Working capital management and inventory control techniques for Small Scale Industries

Introduction
The management of working capital is an integral part of overall corporate management . working capital is the amount of fund which a small scale industry must have to finance its day to day operations.
Such as operations stock of raw material and supply needed for manufacturing. Stocks of finished goods waiting for sales . semi finished goods, sundry debtors and short term investment

Definition
According to the Accounting Board of the American Institute of Certified Public Accounts (BAICPA)

WORKING CAPITAL SOMETIME CALLED NETWORKING CAPITAL, IS

PRESENTED BY THE EXCESS OF CURRENT ASSETS OVER CURRENT LIABILITIES AND IDENTIFIES THE RELATIVELY LIQUID PORTION OF TOTAL ENTERPRISE CAPITAL WHICH CONSTITUTE A MARGIN OF BUFFER FOR MANUFACTURING OBLIGATION WITHIN THE ORDINARY CYCLE OF THE BUSINESS

credit requirement of ssi

Working capital

fixed capital

Or Short term capital

preliminary expenses

purchase of fixed asset

establishment expenses

fixed working capital

Raw material inventories Good

land and building

machinery

others

Objectives of working capital are

The management wants maximum productivity and profit in the employment of capital. This is possible by striving by striving to maintain a correct ratio between working capital and fixed capital. The management has another objective and that is to maintain a smooth and rapid flow of funds in order to enhance the efficiency of working capital. If cash receipt and cash outlay synchronize there is no need to maintain a cash revenue. Hence an as well as abnormal cash needs.

COMPOSITION OF WORKING CAPITAL

For a proper appreciation and understanding of it a closer look of working capital is necessary.

CURRENT ASSETS
1. 2. 3. 4. 5. 6. 7. Inventories Raw materials Work in progress Finished goods Others Loans and advances And other debtor balance Sundry debtors or trade debtors

cont
1. 2. 3. 4. 5. 6. Other including pre payments Investments Govt. security Industrials securities Cash and bank balance Fixed deposits with banks

CURRENT LIABILITIES This includes borrowing from banks other than loans against own debentures and other mortgages.
GROSS and NET WORKING CAPITAL? The gross working capitals presented by the some total of all current assets of the enterprise , while the net working capital is the difference between both current assets and the current liabilities.

NETWORKING CAPITAL Networking capital=current asset-current liabilities =(cash+marketable+accounts +bills+inventeries)Recievables(accounts+notes and bills+expenses+temporary loans payable) GROSS WORKING CAPITAL It is equal to the total sum of current assets and may represents both own and loan capital.

 Total working capital:working capital has two components

1. Physical working capital 2. Financial working capital Physical Working Capital:- is defined to include all physical inventories owned, held or controlled by the factory as on the closing day of the accounting year. financial working capital:-difference of amount receivable and payable on the closing day of the accounting year.(fixed deposit for more than one year and long term borrowing are not to be included)

Time span
Gross working capital:-short term Networking capital:- long term the management of current assets involves short term, financial consideration, whereas the management of networking capital covers an extended time span. i.e. long term financial consideration

The working capital cycle

Raw material purchased Order place Stock arrive Finished Goods soled Cash received

Work in progress

Account receivable period time

Invoice received

Cash paid for material Operating cycle Cash cycle

Account payable period

The strategy
core working capital is finance by long term sources of capital seasonal variation are met through short-term borrowing

The average advantages lower the cost of the financing

short-term financing

Minimises investment in net working capital

Rs.

long-term financing

Necessitates frequent financing Increase risk as the firm is vulnerable to sudden shock The disadvantages

time secular growth in core working capital seasonal variation

 Classification of working capital facilities provided by commercial banks.

1. 2. 3. 4. 5. 6. Lock and key pledge of stock. Factory/mundy type/hypothecation advances. Advance against work in progress. Advance against bills. Clean advances. Packing credit to export to execute export orders.

Document needed for loan from commercial banks

1. Authentic copy of balance sheet and profit and loss account. 2. A statement of assets and liabilities in the prescribed form in the case of partnership and property concerns. 3. proforma statement in all other cases. 4. copies of affidavit in regard of the size of the unit. 5. technical feasibility report from the small industries service institute, the director of industries, if obtained, may also be enclosed.

The total cost of the SSI is computed as:-

1. The cost of fixed assets proposed to be acquired. 2. Total working capital requirement. 3. Preliminary and pre-operative expenses.

source for meeting the above cost of the project

1. Your own capital, seed capital assistance from state GOVT/development corporation. 2. Loans/deposit from your friend and relatives, which can be held for long period(3 years) 3. Medium term loans (for fixed assets) from the bank/term lending institution 4. Working capital loan from the bank 5. Credit on purchase 6. IDBI bill discounting for purchase of machinery on differed payment guarantee

Adequacy of working capital

1. 2. 3. 4. 5. it protect a business from the adverse effect of shrinkage in the value of current asset it is possible to pay all the current obligation promptly and to take advantage of cash discount. it ensures to a greater extent the maintenance of a companys credit standing and provide for such emergencies as strive,flood,fire it permits the carrying of inventories at a level that would enable a business to serve satisfactory the need of its customers. its enable a company to extent favorable credit term to customers. it enable a company to operate its business more efficiently because there is no delay in obtaining material. it enable a business to withstand period of depression smoothly.

6.
7.

Cont
8. there may be operating losses. 9. there may be excessive non-operating extraordinary losses. 10. the management may fail to obtain fund from other sources for the purpose of expansion. 11. there may be an unwise dividend policy. 12. current fund may be invested in non current asset. 13. the management may fail to accumulate fund necessary for meeting debenture on maturity. 14. there may be increasing price necessitating bigger investment in inventory and fixed assets.

problems when working capital inadequate

1. it is not possible for it to utilize production facilities fully for want of working capital. 2. a company may not be able to take advantage of cash discount facilities. 3. the credit worthiness of the company is likely to be geopardised bcz of lack of liquidity. 4. a company may not be able to take advantage of profitable business opportunities. 5. the modernization of equipment and even routine repair and maintenance facility may be difficult to administer.

Cont
6. a company will not be able to pay its dividend because of non availability of funds. 7. a company may not afford to increase it cash sales and may have to restricts its activities to credit sales only. 8. a company may have to borrow funds at exorbitant rates of interest. 9. its low liquidity may leads to low profitability. 10.low liquidity may positively threaten the solvency of business

factor determining the amount of working capital

1. 2. 3. 4. 5. 6. 7. 8. 9. size of the small scale unit process of production proportion of raw material to total cost terms of purchase and sale turnover of inventories importance of labour cash requirement seasonal variation banking facilities

WORKING CAPITAL SCHEMES

Schemes are available with most scheduled banks. Schemes Available in SBI are listed below. 1. Professional and self employed scheme: Margin is 25 percent. No ceiling. Interest is 15 percent and repayment renewal every year. 2. Small scale industries liberalized schemes: Margin 20-25 percent renewal every year. 3. Self employment to educated employed youth: Available to youth 18-35 year age group, family income is less than 10000 p.a, maximum amount 35000 interest rate 10-12 percent. 4. Small business finance: Margin is 20-25 percent loan available 100000 interest rate is 11.5 percent and 15 percent 5. Entrepreneur scheme: It is available to technically qualified persons and caries an interest ranging between 12.5 and 14.5 percent.

Inventory management for SSI

Introduction The term inventory includes materials- Raw, in process finished packaged, spares and others stock in order to meet an unexpected demand or distribution in near future.

Types of Inventory
1. Production Inventory: Rae material, parts of components which are consumes in the production process and become part of the product. 2. Maintenance , Repair and Operating Supplies(MRO) inventories: These are consumed in the production process, but do not become part of a product. 3. In Process Inventories: These are semi finished product found that various stages of the production operation. 4. Finished goods Inventories: These are complete product ready for shipment.

Inventory cost
Ordering cost: cost of placing an order with a
vendor of materials. a) Preparing a purchase order. b) Processing payments. c) Receiving and inspecting the material ordering from the plant. d) Machine setup. e) Start-up scrap generated from getting a production run going.

Cont..
Carrying cost: Cost connected directly with materials. a) Obsolescence b) Deterioration c) Pilferage Financial Costs: a) Taxes b) Insurance c) Storage d) interest

Inventory Control Techniques

Several techniques of inventory control are in use and it depends on the convenience of ye firm to adopt any of the technique. the following points should be kept in mind while managing the inventory. (a) Shortage of inventory (b) Excess inventory carrying cost

Techniques of Inventory control

1. 2. 3. 4. Always better control: inventory in an organization can be classified into three categories- A, B, C on the basis of annual consumption in monetory value. High medium and low(HML):This classification is based on the unit value of the item as in ABC. Vital, Essential and desirable(VED): classification is done to determine the criticality of an item and its effect on production and other services. Scare, Difficult and easy to obtain(SDE): classification is based on the availability of item and is very useful is the context of scarcity of the supply. Fast Moving slow Moving and Non Moving(FSN): the FSN classification is based on the pattern of issues from stores and is useful in controlling obsolescence.

5.

Cont
6. Economic Order Quantity(EOQ): EOQ is order size at which the total cost; comprising ordering cost plus carrying cost is leas. 7.Maximum Minimum System: this system is often used in connection with manual inventory control system. 8. Materials requirement planning (MRP): MRP plans and controls goods on order and generates data for determining when and what specific materials will be needed to meet previously planned production schedule.\ 9: Just In Time (JIT): JIT means that virtually no inventories are held at any stage of production and that the exact number of unit is brought to each successive stage of production at the right time.

Benefits of Inventory control

Stock control ensures adequate supply of materials, stores, spares and so on, minimise stock out and shortages, avoid costly interruption in operation. It keeps down investment in inventories, inventories carrying cost and obsolescence losses to the minimum. It facilitates purchasing economically through the measurement of requirement on the basis of recorded experience. It facilitates cost accounting activities by providing a means for allocating materials cost to products, department or other operating accounts. Perpetual inventory values provide a consistent and reliable basis for preparing financial statement.

Presented by Mohd Fareed Khan Mohd Adnan Danish Ahmad Diwan Atahar khan Mohd Sartaj Khan