REPORT ON SUMMER TRAINING WORKING CAPITAL MANAGEMENT
AT PMP INDIA PVT LIMITED
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF MASTER OF BUSINESS ADMINISTRATION
SUBMITTED BY:
SUBMITTED TO:
BABLOO KUMAR
LOVELY INSTITUTE OF MGT
REG ID: 10906291
LPU PHAGWARA
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Acknowledgement The project "WORKING "WORKING CAPITAL MANAGEMENT OF PMP INDIA PVT LIMITED" woul would d no nott have have been been po poss ssib ible le with withou outt the the kind kind assi assist stan ance ce and and guidan guidance ce of many many person personss who indeed indeed were were helpfu helpful, l, co-ope co-operat rative ive,, kind kind and hospitable during entire course of my assignment. I take this opportunity to express my acknowledgement and deep sense of gratitude for rendering valuable assistance and guidance to me by following personalities for successful completion of my summer training. . My whole hearted thanks to entire staff of PMP India Pvt. Ltd. for their kind cooperation and assistance in order to take my training successfully. My grateful thank also to Mr.Lovey Aggarwal for their co-operation and valuable guidance during tenure. BABLOO KUMAR
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PREFACE A student undergoing a master course needs to be exposed to the realities in the field which puts to test the class room learning. Knowledge cannot be gained only on the basis of theoretical understanding from the book. A practice inside is necessary for the learning process to be complete and effective. I took my training in very well known and well managed organization PMP India Pvt. Pvt.Lt Ltd, d, Wher Wheree I go gott ampl amplee op oppo port rtun unit ity y to give give ov over eral alll work workin ing g of the the organization. Working Capital Management, the project which I did is an important part of financial management. It is most powerful tool for interpreting the current financial health of organization. In the forthcoming pages, an attempt has been made to present a comprehensive report of my study conducted on Working Capital Management of PMP India Pvt.Ltd.
BABLOO KUMAR
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Executive summary The project undertaken was on “working capital management of PMP INDIA PVT LIMITED”. The company deals deals with automobile automobile parts. OBJECTIVES The foremost objective of my work was to study the various policies that fall under working capital management and also see the how is the approach of finance department of PMP India Pvt.Ltd towards their day to day operations. Other important objectives were to observe the impact of working capital cycle and long production process on each other. For this full production process was shown to me and various creditors and debtors policies were also told to me. Other important aspects like cash, inventory, receivables management were also studied to completely accomplish the study. METHODOLOGY Research Type Exploratory, Descriptive Research Data Source Primary Data, secondary data Research Instrument group discussions, interactions Thee ov Th over eral alll resu result ltss were were gene genera rall lly y base based d on ob obse serv rvat atio ions ns,, anal analys ysis is and and interpretation done during the industrial training and project undertaking.
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FINDINGS In marketing very less importance is given to advertisement. Company’s marketing strategy has gone lame on the fact that company is having good reputation built in the past which will work for them in future also. Company had some shortcoming in debtor policy which disturbs the working capital cycle. Company gives material to some parties before their requirement date and for this time period company suffers losses and earns no rate of interest. Most of the ratios were accounting to good financial health of PMP India Pvt. Ltd.
RECOMMENDATIONS Company should pay more attention towards advertisement. For period in which company provides material to the parties early, it should be counted in FOI period of creditor and debtor policy. Proper cash management system should be introduced to the company so that required amount of cash is always available to the company.
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CONTENTS S.NO Chapter-1
CHAPTER – 2(A)
C H A P T ER 3
C H A P T ER 4
TOPICS INTRODUCTION TO SUBJECT INTRODUCTION NEED AND METHODS OF WORKING CAPITAL REVIEW OF LITERATURE COMPANY PROFILE
PAGE NO 1-16 2-9 10-14
TEXTILE INDUSTRY IN INDIA
18
INTRODUCTION OF OCM INDIA LIMITED.
19-27
HISTORY OF OCM ORGANISATION ST STRUCTURE PRODUCTION PROCESS RAW MATERIAL MANAGEMENT OBJECTIVES OF THE STUDY & RESEARCH METHODOLGY OBJECTIVES RESEARCH METHODOLGY LIMITATIONS OF THE STUDY
28 29-34 35-48 49 50-53
DATA PRESENTATION AND INTERPRETATION WORK WORKIN ING G CAPI CAPITA TAL L MANA MANAGE GEME MENT NT FINANCIAL POLICIES
54-83
SOURCES OF FINANCE
60-61
WORKING CAPITAL CYCLE
62-64
DATA ANALYSIS AND INTERPRETATION
65-83
CASH MANAGEMENT
70-75
INVENTORY MANAGEMENT
76-79
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15-16 17-49
51 52 53
55 55-59
CHAPTER 1 INTRODUCTION TO THE TOPIC
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INTRODUCTION WORKING CAPITAL MANAGEMENT MEANING:Capital required for business can be classified under two main categories: Fixed capital 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, Furniture etc. Funds are also needed for short term purposes for the purchase of raw material, payment of wages and other day to day expenses. These funds are known as working capital. In simple words, working capital refers to that part of the firm capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for others current assets. Hence it is also known as revolving capital. In the words of SHUBIN, “Working Capital is the amount of funds necessary to cover the cost of operating the enterprise.” Acc to Genestenberg, Genestenberg, “Circulating “Circulating capital means current current assets of a company that are changed in the ordinary course of business from one form to another, for example cash to inventories, inventories to receivables, receivables into cash.”
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CONCEPTS OF WORKING CAPITAL There are two concepts of working capital:Balance sheet concept Operating cycle or Circular flow Concept. On the basis of balance sheet Working capital may be classified in two ways: ON THE BASIS OF CONCEPT. ON THE BASIS OF TIME.
WORKING CAPITAL
ON THE BASIS OF CONCEPT
ON THE BASIS OF TIME
GROSS WORKING CAPITAL
PERMANENT WORKING CAPITAL
&
&
NET WORKING CAPITAL
TEMPRORY WORKING CAPITAL
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Gross working capital also referred to as working capital means
the firm’s investment in current assets.i.e Net working capital
Net working capital refers to the difference between current assets and current liabilities. i.e. ------CURRENT ASSETS
CURRENT LIABILITIES
CURRENT ASSETS: Current assets are those assets which in the ordinary course of business can be converted into cash or held in the business for the short time only. Constituents of Current Assets:STOCK OF RAW MATERIAL WORK IN PROGRESS FINISHED GOODS TRADE DEBOTRS PREPAYMENTS CASH BALANCES CURRENT LIABILITIES: Current Liabilities refers to short term debts of the business. It is money owned by a business which will need to be repaid within the next 12 months. Constituents of Current Liabilities:TRADE CREDITORS SHORT TERM LOANS BANK OVERDRAFTS DIVIDEND DUE FOR PAYMENT TAX DUE TO PAY WITHIN THE NEXT 12 MONTHS.
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BALANCE SHEET LIABILITIES Creditors Loans Bank overdraft Advances Total
AMOUNT -
ASSETS Debtors Stock Cash Prepayments Total
AMOUNT -
The Gross working capital concept is financial or going concern where as Net working capital is the accounting concept of working capital. Both concepts have its own merits. The Gross concept is preferred for the following reasons:It enables the enterprise to provide correct amount of working capital at the right time. Every management is more interested in the total current assets with which it has to operate than sources from where it is made available. The gross concept takes into consideration the fact that every increase in the funds of the enterprise would increase its working capital. It is also also usef useful ul in dete determ rmin inin ing g the the rate rate of retu return rn on inve invest stme ment nt in work workin ing g capital… The net working capital is preferred for following reason:It is qualit qualitati ative ve concep conceptt which which indica indicates tes the firm’ firm’ss abilit ability y to meet meet its operat operating ing expenses & short term liabilities. It indicates the margin of protection available to the short term creditors i.e. excess of Current assets over current liabilities. It is an indicator of the financial soundness of an enterprise. It suggests the need for financing a part of the working capital requirement out of permanent sources of funds Permanent or Fixed Working Capital It is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets; which is continuously required by the enterprise. For example, every firm has to maintain a minimum level of raw material, work in process, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this amount is permanently blocked in current assets. The 11
permanent working capital can be further classified as regular working capital and reserve working
Fixed working capital
Capital required ensuring circulation of current assets from cash to inventories, from from invent inventor ories ies to receiv receivabl ables, es, from from receiv receivabl ablee to cash cash and so on. Reserv Reservee working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies, 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. Most of the enterprises have to provide additional working capital to meet the seasonal demands and special needs. This type of capital is called seasonal working capital.
Variable working capital
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Temporary working capital differs from permanent working capital in sense that it is required for the short periods and cannot be permanently employed gainfully in the business. Variable working capital Fixed working Capital
Sometimes fixed capital may vary with the expansion, diversification and growth of business and then it is fixed for the long period. OPERATING WORKING CAPITAL CYCLE: The Circular flow of concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material & other resources and ends with the realization of cash from the sale of finished goods. “The period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from the customer” The operating cycle of a manufacturing company involves three phases: -Acquisition -Acquisition of resources such as raw material, labour, power & fuel etc. -Manufacture of the product which includes conversion of raw material into work in progress into finished goods. -Sales of the product either either for cash or credit. credit. Credit sales create create book debts for collection. The diagram is concerned with day to day activities; have funds constantly flowing into and out of them. 13
The chain starts with the firm buying raw material on credit. In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firm’s work in progress (WIP). Work will continue on the WIP until it eventually emerges as the finished product. As production progresses, labour costs and overheads will need to be met. Of course at some stage trade creditors will need to be paid. When the finished goods are sold on credit, debtors are increased. They will eventually pay so that cash will be injected into the firm. Each of the areas stock, trade debtors, cash and trade creditors shown the in and out of the fund. The business will have to make payments to government for taxation. Fixed assets will be purchased and sold. Lessors of fixed assets will be paid their rent. Shareholders (existing or new) may provide new funds in the form of cash. Some shares may be redeemed for cash. Dividends may be paid. Long term loan creditors may provide loan finance, loans will need to be repaid from time to time Interest obligations will have to be met by the business.
WORKING CAPITAL CYCLE 14
NEED FOR WORKING CAPITAL
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The main objective of financial management is to maximize the shareholders wealth. And for this it is important to generate sufficient profits. The extent to which these profits can be earned depends upon the magnitude of sales however do not convert into cash instantly. There is invariable time gap between the sales of good and the receipt of cash. Therefore there is need of working capital in form of current assets to deal with the situation arising of the lack of immediate realization of the cash against goods sold. There is an operating cycle involved in the sales and the realization of cash. During this time lag working capital is required for the following reasons: Purchase of raw material, components and spares. To pay wages and salaries. To incur day to day expenses and overhead cost such as fuel, power and office expenses. To meet the selling cost like packaging, advertising etc. To provide credit facility to customer… To maintain the inventories of raw material, work in progress, stores and spares and finished goods.
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FACTORS DETERMINING DET ERMINING THE WORKING W ORKING CAPIT CA PITAL AL The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operations, the length length of produ producti ction on cycle cycle etc. etc. howeve however, r, the follow following ing are impor importan tantt factor factorss generally influencing the working capital requirements: Nature or character of business: The working capital requirements of a firm basically depend upon the nature of its business. Public utility undertaking like electricity, water supply and railway need very limited working capital because they offer cash sales only and supply services, not products, and as such no funds are tied up in inventories and receivables, and cash; as such they need large amount of working capital. Size of Business/Scale of Operations: Operations: The working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of a business unit, generally larger will be the requirements of working capital. However in some cases even a smaller concern may need more working capital due to high overhead charges, inefficient use of available Resources and other economic disadvantages of small size. E.g. Retail stores require a variety of goods to satisfy varied and continuous demand of their customers. Manufacturing Manufacturing Process/Length of Production Cycle: In manufacturing business, the working capital requirements increase in direct proportion to the length of manufacturing process. Longer the process period of manufacturing time, the raw materials and other supplies have to be carried for a longer period manufacturing in the process with progressive increment of labor and services costs before the finished product is finally obtained. Therefore, if there are alternative processes of production, the process with the shortest production period should be chosen.
Production Policy: Policy : In certain industries the demand is subject to wide fluctuations due to season seasonal al variat variation ions. s. The workin working g capita capitall requir requireme ements nts,, in such such cases, cases, depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be curtailed during the slack season
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and increased during the peak season. If the policy is to keep production steady by accumulating inventories it will require higher working capital.
Seasonal Seasonal Variation Variations: s: In cert certai ain n indu indust stri ries es raw raw mate materi rial al is no nott avai availa labl blee throughout the year. They have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. A huge amount is, thus, blocked in the form of material inventories during such season, which give rise to more working capital requirements. Generally, during the busy season, a firm requires larger working capital than in the slack season. Rate of stock turnover : There is a high high degree of of inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover. For example, in case of precious stone dealers, the turnover is slow. Thus the working capital requirements of such a dealer shall be higher than that of a provision store. Working Capital Cycle: In a manufactur manufacturing ing concern, concern, the working working capital capital cycle cycle starts with the purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labour and service costs, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on.
Credit policy: Credit policy of the concern its dealings with creditors and debtors infl influe uenc ncee the the requ requir irem emen entt of work workin ing g capi capita tal. l. Conc Concer ern n that that pu purc rcha hase sess its its requirements on credit requires less working capital and vice- versa. Rate Rate of Growth Growth of Busine Business ss: The working capital requirements of a concern increa increase se with with growt growth h and expans expansion ion of its busine business ss activi activitie ties. s. Althou Although gh it’s it’s difficult to determine the relationship between growth in the volume of business and the growth of working capital in the business, yet in the fast growing concern, we shall require larger amount of working capital. Price Level Changes : Changes in working working capital also also effect the working working capital requirements. Generally the rising prices will require the firm to maintain larger 18
amount amount of worki working ng capita capital, l, as more more funds funds will will requi require re mainta maintaini ining ng the same same current assets .The effect of price changes may be different for different concerns.
Earning Capacity and Dividend Policy: Some firms have more earning capacity than others due to quality of their products, monopoly conditions etc. such firms with with high high earn earnin ing g capa capaci city ty may may gene genera rate te cash cash prof profit itss from from op oper erat atio ions ns and and cont contri ribu bute te to thei theirr work workin ing g capi capita tal. l. Th Thee divi divide dend nd po poli licy cy of a conc concer ern n also also influences the requirements of its working capital. A firm that maintain a high rate of cash cash divide dividend nd irresp irrespect ective ive of its genera generatio tion n of profit profitss needs needs more more worki working ng capital that retains larger part of its profits and does not pay so high rate of cash dividend. Other Factors: Certain Certain other factors factors such as operating operating efficien efficiency, cy, managemen managementt ability, irregularities of supply, import policy, asset structure, importance of labor, banking facilities etc, also influence the requirements of working capital.
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METHODS OF WORKING CAPITAL The following are the methods of the working capital: MATCHING APPROACH: The firm can adopt a financial plan which matches the expected life of assets with the expected life of the source of the fund raised to finance assets. Thus a ten year loan may be raised to be financed with an expected life of ten year. Stock of goods to be sold off in 30 days may be financed with the 30 days commercial paper or bank loan. CONSERVATIVE APPROACH: A firm in practice may adopt a conservative approach in financing its current as well as fixed assets. Under the conservative plan the firm finances the permanent assets and also a part of the temporary assets with long term financing. In the period when the firm has no need for temporary current assets than the long term fund can be invested in the tangible securities to conserve the liquidity. AGGRESSIVE APPROACH: An aggressive policy is to be followed by the firm when it used more short term finances than warranted by matching plan. Under the aggressive approach the firm finances a part of the permanent current assets with the short term finances. Some extremely aggressive firms may even finance a part of their fixed assets with the short term finances. The relative short term finances make the firm more risky.
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REVIEW OF LITERATURE
Impact of Working Capital Management Policies on Corporate Performance—An Empirical Study Sushma Vishnani Bhupesh Kr. Shah It is felt that there is the need to study the role of working capital management policies on profitability of a company. Conventionally, it has been seen that if a company desires to take a greater risk greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability. In this paper an effo effort rt has has been been made made to make make an empi empiri rica call stud study y of Indian Indian Consum Consumer er Electr Electron onics ics Indust Industry ry for assess assessing ing the impact impact of work workin ing g capi capita tall po poli lici cies es & practices on profitability during the period 1994–95 to 2004–05. The impact of work workin ing g capi capita tall po poli lici cies es on prof profit itab abil ilit ity y has has been been exam examin ined ed by comput computing ing coefficient of correlation and regression analysis between profitability ratio and some key working capital policy indicator ratios.
Management of Working Capital Nandini Sharma
"Management of short term assets and short run sources of finance is described as working capital management. Working capital management is concerned with all decisions and acts that influence the size and effectiveness of working capital. The goal of working capital management is to manage each of the firm's current assets and current liabiliti liabilities es in such a way that an acceptabl acceptablee level of working capital capital is maintained. It is concerned with the determination of appropriate levels of current assets and their efficient use as well as the choice of financing mix for raising the current resources. "Proper management of working capital is very important for the success of a concern. It aims at protecting the purchasing power of assets and maximizing the return on investment. The manner of management of working capital to a very large extent determines the success of operations of the concern. Failure of business is undoubtedly due to poor management of working capital. Shortage of working capital is so often advanced as the main cause of failure of an industrial concern.
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An Analysis of Working Working Capital Management Results Across Across Industries Greg Filbeck, Schweser Study Thomas M. Krueger, University of Wisconsin-La Crosse
Program
The importance of efficient working capital management (WCM) is indisputable. Working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon soon be requ requir ired ed (Cur (Curre rent nt Liab Liabil ilit itie ies) s).. Th Thee ob obje ject ctiv ivee of work workin ing g capi capita tall management is to maintain the optimum balance of each of the working capital comp compon onen ents ts.. Busi Busine ness ss viab viabil ilit ity y reli relies es on the the abil abilit ity y to effe effect ctiv ivel ely y mana manage ge receivables, inventory, and payables. Firms are able to reduce financing costs and/or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. Much managerial effort is expended in bringing non-optimal levels of current assets and liabilities back toward optimal levels. An optimal level would be one in which a balance is achieved between risk and efficiency. A recent example of business attempting to maximize working capital management is the the recu recurr rren entt atte attent ntio ion n bein being g give given n to the the appl applic icat atio ion n of Six Six Sigm Sigma® a® methodology. Six Sigma® methodologies help companies measure and ensure qual qu alit ity y in all all area areass of the the ente enterp rpri rise se.. When When used used to iden identi tify fy and and rect rectif ify y discrepanc discrepancies, ies, ineffici inefficiencie enciess and erroneou erroneouss transacti transactions ons in the financial financial supply supply chai chain, n, Six Six Sigm Sigma® a® redu reduce cess Days Days Sale Saless Outs Outsta tand ndin ing g (DSO (DSO), ), acce accele lera rate tess the the payment cycle, improves customer satisfaction and reduces the necessary amount and cost of working capital needs. There appear to be many success stories, including Jennifer Towne’s (2002) report of a 15 percent decrease in days that sales are outstanding, resulting in an increased cash flow of approximately $2 million at Thibodaux Regional Medical Center. Furthermore, bad debts declined from $3.4 million to $600,000. However, Waxer’s (2003) study of multiple firms employing Six Sigma® finds that it is really a “get rich slow” technique with a rate of return hovering in the 1.2 – 4.5 percent range.
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FINANCE DEPARTMENT Finance department looks into the cash inflow and outflow of the company finance department headed by assistant vice president who responsible for three main activities like. Banking transaction including day dealing with the banks and updating the books of accoun account.D t.Deal ealing ing with with financ financial ial instit instituti ution on for for short short term term financ financing ing of the company. Realization activities including for short term and long term financing of debtors after the sale of goods on credit. General accounts This department maintains all the books of accounts. It maintains the annual accounts that are audited secretly. It also looks into to the government taxes excise duty etc. MIS-Management MIS-Management INFORMATION SYSTEM MIS fives a periodic report to about the financial matters of the company to the head office and board of direction. MIS also handles the budgeting that is based on the last two year experience and the prediction of the next three year based on that it also works out of the company policy and helps in its implementation The supplier will get the L/C and arrange shipment of the material as per order and negotiate negotiatess the documents documents through through bank.The bank.The same same will be delivered delivered to the L/C opening bank. Wool top supply to spinning department for conversion into yarn for making fabric.
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CHAPTER 3 OBJECTIVES & RESEARCH METHODOLOGY
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OBJECTIVE OF THE STUDY Objective setting is the initial stage or starting point of any project to be undertaken. It is essential to know what objectives means from the literally or the study study point of view. view.
The main objectives of the study are:
To study the working capital management of PMP INDIA PVT LTD. To study the various ratios related to inventory, receivable and payable. To study the factors affecting the working capital. To develop a practical approach towards problem solving by applying theoretical knowledge.
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RESEARCH METHODOLOGY Research Methodology is a way to systematically solve the research problem. It may be understood as a science of study how research is done systematically. This research on working capital may be referred to as exploratory research in which problems and findings are generated from the calculations. When some deduction is made from data then a problem is located regarding the same and reasons for the same are also searched for. In the end suggestions and recommendations are made to make research meaningful and worthy to improvise on the same.
DATA COLLECTION Data is collected in two ways. Primary data Secondary data The primary data refers to the data which is collected directly. It is collected by observations, interviews, questionnaires etc. it is generally more accurate. It is costly in the terms of time. One needs to be very careful while collecting this form of data. Here primary data is collected from the employees of PMP INDIA PVT LTD. The data related to financial statements and processes is collected from finance department. Some production data is collected from various departments. Secondary data refers to the data which is already collected by somebody. It is generally collected from websites, magazines, journals etc. here data is collected from annual report of company for financial analysis. Some data was provided by company itself. And rest of the required data is collected from books like prasanna Chandra, im pandey of financial management. Some of the data is also collected from websites.
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LIMITATIONS OF THE STUDY
Although full efforts have been made to complete and comprehensive the study on working capital of PMP INDIA PVT LTD, So that the study could present a true picture, Inspite of all the care efforts there are some limitations such as: Financial resources are limited. The time of research was not that much sufficient that could be regarded as opportunity to analyze WCM of such organization.
As data taken is secondary, so it cannot be said to give constant conclusions, as it’s not revised to present situation. Company planned training schedule, in which long time period was given to see production process of the unit.
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CHAPTER 4 DATA PRESENTATION, ANALYSIS AND INTERPRETATION
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WORKING CAPITAL MANAGEMENT In PMP INDIA PVT TD there are three main types of current assets. stock sundry debtors cash Stock consists of raw material and components stores and spare parts stock in process finished goods Debtors consist of debt over six months other departments Cash includes in hand cash current account fixed account
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FINANCIAL POLICIES OF COMPANY DEBTORS POLICIES IN OCM Material is supplied to the party when the parties pay the invoices. Invoices are paid by the suppliers by 2 ways. The two ways are as follows: Through Bank Direct Payment THROUGH BANK: Suppliers can make the payment through Bank. This is a risky way of payment for the company. Through bank payment can be made by two ways that are as follows: DA (Documents against Acceptance) DP (Documents against Payment) In DA. bank give the documents to the suppliers n supplier accepts the documents. He does not give the money at that time but he make promise to pay the payment. Bank give the documents on the bases of suppliers promise to pay. In DP, direct payment is made by the suppliers. Bank take payment from the supplier and give him the documents. DIRECT ECT PAYMENT ENT: In this mode, payment is made direct'. It can be made by cheque, draft, and at the centers. The
centers of unit are HDFC Bank and Corporation Bank. Payments are received mostly by this method. CREDIT NOTES These are given to the customers. 10% discount is given to the items that have minor defects. And the items having major defects are not sent for sales. Goods are taken back in the later case. SALES POLICY FOI (FREE OF INTEREST POLICY): These are for the suppliers of the company. The policy policy is diffe differen rentt for for diffe differen rentt suppli suppliers ers depend depending ing upo upon n the partie parties. s. A specific time period is given to the suppliers to pay the payment for the goods. Time period given depends upon the amount of payment that he suppliers have to pay. In this time period no interest is charged from the suppliers. Suppliers can make payment: 10lac upto 30Days 10 to 50 lakh upto 45 Days & above 50 lakh a time period of 60 Days.
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INTEREST POLICY The parties that make late payment interest is charged from them. And interest is given to the parties that make early payment. The parties that make early payment interest is given as follows: If the parties make payment within 15 Days then 18% interest is given to those suppliers. If the parties make payment after the 15 Days then 15% interest is given to the supplier. The parties that make late payment, interest is charged from them as follows: If the payment is made within 60 Days after the due date then 15% interest is charged from then If the payment is made after 60 Days then interest charged is 18%. INCENTIVE POLICY To promote the sales, incentives are given to the suppliers depend upon their amount of payment. It is between 1 to 5 %. It is as follows: Amount (in lakhs) Incentives (in %) 2.51 to 3.00
1.50
3.01 to 5.00
2.00
5.01 to 8.00
2.50
8.01 to 10.00
3.00
10.00 to 15.00
3.50
15.01 to 25.00
4.00
25.01 to 50.00
4.50
& Above'50
5.00
The suppliers have to pay 12% interest per annum as a security deposit.
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POLICY RELATED TO AGENT’S COMMISSION Agents are the sales reprehensive of the company. Material is sold by these agents to different parties. Parties can not buy material directly from the company. They have to first visit visit these agents. Booking of of material (with Commission starts from from 2 to 7 %. it depends upon the quality of the material they will sold, if the agent sell material of high quality they are paid more commission. And if they sell low quality they are paid low commission. Agents are given code. And materials are also given codes. Their commission are calculated automatically by seeing their code and the code of the material they sold. Eg. Pb C, here Pb stands for Punjab and C is for the quality of the material. There's a agent in a state. Agent is responsible to receive the payment from the party. It is duty of the agent to receive the payment from the party. Every party has a ledger account. To check the invoice and payment, balance is checked. SIGNIFICANT SIGNIFICANT ACCOUNTING POLICIES 1. Basis of of preparat preparation ion of of financia financiall statemen statementt The financial statements have been prepared on a going concern basis under the histor historica icall cost cost conven conventio tion. n. Accoun Accountin ting g polici policies es not refer referred red to otherw otherwise ise are consistent and in consonance with generally accepted accounting principles. The company follows mercantile system of accounting and recognizes significant items of income and expenditure on accrual basis. Whenever it is not possible to determine the quantum of accrual with reasonable certainty e.g. insurance and other claims, refund of custom/excise duty etc., these continue to be accounted for on settlement basis. 2. Sales Sale Saless are are repo report rted ed net net of turn turnov over er//trad tradee disc discou ount nts, s, retu return rnss and and clai claims ms.. Rebate/discount other than usual allowances accounted for as and when incurred. 3. Fixed assets Fixed Assets are stated at their original cost (including other expenses related to acquisition and installation) less depreciation. 4. Impairment of assets An asset is treated as impaired when the carrying cost of the same exceeds its recoverable amount. An impairment loss recognized in prior is reversed if there has been change in the estimate of the recoverable amount. 37
5. Depreciation Depreciation has been provided on fixed assets (except in case of lease hold land which is being amortized over the period of lease ) on Straight Line Method in accordance with the rates, on pro-rata basis, specified in schedule xiv of the Companies Act, 1956. 6. Foreign currency transaction Any income or expense on account of exchange difference either on settlement or on transaction is recognized in the Profit & Loss Account except in cases where they relate to the loans and liabilities incurred for acquisition of fixed assets in which case they are adjusted to the carrying cost of such Assets. 7. Treatment of expenditure during construction period Expenditure during construction/erection construction/erection period is allocated to the respective assets on completion of such construction or erection. 8. Investments Long term investments are stated at cost less provision for diminution in value other than temporary, if any. Current investments are valued on category basis, at cost or below cost, as the case may be. 9. Valuation of inventories Inventories are valued at lower of cost and net realizable value, except waste, scrap and by-products valued at net realizable value. Cost is computed on weighted average basis. Finished goods and process stock include cost of conversion and othe otherr cost costss incu incurr rred ed in brin bringi ging ng the the inve invent ntor orie iess to the the pres presen entt loca locati tion on and and condition. 10. Borrowing costs Interest cost relating to funds borrowed for acquisition of fixed assets is capitalized up to the date asset put to use, and funds borrowed for other purposes is charged to the Profit & Loss account.
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SOURCES OF FINANCE Firstly, we will consider different sources of finance from which the company gets its working capital.
TRADE CREDIT: - Trade credit is the credit extended by the supplier in the normal course of business.PMP INDIA PVT LTD has strong financial base it has got very good reputation in the market. It is considered to be one of best paymaster among the suppliers, who in turn do not hesitate in extending normal credit period to the company. In purchase of raw material no credit is allowed, but while purchasing the material in bulk quantity the company tries to obtain maximum discounts offered by suppliers, such as quantity & cash discount. ADVANCES: - Advances also form a part of working capital at PMP INDIA. An advance from customers against orders is a short term source of finance for PMP INDI INDIA A PVT PVT LTD. LTD. Part Partie iess make make the the adva advanc ncee paym paymen entt befo before re rece receiv ivin ing g the the material. FIXED DEPOSIT: - Fixed deposit is another source of finance for the company. The company has fixed deposits scheme with option for quarterly payment of interest or payment of interest at the time of maturity along with principle amount. However in both the cases maximum rate of interest is 10.5% for a deposit for 3 years and minimum rate of interest is 9.5% for a deposit for 1 year. In cumulative scheme interest is being compounded at monthly basis. Company makes regular payment of interest as well as of principle amount. The entire fixed deposit scheme is computerized.
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WORKING CAPITAL BORROWINGS FROM BANKS: Commercial banks are the most important source of short term finance. The major portion of working capital is provided by commercial banks. They provide a wide variety of loans tailored to meet the specific requirements of a concern. The different form in which the banks normally provide loans and advances are as follows:CASH CREDIT PACKING CREDIT CREDIT IN INDIAN RS. RS. & IN FOREIGN CURRENCY FOREIGN BILLS NEGOTIATION DISCOUNTING OF INLAND BILLS UNDER LETTER OF CREDIT SHORT TERM LOANS
a) Cash Cash Credi Credit t : Cash credit is an arrangement by which a bank allows his cust custom omer erss to bo borr rrow ow mone money y up to cert certai ain n limi limitt agai agains nstt hy hypo poth thec ecat atio ion n of inventories, receivables etc. The company can operate cash credit account within sanctioned credit limits. For this bank charges interest on the last balance of everyday. PMP INDIA has the following banks from which it takes the cash credit.
HDFC BANK CORPORATION BANK UNION BANK OF INDIA BANK OF INDIA STATE BANK OF INDIA PUNJAB NATIONAL BANK b). Packing Credit : Packing credit is also popularly known as pre shipment credit. It is sanc sancti tion oned ed by comm commer erci cial al bank bankss to bo boos ostt expo export rts. s. It is avai availa labl blee at concessional rate of interest as compared to rates charged by banks on cash credit acco accoun unt. t. Pack Packin ing g cred credit it is avai availa labl blee in Indi Indian an Rupe Rupees es as well well as in fore foreig ign n curr curren ency cy.. Pack Packin ing g cred credit it acco accoun untt is nu null llif ifie ied d agai agains nstt pres presen enta tati tion on of expo export rt documents to the bank.
c).Foreign Bills Negotiation: After submission of export documents to the bank the pre shipment credit is converted into post shipment credit. Usually export documents are drawn at sight, or against acceptance. Tenure of documents depends on factor factorss like like countr country, y, produc productt expor exported ted etc. etc. Compan Company y negoti negotiate atess the export export 40
documents and avail post shipment credit from the banks, which gets liquidated after realization of export documents. At the time of negotiation bank charges interest for the for the unexpired period from the company along with negotiation charges.
d).Discounting of Inland Documents Drawn Under Letter of Credit: The company supplies goods to the customers against inland letter of credit drawn in favor of OCM by customer. After dispatch of material to the customer the presents the documents to the bank for discounting and receives the amount from the bank . e.)Short term loans: Working capital borrowings from banks are secured by the hypothecation of entire present and future tangible assets of the company and also personally guaranteed by the directors of the company. f). Letter Of Credit: - A Letter Of Credit popularly known as L/C is an under taking by a bank to honor the obligation of its customer up to a specified amount, should the customer failed to do so. In case the customer fails to pay the amount, on the due date, to its supplier the bank assumes the liability of its customers for the purchases made under the L/C Arrangement. OCM also accepts the payment from their customers on behalf of L/C, so it becomes the source of finance for them.
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WORKING CAPITAL CYCLE IN PMP INDIA PVT LTD Working Capital Cycle: In a manufacturing concern, the working capital cycle starts with the purchase of raw material and ends with the realization 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 labor and service costs, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on.
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APPLICATION OF FUNDS The major portion of company’s working capital consists of inventory, stores, spar spares es,, fini finish shed ed go good odss and and work work in prog progre ress ss etc. etc. no now w we will will disc discus usss them them separately: 1. Raw Material: The major portion of company’s working capital consists of inventories. Company purch purchase asess machin machinery ery,, spares spares,, waste waste paper, paper, chemic chemicals als for manuf manufact acturi uring ng ,raw ,raw materi material al takes takes around around 20 to 40 days days to reach reach at unit unit from from domestic domestic as well as international market. Consequently payment is made on the basis of installments decided at the time of deal. 2. Work in process: When raw material is purchased the next step is the processing of the material. Material purchased has to process also. Working capital is needed for following purposes: For the payment of direct labor. Power supply . 3. Stores and Spares: Stor Stores es,, spar spares es,, oils oils and and lubr lubric ican ants ts,, pack packin ing g mate materi rial al,, chem chemic ical alss are are vari variou ouss constituents of inventory of stores and spares. Indent is sent to material department for procurement. They call quotations from various suppliers and place order to the supplier who offers better price, quality, payment terms etc. Goods are received at gate and then gate entry is done. Usually credit period offers by suppliers are 15 days, 30 days, 60 days. Bills duly processed by material department are received in finance department where they are passed for payment. Finance department enters thes thesee bill billss in comp comput uter er givi giving ng indi indica cati tion on of du duee date date of paym paymen ent. t. Fina Financ ncee department enters these bills on day to day basis. Fortnightly payment to suppliers is made on 10 th and 25th of every month. List of bills due for payment is obtained from computer. Other than this stock and spares normally account to minimum of 4 crore at anytime, for future needs.
4. Finished goods:Finished goods are sold to their customers or debtors. The debtor policy mentioned above shows the time period offered to pay back. This normally in one lot accounts to Rs.25 crore.
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DATA ANALYSIS AND INTERPRETATION INTERPRETATION
Calculation of gross working capital Stock PARTICULARS RAW MATERIAL WORK IN PROCESS FINISHED STOCK STORES END SPARES WASTE AND SCRAP TOTAL ST STOCK
2006 29541657
2007 25381734
2008 83170779
39385321
35845838
70624168
173344236
138497501
103458859
32494380
3036954
33284652
331750
549592
829249
275097344
230644319
291367657
Debtors 44
Particulars Over 6 months Other debtors Less : Provision for doubt debtors Total debtors
2006 47784158 165657116 35964581
2007 55639817 120134422 44008482
2008 81444414 341898394 41467189
177476693
131765757
381875624
Cash 45
Particulars Cash in hand On current account Fixed deposit Total cash
2006 276837 745530 22000 1044367
2007 71645 4555244 64404693 69031582
2008 221360 2739552 40162000 43122912
2006 35744752
2007 22907167
2008 33635982
2007 454348825 -7.15%
2008 750002175 53.26%
Loans and Advances :
Particulars Total loans and advances
Gross working Capital : Particulars 2006 GWC 489363156 Grow Growth th rate rate (bas (basee year year 2006)
46
47
Net working capital :
Particulars Current assets Current liabilities NWC Growth rate
2006 489363156 205166434 284196722 -
2007 454348825 188480460 265868365 -6.64%
2008 750002175 265573692 484428483 70.45%
INTERPRETATION: In the above above calculatio calculations ns it is seen that condition condition of the company company is becoming becoming better in 2008. Company has recovered from his downfall, or it can be said that company company is still recovering recovering.. It can be clearly seen that that stock has gone up for the company in the year 2008 as compared to previous two years. It means company is getting more orders to be placed in future. The debtors of the company have turned up with positive response, which earlier in 2007 gone down because of company was running under losses. Cash is now not left idle in 2008, which again is good for company to effectively use its cash in day to day operations. After a steep fall in gross working capital in year 2007 the company again jumped to good required working capital. recession struck badly in 2007 as company mostly deals in international market. The company witnessed some bad response from his creditors and debtors also.. Company got business opportunities from abroad and 2008 again company had a sound working capital to keep operations running. In all the three years 2008 is proving to be better year in financial terms 48
CASH MANAGEMENT Cash is the most important current assets needed for the uninterrupted and efficient efficient flow of various operations of a firm. Cash basically is the business at all times. It is also the ultimate output that is expected to be realized by selling of the product or service of a particular firm. In a narrower sense cash is used to cover currency and generally accepted equivalent of a cash. Such as cheques, drafts and demand deposits in banks. However a broader meaning of it includes near cash assets marketable securities and time deposits. In banks that are characterised as being reserve pool of liquidity that can be readily sold and converted into cash. They also provide a short term investment outlet for excess cash has to be invested while the deposit has to be borrowed cash management seeks to accomplish this cycle, at a minimum cost at the same time it also seeks to achieve liquidity and control. In order to cash the uncertainity regarding the cash flow production an efficient cash management should follow following steps.
1. Cash planning Cash inflows and outflows should be planned to project cash surplus or depict for each part of the planning period. Cash budget should be prepared for this purpose. 2. Managing cash flows The flow of cash should be so managed. The cash inflows should be accelerated while, as far as possible, the cash outflows should be decelerated. 3. Optimum cash level The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. 4. Investing surplus ca cash The surplus cash balance should be properly invested to earn profits. The firm should should decide about the division division of such cash balance between between alternative alternative short term investment opportunities such as bank deposits, marketable securities or intercorporate lending.
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MOTIVES FOR HOLDING CASH The firm need to hold the cash may be attributed to the following three motives: Transaction motive Precautionary motive Speculative motive Compensation motive Basic strategies of Compsny to manage the cash 1. Stretching accounts payable This implies that the firm pay its accounts payable as late as possible without damaging its credit standing. However cash discount available on prompt payment should also availed off. 2. Efficient inventory production management Another strategy is to increase the Inventory turnover rate avoiding stock out for shor shorta tage ge of stoc stock k by incr increa easi sing ng the the raw raw mate materi rial al turn turnov over er,, decr decrea easi sing ng the the production cycle or increasing the finished goods.
3. Speeding collection of accounts receivable This refers to the quick collection of receivables without loosing future sales. The average collection period of receivable can be reduced by changes in the credit terms, credit standards and collection policies. . To ensure speedy collection of receivables, firstly the firm grants a free of interest period to its customers. This is 15 to 20 days depending on the reputation of the customer. During this period, no interest is charged from the customers. Although, in case of delay in payment of the expiry of this period. The following rates are charged 22-45 days 18% 45-65 days 20% 60-75 days 22% 75-90 days 24% 90 onwards 26% Seco Second ndly ly cash cash disc discou ount nt is offe offere red d to the the cust custom omer erss by the the firm firm regu regula larl rly. y. Some Someti time mess the the comp compan any y anno announ unce cess some some spec specia iall offe offers rs to spec specif ify y the the debt debt recovery which is bound by a particular condition that the customer would be required to pay particular percentage of the total payment. Initially to be entered 50
for the cash discount. Thirdly, the firm has increased the customer management services network. Earlier 20 banks offering the facility of cash collection, now the number has increased to 27. Calculation of cash position ratio: Formula: = Cash C.L. CASH POSITION RATIO PARTICULARS
2006
2007
2008
CASH CURRENT LIABILITIES CASH CASH POSIT POSITION ION RATIO
1044367 20516643 4
69031582 18848046 0
43122912
0.005
0.37
0.16
265573692
INTERPRETATION: Cash position ratio in all the three years is not able to reach rule of thumb. It is matter of worry. In the 2007 ratio was 0.37 which has helped PMP INDIA INDIA LTD in the time of of real need. need. But But as company company didn’t didn’t ever store stored d much cash in hand, and has always invested somewhere to prevent cash being idle, which is positive sign for PMP INDIA. PMP INDIA has always returned its loans and other liabilities in time. Because of this it holds good reputation from long time. So it can be concluded that cash reserved with company is generally reserved out of every task that needs to be accomplished in time, but according to rule of thumb firm must have at least ratio of 0.5 where PMP INDIA lacks. 51
OTHER RATIOS: Current ratio : Year 2006 2007 2008
C.A. 489363456 454348825 750002175
C.L. 205166434 188480460 265573692
Ratios 2.38 :1 2.41 :1 2.82 :1
Quick Assets 214265812 223704506 458634518
C.L. 205166434 188480460 265573692
Ratios 1.04 :1 1.18 :1 1.17 :1
Quick ratio : Year 2006 2007 2008 INTERPRETATION: Both the above ratios are speaking for good financial health. The current ratio in all the three years is above rule of thumb i.e. 2:1, which is considered to be satisfactory for the firm. Quick ratio is also above the rule of thumb, i.e. 1:1 which again is satisfactory far the company. This also covers the shortcomings of the cash ratio. These all ratios show that liquidity is sound and tells that company is fully able to meet any current obligations.
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INVENTORY MANAGEMENT Inventory contribution the most significant part of the current assets of PMP INDIA for effective management of inventory and therefore the whole procedure of inventory management is carried on in a systematic manner. Decision relating to the procurement of inventory are primarily by the executive of the production purchase and marketing department In case of contingencies following policies are obtained. Whenever raw material is purchased transit insurance is done. For insuring the building, furniture, fixtures etc. the following policies are there. Fire insurance Flood risk policy Earthquake policy
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INVENTORY PROCUREMENT IN PMP INDIA PVT LIMITED
In order to forecast the future requirement of inventory ,it follow a very systematic procedure. The raw material is procured twice or thrice a day in case of a stores and spares and other miscellaneous items. Firstly a sales conference is held twice a year where dealers from country and abroad are invited for bookings or order or the finished items for each season, summer and winter once the booking are done . Then on the basis of demand of a particular variety feed back from the market future trends as well as the suppliers of last season. A sales plan is prepared by the production planning and control depa depart rtme ment nt head headed ed by the the depu deputy ty gene genera rall mana manage ger. r. Th This is Th Thes esee orde orderr are are communicated to the purchase department of arrangement are done to set the finance from the banks. For this purpose banks issue letter of credit in favour of PMP INDIA. These 73 days of operating cycle will takes place when raw material is already available. But in case the company has to purchase outside the whole operating cycle will take almost 140 days. Material procurement = 45 days Operation = 73 days Days given to debtors = 21 days 139 days
Hence the company maintains its inventory level keeping in view the operating cycle and lead time and accordingly maintains its buffer stock and sets its reorder point. CALCULATION OF INVENTORY TURNOVER RATIO INVENTORY TURNOVER RATIO: Inventory Turnover Ratio = Cost of Sales Average Inventory Conversion period = 365 Inventory Turnover Ratio Inventory turnover ratio (ITR) establishes the relationship between the sales during a period and the average amount of inventory carried during that period.
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Particulars Sales Opening stock Closing stock Average inventory ITR
2006 436858856 1444170 1649795254 87394203
2007 522133945 173344236 138497501 151738513
2008 966065240 138497501 103458859 120978180
4.99 times
3.44 times
7.99 times
INTERPRETATION: Inventory turnover ratio has improved as compared to previous two years. Inventory conversion period seems to be reduced in the year 2008. It is good for the company. Here it is definitely beneficial as sales made were high and stock was also high in 2008. So company is getting good response from market for its products and it is more efficient in converting raw material to finished good.
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RECEIVABLE MANAGEMENT Receivables are defined as debt owned to the firm by the customers arising from the sales of goods or services in the ordinary course of business. In other words rece receiv ivab able less repr repres esen entt an exte extens nsio ion n of cred credit it to cust custom omer erss allo allowi wing ng them them a reasonable period of time in which to pay for the goods they have received. The sale of goods on credit is an essential part of the modern competitive economic system credit sales are of ten treated as a marketing tool aid the sale of goods. It is also variable to the customers as it arguments their resources it is particularly appearing to those customers who cannot borrow from other sources or find it expensive or cumbersome to do so. Thus the objective of receivable management is to promote sales and profit 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 to that additional credit however extension of credit involves risk also sold on credit. Cost benefit involved The major categories of cost associated with the extension of credit and accounts receivables are: 1. Collection cost This involves involves the administra administration tion cost incurred incurred in collectin collecting g the accounts accounts receivable such as maintaining the staff, postage, etc. and also expenses involved in acquiring credit information from outside parties. 2. Capital cost This is the cost that a firm has to incur due to the time lag between making sales and receiving payment meanwhile meeting its own obligation like payments of wages, procuring raw material etc. 3. Delinquency cost These are the costs that arise when the firm makes extra effects on collecting receivables when they become due for payments. 4. Default cost This involves the bad debts that have to be written off as they cannot be realized. Key decision areas in management of receivables Credit policy The first decision area is the determination of the credit policy. It has two broad dimensions Credit standards Credit standards are the criteria which a firm follows in selecting customers for the purpose of credit extension. The firm may have tight credit standards or loose credit standards. 56
Credit analysis Credit Credit standa standards rds influe influence nce the the qualit quality y of the firm' firm'ss custom customers ers.. There There are two aspects of the quality of customers, the time taken by customers to repay credit obligations and the default rate. Credit terms The stipulations under the firm sells to customers are called credit terms. These stipulations include Credit period The length of time which is extended to customers is called the credit period. It is generally stated in terms of a net date. Cash discount A cash discount is a reduction in payment offered to customers induce them to repay credit obligations within a specified period of time, which will be less than the normal credit period. It is usually expressed as a percentage of sales. Collection policy A collection policy is needed because all customers do not pay the firm's bills in time. The collection efforts aim at accelerating collections from slow payers and reducing bad debt looses. The collection policy should ensure prompt and regular collections.
CALCULATION OF DEBTOR TURNOVER RATIO: DEBTORS TURNOVER RATIO Debtors turnover ratio= Sales Average debtors Collection Period = 365 Debtor’s turnover ratio Percentage of debtors turnover in NWC Particulars 2006 2007 Debtors 177476693 131765757 NWC 284196722 265868365 percentage 62.4 49.5
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2008 381875624 484428483 78.8
Particulars Debtors Sales DTR (Times)
2006 177476693 436858856 2.46
2007 131765757 52133945 0.397
2008 381875624 966065240 2.53
PARTICULARS DTR AVERRAGE COLLECTION PERIOD
2006 2.46 148 DAYS
2007 3.96 92 DAYS
2008 2.53 144 DAYS
INTERPRETATION: DTR ratio is best in year 2007. But it is not that it was profitable for the firm. In the year 2007 company didn’t had much to collect from outside because of lack of business. So leaving 2007, 2008 seems to be better than other good busuiness year that is 2006. More of the collection is to be made from foreign. foreign. This is another another reason for long collection collection time. Overall it is not good for company.
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CHAPTER 5 SUMMARY CONCLUSION AND SUGGESTIONS
SUMMARY 59
The main purpose of this project undertaken was to study the working capital management of PMP INDIA PVT LTD. Firstly, the basics of the working capital manage managemen mentt are explai explained ned in detail detail.. It covers covers meanin meaning, g, need, need, import importanc ancee of working capital management. Afterwards types of working capital are explained i.e. i.e. fixed fixed and variab variable le workin working g capita capital. l. Then Then the factor factorss determ determini ining ng workin working g capital and working capital cycle are explained. Research methodology and scope of the study is given in chapter no. 3. The study had various limitations. Very less tools were used in analysis of the company. Time was another constraint,as other objectives of training were also to be kept in mind. mind. Resear Research ch was more more of an explor explorato atory ry resear research ch which which showed showed valuab valuable le results. Working capital management at PMP INDIA PVT LTD is having strong base. The different financial policies adopted by the company are really supporting the company. Working capital cycle which starts from the purchase of raw material to the realization of cash involves a long time span. This is because of nature of business. Then every single aspect of working capial management was covered. In cash cash manage managemen mentt compan company y was having having diffe differen rentt polici policies es for for speedi speeding ng cash cash recovery. In inventory and receivables management both turnover ratios were good as per nature of business and requirement of business. Overall the crux of the study says company had sound financial base and is recovering from recession good. Analysis were made on the basis of the data of year 2006, 2007, 2008. The data and ratios went more supportive in the year 2008 as compared to previous two years.
CONCLUSION 60
After studying the the components of working capital management management system .It is found that the company has a sound and effective policy and its performance is very good, even in this bad recession situation.Company has managed to pose good profit.Company is competing well ar the domestic as well as at international level. Compan Company y has shown shown increa increase se in curre current nt ratio, ratio, growt growth h rate rate in gross gross worki working ng capital,net working capital in the year 2008.sales of company and debtors have also increased in 2008 as compared to 2006-2007.So we can say that the position of company is good. All the ratios were speaking for strong financial output brought to the company in the year 2008. The company is matured matured one and it has contributed well in the countries growth and development and will continue to perform and contribute to the whole nation In conclusion we can say that the compan companies ies manage managemen mentt is effect effective ive one and kno knows ws well well the manage managemen mentt of finance. That’s why it’s working capital management system is very good .
SUGGESTION 61
For cash management the company largely upon the short term sources of funds. Instead there should be a more systematic procedure of investing in the short term securities. So far such decisions are centralized and lie in the hands of the head office. There needs to be more decentralized in this respect so that more could be invested in short term securities, which can be realized at any time to pay time to pay the short term liabilities The company's ratio analysis shows too much of surplus liquidity in the hands of the company. This cash should not be left idle and should be invested . The company should make disbursement from a centralized account , so that a smaller cash balance would be needed at each branch and secondly , the company would be able to control the schedule tightly and it would be easier to make disbur disbursem sement ent on the right right day .in order order to speed speed up accoun accounts ts recei receivab vable, le, the company can adopt the lock box system. The would ensure quick recovery of receivables. The main advantage of lock box system would be: The banks of PMP INDIA can handle the remittances prior to deposits at lower cost. The processing time of such remittances is reduced since their collection process faster than if PMP INDIA would have processed them for internal accounting purpose prior to their deposits in the box. This job could still be banks without delaying the collection. The major major advant advantage age of accele accelerat rating ing the collec collectio tion n is reduc reducee the firm's firm's total total financing requirements. And by transferring the clerical function to the bank, the firm may reduce its cost.
SWOT ANALYSIS 62
STRENGTH Thee bigg Th bigges estt stre streng ngth th of PMP PMP INDI INDIA A is its its late latest st tech techno nolo logy gy and and impo import rted ed machinery. Moreover, versatility is synonymous to PMP INDIAIn North India, the brand is perceived to be a premium and reliable brand because of its presence in the market for over eight decades. WEAKNESSES Thee main Th main weak weakne ness ss of PMP PMP INDI INDIA A is a conv conven enti tion onal al dist distri ribu buti tion on chan channe nel. l. The company relies mainly on the agents for sales promotion. The company spends less money on advertisement. The company's capacity is too high thus the fixed cost remains the same at any amount of production. OPPORTUNITIES in today's phase of recession, small units are rather lacking back. And thus PMP INDIA can take advantage of this situation.
THREATS
BIBLIOGRAPHY 63
BOOKS I.M.Pandey, “Financial Management” vikas publications. Prasanna Chandra, “Financial Management Theory and Practice”. S.K. Gupta and R.K. Sharma, “Financial Management”, kalyani publishers. C.R. KOTHARI, “Research methodology”.
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