CHAPTER- I

Research Design
1.1 Introduction of the Subject 1.2 Objectives 1.3 Importance of Study 1.4 Methodology 1.5 Chapterisation 1.6 Limitations

Pune University

CHAPTER NO. 1
RESEARCH DESIGN
INTRODUCTION OF THE SUBJECT
Management of working capital is a challenging task particularly in developing countries like India. In developing countries generally, there is shortage of funds, frequent changes in the monetary policy as an instrument of controlling inflation, vast demands on bank funds, high interest rates, shortage of goods and services luring both business houses and consumers to hoard and maintain large inventories and existence of parallel black economy. A large part of finance managers is devoted in managing working capital to get day-to-day needs of an organization. His prime attention is devoted to maintain sufficient liquidity in the form of cash, marketable securities, accounts receivables and inventories to grease the operations of business adequately. But at the same time he is to take care of the profitability of the organization. Too much liquidity is a burden on profitability, as these are inversely related to each other. It is to balance between these two conflicting objectives of liquidity and profitability. For the organization it is a continuous process.

Pune University

OBJECTIVES OF THE PROJECT The objectives of the study were

To understand and study in general the management of working capital. To analyze the distribution of gross working capital into various components. To calculate the operating cycle period. To analyze the liquidity position of the company by analyzing the various ratios.

IMPORTANCE OF THE STUDY

In every business organization its financial transactions are recorded in the systematic term, which called Financial Statement such as Profit and Loss Account and Balance Sheet. Financial Statements shows the financial strength and weakness of the firm, hence, the Financial Statements are prepared for the decision-making. Management becomes able to this purpose such financial statement are necessary to be analyzed. The study was useful to understand the Working Capital Management at Raymond Ltd. It was useful in understanding all theoretical concepts, how they are practically implemented. Also the various types of ratios were studied which helps in analyzing the financial statements.

METHODOLOGY
Research in common parlance refers to a search for knowledge. Research may be defined as manipulation of things, concepts or symbols for the purpose of generalizing to

Pune University

extent, correct or verify knowledge, whether that knowledge aids in construction of theory or in the practice of an art. Research objectives: The main objectives of research in management are: 1. To verify and to test the existing facts and theories. 2. To gain familiarity with a phenomenon or to achieve new insights into it. 3. To establish generalization in various fields of knowledge. 4. To bring to limelight information that could have never been brought to the knowledge under normal course. METHODS OF DATA COLLECTION Primary data collected from: Personal interview was the main tool for the collection of primary data and information. This study has brought in use very little primary data in relation with the elements of working capital. Secondary data collected from: Since the study is based on the financial aspects of the company so the annual report of the organization, Trial Balance, Income & Expenditure accounts of the company brought in use. Besides the company profile and theoretical aspects taken from the secondary sources. PRESENTATION OF THE DATA The data collected is presented in the form of: (a) (b) Tables Bar diagrams

(c) Pie charts

Pune University 4

CHAPTERISATION
The research project has been articulated with the help of five chapters as follows_ CHAPTER I RESEARCH DESIGN AND METHODOLOGY :It details defines objective, their formulation & design of the research. It is most important chapter because it designs all the activity research. CHAPTER II THEORETICAL BACKGROUND :In this chapter includes theoretical concepts relating to subject of project it focuses theoretical knowledge in financial management books related to topic i.e. working capital. CHAPTER III INTRODUCTION OF COMPANY:Company profile it focus on introduction of company, human resource development, research & development, organizational set up. CHAPTER IV- ANALYSIS & INTERPRETATION OF DATA:In which after collection of data from the subordinates, the work of conclusion & suggestion are depending on analysis. CHAPTER V: CONCLUSION & SUGGESTION: This chapter is based on analysis and interpretation. The researcher has alternative solution and suggestions give the origination. Last by the report contains
Pune University 5

appendix & bibliography. This contains the balance sheet and profit and loss accounts with help of this researcher has done research work & bibliography give the information about the books magazine & websites used by the researcher to complete the research work.

ANALYSIS OF DATA
For the analysis ratio has been used and for calculation of working capital and operating cycle three years figures has been compared crudely.

LIMITATIONS
This project is not far from limitations. The limitations are: A company generally cannot disclose its internal policies to outsiders. In such case, it is very difficult to find out and gather complete and true information in the forms of figures regarding financial matters.

Pune University

CHAPTER- II

Theoretical Background
2.1 Introduction 2.2 Risk and return in Working Capital 2.3 Elements of Working Capital 2.4 Working Capital Finance 2.5 Ratios 2.6 Operating Cycle

Pune University

CHAPTER NO. 2
IN TO THE CONCEPT - WORKING CAPITAL MANAGEMENT
INTRODUCTION
Working capital management refers to management of the working capital, or more precise, the management of current assets. A firms working capital consist of its investment in current asset which include short term asset such as cash and bank balance, inventories, receivables, and marketable securities. Working capital management arises from two considerations: 1. Existence of working capital is imperative in any firm. 2. The working capital involves investment of funds of the firm. Working capital refer to current asset which may be defined as: 1. Those which are convertible into cash or equivalent within a period of one year. 2. Those which are required to meet day to day operations. Though fixed asset and current asset both require investment of funds, working capital involve different concept and methodology than the techniques used in fixed asset management. Reason for this is that very basics of fixed assets decision process and working capital decision process are different. The fixed assets involve long period perspective, hence the concept of time value of money is applied in order to discount the future cash flows, where as in working capital the time horizon is limited, in general to one year only and the time value of money concept is not used. Fixed asset affect the long-term profitability of the firm while current assets affect the short-term liquidity of firm. Managing current asset may require more attention than managing fixed assets, because level of investment in each of the current asset varies from day to day, and the financial manager must there fore, continuously monitor these assets to ensure that the desired
Pune University 8

levels are being maintained. Too large an investment in current assets means tying up funds that can be productively used elsewhere. Excess investment may also expose the firm to undue risk e.g. in case, the inventory cannot be sold or the receivable cannot be collected. On the other hand, too little investment also can be expansive. For example, insufficient inventory may mean that sales are lost as the finish goods which customers wants are not available. Financial manager is faced with decisions involving some of the considerations are as follows: 1.What should be the total investment in working capital of the firm? 2.What should be the level of individual current assets? 3.What should be the relative proportion of different sources to finance the working capital requirement? Thus working capital management may be defined as the management of firms sources and uses of working capital in order to maximize the wealth of the shareholders The term working capital may be used in two different ways. 1. Gross working capital: The gross working capital refers to the firms investment in all current assets taken together. 2. Net working capital: The term net working capital may be defined as the excess of total current assets over total current liabilities. The gross working capital denotes the total working capital or total investment in current assets. A firm should maintain an optimum level of gross working capital. This will help avoiding: 1. The unnecessarily stoppage of work or chance of liquidation due to insufficient working capital. 2. Effect on profitability because over flowing working capital implies cost. Therefore, a firm should have just adequate level of total current assets. The gross working capital also gives an idea of total funds required for maintaining current assets.
Pune University 9

On other hand, net working capital refers to amount of funds that must be invested by the firm, more or less regularly in current assets. The net working capital also denotes the net liquidity being maintained by the firm. This also gives an idea of buffer available to the current liability. Need for adequate working capital: The need and importance of adequate working capital for day to day operation can hardly be underestimated. Every firm must maintain a sound working capital position otherwise; its business activities may be adversely affected. Thus every firm must have adequate working capital. The excess working capital, when the investment in working capital is more than the required level, may result in a). Unnecessary accumulation of inventories resulting in waste, theft, damage etc. b). Delay in collection of receivables resulting in more liberal credit terms to customers than warranted by the market conditions. c). Adverse influence on the performance of the management. On the other hand, inadequate working capital situation is not good for the firm. Such a situation may have following consequences: 1) 2) 3) 4) 5) The fixed asset may not be optimally used. Firm growth may stagnate. Interruptions in production schedule may occur ultimately resulting in The firm may not be able to take benefit of an opportunity. Firm goodwill in the market is affected if it is not in a position to meet its

lowering of the profit of the firm.

liabilities on time. Thus taking in to consideration financial manager must establish: a)

b)

A well defined working capital policy

A self-sufficient working capital management system.

Pune University

10

DIFFERENT TYPES OF WORKING CAPITAL POLICIES

Current Assets Conservative

Moderate

Aggressive

Sales Level

Above figure show three policies in working capital management. In moderate policy value of current asset increases in proportion with sales level. In conservative policy value of current asset increases more rapidly than sales level. Such a policy tends to reduce the risk of shortage of working capital by increasing the safety component of current asset. The conservative policy also reduces the risk of nonpayment to liability. In aggressive type of policy sales level increases more in percentage than increase in current assets. This type of aggressive policy has many implications. a) The risk of insolvency of the firm increases as it maintains law liquidity.
b)

The firm is expose to greater risk as it may not be able to face unexpected change in market

c) Reduced investment in current asset will result in increase in profitability of the firm.

Pune University

11

Risk and Return in Working Capital

Another important aspect of working capital policy is to maintain and provide sufficient liquidity to the firm. Having a large working capital may reduce the liquidity risk faced by the firm, but it can have a negative effect on the cash flows. Greater liquidity makes the firm meeting its obligation, but simultaneously greater liquidity involves cost also. Therefore, the net effect on the value of the firm should be used to determine the optimum amount of working capital. Risk return trade off in working capital management is trade off between the Firms liquidity and its profitability. By maintaining large investment in current asset firm can reduces chances of 1.Production stoppages and the lost sales from the inventory shortage 2.Inability to pay the creditors on time. However if the firms increase in investment does not increase the corresponding return, this mean that the firms return on investment drops because profit is unchanged. In addition to above, other things remain same, greater the firms reliance on the short term debt in financing its current asset, greater the risk of ill-liquidity. A firm can reduce its risk of ill-liquidity through the use of long-term debt at the cost of reduction on its return on investment. So the risk in this context is measured by the probability that firm will become technically insolvent by not paying current liabilities as they occur, and profitability here means the reduction of cost of maintaining of current asset. In other words, more liquid is the firm, the less likely it is to become insolvent. Conversely, lower levels of liquidity are associated with increasing levels of risk. So, the relationship of working capital, liquidity and risk of the firm is that the liquidity and risk move in opposite direction. The Risk Return Syndrome Can Be Summed Up As Follows: When liquidity increases, the risk of insolvency is reduced, but profitability also reduced. However when the liquidity is reduced, the profitability increases but the risk of insolvency also increases. So profitability and risk move in the same direction.
Pune University 12

Moreover, the different elements of current assets should also be appropriately balanced. Each element and its position in the total working capital should be analyzed in the light of its characteristics. For e.g. the total current assets may be sufficient to cover the current liabilities but when the composition of current asset is analyzed, it may be found that its is consisting mainly of the obsolete and slow moving stock. This stock may not provide desired level of liquidity to pay off the current liabilities. Similarly, higher level of cash and bank balance may provide liquidity but affect the profitability because keeping cash and bank balance is not profitable use of the resources. The effect of working capital changes on the liquidity risk depend on a number of factor such as: a) Stand-by sources: A firm with stand-by source of external financing is less exposed to liquidity risk than the firm, which does not have such access, because the former can tap these sources if it needs to cover the increasing current liabilities. b) Economic conditions: Holding other factors constant, firms typically experience larger changes in liquidity risk as a consequence of working capital change when the economy is in recession than when in boom.
d)

Future uncertainty: To the extent that future operations of the firm are predictable and stable, the firm can survive with lower investment in working capital than could, otherwise similar firms which have more uncertainty about the future operations.

Pune University

13

ELEMENTS OF WORKING CAPITAL

Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the interrelationship that exists between them. The major current assets are cash, marketable securities, accounts receivable and inventory. The current liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses. INVENTORY MANAGEMENT: Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stockholding periods will be influenced by the nature of the business. Factors to be considered when determining optimum stock levels include: What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without

compromising best sellers? It should be noted that stock sitting on shelves for long periods of time ties up money, which is not working. For better stock control, the following may be considered:

Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many.

Pune University

14

Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it. Consider having part of your product outsource to another manufacturer rather than make it yourself. Review your security procedures to ensure that no stock "is going out the back door!"

Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges. The inventory of a manufacturing concern usually includes: Raw material Work-in-Progress Finished goods

ACCOUNT RECEIVABLE: It is essential marketing tool, acting as a bridge for the movement of goods through production and distribution stages to customers. Firms grant trade credit for following reason 1. To protect its sales from competitors 2. To attract potential customers to buy its product at favorable term 3. Buyers requirement 4. Companies bargaining power 5. Relationship with dealers 6. Marketing tool Receivable has three characteristics: 1. It involve an element of risk 2. It is based on economic value 3. It implies futurity.

Pune University

15

Receivable is a major component of current asset, granting credit and creating debtors amount to blocking of the Firms funds thus time interval between the date of sales and the date of payment has to be financed out of working capital. A Firms investment in account receivable depends on 1. The volume of credit sales 2.Collection period Therefore average investment in Accounts receivable is Daily credit sales * Average collection period. Credit policy ranges from credit to any one to no credit. If credit is given to any one then there is chances of creating bad debt on other hand if credit is not given then sales will reduce. There are various costs and benefits attached with a credit policy. Costs of Receivables 1. Costs of financing. 2.Administrative cost 3.Delinquency costs 4.Cost of default by customer Benefit of Receivables 1. Increase in sales 2 Increase in profits 3 Extra profits CASH MANAGEMENT: Financing of Current Assets: Another important aspect of working capital management is to decide the pattern of financing the current asset. Breaking down working capital needs into permanent components over time provides a useful by-product in terms of financing choice. Permanent component is predictable insofar as it is linked up to expected change in sale or cost of goods sales over time, temporary components is also predictable in general as it
Pune University 16

follows the same pattern every year. So two components need to be financed accordingly for which the different sources of funds can be grouped as follows: 1.Long term sources: e.g. share capital, retained earning, debentures and long term borrowings. 2.Short term sources: e.g. bank credits public deposit, commercial papers, factoring etc. 3.Transactionary sources: e.g. credit allowed by suppliers and outstanding labor and other expenses. There are different approaches to take this decision relating to financing mix of working capital as follows:
1.

Hedging approach: In this approach financing maturity should follow the cash flow characteristics of the assets being financed. The general rule is that the length of the finance should match with the life duration of assets. 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.

2. Conservative approach: In this approach all or most of the working capital needs are met by long-term sources and thus the firm avoids the risk of uncertainty. 3.Aggerassive approach: In this approach the firm decides to finance a part of the permanent working capital by short-term sources. Motives for holding cash: Though cash is the most liquid asset, but it doesnt earn any substantial return for the business. But every firm maintains some cash balance because of following motives: 1. Transaction motive 2. Precautionary motive 3 4 3. Speculative motive 4. Compensation motive

Objective of cash management: Following are the two main objective of the cash management
Pune University 17

1.To provide the cash needed to meet the obligations: if the firm have sufficient cash in hand, it will help firm in a) avoiding a chance of default. b) Availing the opportunities of getting cash discounts by making early or prompt payments. c) Meeting unexpected cash outflows without more problems. 2. Minimize the cash balance: Investment in idle cash balance is a dead investment and has no earning. Therefore, whatever cash balance is maintained, the firm is foregoing interest income on the balance. Factors affecting the cash: Various factoring which will determine the amount of cash balance to be kept by the firm are a) Cash cycle: the term cash cycle refers to the length of the time between the payment for purchase of raw material and the receipts of the sales revenue b) Cash inflow and cash outflows: every firm has to maintain cash balance because its expected inflows and outflows are not always synchronized. c) Cost of cash balance: another factor to be considered while determining the minimum cash balance is the cost of maintaining excess cash or of meeting shortages of cash. There is always an opportunity cost of maintaining excessive cash balance. In addition to above factors there are some other considerations also affecting the need for cash balance. They are uncertainties of a particular trade, staff required for cash management etc which will have a bearing on determining the cash balance required by a firm. MARKETABLE SECURITIES: Management of Marketable securities is an integral part of investment of cash as this may serve both the purposes of liquidity and cash provided choice of investment is made correctly. As the working capital needs are fluctuating, it is possible to park excess funds in some short-term securities, which can be liquidated which need for cash is left. The selection of securities should be guided by three principles: Pune University 18

(i) Safety- Return and risk go hand in hand. As the objective in this investment is ensuring liquidity, minimum risk is the criterion of selection. (ii) Maturity- Matching of maturity and forecasted cash needs is essential. Price of longterm securities fluctuates more with change in interest rates and is therefore more risky. (iii) Marketability- It refers to the convenience, speed and cost at which a security can be converted into cash. If the security can be sold quickly without loss of time and price it is highly liquid or marketable. Marketable Security Alternative: The choice of marketable securities is mainly limited to government treasury bill, deposits with banks and inter-corporate deposits. Unit Trust of India and Commercial papers of corporate are other attractive means of parking surplus funds, for companies along with deposits with sister concerns or associate companies.

ACCOUNTS PAYABLE:

Paying according to best terms is a critical component in maximizing the organizations purchasing profitability. Timely payments to suppliers, vendors and employees reduces costs, relieves administrative burden and helps in better utilization of short term working capital. Payable management gives an effective control over the expenses. Tracking vendors, processing payments and analyzing the vendors performances gives a clear picture of cash flow and provides the level of payables processing needed for the business. Payable management for an organization contributes to operational excellence by,
Optimizing Improve Achieve

the workforce with improved productivity.

the cash flow and enhance vendor relations. higher levels of accounting efficiency and accuracy.

Pune University

19

Payable management helps in achieving more accurate cost of goods sold, manage cash flow and generate payments with speed, accuracy and efficiency.

Pune University

20

WORKING CAPITAL FINANCE

After determining the level of working capital, then comes the question of financing of the same. The source of finance for working capital may be categorized as (a) Trade Credit (b) Bank Finance (c) Accrued Expenses & Deferred Income (d) Commercial Papers Trade Credit Trade credit refers to the credit that a customer gets from suppliers of goods in the normal course of business. The buying firms do not have to pay cash immediately for the purchase made. This deferral of payments is a short-term financing called trade credit. Bank Finance Bank finance is the most commonly negotiated source of the working capital finance. It can be availed in the forms of overdraft, cash credit, purchase/discount of bills and loan. Banks are the largest providers of working capital finance to firms. Each companys working capital need is determined as per the norms. These norms are based on the recommendations of the following committees The Tandon Committee The Chore Committee

Accrued Expenses & Deferred Income Accrued expenses represent a liability that a firm has to pay for the services, which it has already received. For e.g. salaries & wages, tax & interest. Deferred income represents funds received by the firm for goods and services, which it has agreed to supply in future. For e.g. advance payments made by the customers. Accrued expenses and deferred income also provide some funds for financing working capital. It is a limited source as payment of accrued expenses cannot be postponed for a long period and similarly advance income will be received only when there is a demandsupply gap or the firm is a monopoly. Commercial Paper Commercial paper is an important money market instrument for raising short-term finances. The Reserve Bank of India introduced the commercial paper
Pune University 21

scheme in the Indian money market in 1989. Commercial paper is a form of unsecured promissory note issued by the firms to raise short-term funds.

RATIOS
Ratios are relative figures reflecting the relation between variables. In simple words, a ratio is an arithmetical relationship between two figures. They enable analyst to draw conclusions regarding financial operations. The use of ratios as tool of financial analysis, involves their comparisons, for a single ratio, like absolute figures, fails to reveal the true position. It predicts strength and weakness of the firm in various areas as well as helps in assessing corporate excellence, judging credit worthiness, forecasting bond ratings, predicting bankruptcy and assessing market risk Thus ratio basically represents the relationship between two groups of items taken either from profit and loss account or from the balance sheet or both. In other words, the ratios measure the relationship among the tangible factors affecting the performance and profitability of the company. TYPES OF RATIOS: Various accounting ratios can be classified as follows:

Ratios
Traditional Classification Or Statement Ratio Importance 1) Balance sheet Ratios or Position statement Ratio Functional Classification Or Classification According to Test Significance Ratio Or Ratio According 1) Primary Ratios 2) Secondary Ratio

1) Liquidity Ratios 2) Leverage Ratios 3) Activity Ratios 2) Profit and Loss account Ratio 4) Profitability Ratios. Or Revenue/Income Statement Ratio 3) composite/Mixed Ratio or Inter-Statement Ratios
Pune University

22

LIQUIDITY RATIO Liquidity mainly relates to the quick availability of cash. While managing the working capital quick availability of cash against the blocked assets is need to be taken into consideration. Cash is needed to pay the liabilities relating working capital such as creditors and bank o/d .On the other hand this cash is collected through debtors or cash sales. Thus various liquidity ratios give us the idea about how the current liabilities can be covered by the current assets. These are short term blocking of funds and normally dont need a bigger amount of funds. It is worthy to mention that in emergency to pay-off short term current liabilities, long term debts can be used but those are rarely covered by the working capital analysis because it is mainly deal with pay-off of liabilities by realization of current assets.

Current Ratio: This ratio states that how many times the current liabilities can be covered by current assets. Whether the organization has short-term liquidity (solvency) to cover its debt and how strong the company is in paying its current liability. Normally 2:1 is the ratio, which is considered satisfactory. Quick Ratio: It is modified form of current ratio, which gives the comparison of immediately available and required cash. It excludes the liabilities and assets, which are accrued but not due; such as provisions. Thus it is wholly based on the cash liquidity aspects.

TURNOVER RATIO
Turnover is the total sales of the company i.e. the main source of the organization can gain. Various turnover ratios are calculated to see the exact proportions of the sales to various other items, which are related to sales. To build up the figure of the sales there
Pune University 23

are many other items, which contributes to it. There are many factors, which are part and parcel of working capital cycle, which creates the importance in working capital management. Though the sales is the important aspect of any business cost of sales blocking of funds into sales also gains important position in working capital management. Inventory Turnover Ratio: How the cost of production is blocked in the nature of stock, lying in the go down is one of the important aspects. Huge nature of cost of production and huge inventory built up in the godown can affect the liquidity adversely and vice-a-versa. On the other hand shortage of stock cannot be beneficial to grab the market demand profits. Thus inventory turnover ratio says about, how the cost of goods sold is blocked in the stock. Inventory Period: This is more useful form of inventory turnover ratio as it gives the time period for which the funds are locked. Thus with comparison of inventory turnover and period ratio we can say that the first gives us the amount blocked and the other says how long it is blocked.

Debtors Turnover Ratio: Debtors turnover ratio is calculated to give an idea about how the debtors can be covered by the total sales i.e. basically for how much times sales realization is blocked in the debtors. As organization receives credit facility from suppliers, it also allows credit period to the debtors for larger volume of sales. Though the funds are blocked in Debtors or B/R this is one of the major marketing strategies to increase the sales. Debtors Collection Period: In any business, whenever something is sold, the payment has to be received from the other party. Now, Debtor Collection mean indicated is the average number of days taken to receive the money from the other party. Low ratio implies quick cash collection andless working capital required. Creditors Turnover Ratio: These ratios say that how early you have to make the payments. Basically these ratios are calculated to know the exact cash flow required at
Pune University 24

the appropriate time. Say, on particular day creditors of Rs.X has to be paid then it should be considered that whether on that bank or cash account has sufficient balance or any debtors or B/R are realizing on that day. Thus creditors turnover ratio is calculated by dividing credit purchase by average creditors carried by the company i.e. how many times the creditors cover the total purchases. Creditors Payment Period: In any business, whenever something is purchased from another party, then the party needs to be paid. Creditor Payment indicates the average number of days within which other party is paid. High ratio is more credit period and less working capital required. To find the average credit available by the suppliers can be obtained, by dividing 365 to turnover ratio. Working Capital Turnover Ratio: It is the relationship between turnover (sales) and working capital. It highlights how effectively working capital is being used in terms of the turnover it can help to generate. It enables to find the structure of working capital cycle of the Organization. No ideal values, but higher the ratio stronger the position of the working capital. Current Assets to Total Assets: Total Assets acquired by Finance Manager can be applied by him in various ways such as expenses and assets. It can be divided into two major aspects Current Assets and Fixed Assets. It should be worth while to observe that how much of the portion of the total assets is occupied by the current assets, as current assets are mainly involved in forming in working capital. Thus the ratio should not be so large to ignore the application of the funds in fixed assets. Also care should be taken that main investment of the organization should be in the operating items. Hence, the ratio of current assets to total assets though depend upon industry to industry should not vary largely.

Inventory Ratio: It states how much portion of current assets is blocked in current assets. It is important from the view of quick realization of the current assets. Inventories can be
Pune University 25

transformed into cash or debtors depending upon the sales. Thus inventory ratio helps in working capital management as well as production life cycle, costing and management. PROFITABILITY RATIO

Profitability ratio reveals how good a business or a company is in terms of earnings. It helps in assessing the adequacy of profits earned by the company and also to discover whether profitability is increasing or decreasing. The profitability of the firm is net result of large number of policies and decisions. The profitability ratios show the combined effect of liquidity, asset management and debt management on operating results. Profitability ratios are measured with reference to sales, capital employed, total assets employed, shareholders funds etc. Cash Profit Ratio: This ratio is very important from the point of view of liquidity and working capital ratio. Cash profit gives all those expenses and incomes, which are accrued due and receive. The portion of such profit to the sales is a cash profit ratio. Higher the ratio higher will be the profit gaining position of the company, which gives a liberty to the organization to use the liquid profit in another income generating operations or projects. The difference between the cash profit and normal profit is that cash profit is what is actually realized in the hands of the organization to be used for other purposes. Return on Capital Employed: This ratio is not very important from working capital management point of view but to obtain the funds for short term as well as long term purposes, supplier of the firm will invariably ask of earning capacity of the organization. Return on capital employed is the major indicator of earning capacity, which is compared with market return and the investment decision are taken. How the organization is managing to maintain the profit above the market level shows the success ratio as compared to the other companies in the industry.

Pune University

26

OPERATING CYCLE

The working capital requirement of a firm depends, to a great extent upon the operating cycle of the firm. The operating cycle is defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization. The length and nature of the operating cycle differs from one firm to another depending upon the size and nature of the firm. A companys operating cycle typically consists of three primary activities: purchasing resources, producing the product and selling the product. These activities create fund flows that are both unsynchronized and uncertain. They are unsynchronized because cash disbursements usually take place before cash receipts. They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy. The concept of operating cycle is useful in controlling as well as forecasting working capital. Longer the operating cycle the more working capital funds the firm needs, while shorter operating cycle period indicates that the locking up of funds in current assets is relatively for short duration.

Cash

Debtors/BR

Raw Material

Sales

Work-in Progress Finished Goods

Pune University

27

Thus the operating cycle of a firm consists of the time required for the completion of the chronological sequence of the following: . Procurement of raw materials and services. . Conversion of raw materials into work-in-progress. . Conversion of work-in-progress into finished goods. . Sale of finished goods (cash or credit). . Conversion of receivables into cash. The segments of the operating cycle include raw material storage period, conversion period, finished goods storage period and average collection period before getting back cash along with profit. The total duration of all the segments mentioned above is known as gross operating cycle period. When the average payment period of the company to its suppliers is deducted from the gross operating cycle period the resultant period is called the net operating cycle period or the operating cycle period.

Pune University

28

CHAPTER- III

Company Profile
3.1 Introduction 3.2 History 3.3 Group Companies 3.4 Brands

Pune University

29

CHAPTER NO. 3
COMPANY PROFILE Introduction
The company has completed 79 years. During this period the company has grown from a small woollen mill to a leading global producer of woollen fabrics. The company is engaged in many divisions like textile, ready-made & accessories, engineering files & tools, denim, prophylactics and cosmetics. Raymond group having businesses in Textiles, Readymade Garments, Engineering Files & Tools, Prophylactics and Toiletries. The group is the leader in textiles, apparel, & files & tools in India and enjoys a pronounced position in the international market. Raymond belie, which has resulted in path-breaking new products. Perceived as pioneer and innovator, Raymond ves in Excellence, Quality and Leadership. Raymond Textile is India's leading producer of worsted suiting fabric with over 60% market share. With a capacity of 25 million meters of wool & wool-blended fabrics, Raymond Textiles is the worlds third largest integrated manufacturer. The company exports its suiting to more than 50 countries including USA, Canada, Europe, Japan and the Middle East. Over the years, Raymond Textile has developed strong in- house skills for research & development Textile has been responsible for raising the standard of the Indian textiles industry. The Denim division has an installed capacity of 16 million meters and produces high quality ring denims. The company currently ranks among the top 3 producers in India. The products are exported to over 30 countries in the world.
Pune University 30

The Engineering Files & Tools division, J K Files & Tools, is the worlds largest producer of steel files with 90% market share in India and about 30% market share in the world.

The Designer Wear division, Be: is an exclusive pret-a-porter range that houses designs by some of the finest Indian designers. Be: offers an eclectic mix of formal, office and evening wear for men and women, in western, ethnic and fusion styles with accessories.

The Aviation division, Million Air was launched in 1996 to provide air charter services. Known for high quality and reliable services, Million Air has a fleet of three helicopters and one executive jet

The company also diversified its business interests into cement and steel. In a restructuring exercise, the company divested its cement business to Lafarge India for Rs7.85bn and the steel business to German steel major, Thyssen-Krupp steel, for Rs4.21bn. With the divestment of its steel and cement businesses, the company has focussed on its textile business. Raymond is further consolidating by merging its textile subsidiaries with itself and is planning to expand the ready-made garments segment, which enjoys higher growth rates as well as margins, through the inorganic route. After restructuring the company's textile business's share including garments, worsted fabric and denim has gone up to around 90%.

Pune University

31

History
Around the time the Singhania family was building, consolidating and expanding its various businesses in Kanpur, one Mr. Wadia, was in a similar manner engaged in fulfilling his dream: he set up a small woollen mill in the area around Thane creek, 40 kms away from Bombay. The Sassoons, a well-known industrialist family of Bombay, who renamed it as The Raymond Woollen Mills, soon acquired this mill. When the Singhanias were looking for new regions to establish their presence and new fields to venture into, they concurred that textiles appeared to hold promise. A piece of information that a woollen mill was available on the outskirts of Bombay clinched the issue. When the grandson of Lala Juggilal, Lala Kailashpat Singhania took over Raymond in 1944, the mill was primarily making cheap and coarse woollen blankets, and modest quantities of low priced woollen fabrics. The vision and foresight of Mr. Kailashpat Singhania helped greatly in establishing the J.K. Groups presence in the western region. Under his able stewardship, Raymond embarked upon a gradual phase of technological upgradation and modernization producing woollen fabrics of a far superior quality. Under Mr. Gopalakrishna Singhania, the mill became a world-class factory and the Raymond brand became synonymous with fine quality woollen fabrics. At Raymond, quality did not rest on its laurels. When Dr. Vijayapat Singhania took over the reins of the company in 1980, he injected fresh vigour into Raymond, transforming it into a modern, industrial conglomerate. His son Mr. Gautam Hari Singhania, the present chairman and managing director has been instrumental in restructuring the Group. With the divestment of the Synthetics, Steel and Cement divisions he initiated, the Group has emerged stronger with a better bottom line, more focused approach, become market oriented and achieved a consolidated position.
Pune University 32

Today, the woollen mill by the creek has turned into a Rs. 1400 crores conglomerate and is Indias leading producer of worsted suiting fabric with 60% market share. It is also the largest exporter of worsted fabrics and readymade garments to 54 countries including Australia, Canada, USA, the European Union and Japan. The Raymond group is also the leader among readymades in India with a turnover of Rs. 2000 million with its three brands Park Avenue, Parx and Manzoni. In its pursuit of excellence Raymond continues to achieve enhanced customer satisfaction through ongoing innovation. And happily the growth graph continues to rise higherand higher.

THE GROUP COMPANIES OF RAYMOND ARE: Raymond Ltd. is Indias leading producer of worsted suiting fabric with a 60% market share. Raymond Apparel Ltd. has three highly regarded menswear brands in its folio: Park Avenue, Parx & Manzoni. J.K. Ansell Ltd. is the manufacturer and marketer of KamaSutra brand of premium condoms. J.K. Helene Curtis Ltd. is the marketers of the Park Avenue and Premium brands of mens toiletries. Color Plus Fashions Pvt. Ltd. Established in 1994 Color plus is one of the leading domestic brands for premium casual wear in the country.

Pune University

33

THE BRANDS OF RAYMOND GROUP ARE The largest and most respected textile brand in India for 'The Complete Man' addressing the innate need of men to look good and at the same time possess strength of character. Formal readymade garments & accessories for men it has recently bagged the "Most Admired Brand" and "Most Admired Trouser Brand" awards. The semi formal and casual range of cottons, blends and denim wear catering to the smart, fashionable and comfortable clothing segment.

The luxury range of mens shirts and ties acknowledged for its high quality and international styling.

An exclusive prt-a-porter line of ready-to-wear designer clothing for women and men in western, ethnic and fusion styles.

The premium condom brand with the unique for the pleasure of making love positioning in textured & flavored variants. The range of cosmetics & toiletries including aftershaves, shampoos, cologne, shaving cream, soaps deodorants, room fresheners

Premium casual wear brand in high quality natural fibers like cotton and linen, in superior mixed and performance oriented weaves.

Pune University

34

Raymond exports fabrics, blankets, garments, denim, readymade accessories such as tie, socks handkerchiefs and leather belts to Africa, America, Asia, Australia, Europe etc.

GROWTH
Today, more than ever, companies depend on growth to build a strong market value. But, as most veteran executives know, growth is a double-edged sword. Creating growth is a challenge. Managing growth is a challenge. Raymond is a leading player in the textile segment with a presence in several segments - worsted textiles, denim and apparels. A strong brand and significant cash surplus are the key advantages that would enable the company to pursue both organic and inorganic growth opportunities. The company is well positioned to explore multitude of growth opportunities available to the sector. The sales of the textile division, which contributes substantially to the companys total sales and profitability, are of seasonal nature. The revenue of the textile division registered an impressive growth of 46 per cent

Growth in terms of Sales revenue

180000

Rupees in Lakhs

160000 140000 120000 100000 80000 60000 40000 20000 0 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Sales and Other Income

Years

Pune University

35

Growth in terms of Profit

60000

Rupees in lakhs

50000 40000 30000 20000 10000 0 2001-2002 1999-2000 2000-2001 2002-2003 2003-2004

Gross Profit before int. and dep. NPAT

Years

Pune University

36

O
M C O R

R
A PC N

G
A OO RR

A
G I N

N
G

I S
D F A I TN I

AP TO E R

G ( T P N O R ER OM AT

E E DA WSH

N X P UR

E G R E A N L E G M R E A N LN E A M R G T ( D I L E E N ( D F I M I LV ED I S S I VI O & I S E CK R ET S I T O OI N N N G N E L N E

T E Z S Z SO O O T N U N EZ T E O H

N Z E O

Pune University

37

CHAPTER- IV

Analysis and Interpretation of Data

Pune University

38

CHAPTER NO. 4
ANALYSIS AND INTERPRETATION OF DATA

Calculation of Working Capital

Introduction: Working Capital refers to the capital required to meet day to day operations. It is calculated by deducting current liabilities from current assets. (Rs.In lakhs) Particulars Current Assets, Loans and Advances: -Inventories -Sundry Debtors -Cash and Bank Balances -Other Current Assets -Loans and Advances Gross Working Capital (a) Current Liabilities and Provisions: -Current Liabilities -Provisions TOTAL (b) Net Working Capital (a-b) Source: Balance Sheet 18037.24 8373.15 26410.39 44380.64 20217.82 6839.76 27057.58 46622.66 19774.42 6513.40 26287.82 50689.46 29490.66 24614.52 2675.92 1887.79 12122.14 70791.03 27734.83 29070.82 1494.35 2516.56 12863.68 73680.24 25883.75 32744.55 3442.47 2712.77 12193.74 76977.28 2004 2003 2002

From the above table, taking individually, the company has favorable working capital. However, comparing the given years it is seen that there is increase in stock year by year also decrease in debtors. This may be due to inability to sell the products. This means that the company is purchasing the material but not able to sell in the market and as such the sales is reducing and so are the debtors and also the stock is increasing because of increased purchase and reduced sales. Thus, many a times it may happened that liquidity
Pune University 39

position are favorable but in fact, they may not be this due to increased stock. Cash is fluctuating over the period of three years. Other current assets are decreasing. Loans and advances are favorably stable along the period of three years. Current liabilities are decreasing; as such, the company has enough cash reserves to payoff the creditors in stipulated time. This may be due to the trust on the suppliers about the material quality. Provisions on other hand were stable in 2002 and 2003 but sudden shoot up in the year 2004. This may be due to increase in proposed dividend and tax for the same.

Pune University

40

Calculation of Operating Cycle

Introduction: Operating cycle is the time duration starting from the procurement of goods or raw materials and ending with the sales realization.
(Rs. In Lakhs)

Particulars

2004

2003

2002

A. Raw Material Storage Period

-Annual consumption Of Raw Material 28296.37 -Avg. daily consumption of RM (assume 365 days) -Avg. stock of RM RM days) Storage Period 4264.37 (in 55 2956.36 51 2593.96 46 77.52 21079.39 57.75 20755.09 56.86

B. Conversion Period

-Annual

Cost of Production

72973.38

62377.10

60654.02

-Avg. daily COP (assume 365 days)

199.93

170.90

166.18

Pune University

41

-Avg.

stock of WIP

7622.03

7598.65

7560.69

Conversion days)

Period

(in 38

44

46

C.

Finished

Goods

Storage Period

-Annual

Cost of Sales

100819.29

92401.36

90302.23

-Avg.

daily COS. (assume 365 days)

276.22

253.15

247.40

-Avg.

stock of FG

12553.21

12307.76

10700.63

FG

Storage

Period

(in 45

49

43

days)

D. Avg. Collection Period

-Annual Credit Sales

94431.64

85469.15

79352.84

-Avg. daily Credit (assume 365 days)

258.72

234.16

217.41

Pune University

42

-Avg. Debtors

26842.67

30907.68

30405.39

Avg. days)

Collection

Period

(in 104

132

140

E. Avg. Payment Period

-Annual Credit Purchases

29712.85

23982.01

21055.46

-Avg. daily Purchases

81.41

65.70

57.69

-Avg. Creditors

2696.60

2416.38

2235.12

Avg. days)

Payment

Period

(in 33

37

39

Operating Cycle (in days)209 A+B+C+D-E

239

236

Source: Balance sheet & Income & Expenditure Account Raw Material Storage Period: To calculate the Raw Material. storage period on an average divide the average stock maintain by the organization by daily consumption, resulting in giving the blocking period. From the observation of the figures it can be seen that increasing consumption of Raw Material. is leading to increasing requirement of higher level of stock, surely affecting the Raw Material.storage period. Thus the Raw
Pune University 43

Material storage period is increasing from 46 days in 2002 upto 55 days in 2004.This shows that more funds are blocked in Raw Material. for 9 days, though increasing production demands more flow of Raw Material Conversion Period: The observation is showing increasing daily Cost of Production which is the obvious result of increasing production pattern of the organization. The organization has successfully maintained the stock level of Work in Progress with a very little variation. The average daily Cost of Production is increasing from Rs. 166 lakhs to Rs. 200 lakhs. Over the period of three years maintaining the same level of Work in Progress is reducing the conversion period from 46 days to 38 days. It can be said that increased Raw Material storage period of 9 days is very much compensated by the conversion period which is reduced by 12 days.

Finished Goods Storage Period: It is mainly dependent on sales trend of the company. Company is constantly showing increasing turnover and the figures can be taken as indicator of the same from the operating cycle point of view. Though the average daily Cost of Sales and average stock of Finished Goods figures are increasing, no specific trend can be observed in their proportion which can be easily pointed out by Finished Goods storage period which is initially 43 days in 2002 increased to 49 days in 2003 and again came down to 45 days in 2004. The lesser period of Finished Goods stock gives favorable view towards organizations operating cycle management.

Average Collection Period: It is cumulative figure effect of companys credit policy, Debtors/BR maintenance discount policy and other bad debts. Naturally increasing sales will show increased average daily credit which can be observed in the given figures i.e. Rs. 217 lakhs in 2002 to Rs.259 lakhs in 2004. But the average debtors maintained by the organization are showing slight increase in 2002 to 2003 and significant decrease in 2004. The decrease is about Rs. 1000 lakhs, which is heavily resulting into reduced collection period. Coming down of collection period from 140 days to 104 days is
Pune University 44

showing the strong receivable policies of the company. These are allowing more funds (around 36 days (140-104) i.e. Rs. 259 lakhs) at the disposal to the organization. Average Payment Period: Though the company is allowing enough credit periods to its debtors it is getting even lesser period from its creditors. Thus, decreasing payment period, calling for more liquidity or cash, parallelly compensates the reducing collection period. The average payment period is reduced to 33 days from 39 days with increasing average daily purchases from Rs.58 lakhs to Rs.81 lakhs over the period of three years. Increasing purchases are the result of the increased turnover of the company. It can be said that reducing payment period is observed due to changing policies of the company.

Operating Cycle Lock-in-Period: This is the jumbled effect of R.M storage period, Conversion period, F.G storage period, and Collection period reduced by Average payment period to creditors. Slight increase from 2002 to 2003 and significant reduction in 2004 is the main observation of total operating cycle. The whole operating cycle was of 236 days which increased by just 3 days (239 days) in 2003 and came down to 209 days in 2004, showing the favorable working capital position in comparison of earlier two years.

Pune University

45

Calculations of Financial ratios:

Introduction: Ratios are used as tool for financial analysis. They measure the relationship among the tangible factors affecting the performance and profitability of the company. Ratio Formula Ratio used for Financial Year ended 2004 Liquidity Ratios: Current Ratio Current Assets, Loans and Advances Current Liabilities and Provisions Quick Ratio Activity Ratios: Inventory Turnover Ratio (times) Inventory Period (days) Debtors Turnover Ratio (times) Debtors Collection Period (days)
Pune University 46

2003

2002

3.13

2.72

2.93

Liquid Assets Current Liabilities and Bank O/D 1.81 1.68 1.93

COGS Average Inventory 2.80 2.60 2.90

365 Inventory Turnover Ratio 130 140 126

Net Sales Avg.Debtors 365 Debtors Turnover Ratio

3.52

2.77

2.61

104

132

140

Creditors Turnover Ratio (times) Purchases Avg.Creditors

11.02

9.92

9.42

Creditors Payment Period (days) Working Capital Turnover Ratio Sales Capital Employed Ratio Current Assets Total Assets Inventory Ratio Debt

365 Creditors Turnover Ratio

33

37

39

Net Sales Net Working Capital 2.24 1.94 1.66

to Sales Capital Employed

0.63

0.61

0.57

Current Assets to Total Assets

62.70 %

64.47 %

66.91 %

Inventory Current Assets to Debt Shareholders Equity

33.63 % 45.44 %

37.64 % 50.44 %

41.65 % 59.32 %

Equity Ratio

Profitability
Pune University 47

Ratios: Cash Ratio Return Capital Profit Cash Profit Sales on Profit before int, dep.& tax *100 Capital Employed *100 22.93 % 15.96 % 19.05 % 13.35 % 17.46 % 11.73 %

Employed Source: Balance Sheet & Income & Expenditure Account NOTES: 1.Cost of goods sold = increase in finished and process stock + material cost + manufacturing and operating costs + employment cost (85%) + selling related administrative and general expenses. 2.Creditors (Rs.In lakhs) Particulars Raw materials, Merchanting goods 2004 2898.47 2003 2494.53 2002 2338.22 2001 2135.02

Pune University

48

Ratio Analysis
It is widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of the firm as well as its historical performance and the current financial conditions can be determined. The rationale of ratio analysis lies in the fact that it makes related information comparable. Comparison with related facts is, therefore, the basis of ratio analysis. Analysis of financial statements is of interest to lenders (short-term as well as long-term), investors, security analysts, managers and others. If properly analyzed and interpreted, financial statements can provide valuable insights into a firms performance. LIQUIDITY RATIO Current Ratio: On the observation and review of current ratio it can be analyzed that the company is enough strong to take care of its current short-term liabilities. Quite higher than normally accepted ratios gives the short-term solvency to the company. Similarly the ratio has gone upto 3.13 in 2004 as compared to 2.93 in 2002 which shows the growing strong position of the working capital management. Quick Ratio: There is not any significant variation in the quick ratio, which states that though not very adverse, the Finance Management has not taken proper care of quick liquidity factor. The ratio over the three years is not continuously fluctuating and a sort of steadiness can be observed. But it should be noted that it has not crossed the 2:1 criteria. TURNOVER RATIO Inventory Turnover Ratio: The observation shows that inventory turnover ratio results as 2.9 times in 2002 reduced to 2.6 times in 2004. It can be said that the company is not following any particular trend or policy to maintain the inventory and the decisions of maintaining the stock of finished goods is taken by current market situation and demand and not by any particular policy.
Pune University 49

Debtors Turnover Ratio: Dividing 365 days by debtors turnover ratio gives average credit period allowed by the company. This enlightens credit policy, sales structure (cash sales-credit sales) of the organization. Increasing credit period can lead to chances of bad debts. So it should be reviewed and controlled properly. Debtors Turnover Ratio is showing smooth increase i.e. 2.61 in 2002, 2.77 in 2003 and 3.52 in 2004, which is quite good and steady. The main reason behind it is increasing sales of the company and thus though the sales are increasing there is no major change in the debtors structure maintained by the company. Increasing debtors turnover ratio naturally will lead to decreasing credit period allowed to the customers; which is going down from 140 days to 104 days; which is quite good from the liquidity point of view. On the contrary company could have increased the sales by maintaining average credit or allowed at the same level. Creditors Turnover Ratio: There is continuous increasing trend in the creditors turnover i.e. it is moved up from 9.42 in 2002 to 11.02 in 2004. There may be various reasons for increase in turnover ratio mainly increase in purchases or decrease in average creditors. Due to increased production level, higher purchase of material can be main reason for increase in creditors turnover. So the company is very well in the position to maintain its credit worthiness in the market. Creditors Payment Period: Creditors payment period is inversely related to creditors turnover ratio, average credit period is going down from 39 days to 33 days over the span of three years. Though the first look on this ratio gives the adverse impression due to decreasing credit period it can be observed that this is not because of reduction of credit facility but mainly because of increase in purchases.

Pune University

50

Working Capital Turnover Ratio: It is the relationship between turnover (sales) and working capital. It highlights how effectively working capital is being used in terms of the turnover it can help to generate. It enables to find the structure of working capital cycle of the Organization. No ideal values, but higher the ratio stronger the position of the working capital. Current Asset to Total Assets: The ratio of 67% in 2002, 65% in 2003, and 63% in 2004 indicates a small decrease, which is not so significant and can be said that company has properly maintained its current assets to total assets ratio over the period. As Raymond is mainly a manufacturing company, investment on an average of 65% in current assets is very much satisfactory as the major items of funds invested cover the accounts like debtors, cash and stock. Inventory Ratio: A decreasing trend can be observed in holding which is 41.65%, 37.64%, and 33.63% over the period starting from 2002 to 2004. There may be various reasons including management policy, production policy, demand in the market, or increase in other current assets like cash and debtors. We can say that reducing inventory component would lead to increasing liquidity of current assets. PROFITABILITY RATIO Cash Profit Ratio: The ratios observed are as follows: 2002 - 17.46% 2003 - 14.55% 2004 - 22.93%

A sudden increase can be spotted in 2004 from 14.55% to 22.93%, which is almost 57% from the earlier year. The reasons behind the same may be cash realization, change in credit policy of the company or credit policy of the customer or suppliers, sudden increase in cash sales. Return on Capital Employed: Smooth increase can be observed in three years i.e. 11.73%, 13.35%, and 15.96%. Therefore positively can be said that the company is doing well and in earning the profit with increasing trend. Though the comparison is necessary
Pune University 51

with the industry return on capital employed 15.96% return is quite satisfactory supported by increasing trend enables to draw positive attitude towards company earning capacity.

ELEMENTS OF WORKING CAPITAL MANAGEMENT

INVENTORY MANAGEMENT: The inventory of the company includes the following: Raw material Work-in-Progress Stores and Spares Finished goods

The table below gives a brief description of all the types of inventory, the components included, the valuation methods followed and other relevant details:
Particulars Raw Material Work-in-Progress Finished Goods Stores and Spares Wool (Australia) (fine micron, coarse) Polyester (Reliance Ltd.) Components Viscose (Locally) Yarn (RSM)(Rajasthan) Camel hair (Locally) Soya bean fiber (Locally) Fine micron-July and At its peak stored for the entire year Wedding and festive Seasons. stable-April-August Valuation Method Value as in May 2004 Pune University 14 68-70 Specific Identification Weighted Average Dec-Jan Weighted Average Cost or market value Which ever is less. 110 (in accordance with AS-2 52 Weighted Average 8-9 Fabric Oils, Lubricants etc.

(Rs. Crores) Production and Planning Production and Managed by Dept. Planning dept.

including Excise duty) Production and Planning Dept., Warehousing dept and Marketing dept.

RAW MATERIAL: Wool : Tops of around 19microns and less are seasonally imported and of around 21, 22,and 24 microns are imported throughout the year. The ordering of the raw materials depends on the landing cost, which is the product of the following: Price, availability, and exchange rate fluctuations. The maximum demand is during the festive and wedding season, i.e. from the month of Oct. onwards. The production time being 2-2.5 months, the lead-time (the time from when the order is placed to when the material stock is actually received) being 2 months, the inventory is accordingly ordered in the months of June July and stored for the entire year. It is expected that the company should maintain 100% raw material inventory as it accounts for only 27%(approx.) of the ex-mill price which turns out to be around Rs. 18-20 crores. The company does not maintain any safety stock, as fluctuations are present throughout the year. The pricing policy of the raw materials is done by specific identification method, in this method the raw material stock is imported consignment -wise and the stock identification is done in the form of lots. There are no standards or norms followed by the company in specific as fluctuations dominate the market. WORK-IN-PROGRESS: The in process inventory for the company is fairly stable throughout the year at Rs.68-70 crores with a minor fluctuation of around Rs.2-3 crores. This is mainly as the following mentioned factors are more or less constant throughout the year:
Pune University

Machine efficiency Loading

Flow 53

FINISHED GOODS: The finished goods inventory at the company is very volatile. The production is more or less in stock during the period April August and starts depleting somewhere in the months of September / October, it again starts picking up in the months of December / January (which is the peak). Exports are more or less constant, though there the predominant exports are in the months of April July. The debtors constitute the major portion of Inventory. As the finished goods and inventory vary inversely, i.e. when the inventory is at its peak, the debtors are at their lowest and vice versa. Thus the finished goods inventory levels and debtors are more or less constant. ACCOUNT RECEIVABLE: In Raymond Ltd. the goods are sold through the following distribution channel: Dealer

Wholesaler, retailer, franchisees In order to gain more profit or to keep profit within the company it has 300 own retail shops. The company is very speculative about appointing its dealers. To appoint new dealers it is taking following precautions 1. Worthiness of dealers is checked by the Raymond and also conformed from the agent of that particular area. 2. It will not appoint two dealers in same area, which will hamper the market of each other .if necessary it will appoint new dealers with proper market survey 3. Amount of credit is decided by company. If credit is given to new dealers then there is a risk of bad debts if he is not able to make the payment.
Pune University 54

Raymond takes security deposit of 2% of net sales of previous year sales As most of the sales are on credit so it is necessary to manage the collection properly So payment is collected through: 1.Direct payment 2.Collection of bills The company it is not allowing any discount on early payment Direct payment is collected through check or Cash Management Service (CMS). 50% of collection is through CMS, which reduces delay in collection. In collection of bill Raymond send bill to dealers, when dealers accept these Bills, the Banks will discount them. Bank discounts the bill in two ways: 1.with recourse 2.without recourse In with recourse system company is giving guarantee that if dealer is not paying bill then company will pay it, which is secure hence bank will not check dealer worthiness it will just check signature. In this way Raymond maintains good relations with bank as well as dealers. Factoring is done with HSBC, UTI, Kotak Mahindra, at the rate of 6.25% for 90 days bill. In without recourse system bank will check the worthiness of dealer because Raymond is not going to pay the bill, but in case of any default of payment it will help bank by stopping the delivery of the goods to the customer. This is not true for all dealers, if the company feels that the dealer is worthy then it will allow supply of goods to default dealer. Channel financing is done through Centuring financing, ABN Amro HSBC, ICC bank In this rate is 10-12% depending on bank and worthiness of dealer. Normally 16 days are allowed for collecting money through check or demand draft, while 10 days are allowed for bills and Cash Management Service.

Pune University

55

The credit period allowed for wholesaler, franchisee, retailers are as follows Wholesaler Franchisee Retailers 90 days 60 days 45 days

Due to credit policy Raymond claims that they do not have any bad debt since long year. In case any dealer made the bad debt then in that case the commission of agent is held and the amount of bad debt is recovered from that commission The commission given to the agent varies from 2.5-3.5% depending on quality of product. For a particular area there is only one agent and the amount of his commission is in crores of Rupees, hence the company can say that they will recover the bad debt. The company also gives free bags, Air conditioner, Generator for franchisee in order to make payment properly. CASH MANAGEMENT: Raymond is cash rich company. They are using conservative policy for working capital management in order to not to loose the sales. In case of booming period of sales like marriage season, Diwali, they require more working capital before two month of booming period of sales. The company does not have debt so even if they follow conservative approach they are managing to have less reduction in profit due to liquidity by investing it in to short term investment like mutual funds for monthly quarterly or semiannually basis. They also manage the liquidity at time of requirement by investing it in to different period. Kotak Mahindra and DSP Merrill Lynch are the advisers of Raymond. They also invest in Chartered Bank on daily basis. Their average rate of return on this investment is 5-6%. Also no other investment gives more rate of return than this because bank interest rates are low.

ACCOUNTS PAYABLE:
Pune University 56

The payment section in the Accounts department in the company makes payment to the 20 departments of the company and some part of management expenditure. They also maintain the records of all payment receipts of the companys registered office at Ratnagiri. The Government and other payments are made through the State Bank of India and Bank of India. Major payments are made through UTI Bank, Standard Chartered Bank, HSBC because only these banks gives the facility of free cheques printed with the name of Raymonds while other banks charge for the same. At Raymond Ltd. the modes of payment differ according to the amount, which is shown in the following table--Amount in Rs. 0-1000 1000-20000 Above 20000 Mode of payment Petty cash Cash / Cheque Cheque

The payment to the foreign suppliers is made through the banks by debiting the companys account in rupees equivalent to the foreign currency of the concerned supplier including transfer charges. The salaries are paid through cheques, which is controlled by the Salary department. The company makes payment after receiving the goods except incase of Reliance to whom they make advance payment. The company generally receives 2%-4% cash discount and 15-30 days of credit. Only the Pran Brothers give regular discounts even on bills of Rs.1000-Rs.5000. The Commercial department does all the negotiation regarding purchases. The company plant is situated at Thane in order to avoid the octroi duty. The payment structure is revised quarterly.

Pune University

57

CHAPTER- V

Conclusions and Suggestions

5.1 Conclusion 5.2 Suggestions

Pune University

58

CHAPTER NO 5
CONCLUSIONS AND SUGGESSTIONS
CONCLUSIONS
General Conclusions: Despite the difficult conditions in the international market the company continued to be on the growth path, both in terms of volume and revenue. Raymond shops network, already representing largest retailing space under any single brand crossed the 300 mark(20 overseas) reduces the commission paid to dealers, agents etc thereby increasing the profit within the company.

Specific Conclusions: Though the consumption of Raw Material, cost of production and cost of sales has increased in 2004, net working capital is decreased by 30 days due to decrease in collection period. This shows the improvement in the collection policies of the company which includes discounting of channel financing and aggressive collection policy. The operating cycle Lock In Period came down to 209 days in 2004 compared to 236 days in 2003 and 239 days in2002, which shows that the working capital position of the company is favorable as compared to the earlier 2 years.

Pune University

59

SUGGESTIONS
General Suggestions: The company has to take steps to counter the rising input cost and domestic competition through cost reduction, rationalization of products and distribution channels, judicious inventory management and research and development. As China has become a part of World Trade Organisation, which can hamper the Indian Textile market, the company has to leverage a strong brand in the international market. It is seen that as the inventory carrying cost is reducing because of the falling interest rates, the company may stock more if desired. Specific Suggestions: The Raw Material storage period has increased from 46 days in 2002 upto 55 days in 2004,which shows that more funds are blocked in Raw Materials for 9 days though increasing production demands more flow of Raw Material.Using modern production techniques like Just In Time approach will reduce the Raw Material storage period and increase the liquidity or cash in hand. The company can adopt the aggressive approach to finance current assets. In this approach the firm finances a part of its permanent current assets with short term financing. This is more risky but may add to the return on assets.

Pune University

60

ANNEXURES
ANNEXURE NO. 01 BALANCE SHEET AS ON 31st MARCH Particulars Sources of Funds: Shareholders Funds Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans Deferred Tax Liability TOTAL Application of Funds: Fixed Assets Gross Block Less: Depreciation Net Block Capital WIP Technical Knowhow Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Bal. Other Current Assets
Pune University

2004

2003

2002

6138.08 98717.37 104855.45 22928.24 24722.05 47650.29 5701.71 158207.45

6138.08 89297.33 95435.41 27179.69 20960.20 48139.89 4912.83 148488.13

6138.08 83388.27 89526.35 14243.87 38864.68 53108.55 4392.57 147027.47

97952.73 57309.49 40643.24 1478.85 --42122.09 71586.85 29490.66 24614.52 2675.92 1887.79

90986.31 51496.69 39489.62 1112.25 --40601.87 61231.64 27734.83 29070.82 1494.35 2516.56

82238.59 47096.93 35141.66 2146.68 141.76 37430.10 58765.84 25883.75 32744.55 3442.47 2712.77
61

Loans & Advances Less: Current liabilities & Provisions Current Liabilities Provisions Net Current Assets extent not written off or adjusted TOTAL

12122.14 70791.03

12863.68 73680.24

12193.74 76977.28

18037.24 8373.15 26410.39 44380.64

20217.82 6839.76 27057.58 46622.66 31.96 148488.13

19774.42 6513.40 26287.82 50689.46 142.07 147027.47

Miscellaneous Expenditure to the 117.87 158207.45

ANNEXURE NO. 02
Pune University 62

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH Particulars Income Sales Services & Export Incentives Other Income Expenditure Material Costs Manufacturing & Operating Cost Increase/Decrease processed stock Excise Duties Employment Costs Administrative, Expenses Finance Charges Depreciation & Amortisation Miscellaneous Expenditure written off Profit for the year before exceptional items Add/less: Exceptional items Profit for the year before tax Provision for income tax Current tax Deferred tax Provision for Wealth tax Profit for the year after tax Add/Less: Prior period Adjustments(net) Excess provision for tax written back
Pune University

2004 102393.56 14459.52 116853.08 31134.16 22932.10 & (417.46) --18042.16

2003 93327.40 8673.99 102001.39 23926.31 21355.82 (298.98) --16803.66 17286.04 3871.85 5810.64 127.03 88882.37 13119.02 194.59 13313.61 3600.00 520.26 50.00 9143.35 (117.87) --

2002 97512.31 9167.06 106679.37 22895.67 20428.80 3307.40 10667.62 16667.38 16645.66 5993.36 5260.80 151.66 102018.35 4661.02 (214.74) 4446.28 2200.00 479.32 18.00 1748.96 (250.75) 698.43
63

in

Finished

Selling

&

General 18120.12 2308.94 6337.85 82.44 98540.31 18312.77 345.65 18658.42 4660.00 788.88 26.00 13183.54 (146.98) 192.38

Balance brought forward Balance available for Appropriation Appropriation Debenture Redemption Reserve General Reserve Dividend paid including tax thereon Proposed Dividend Tax on Proposed Dividend Balance carried to Balance Sheet

2974.74 16203.68 250.00 6000.00 0.41 3375.95 432.54 10058.90 6144.78

4140.68 13166.16 375.00 6700.00 0.38 2762.14 353.90 10191.42 2974.74

2188.07 4384.71 80.00 4016.69 --2762.14 -6858.83 4140.68

Pune University

64

BIBLIOGRAPHY
BOOKS:
Khan M. Y. & Jain P. K., Financial Management (Text & Problems), Tata McGraw-Hill Publishing Co. Ltd., New Delhi, Third Edition. Chandra Prasanna, Financial Management (Theory & Practice), Tata McGraw-Hill Publishing Co. Ltd., New Delhi, Fifth Edition. Rustagi R. P., Financial Management (Theory, Concepts and Problems), Galgotia Publishing Co., New Delhi, Second Revised Edition. Bodhanwala R. J., Taxmanns Learning Financial Management using Financial Modelling, Taxmann Allied Services Pvt. Ltd., New Delhi, July 2003 Edition. Pandey I. M., Financial Management, Vikas Publishing House Pvt. Ltd., New Delhi, Eighth Edition. Annual Reports, Raymond Ltd., 2002 to 2004.

WEBSITES:
www.raymondindia.com www.indiainfoline.com www.managementor.com www.kjmc.com www.icicidirect.com

Pune University

65

Pune University

66