material, WIP, finished goods, stocks, stores and debtors.

Periodical reports to bank

Quarterly Information System: This statement is regarding production, sales, and profit and loss debtors. Quarterly monitoring system.

Quarterly Half Yearly Monitoring System:

This statement is regarding profit and loss and cash flow statement.

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SUGGESTIONS & CONCLUSION

I would like to suggest the following;

1. Proper monitoring of Receivables/Debtors should be made with the submission

of Age-wise analysis reports. 2. Credit cycle of Receivables should be curtailed which will ultimately result in

reduction in bad debts and other contingent losses. 3. Cash discount facility offered should be reversed in case of default parties. Provision of Working Capital Cycle of Alcon Wires&Cables Pvt.Ltd

4.

should be enhanced with targeted increased production capacity.

5.

Export market should be curtailed for the existing products as there is no

developed infrastructure to keep pace with changing international business environment, besides there is wide scope of demand as well as prices in the domestic market. Hence stringent efforts should be made to expand the area in domestic counterpart.

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LIMITATIONS OF THE STUDY

As we know that work is always incomplete in itself. Similarly the present one the validity of this report might have partly been affected because of various limitations faced during the cause of this summer training caused out at FEDM. Financial statements are useful tools for understanding a firms performance and condition. However, there are certain problems and issues encountered in such analysis, which call for care judgment in such an exercise. Working capital management is so wide topic however to cover all these would affect the depth and quality of the study.

Time period for summer training was just five months .It was very short period
for collecting the information.

The balance for the year 2010 was not finalized till the date of preparing project
report.So some approximate figs. have been taken.

As the more information is collected from the secondary sources, so it is

possible that the data used may be biased.

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 As there is no closing inventory so it becomes very different to analysis inventory management. Similarly advertisements amounts much more than accounts receivables. So it was also very difficult to calculate these ratios

The financial statement of comparison may not show the free financial position
of business. Since there are many factors that do not form part of financial.

statements such as market position, customer satisfaction etc.

Price level changes are not taken into account to modify the balance sheet figures. Some items of the information are not available in the published annual reports, for the purpose of analysis.

Data available in financial reports is not sufficient and the in-depth data for the
group as a whole is not available at Rajpura Plant.

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Bibliography

I.M. PANDEY : Financial Management,New Delhi, Vikas Publications;

PRASANA CHANDRA : Fundamentals of Financial Management, Theory and practices

KHAN & JAIN; Financial Management ; New Delhi,Tata Mc Graw Hill Publications;

SHASHI K. GUPTA & R.K. SHARMA ; Management Accounting and Public Finance; New Delhi, Kalyani publications.

JAIN & NARANG ; Management Accounting and Cost Accounting ,New Delhi, Kalyani publications.

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Website: www.alconcable.com

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