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2
ASSIGN
MENT
ON
WORKI
NG
CAPITA
LMANA
GEMEN
T
2010-
11
Working
Capital
Managem
ent of
DLF
SUBBMITED BY:-
VIVEK KUMAR
GUPTA; ROLL
NO: 106
SUBMIT
TED
TO :-
CHAND
TANDON
3
TABLE
OF
CONTEN
T
Pg no.
➢
Company
Profile3
➢
Working
Capital
Management
4
•
Meaning
•
Factors
Affecting
working
capital
•
Working
capital cycle
➢
Working
capital
management
6
➢
Kinds of
Working
capital8
➢
Inventory
management
at Dlf 13
4
➢
Methods
used for
inventory
control15
➢
Cash
management
at dlf 15
➢
Receivable
management
at dlf 16
➢
Key working
capital
ratios17
➢
Interpretatio
n of ratios19
➢
Calculation
of working
capital24
•
Current asset
holding
period
•

Ratio to sales
•
Ratio to fixed
investment
WORKIN
G
CAPITAL
MANAG
EMENT
For
5
DELHI
LAND
AND
FINANC
E(DLF)
DLF Limited
or DLF (Delhi
Land and
Finance) is the
India'sbiggestr
eal estate
developerbased
in New Delhi,
India. The
DLFGroup
was founded
by
Raghuvendra
Singh in 1946.
DLF
developedresid
ential colonies
in Delhi such
as Shivaji Park
( which
wasactually its
first one),
Rajouri
Garden,
Krishna Nagar,
SouthExtensio
n, Greater
Kailash,
Kailash
Colony and
Hauz Khas.
In1957, with
the passage of
Delhi
Development
Act, the
localgovernme
nt assumed
control of real
estate
development in
Delhiand
banned private
real estate
developers.As
a result DLF
began
acquiring land
at relatively
low cost
outsidethe area
controlled by
the Delhi
Development
Authority, in
thedistrict of
Gurgaon
, in the
adjacent state
of Haryana. In
the mid-1970s,
the company
started
developing
DLF City
project
atGurgaon. Its
upcomingplani
ncludehotels,in
frastructureand
special
economic
zones- related
development
projects.
•
In this report
I have
highlighted
the (working
capital manag
ement of DLF)
, focusing on
different
components
of working
capital like,
cash
management,
inventoryma
nagement etc.
Various
necessary
ratios have
been
6 calculated in
order to
analyze the
financial
stability of
thecompany.
•
Thereafter the
working
capital
requirement of
overall DLF
hasbeen
calculated.
After that
analysis of
working
capital
hasbeen done.
WORKING
CAPITAL
MANAGEM
ENT
(WORKING
CAPITAL
(DEFINITION
)
Working
capital refers
to the funds
invested in
current assets
i.e.sundry
debtors,
inventories,
cash & bank
balance and
other
currentassets.
In other
words, the
fund requires
supporting day
to
dayoperations
such as
purchase of
raw materials,
payments of
wagesand
defraying other
expenses for
operations
FACTORS
AFFECTING
WORKING
CAPITAL
REQUIREME
NTSNature of
business
: The nature of
business
influences to a
greatextent the
amount of
working
capital to be
required to
run
thebusiness.
Size of
business
: Large
business
requires large
amount
of working
capital than a
small
business
where
operations
arerelatively
less, though
they engaged
in the same
type of
businessoperat
ions.
7
Production
policy
: The need
for working
capital will
varyaccording
to production
plans.
Operating
efficiency
: Optimum
utilization of
resources
atminimum
costs as a
result of which
profitability
increases. It
helpsin
increasing
generation of
internal funds
which reduces
thepressure on
working
capital.
Credit policy
: The credit
policy of the
firm also
determines
theworking
capital
requirement.
Supply of raw
materials
: If supply of
raw materials
is regularthen
there is no
necessary to
maintain a
huge level of
inventory &no
blocking of
working
capital
unnecessarily.
Market
Conditions:
Working
Capital
requirements
are
alsoaffected
by market
conditions like
degree of
competition.
Condition of
supply:
 The
inventory of
raw materials,
sparesand
stores depends
on the
conditions of
supply.
Dividend
Policy:
Dividend
policies affect
Working
Capital.
Growth and
Expansion:
Growth and
expansion of
a firmrequires
adequate
working
capital.
Abnormal
Factors:
Working
Capital
requirement is
also
affectedby the
abnormal
factors like
strikes,
lockout,
inflationary
8 conditions
etc.
1. Working
Capital Cycle
Cash flows in
a cycle into,
around and
out of a
business. It is
thebusiness's
life blood and
every
manager's
primary task is
to helpkeep it
flowing and to
use the cash
flow to
generate
profits. If
abusiness is
operating
profitably, then
it should, in
theory,
generatecash
surpluses. If it
doesn't
generate
surpluses, the
business
willeventually
run out of cash
and
expire. The
faster a
business
expands the
more cash it
will need
forworking
capital and
investment.
The cheapest
and best
sources
of cash exist
as working
capital right
within
business.
Goodmanage
ment of
working
capital will
generate cash
will
helpimprove
profits and
reduce risks.
The business
should bear in
mindthat the
cost of
providing
credit to
customers and
holding
stockscan
represent a
substantial
proportion of a
firm's total
profits. There
are two
elements in
the business
cycle that
absorb cash -
Inventory
(stocks and
work-in-
progress) and
Receivables
(debtors
owing you
money). The
main sources
of cash are
Payables
(your
creditors) and
Equity and
Loans
.
9
WORKING
CAPITAL
MANAGEME
NT
The term
Working
capital
management
refers to the
managementef
forts for
optimizing
the working
capital and
improving
theproductivit
y of the short
term capital
invested in the
Business.
Itincludes
decisions
relating to
working
capital and
short
termfinancing
and involves
managing the
relationship
between a
firm'sshort-
term assetsand
itsshort-term
liabilities. The
goal of
working
capital
management is
to ensure that
the firm is able
to continueand
that it has
sufficient cash
flow to satisfy
both maturing
short-term debt
and upcoming
operational
expenses.
10
•

Cash
management-
Identify the
cash balance
which
allowsfor the
business to
meet day to
day expenses,
but
reducescash
holding costs.
•
Inventory
management
- Identify the
level of
inventorywhic
h allows for
uninterrupted
production but
reduces
theinvestment
in raw
materials - and
minimizes
reordering
costs- and
hence
increases cash
flow.
•

Debtor’s
management
- Identify the
appropriatecre
dit policy, i.e.
credit terms
which will
attract
customers,
such thatany
impact on cash
flows and the
cash
conversion
cycle willbe
offset by
increased
revenue and
hence Return
on Capital(or
vice versa
); seeDiscounts
and
allowances.
•

Short term
financing
- Identify the
appropriate
source
of financing,
given the cash
conversion
cycle: the
inventory
isideally
financed by
credit granted
by the supplier;
however,
itmay be
necessary to
utilize a
bankloan(or
overdraft), or
to"convert
debtors to
cash" through
"factoring".
11
•

Managing
payables -
Creditors are a
vital part of
effectivecash
management
and should be
managed
carefully
toenhance the
cash
position.KIND
S OF
WORKING
CAPITAL
Kinds of
working capital
are shown in the
following
chart:-
CONCEPTS
OF
WORKING
CAPITAL The
concept of
Working
Capital
includes
Current
Assets
andCurrent
Liabilities
both. There are
two concepts
of Working
Capitalthey are
Gross and Net
Working
Capital.1.
Gross
Working
Capital
: Gross
Working
Capital refers
to thefirm's
investment in
Current
Assets.
Current Assets
are the
assets,which
can be
converted into
cash within an
accounting
year
oroperating
cycle. It
includes cash,
short-term
securities,
debtors(accou
nt receivables
or book
debts), bills
receivables
and
stock(inventor
y).
12 2.
Net Working
Capital:
Net Working
Capital refers
to
thedifference
between
Current Assets
and Current
Liabilities are
thoseclaims of
outsiders,
which are
expected to
mature for
paymentwithi
n an
accounting
year. It
includes
creditors or
accountspaya
bles, bills
payables and
outstanding
expenses. Net
Workingcapita
l can be
positive or
negative. A
positive Net
Working
Capitalwill
arise when
Current Assets
exceed Current
Liabilities and
viceversa.On
the basis of
TIME,
working
capital may be
classified as:
➢
Permanent
Working
Capital
- Permanent or
fixed
workingcapita
l is the
minimum
amount which
is required to
ensureeffectiv
e utilization of
fixed facilities
and for
maintaining
thecirculation
of current
assets. As the
business
grows,
therequirement
s of permanent
working
capital also
increases due
othe increase
in current
assets. The
permanent
working
capital can
further be
classified
asregular
workingCapital
. Working
capital
required to
ensure
circulation of
currentassets
from cash to
inventories,
from
inventories to
receivablesand
from
receivables to
cash and so on
is known as
regular
13 working
capital.
Reserve
working
capital is the
excess
amountover
the
requirement
for regular
working
capital which
may
beprovided for
contingencies
that may arise
at unstated
periodssuch as
strikes, rise in
prices,
depression ,etc.
it is required
bythe
enterprise to
carry out its
normal
business
operations.
➢
Temporary or
Variable
Working
Capital
- Temporary
orvariable
working
capital is the
amount of
working
capital whichis
required to
meet the
seasonal
demands and
some
specialexigenc
ies. Variable
working
capital can be
further
classified
asseasonal
working
capital and
special
working
capital. Most
of
theenterprises
have to
provide
additional
working
capital to
meetthe
seasonal and
special needs.
The capital
required to
meet
theseasonal
needs of the
enterprise is
called
seasonal
workingcapital
.Special
working
capital is that
part of
working
capital which
isrequired to
meet special
exigencies
such as
launching
of extensive
marketing
campaigns for
conducting
research,
etc.DIFFEREN
CE
BETWEEN
TEMPORARY
WORKING
CAPITAL
ANDPERMA
NENT
WORKING
CAPITAL
14 Temporary
working
capital differs
from
permanent
working
capitalin the
sense that it is
required for
short periods
and cannot
bepermanently
employed
gainfully in the
business.
OBJECTIVES
OF
WORKING
CAPITAL
Every business
needs some
amount of
working
capital. It is
neededfor
following
purposes-• For
the purchase of
raw materials,
components
and spares.• To
pay wages and
salaries.• To
incur day to
day expenses
and overhead
costs such as
fuel,power,
and office
expenses etc.•
To provide
credit facilities
to customers
etc.
ADVANTAG
ES
• It helps the
business
concern in
maintaining
the goodwill.•
It can
arrange loans
from banks
and others on
easy
andfavorable
terms.• It
enables a
concern to
face business
crisis in
emergencies
suchas
depression.• It
creates an
environment
of security,
confidence,
and
overallefficien
cy in a
business.• It
helps in
maintaining
solvency of the
business.
ADEQUACY
OF
WORKING
CAPITAL
15 A firm
must have
adequate
working
capital. It
should neither
beexcessive
nor
inadequate.
Excessive
working
capital is a
situationwhere
in the firm
invests
excessive
funds in
working
capital.
Theseexcessive
or idle funds
earn no profit
for the firm.
DANGERS
OF EXCESS
WORKING
CAPITAL
•
It may result in
unnecessary
accumulation
of inventory
whichmay lead
to increase in
wastage due to
mishandling,
theft etc.
•
It is an
indication of
defective
credit policy.
There is
thepossibility
of higher
incidence of
bad debts.
•
It may lead to
complacency
in managing
day-to-day
expensesof the
firm.
•
Executives
may be
tempted to
spend more
•
Excessive
working
capital means
idle funds
which earns
noprofit for
the business,
and thus
cannot earn
proper rate
of return on its
investments.
•
It may result
into overall
inefficiency in
the
organizations.
•
When there is
excessive
working
capital
relation with
banksand other
financial
institutions
may not be
maintained.
16
•
The
redundant
working
capital gives
rise to
speculativetra
nsactions.
•
Due to low
rate of return
on investments
the value of
sharesmay also
fall.
•
In case of
redundant
working
capital there is
always a
chanceof
financing long
term assets
from short
term funds
which isvery
harmful in long
run for any
organizationIn
adequate
working
capital is a
situation
where in the
firmdoes not
have
sufficient
funds to meet
day to day
runningexpen
ses. This
ultimately
results in
interruption
in
theproduction
process.
DANGERS
OF
INADEQUAT
E WORKING
CAPITAL
•
Operating
inefficiencies
creep in when
it becomes
difficult
of meet day-to-
day
commitments.
•
It becomes
difficult to
implement
operating plans
and
achievefirm’s
targets.
•
It directly
affects firm’s
liquidity
position and
the firm may
findit difficult
to honor short-
term
obligations.
17
•
It cannot by
its
requirements
in bulk and
cannot avail
of discounts it
stagnates
growth.
•
It becomes
difficult for
the firm to
exploit
favorable
marketconditi
ons and
undertake
profitable
projects due
to
nonavailability
of working
capital funds.
•
It becomes
impossible to
utilize
efficiently the
fixed
assetsdue to
non
availability
of liquid
funds thus
the
firm’sprofitab
ility would
deteriorate.ii)
SIGNIFICAN
CE OF
WORKING
CAPITAL
MANAGEME
NT OF DLF
INVENTORY
MANAGEME
NT AT DLF
The
investment in
inventory in
production is
a
dominantdete
rminant of
working
capital
management.
It holds
muchimportan
t in context of
DLF as it is
having a long
production
cyclewhere a
good amount
of capital is
tied up in form
of raw
material,work
in progress
and
conversion
cost.
Production
planning
andcontrol
department
plays a pivotal
role in
inventory
management.
The
engineering
department
plays a
supporting role
and
providesthe
41742896-Evaluating-the-Working-Capital-
Requirements-of-Dlf
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