Working Capital Management

[Type the document title]
About Polyplex Corporation Ltd. Business of Polyplex

Polyplexs business is focused on producing high performance plastic films (PET, BOPP & CPP) which are mainly used in the flexible packaging industry. Polyplex is one of the leading integrated producers of Polyester (PET) films in the world. In the recent past, the Company also has ventured into downstream businesses like Silicone Coating and Extrusion Coating. As part of its concentric diversification strategy, the Company has also decided to enter into the Thick PET film business as well as install a Blown PP film in order to broaden the product offering on its silicone coated films business. PET film is made from Polyester resin (chips), which in turn is produced from Purified Terephthalic Acid (PTA) & Mono-Ethylene Glycol (MEG). The Company produces its own resin. The Company largely produces PET films for application in Packaging, Electrical and other Industrial segments like hot stamping foils, thermal lamination, cable wrap, release films, air conditioning ducts etc. Currently, Company produces only thin PET films, which account for three-quarters of the total global demand for PET Films, and does not participate in some of the other smaller segments like imaging, magnetic media and optical films. Packaging being the dominant business segment, the Company would now be in a position to offer other substrates used in the flexible packaging industry. BOPP and CPP films are Polypropylene (PP) based films, which are pre-dominantly used in packaging besides certain industrial applications like tapes, labels, thermal lamination and textiles. Flexible packaging companies supply their laminates to consumer product companies for packaging of a diverse range of products like food products, household goods, personal care products, etc. The downstream businesses of Silicone Coating and Extrusion Coating are niche businesses producing release films and thermal laminates respectively.
Submitted By: - Ankit Sachan Roll No : - PGP- 13012
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The value chain for the Companys Plastic film businesses is depicted below:
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Operations of Polyplex Corporation Ltd.

Polyplex has attained a leadership position in the thin PET films business with manufacturing facilities in India, Thailand and Turkey and a distribution setup in USA and China. Polyplex Corporation Ltd. (PCL/ Polyplex India) has a majority ownership of 51% in Polyplex (Thailand) Plc (PTL/ Polyplex Thailand) which in turn holds 100% of Polyplex Europa Polyester Film Sanayi Ve Ticaret Anonim Sirketi (PE/ Polyplex Europa) and Polyplex Trading (Shenzhen) Co. Ltd. (PTSL/Polyplex China). The Company also has a 51% controlling stake in Polyplex (Americas) Inc. (PA/ Polyplex Americas), a wholly owned subsidiary of Polyplex India . During the year, Polyplex (Asia) Pte. Ltd (PAPL/ Singapore) had sold 19% stake in PTL. With a view to further expand its global manufacturing footprint into North America, Polyplex has recently incorporated two new entities in USA. Polyplex America Holdings Inc (PAH) would be 100% held by PTL and would be the intermediate holding company for Polyplex USA LLC (PU) which would invest in a Greenfield facility in the State of Alabama in USA. The proposed project scope includes a thin PET film line, a continuous process PET chips plant and a metallizer. Further, PAPL has invested in PAR LLC, USA which would be an investment vehicle for a real estate investment in the USA which is expected to enable profitable deployment of part of its cash surpluses. The current group structure (as of July 31, 2011) can be depicted as follows:
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OBJECTIVE OF THE PROJECT
To know about the Current assets and Current liabilities position of Polyplex Corporation Ltd. To determine the Ratios relating to the Working Capital. To know about the Net Working Capital position of Polyplex Corporation Ltd. To look at possible remedial measures if any on the basis of which tied up funds in Working Capital could be used effectively and efficiently. To analyze the performance of the Polyplex Corporation Ltd. of last 3 years. To suggest, if possible on the basis of conclusion some modification to meet the situation.
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Working Capital Management

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. A business should not have a very long Cash Conversion Cycle. A cash conversion cycle measures the time period for which a firm will be deprived of funds if it increases its investments as a part of its business growth strategies. For this the company has to take certain measures such as reduce the credit period of the customers, negotiate with the suppliers and increase its own credit period with them, maintaining the right level of inventory which reduces the raw material costs and proper cash management which ensures that cash holding costs are reduced. If these measures are followed, the working capital requirement automatically comes down. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. A few key performance ratios of a working capital management system are the working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.
Importance of working capital management

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).
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Working Capital
Working capital is the cash needed to pay for the day to day operation of the business. Working capital is a financial metric which represents operating liquidity available to a business. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.
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Current Assets
Current assets refers to those assets which can converted into cash within 12 months, there are no set convention as far as current assets are concerned the same can be a current asset for one
company and fixed asset for other company. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. Here are assets which are most of the time treated as current assets by majority of companies 1. 2. 3. 4. 5. 6. 7. 8. Cash available with company Bank balance of the company Debtors of the company after deducting provision for bad debts. Bills receivables or accounts receivables Short term investments of the company Prepaid expenses paid by the company Short term loans and advances. Inventories of stock as: a) Raw material b) Work in process c) Stores and spares d) Finished goods
9. Temporary investment of surplus funds. 10. Accrued incomes. 11. Marketable securities. Some important topics in the Current Assets (a)- Cash And Equivalents: - This most liquid form of Working Capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet Current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will be a peak of cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it?
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(b)- Accounts Receivable: - Many businesses extend credit to their customers. If you do, is the amount of Accounts Receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them? (c)- Inventory: - Inventory is often as much as 50 percent of a firm's Current Assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What's the rate of inventory turnover compared with other companies in your type of business? (d)-Accounts Payable:- Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? (e)- Accrued Expenses And Taxes Payable: - These are obligations of your company at any given time and represent a future outflow of cash.
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Current Liability
A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. Current liabilities are what a company currently owes to its suppliers and creditors. These are short-term debts, all due in less than a year. Paying them off normally requires the company to convert some of its current assets into cash. Beyond simply being bills to pay, liabilities -- confusing as this might sound -- are also a source of assets. Any money that a company pulls from a line of credit, or postpones paying from its accounts payable, is an asset that can be used to grow the business. There are five main categories of current liabilities:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Accounts payable Accrued expenses Income tax payable Short-term notes payable Portion of long-term debt payable
Short term loans, advances and deposits. Dividends payable. Bank overdraft. Provision for taxation, if it does not amt. to app. Of profit. Sundry creditors.
Accounts payable
This is the money the company currently owes to its suppliers, partners, and employees -- the basic costs of business that the company hasn't yet paid, for whatever reason. One company's accounts payable is another company's accounts receivable, which is why both terms are similarly structured. A company has the power to push back the due dates on some of its accounts payable. Paying those debts later than expected can often produce a short-term increase in earnings and current assets.
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Accrued expenses
The company has racked up these bills, but not yet paid them. These are normally marketing and distribution expenses that are billed on a set schedule and have not yet come due.
Income tax payable

This is a specific type of accrued expense -- the income tax a company accrues over the year, but does not have to pay yet, according to various federal, state and local tax schedules. Although they're subject to withholding, some taxes simply are not accrued by the government over the course of the quarter or the year. Instead, they're paid in lump sums whenever the bill is due.
Short-term notes payable

The Company has drawn off this amount from its line of credit from a bank or other financial institution. It needs to be repaid within the next 12 months.
Portion of long-term debt

This represents a chunk of a company's longer-term obligations that may come due in a given year or quarter. That's why it's counted as a current liability, even though it's called "long term."
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Classification Type of WC
a. On the Basis of Concept
1. Gross Working Capital 2. Net Working Capital {Positive and Negative Working capital}
b. On the Basis of Periodicity

1. Fixed / Permanent Working Capital {Regular & Reserve Margin, Cushion WC} 2. Variable Working Capital {Seasonal & Special Working Capital}
Classification Of Working Capital
On the Basis of Concept
On the Basis of Periodicity / Time
Gross Working Capital
Fixed / Permanent Working Capital
Variable Working Capital
Net Working Capital
Cushion Working Capital
Seasonal Working Capital
Regular & Reserve Margin,
Special Working Capital
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Gross Working Capital

Cash and short-term assets expected to be converted to cash within a year. Businesses use the calculation of gross working capital to measure cash flow. Gross working capital does not account for current liabilities, but is simply the measure of total cash and cash equivalent on hand. Gross working capital tends not to add much to the business' assets, but helps keep it running on a day-to-day basis. The gross concept is sometimes preferred to the concept of working capital for the following reasons: 1. It is a quantitative concept. 2. It enables the enterprise to provide correct amount of working capital at correct time. 3. Every management is more interested in total current assets with which it has to operate then the source from where it is made available. 4. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. 5. This concept is also useful in determining the rate of return on investments in working capital.
Net Working Capital
Working Capital= Current Assets - Current Liability

Net Working Capital is a measurement of the operating liquidity available for a company to use in developing and growing its business. The working capital can be calculated very simply by subtracting a companys total current liabilities from its total current assets. The net working capital concept, however, is also important for following reasons: 1. It is qualitative concept, which indicates the firms ability to meet to its operating expenses and short-term liabilities. 2. IT indicates the margin of protection available to the short term creditors. 3. It is an indicator of the financial soundness of enterprises. 4. It suggests the need of financing a part of working capital requirement out of the permanent sources of funds. This can be both positive and negative; although negative working capital is not good for the companies.
Submitted By: - Ankit Sachan Roll No : - PGP- 13012 Page - 12 -
Money
Temporary Current Assets Short Term Loans
Permanent C.A.
Long Term Fin Stocks, Bonds
Fixed Assets Time
Fixed / Permanent Working Capital

Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital being a permanent investment needs to be financed through long-term funds. Permanent working capital is a term that is used to identify that portion of working capital that is expected to generate on a consistent and uninterrupted. This is in contrast to temporary
working capital, which revenue is coming from sources that may or may not continue. Businesses tend to cultivate and maintain sources of permanent working capital as the foundation for their continued operation from one year to the next. The exact criteria used to define what is and is not permanent working capital will vary slight from one business to the next. A general understanding is that this form of working capital is often the base level of current assets held by the business, with the balance of accounts receivable being an example. In some companies that provide services to clients on a mainly contractual basis, revenues generated month to month under the terms of those contracts may be considered permanent working capital. Any clients who choose to purchase services on a one-time basis, with no guarantees of repeat business, would be considered sources of temporary working capital. Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital being a permanent investment needs to be financed through long-term funds.
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Variable Working Capital

The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans.
Why is working capital so important?

Every business needs some amount of working capital. It is needed for following purposes For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc. To provide credit facilities to customers etc. Maintains solvency of business. Helps in arranging loans from banks & others on easy and favorable terms. Enables a concern to avail cash discount and hence reduce cost. Ensures regular supply of raw materials. Ensures regular payment of salaries and wages and other day to day commitment. Exploitation of favorable market condition. Enables a concern to face business crises. It is a qualitative concept which indicates firms ability to meet its operating expenses and short time liabilities. It indicates the margin of protection available to the short term creditors. Working capital is the indicator of financial soundness of a company.
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SIGNIFICANCE OF WORKING CAPITAL
PAYMENT TO SUPPLIERS
EASY LOANS FROM BANKS.
DIVIDENT DESTRIBUTION
SIGNIFICANCE OF WORKING CAPITAL
INCREASE EFFECIENCY.
INCREASE DEBT CAPICITY
INCREASE IN FIXED ASSETS.
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IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill. Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production. Regular Payment of Salaries, Wages And Other Day TO Day Commitments: It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits. Exploitation of Favorable Market Conditions: If a firm is having adequate working capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices. Ability to Face Crises: A concern can face the situation during the depression. Quick And Regular Return On Investments: Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future. High Morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.
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DETERMINANTS OF WORKING CAPITAL:

Working Capital requirements of a concern depends on a number of factors, each of which should be considered carefully for determining the proper amount of Working Capital. It may be however be added that these factors affect differently to the different units and these keeps varying from time to time. In general, the determinants of Working Capital which re common to all Organizations can be summarized as under:
(a)- Nature of Business: Need for Working Capital is highly depends on what type of business, the firm in. there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public utilities like railways, electricity, etc., need much less inventories and cash. Manufacturing concerns stands in between these two extends. Working Capital requirement for manufacturing concerns depends on various factors like the products, technologies, marketing policies.
(b)- Production Policies: Production policies of the organization effects Working Capital requirements very highly. Seasonal industries, which produces only in specific season requires more Working Capital. Some industries which produces round the year but sale mainly done in some special seasons are also need to keep more Working Capital.
(c)- Size of Business: Size of business is another factor to determines the need for Working Capital.
(d)- Length of Operating Cycle: Operating Cycle of the firm also influence the Working Capital. Longer the Operating Cycle, the higher will be the Working Capital requirement of the organization.
(e)- Credit Policy:
Companies; follows liberal credit policy needs to keep more Working Capital with them. Efficiency of debt collecting machinery is also relevant in this matter. Credit availability form suppliers also effects the companys Working Capital requirements. A company doesnt enjoy a liberal credit from its suppliers will have to keep more Working Capital. (f)- Business Fluctuation: Changes in the Economy also influence the working capital. During boom period, the tendency of Management is to increase the up inventories of raw materials and finished goods to avail the advantage of rising prove. This creates demand for more Capital. Similarly during depression when the prices and demand for manufactured goods. Constantly reduce the industrial and trading activities show a downward termed. Hence the demand for Working Capital is low.
(g)- Current Asset Policies: The quantum of Working Capital of a company is significantly determined by its Current Assets policies. A company with conservative assets policy may operate with relatively high level of Working Capital than its sales volume. A company pursuing an aggressive amount assets policy operates with a relatively lower level of Working Capital.
(h)- Fluctuations of Supply And Seasonal Variations: Some Companies need to keep large amount of Working Capital due to their irregular sales and intermittent supply. Similarly companies using bulky materials also maintain large reserves of raw material inventories. This increases the need of Working Capital. Some companies manufacture and sell goods only during certain seasons. Working Capital requirements of such industries will be higher during certain season of such industries period.
(i)- Other Factors:
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Effective co ordination between production and distribution can reduce the need for Working Capital. Transportation and communication means. If developed helps to reduce the Working Capital requirement.
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NEED FOR WORKING CAPITAL

The basic objective of Financial Management is to maximize shareholders wealth. For this it is necessary to generate sufficient profits. The extent to it, which the profit can be earned, largely depends on the magnitude of sales. However sales do not convert into cash instantly. There is invariable the time gap between the sales of goods and receipts 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 again goods sold. Therefore, sufficient Working Capital is necessary to sustain sales activity. Working Capital is needed for the following purpose: For the purchase of raw material, components and spares. To incur day to day expenses and overhead costs such as fuel, power and office expenses, etc. To meet selling costs as packing, advertisement etc. To provide credit facilities to the customers. To maintain the inventories of raw material, work in progress, stores and spare and finished goods. To pay wages and salaries.
OBJECTIVE OF WORKING CAPITAL MANAGEMENT

Deciding Optimum Level of Investment in various Working Capital Assets. Decide Optimal Mix of Short Term and Long Term Capital. Decide appropriate means of Short Term Financing.
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NATURE OF WORKING CAPITAL MANAGEMENT
Profitablity, Risk & Liquidity
WORKING CAPITAL MANAGEMENT
Composition & Level Of CA
Composition & Level of CL
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WORKING CAPITAL IN TERMS OF FIVE COMPONENTS

(a)- Cash And Equivalents: - This most liquid form of Working Capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet Current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will be a peak of cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it? (b)- Accounts Receivable: - Many businesses extend credit to their customers. If you do, is the amount of Accounts Receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them? (c)- Inventory: - Inventory is often as much as 50 percent of a firm's Current Assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What's the rate of inventory turnover compared with other companies in your type of business? (d)-Accounts Payable:- Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? (e)- Accrued Expenses And Taxes Payable: - These are obligations of your company at any given time and represent a future outflow of cash.
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EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as short working capital positions are bad for any business. However, it is the inadequate working capital which is more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments. 2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. 3. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. 4. It may reduce the overall efficiency of the business. 5. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 6. Due to lower rate of return n investments, the values of shares may also fall. 7. The redundant working capital gives rise to speculative transactions.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT

NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital.
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LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger working capital than in slack season. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and vice-versa. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt. of working capital. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital.
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Others FACTORS: These are: Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Importance of labor. Banking facilities, etc.
MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attempting to manage the current assets, current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also no working capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its probability, liquidity and structural health of the organization. So working capital management is three dimensional in nature as It concerned with the formulation of policies with regard to profitability, liquidity and risk. It is concerned with the decision about the composition and level of current assets. It is concerned with the decision about the composition and level of current liabilities.
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WORKING CAPITAL (OPERATING) CYCLE

The Working Capital requirement of a firm depends, to a great extent upon the Operating Cycle of the firm. The operating cycle may be defined as the time duration starting from the procurement of goods or raw material and ending with the sales of realization. The length and nature of the Operating Cycle may differ from one firm to another depending upon the size and nature of the firm. In a trading concern, there is a series of activities starting from procurement of goods (saleable goods) and ending with the realization of sales revenue (at the time of sale itself in the case of cash sales and at the time of debtors realization in case of credit sales). Similarly in case of manufacturing concern, this series starts from the procurement of raw materials and ending with the sales realization of finished goods. In both the cases, however, there is a time gap between the happening of the first event and the happening of the last event. This time gap is called the Operating Cycle. Thus, the Operating Cycle of a firm consists of the time required for the completion of the chronological sequences of some or all of the following: Procurement of raw material and services. Conversion of raw material into work in progress. Conversion of work in progress into finished goods. sale of finished goods (cash or credit) Conversion of receivable into cash.
Symbolically: -
O = R + W + F + D - C.
Where, O= Length of Operating Cycle. R= Raw Material storage period. W= work in progress period. F= Finished stock storage period. D= Debtors collection period. C= Creditors payment period
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The Working Capital Cycle or Operating Cycle
Profit
Raw material
Debtors Account Receivables & sales
Work In Progress
Finished Goods
Operating cycle of Polyplex Corporation Ltd.
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DIFFERENT ASPECTS OF WORKING CAPITAL MANAGEMENT
DIFFERENT ASPECTS OF WORKING CAPITAL MANAGEMENT
Management of Inventory.
Management of Receivables / Debtors.
Management of Cash.
Management of Payables / Creditors.
It is very difficult to have a complete control over working capital as its area is huge and hence we have to divide working capital in the above four major areas.
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Management of Inventory
Inventories constitute the most significant part of Current Assets of a large majority of companies. On an average, inventories are approximately 60% of Current Assets. Because of large size, it requires a considerable amount of fund. The inventory means and includes the goods and services being sold by the firm and the raw material or other components being used in the manufacturing of such goods and services. NATURE OF INVENTORY The common type of inventories for most of the business firms may be classified as raw material, work in progress, finished goods. Raw Material: It is basic inputs that are converted into finished products Through the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions. Work In Progress (WIP): Work in progress is semi manufactured products. They represent products that need more work before they become finished products for sale. Finished Goods: These are completely manufactured products which are ready for sale. NEED TO HOLD INVENTORY. Maintaining inventories involves trying up of the companys funds and incurrence of storage and holding costs. There are three general motives for holding inventories: (a)- Transactions Motive: IT emphasizes the need to maintain inventories to facilitate smooth production and sales operation. (b)- Precautionary Motive: It necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. (c)- Speculative Motive: It influences the decision to increase or reduce inventory levels to take advantage of price fluctuations.
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OBJECTIVE OF INVENTORY MANAGEMENT

The aim of Inventory Management should be to avoid excessive and inadequate levels of inventories and to maintain sufficient inventory for smooth production and sales operations. An effective Inventory Management should: To ensure a continuous supply of raw material to facilitate uninterrupted production. To maintain sufficient stocks of raw materials in the periods of short supply and anticipate price changes. To maintain sufficient finished goods inventory for smooth sales operation, and efficient customers service. To minimize the carrying cost and time. To Control investment in inventories and keep it at an optimum level. EFFECT OF EXCESS OR INADEQUATE INVENTORY If too much inventory is held, the organization wastes money through a variety of factors. Money is held up in stock when it could be put to better use. There are superfluous warehousing and storage costs. Inventory may deteriorate. There is potentially greater risk of theft.
On the other hand, too little inventory can lead to stock out which can stop all the activities. Lose income. Cause discomfort or distress to Clint. INVENTORY MANAGEMENT TECHNIQUE In managing inventories, the firms objective should be in consonance with the shareholder wealth maximization principle. For this, the firm should determine the optimum level of inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory control results in unbalanced inventory and inflexibility the firm may sometimes run out of stock and sometimes may pile up unnecessary stocks. This increases the level of investment and makes the firm unprofitable.
To manage inventories efficiently, the following two questions should be kept in mind:1. How much should be ordered? 2. When should be ordered? To answer the above two questions, we must calculate Economic Order Quantity and Re Order Point. Economic Order Quantity (EOQ) The Economic Order Quantity model attempts to determine the order size that will minimize the total inventory cost. It assumes that total inventory cost = total carry cost + total ordering cost. The EOQ model as a technique of Inventory Management defines three parameters for any inventory: Minimum level of inventory of that item depending upon the usage rate of that item, time leg in procuring that item and unforeseen circumstances, if any. The re order level of that item , at which next order for that item must be placed to avoid any chance of a stock out . The re order quantity for which each order must be placed. Assumptions: The EOQ model is based on the following assumptions: The total usage of a particular item for a given period ( usually 1 year) is known with certainty and that the usage rate is even throughout the period. That there is no time gap between placing an order and getting its supply. The cost per order of an item is constant and the cost of carrying inventory is also fixed and is given as % of average value of inventory. That there are only two costs associated with the inventory, and these are the cost of ordering and the cost of carrying the inventory.
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EOQ may be presented as follows:-
EOQ=(2AP/C)
Where, EOQ = Economic Order Quantity. A = Total annual requirement for the item. P = Ordering cost per order of that Item. C = Carrying cost per unit per annum. Ordering Cost The term Ordering Costs is used in case of raw materials (or supplies) and includes the entire costs of acquiring raw material. It includes requisitioning, purchase ordering, transporting, receiving, inspecting and storing. Ordering Cost increase in proportion to the number of order placed. Thus, the more frequently inventory is acquired, the higher the firms Ordering Cost. On the other hand, if the firm maintains large inventory level, there will be few orders placed and Ordering Costs will be relatively small.
(Annual Requirement Total Ordering Cost =
Per order Cost)
Order Size
TOC=AP/C
WhereA=Annual Requirement P=Per Order Cos C=Order Size
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Carrying Cost Costs incurred for maintaining a given level of inventory are called carrying cost. It includes storage, insurance, Taxes, deterioration and obsolescence. Carrying costs very with inventory size Total Cost Carrying Cost
Cost Ordering Cost
O EOQ.
It is shown that the total Ordering Cost for any particular item is decreasing as the size per order is increasing. It is just because of the increase in the size of the order; the total numbers of orders for a particular item will decrease resulting in decrease in the Total Order Cost. The Total Annual Carrying Cost is increasing with the increase in order size. This will happen because the firm would be keeping more and more items in stores. The Total Cost of inventory initially reduces with the increase in the size of order but then increases with the increase in the size of order. The trade off of these two costs is attained at the level at which the Total Annual Cost is the least.
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The Re Order Point The Re Order level is the level of inventory at which the fresh order for the item must be placed to procure fresh supply. The Re Order point depends on Lead Time, Average usage, Economic Order Quantity Lead Time Is the time normally taken between the placement of an order and receiving the supply. Average Usage Is the rate at which the inventory is being used up.
Reorder point = Lead time Average usage
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MANAGEMENT OF RECEIVABLES / DEBTORS

The Receivables (including the debtors and the bills) constitute a significant portion of the Working Capital. The Receivables emerge whenever goods are sold on credit and payments are deferred by customers. A promise is made by the customer to pay cash within a specified period. The customers from whom receivable or book debts have to be collected in the future are called trade debtors and represents the firms claim or Assets. Thus, Receivable is type of loan extended by the seller to the buyer to facilitate the purchase process. Receivable Management may be defined as collection of steps and procedure required to properly weight the costs and benefits attached with the credit policy. The Receivable Management consist of matching the cost of increasing sales (particularly credit sales) with the benefits arising out of increased sales with the objective of maximizing the return on investment of the firm.
Nature
The term Credit Policy is used to refer to the combination of three decision variables:(a)- Credit Standards It is the criteria to decide the type of customers to whom goods could be sold on credit. If a firm has more slow paying customers, its investment in accounts receivable will increase. The firm will also be exposed to higher risk of default. (b)- Credit Terms It specifies duration of credit and terms of payment be customers. Investment in accounts receivable will be high if customers are allowed extended time period for making payments. (c)- Collection efforts It determine the actual collection period. The lower the collection period, the lower the investment in accounts receivable and vice versa.
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COSTS AND BENEFITS OF CREDIT POLICY

There are various costs and benefits attached with a Credit Policy. COSTS Cost Of Financing The credit sales delays the time of sales realization and therefore the item gap between incurring the cost and the sales realization is extended. This results blocking of funds and the company has to arrange funds to meets its obligation. These funds are to be procured at some explicit or implicit cost. This is known as the Cost of Financing the receivables. Administration Cost: A firm will have to incur various costs in order to maintain the record of credit customers both before and after the credit sales. (a)- Delinquency Costs: The firm may have to incur additional cost as delinquency costs, if there is delay in payment by a customer. It includes reminders, phone calls, postage, legal notice etc. Moreover, there is always an opportunity cost of the fund tied up in the receivable due to delay in payment. (b)- Cost Of Default By Customers: If any default is made by the customers in payment, partly or wholly, it will termed as bad debts. It becomes cost to the firm. BENEFITS (a)- Increase In Sales: The sales can be increased by credit sales. This will attract more customers to the firm resulting in higher sales and growth of the firm. (b)- Increase In Profit: Increase in sales will help the firm to easily recover the fixed expenses and attaining break even level and increase the operating profit of the firm. In a normal situation, there is a positive relation between the sales volume and the profit. (c)- Extra Profit: Sometimes, the firm make the credit sales at a price which is higher than the usual cash selling price. It brings an opportunity for the firms to make extra profits.
TRADE OFF ON RECIVABLE The trade off on receivables can be applied to find out whether to liberalize the credit terms or not. More liberal credit terms may be expected to generate higher sales revenue and higher profit. But they increase the potential cost also in the form of bad debts and a decrease in liquidity of the firm. If the net benefit expected from liberalizing the credit terms is positive, the firm may offer such terms, otherwise not. On the other hand, a stringent Credit Policy reduces the profitability but may increase the liquidity of the firm. Profitability
Cost And Benefit
Liquidity Optimum Credit Policy
Stringent Policy
Liberal Policy
Relationship among Credit Policy, Profitability and Liquidity of a Firm. It is clear from the above figure that as the firm takes its Credit Policy towards more and more liberal; its liquidity decreases whereas the profitability increases. On the other hand, if the firm makes its Credit Policy more and more stringent, the liquidity may increase but profitability will go down. Thus, a firm should try to frame its Credit Policy in such a way as to attain the best possible combination of profitability and liquidity.
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CREDIT EVALUATION Credit Evaluation involves determination of the type of customers who are going to qualify for the trade credit. Evaluation of Credit worthiness of a customer is a two-fold steps procedure: Collection of information. Analysis of information. Collection of Information In order to make better decisions, the firm may collect information from various on the prospective credit customers. The following are sources of information which can provide sufficient data or information about the credit worthiness of a customer:(a)- Bank Reference: The bank may be asked to comment on the financial position of a particular customer. The customer may also be required to ask his Bank to provide necessary information in this respect. (b)- Credit Agency Report: There are certain credit rating agencies which provide independent information on the credit worthiness of different parties. These credit agencies gather information on the credit history and see it to the firm which want to extend credit. (c)- Published Information: The published financial statements of the customers for few preceding years may also be taken as a source of information. Various ratios calculated on the basis of these financial statements may throw light on the profitability, liquidity and debt service capacity of a customer. Analysis of Information Once all the available credit information about a potential customer has been gathered, it must be analyzed to reach at some conclusion regarding the credit worthiness of a customer. A firm should go for further information and analysis only if required. If it is evident at any stage that the customer has satisfactory credit worthiness, then there is no need to go for costly exercise of further analysis . In case of those customers who are marginally creditworthy. In such situation, the financial manager must attempt to balance the potential profitability against the potential loss from the default.
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CONTROL OF RECEIVABLES Once the credit has been extended to a customer as per the credit policy, the next important step in the management of receivables is the control of these receivables. In this reference, the efforts may be required in the two directions as follow:(a)- The Collection Procedure: Once a firm decides to extend credit and defines the terms of credit sales, it must develop a policy for dealing with delinquent or slow paying customers. The overall collection procedure of the firm should neither be too lenient nor too strict. A strict collection policy can affect the goodwill and damage the growth prospect of sales. If a firm has a lenient Credit Policy, the customer may become slower in payments. Thus, the objective of collection procedure and policies should be to speed up the slow paying customers and reduce the incidence of bad debts. (b)- Monitoring Of Receivables: In order to control the level of receivables, the firm should apply regular checks and there should be a continuous monitoring system. The finance manager should keep a watch on the credit worthiness of all the individual customers and the total Credit Policy of the firm. For this, number of measures is available as follows:1. Average Collection Period: A common method to monitor the receivables collection period or number of days outstanding receivables. The Average Collection Period may be as follows: is the
Average Collection Period= Debtors 365/ Credit Sales

The collection period so calculated is compared with the firms stated credit period to judge the collection efficiency There are 2 limitations to this method: It provides an average picture of collection experience and it is based on aggregate data. It is susceptible to sales variations and the period over which sales and receivables have been aggregated. 2. Lines Of Credit: Another control measures for Receivables Management is the line of credit which refers to the maximum amount of a particular customer may have as due
to the firm at any time. Different lines of credit may be allowed to different customers. The lines of credit must be reviewed periodically for all the customers. 3. Accounting Ratios: Accounting information may be useful in order to control the receivables. Two accounting ratios may be calculated to find out the changing pattern of receivables. Receivables Turnover Ratio. Average Collection Period.
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MANAGEMENT OF CASH
Cash Management refers to management of cash balance and the bank balance and also includes the short terms deposits. Cash is the important Current Asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis. It is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The term cash includes coins, currency, and cheque held by the firm and balance in the bank accounts. Factors of Cash Management Cash flows into and out of the firm. Cash flows within the firm. Cash balance held by the firm at a point of time by financing deficit or investing surplus cash.
Cash Business Operation. Collection.
Deficit. Surplus.
Borrow. Invest.
Information And Control. Cash Payment.
(CASH MANAGEMENT CYCLE)
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Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to borrow. Cash Management seeks to accomplish this cycle at a minimum cost and it also seeks to achieve liquidity and control. ASPECT OF CASH MANAGEMENT In order to resolve the uncertainty about cash flow prediction and lack of synchronization between cash receipts and payments . The firm should develop appropriate strategies regarding the following four aspects of Cash Management:(a)- Cash Planning: Cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash Budget should be prepared for this purpose. (b)- Managing The Cash Flows: The flow of cash should be properly managed. The Cash Flow should be accelerated while the cash outflows should be decelerated. (c)- Optimum Cash Level: The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. (d)- Investing Surplus Cash: The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short term investment opportunities such as bank deposits, marketable securities, or inter corporate lending. MOTIVES OF HOLDING CASH A distinguishing feature of cash as an asset is that it does not earn any substantial return for the business. Even though firm hold cash for following motives:(a)- Precautionary Motive: This implies the needs to hold cash to meet unpredictable contingencies such as strike, sharp increase in raw materials prices. If a firm can borrow at short notice to pay them unforeseen contingency, it will need to maintain relatively small balances and vice versa. (b)- Speculative Motives: It refers to the desire of the firm to take advantage of opportunities which present themselves at unexpected movements and which are typically outside the normal course of business.
(c)- Compensatory Motive: Bank provides certain services to their client free of cost. They therefore, usually require client to keep minimum cash balance with them to earn interest and thus compensate them for the free service so provided.
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OBJECTIVE OF CASH MANAGEMENT There are two basic objectives of Cash Management:(a)- Meeting cash disbursement This is the first basic objective of cash management, according to which the firm should have sufficient cash to meet the various requirement of the firm at different time period. Cash has been described as Oil to lubricate the ever turning wheels if business, without it the process grinds to a stop. Managing your cash balances is one of the most important parts of Working Capital Management. If an organization runs out of cash resources it will have to stop operating immediately . There may not even be the money to pay the salaries at the end of the month, and the banks might have started dishonoring cheques. Furthermore, the trustees or directors could stand charged with wrongful or fraudulent trading, which could entail personal liability or even imprisonment. (b)- Cash Planning Cash Planning is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash balances and cash deficits. Cash Planning protects the financial conditions of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given project. Cash plans are very crucial in developing the overall operating plans of the firm. Cash Planning may be done on daily, weekly or monthly basis. The period and frequency of Cash Planning generally depends upon the size of the firm and philosophy of management. Cash forecasting and Budgeting: Cash Budget is the most significant device to plan for and control cash receipts and payments. A Cash Budget is a summery-statement of the firms expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. This information helps the financial manager to determine the ture cash needs of the firm, plan for the financing of these needs and exercise control over the cash and liquidity of the firm.
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IMPORATANCE AND SIGNIFICANCE OF CASH BUDGET Cash Budget is an effective tool of cash management and it may help the management in the following ways: Identification of the period of cash shortage so that the Financial Manager may plan well in advance about arranging the funds at an appropriate time. Identification of cash surplus position and duration for which surplus would be available so that alternative investment of this excess liquidity may be considered in advance. Better coordination of the timing of cash inflows and outflows in order to avoid chances of shortages or surplus of cash. Cash forecasts are needed to prepare Cash Budgets. Cash forecasting may be done on short or long term basis. Generally, forecasts covering periods of one year or less are considered short term. Those extending beyond one year are considered long term. Short Term Cash Forecast: It is comparatively easy to make Short Term Cash Forecasts. The important functions of carefully developed Short Term Cash Forecasts are: To determine operating cash requirements. To anticipate short term financing. To manage investment of surplus cash. The short term forecast helps in determining the cash requirements for predetermined period to run a business. One of the significant roles of the Short Term Forecasts is to pinpoint when the money will be needed and when it can be repaid. Long term Cash Forecasting: Long Term cash forecasts are prepared to give an idea of the companys financial requirements in the distant future. They are not as detailed as the Short Term Forecasts. The major uses of the Long Term Cash Forecast are: It indicates as companys future financial needs, especially for its Working Capital requirement.
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It helps to evaluate proposed capital projects. It pinpoints the cash required to finance these projects as well as the cash to be generated by the company to support them. It helps to improve corporate planning. Long Term Cash Forecasts compel each division to plan for future and to formulate projects carefully. Long Term Cash Forecast may be made for two, three or five years. Long Term Cash Forecasting reflects the impact of growth, expansion or acquisitions. It also indicates problems arising from these developments. Control Aspects: After preparation of Cash Budget, the Financial Manager should also ensure that there are no significant difference between the expected Cash Flows and the Actual Cash Flows. This requires controlling and reviewing of the whole exercise on a regular basis.
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MANAGEMENT OF PAYABLES / CREDITORS

Creditors are a important part of effective Cash Management and should be managed carefully to enhance the cash position. Purchasing initiates Cash Outflows and an over zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in our company is it tightly managed or spread among a number of people? Are purchase quantities geared to demand forecasts? Do we use order quantities which take account of stock holding and purchasing costs? Do we know the cost to the company of Carrying Stock? Do we have alternative source of supply? How many of our suppliers have a returns policy? Are we in a position to pass on cost increases quickly through price increase? If a supplier of good or service lets you down can you charge back the cost of delay? Can we arrange delivery of supplies staggered or on a just in time basis? TRADE CREDIT Trade Credit refers to that credit that a customer gets from suppliers of goods in the normal course of business. This deferral of payments is a short term financing called Trade Credit. It is a major source of financing for firms. It is mostly an informal arrangement and is granted on an open account basis. Open account Trade Credit appears as Sundry Creditors on the buyers balance sheet. CREDIT TERMS Credit Terms refer to the conditions under which the supplier sells on credit to the buyer and the buyer is required to repay the credit. These conditions include the due date and the cash discount given for prompt payments. Due date is the date by which the supplier expects payments. Cash discount is the concession offered to the buyer by the supplier to encourage him to make prompt payments.
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BENEFITS AND COSTS OF TRADE CREDIT Trade Credit is normally available to a firm. As the volume of the firms purchase increases, Trade Credit also expands. The major advantages of Trade Credits are as follows:(a)- Easy Availability: Unlike other sources of finance, Trade Credit is relatively easy to obtain. Except in the case of financially very unsound firms, it is almost automatic and does not require any negotiations. (b)- Flexibility: Trade Credit grows with the growth in firms sales. The expansions in the firms sales cause its purchase of goods and services to increase which is automatically financed by Trade Credit. (c)- Informality: It does not require any negotiations and formal agreement. it does not have the restrictions which are usually parts of negotiated sources of finance. Trade Credit involves implicit cost. The cost of credit may be transferred to the buyer via the increased price of goods supplied to him. The user of Trade Credit should be aware of the costs of Trade Credit to make use of it intelligently. Most of the time the supplier passes on all or part of costs to the buyer implicitly in the form of higher purchase price of goods and services supplied. Credit Terms sometimes include cash discount if the payment is made within a specified period. The buyer should take a decision whether or not to avail it. If the buyer takes discount, he benefits in terms of less cash outflow, but then he foregoes the credit granted by the supplier beyond the discount period. In case of stretching accounts payable the firm has to forgo the cash discount and may also be required to pay penalty interest charges.
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Current Ratio:
Current Ratio = Current Assets / Current Liabilities
Current ratio measures ability to meet short term obligations from the assets which are easily convertible into cash within short period of time.
Current Ratio
1.76 1.42 1.20
2011
2010
2009
A Current Ratio of 2:1 is usually considered satisfactory (thumb rule). However, sometimes a lower ratio of 1.76:1 is good enough. This year (2011) the ratio was very close to 2 hence it is considered to be good. It may be said that the firm is very efficiently using the funds.
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Quick Ratio:
Quick Ratio = (Current Assets Inventories) / Current Liabilities
Inventories are least liquid current assets and sometimes are not easily convertible to cash. So to overcome the effect of current ratio we calculate quick ratio. A quick Assets means Current Assets excluding Stock and Prepaid Expenses. The term Quick Assets refers to Current Assets which can be converted into cash immediately or at a short notice without diminution of value. These include Cash and Bank balances, Short Term Marketable Securities and Debtors/ Receivables. The Acid Test Ratio is a rigorous measure of the firms ability to service short term liabilities. An ideal Acid Test Ratio is generally taken as 1:1.
Quick Ratio
1.07 0.88 0.85
2011
2010
2009
This year it is more than 1 which simply means that the firm very much capable of facing its current liability.
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Net Working Capital (NWC):
Working Capital = Current Assets Current Liabilities
NWC represents excess of current assets over current liability. The greater is the amount of NWC greater the liquidity of firm. But huge working capital is also not a good sign. This shows that firm is not using their current assets efficiently.
Net Working Capital

152.39 Cr.
46.52 Cr. 14.59 Cr.
2011
2010
2009
This year net working capital has become more than 3 times to that of previous year.
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Average Age of Inventory (AAI):
AAI = Average Inventory / Cost of goods sold per day
This shows that for how many days inventory stays in warehouse.
Average Age of Inventory (AAI)

105.56 Days 77.40 Days 73.63 Days
2011
2010
2009
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Average Receivable Period (ARP):

ARP = Average Receivable / Net sales per day
This measures how rapidly receivables are collected after credit sales of goods.
Average Receivable Period (ARP)

32.47 Days 27.58 Days 19.07 Days
2011
2010
2009
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Average Payable Period (APP):

APP = Average Payables / Cost of goods sold per day
APP shows the extent to which creditors are willing to wait for payment. This reflects the paying policy of firm.
Average Payble Period (APP)

80.63 Days
45.32 Days 40.83 Days
2011
2010
2009
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Operating Cycle (OC):

OC = AAI + ARP
This reflects the time taken between the purchase of inventory and cash received from the sales of that purchased inventory.
Operation Cycle (OC)

133.14 Days 106.10 Days 96.47 Days
2011
2010
2009
The operating cycle of the firm has decreased which means the profitability has increased.
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Cash Conversion Cycle (CCC):

CCC = OC APP
Cash conversion cycle indicates the time taken between date of payment of account payable and the time when we get respective
Cash Conversion Cycle (CCC)

65.27 Days 51.15 Days 52.51 Days
2011
2010
2009
The time period has decreased hence the efficiency has increased.
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INVENTORY TURNOVER RATIO

It is the ratio between the Net Sales and the average inventory.
Inventory Turnover Ratio = Net Sales / Average Inventory

The ratio indicates how fast inventory is sold.
Inventory Turnover Ratio

9.51 9.58
5.64
2011
2010
2009
This ratio has improved which means that we can empty our warehouse 9.51 times in a year.
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