CHAPTER- I

Research Design
1.1 Introduction of the Subject

1.2 Objectives

1.3 Importance of Study

1.4 Methodology

1.5 Chapterisation

1.6 Limitations

IMT, GHAZIABAD 1
 CHAPTER NO. 1
RESEARCH DESIGN

INTRODUCTION OF THE SUBJECT

Management of working capital is a challenging task particularly in developing countries

like India. In developing countries generally, there is shortage of funds, frequent changes
in the monetary policy as an instrument of controlling inflation, vast demands on bank
funds, high interest rates, shortage of goods and services luring both business houses and
consumers to hoard and maintain large inventories and existence of parallel black
economy. A large part of finance manager’s is devoted in managing working capital to
get day-to-day needs of an organization. His prime attention is devoted to maintain
sufficient liquidity in the form of cash, marketable securities, accounts receivables and
inventories to grease the operations of business adequately. But at the same time he is to
take care of the profitability of the organization. Too much liquidity is a burden on
profitability, as these are inversely related to each other. It is to balance between these
two conflicting objectives of liquidity and profitability. For the organization it is a
continuous process.

IMT, GHAZIABAD 2
 OBJECTIVES OF THE PROJECT

The objectives of the study were –

 To understand and study in general the management of working capital.

 To analyze the distribution of gross working capital into various components.

 To calculate the operating cycle period.

 To analyze the liquidity position of the company by analyzing the various ratios.

IMPORTANCE OF THE STUDY

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

METHODOLOGY

Research in common parlance refers to a search for knowledge. Research may be defined
as “ manipulation of things, concepts or symbols for the purpose of generalizing to
extent, correct or verify knowledge, whether that knowledge aids in construction of
theory or in the practice of an art”.
IMT, GHAZIABAD 3
Research objectives:

The main objectives of research in management are: -

1. To verify and to test the existing facts and theories.
2. To gain familiarity with a phenomenon or to achieve new insights into it.
3. To establish generalization in various fields of knowledge.
4. To bring to limelight information that could have never been brought to the
knowledge under normal course.

METHODS OF DATA COLLECTION

Primary data collected from: -

Personal interview was the main tool for the collection of primary data and information.
This study has brought in use very little primary data in relation with the elements of
working capital.

Secondary data collected from: -

Since the study is based on the financial aspects of the company so the annual report of
the organization, Trial Balance, Income & Expenditure accounts of the company brought
in use. Besides the company profile and theoretical aspects taken from the secondary
sources.

PRESENTATION OF THE DATA

The data collected is presented in the form of:

(a) Tables
(b) Bar diagrams
(c) Pie charts

IMT, GHAZIABAD 4
CHAPTERISATION
The research project has been articulated with the help of five chapters as follows_

CHAPTER I – RESEARCH DESIGN AND METHODOLOGY :-

It details defines objective, their formulation & design of the research. It is

most important chapter because it designs all the activity research.

CHAPTER II – THEORETICAL BACKGROUND :-

In this chapter includes theoretical concepts relating to subject of project it

focuses theoretical knowledge in financial management books related to topic i.e.

working capital.

CHAPTER III –INTRODUCTION OF COMPANY:-

Company profile it focus on introduction of company, human resource

development, research & development, organizational set up.

CHAPTER IV- ANALYSIS & INTERPRETATION OF DATA:-

In which after collection of data from the subordinates, the work of conclusion

& suggestion are depending on analysis.

IMT, GHAZIABAD 5
CHAPTER V: CONCLUSION & SUGGESTION: -

This chapter is based on analysis and interpretation. The researcher has

alternative solution and suggestions give the origination. Last by the report contains

appendix & bibliography. This contains the balance sheet and profit and loss accounts

with help of this researcher has done research work & bibliography give the information

about the books magazine & websites used by the researcher to complete the research

work.

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

LIMITATIONS

This project is not far from limitations. The limitations are: -

 A company generally cannot disclose its internal policies to outsiders. In such

case, it is very difficult to find out and gather complete and true information in
the forms of figures regarding financial matters.

IMT, GHAZIABAD 6
CHAPTER- II

Theoretical Background
2.1 Introduction

2.2 Risk and return in Working Capital

2.3 Elements of Working Capital

2.4 Working Capital Finance

2.5 Ratios

2.6 Operating Cycle

IMT, GHAZIABAD 7
 CHAPTER NO. 2
INTO THE CONCEPT - WORKING CAPITAL
MANAGEMENT
INTRODUCTION
Working capital management refers to management of the working capital, or more
precise, the management of current assets. A firms working capital consist of its
investment in current asset which include short term asset such as cash and bank balance,
inventories, receivables, and marketable securities.

Working capital management arises from two considerations:

1. Existence of working capital is imperative in any firm.
2. The working capital involves investment of funds of the firm.

Working capital refer to current asset which may be defined as:

1. Those which are convertible into cash or equivalent within a period of one year.
2. Those which are required to meet day to day operations.

Though fixed asset and current asset both require investment of funds, working capital
involve different concept and methodology than the techniques used in fixed asset
management. Reason for this is that very basics of fixed assets decision process and
working capital decision process are different. The fixed assets involve long period
perspective, hence the concept of time value of money is applied in order to discount the
future cash flows, where as in working capital the time horizon is limited, in general to
one year only and the time value of money concept is not used.
Fixed asset affect the long-term profitability of the firm while current assets affect the
short-term liquidity of firm.

Managing current asset may require more attention than managing fixed assets, because
level of investment in each of the current asset varies from day to day, and the financial
manager must there fore, continuously monitor these assets to ensure that the desired
levels are being maintained. Too large an investment in current assets means tying up
IMT, GHAZIABAD 8
funds that can be productively used elsewhere. Excess investment may also expose the
firm to undue risk e.g. in case, the inventory cannot be sold or the receivable cannot be
collected.
On the other hand, too little investment also can be expansive. For example, insufficient
inventory may mean that sales are lost as the finish goods which customers wants are not
available.
Financial manager is faced with decisions involving some of the considerations are as
follows:
1.What should be the total investment in working capital of the firm?
2.What should be the level of individual current assets?
3.What should be the relative proportion of different sources to finance the
working capital requirement?
Thus working capital management may be defined as the management of firms sources
and uses of working capital in order to maximize the wealth of the shareholders.
The term working capital may be used in two different ways.
1. Gross working capital: The gross working capital refers to the firm’s investment in all
current assets taken together.
2. Net working capital: The term net working capital may be defined as the excess of
total current assets over total current liabilities.
The gross working capital denotes the total working capital or total investment in current
assets. A firm should maintain an optimum level of gross working capital. This will help
avoiding:
1. The unnecessarily stoppage of work or chance of liquidation due to insufficient
working capital.
2. Effect on profitability because over flowing working capital implies cost.
Therefore, a firm should have just adequate level of total current assets. The gross
working capital also gives an idea of total funds required for maintaining current assets.
On other hand, net working capital refers to amount of funds that must be invested by the
firm, more or less regularly in current assets. The net working capital also denotes the net
liquidity being maintained by the firm. This also gives an idea of buffer available to the
current liability.

IMT, GHAZIABAD 9
Need for adequate working capital:
The need and importance of adequate working capital for day to day operation can hardly
be underestimated. Every firm must maintain a sound working capital position otherwise;
its business activities may be adversely affected. Thus every firm must have adequate
working capital.
The excess working capital, when the investment in working capital is more than the
required level, may result in
a). Unnecessary accumulation of inventories resulting in waste, theft, damage etc.
b). Delay in collection of receivables resulting in more liberal credit terms to customers
than warranted by the market conditions.
c). Adverse influence on the performance of the management.

On the other hand, inadequate working capital situation is not good for the firm. Such a
situation may have following consequences:
1) The fixed asset may not be optimally used.
2) Firm growth may stagnate.
3) Interruptions in production schedule may occur ultimately resulting in
lowering of the profit of the firm.
4) The firm may not be able to take benefit of an opportunity.
5) Firm goodwill in the market is affected if it is not in a position to meet its
liabilities on time.

Thus taking in to consideration financial manager must establish:

a) A well defined working capital policy
b) A self-sufficient working capital management system.

IMT, GHAZIABAD 10
DIFFERENT TYPES OF WORKING CAPITAL POLICIES

Current
Assets
Conservative

Moderate

Aggressive

Sales Level

Above figure show three policies in working capital management.

In moderate policy value of current asset increases in proportion with sales level.

In conservative policy value of current asset increases more rapidly than sales level.
Such a policy tends to reduce the risk of shortage of working capital by increasing
the safety component of current asset. The conservative policy also reduces the risk
of nonpayment to liability.
In aggressive type of policy sales level increases more in percentage than increase in
current assets.

This type of aggressive policy has many implications.

a) The risk of insolvency of the firm increases as it maintains law liquidity.
b) The firm is expose to greater risk as it may not be able to face unexpected change in
market
c) Reduced investment in current asset will result in increase in profitability of the firm.

IMT, GHAZIABAD 11
Risk and Return in Working Capital

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

IMT, GHAZIABAD 12
The Risk Return Syndrome Can Be Summed Up As Follows:

When liquidity increases, the risk of insolvency is reduced, but profitability also reduced.
However when the liquidity is reduced, the profitability increases but the risk of
insolvency also increases. So profitability and risk move in the same direction.
Moreover, the different elements of current assets should also be appropriately balanced.
Each element and its position in the total working capital should be analyzed in the light
of its characteristics. For e.g. the total current assets may be sufficient to cover the current
liabilities but when the composition of current asset is analyzed, it may be found that its
is consisting mainly of the obsolete and slow moving stock. This stock may not provide
desired level of liquidity to pay off the current liabilities. Similarly, higher level of cash
and bank balance may provide liquidity but affect the profitability because keeping cash
and bank balance is not profitable use of the resources.

The effect of working capital changes on the liquidity risk depend on a number of factor
such as:
a) Stand-by sources: A firm with stand-by source of external financing is less exposed to
liquidity risk than the firm, which does not have such access, because the former can
tap these sources if it needs to cover the increasing current liabilities.
b) Economic conditions: Holding other factors constant, firms typically experience
larger changes in liquidity risk as a consequence of working capital change when the
economy is in recession than when in boom.
d) Future uncertainty: To the extent that future operations of the firm are predictable
and stable, the firm can survive with lower investment in working capital than could,
otherwise similar firms which have more uncertainty about the future operations.

IMT, GHAZIABAD 13
ELEMENTS OF WORKING CAPITAL

Working capital management is concerned with the problems that arise in attempting to
manage the current assets, current liabilities and the interrelationship that exists between
them. The major current assets are cash, marketable securities, accounts receivable and
inventory. The current liabilities are accounts payable, bills payable, bank overdraft and
outstanding expenses.

INVENTORY MANAGEMENT:

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the
cash resources of a business. Insufficient stocks can result in lost sales, delays for
customers etc.
The key is to know how quickly your overall stock is moving or, put another way, how
long each item of stock sit on shelves before being sold. Obviously, average stock-
holding periods will be influenced by the nature of the business.

Factors to be considered when determining optimum stock levels include:

• What are the projected sales of each product?

• How widely available are raw materials, components etc.?

• How long does it take for delivery by suppliers?

• Can you remove slow movers from your product range without

compromising best sellers?

It should be noted that stock sitting on shelves for long periods of time ties up money,
which is not working. For better stock control, the following may be considered:
• Review the effectiveness of existing purchasing and inventory systems.
• Know the stock turn for all major items of inventory.
• Apply tight controls to the significant few items and simplify controls for the
trivial many.

IMT, GHAZIABAD 14
 • Sell off outdated or slow moving merchandise - it gets more difficult to sell the
longer you keep it.
• Consider having part of your product outsource to another manufacturer rather
than make it yourself.
• Review your security procedures to ensure that no stock "is going out the back
door!"

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

ACCOUNT RECEIVABLE:
It is essential marketing tool, acting as a bridge for the movement of goods through
production and distribution stages to customers.

Firms grant trade credit for following reason

1. To protect its sales from competitors
2. To attract potential customers to buy its product at favorable term
3. Buyers requirement
4. Companies bargaining power
5. Relationship with dealers
6. Marketing tool
Receivable has three characteristics:
1. It involve an element of risk
2. It is based on economic value
3. It implies futurity.

IMT, GHAZIABAD 15
Receivable is a major component of current asset, granting credit and creating debtors
amount to blocking of the Firms funds thus time interval between the date of sales and
the date of payment has to be financed out of working capital.
A Firms investment in account receivable depends on
1. The volume of credit sales
2.Collection period
Therefore average investment in Accounts receivable is
Daily credit sales * Average collection period.
Credit policy ranges from credit to any one to no credit. If credit is given to any one then
there is chances of creating bad debt on other hand if credit is not given then sales will
reduce.
There are various costs and benefits attached with a credit policy.
Costs of Receivables
1. Costs of financing.
2.Administrative cost
3.Delinquency costs
4.Cost of default by customer
Benefit of Receivables
1. Increase in sales
2 Increase in profits
3 Extra profits

IMT, GHAZIABAD 16
CASH MANAGEMENT:

Financing of Current Assets:

Another important aspect of working capital management is to decide the pattern of
financing the current asset. Breaking down working capital needs into permanent
components over time provides a useful by-product in terms of financing choice.
Permanent component is predictable insofar as it is linked up to expected change in sale
or cost of goods sales over time, temporary components is also predictable in general as it
follows the same pattern every year. So two components need to be financed accordingly
for which the different sources of funds can be grouped as follows:
1.Long term sources: e.g. share capital, retained earning, debentures and long term
borrowings.
2.Short term sources: e.g. bank credits public deposit, commercial papers, factoring etc.
3.Transactionary sources: e.g. credit allowed by suppliers and outstanding labor and other
expenses.

There are different approaches to take this decision relating to financing mix of working
capital as follows:
1. Hedging approach: In this approach financing maturity should follow the cash flow
characteristics of the assets being financed. The general rule is that the length of the
finance should match with the life duration of assets. The financing mix as suggested
by the hedging approach is a desirable financing pattern. However, it may be noted
that the exact matching of maturity period of current assets and sources of finance is
always not possible because of uncertainty involved.
2. Conservative approach: In this approach all or most of the working capital needs are
met by long-term sources and thus the firm avoids the risk of uncertainty.
3.Aggerassive approach: In this approach the firm decides to finance a part of the
permanent working capital by short-term sources.

IMT, GHAZIABAD 17
Motives for holding cash:
Though cash is the most liquid asset, but it doesn’t earn any substantial return for the
business. But every firm maintains some cash balance because of following motives:
1. Transaction motive
2. Precautionary motive
3 3. Speculative motive
4 4. Compensation motive
Objective of cash management:
Following are the two main objective of the cash management
1.To provide the cash needed to meet the obligations: if the firm have sufficient cash in
hand, it will help firm in a) avoiding a chance of default. b) Availing the opportunities of
getting cash discounts by making early or prompt payments. c) Meeting unexpected cash
outflows without more problems.

2. Minimize the cash balance: Investment in idle cash balance is a dead investment and
has no earning. Therefore, whatever cash balance is maintained, the firm is foregoing
interest income on the balance.

Factors affecting the cash:

Various factoring which will determine the amount of cash balance to be kept by the firm
are
a) Cash cycle: the term cash cycle refers to the length of the time between the payment
for purchase of raw material and the receipts of the sales revenue
b) Cash inflow and cash outflows: every firm has to maintain cash balance because its
expected inflows and outflows are not always synchronized.
c) Cost of cash balance: another factor to be considered while determining the minimum
cash balance is the cost of maintaining excess cash or of meeting shortages of cash.
There is always an opportunity cost of maintaining excessive cash balance.
In addition to above factors there are some other considerations also affecting the need
for cash balance. They are uncertainties of a particular trade, staff required for cash
management etc which will have a bearing on determining the cash balance required by a
firm.
IMT, GHAZIABAD 18
MARKETABLE SECURITIES:

Management of Marketable securities is an integral part of investment of cash as this may

serve both the purposes of liquidity and cash provided choice of investment is made
correctly. As the working capital needs are fluctuating, it is possible to park excess funds
in some short-term securities, which can be liquidated which need for cash is left.

The selection of securities should be guided by three principles: -

(i) Safety- Return and risk go hand in hand. As the objective in this investment is
ensuring liquidity, minimum risk is the criterion of selection.
(ii) Maturity- Matching of maturity and forecasted cash needs is essential. Price of long-
term securities fluctuates more with change in interest rates and is therefore more
risky.
(iii) Marketability- It refers to the convenience, speed and cost at which a security can be
converted into cash. If the security can be sold quickly without loss of time and price
it is highly liquid or marketable.

Marketable Security Alternative: -

The choice of marketable securities is mainly limited to government treasury bill,

deposits with banks and inter-corporate deposits. Unit Trust of India and Commercial
papers of corporate are other attractive means of parking surplus funds, for companies
along with deposits with sister concerns or associate companies.

IMT, GHAZIABAD 19
ACCOUNTS PAYABLE:

Paying according to best terms is a critical component in maximizing the organization’s

purchasing profitability. Timely payments to suppliers, vendors and employees reduces
costs, relieves administrative burden and helps in better utilization of short term working
capital.
Payable management gives an effective control over the expenses. Tracking vendors,
processing payments and analyzing the vendor’s performances gives a clear picture of
cash flow and provides the level of payables processing needed for the business.

Payable management for an organization contributes to operational excellence by,

Optimizing the workforce with improved productivity.
Improve the cash flow and enhance vendor relations.
Achieve higher levels of accounting efficiency and accuracy.

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

IMT, GHAZIABAD 20
WORKING CAPITAL FINANCE
After determining the level of working capital, then comes the question of financing of
the same.
The source of finance for working capital may be categorized as—
(a) Trade Credit
(b) Bank Finance
(c) Accrued Expenses & Deferred Income
(d) Commercial Papers
Trade Credit – Trade credit refers to the credit that a customer gets from suppliers of
goods in the normal course of business. The buying firms do not have to pay cash
immediately for the purchase made. This deferral of payments is a short-term financing
called trade credit.
Bank Finance – Bank finance is the most commonly negotiated source of the working
capital finance. It can be availed in the forms of overdraft, cash credit, purchase/discount
of bills and loan. Banks are the largest providers of working capital finance to firms.
Each company’s working capital need is determined as per the norms. These norms are
based on the recommendations of the following committees –
• The Tandon Committee
• The Chore Committee
Accrued Expenses & Deferred Income – Accrued expenses represent a liability that a
firm has to pay for the services, which it has already received. For e.g. salaries & wages,
tax & interest.
Deferred income represents funds received by the firm for goods and services, which it
has agreed to supply in future. For e.g. advance payments made by the customers.
Accrued expenses and deferred income also provide some funds for financing working
capital.
Commercial Paper – Commercial paper is an important money market instrument for
raising short-term finances. The Reserve Bank of India introduced the commercial paper
scheme in the Indian money market in 1989. Commercial paper is a form of unsecured
promissory note issued by the firms to raise short-term funds.

IMT, GHAZIABAD 21
RATIOS

Ratios are relative figures reflecting the relation between variables. In simple words, a
ratio is an arithmetical relationship between two figures. They enable analyst to draw
conclusions regarding financial operations. The use of ratios as tool of financial analysis,
involves their comparisons, for a single ratio, like absolute figures, fails to reveal the true
position. It predicts strength and weakness of the firm in various areas as well as helps in
assessing corporate excellence, judging credit worthiness, forecasting bond ratings,
predicting bankruptcy and assessing market risk

Thus ratio basically represents the relationship between two groups of items taken either
from profit and loss account or from the balance sheet or both. In other words, the ratios
measure the relationship among the tangible factors affecting the performance and
profitability of the company.

TYPES OF RATIOS:
Various accounting ratios can be classified as follows:

Ratios

Traditional Classification Functional Classification Significance Ratio

Or Or Or
Statement Ratio Classification According to Test Ratio According
Importance
1) Balance sheet Ratios or 1) Liquidity Ratios 1) Primary Ratios
Position statement Ratio 2) Leverage Ratios 2) Secondary Ratio
3) Activity Ratios
2) Profit and Loss account Ratio 4) Profitability Ratios.
Or
Revenue/Income Statement
Ratio
3) composite/Mixed Ratio or
Inter-Statement Ratios

IMT, GHAZIABAD 22
LIQUIDITY RATIO

Liquidity mainly relates to the quick availability of cash. While managing the working
capital quick availability of cash against the blocked assets is need to be taken into
consideration. Cash is needed to pay the liabilities relating working capital such as
creditors and bank o/d .On the other hand this cash is collected through debtors or cash
sales. Thus various liquidity ratios give us the idea about how the current liabilities can
be covered by the current assets. These are short term blocking of funds and normally
don’t need a bigger amount of funds.

It is worthy to mention that in emergency to pay-off short term current liabilities, long
term debts can be used but those are rarely covered by the working capital analysis
because it is mainly deal with pay-off of liabilities by realization of current assets.

Current Ratio: This ratio states that how many times the current liabilities can be
covered by current assets. Whether the organization has short-term liquidity (solvency) to
cover it’s debt and how strong the company is in paying it’s current liability. Normally
2:1 is the ratio, which is considered satisfactory.

Quick Ratio: It is modified form of current ratio, which gives the comparison of
immediately available and required cash. It excludes the liabilities and assets, which are
accrued but not due; such as provisions. Thus it is wholly based on the “cash” liquidity
aspects.

IMT, GHAZIABAD 23

TURNOVER RATIO

Turnover is the total sales of the company i.e. the main source of the organization can
gain. Various turnover ratios are calculated to see the exact proportions of the sales to
various other items, which are related to sales. To build up the figure of the sales there
are many other items, which contributes to it. There are many factors, which are part and
parcel of working capital cycle, which creates the importance in working capital
management. Though the “sales” is the important aspect of any business “cost of sales”
blocking of funds into sales also gains important position in working capital
management.

Inventory Turnover Ratio: How the cost of production is blocked in the nature of
stock, lying in the go down is one of the important aspects. Huge nature of cost of
production and huge inventory built up in the godown can affect the liquidity adversely
and vice-a-versa. On the other hand shortage of stock cannot be beneficial to grab the
market demand profits. Thus inventory turnover ratio says about, how the cost of goods
sold is blocked in the stock.
Inventory Period: This is more useful form of inventory turnover ratio as it gives the
time period for which the funds are locked. Thus with comparison of inventory turnover
and period ratio we can say that the first gives us the amount blocked and the other says
how long it is blocked.

Debtor’s Turnover Ratio: Debtors turnover ratio is calculated to give an idea about how
the debtors can be covered by the total sales i.e. basically for how much time’s sales
realization is blocked in the debtors. As organization receives credit facility from
suppliers, it also allows credit period to the debtors for larger volume of sales. Though
the funds are blocked in Debtors or B/R this is one of the major marketing strategies to
increase the sales.
IMT, GHAZIABAD 24
Debtor’s Collection Period: In any business, whenever something is sold, the payment
has to be received from the other party. Now, Debtor Collection mean indicated is the
average number of days taken to receive the money from the other party. Low ratio
implies quick cash collection andless working capital required.
Creditors Turnover Ratio: These ratios say that how early you have to make the
payments. Basically these ratios are calculated to know the exact cash flow required at
the appropriate time. Say, on particular day creditors of Rs.’X’ has to be paid then it
should be considered that whether on that bank or cash account has sufficient balance or
any debtors or B/R are realizing on that day. Thus creditors turnover ratio is calculated by
dividing credit purchase by average creditors carried by the company i.e. how many
times the creditors cover the total purchases.

Creditors Payment Period: In any business, whenever something is purchased from

another party, then the party needs to be paid. Creditor Payment indicates the average
number of days within which other party is paid. High ratio is more credit period and less
working capital required. To find the average credit available by the suppliers can be
obtained, by dividing 365 to turnover ratio.

Working Capital Turnover Ratio: It is the relationship between turnover (sales) and
working capital. It highlights how effectively working capital is being used in terms of
the turnover it can help to generate. It enables to find the structure of working capital
cycle of the Organization. No ideal values, but higher the ratio stronger the position of
the working capital.

IMT, GHAZIABAD 25
Current Assets to Total Assets: Total Assets acquired by Finance Manager can be
applied by him in various ways such as expenses and assets. It can be divided into two
major aspects Current Assets and Fixed Assets. It should be worth while to observe that
how much of the portion of the total assets is occupied by the current assets, as current
assets are mainly involved in forming in working capital. Thus the ratio should not be so
large to ignore the application of the funds in fixed assets. Also care should be taken that
main investment of the organization should be in the operating items. Hence, the ratio of
current assets to total assets though depend upon industry to industry should not vary
largely.

Inventory Ratio: It states how much portion of current assets is blocked in current assets.
It is important from the view of quick realization of the current assets. Inventories can be
transformed into cash or debtors depending upon the sales. Thus inventory ratio helps in
working capital management as well as production life cycle, costing and management.

IMT, GHAZIABAD 26
PROFITABILITY RATIO

Profitability ratio reveals how good a business or a company is in terms of earnings. It

helps in assessing the adequacy of profits earned by the company and also to discover
whether profitability is increasing or decreasing. The profitability of the firm is net result
of large number of policies and decisions. The profitability ratios show the combined
effect of liquidity, asset management and debt management on operating results.
Profitability ratios are measured with reference to sales, capital employed, total assets
employed, shareholders funds etc.

Cash Profit Ratio: This ratio is very important from the point of view of liquidity and
working capital ratio. Cash profit gives all those expenses and incomes, which are
accrued due and receive. The portion of such profit to the sales is a cash profit ratio.
Higher the ratio higher will be the profit gaining position of the company, which gives a
liberty to the organization to use the liquid profit in another income generating operations
or projects. The difference between the cash profit and normal profit is that cash profit is
what is actually realized in the hands of the organization to be used for other purposes.

Return on Capital Employed: This ratio is not very important from working capital
management point of view but to obtain the funds for short term as well as long term
purposes, supplier of the firm will invariably ask of earning capacity of the organization.
Return on capital employed is the major indicator of earning capacity, which is compared
with market return and the investment decision are taken. How the organization is
managing to maintain the profit above the market level shows the success ratio as
compared to the other companies in the industry.

IMT, GHAZIABAD 27
OPERATING CYCLE

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

Cash

Debtors/BR Raw Material

Sales Work-in Progress

Finished Goods

IMT, GHAZIABAD 28
Thus the operating cycle of a firm consists of the time required for the completion of the
chronological sequence of the following:
. Procurement of raw materials and services.
. Conversion of raw materials into work-in-progress.
. Conversion of work-in-progress into finished goods.
. Sale of finished goods (cash or credit).
. Conversion of receivables into cash.

The segments of the operating cycle include raw material storage period, conversion
period, finished goods storage period and average collection period before getting back
cash along with profit. The total duration of all the segments mentioned above is known
as gross operating cycle period. When the average payment period of the company to its
suppliers is deducted from the gross operating cycle period the resultant period is called
the net operating cycle period or the operating cycle period.

IMT, GHAZIABAD 29
CHAPTER- III

Company Profile
3.1 Introduction

3.2 History

3.3 Group Companies

3.4 Brands

IMT, GHAZIABAD 30
 CHAPTER NO. 3

COMPANY PROFILE

Introduction

The company has completed 79 years. During this period the company has grown from a
small woollen mill to a leading global producer of woollen fabrics. The company is
engaged in many divisions like textile, ready-made & accessories, engineering files &
tools, denim, prophylactics and cosmetics.

Raymond group having businesses in Textiles, Readymade Garments, Engineering Files

& Tools, Prophylactics and Toiletries.

The group is the leader in textiles, apparel, & files & tools in India and enjoys a
pronounced position in the international market. Raymond belie, which has resulted in
path-breaking new products. Perceived as pioneer and innovator, Raymond ves in
Excellence, Quality and Leadership.

Raymond Textile is India's leading producer of worsted suiting

fabric with over 60% market share. With a capacity of 25 million
meters of wool & wool-blended fabrics, Raymond Textiles is the
world’s third largest integrated manufacturer. The company exports
it’s suiting to more than 50 countries including USA, Canada, Europe, Japan and the
Middle East. Over the years, Raymond Textile has developed strong in- house skills for
research & development Textile has been responsible for raising the standard of the
Indian textiles industry.

The Denim division has an installed capacity of 16 million meters

and produces high quality ring denims. The company currently ranks
among the top 3 producers in India. The products are exported to
over 30 countries in the world.

IMT, GHAZIABAD 31
 The Engineering Files & Tools division, J K Files & Tools, is the
world’s largest producer of steel files with 90% market share in
India and about 30% market share in the world.

The Designer Wear division, Be: is an exclusive pret-a-porter range

that houses designs by some of the finest Indian designers. Be:
offers an eclectic mix of formal, office and evening wear for men
and women, in western, ethnic and fusion styles with accessories.

The Aviation division, Million Air was launched in 1996 to provide

air charter services. Known for high quality and reliable services,
Million Air has a fleet of three helicopters and one executive jet

The company also diversified its business interests into cement and steel. In a
restructuring exercise, the company divested its cement business to Lafarge India for
Rs7.85bn and the steel business to German steel major, Thyssen-Krupp steel, for
Rs4.21bn.

With the divestment of its steel and cement businesses, the company has focussed on its
textile business. Raymond is further consolidating by merging its textile subsidiaries with
itself and is planning to expand the ready-made garments segment, which enjoys higher
growth rates as well as margins, through the inorganic route. After restructuring the
company's textile business's share including garments, worsted fabric and denim has gone
up to around 90%.

History
IMT, GHAZIABAD 32
Around the time the Singhania family was building, consolidating and expanding its
various businesses in Kanpur, one Mr. Wadia, was in a similar manner engaged in
fulfilling his dream: he set up a small woollen mill in the area around Thane creek, 40
kms away from Bombay. The Sassoons, a well-known industrialist family of Bombay,
who renamed it as The Raymond Woollen Mills, soon acquired this mill.

When the Singhanias were looking for new regions to establish their presence and new
fields to venture into, they concurred that textiles appeared to hold promise. A piece of
information that a woollen mill was available on the outskirts of Bombay clinched the
issue.

When the grandson of Lala Juggilal, Lala Kailashpat Singhania took over Raymond in
1944, the mill was primarily making cheap and coarse woollen blankets, and modest
quantities of low priced woollen fabrics.

The vision and foresight of Mr. Kailashpat Singhania helped greatly in establishing the
J.K. Group’s presence in the western region. Under his able stewardship, Raymond
embarked upon a gradual phase of technological upgradation and modernization
producing woollen fabrics of a far superior quality.

Under Mr. Gopalakrishna Singhania, the mill became a world-class factory and the
Raymond brand became synonymous with fine quality woollen fabrics. At Raymond,
quality did not rest on its laurels. When Dr. Vijayapat Singhania took over the reins of the
company in 1980, he injected fresh vigour into Raymond, transforming it into a modern,
industrial conglomerate. His son Mr. Gautam Hari Singhania, the present chairman and
managing director has been instrumental in restructuring the Group. With the divestment
of the Synthetics, Steel and Cement divisions he initiated, the Group has emerged
stronger with a better bottom line, more focused approach, become market oriented and
achieved a consolidated position.

IMT, GHAZIABAD 33
Today, the woollen mill by the creek has turned into a Rs. 1400 crores conglomerate and
is India’s leading producer of worsted suiting fabric with 60% market share. It is also the
largest exporter of worsted fabrics and readymade garments to 54 countries including
Australia, Canada, USA, the European Union and Japan. The Raymond group is also the
leader among readymades in India with a turnover of Rs. 2000 million with its three
brands – Park Avenue, Parx and Manzoni.

In its pursuit of excellence Raymond continues to achieve enhanced customer satisfaction

through ongoing innovation. And happily the growth graph continues to rise higher…and
higher.

THE GROUP COMPANIES OF RAYMOND ARE:

Raymond Ltd. is India’s leading producer of worsted suiting fabric with a 60% market
share.

Raymond Apparel Ltd. has three highly regarded menswear brands in its folio: Park
Avenue, Parx & Manzoni.

J.K. Ansell Ltd. is the manufacturer and marketer of KamaSutra brand of premium
condoms.

J.K. Helene Curtis Ltd. is the marketers of the Park Avenue and Premium brands of
men’s toiletries.

Color Plus Fashions Pvt. Ltd. Established in 1994 Color plus is one of the leading
domestic brands for premium casual wear in the country.

IMT, GHAZIABAD 34
 THE BRANDS OF RAYMOND GROUP ARE

The largest and most respected textile brand in India for 'The
Complete Man' addressing the innate need of men to look good and
at the same time possess strength of character.

Formal readymade garments & accessories for men it has recently

bagged the "Most Admired Brand" and "Most Admired Trouser
Brand" awards.

The semi formal and casual range of cottons, blends and denim wear
catering to the smart, fashionable and comfortable clothing segment.

The luxury range of men’s shirts and ties acknowledged for its high
quality and international styling.

An exclusive prêt-a-porter line of ready-to-wear designer clothing for

women and men in western, ethnic and fusion styles.

The premium condom brand with the unique for the pleasure of making
love positioning in textured & flavored variants.

The range of cosmetics & toiletries including after-

shaves, shampoos, cologne, shaving cream, soaps
deodorants, room fresheners

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

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

IMT, GHAZIABAD 35
GROWTH
Today, more than ever, companies depend on growth to build a strong market value. But,
as most veteran executives know, growth is a double-edged sword. Creating growth is a
challenge. Managing growth is a challenge. Raymond is a leading player in the textile
segment with a presence in several segments - worsted textiles, denim and apparels. A
strong brand and significant cash surplus are the key advantages that would enable the
company to pursue both organic and inorganic growth opportunities. The company is
well positioned to explore multitude of growth opportunities available to the sector. The
sales of the textile division, which contributes substantially to the company’s total sales
and profitability, are of seasonal nature. The revenue of the textile division registered an
impressive growth of 46 per cent

Growth in terms of Sales revenue

180000
160000
Rupees in Lakhs

140000
120000
100000
Sales and
80000
Other
60000 Income
40000
20000
0
1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

Years

IMT, GHAZIABAD 36
 Growth in terms of Profit
60000
Rupees in lakhs
50000
Gross
40000 Profit
before int.
30000 and dep.
20000
NPAT

10000

2001-2002
1999-2000

2000-2001

2002-2003

2003-2004
Years

IMT, GHAZIABAD 37
 O R G A N I S A

M A N A G I N G D I R

C O R PC OO RR AP TO E R F A I TN EA

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

P R OM DA P UR E CK R ET S I T O OI N N N G N E L

N O ER AT WSH T E Z S Z SO O O T N U N EZ T E O H N Z E O N E

IMT, GHAZIABAD 38
CHAPTER- IV

Analysis and Interpretation of Data

IMT, GHAZIABAD 39
 CHAPTER NO. 4
ANALYSIS AND INTERPRETATION OF DATA

Calculation of Working Capital

Introduction:
Working Capital refers to the capital required to meet day to day operations. It is
calculated by deducting current liabilities from current assets.

(Rs.In lakhs)
Particulars 2008 2009 2010
Current Assets, Loans and
Advances:
-Inventories 29490.66 27734.83 25883.75
-Sundry Debtors 24614.52 29070.82 32744.55
-Cash and Bank Balances 2675.92 1494.35 3442.47
-Other Current Assets 1887.79 2516.56 2712.77
-Loans and Advances 12122.14 12863.68 12193.74
Gross Working Capital (a) 70791.03 73680.24 76977.28
Current Liabilities and
Provisions:
-Current Liabilities 18037.24 20217.82 19774.42
-Provisions 8373.15 6839.76 6513.40
TOTAL (b) 26410.39 27057.58 26287.82
Net Working Capital (a-b) 44380.64 46622.66 50689.46
Source: Balance Sheet

IMT, GHAZIABAD 40
From the above table, taking individually, the company has favorable working capital.
However, comparing the given years it is seen that there is increase in stock year by year
also decrease in debtors. This may be due to inability to sell the products. This means that
the company is purchasing the material but not able to sell in the market and as such the
sales is reducing and so are the debtors and also the stock is increasing because of
increased purchase and reduced sales. Thus, many a times it may happened that liquidity
position are favorable but in fact, they may not be this due to increased stock. Cash is
fluctuating over the period of three years. Other current assets are decreasing. Loans and
advances are favorably stable along the period of three years.

Current liabilities are decreasing; as such, the company has enough cash reserves to pay-
off the creditors in stipulated time. This may be due to the trust on the suppliers about the
material quality. Provisions on other hand were stable in 2008 and 2009 but sudden shoot
up in the year 2010. This may be due to increase in proposed dividend and tax for the
same.

IMT, GHAZIABAD 41
Calculation of Operating Cycle
Introduction:
Operating cycle is the time duration starting from the procurement of goods or raw
materials and ending with the sales realization.
(Rs. In Lakhs)

Particulars 2008 2009 2010

A. Raw Material Storage

Period

-Annual consumption Of Raw Material 28296.37 21079.39 20755.09

-Avg. daily consumption of RM 77.52 57.75 56.86

(assume 365 days)

-Avg. stock of RM 4264.37 2956.36 2593.96

RM Storage Period (in 55 51 46

days)

B. Conversion Period

-Annual Cost of Production 72973.38 62377.10 60654.02

-Avg. daily COP 199.93 170.90 166.18

(assume 365 days)

IMT, GHAZIABAD 42
 -Avg. stock of WIP 7622.03 7598.65 7560.69

Conversion Period (in 38 44 46

days)

C. Finished Goods
Storage Period

-Annual Cost of Sales 100819.29 92401.36 90302.23

-Avg. daily COS. (assume 365 days) 276.22 253.15 247.40

-Avg. stock of FG 12553.21 12307.76 10700.63

FG Storage Period (in 45 49 43

days)

D. Avg. Collection Period

-Annual Credit Sales 94431.64 85469.15 79352.84

-Avg. daily Credit (assume 365 days) 258.72 234.16 217.41

IMT, GHAZIABAD 43
 -Avg. Debtors 26842.67 30907.68 30405.39

Avg. Collection Period (in104 132 140

days)

E. Avg. Payment Period

-Annual Credit Purchases 29712.85 23982.01 21055.46

-Avg. daily Purchases 81.41 65.70 57.69

-Avg. Creditors 2696.60 2416.38 2235.12

Avg. Payment Period (in

33 37 39
days)

Operating Cycle (in days)209 239 236

A+B+C+D-E

Source: Balance sheet & Income & Expenditure Account

Raw Material Storage Period: To calculate the Raw Material. storage period on an
average divide the average stock maintain by the organization by daily consumption,
resulting in giving the blocking period. From the observation of the figures it can be seen
that increasing consumption of Raw Material. is leading to increasing requirement of
IMT, GHAZIABAD 44
higher level of stock, surely affecting the Raw Material storage period. Thus the Raw
Material storage period is increasing from 46 days in 2009 up to 55 days in 2010.This
shows that more funds are blocked in Raw Material. for 9 days, though increasing
production demands more flow of Raw Material

Conversion Period: The observation is showing increasing daily Cost of Production

which is the obvious result of increasing production pattern of the organization. The
organization has successfully maintained the stock level of Work in Progress with a very
little variation. The average daily Cost of Production is increasing from Rs. 166 lakhs to
Rs. 200 lakhs. Over the period of three years maintaining the same level of Work in
Progress is reducing the conversion period from 46 days to 38 days. It can be said that
increased Raw Material storage period of 9 days is very much compensated by the
conversion period which is reduced by 12 days.

Finished Goods Storage Period: It is mainly dependent on sales trend of the company.
Company is constantly showing increasing turnover and the figures can be taken as
indicator of the same from the operating cycle point of view. Though the average daily
Cost of Sales and average stock of Finished Goods figures are increasing, no specific
trend can be observed in their proportion which can be easily pointed out by Finished
Goods storage period which is initially 43 days in 2008 increased to 49 days in 2009 and
again came down to 45 days in 2010. The lesser period of Finished Goods stock gives
favorable view towards organization’s operating cycle management.

 Average Collection Period: It is cumulative figure effect of company’s credit policy,

Debtors/BR maintenance discount policy and other bad debts. Naturally increasing sales

IMT, GHAZIABAD 45
will show increased average daily credit which can be observed in the given figures i.e.
Rs. 217 lakhs in 2008 to Rs.259 lakhs in 2010. But the average debtors maintained by the
organization are showing slight increase in 2008 to 2009 and significant decrease in
2010. The decrease is about Rs. 1000 lakhs, which is heavily resulting into reduced
collection period. Coming down of collection period from 140 days to 104 days is
showing the strong receivable policies of the company. These are allowing more funds
(around 36 days (140-104) i.e. Rs. 259 lakhs) at the disposal to the organization.

Average Payment Period: Though the company is allowing enough credit periods to its
debtors it is getting even lesser period from its creditors. Thus, decreasing payment
period, calling for more liquidity or cash, parallelly compensates the reducing collection
period. The average payment period is reduced to 33 days from 39 days with increasing
average daily purchases from Rs.58 lakhs to Rs.81 lakhs over the period of three years.
Increasing purchases are the result of the increased turnover of the company. It can be
said that reducing payment period is observed due to changing policies of the company.

Operating Cycle Lock-in-Period: This is the jumbled effect of R.M storage period,
Conversion period, F.G storage period, and Collection period reduced by Average
payment period to creditors. Slight increase from 2008 to 2009 and significant reduction
in 2010 is the main observation of total operating cycle. The whole operating cycle was
of 236 days which increased by just 3 days (239 days) in 2009 and came down to 209
days in 2010, showing the favorable working capital position in comparison of earlier
two years.

IMT, GHAZIABAD 46
 Calculations of Financial ratios:
Introduction:
Ratios are used as tool for financial analysis. They measure the relationship among the
tangible factors affecting the performance and profitability of the company.
Ratio Formula Ratio used for Financial
Year ended
2010 2009 2008
Liquidity
Ratios:

Current Ratio Current Assets, Loans and Advances 3.13 2.72 2.93
Current Liabilities and Provisions

Quick Ratio Liquid Assets

Current Liabilities and Bank O/D 1.81 1.68 1.93
Activity
Ratios:

Inventory COGS
Turnover Average Inventory 2.80 2.60 2.90
Ratio (times)

Inventory 365
Period (days) Inventory Turnover Ratio 130 140 126

Debtors
Turnover Net Sales 3.52 2.77 2.61
Ratio (times) Avg.Debtors
Debtors
Collection 365 104 132 140
Period Debtors Turnover Ratio
(days)

IMT, GHAZIABAD 47
 Creditors 11.02 9.92 9.42
Turnover Purchases
Ratio (times) Avg.Creditors

Creditors 365 33 37 39
Payment Creditors Turnover Ratio
Period (days)

Working Net Sales

Capital Net Working Capital 2.24 1.94 1.66
Turnover
Ratio

Sales to Sales 0.63 0.61 0.57

Capital Capital Employed
Employed
Ratio

Current Current Assets 62.70 64.47 66.91

Assets to Total Assets % % %
Total Assets

Inventory Inventory 33.63 37.64 41.65

Ratio Current Assets % % %

Debt to Debt 45.44 50.44 59.32

Equity Ratio Shareholders Equity % % %

Profitability
Ratios:
IMT, GHAZIABAD 48
 Cash Profit Cash Profit *100 22.93 19.05 17.46
Ratio Sales % % %

Return on Profit before int, dep.& tax *100 15.96 13.35 11.73
Capital Capital Employed % % %
Employed
Source: Balance Sheet & Income & Expenditure Account

NOTES:
1.Cost of goods sold = increase in finished and process stock + material cost +
manufacturing and operating costs + employment cost (85%) + selling related
administrative and general expenses.
2.Creditors

(Rs.In lakhs)
Particulars 2010 2009 2008 2007
Raw materials,
Merchanting 2898.47 2494.53 2338.22 2135.02
goods

IMT, GHAZIABAD 49
Ratio Analysis

It is widely used tool of financial analysis. It is defined as the systematic use of ratio to
interpret the financial statements so that the strengths and weaknesses of the
firm as well as its historical performance and the current financial conditions
can be determined. The rationale of ratio analysis lies in the fact that it makes
related information comparable. Comparison with related facts is, therefore,
the basis of ratio analysis. Analysis of financial statements is of interest to
lenders (short-term as well as long-term), investors, security analysts,
managers and others. If properly analyzed and interpreted, financial
statements can provide valuable insights into a firm’s performance.

LIQUIDITY RATIO

Current Ratio: On the observation and review of current ratio it can be analyzed that the
company is enough strong to take care of it’s current short-term liabilities. Quite higher
than normally accepted ratios gives the short-term solvency to the company. Similarly the
ratio has gone upto 3.13 in 2010 as compared to 2.93 in 2008 which shows the growing
strong position of the working capital management.

Quick Ratio: There is not any significant variation in the quick ratio, which states that
though not very adverse, the Finance Management has not taken proper care of quick
liquidity factor. The ratio over the three years is not continuously fluctuating and a sort of
steadiness can be observed. But it should be noted that it has not crossed the 2:1 criteria.

TURNOVER RATIO

Inventory Turnover Ratio:

The observation shows that inventory turnover ratio results as 2.9 times in 2008 reduced
to 2.6 times in 2010. It can be said that the company is not following any particular trend
or policy to maintain the inventory and the decisions of maintaining the stock of finished
goods is taken by current market situation and demand and not by any particular policy.

IMT, GHAZIABAD 50
Debtor’s Turnover Ratio:
Dividing 365 days by debtor’s turnover ratio gives average credit period allowed by the
company. This enlightens credit policy, sales structure (cash sales-credit sales) of the
organization. Increasing credit period can lead to chances of bad debts. So it should be
reviewed and controlled properly.
Debtors’ Turnover Ratio is showing smooth increase i.e. 2.61 in 2008, 2.77 in 2009 and
3.52 in 2010, which is quite good and steady. The main reason behind it is increasing
sales of the company and thus though the sales are increasing there is no major change in
the debtors structure maintained by the company. Increasing debtors turnover ratio
naturally will lead to decreasing credit period allowed to the customers; which is going
down from 140 days to 104 days; which is quite good from the liquidity point of view.
On the contrary company could have increased the sales by maintaining average credit or
allowed at the same level.

Creditors Turnover Ratio:

There is continuous increasing trend in the creditors turnover i.e. it is moved up from
9.42 in 2008 to 11.02 in 2010. There may be various reasons for increase in turnover ratio
mainly increase in purchases or decrease in average creditors. Due to increased
production level, higher purchase of material can be main reason for increase in creditors
turnover. So the company is very well in the position to maintain its credit worthiness in
the market.

Creditors Payment Period:

Creditors payment period is inversely related to creditors turnover ratio, average credit
period is going down from 39 days to 33 days over the span of three years. Though the
first look on this ratio gives the adverse impression due to decreasing credit period it can
be observed that this is not because of reduction of credit facility but mainly because of
increase in purchases.

IMT, GHAZIABAD 51
Working Capital Turnover Ratio: It is the relationship between turnover (sales) and
working capital. It highlights how effectively working capital is being used in terms of
the turnover it can help to generate. It enables to find the structure of working capital
cycle of the Organization. No ideal values, but higher the ratio stronger the position of
the working capital.
Current Asset to Total Assets: The ratio of 67% in 2008, 65% in 2009, and 63% in 2010
indicates a small decrease, which is not so significant and can be said that company has
properly maintained its current assets to total assets ratio over the period. As Raymond is
mainly a manufacturing company, investment on an average of 65% in current assets is
very much satisfactory as the major items of funds invested cover the accounts like
debtors, cash and stock.
Inventory Ratio: A decreasing trend can be observed in holding which is 41.65%,
37.64%, and 33.63% over the period starting from 2008 to 2010. There may be various
reasons including management policy, production policy, demand in the market, or
increase in other current assets like cash and debtors. We can say that reducing inventory
component would lead to increasing liquidity of current assets.

PROFITABILITY RATIO

Cash Profit Ratio: The ratios observed are as follows:

2008 - 17.46% 2009 - 14.55% 2010 - 22.93%

A sudden increase can be spotted in 2010 from 14.55% to 22.93%, which is almost 57%
from the earlier year. The reasons behind the same may be cash realization, change in
credit policy of the company or credit policy of the customer or suppliers, sudden
increase in cash sales.

Return on Capital Employed: Smooth increase can be observed in three years i.e.
11.73%, 13.35%, and 15.96%. Therefore positively can be said that the company is doing
well and in earning the profit with increasing trend. Though the comparison is necessary
with the industry return on capital employed 15.96% return is quite satisfactory supported
by increasing trend enables to draw positive attitude towards company earning capacity.

IMT, GHAZIABAD 52
 ELEMENTS OF WORKING CAPITAL MANAGEMENT

INVENTORY MANAGEMENT:

The inventory of the company includes the following:

♦ Raw material
♦ Work-in-Progress
♦ Stores and Spares
♦ Finished goods

The table below gives a brief description of all the types of inventory, the components included,
the valuation methods followed and other relevant details:

Particulars Raw Material Work-in-Progress Finished Goods Stores

and Spares

Wool (Australia) - Fabric Oils,

(fine micron, coarse) Lubricants
Polyester (Reliance Ltd.) etc.

Components Viscose (Locally)

Yarn (RSM)(Rajasthan)
Camel hair (Locally)
Soya bean fiber (Locally)
Fine micron-July and Wedding and festive

At its peak stored for the entire year Seasons.

stable-April-August
Dec-Jan
Valuation Specific Identification Weighted Average Weighted Average Weighted
Method Cost or market value Average
Which ever is less.
Value as in 14 68-70 110 8-9
May 2010 (in accordance with AS-2
(Rs. Crores) including Excise duty)
Production and Planning Production and Production and Planning -

Managed by Dept. Planning dept. Dept., Warehousing dept

and Marketing dept.

IMT, GHAZIABAD 53
RAW MATERIAL:

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

WORK-IN-PROGRESS:

The in process inventory for the company is fairly stable throughout the year at Rs.68-70 crores
with a minor fluctuation of around Rs.2-3 crores. This is mainly as the following mentioned factors
are more or less constant throughout the year:
♦ Machine efficiency
♦ Loading
♦ Flow

IMT, GHAZIABAD 54
FINISHED GOODS:

The finished goods inventory at the company is very volatile. The production is more or
less in stock during the period April – August and starts depleting somewhere in the
months of September / October, it again starts picking up in the months of December /
January (which is the peak). Exports are more or less constant, though there the
predominant exports are in the months of April – July.

The debtors constitute the major portion of Inventory. As the finished goods and
inventory vary inversely, i.e. when the inventory is at its peak, the debtors are at their
lowest and vice versa. Thus the finished goods inventory levels and debtors are more or
less constant.

ACCOUNT RECEIVABLE:

In Raymond Ltd. the goods are sold through the following distribution channel: -
Dealer

Wholesaler, retailer, franchisees

In order to gain more profit or to keep profit within the company it has 300 own retail
shops. The company is very speculative about appointing its dealers.

To appoint new dealers it is taking following precautions

1. Worthiness of dealers is checked by the Raymond and also conformed from the agent
of that particular area.
2. It will not appoint two dealers in same area, which will hamper the market of each
other .if necessary it will appoint new dealers with proper market survey
3. Amount of credit is decided by company.

If credit is given to new dealers then there is a risk of bad debts if he is not able to make
the payment.

IMT, GHAZIABAD 55
Raymond takes security deposit of 2% of net sales of previous year sales
As most of the sales are on credit so it is necessary to manage the collection properly
So payment is collected through:
1.Direct payment
2.Collection of bills

The company it is not allowing any discount on early payment

Direct payment is collected through check or Cash Management Service (CMS). 50% of
collection is through CMS, which reduces delay in collection.
In collection of bill Raymond send bill to dealers, when dealers accept these Bills, the
Banks will discount them.
Bank discounts the bill in two ways:
1.with recourse
2.without recourse
In with recourse system company is giving guarantee that if dealer is not paying bill
then company will pay it, which is secure hence bank will not check dealer worthiness it
will just check signature. In this way Raymond maintains good relations with bank as
well as dealers.
Factoring is done with HSBC, UTI, Kotak Mahindra, at the rate of 6.25% for 90 days
bill.

In without recourse system bank will check the worthiness of dealer because Raymond
is not going to pay the bill, but in case of any default of payment it will help bank by
stopping the delivery of the goods to the customer. This is not true for all dealers, if the
company feels that the dealer is worthy then it will allow supply of goods to default
dealer.
Channel financing is done through Centuring financing, ABN Amro HSBC, ICC bank
In this rate is 10-12% depending on bank and worthiness of dealer.
Normally 16 days are allowed for collecting money through check or demand draft, while
10 days are allowed for bills and Cash Management Service.

The credit period allowed for wholesaler, franchisee, retailers are as follows
IMT, GHAZIABAD 56
 Wholesaler 90 days
Franchisee 60 days
Retailers 45 days

Due to credit policy Raymond claims that they do not have any bad debt since long year.
In case any dealer made the bad debt then in that case the commission of agent is held
and the amount of bad debt is recovered from that commission
The commission given to the agent varies from 2.5-3.5% depending on quality of
product. For a particular area there is only one agent and the amount of his commission is
in crores of Rupees, hence the company can say that they will recover the bad debt.

The company also gives free bags, Air conditioner, Generator for franchisee in order to
make payment properly.

CASH MANAGEMENT:

Raymond is cash rich company. They are using conservative policy for working capital
management in order to not to loose the sales. In case of booming period of sales like
marriage season, Diwali, they require more working capital before two month of
booming period of sales.
The company does not have debt so even if they follow conservative approach they are
managing to have less reduction in profit due to liquidity by investing it in to short term
investment like mutual funds for monthly quarterly or semiannually basis. They also
manage the liquidity at time of requirement by investing it in to different period. Kotak
Mahindra and DSP Merrill Lynch are the advisers of Raymond. They also invest in
Chartered Bank on daily basis.
Their average rate of return on this investment is 5-6%. Also no other investment gives
more rate of return than this because bank interest rates are low.

ACCOUNTS PAYABLE:

IMT, GHAZIABAD 57
The payment section in the Accounts department in the company makes payment to the
20 departments of the company and some part of management expenditure. They also
maintain the records of all payment receipts of the company’s registered office at
Ratnagiri.

The Government and other payments are made through the State Bank of India and
Bank of India. Major payments are made through UTI Bank, Standard Chartered
Bank, HSBC because only these banks gives the facility of free cheques printed with the
name of Raymond’s while other banks charge for the same.

At Raymond Ltd. the modes of payment differ according to the amount, which is shown
in the following table---
Amount in Rs. Mode of payment
0-1000 Petty cash
1000-20000 Cash / Cheque
Above 20000 Cheque

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

IMT, GHAZIABAD 58
CHAPTER- V

Conclusions and Suggestions

5.1 Conclusion

5.2 Suggestions

IMT, GHAZIABAD 59
 CHAPTER NO 5

CONCLUSIONS AND SUGGESSTIONS

CONCLUSIONS

General Conclusions:

• Despite the difficult conditions in the international market the company continued to
be on the growth path, both in terms of volume and revenue.

• Raymond shops network, already representing largest retailing space under any single
brand crossed the 300 mark(20 overseas) reduces the commission paid to dealers,
agents etc thereby increasing the profit within the company.

Specific Conclusions:

• Though the consumption of Raw Material, cost of production and cost of sales has
increased in 2010, net working capital is decreased by 30 days due to decrease in
collection period. This shows the improvement in the collection policies of the
company which includes discounting of channel financing and aggressive collection
policy.

• The operating cycle Lock – In –Period came down to 209 days in 2010 compared to
236 days in 2009 and 239 days in 2008, which shows that the working capital
position of the company is favorable as compared to the earlier 2 years.

IMT, GHAZIABAD 60
SUGGESTIONS

General Suggestions:

• The company has to take steps to counter the rising input cost and domestic
competition through cost reduction, rationalization of products and distribution
channels, judicious inventory management and research and development.

• As China has become a part of World Trade Organisation, which can hamper the
Indian Textile market, the company has to leverage a strong brand in the international
market.

• It is seen that as the inventory carrying cost is reducing because of the falling interest
rates, the company may stock more if desired.

Specific Suggestions:

• The Raw Material storage period has increased from 46 days in 2008 upto 55 days in
2010,which shows that more funds are blocked in Raw Materials for 9 days though
increasing production demands more flow of Raw Material.Using modern production
techniques like ‘Just In Time’ approach will reduce the Raw Material storage period
and increase the liquidity or cash in hand.

• The company can adopt the aggressive approach to finance current assets. In this
approach the firm finances a part of its permanent current assets with short term
financing. This is more risky but may add to the return on assets.

IMT, GHAZIABAD 61
 ANNEXURES
ANNEXURE NO. 01
BALANCE SHEET AS ON 31st MARCH

Particulars 2010 2009 2008

Sources of Funds:
Shareholders’ Funds
Share Capital 6138.08 6138.08 6138.08
Reserves & Surplus 98717.37 89297.33 83388.27
104855.45 95435.41 89526.35
Loan Funds
Secured Loans 22928.24 27179.69 14243.87
Unsecured Loans 24722.05 20960.20 38864.68
47650.29 48139.89 53108.55
Deferred Tax Liability 5701.71 4912.83 4392.57
TOTAL 158207.45 148488.13 147027.47
Application of Funds:
Fixed Assets
Gross Block 97952.73 90986.31 82238.59
Less: Depreciation 57309.49 51496.69 47096.93
Net Block 40643.24 39489.62 35141.66
Capital WIP 1478.85 1112.25 2146.68
Technical Knowhow --- --- 141.76
42122.09 40601.87 37430.10
Investments 71586.85 61231.64 58765.84
Current Assets, Loans & Advances
Inventories 29490.66 27734.83 25883.75
Sundry Debtors 24614.52 29070.82 32744.55
Cash & Bank Bal. 2675.92 1494.35 3442.47
Other Current Assets 1887.79 2516.56 2712.77
IMT, GHAZIABAD 62
 Loans & Advances 12122.14 12863.68 12193.74
70791.03 73680.24 76977.28
Less:
Current liabilities & Provisions
Current Liabilities 18037.24 20217.82 19774.42
Provisions 8373.15 6839.76 6513.40
26410.39 27057.58 26287.82
Net Current Assets 44380.64 46622.66 50689.46
Miscellaneous Expenditure to the 117.87 31.96 142.07
extent not written off or adjusted
TOTAL 158207.45 148488.13 147027.47

ANNEXURE NO. 02

IMT, GHAZIABAD 63
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH

Particulars 2010 2009 2008

Income
Sales Services & Export Incentives 102393.56 93327.40 97512.31
Other Income 14459.52 8673.99 9167.06
116853.08 102001.39 106679.37
Expenditure
Material Costs 31134.16 23926.31 22895.67
Manufacturing & Operating Cost 22932.10 21355.82 20428.80
Increase/Decrease in Finished & (417.46) (298.98) 3307.40
processed stock
Excise Duties --- --- 10667.62
Employment Costs 18042.16 16803.66 16667.38
Administrative, Selling & General
Expenses 18120.12 17286.04 16645.66
Finance Charges 2308.94 3871.85 5993.36
Depreciation & Amortisation 6337.85 5810.64 5260.80
Miscellaneous Expenditure written off 82.44 127.03 151.66
98540.31 88882.37 102018.35
Profit for the year before exceptional
items 18312.77 13119.02 4661.02
Add/less: Exceptional items 345.65 194.59 (214.74)
Profit for the year before tax 18658.42 13313.61 4446.28
Provision for income tax
Current tax 4660.00 3600.00 2200.00
Deferred tax 788.88 520.26 479.32
Provision for Wealth tax 26.00 50.00 18.00
Profit for the year after tax 13183.54 9143.35 1748.96
Add/Less: Prior period Adjustments(net) (146.98) (117.87) (250.75)
Excess provision for tax written back 192.38 -- 698.43

IMT, GHAZIABAD 64
Balance brought forward 2974.74 4140.68 2188.07
Balance available for Appropriation 16203.68 13166.16 4384.71
Appropriation
Debenture Redemption Reserve 250.00 375.00 80.00
General Reserve 6000.00 6700.00 4016.69
Dividend paid including tax thereon 0.41 0.38 ---
Proposed Dividend 3375.95 2762.14 2762.14
Tax on Proposed Dividend 432.54 353.90 --
10058.90 10191.42 6858.83
Balance carried to Balance Sheet 6144.78 2974.74 4140.68

IMT, GHAZIABAD 65
 BIBLIOGRAPHY

BOOKS:

Khan M. Y. & Jain P. K., ‘Financial Management (Text & Problems)’, Tata
McGraw-Hill Publishing Co. Ltd., New Delhi, Third Edition.

Chandra Prasanna, ‘Financial Management (Theory & Practice)’, Tata

McGraw-Hill Publishing Co. Ltd., New Delhi, Fifth Edition.

Rustagi R. P., ‘Financial Management (Theory, Concepts and Problems)’,

Galgotia Publishing Co., New Delhi, Second Revised Edition.

Bodhanwala R. J., ‘Taxmann’s Learning Financial Management using

Financial Modelling’, Taxmann Allied Services Pvt. Ltd., New Delhi, July 2003
Edition.

Pandey I. M., ‘Financial Management’, Vikas Publishing House Pvt. Ltd., New
Delhi, Eighth Edition.

Annual Reports, Raymond Ltd., 2008 to 2010.

WEBSITES:

www.raymondindia.com

www.indiainfoline.com

www.managementor.com

www.kjmc.com

www.icicidirect.com

IMT, GHAZIABAD 66