SUMMER TRAINING PROJECT REPORT

ON
WORKING CAPITAL MANAGEMENT at DCM SHRIRAM
INDUSTRIES LTD

A Report submitted

In Partial fulfilment of the Requirements

For the Degree of

MASTERS OF BUSINESS ADMINISTRATION

BY
Vaishali Sharma
(Roll no:- 1802970107)

Under the Supervision of

Dr. Prateek Gupta

KRISHNA INSTITUTE OF ENGINEERING & TECHNOLOGY, GHAZIABAD

Dr. A.P.J. Abdul Kalam Technical University, Uttar Pradesh

2019-20

1
 DECLARATION

I, undersigned hereby declare that the Project Report entitled “WORKING CAPITAL

MANAGEMENT” Written and submitted by me to the DR. APJ Abdul Kalam Technical

University, Lucknow partial fulfillment of the requirements for the award of degree for

Master of Business Administration under the guidance of Dr. Prateek Gupta (Associate

Professor) is my original work and conclusion drawn therein are based on the material

collected by myself.

Place : Vaishali Sharma

Date : Roll No.: 1802970107

MBA 3rd Sem.

2
 CERTIFICATE

Certified that Vaishali Sharma (1802970107) has carried out the research work presented in

the report entitled “Working Capital Management at DCM Shriram Industries Ltd.” for

the award of degree of MASTERS OF BUSINESS ADMINISTRATION from Dr. A.P.J.

Abdul Kalam Technical University, Uttar Pradesh under my/our supervision. The report

embodies results of original work, and studies as are carried out by the student himself and

the contents of the report do not form the basis for the award of any other degree to the

candidate or to anybody else from this or any other university/institution.

Signature

Dr. Prateek Gupta

(Associate Professor)

Date

3
 ACKNOWLEDGEMENT

Getting a project ready requires the work and effort of many people . I would like to pay my

sincere gratitude and thanks to those people , who directed me at every step in this project

report work .The present report is based on “Working Capital Management.”

I extend my sincere thank and gratitude to Dr. Prateek Gupta (Associate Professor), my

mentor, for helping me and providing valuable support throughout the term of the project . It

was a learning experience to work under his guidance.

I am also very thankful to Mrs. Sohini Pandey my company guide , Ms. Jigyasa , Mr.

Deepeak Maheshwari , Mr. Sachin , Mr. Jagjeet Singh Negi and others who have shared

their expertise and knowledge with me without which the completion of project would not

have been possible. Also for their guidance and support and providing us corporate exposure

from where we could extract the valuable learning and experience.

VAISHALI SHARMA

4
 TABLE OF CONTENTS

1. Executive Summary 6

2. Introduction 7

3. Company Profile 8-21

4. About the Topic 22-64

5. Objective of the Study 65

6. Research Methodology 66-70

7. Data Analysis & Interpretation 71-79

8. Findings 80-81

9. Recommendations 82

10. Conclusions 83

11. Bibliography 84

5
 EXECUTIVE SUMMARY

This study tries to explore the impact of working capital management on profitability of DCM

Shriram Industries Ltd. Working Capital can be defined as the amount when current asset is

surpassing current liabilities.

The focus of this paper is to analyze how the company manages its working capital on the

basis of cash, inventory period, receivable period and payable period management and how it

influence the profitability of an organization. The project report contains the analysis of five

years data of DCM Shriram Industries Ltd. commencing from the year 2014 to 2018.

Afterwards description of the company including its history, products, manufacturing units,

etc. is discussed. Working Capital Management policy for DCM Shriram Industries Ltd. is

discussed elaborately. They follow aggressive WCM policy because of their higher utilization

of short term financing. Analysis of the collected data is presented in chapter five. It contains

descriptive, correlation and multiple regression analysis of the variables with proper

interpretation and it was found that there is relationship between profitability and working

capital components. Finally findings and conclusion chapter includes a summary of the

results found in the analysis portion.

6
 INTRODUCTION

DCM Shriram Industries Ltd. (DSIL) is based in Northern India with a

portfolio of products comprising of sugar, alcohol, fine chemicals and rayon

tyrecord. The company has a strong emphasis on technology and

quality as also a strong commitment to environmental & social concerns.

As a market-driven Company, responsive to customer needs, DCM Shriram Industries Ltd

remains committed to continuous modernization, expansion, diversification and innovation.

It is a commitment that has helped us maintain leadership in every area of our operations.

A tradition of excellence.

7
 COMPANY PROFILE

MAIN BUSINESS OPERATIONS

1. DAURALA SUGAR WORKS

Daurala Sugar Works was established in the pre independence era in the year 1932 at

Daurala, a small unknown village near Meerut on New Delhi - Haridwar National highway

no. 58. 

Over this period of time, diversification of activities were pioneered under the umbrella brand

of "Daurala Sugar works" Daurala. These included manufacture of pharmaceutical grade

sugar, sugarcane research farm, setting up of distillery, manufacture of IMFL, Bio-

Methanation , manufacture of aromatic chemical, co-generation of power etc.

Today , after more than eight decades it continues to command respect as one of the more

efficient and modern sugar factories of the country, being a familiar name not only in India

but overseas as well.

Over this period of time, diversification of activities were pioneered under the umbrella brand

of "Daurala Sugar works" Daurala. These included manufacture of pharmaceutical grade

sugar , sugarcane research farm, setting up of distillery, manufacture of IMFL, Bio-

Methanation , manufacture of aromatic chemical, co-generation of power etc.

The entire range of products are manufactured in modern plants having contemporary

equipments and employing R&D based advanced technologies. An independent quality

assurance and control system ensures continual improvement and choicest quality products to

satisfy the need of even the most demanding customers

8
Awards
Certifications:

Daurala Sugar Works, Daurala is certified for "Quality

Management Systems" based on ISO 9001:2008 as well

as "Food Safety System Certificate" based on FSSC

22000:2011 (a Global Safety Initiative "GFSI"        

recognised standard), by Det Norske Veritas

Certification B.V., The Netherlands.

Recognistions:

Research & Development division of Daurala Sugar

Works , Daurala is recognized with Department of

Scientific and Industrial Research (DSIR) , Ministry of

Science and Technology , Government of India.

Quality Systems
The first sugar complex in India to be accredited with

ISO-9002 certification way back in 1996, for all its

manufacturing facilities and recently accredited under the

upgraded ISO 9001:2000 certification scheme by DET

NORSKEY VERITAS, Norway. 

Product categories

1. Sugar
2. Chemical and drug intermediaries
3. Alcohol

9
 2. Shriram Rayons

Shriram Rayons was set up in 1965 to produce rayon tyre cord. The

engineering and design was provided by Chemtex Inc., USA and Beaunit

Fibres Inc., USA. Over the years this facility has been upgraded and

modernized to meet the stringent quality requirements of reputed

international tyre giants, our customers.

Shriram Rayons is amongst the world's major manufacturers of high

tenacity rayon tyre cord with state of the art twisting, weaving and

dipping facilities. It also has integrated Nylon conversion with modern

treating facilities catering to the needs of overseas and domestic

customers.  It also has a complex for the manufacture of inorganic

chemicals.

Key Technology Sources  

-  Beaunit Fibres Inc, USA.

-  Chemtex Inc, USA.                              

Quality Systems
Certified by TUV NORD CERT GmbH for:
 
ISO 9001:2015 for manufacturing & sale of grey

dipped industrial / tyre grade yarn, cord, fabric and

-
chafer fabric from 1994
ISO 14001:2015 for manufacturing of grey / dipped

- industrial / tyre grade yarn, cord, fabric and chafer

fabric from 2010

- BS OHSAS 18001:2007

Poduct Range

10
Under Rayon and Nylon

 Grey Rayon Yarn

 Treated Rayon Fabric

 Nylon Product

 Chemical Products

11
 ACHIEVEMENTS

 We are known for adapting to change. We have transformed the unit from domestic

one to a virtual 100% Export Oriented Unit.

 Recipient of 20 Export Awards for highest exports of Rayon Tyre Product (Man

Made Technical Textiles) from the Synthetic & Rayon Textiles Export Promotion

Council.

 Recipients of 15 Safety Awards for safe and healthy operations from Government

of India .Ministry of Labour.

 We are ISO 9001:2015 , ISO 14001:2015 (TUV NORD CERT GmbH) & BS

OHSAS 18001:2007 certified company

 Our products have been approved for tyre reinforcement by all major international

tyre giants.

12
 3. Daurala Organics

Daurala Organics , was established as a public limited Company in 1994, promoted

by DCM Shriram Industries Ltd., as a grass-roots diversification project , to

manufacture  high-technology, high-value drug intermediates.  Within a span of five

years, it has achieved major share of the Indian market for its main products.Daurala

Organics was merged with its parent company in early 2005.

Quality Systems
Certified under ISO 9001, ISO 14001 & OHSAS 18001  by DET NORSKEY VERITAS,

NORWAY.      
For more than a century the names DCM and Shriram have stood for a pioneering spirit.

The cornerstones of the group's success have been integrity, innovation and excellence that

only an unerring eye on quality can guarantee. 

The reputation of DCM Shriram Industries has been crafted by the vision of Sir Shriram.

Fashioned by him into a major force in corporate enterprise, we strive to fulfil a legacy of

technological knowhow, engineering enterprise, managerial and financial acumen, and

above all the goodwill and faith of employees, shareholders and generations of customers. 

We continue to build the success of our business on a foundation of individual excellence,

ethics and values cherished by our founder Sir Shriram. 

In 1994,as the Fine Chemicals industry grew, a new company Daurala Organics was

promoted by DCM Shriram Industries to produce high value/high technology drug

intermediates. Affiliations with three European companies were established to obtain state-

of-the-art technology. 

The growth of the business has been spectacular. Within a short span of 4 years, Daurala

Organics has achieved a major share of the Indian market. 

13
The sprawling Daurala complex is spread over 300 acres, around 90 kms from Delhi, and

houses a vast pool of trained manpower and technological expertise. 

Daurala Organics comprises of :

 Plants for the manufacture of Benzaldehyde, DL Phenly Glycine, D (-) Phenyl

Glycine, D (-) Para Hydroxy Phenyl Glycine and its derivatives, Sodium / Potassium

Phenyl Acetate.

 Comprehensive and extensive utilities.

 An Incinerator for solid wastes and a liquid Effluent Treatment Plant.

 Very well equipped QC and R&D laboratories.

 A very flexibly designed plant to be responsive to changing segments of products and

customers.

 Daurala Organics has ISO 9001, 14001 & OHSAS 18001 certification.

14
 CORPORATE ETHOS

Enterprises of DCM SHRIRAM Industries Ltd's endeavour to maintain leadership status

by observing norms of excellence in all areas. 

Quality Systems
Highest degree of product specifications and quality standards are

maintained by adopting world-class quality systems.  ISO 9000 series

certification has been received from RWTUV of Germany and Det

Norsk Veritas of Norway.

Research & Development

Research & Development is a continuous process.  Focus is on

maintaining a technological edge through product development,

technology upgradation, energy conservation, pollution control,

optimisation of resources, and conservation of environment.  Close

connection is maintained with research institutions like the Shriram

Institute for Indusatrial Research (SRIFIR), Shriram Cane Research

Farm, and Shriram Test House.

Environment
Manufacturing units of the Company are like garden factories.  Utmost

attention is paid to treatment of effluents, control of pollution, and

conservation of environment.  This constitutes a specific target of R&D

effort.
Safety

Safety of men, machines & materials has a high priority. One of the

units, Shriram Rayons, has won the National Safety Award

consecutively for 15 Yrs.

    

Human Resource

Emphasis is placed on worker-management partnership... Achieving

15
corporate goals through the cooperation & dedication of all personnel...

Motivating them by imparting a sense of involvement, caring &

recognition.
Human resource development, career planning & skill-upgradation are

essential parts of the Group's management process.

Quality Of Life
Helping to improve the quality of life of employees is a part of the

basic management philosophy of the Company. Facilities like housing,

education, healthcare, family welfare, libraries & reading rooms, sports

& cultural centres are common features at all units. 

Social Responsibility

As part of corporate social responsibility, programs are undertaken

regularly for community development to improve the living conditions

of people in the vicinity of the Company's units.

16
 Quality policy

DCM Shriram Industries Ltd. has inherited the precept of giving the customer "an extra inch"

from its founder. The group has moved away from its one-time staple, textiles, but the

precept remains. And it applies to product specifications and quality as much as to other

aspects of business.

17
Environment health and safety

DCM Shriram Industries  has always been dedicated to meeting their responsibility towards

protection of environment and conserving scarce natural resources.  This has prompted us to

adopt the following measures :

 Boilers modified for multi-fuel arrangement and can be run on various renewable

fuels, viz., bagasse, rice-husk and eco-friendly bio-gas (methane).

 Effective flue gas wet scrubbing system using in-house technologies to release

pollution free flue gases.

 ESP's

 Bio-methanation and secondary Plant set up to obtain eco-friendly bio-gas from

distillery effluent, using in-house technologies.

 Effluent Treatment Plants set up in all factories to not only control discharge of

pollutants within prescribed limit but also generates bio gas which is used as a claen

fuel in the boilers

 Green Belt in and around the factory and residential complexes.

 Minimising energy and water consumption in processess.

 Yearly Plantation practice

 Newer technology are adopted to minimise consumption of energy and water in the

complex

 Bio compost plant provides eco-friendly manure to the farmers of the area

It is our policy to maintain the wholesomeness of the environment and preserve the

ecosystem.

HEALTH & SAFETY

Health and safety of employees and the public is of paramount importance to us.
18
  Shriram Rayons, has won the National Safety Award for 15 Yrs.

 Organise regular training programmes covering all aspects of safety and hazardous

operations.

 Assessment and elimination of potential hazards/risks to Safety, Health and the

environment, supported by regular safety audits and timely implementation and

maintenance of safety systems supported by periodic drills and rehearsals.

Social Commitments

Helping to improve the quality of life of our workers is    

very much a part of the basic management philosophy at    

DCM Shriram Industries.

Facilities like housing, education, medicare, family

welfare, libraries and reading rooms, play grounds and

cultural centres for employees and their families are

provided at all our units.

Highlights
-  Workers' clubs equipped with reading room, sports

room, gymnasium etc. to encourage social interaction.

-  In-house facilities for regular sports and cultural

events at all units, to encourage participation by all

employees and their families.

-  Sponsoring of national sporting events, like the DCM

Shriram Air Force Open Golf Championships.

-  Annual Shankar Shad Mushaira with participation of

distinguished poets.

19
-  Organising free family planning & welfare camps in

rural areas in collaboration with the local

administration on a regular basis. 

-  Operating charitable hospital for the workmen as well

as people of the nearby villages.

-  Maintaining green belts in and around manufacturing

sites.

RURAL DEVELOPMENT

The company believes in sustainable development and

therefore perform its role in the development of the

community in and around its units.

Various programs are regularly undertaken for improving the

living conditions of the people in the vicinity of our units

Today, the DCM Shriram name is widely associated with

education, health care and welfare activities.

Highlights

   Building schools, hospitals, vocational and community centres.

   Connecting villages in the sugar factory area with metalled roads

and providing other infrastructure such as street lights, solar

lighting , culverts, etc.

   Organising free family welfare and health camps

   Conducting immunisation drives.

20
   Popularising and subsidising biogas plants, smokeless chulhas

and solar cookers to meet local energy requirements and

protecting the environment.

   Adopting villages for community development.

   Providing subsidies to farmers for purchase of agricultural input.

21
 ABOUT THE TOPIC:

WORKING CAPITAL MANAGEMENT

Working capital (abbreviated WC) is a financial metric which represents operating

liquidity available to a business, organisation or other entity, including governmental entities.

Along with fixed assets such as plant and equipment, working capital is considered a part of

operating capital. Gross working capital is equal to current assets. Working capital is

calculated as current assets minus current liabilities. If current assets are less than current

liabilities, an entity has a working capital deficiency, also called a working capital deficit.

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.

Meaning of Working Capital

Capital required for a business can be classified under two main categories viz.

(i)        Fixed capital

(ii)      Working capital.

Every business needs funds for two purposes for its establishment and to carry out its

day-to-day operations. Long-term funds are required to create production facilities through

purchase of fixed assets such as plant and machinery, land, Building etc. Investments in these

assets represent that part of firm’s capital which is blocked on permanent basis and is called

fixed capital. Funds are also needed for short-term purposes for purchase of raw materials,

payment of wages and other day-to-day expenses etc. These funds are known as working

capital which is also known as Revolving or circulating capital or short term capital.

22
According to Shubin, “Working capital is amount of funds necessary to cover the cost of

operating the enterprise”.

Concept of Working Capital

There are two concepts of working capital:

(i)  Gross working capital

(ii) Net working capital.

Gross working capital is the capital invested in total current assets of the enterprise.

Examples of current assets are : cash in hand and bank balances, Bills Receivable, Short term

loans and advances, prepaid expenses, Accrued Incomes etc. The gross working capital is

financial or going concern concept. Net working capital is excess of Current Assets over

Current liabilities.

       Net Working Capital = Current Assets – Current Liabilities

When current assets exceed the current liabilities the working capital is positive and negative

working capital results when current liabilities are more than current assets. Examples of

current liabilities are Bills Payable, Sunday debtors, accrued expenses, Bank Overdraft,

Provision for taxation etc. Net working capital is an accounting concept of working capital.

Classification or Kinds of Working Capital

Working capital may be classified in two ways:

(a)    On the basis of concept

(b)   On the basis of time

On the basis of concept working capital is classified as gross working capital and net working

capital. On the basis of time working capital may be classifies as Permanent or fixed working

capital and Temporary or variable working capital. 

23
Permanent or Fixed working capital

It is the minimum amount which is required to ensure effective utilisation of fixed facilities

and for maintaining the circulation of current assets. There is always a minimum level of

current assets which its continuously required by enterprise to carry out its normal business

operations. As the business grows, the requirements of permanent working capital also

increase due to increase in current assets. The permanent working capital can further be

classified as regular working capital and reserve working capital required to ensure

circulation of current assets from cash to inventories, from inventories to receivables and

from receivables to cash and so on. Reserve working capital is the excess mount over the

requirement for regular working capital which may be provided for contingencies that may

arise at unstated periods such as strikes, rise in prices, depression etc.

Temporary or Variable working capital

It is the amount of working capital which is required to meet the seasonal demands and some

special exigencies. Variable working capital is further classified as seasonal working capital

and special working capital. The capital required to meet seasonal needs of the enterprise is

called seasonal working capital. Special working capital is that part of working capital which

is required to meet special exigencies such as launching of extensive marketing campaigns

for conducting research etc.

Importance or Advantages of Adequate Working Capital :

 Working capital is the life blood and nerve centre of a business. Hence, it is very essential to

maintain smooth running of a business. No business can run successfully without an adequate

amount of working capital. The main advantages of maintaining adequate amount of working

capital are as follows:

1.            Solvency of the Business: Adequate working capital helps in maintaining solvency

of business by providing uninterrupted flow of production.

24
2.            Goodwill: Sufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

3.            Easy Loans: A concern having adequate working capital, high solvency and good

credit standing can arrange loans from banks and others on easy and favourable terms.

4.            Cash Discounts: Adequate working capital also enables a concern to avail cash

discounts on purchases and hence it reduces cost.

5.            Regular Supply of Raw Material: Sufficient working capital ensure regular supply

of raw materials and continuous production.

6.            Regular payment of salaries, wages and other day to day commitments: A

company which has ample working capital can make regular payment of salaries, wages

and other day to day commitments which raises morale of its employees, increases their

efficiency, reduces costs and wastages.

7.            Ability to face crisis: Adequate working capital enables a concern to face business

crisis in emergencies such as depression.

8.            Quick and regular return on investments: Every investor wants a quick and

regular return on his investments. Sufficiency of working capital enables a concern to

pay quick and regular dividends to is investor as there may not be much pressure to

plough back profits which gains the confidence of investors and creates a favourable

market to raise additional funds in future.

9.            Exploitation of Favourable market conditions: Only concerns with adequate

working capital can exploit favourable market conditions such as purchasing its

requirements in bulk when the prices are lower and by holding its inventories for higher

prices.

10.        High Morale: Adequacy of working capital creates an environment of security,

confidence, high morale and creates overall efficiency in a business.

25
Excess or Inadequate Working Capital

Every business concern should have adequate working capital to run its business operations.

It should have neither excess working capital nor inadequate working capital. Both excess as

well as short working capital positions are bad for any business.

Disadvantages of Excessive Working Capital

1. Excessive working capital means idle funds which earn no profits for business and

hence business cannot earn a proper rate of return.

2. When there is a redundant working capital it may lead to unnecessary purchasing and

accumulation of inventories causing more chances of theft, waste and losses.

3. It may result into overall inefficiency in organization.

4. Due to low rate of return on investments, the value of shares may also fall.

5. The redundant working capital gives rise to speculative transaction.

6. When there is excessive working capital, relations with banks and other financial

institutions may not be maintained.

Disadvantages of Inadequate working capital

1. A concern which has inadequate working capital cannot pay its short-term liabilities

in time. Thus, it will lose its reputation and shall not be able to get good credit facilities.

2. It cannot buy its requirements in bulk and cannot avail of discounts.

3. It becomes difficult for firm to exploit favourable market conditions and undertake

profitable projects due to lack of working capital.

4. The rate of return on investments also falls with shortage of working capital.

5. The firm cannot pay day-to-day expenses of its operations and it created

inefficiencies, increases costs and reduces the profits of business.  

26
The Need or Objects or Working Capital

The need for working capital arises due to time gap between production and realisation of

cash from sales. There is an operating cycle involved in sales and realisation of cash. There

are time gaps in purchase of raw materials and production, production and sales, and sales

and realisation of cash. Thus, working capital is needed for following purposes.

1. For purchase of raw materials, components and spares.

2. To pay wages and salaries.

3. To incur day-to-day expenses and overhead costs such as fuel, power etc.

4. To meet selling costs as packing, advertisement

5. To provide credit facilities to customers.

6. To maintain inventories of raw materials, work in progress, stores and spares and

finished stock.

Greater size of business unit large will be requirements of working capital. The amount of

working capital needed goes on increasing with growth and expansion of business till it

attains maturity. At maturity the amount of working capital needed is called normal working

capital.

Factors Determining the Working Capital Requirements

The following are important factors which influence working capital requirements:

1.         Nature or Character of Business: The working capital requirements of firm

depend upon nature of its business. Public utility undertakings like electricity,

water supply need very limited working capital because they offer cash sales only

and supply services, not products, and such no funds are tied up in inventories and

receivables whereas trading and financial firms require less investment in fixed

27
 assets but have to invest large amounts in current assets and as such they need large

amount of working capital. Manufacturing undertaking require sizeable working

capital between these two.

2.       Size of Business/Scale of Operations: Greater the size of a business unit, larger

will be requirement of working capital and vice-versa.

3.       Production Policy: The requirements of working capital depend upon production

policy. If the policy is to keep production steady by accumulating inventories it

will require higher working capital. The production could be kept either steady by

accumulating inventories during slack periods with view to meet high demand

during peak season or production could be curtailed during slack season and

increased during peak season.

4.       Manufacturing process / Length of Production cycle: Longer the process period

of manufacture, larger is the amount of working capital required. The longer the

manufacturing time, the raw materials and other supplies have to be carried for

longer period in the process with progressive increment of labour and service costs

before finished product is finally obtained. Therefore, if there are alternative

processes of production, the process with the shortest production period should be

chosen.

5.       Credit Policy: A concern that purchases its requirements on credit and sell its

products/services on cash requires lesser amount of working capital. On other hand

a concern buying its requirements for cash and allowing credit to its customers,

shall need larger amount of working capital as very huge amount of funds are

bound to be tied up in debtors or bills receivables.

6.       Business Cycles: In period of boom i.e. when business is prosperous, there is need

for larger amount of working capital due to increase in sales, rise in prices etc. On

contrary in times of depression the business contracts, sales decline, difficulties are

28
 faced in collections from debtors and firms may have large amount of working

capital lying idle.

7.       Rate of Growth of Business: The working capital requirements of a concern

increase with growth and expansion of its business activities. In fast growing

concerns large amount of working capital is required whereas in normal rate of

expansion in the volume of business the firm may have retained profits to provide

for more working capital.

8.       Earning Capacity and Dividend Policy: The firms with high earning capacity

generate cash profits from operations and contribute to working capital. The

dividend policy of concern also influences the requirements of its working capital.

A firm that maintains a steady high rate of cash dividend irrespective of its

generation of profits need more working capital than firm that retains larger part of

its profits and does not pay so high rate of cash dividend.

9.       Price Level Changes: Changes in price level affect the working capital

requirements. Generally, the rising prices will require the firm to maintain large

amount of working capital as more funds will be required to maintain the same

current assets. The effect of rising prices may be different for different firms.

10.     Working Capital Cycle: In a manufacturing concern, the working capital cycle

starts with the purchase of raw material and ends with realisation of cash from the

sale of finished products. This cycle involves purchase of raw materials and stores,

its conversion into stocks of finished goods through work in progress with

progressive increment of labour and service costs, conversion of finished stock into

sales, debtors and receivables and ultimately realisation of cash and this cycle

again from cash to purchase of raw material and so on.  The speed with which the

working capital completes one cycle determines the requirements of working

capital longer the period of cycle larger is requirement of working capital.

29
Management of Working Capital

Working capital refers to excess of current assets over current liabilities. Management of

working capital therefore is concerned with the problems that arise in attempting to manage

current assets, current liabilities and inter relationship that exists between them. The basic

goal of working capital management is to manage the current assets and current of a firm in

such a way that satisfactory level of working capital is maintained i.e. it is neither inadequate

nor excessive. This is so because both inadequate as well as excessive working capital

positions are bad for any business. Inadequacy of working capital may lead the firm to

insolvency and excessive working capital implies idle funds which earns no profits for the

business. Working capital Management policies of a firm have a great effect on its

profitability, liquidity and structural health of organization. In this context, evolving capital

management is three dimensional in nature.

1. Dimension I is concerned with formulation of policies with regard to profitability, risk

and liquidity.

2. Dimension II is concerned with decisions about composition and level of current

assets.

3. Dimension III is concerned with decisions about composition and level of current

liabilities. 

30
 Principles of Working Capital Management 

1. Principle of Risk Variation: Risk refers to inability of firm to meet its obligation as and

when they become due for payment. Larger investment in current assets with less dependence

on short-term borrowings increases liquidity, reduces risk and thereby decreases opportunity

for gain or loss. On other hand less investment in current assets with greater dependence on

short-term borrowings increases risk, reduces liquidity and increases profitability.

There is definite direct relationship between degree of risk and profitability. A conservative

management prefers to minimize risk by maintaining higher level of current assets while

liberal management assumes greater risk by reducing working capital. However, the goal of

management should be to establish suitable trade off between profitability and risk.

2. Principle of Cost of Capital: The various sources of raising working capital finance have

different cost of capital and degree of risk involved. Generally, higher the risk lower is cost

and lower the risk higher is the cost. A sound working capital management should always try

to achieve proper balance between these two.

3. Principle of Equity Position: This principle is concerned with planning the total

investment in current assets. According to this principle, the amount of working capital

invested in each component should be adequately justified by firm’s equity position. Every

rupee invested in current assets should contribute to the net worth of firm. The level of

current assets may be measured with help of two ratios.

(i)   Current assets as a percentage of total assets and

(ii)  Current assets as a percentage of total sales.

4. Principle of Maturity of Payment: This principle is concerned with planning the sources

of finance for working capital. According to this principle, a firm should make every effort to

relate maturities of payment to its flow of internally generated funds. Generally, shorter the
31
maturity schedule of current liabilities in relation to expected cash inflows, the greater

inability to meet its obligations in time.

(1)   The Hedging or Matching Approach: The term ‘hedging’ refers to two off-selling

transactions of a simultaneous but opposite nature which counterbalance effect of each other.

With reference to financing mix, the term hedging refers to ‘process of matching of

maturities of debt with maturities of financial needs’. According to this approach the maturity

of sources of funds should match the nature of assets to be financed. This approach is also

known as ‘matching approach’ which classifies the requirements of total working capital into

permanent and temporary working capital.

 The hedging approach suggests that permanent working capital requirements should be

financed with funds from long-term sources while temporary working capital requirements

should be financed with short-term funds.

(2) The Conservative Approach: This approach suggests that the entire estimated

investments in current assets should be financed from long-term sources and short-term

sources should be used only for emergency requirements. The distinct features of this

approach are:

(ii)        Liquidity is greater

(iii)       Risk is minimised

(iv)       The cost of financing is relatively more as interest has to be paid even on

seasonal requirements for entire period.

32
Trade off Between the Hedging and Conservative Approaches 

The hedging approach implies low cost, high profit and high risk while the conservative

approach leads to high cost, low profits and low risk. Both the approaches are the two

extremes and neither of them serves the purpose of efficient working capital management. A

trade off between the two will then be an acceptable approach. The level of trade off may

differ from case to case depending upon the perception of risk by the persons involved in

financial decision making. However, one way of determining the trade off is by finding the

average of maximum and the minimum requirements of current assets. The average

requirements so calculated may be financed out of long-term funds and excess over the

average from short-term funds.

(3).    Aggressive Approach: The aggressive approach suggests that entire estimated

requirements of current asset should be financed from short-term sources even a part of fixed

assets investments be financed from short-term sources. This approach makes the finance –

mix more risky, less costly and more profitable.

Hedging Vs Conservative Approach

Hedging Approach Conservative Approach

1.  The cost of financing is reduced. 1. The cost of financing is higher
2. The investment in net working 2. Large Investment is blocked in

capital is nil. temporary working capital.

3. Frequent efforts are required to 3. The firm does not face frequent

arrange funds. financing problems.

4. The risk is increased as firm is 4. It is less risky and firm is able to

vulnerable to sudden shocks. absorb shocks. 

33
 The term working capital may be used to denote either the gross working capital

which refers to total current assets or net working capital which refers to excess of current

asset over current liabilities.

 The working capital requirement for a firm depends upon several factors such as

Nature or Character of Business, Credit Policy, Price level changes, business cycles,

manufacturing process, production policy.

 The working capital need of the firm may be bifurcated into permanent and temporary

working capital.

 The Hedging Approach says that permanent requirement should be financed by long

term sources while the temporary requirement should be financed by short-term sources

of finance. The Conservative approach on the other hand says that the working capital

requirement be financed from long-term sources. The Aggressive approach says that even

a part of permanent requirement may be financed out of short-term funds.

 Every firm must monitor the working capital position and for this purpose certain

accounting ratios may be calculated.

Estimate of Working Capital Requirements

“ Working Capital is the life blood and controlling nerve centre of a business.” No

business can be successfully run without an adequate amount of working capital. To

avoid the shortage of working capital at once, an estimate of working capital requirements

should be made in advance so that arrangements can be made to procure adequate

working capital. But estimation of working capital requirements is not an easy task and

large numbers of factors have to be considered before starting this exercise. There are

different approaches available to estimate the working capital requirements of a firm

which are as follows:

34
(1) Working Capital as a Percentage of Net Sales: This approach to estimate the working

capital requirement is based on the fact that the working capital for any firm is directly

related to the sales volume of that firm. So, the working capital requirement is expressed as a

percentage of expected sales for a particular period. This approach is based on the assumption

that higher the sales level, the greater would be the need for working capital. There are three

steps involved in the estimation of working capital.

a)      To estimate total current assets as a % of estimated net sales.

b)      To estimate current liabilities as a % of estimated net sales, and

c)      The difference between the two above, is the net working capital as a % of net sales.

(2) Working Capital as a Percentage of Total Assets or Fixed Asset: This approach of

estimation of working capital requirement is based on the fact that the total assets of the firm

are consisting of fixed assets and current assets. On the basis of past experience, a

relationship between (i) total current assets i.e., gross working capital; or net working capital

i.e. Current assets – Current liabilities; and (ii) total fixed assets or total assets of the firm is

established. The estimation of working capital therefore, depends upon the estimation of

fixed capital which depends upon the capital budgeting decisions.

            Both the above approaches to the estimation of working capital requirement are

simple in approach but difficult in calculation.

(3) Working Capital based on Operating Cycle: In this approach, the working capital

estimate depends upon the operating cycle of the firm. A detailed analysis is made for each

component of working capital and estimation is made for each of these components. The

different components of working capital may be enumerable as follows:

Current Assets                                                    Current Liabilities

Cash and Bank Balance                              Creditors for Purchases      

Inventory of Raw Material                                       Creditors for Expenses

35
 Inventory of Work-in-Progress

Inventory of Finished Goods

For manufacturing organisation, the following factors have to be taken into consideration

while making an estimate of working capital requirements.

     Factors Requiring Consideration While Estimating Working Capital

1.  Total costs incurred on material, wages and overheads

2. The length of time for which raw material are to remain in stores before they are issued for

production.

3. The length of production cycle or work in process i.e. the time taken for conversion of raw

material into finished goods.

4. The length of sales cycle during which finished goods are to be kept waiting for sales.

5. The average period of credit allowed to customers.

6. The amount of cash required to  pay day to day expenses of the business.

7. The average amount of cash required to make advance payments, if any.

8. The average credit period expected to be allowed by suppliers.

9. Time lag in the payment of wages and other expenses.

From the total amount blocked in current assets estimated on the basis of the first seven items

given above, the total of the current liabilities i.e. the last two item, is deducted to find out the

requirements of working capital. In case of purely trading concern, points 1,2,3 would not

arise but all other factors from points 4 to 9 are to be taken into consideration. In order to

provide for contingencies, some extras amount generally calculated as a fixed percentage of

the working capital may be added as margin of safety. Suggested Proforma for estimation of

working capital requirements under operating cycle is given below:

                                Estimation of Working Capital Requirements

36
I. Current Assets: Amount Amount Amount
Minimum Cash Balance   ****  
Inventories:      
            Raw Materials ****    
            Work-in-Progress ****    
           Finished Goods **** ****  
Receivables      
            Debtors ****    
            Bills **** ****  
Gross Working Capital (CA)   **** ****

II. Current Liabilities :   Amoun Amount

t
Creditors for purchases   ****  
Creditors for Wages   ****  
Creditors for Overheads   ****  
Total Current Liabilities (CL)   **** ****
Excess of CA over CL     ****
+ Safety Margin     ****
Net Working Capital    

37
38
F
E
W
C
S
N
K
R
O
L
IT
P
A
 MANAGEMENT OF CASH

Cash is one of the current assets of a business. It is needed at all times to keep the business

going. A business concern should always keep sufficient cash for meeting its obligations.

Any shortage of cash will hamper the operations of a concern and any excess of it will be

unproductive. Cash is the most unproductive of all the assets. While fixed asses like

machinery, plant, etc. and current assets such as inventory will help the business in increasing

its earning capacity, cash in hand will not add anything to the concern. It is in this context

that cash management has assumed much importance.

Nature of Cash

For some persons, cash means only money in the form of currency (cash in hand). For

other persons, cash means both cash in hand and cash at bank. Some even include near cash

assets in it. They take marketable securities too as part of cash. These are the securities which

can easily be converted into cash.

Cash itself does not produce good or services. It is used as a medium to acquire other

assets. It is the other assets which are used in manufacturing goods or providing services. The

idle cash can be deposited in bank to earn interest.

A business has to keep required cash for meeting various needs. The assets acquired

by cash again help the business in producing cash. The goods manufactured of services

produced are sold to acquire cash. A firm will have to maintain a critical level of cash. If at a

time it does not have sufficient cash with it, it will have to borrow from the market for

reaching the required level.

There remains a gap between cash inflows and cash outflows. Sometimes cash

receipts are more than the payments or it may be vice-versa at another time. A financial

manager tries to synchronize the cash inflow and cash outflows.

39
Motives for Holding Cash

The firm’s needs for cash may be attributed to the following needs: Transactions

motive, Precautionary motive and Speculative motive.  These motives are discussed as

follows:

1. Transaction Motive: A firm needs cash for making transacions in the day-to-day

operations. The cash is needed to make purchases, pay expenses, taxes, dividend, etc. The

cash needs arise due to the fact that there is no complete synchronization between cash

receipts and payments. Sometimes cash receipts exceed cash payments or vice-versa. The

transaction needs of cash can be anticipated because the expected payments in near future can

be estimated. The receipts in future may also be anticipated but the things do not happen as

desired. If more cash is needed for payments than receipts, it may be raised through bank

overdraft. On the other hand if there are more cash receipts than payments, it may be spent on

marketable securities.

2. Precautionary Motive: A firm is required to keep cash for meeting various contingencies.

Though cash inflows and cash outflows are anticipated but there may be variations in these

estimates. For example a debtor who was to pay after 7 days may inform of his inability to

pay; on the other hand a supplier who used to give credit for 15 days may not have the stock

to supply or he may not be in a position to give credit at present. In these situations cash

receipts will be less then expected and cash payments will be more as purchases may have to

be made for cash instead of credit. Such contingencies often arise in a business. A firm

should keep some cash for such contingencies or it should be in a position to raise finances at

a short period.

3. Speculative Motive: The speculative motive relates to holding of cash for investing in

profitable opportunities as and when they arise. Such opportunities do not come in a regular

manner. These opportunities cannot be scientifically predicted but only conjectures can be

made about their occurrence. The price of shares and securities may be low at a time with an

40
expectation that these will go up shortly. Such opportunities can be availed of if a firm has

cash balance with it.

Cash Management

Cash management has assumed importance because it is the most significant of all the

current assets. It is required to meet business obligations and it is unproductive when not

used.

Cash management deals with the following:

(i)     Cash inflows and outflows

(ii)    Cash flows within the firm

(iii)   Cash balances held by the firm at a point of time.

Cash Management needs strategies to deal with various facets of cash. Following are some of

its facets.

(a) Cash Planning: Cash planning is a technique to plan and control the use of cash. A

projected cash flow statement may be prepared, based on the present business operations and

anticipated future activities. The cash inflows from various sources may be anticipated and

cash outflows will determine the possible uses of cash.

(b) Cash Forecasts and Budgeting: A cash budget is the most important device for the

control of receipts and payments of cash. A cash budget is an estimate of cash receipts and

disbursements during a future period of time. It is an analysis of flow of cash in a business

over a future, short or long period of time. It is a forecast of expected cash intake and outlay.

The short-term forecasts can be made with the help of cash flow projections. The

finance manager will make estimates of likely receipts in the near future and the expected

disbursements in that period. Though it is not possible to make exact forecasts even then

estimates of cash flow will enable the planners to make arrangement for cash needs. A

41
financial manager should keep in mind the sources from where he will meet short-term needs.

He should also plan for productive use of surplus cash for short periods.

The long-term cash forecasts are also essential for proper cash planning. These

estimates may be for three, four, five or more years. Long-term forecasts indicate company’s

future financial needs for working capital, capital projects, etc.

Both short term and long term cash forecasts may be made with help of following

methods.

(a)    Receipts and Disbursements method

(b)   Adjusted net income method

Receipts and Disbursements method

In this method the receipt and payment of cash are estimated. The cash receipts may

be from cash sales, collections from debtors, sale of fixed assets, receipts of dividend or other

income of all the items; it is difficult to forecast the sales. The sales may be on cash as well as

credit basis. Cash sales will bring receipts at the time of sales while credit sale will bring cash

later on. The collections from debtors will depend upon the credit policy of the firm. Any

fluctuation in sales will disturb the receipts of cash. Payments may be made for cash

purchases, to creditors for goods, purchase of fixed assets etc.

The receipts and disbursements are to be equalled over a short as well as long periods.

Any shortfall in receipts will have to be met from banks or other sources. Similarly, surplus

cash may be invested in risk free marketable securities. It may be easy to make estimates for

payments but cash receipts may not be accurately made.

Adjusted Net Income Method

This method may also be known as sources and uses approach. It generally has three

sections: sources of cash, uses of cash and adjusted cash balance. The adjusted net income

method helps in projecting the company’s need for cash at some future date and to see

42
whether the company will be able to generate sufficient cash. If not, then it will have to

decide about borrowing or issuing shares etc. in preparing its statement the items like net

income, depreciation, dividends, taxes etc. can easily be determined from company’s annual

operating budget. The estimation of working capital movement becomes difficult because

items like receivables and inventories are influenced by factors such as fluctuations in raw

material costs, changing demand for company’s products. This method helps in keeping

control on working capital and anticipating financial requirements.

Managing Cash Flows

After estimating the cash flows, efforts should be made to adhere to the estimates or

receipts and payments of cash. Cash management will be successful only if cash collections

are accelerated and cash disbursements, as far as possible, are delayed. The following

methods of cash management will help:

Methods of Accelerating Cash Inflows

1. Prompt Payment by Customers: In order to accelerate cash inflows, the collections

from customers should be prompt. This will be possible by prompt billing. The customers

should be promptly informed about the amount payable and the time by which it should

be paid. Another method for prompting customers to pay earlier is to allow them cash

discount.

2. Quick Conversion of Payment into Cash: Cash inflows can be accelerated by

improving the cash collecting process. Once the customer writes a cheque in favour of the

concern the collection can be quickened by its early collection. There is a time gap

between the cheque sent by the customer and the amount collected against it. This is due

to many factors, (i) mailing time, i.e. time taken by post office for transferring cheque

from customer to the firm, referred to as postal float; (ii) time taken in processing the

cheque within the organization and sending it to bank for collection, it is

43
 called lethargy and (iii) collection time within the bank, i.e. time taken by the bank in

collecting the payment from the customer’s bank, called bank float. The postal float,

lethargy and bank float are collectively referred to as deposit float. The term deposit float

refers to cheques written buy customers but the amount not yet usable by the firm.

3. Decentralised Collections: A big firm operating over wide geographical area can

accelerate collections by using the system of decentralised collections. A number of

collecting centres are opened in different areas instead of collecting receipts at one place.

The idea of opening different collecting centres is to reduce the mailing time for

customer’s dispatch of cheque and its receipt in the firm and then reducing the time in

collecting these cheques.

4. Lock Box System: Lock box system is another technique of reducing mailing,

processing and collecting time. Under this system the firm selects some collecting centres

at different places. The places are selected on the basis of number of consumers and the

remittances to be received from a particular place.

Methods of Slowing Cash Outflows

A company can keep cash by effectively controlling disbursements. The objective of

controlling cash outflows is slow down the payments as far as possible. Following methods

can be used to delay disbursements:

1. Paying on Last Date: The disbursements can be delayed on making payments on the last

due date only. It is credit is for 10 days then payment should be made on 10 th day only. It can

help in using the money for short periods and the firm can make use of cash discount also.

2. Payments through Drafts: A company can delay payments by issuing drafts to the

suppliers instead of giving cheques. When a cheque is issued then the company will have to

keep a balance in its account so that the cheque is paid whenever it comes. On the other hand

a draft is payable only on presentation to the issuer. The receiver will give the draft to its

44
bank for presenting it to the buyer’s bank. It takes a number of days before it is actually paid.

The company can economise large resources by using this method.

3. Adjusting Payroll Funds: Some economy can be exercised on payroll funds also. It can

be done by reducing the frequency of payments. If the payments are made weekly then this

period can be extended to a month. Secondly, finance manager can plan the issuing of salary

cheques and their disbursements. If the cheques are issued on Saturday then only a few

cheque may be presented for payment, even on Monday all cheques may not be presented.

4. Centralisation of Payments: The payments should be centralised and payments should be

made through drafts or cheques. When cheques are issued from the main office then it will

take time for the cheques to be cleared through post. The benefit of cheque collecting time is

availed.

5. Inter-bank Transfer:  An efficient use of cash is also possible by inter-bank transfers. If

the company has accounts with more than one bank then amounts can be transferred to the

bank where disbursements are to be made. It will help in avoiding excess amount in one

bank.

6. Making use of Float: Float is a difference between the balance shown in company’s cash

book (Bank column) and balance in passbook of the bank. Whenever a cheque is issued, the

balance at bank in cashbook is reduced. The party to whom the cheque is issued may not

present it for payment immediately. If the party is at some other station then cheque will

come through post and it may take a number of days before it is presented. Until the time; the

cheques are not presented to bank for payment there will be a balance in the bank. The

company can make use of this float if it is able to estimate it correctly.

Determining Optimum Cash Balance

A firm has to maintain a minimum amount of cash for settling the dues in time. The

cash is needed to purchase raw materials, pay creditors, day-to-day expenses, dividend etc.

45
 An appropriate amount of cash balance to be maintained should be determined on the

basis of past experience and future expectations. If a firm maintains less cash balance then its

liquidity position will be weak. If higher cash balance is maintained then an opportunity to

earn is lost. Thus, a firm should maintain an optimum cash balance, neither a small nor a

large cash balance.

There are basically two approaches to determine an optimal cash balance, namely, (i)

Minimising Cost Models and (ii) Preparing Cash Budget. Cash budget is the most important

tool in cash management.

Cash Budget

A cash budget is an estimate of cash receipts and disbursements of cash during a

future period of time. In the words of soloman Ezra, a cash budget is “an analysis of flow of

cash in a business over a future, short or long period of time. It is a forecast of expected cash

intake and outlay.” It is a device to plan and control the use of cash. Thus a firm by preparing

a cash budget can plan the use of excess cash and make arrangements for the necessary cash

as and when required.

The cash receipts from various sources are anticipated. The estimated cash collections

for sales, debts, bills receivable, interests, dividends and other incomes and sale of

investments and other assets will be taken into account. The amounts to be spent on purchase

of materials, payment to creditors and meeting various other revenue and capital expenditure

needs should be considered. Cash forecasts will include all possible sources from which cash

will be received and the channels in which payments are to be made so that a consolidated

cash position is determined.

Baumol’s Model

William J. Baumol has suggested a model for determining the optimum balance of

cash based upon carrying and transaction costs of cash. The carrying cost refers to the cost of

46
the holding cash i.e. interest; and transaction cost refers to the cost involved in getting the

marketable securities converted into cash, the algebraic representation of the model is:  

where,          C = Optimum cash balance

         A = Annual (or monthly) cash disbursements)

         F = Fixed cost per transaction

         O = Opportunity cost of cash

Limitations of Model:

1. The model assumes a constant rate of use of cash. This is hypothetical assumption.

Generally the cash outflows in any firm are not regular and hence this model may not

give correct results.

2. The transaction cost will also be difficult to be measured since these depend upon the

type of investment as well as the maturity period.

Miller-Orr Model

The Miller–Orr model argues that changes in cash balance over a given period are

random in size as well as in direction. The cash balance of a firm may fluctuate irregularly

over a period of time. The model assumes (i) out of the two assets i.e. cash and marketable

securities, the latter has a marginal yield, and (ii) transfer of cash to marketable securities and

vice versa is possible without any delay but of course of at some cost.

The model has specified two control limits for cash balance. An upper limit, H, beyond

which cash balance need not be allowed to go and a lower limit, L, below which the cash

level is not allowed to reduce. The cash balance should be allowed to move within these

limits. If the cash level reaches the upper control limit, H, then at this point, apart of the cash

should be invested in marketable securities in such a way that the cash balance comes down

to a predetermined level called return level, R, If the cash balance reaches the lower level, L

then sufficient marketable securities should be sold to realize cash so that cash balance is
47
restored to the return level, R. No transaction between cash and marketable securities is

undertaken so long as the cash balance is between the two limits of H and L.

The Miller–Orr model has superiority over the Baumol’s model. The latter assumes

constant need and constant rate of use of funds, the Miller-Orr model, on the other hand is

more realistic and maintains that the actual cash balance may fluctuate between higher and

the lower limits. The model may be defined as:

                            Z    = (3TV/4i)1/3

Where, T = Transaction cost of conversion

            V = Variance of daily cash flows

            i    = Daily % interest rate on investments.

48
 RECEIVABLES MANAGEMENT

 Introduction

A sound managerial control requires proper management of liquid assets and inventory.

These assets are a part of working capital of the business. An efficient use of financial

resources is necessary to avoid financial distress. Receivables result from credit sales. A

concern is required to allow credit sales in order to expand its sales volume. It is not always

possible to sell goods on cash basis only. Sometimes, other concerns in that line might have

established a practice of selling goods on credit basis. Under these circumstances, it is not

possible to avoid credit sales without adversely affecting sales. The increase in sales is also

essential to increase profitability. After a certain level of sales the increase in sales will not

proportionately increase production costs. The increase in sales will bring in more profits.

Thus, receivables constitute a significant portion of current assets of a firm. But, for

investment in receivables, a firm has to incur certain costs. Further, there is a risk of bad

debts also. It is, therefore, very necessary to have a proper control and management of

receivables.

Meaning of Receivables: Receivables represent amounts owed to the firm as a result of sale

of goods or services in the ordinary course of business. These are claims of the firm against

its customers and form part of its current assets. Receivables are also known as accounts

receivables, trade receivables, customer receivables or book debts. The receivables are

carried for the customers. The period of credit and extent of receivables depends upon the

credit policy followed by the firm. The purpose of maintaining or investing in receivables is

to meet competition, and to increase the sales and profits.

Costs of Maintaining Receivable: The allowing of credit to customers means giving funds

for the customer’s use. The concern incurs the following cost on maintaining receivables:

49
            (1) Cost of Financing Receivables: When goods and services are provided on credit

then concern’s capital is allowed to be used by the customers. The receivables are financed

from the funds supplied by shareholders for long term financing and through retained

earnings. The concern incurs some cost for colleting funds which finance receivables.

            (2) Cost of Collection: A proper collection of receivables is essential for receivables

management. The customers who do not pay the money during a stipulated credit period are

sent reminders for early payments. Some persons may have to be sent for collection these

amounts. All these costs are known as collection costs which a concern is generally required

to incur.

            (3) Bad Debts : Some customers may fail to pay the amounts due towards them. The

amounts which the customers fail to pay are known as bad debts. Though a concern may be

able to reduced bad debts through efficient collection machinery but one cannot altogether

rule out this cost.

Factors Influencing the Size of Receivables

Besides sales, a number of other factors also influence the size of receivables. The following

factors directly and indirectly affect the size of receivables.

(1) Size of Credit Sales: The volume of credit sales is the first factor which increases or

decreases the size of receivables. If a concern sells only on cash basis as in the case of Bata

Shoe Company, then there will be no receivables. The higher the part of credit sales out of

total sales, figures of receivables will also be more or vice versa.

(2) Credit Policies: A firm with conservative credit policy will have a low size of receivables

while a firm with liberal credit policy will be increasing this figure. If collections are prompt

then even if credit is liberally extended the size of receivables will remain under control. In

case receivables remain outstanding for a longer period, there is always a possibility of bad

debts.

50
(3) Terms of Trade: The size of receivables also depends upon the terms of trade. The

period of credit allowed and rates of discount given are linked with receivables. If credit

period allowed is more then receivables will also be more. Sometimes trade policies of

competitors have to be followed otherwise it becomes difficult to expand the sales.

(4) Expansion Plans: When a concern wants to expand its activities, it will have to enter new

markets. To attract customers, it will give incentives in the form of credit facilities. The

period of credit can be reduced when the firm is able to get permanent customers. In the early

stages of expansion more credit becomes essential and size of receivables will be more.

(5) Relation with Profits: The credit policy is followed with a view to increase sales. When

sales increase beyond a certain level the additional costs incurred are less than the increase in

revenues. It will be beneficial to increase sales beyond the point because it will bring more

profits. The increase in profits will be followed by an increase in the size of receivables or

vice-versa.

(6) Credit Collection Efforts: The collection of credit should be streamlined. The customers

should be sent periodical reminders if they fail to pay in time. On the other hand, if adequate

attention is not paid towards credit collection then the concern can land itself in a serious

financial problem. An efficient credit collection machinery will reduce the size of

receivables.

(7) Habits of Customers: The paying habits of customers also have bearing on the size of

receivables. The customers may be in the habit of delaying payments even though they are

financially sound. The concern should remain in touch with such customers and should make

them realise the urgency of their needs.

Meaning and Objectives of Receivables Management

Receivables management is the process of making decisions relating to investment in

trade debtors. We have already stated that certain investment in receivables is necessary to

51
increase the sales and the profits of a firm. But at the same time investment in this asset

involves cost considerations also. Further, there is always a risk of bad debts too. Thus, the

objective of receivables management is to take a sound decision as regards investment in

debtors. In the words of Bolton, S.E., the objectives of receivables management is “to

promote sales and profits until that point is reached where the return on investment in further

funding of receivables is less than the cost of funds raised to finance that additional credit.”

Dimensions of Receivables Management

Receivables management involves the careful consideration of the following aspects:

1. Forming of credit policy.

2. Executing the credit policy.

3. Formulating and executing collection policy.

1. Forming of Credit Policy

For efficient management of receivables, a concern must adopt a credit policy. A

credit policy is related to decisions such as credit standards, length of credit period, cash

discount and discount period, etc.

(a) Quality of Trade Accounts of Credit Standards: The volume of sales will be influenced

by the credit policy of a concern. By liberalising credit policy the volume of sales can be

increased resulting into increased profits. The increased volume of sales is associated with

certain risks too. It will result in enhanced costs and risks of bad debts and delayed receipts.

The increase in number of customers will increase the clerical wok of maintaining the

additional accounts and collecting of information about the credit worthiness of customers.

There may be more bad debt losses due to extension of credit to less worthy customers.

(b) Length of Credit Period: Credit terms or length of credit period means the period

allowed to the customers for making the payment. The customers paying well in time may

52
also be allowed certain cash discount. A concern fixes its own terms of credit depending upon

its customers and the volume of sales. The competitive pressure from other firms compels to

follow similar credit terms, otherwise customers may feel inclined to purchase from a firm

which allows more days for paying credit purchases. Sometimes more credit time is allowed

to increase sales to existing customers and also to attract new customers. The length of credit

period and quantum of discount allowed determine the magnitude of investment in

receivables.

(c) Cash Discount: Cash discount is allowed to expedite the collection of receivables. The

concern will be able to use the additional funds received from expedited collections due to

cash discount. The discount allowed involves cost. The discount should be allowed only if its

cost is less than the earnings from additional funds. If the funds cannot be profitably

employed then discount should not be allowed.

(d) Discount Period: The collection of receivables is influenced by the period allowed for

availing the discount. The additional period allowed for this facility may prompt some more

customers to avail discount and make payments. This will mean additional funds released

from receivables which may be alternatively used. At the same time the extending of discount

period will result in late collection of funds because those who were getting discount and

making payments as per earlier schedule will also delay their payments.

2. Executing Credit Policy

After formulating the credit policy, its proper execution is very important. The evaluation of

credit applications and finding out the credit worthiness of customers should be undertaken.

(a) Collecting Credit information: The first step in implementing credit policy will be to

gather credit information about the customers. This information should be adequate enough

so that proper analysis about the financial position of the customers is possible. This type of

investigation can be undertaken only upto a certain limit because it will involve cost.

53
The sources from which credit information will be available should be ascertained. The

information may be available from financial statements, credit rating agencies, reports from

banks, firm’s records etc. Financial reports of the customer for a number of years will be

helpful in determining the financial position and profitability position. The balance sheet will

help in finding out the short term and long term position of the concern. The income

statements will show the profitability position of concern. The liquidity position and current

assets movement will help in finding out the current financial position. A proper analysis of

financial statements will be helpful in determining the credit worthiness of customers. There

are credit rating agencies which can supply information about various concerns. These

agencies regularly collect information about business units from various sources and keep

this information upto date. The information is kept in confidence and may be used when

required.

Credit information may be available with banks too. The banks have their credit

departments to analyse the financial position of a customer.

In case of old customers, business own records may help to know their credit

worthiness. The frequency of payments, cash discounts availed, interest paid on over due

payments etc. may help to form an opinion about the quality of credit.

(b) Credit Analysis: After gathering the required information, the finance manager should

analyse it to find out the credit worthiness of potential customers and also to see whether they

satisfy the standards of the concern or not. The credit analysis will determine the degree of

risk associated with the account, the capacity of the customer borrow and his ability and

willingness to pay.

(c) Credit Decision: After analysing the credit worthiness of the customer, the finance

manager has to take a decision whether the credit is to be extended and if yes then up to what

level. He will match the creditworthiness of the customer with the credit standards of the

company. If customer’s creditworthiness is above the credit standards then there is no

54
problem in taking a decision. It is only in the marginal case that such decisions are difficult to

be made. In such cases the benefit of extending the credit should be compared to the likely

bad debt losses and then decision should be taken. In case the customers are below the

company credit standards then they should not be out rightly refused. Rather they should be

offered some alternative facilities. A customer may be offered to pay on delivery of goods,

invoices may be sent through bank. Such a  course help in retaining the customers at present

and their dealings may help in reviewing their requests at a later date.

(d) Financing Investments in Receivables and Factoring: Accounts receivables block a

part of working capital. Efforts should be made that funds are not tied up in receivables for

longer periods. The finance manager should make efforts to get receivables financed so that

working capital needs are met in time. The quality of receivables will determine the amount

of loan. The banks will accept receivable of dependable parties only. Another method of

getting funds against receivables is their outright sale to the bank. The bank will credit the

amount to the party after deducting discount and will collect the money from the customers

later. Here too, the bank will insist on quality receivables only. Besides banks, there may be

other agencies which can buy receivables and pay cash for them. This facility is known as

factoring. The factoring may be with or without recourse. It is without recourse then any bad

debt loss is taken up by the factor but if it is with recourse then bad debts losses will be

recovered from the seller.

Factoring is collection and finance service designed to improve he cash flow position of the

sellers by converting sales invoices into ready cash. The procedure of factoring can be

explained as follows:

1. Under an agreement between the selling firm and factor firm, the latter makes an

appraisal of the credit worthiness of potential customers and may also set the credit limit

and term of credit for different customers.

55
2. The sales documents will contain the instructions to make payment directly to factor

who is responsible for collection.

3. When the payment is received by the factor on the due date the factor shall deduct its

fees, charges etc and credit the balance to the firm’s accounts.

4. In some cases, if agreed the factor firm may also provide advance finance to selling

firm for which it may charge from selling firm. In a way this tantamount to bill

discounting by the factor firm. However factoring is something more than mere bill

discounting, as the former includes analysis of the credit worthiness of the customer also.

The factor may pay whole or a substantial portion of sales vale to the selling firm

immediately on sales being effected. The balance if any, may be paid on normal due date.

Benefits and Cost of Factoring: A firm availing factoring services may have the following

benefits:

§  Better Cash Flows

§  Better Assets Management

§  Better Working Capital Management

§  Better Administration

§  Better Evaluation

§  Better Risk Management

However, the factoring involves some monetary and non-monetary costs as follows:

Monetary Costs

a)      The factor firm charges substantial fees and commission for collection of

receivables. These charges sometimes may be too much in view of amount

involved.

56
 b)      The advance fiancé provided by factor firm would be available at a higher

interest costs than usual rate of interest.

Non-Monetary Costs

a)      The factor firm doing the evaluation of credit worthiness of the customer will be

primarily concerned with the minimization of risk of delays and defaults. In the

process it may over look sales growth aspect.

b)      A factor is in fact a third party to the customer who may not feel comfortable while

dealing with it.

c)      The factoring of receivables may be considered as a symptom of financial

weakness.

3. Formulating and Executing Collection Policy

The collection o f amounts due to the customers is very important. The collection policy the

termed as strict and lenient. A strict policy of collection will involve more efforts on

collection. Such a policy has both positive and negative effects. This policy will enable early

collection of dues and will reduce bad debt losses. The money collected will be used for other

purposes and the profits of the concern will go up. On the other hand a rigorous collection

policy will involve increased collection costs. It may also reduce the volume of sales. A

lenient policy may increase the debt collection period and more bad debt losses. A customer

not clearing the dues for long may not repeat his order because he will have to pay earlier

dues first, thus causing.

57
 INVENTORY MANAGEMENT

Every enterprise needs inventory for smooth running of its activities. It serves as a link

between production and distribution processes. There is, generally, a time lag between the

recognition of need and its fulfilment. The greater the time – lag, the higher the

requirements for inventory.

The investment in inventories constitutes the most significant part of current

assets/working capital in most of the undertakings. Thus, it is very essential to have proper

control and management of inventories. The purpose of inventory management is to ensure

availability of materials in sufficient quantity as and when required and also to minimise

investment in inventories.

Meaning and Nature of inventory

In accounting language it may mean stock of finished goods only. In a manufacturing

concern, it may include raw materials, work in process and stores, etc. Inventory includes the

following things:

(a) Raw Material: Raw material form a major input into the organisation. They are required

to carry out production activities uninterruptedly. The quantity of raw materials required will

be determined by the rate of consumption and the time required for replenishing the supplies.

The factors like the availability of raw materials and government regulations etc. too affect

the stock   of raw materials.

(b) Work in Progress: The work-in-progress is that stage of stocks which are in between

raw materials and finished goods. The raw materials enter the process of manufacture but

they are yet to attain a final shape of finished goods. The quantum of work in progress

depends upon the time taken in the manufacturing process. The greater the time taken in

manufacturing, the more will be the amount of work in progress.

58
(c) Consumables: These are the materials which are needed to smoothen the process of

production. These materials do not directly enter production but they act as catalysts, etc.

Consumables may be classified according to their consumption and criticality.

(d) Finished goods: These are the goods which are ready for the consumers. The stock of

finished goods provides a buffer between production and market. The purpose of maintaining

inventory is to ensure proper supply of goods to customers.

(e) Spares: Spares also form a part of inventory. The consumption pattern of raw materials,

consumables, finished goods are different from that of spares. The stocking policies of spares

are different from industry to industry. Some industries like transport will require more spares

than the other concerns. The costly spare parts like engines, maintenance spares etc. are not

discarded after use, rather they are kept in ready position for further use.

Purpose/Benefits of Holding Inventors

There are three main purposes or motives of holding inventories:

(i) The Transaction Motive 

(ii) The Precautionary Motive 

(iii) The Speculative Motive 

Risk and Costs of Holding Inventors

The holding of inventories involves blocking of a firm’s funds and incurrence of capital and

other costs. It also exposes the firm to certain risks. The various costs and risks involved in

holding inventories are as below:

(i)        Capital costs: Maintaining of inventories results in blocking of the firm’s

financial resources. The firm has, therefore, to arrange for additional funds to

meet the cost of inventories. The funds may be arranged from own resources or

from outsiders. But in both cases, the firm incurs a cost. In the former case, there

59
 is an opportunity cost of investment while in later case the firm has to pay interest

to outsiders.

(ii)        Cost of Ordering: The costs of ordering include the cost of acquisition of

inventories. It is the cost of preparation and execution of an order, including cost

of paper work and communicating with supplier. There is always minimum cot

involve whenever an order for replenishment of good is placed. The total annual

cost of ordering is equal to cost per order multiplied by the number of order

placed in a year.

(iii)       Cost of Stock-outs: A stock out is a situation when the firm is not having units of

an item in store but there is demand for that either from the customers or the

production department. The stock out refer to demand for an item whose

inventory level is reduced to zero and insufficient level. There is always a cost of

stock out in the sense that the firm faces a situation of lost sales or back orders.

Stock out are quite often expensive.

(iv)       Storage and Handling Costs. Holding of inventories also involves costs on

storage as well as handling of materials. The storage costs include the rental of the

go down, insurance charge etc.

(v)       Risk of Price Decline. There is always a risk of reduction in the prices of

inventories by the suppliers in holding inventories. This may be due to increased

market supplies, competition or general depression in the market.

(vi)      Risk of Obsolescence. The inventories may become obsolete due to improved

technology, changes in requirements, change in  customer’s tastes etc.

(vii)     Risk Deterioration in Quality: The quality of the materials may also deteriorate

while the inventories are kept in stores.

60
Inventory Management

It is necessary for every management to give proper attention to inventory

management. A proper planning of purchasing, handling storing and accounting should form

a part of inventory management. An efficient system of inventory management will

determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d)

where to store, etc.

There are conflicting interests of different departmental heads over the issue of

inventory. The finance manager will try to invest less in inventory because for him it is an

idle investment, whereas production manager will emphasise to acquire more and more

inventory as he does not want any interruption in production due to shortage of inventory.

The purpose of inventory management is to keep the stocks in such a way that neither there is

over-stocking nor under-stocking. The over-stocking will mean reduction of liquidity and

starving of other production processes; under-stocking, on the other hand, will result in

stoppage of work. The investments in inventory should be kept in reasonable limits.

Objects of Inventory Management

The main objectives of inventory management are operational and financial. The operational

objectives mean that the materials and spares should be available in sufficient quantity so that

work is not disrupted for want of inventory. The financial objective means that investments in

inventories should not remain idle and minimum working capital should be locked in it. The

following are the objectives of inventory management:

(1)   To ensure continuous supply of materials spares and finished goods so that

production should not suffer at any time and the customers demand should also be

met.

(2)   To avoid both over-stocking and under-stocking of inventory.

61
 (3)   To keep material cost under control so that they contribute in reducing cost of

production and overall costs.

(4)   To minimise losses through deterioration, pilferage, wastages and damages.

(5)   To ensure perpetual inventory control so that materials shown in stock ledgers

should be actually lying in the stores.

(6)   To ensure right quality goods at reasonable prices.

(7)   To maintain investments in inventories at the optimum level as required by the

operational and sales activities.

(8)   To eliminate duplication in ordering or replenishing stocks. This is possible with

help of  centralising purchases.

(9)   To facilitate furnishing of data for short term and long term planning and control of

inventory.

(10) To design proper organisation of inventory. A clear cut accountability should be fixed

at various levels of management.

Tools and Techniques of inventory Management

Effective Inventory management requires an effective control system for inventories. A

proper inventory control not only helps in solving the acute problem of liquidity but also

increases profits and causes substantial reduction in the working capital of the concern. The

following are the important tools and techniques of inventory management and control:

1. Determination of Stock Levels.

2. Determination of Safety Stocks.

3.  Determination of Economic Order Quantity

4. A.B.C. Analysis

62
5. VED Analysis

6. Inventory Turnover Ratios

7. Aging Schedule of Inventories

8. Just in Time Inventory

1. Determination of Stock Levels

Carrying of too much and too little of inventories is detrimental to the firm. If the

inventory level is too little, the firm will face frequent stock-outs involving heavy ordering

cost and if the inventory level is too high it will be unnecessary tie-up of capital. Therefore,

an efficient inventory management requires that a firm should maintain an optimum level of

inventory where inventory costs are the minimum and at the same time there is not stock-out

which may result in loss of sale or stoppage of production.

2. Determination of Safety Stocks

Safety stock is a buffer to meet some unanticipated increase in usage. It fluctuates

over a period of time. The demand for materials may fluctuate and delivery of inventory may

also be delayed and in such a situation the firm can face a problem of stock-out. The stock-

out can prove costly by affecting the smooth working of the concern. In order to protect

against the stock out arising out of usage fluctuations, firms usually maintain some margin of

safety or safety stocks. Two costs are involved in the determination of this stock i.e.

opportunity cost of stock-outs and the carrying costs. The stock out of raw materials cause

production disruption resulting in higher cost of production. Similarly, the stock out of

finished goods result into failure of firm in competition, as firm cannot provide proper

customer service. If a firm maintains low level of safety frequent stock out will occur

resulting in large opportunity coast. On the other hand larger quantity of safety stock involves

higher carrying costs.

3. Economic Order Quantity (EOQ)

63
 A decision about how much to order has great significance in inventory management.

The quantity to be purchased should neither be small nor big because costs of buying and

carrying materials are very high. Economic order quantity is the size of the lot to be

purchased which is economically viable. This is the quantity of materials which can be

purchased at minimum costs. Generally, economic order quantity is the point at which

inventory carrying costs are equal to order costs. In determining economic order quantity it is

assumed that cost of a managing inventory is made of solely of two parts i.e. ordering costs

and carrying costs.

(A) Ordering Costs: These are costs that are associated with the purchasing or ordering of

materials. These costs include:

(1) Inspection costs of incoming materials.

(2) Cost of stationery, typing, postage, telephone charges etc.

(3) Expenses incurred on transportation of goods purchased.

These costs are also know as buying costs and will arise only when some purchases are made.

(B) Carrying Costs: These are costs for holding the inventories. These costs will not be

incurred if inventories are not carried. These costs include:

(1)    The cost of capital invested in inventories. An interest will be paid on the amount of

capital locked up in inventories.

(2)    Cost of storage which could have been used for other purposes.

(3)    Insurance Cost

(4)    Cost of spoilage in handling of materials

64
 OBJECTIVES OF THE STUDY

The objectives of the study are as follows:

 To analyze the working capital management of the company.

 To determine the gross and net operating cycle of the unit.
 To know the future need of working capital in the running organization.
 To render recommendations for the effective management of working capital.

SCOPE OF THE STUDY

The study is conducted at “DCM Shriram Industries, Ghaziabad” for 6 weeks duration. The
study of W.C. management is purely based on secondary data and all the information is
available within the company itself in the form of records. To get proper understanding of
this concept, I have done the study of the balance sheets, profit and loss A/C’s, cash accounts,
trial balance, and cost sheets. I have also conducted the interviews with employees of
accounts and finance department and stores department. So, scope of the study is limited up
to the availability of official records and information provided by the employees. The study is
supposed to be related to the period of last five years.

65
 RESEARCH METHODOLOGY

 Research design:

This study is based on the applied and descriptive research. The study focused on the

liquidity, profitability, efficiency and solvency position of DCM Shriram Industries

Ltd. Through ratio analysis and horizontal and vertical analysis, the result of the

controlled mechanism can be summarised which will help in identifying the

usefulness of the system. Hence, the tools such as ratios, comparative and common-

size income statement, comparative and common-size balance sheet are used to arrive

at the conclusion.

 Tools and Techniques of Data Collection:

Data is collected from secondary sources such as:

 Annual reports

 Journals and books

 Research articles

 Websites

 Research Techniques:

The project report entitled “Financial Statement Analysis of DCM Shriram Industries

Ltd.” is purely based on annual reports and other published reports. Therefore this

study mainly consists of interpretation of financial statements. The major tools that

are used for interpretation are as follows:

 Ratio Analysis

 Tables

 Graphs

66
 TOOLS/TECHNIQUES OF ANALYSIS

RATIO ANALYSIS

Following ratios are used for analysing Working Capital Management:

Liquidity ratios :

Liquidity ratios measure the ability of the firm to meet its current obligations (liabilities). A

firm should ensure that it doesn’t suffer from lack of liquidity, and also that it doesn’t have

excess liquidity. The failure of a company to meet its obligations due to lack of sufficient

liquidity will result in a poor credit worthiness, loss of creditors’ confidence or even in legal

tangles resulting in the closure of the company. A very high degree of liquidity is also bad;

idle assets earn nothing. The firm’s funds will be unnecessarily tied up in current assets.

Therefore, it is necessary to strike a proper balance between high liquidity and lack of

liquidity.

Types of liquidity ratios :

● Current Ratio

● Quick Ratio/ Acid-Test Ratio

● Cash Ratio

● Net Working Capital Ratio

1. Current ratio:

The current ratio is a liquidity ratio that measures a company's ability to pay short-term and

long-term obligations. To gauge this ability, the current ratio considers the current total assets

of a company (both liquid and illiquid) relative to that company’s current total liabilities. The

Formula

67
2. Quick ratio/ acid-test ratio:

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to

pay its current liabilities when they come due with only quick assets. Quick assets are current

assets that can be converted to cash within 90 days or in the short-term. Cash, cash

equivalents, short-term investments or marketable securities, and current accounts receivable

are considered quick assets. Liquid assets are also equal to total current assets minus

inventories and prepaid expenses.

Formula :

3. Cash ratio:

The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm’s ability to pay

off its current liabilities with only cash and cash equivalents. The cash ratio is much more

restrictive than the current ratio or quick ratio because no other current assets can be used to

pay off current debt–only cash.

Formula :

68
4. Net working capital ratio:

The net working capital ratio is the net amount of all elements of working capital. It is

intended to reveal whether a business has a sufficient amount of net funds available in the

short term to stay in operation. the intent is to track the proportion of short term net funds to

assets, usually on a trend line. By doing so, you can tell if a business is gradually shifting

more of its assets into or out of long-term assets, such as fixed assets. An

increasing ratio is considered good, since it implies that a business is minimizing its

investment in fixed assets and keeping its asset reserves as liquid as possible.

Formula:

Net working capital ratio: (Current Assets- Current Liabilities)/ Total Assets

5. WORKING CAPITAL TURNOVER RATIO

Working capital turnover is a ratio which measures how efficiently a company is using its

working capital to support a given level of sales. Also referred to as net sales to working

capital, it shows the relationship between the funds used to finance a company's operations

and the revenues a company generates as a result.

A high turnover ratio shows that management is being very efficient in using a company’s

short-term assets and liabilities for supporting sales, i.e., it is generating a higher dollar

amount of sales for every dollar of the working capital used. In contrast, a low ratio may

indicate that a business is investing in too many accounts receivable and inventory to support

its sales – which could lead to an excessive amount of bad debts or obsolete inventory.

Formulae:

6. RECEIVABLE TURNOVER RATIO

69
The receivables turnover ratio is an accounting measure used to quantify a firm's

effectiveness in extending credit and in collecting debts on that credit. The receivables

turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.

Formulae:

7. INVENTORY TURNOVER RATIO

Inventory turnover is a ratio showing how many times a company has sold and

replaced inventory during a period. The company can then divide the days in the period by

the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is

calculated as sales divided by average inventory.

Low turnover implies weak sales and, excess inventory. A high ratio implies either strong

sales or large discounts.

Formulae:

70
 DATA ANALYSIS AND INTERPRETATION
RATIO ANALYSIS

1. CURRENT RATIO

RATIO MAR'14 MAR'15 MAR'16 MAR'17 MAR'18

CURRENT
0.75 0.66 0.71 0.72 0.73
RATIO

CURRENT RATIO
0.76

0.74

0.72

0.7
CURRENT RATIO

0.68

0.66

0.64

0.62

0.6
MAR'2014 MAR'2015 MAR'2016 MAR'2017 MAR'2018
YEAR

INTERPRETATION :

There was a decline in current ratio from March 2014 to March 2015. In the past four years,

current ratio of the company has improved. It shows that the short-term debt paying ability of

the business has improved. There are sufficient current assets available with the company to

pay-off its current liabilities. It also represents a margin of safety for their creditors. The

increasing trend of current ratio reflects the greater margin of safety along firm’s ability to

meet its current obligations.

71
 2. QUICK RATIO :

RATIO MAR'14 MAR'15 MAR'16 MAR'17 MAR'18

QUICK
0.43 0.58 0.45 0.6 0.83
RATIO

QUICK RATIO
0.9
0.8
0.7
0.6
QUICK RATIO

0.5
0.4
0.3
0.2
0.1
0
MAR'2014 MAR'2015 MAR'2016 MAR'2017 MAR'2018
YEAR

INTERPRETATION :

Quick ratio or Acid-test ratio is considered a more reliable test of short-term solvency

than current ratio because it shows the ability of the business to pay short term debts

immediately. Above graph shows that the company has not enough liquid assets to pay-off its

current liabilities. Since three years, company has witnessed an increasing trend before that it

decreased. However, the company managed to improve their short-term financial position by

improving their quick ratio from the year 2015-16 to 2017-18.

72
3. CASH RATIO

RATIO MAR'14 MAR'15 MAR'16 MAR'17 MAR'18

CASH RATIO 0.013 0.011 0.014 0.018 0.044

CASH RATIO
0.05
0.05
0.04
0.04
0.03
CASH RATIO

0.03
0.02
0.02
0.01
0.01
0
MAR'2014 MAR'2015 MAR'2016 MAR'2017 MAR'2018
YEAR

INTERPRETATION :

In the past five years, the company’s cash ratio is less than 1 which means that the current

liabilities are more than cash and cash equivalents. The company has insufficient cash on

73
hand to pay off short-term debt. In the past five years, the company has more current

liabilities as compared to its cash and cash equivalents. This indicates that the company might

have a risk of facing a financial difficulty. But the cash ratio of the company is increasing at

an increasing rate from the last four years which reflects the company’s potential to deal with

all the financial difficulties.

4. OPERATING PROFIT RATIO

RATIO MAR'14 MAR'15 MAR'16 MAR'17 MAR'18

OPERATING

PROFIT 7.01 4.9 6.81 12.87 5.9

RATIO(%)

OPERATING PROFIT RATIO

14

12
OPERATING PROFIT RATIO

10

0
MAR'2014 MAR'2015 MAR'2016 MAR'2017 MAR'2018
YEAR

INTERPRETATION :

The operating profit ratio decreased by 30% from the year 2013-14 to 2014- 15. However,

it showed an upward trend from the year 2014-15 to 2016-17 and came back to its normal

condition in the year 2017-18 after an extra-ordinary jump of about 89% increase in operating

74
profit during the year 2016-17. The operating profit of the company doesn’t seem satisfactory

as the lower ratio reflects that the company is not making enough money from its ongoing

operations to pay for its variable costs as well as fixed costs.

5. INVENTORY TURNOVER RATIO

RATIO MAR'14 MAR'15 MAR'16 MAR'17 MAR'18

INVENTORY
3.17 3.15 2.48 2.81 3.48
TURNOVER RATIO
.

INVENTORY TURNOVER RATIO

4
3.5
INVENTORY TURNOVER RATIO

3
2.5
2
1.5
1
0.5
0
MAR'2014 MAR'2015 MAR'2016 MAR'2017 MAR'2018
YEAR

INTERPRETATION :

In the last five years, 2017-18 accounted the highest inventory turnover ratio. From the year

2015-16 to 2017-18, the company accounted a continuous increase in its inventory turnover

75
ratio which reflects company’s efficiency to control its merchandise and its effectiveness to

sell the merchandise.

6. DEBTORS TURNOVER RATIO

RATIO MAR'14 MAR'15 MAR'16 MAR'17 MAR'18

DEBTORS

TURNOVER 12.64 12.45 11.59 11.42 10.9

RATIO

DEBTORS TURNOVER RATIO

13

12.5
DEBTORS TURNOVER RATIO

12

11.5

11

10.5

10
MAR'2014 MAR'2015 MAR'2016 MAR'2017 MAR'2018
YEAR

INTERPRETATION:

76
In the last five years, company accounted its lowest debtors turnover ratio in the FY 2017-18.

From the last five years, there is a downward trend in company’s debtors turnover ratio which

depicts that the company have poor collection processes and customers with financial

difficulty. Low ratio implies that the company should reassess its credit policies in order to

ensure the timely collection of imparted credit that is not earning interest for the firm.

CASH FLOW STATEMENT

Particulars For the year For the year Increase/

ended 31 ended 31 Decrease

March 2018 March 2017

Cash Flows From Operating Activities
Profit before tax 7,020.36 15 ,272.36 (8252)
Adjustments for : Depreciation and 1,924.16 1 907.47 16.69

amortisation
Finance costs 2,814.32 3,805.56 (991.24)
Interest income (174.53) (172.93) 1.6
Interest received against subvention (350.42) (696.08) (345.66)
Deferred rent amortisation 1.30 1.80 (0.5)
Loss on sale of property, plant and equipments 49.05 143.46 (94.41)

/ discarded assets (net)

Share of profit of equity accounted investees (68.45) (57.75) 10.7

(net of tax)
Profit on sale of current investments (60.23) (17.47) 42.76
Net gain on fair value of investments - (18.14) (18.14)
Operating profit before changes in assets 11,155.56 20,168.28 9012.72

and liabilities
Changes in operating assets and liabilities
(Decrease) in trade payables (5,622.15) (2,167.61) 3454.54
(Decrease) / Increase in other financial 5.11 (149.21) (144.1)

liabilities
(Decrease) / Increase in other liabilities and (2,437.29) 252.73 2690.02

77
provisions
(Increase) in trade receivables (1,689.89) (2,444.04) (4133.93)
Decrease / (Increase) in inventories 5,912.16 (4,476.24) 10388.4
Decrease / (Increase) in financial assets 254.70 (164.61) 419.31
Decrease / (Increase) in other assets 880.57 (184.93) 1065.5
Cash generated from operations 8,458.77 10,834.37 (2375.6)
Net income tax paid (2,140.84) (3,436.34) 5577.18
Net cash from operating activities (A) 6,317.93 7,398.03 1080.1

Cash Flows From Investing Activities

Capital expenditure on property, plant and (3,862.08) (2,697.24) 6559.32

equipments, including capital advances

Proceeds from sale of property, plant and 163.07 58.96 222.03

equipments
Purchase of current investments (9,964.00) – (9964.0)
Proceeds from sale of current investments 10,248.41 739.42 9508.99
Changes in other bank balances (175.36) (287.46) 462.82
Interest received 148.53 148.83 0.30
Inter corporate deposits received back 150.00 40.00 110.0
Net cash used in investing activities (B) (3,291.43) (1,997.49) (1293.94)

Cash Flows From Financing Activities 3,531.13 318.11 3213.02

Proceeds from long term borrowings
Repayment of long term borrowings (2,992.60) (8,099.67) (11092.27)
Proceeds from current borrowings 552.69 6,876.95 7432.64
Finance costs paid (net of subvention) (2,438.04) (3,177.80) (5615.84)
Dividend paid (1,097.21) (1,103.89) (6.68)
Corporate distribution tax paid (230.22) (230.23) 460.45)
Net cash used in financing activities ( C ) (2,674.25) (5,416.53) (2742.28)
Net increase / (decrease) in cash and cash 352.25 (15.99) 336.26

equivalents (A+B+C)
Cash and cash equivalents at the beginning of 515.14 531.13 (15.99)

the year
Cash and cash equivalents at the end of the 867.39 515.14 352.25

year
Component of cash and cash equivalents

Balances with scheduled banks: -

Current accounts 834.96 484.80 350.16
Cash in hand 32.43 30.34 2.09
Cash and cash equivalents at the close of 867.39 515.14 352.25

the year

78
FINDINGS

79
 FINDINGS

 The short-term debt paying ability of the business has improved. There are sufficient

current assets available with the company to pay-off its current liabilities.

 Company has not enough liquid assets to pay-off its current liabilities. Since three

years, company has witnessed an increasing trend before that it decreased.

 The company has insufficient cash on hand to pay off short-term debt. In the past five

years, the company has more current liabilities as compared to its cash and cash

equivalents. This indicates that the company might have a risk of facing a financial

difficulty.

 The operating profit of the company doesn’t seem satisfactory as the lower ratio

reflects that the company is not making enough money from its ongoing operations to

pay for its variable costs as well as fixed costs.

 Increase in its inventory turnover ratio which reflects company’s efficiency to control

its merchandise and its effectiveness to sell the merchandise.

 Increase in its inventory turnover ratio which reflects company’s efficiency to control

its merchandise and its effectiveness to sell the merchandise.

 There is a downward trend in company’s debtors turnover ratio which depicts that the

company have poor collection processes and customers with financial difficulty

80
 RECOMMENDATIONS

 Company maintains a very low cash balance that makes it an under-performer in

comparison to its peers. So, it is advisable to increase its cash ratio.

 Company needs to improve their credit policy as it is under-performing than its

peers in terms of debtors turnover ratio.

81
 CONCLUSION

The study has identified and examined the working capital position position of DCM

Shriram Industries Ltd. It has been observed that the assessment of working capital position

requires evaluation many factors. The study has identified various techniques for the

analysis of working capital management.

DCM Shriram Industries Limited maintains a sound position in terms of liquidity, solvency

and profitability. The company had primarily been operating on debt but now they have

become equity oriented. Because of the external economic conditions, FY 2016-17 proved

to be the most profitable financial year and FY 2014-15, the least profitable financial year

for the company. It has been observed that the company has a competent management

which is capable of controlling any adverse fluctuations. Nevertheless there is scope of

improvement in cash balance as well as in the credit policy of the company.

82
 BIBLIOGRAPHY

Company Reports

➢ Annual Reports of DCM Shriram Industries Ltd. of the financial years 2017-

18, 2016-17, 2015-16, 2014-15 and 2013-14.

Books Referred

➢ I M Pandey, “Financial Management”, Vikas Publishing House Pvt. Ltd.

➢ Prasanna Chandra - Fundamentals of Financial Management (TMH, 9th Ed.)

➢ PC Tulsian, “Financial Accounting”, Pearson Education.

➢ NP Srivastava & Dr. M Sakthivel Murugan, “Accounting for Management”, S.

Chand.

Webliography

➢ https://www.investopedia.com/terms/f/working capital -analysis.asp

➢ https://en.wikipedia.org/wiki/working capital management_analysis

➢ https://www.accountingtools.com/articles/2017/5/14/working capital

management-analysis

➢ https://www.moneycontrol.com

➢ https://economictimes.indiatimes.com 

➢ https://www.dcmsr.com/

83