Working Capital Management

SUMMER TRAINING REPORT
ON
WORKING CAPITAL MANAGEMENT
IN
VINAYAK TEXTILE MILLS
LIMITED
Submitted To:
Mr. M.S.Arora (D.G.M.)
In partial fulfillment of requirement for the award of degree in

MASTER OF BUSINESS ADMINISTRATION
Submitted By:-
AMAN DEEP PASSI
AJAY JAIN
(2008-10)
PREFACE
This report , prepared during the summer training, is life’s greatest treasure. The training
held was very gainful as it took me close to real life.
The study aims to analyze the extent to which volume of working capital has been
effectively and efficiently utilized in this unit. The report is divided into various parts for
the close analyses of different components of working capital. The last part deals with the
conclusion and suggestions to improve the working capital management and to make it
more effective.
ACKNOWLEDGEMENT
“Accomplishment of a task with desired success calls for dedication towards work and
prompting guidance, co-operation and deliberation from seniors.”
This report is the outcome of six weeks training that I received at VINAYAK
TEXTILE MILLS LTD.
First of all, I wish to express my profound gratitude and sincere thanks to

MR. M.S. ARORA(D.G.M, ACCOUNTS DEPARTMENT),Incharge of the project for
his constant and tireless guidance and encouragement given during the study and who
allowed me to join summer training at VTM.
It gives me immense pleasure to acknowledge my deep sense of gratitude

and sincere thanks to Mr. GURNAM SINGH, ACCOUNTS OFFICER for extending the
courtesy and for guidance, support and affection throughout the course of this work.
I am extremely grateful to MISS. KAWALPREET KAUR and other

faculty members for their valuable guidance and glorious teaching.
In last, I express my profound gratefulness and indebtedness to the

esteemed organization for granting me the grand privilege of working on a project under
team of experts and professionals in the field of finance.
CONTENTS
CHAPTER 1
THEORETICAL BACKGROUND OF WORKING CAPITAL
MANAGEMENT
CHAPTER 2
HISTORY OF INDIAN TEXTILE INDUSTRY
CHAPTER 3
PROFILE OF THE GROUP AND UNIT
CHAPTER 4
OUTLINE OF THE STUDY
CHAPTER 5
WORKING CAPITAL ANALYSIS
• OPERATING CYCLE ANALYSIS
• ANALYSIS ON THE BASIS OF HISTORICAL DATA
1. RATIO ANALYSIS
2. COMMON SIZE STATEMENT ANALYSIS
3. ANALYSIS ON THE BASIS OF SCHEDULE
OF CHANGES IN WORKING CAPITAL
CHAPTER 6
CASH MANAGEMENT
CHAPTER 7
RECEIVABLES MANAGEMENT
CHAPTER 8
MANAGEMENT OF INVENTORY
CHAPTER 9
FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY
APPENDIX
REFERENCES AND BIBLIOGRAPHY

EXECUTIVE SUMMARY
STUDY TOPIC:
WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD.

( A UNIT OF VARDHMAN POLYTEX LTD.)
OBJECTIVES OF THE STUDY:
To analyze the working capital management of the company.

To determine the operating cycle of the unit.
To know the future need of working capital in the running organization.
• To render recommendations for effective management of working capital.
TIME SPAN:
A period of five year i.e. 2004-2008 has been taken for the study.
STUDY INSTRUMENT:
Annual Reports and other official documents of the selected units of the company.
METHODOLOGY:
 To recognize the various type of information which are necessary for the
study of working capital management.
 Collection of data from various department of VTM to analyze the working
capital management of VTM.
 For understanding the various reports, personal interviews are conducted.
 With the help of various techniques like:
- Operating Cycle analysis
- Ratio Analysis
- Common size statement
- Schedule of changes in working capital
The overall position of VTM is studied and analyzed
 Suggestions are given on the basis of findings for better understanding of
working capital management.
SCHEME OF PRESENTATION:
The project report is prepared in three parts.

First part of the report gives an overview and theoretical background to the subject
i.e working capital management.
Second part of the report presents a general profile of VINAYAK TEXTILE
MILLS LTD. where the summer training has been undertaken.
Third part of the report deals with the project under study which includes:

- Ratio Analysis
Chapter- 1
THEORETICAL BACKGROUND
OF WORKING CAPITAL MANAGEMENT
MEANING OF WORKING CAPITAL:-
In simple words working capital means that which is issued to carry out the day to day
operations of a business. Capital required for a 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 on 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.
Investment in these assets represents that part of firm capital, which is blocked on a
permanent or fixed basis called fixed capital. Funds are also needed for short term
purposes i.e. for the purchase of raw material, payment of wages and other day to day
operations of business. These funds are known as working capital. In other words,
working capital refers to that firm’s Capital, which is required for short – term assets or
current assets. Funds thus invested in current assets keep revolving last and being
constantly converted into cash and this cash flow is again converted into other current
assts. Hence it is known as circulating or short – term capital.
CONCEPT OF WORKING CAPITAL:
1. Gross Working Capital

It is simply called working capital refers to the firm’s investment in current assets so
the total current assets of the firm are known as gross working capital.
2. Net Working Capital

It represents the difference between current assets and current liabilities. Net
working capital may be positive or negative. Positive net working capital is that when
current assets are more than current liabilities. But when current liabilities become
more than current assets than it is negative working capital.
In brief we can say that working capital is too much necessary for the smooth functioning
and proper utilization of fixed assets.
TYPES OF WORKING CAPITAL:
1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working capital also
arises continuously. But the magnitude of current assets needed is not always
same; it increases and decreases over time. However there is always a minimum
level of current assets. This level is known as permanent or fixed working capital.
2. Temporary Working Capital:

The extra working capital needed to support the changing production and sales
activities, is called variable or functioning or temporary working capital. This can
be shown in the following diagram:-
Amount of Working
Capital Temporary capital
Permanent Capital
Time
NEED FOR WORKING CAPITAL:
The need for working capital cannot be overemphasized. The need of working capital
arises due to the time gap between production and realization of cash from sales. So the
working capital or investment in current assets becomes necessary need for working
capital. It arises due to following reasons:-
A. OPERATING CYCLE
“Operating cycle is the time duration requires for converting sales into cash after the
conversion of resources into inventories.”
First of all a firm purchase Raw Material, then after some processing it is
converted into work–in–progress and after this further processing is done to convert
work–in–progress in finished goods. After the raw material is converted into finished
goods, sales are made. Sales are no always full cash sales; there are credit sales also.
These credit sales after some period are converted into cash. So the whole process takes
the time. This time taken is known as the length of operating cycle. So operating cycles
includes:-
1. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)
So operating cycle can be known as following:-
Raw Material
Work in
Progress
Cash Collection
from
Debtors Sales
Finished Goods
Credit Cash Sales

Sales
If the length of the operating cycle has short length period then less working capital is
required. So working capital requirement is directly related with operating cycle.
Operating cycle may be of two types
1. Gross Operating cycle
2. Net operating cycle
1. Gross Operating cycle

Gross Operating cycle is the total time period from the conversion of Raw Material
into finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP
2. Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to
us for payment to them. So this reduces our requirement of working capital. This also
affects the operating cycle. Operating cycle’s length reduces with so many days as
provided by the creditors to us. The difference between gross operating cycle and
period allowed by the creditors for payment is known as net operating cycle.
NOC = GOC – CPP
B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

NEEDS FOR FUTURE:-
These needs may be of Raw Material or Finished Goods. Sometimes because of non-
availability of Raw Material or due to seasonal availability of Raw Material some
advances stock of Raw Material becomes necessary for company. In the similar way due
to sudden arise of demand of finished goods in future more finished goods are kept in
stock. For both reasons more working capital is required because funds will be involve in
these safeties stocks.
DETERMINENTS OF WORKING CAPITAL:
Followings are the main determinants of working capital.

1. Nature and Size of Business :
The working capital of a firm basically depends upon nature of its business for e.g.
Public utility undertakings like electricity; water supply needs very less working
capital because offer only cash sales whereas trading & financial firms have a very
less investment in fixed assets but require a large sum of money invested in working
capital.
The size of business also determines working capital requirement and it may be
measured in terms of scale of operations. Greater the size of operation, larger will be
requirement of working capital.
2. Manufacturing Cycle:
The manufacturing cycle also creates the need of working capital. Manufacturing
cycle starts with the purchase and use of Raw Material and completes with the production
of finished goods. If the manufacturing cycle will be longer more working capital will be
required or vice versa.
3. Seasonal variation:
In certain industries like VTM raw material is not available throughout the year. They
have to buy raw material in bulk during the season to ensure an uninterrupted flow and
process them during the year. Generally, during the busy season, a firm requires large
working capital than in the slack season.
.
4. Production Policy:
Production policy also determines the working capital level of a firm. If the firm has
steady production policy, it may require need of continuous working capital. But if the
firms adopt a fluctuating production policy means to produce more during the lead
demand season then the more working capital may require at that time but not in other
period during a financial year. So the different productions policy arises different type
of need of working capital.
5. Firm’s Credit Policy:
The firm’s credit policy directly affects the working capital requirement. If the firm
has liberal credit policy, hence the more credit period will be provided to the debtors
so this will lead to more working capital requirement. With the liberal credit policy
operating cycle length increases and vice versa.
6. Sales Growth:
Working capital requirement is directly related with sales growth. If the sales are
growing, more working capital will be needed due to arises need of more Raw Material,
finished goods and credit sales.
7. Business Cycle:
Business cycle refers to alternate expansion and contraction in general business. In a
period of boom, larger amount of working capital is required where as in a period of
depression lesser amount of working capital is required.
8. Earning Capacity & Dividend Policy:

If the firm has enough earnings and it is not paying dividend then it will not be in need
of external borrowings. If firm wants to increase its earning power then more working
capital will be required also to pay more dividend more profits are needed which give
rise to more working capital. Company is paying 42% dividend to its shareholder.
9. Price Level Changes:

Changes in the price level also effects the working capital requirements. Generally, the
rising prices will require the firm to maintain larger amount of working capital as
more funds will be required to maintain the same current assets.
10. Condition of Supply:

The inventory of raw material, spares and stores depends on the condition of supply.
If the supply is prompt the firm can manage with small inventory. However if the
supply is unpredictable then the firm to ensure continuity of production, should
acquire stocks as and when they are available and have to carry larger inventory on an
average.
11. Other Factors:

Certain other factors such as operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facilities, time
lag. etc. also influence the requirement of working capital.
So these are the main determinants of working capital. The importance of influence of
these determinants on working capital may differ from firm to firm.
MEANING AND NATURE OF WORKING CAPITAL

MANAGEMENT
The management of working capital is concerned with two problems that arise in
attempting to manage the current assets, current liabilities and the inter relationship that
asserts between them.
The basic goal is working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital
is maintained i.e. it is neither inadequate nor excessive. This is so because both
inadequate as well as excessive working capital position is bad for business.
MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-
1. What should be ratio of current assets to sales?
2. What should be the appropriate mix of short term financing and long term
financing for financing these current assets?
1. Current assets in relation to sales:-
If the firm can forecast accurately the factors, which effect the working capital, the
investment in current assets, can be designed uniquely. When uncertainty characteristics
the above factors, as it usually does the investment in current assets cannot be specified
uniquely. In case of uncertainty, the outlay on current assets should consist of base
component meant to meet normal requirement and a safety component meant to cope
with unusual requirement. The safety component depends upon low conservative or
aggressive in the current assets policy of a firm. If the firm purchases a very conservative
current asset policy it would carry a high level of current assets in relation to sales. If a
firm adopts a moderate current assets policy it would carry moderate level of current
assets in relation to sales, finally is a firm follows a highly aggressive current assets
policy, it would carry a low level of current assets in relation to sales.
VTM is following current assets policy showing moderate level of current assets in
relation to sales as is evident from ratio analysis.
2. Determining a Short Term and Long Term Financing Mix for

Financing of current assets:-
There are three approaches in this regard, which are discussed below:
HEDGING APPROACH
This approach is also called matching approach. In this approach there is a proper
matching of expected life of asset with the duration of fund. Usually, according to this
approach long-term sources are used for financing permanent current assets and fixed
assets & short-term sources are used for financing temporary current assets:
Temporary current assets
Short term financing
A
S term financing
S
E Permanent current assets
T Long term financing
S
Fixed Assets
Time
CONSERVATIVE APPROACH
In this approach there is more reliance on long-term financing in comparison to short-

term financing. Even some part of the temporary current comparison to finance from
long-term sources because long-term sources are less risky in comparison to short-term
sources.
Temporary Current Assets

A Short-term financing
S
S
E
T
S
Permanent Current Assets Long-term financing
Fixed Assets
Time
AGGRESSIVE APPROACH
In this approach there is more reliance on short term financing and even a part of
permanent current assets is financed from short-term finance.
Temporary current assets Short term financing

A
S
S
E
T Permanent current assets Long term financing
S
Fixed Assets
Time
In VTM, the current assets are financed from short term sources as well as long term
sources, so they follow conservative approach.
Chapter- 2
HISTORY OF THE INDIAN TEXTILE
INDUSTRY
HISTORY OF THE INDIAN TEXTILE INDUSTRY:
The human need is to eat well for to be alive and shelter to protect them from discomforts
of nature and a place to live in. Human beings also need something to cover their body to
protect from diverse climates and to add the appearance. Earlier there was a time when
the human being known nothing about the cloth to wear. The human beings first use
plant barks, leaves and animal skin to wrap around them. Then as the development of
brain took place, they started to explore other possibilities and invent more in this area.
There is constant search for clothing and it led to the knowledge of sources from
vegetation i.e. Cotton and from animals i.e. wool, which could be knitted and woven to
manufacture clothes to wear.
The commercial development of man-made fiber began late in the 19th Century,
experienced much growth during the 1940’s, expanded rapidly after world War – II and
in the 1970’s was still the subject of extensive Research and Development.
The spinning and weaving both are very common and attached with each other in all parts
of the world. We talk of the ancient times, when maximum work like weaving of the
clothes was done manually, but all the things were being done for the right perspectives.
From time to time in this world development had taken place, which has been found to be
a continuous process. Similarly considering the developments in the Spinning and
Weaving lot of improvements has come-up. Because earlier too was the Cotton crop was
grown by the farmers, but its end use was not done in an effective way, which seems
good. So much thick fiber was produced and accordingly its impact for the fabric
preparation.
APPARATUS USED FOR SPINNING AND WEAVING DURING
PRE-INDEPENDENCE PERIOD
Before Independence we talk of the political leaders like Mahatma Gandhi, who had
always insisted to use Khadi Clothes and even self-spinning and weaving. It is also
called as self-dependence for all needs. Such a good initiatives had come-up at India
level amongst the followers of the Leader – Mahatma Gandhi. On the other side too such
initiatives had been proved very good and had attracted many other western countries to
follow such practices and show their excitedness. Though in case we talk of the English
rule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but
after the freedom these leaders had got very good appreciation particularly for the self
spinning and weaving and in an overall manner this sector of Spinning and Weaving was
industrialized even after the independence too on the basis of Indian cotton growers.
It is needless to mention here that through out India, cotton growers belts are available
and after independence even English people take their raw material from here and had
established themselves with the Spinning and Weaving industries. Overall In India no
such preferences for the Spinning and Weaving industries were made, however the
Library research reveals that the first Cotton mill had been established in India during
1854 named as Bombay Spinning and Weaving company. Though the Cotton industry
had progressed a lot, but in case we say that India alone is heading this world, it is wrong.
Though in India Textile Machine manufacturers are there and one or two decades ago
they were the market leaders, but with the help of the other parts/people of world i.e.
Germany, Switzerland etc., India had made a very good recognition in the yarn market.
Because Indian Industrial Organizations have also initiated towards the most modernized
machinery produced by Schlafhorsts – Germany, Luwa – Humidification systems,
Switzerland. This is just the example of the development, that in India too the most
modern machinery is being installed. However, it is an evident that the Indian yarn is
always running on the development trend since its Inception of first unit in Bombay, but
its position in the international market has not appeared so good. Because many other
countries like China as Cotton Textiles has went ahead. Though till today India has
achieved a lot in the Textile Industry and almost 700 Textile units are working
successfully, because India is having at present more than 20 Million spindles and a
weaving capacity of more than 2.5 Lac looms and the total output value of the same is
around Rs.1500 Cores, employing more than 10 Lac of workers directly.
The invention and production of man made thirty three fibers that is synthetic fibers like
Nylon, Acrylic fibers, Polyester Fiber, Viscose, Filament yarns, Melange yarn, etc.,
which ultimately had given a good blow to grow for the Cotton Textile Industry and
know occupy a major part of consumer acceptance. About 50 countries have been
importing such material from India and the description of the Spinning and weaving
industry had remained incomplete without referring to the woolen industry.
Chapter- 3

The industrial city- Ludhiana nestles the corporate Headquarters of the Oswal Group of
industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in
Ludhiana, Vardhman Polytex Limited situated in Bathinda, Vinayak Textile Mills
situated in Ludhiana. Oswal group is earning laurels by exporting yarn of international
quality to several countries and VPL Bathinda is an ISO 9001-2000 certified company
and VTM is granting authorization to use the Trademark USTERIZED “USTER” think
quality.
BACK DROP:
OSWAL GROUP is a premier of textile group of northern India having its corporate
office situated at Ludhiana, Punjab,(India). The organization has existence for last 40
year in core competency of spinning. We were earlier part of the Vardhman Group.but
after settlement between two brother in 2003, we have named ourselves as Oswal Group
has mainly into Spinning and Dyeing of all type of Yarn in different manufacturing of
Garments. The group has ambitious plan to diversify in future but in textiles related
activities
Oswal Group will achieve a turnover of Rs.500 crores by strengthening its core
competencies and capacities in Textile and diversified business to create value for its
stakeholders.(USD 110 millions).
The group has very good potential and high presence in the textiles industry with well set
manufacturing set up for 100% cotton, Polyester cotton, Worsted Spun Yarn ,Dyed Yarn,
and other blended yarns. All the group units have state of the art technology imported
from machinery giant in Europe, Japan, China and many other countries. To ensure
quality commitment to its valuable customers, the R&D department is well equipped with
latest R&D equipments. Continuous efforts are always being made to further improve the
quality and match the industry standard to meet the actual requirements of its quality
conscious customers.
COMPANY STRUCTURE
OSWAL
GROUP
ANSHUPA
TI
LUDHIANA
VPL VTM
BATHIND LUDHIAN
A A
Anshupati Textiles Limited, based at Ludhiana in Punjab, the worsted spinning units in
the Indian subcontinent with 8000 worsted spindles installed, manufactures the Machine
Knitting Yarn, Mink Yarn and Fancy yarn, with vast product range, to meet every sort of
count combination demand of its prospective customers. The quality yarn in this unit is
manufactured using state of art technology imported from Europe, which is fully backed
with ultra modern R&D equipment for consistent quality. The yarn manufactured from
this unit holds a very strong reputation and demand both in domestic and international
market. The present capacity in terms of production is approximately 6.5 ton/Day
Vardhman Polytex Limited, a unit based at Bathinda in Punjab with 105000 cotton
spindles installed, is manufacturing 100% cotton yarn, Polyster cotton yarn and Tyre cord
yarn with vast range of count selection varies from NE 10 to 40 both in carded and
combed varieties. To ensure quality to its customers the group has received the ISO-
9001-2000 certification. This unit is exporting its product to Mauritius, Hong Kong,
Singapore, Egypt, Turkey, Bangladesh, China, Taiwan etc. The company keeps on
receiving repeat orders, which shows the level of confidence, bestowed by its customers
into it. The company had been awarded the Export House status by the Government of
India. The present capacity in term of production is around 65 Tons /day. They are also
thinking of producing Value added that is (i) Slub yarn (ii) Lyera yarn.
Vinayak Textile Mills, a unit at Ludhiana in Punjab with 50000 cotton spindles installed,
is manufacturing 100% cotton yarn and Polyster yarn with vast range of count selection
varies from NE 10s to 40s both in carded and combed varieties. The present capacity in
term of production is around 29Tons /Day and 14 -mt dyeing /day.
CURRENT SET UP:
Presently the Company has its corporate office situated at Chandigarh Road, village
Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are
looked after by qualified technocrats/professional at plant/work as well as at corporate
office having rich experience in their respective fields of management.
Ashok Oswal himself a Law Graduate has been looking after the textile business in this
company since 1987. Uptill family settlement, he was actively associated with the
business management of Vardhman group.
PRESENT CAPACITIES
Presently the group has following production capacity and product range at its different
manufacturing facilities.
Location Installed Production Product Range

Capacity Capacity
(spindles)
Bathinda (existing ) 105000 65Tons / Day Cotton, synthetic,
(VPL) blended yarn
Ludhiana 8000 6.5 Tons/Day Acrylic Yarn
(Anshupati Textile)
Ludhiana (VTM) 50000 29 Tons/Day 100%cotton
14-MT yarn,Polyester/
dyeing/Day Cottonblended
COMPUTERISATION
Presently the unit is operating under “SAP system”. This system is well structured
keeping in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The
system is functioning to online to finance, raw material, stores and commercial. All the
stauratory returns are generated online from the system.
Personal computers have also been provided separately for each department like
administration, costing, R&D, Maintenance as well as the production areas.
USTERIZED CERTIFICATION
The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/
Switzerland on April 10, 2007. M/S Vinayak Textile mills, Ludhiana / India fulfil all
conditions for using the brand USTERIZED and will be checked regularly at once per
year basis.
PRODUCTION
The unit is producing different types of yarn both for Domestic consumption and Export
purpose. The production department is headed by General Manager (G.M.). The VTM
has two units. The unit I is concerned with the production of 100% cotton yarn NE 10s-
40s, Carded & Combed, Single & Multifold, Dyed , Processed & Polyester yarn NE 10s-
40s, Carded & Combed with a capability to offer any blend. The unit-II expansion is
concerned with production of Worsted Spun yarn 100% Cotton. .Production capacity of
unit –I is 15 ton per day and unit-II is 13 tons per day.
MARKETING
For Marketing of different product, the unit is having a modern marketing department
headed by experienced team which covers all the activities for conversion of finished
goods into cash. It keeps vigil on the market feed-back on the level competition, market,
trend, changing customer needs and modifications. The marketing department deals with
domestic sales, while export department of the group manages export sales. The VTM.
having the export and domestic ratio is 34:66. The unit is having different channels for
distribution of its products.
1. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur.
2. Branches at Delhi and Ludhiana.
3. Direct Dispatches are also made by the units.
ORGNISATION STRUCTURE
A chart showing the organizational structure of VTM Ludhiana is given on the next page.
It shows the various hierarchical levels of the organization. It is a department line
organization which is divided into various department headed by their respective
department heads. All departments operate under the ultimate control of Chief Executive
Sh. Ashok Goyal. The orders flow directly from unit head to different departmental heads
down the line to respective department subordinates.
Manufacturing Process Flow Chart of VPL
100% COTTON CARDED/COMBED YARN
Issue of Cotton Bales
Laying Down
Blow Room
Card
Breaker Draw Frame Unilap
Finisher Draw Frame Comber
Speed Frame
Ring Frame
Winding
Cheese Winding
T.F.O
Conditioning Conditioning
Packing for Single Yarn Packing for Double Yarn
Storage & Dispatch

MANUFACTURING PROCESS IN VINAYAK TEXTILE MILLS
LIMITED, LUDHIANA
Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.
1. MIXING
The different varieties of cotton are issued as per product mix from the raw material
section in bale from. The different varieties of cotton and different lots are mixed together
as per the requirement of end product and standard recommended mixings. The material
is conditioned in mixing for 24 hours.
2. BLOW ROOM
In this process, the cleaning and opening of fibers is done in a sequence of beaters. Main
purpose is to reduce tuft size, remove the trash particles and foreign matter etc, which
often comes in the bales.
3. CARDING
In this process, further cleaning of fibers is done and the fibers are opened into single
fibers extent i.e. the main purpose is further removal of trash in cotton and the
industrialization and parallelization of fibers. From the carding machine, the material is
delivered in the form of sliver.
4. DRAW FRAME
The purpose of this process is to reduce the wt/yard in the card sliver 6 to 8 end of card
slivers are doubled together in this process to reduce variations and further drafting is
done to reduce the wt/yard of delivered sliver. Two passages are given at the draw frame
stage.
In case of combed counts, the card sliver is fed to the precombing draw frame. The
purpose of combing draw frame is to reduce the wt/yard variations in the card sliver and
to parallelize the fibers. Singles passage is given at the precombing stage.
5. LAP FORMER
20-25 precombed draw slivers are fed together to produce a lap sheets of fibers, which is
wound on the spools.
6. COMBERS
The laps prepared on lap former are fed to combers. The main purpose of combing
process is to remove the short fibers from the material in the form of noil. The average
noil percentage caries from 15% to 18%. The material is delivered in the form of sliver.
7. SPEED FRAME
The finisher draw frame sliver is fed to the speed frames for conversion into the roving
form. In this process the wt/yard of the sliver is reduced, slight twist is given to the fleece
and the material delivered in the form of roving, wound on the plastic bobbins.
8. RING FRAME
The roving is fed to ring frame for conversion into yarn. In the process, the weight / yd of
roving is reduced as per requirement of ultimate user and the delivered yarn is wound on
the plastic bobbins.
9. WINDING
In this process, the yarn is wound on paper cones to produce bigger package, as per
requirement of the market. The weight / package varies from 1.2 kilogram to 2.1
kilogram. During the process, in addition to the formation of bigger packages, the yarn
faults are also removed with help of electronic yarn cleaner.
10. DOUBLING
In the case of type cord the process is same upto cone winding. After cone winding the
yarn is fed into Cheese Winding. In the process 2 ply or 4 ply is to be done as per
requirement. After the yarn is fed into ring doubling and required T.P.I. is given in 2 ply
or 4 ply yarn. In the next process in assembly cheese winding is get the package in the
package in the required from to be fed into T.F.O. in T.F.O. final yarn is prepared in the
form of cheese and required T.P.I. is given to the final yarn in process.
11. PACKING
In this process, the cones / cheese are packed in bags or cartoons as per the requirement
of the market. In addition to the packing the material is checked thoroughly to avoid
mixing of different materials
Chapter- 4

The management of working capital is very important. It involves the study of day to day
affairs of the company. The motive behind the study is to develop an understanding about
the working capital management in the running business organization and to help the
company in developing the efficient working capital management. So it helps in future
planning and control decisions.
OBJECTIVES OF THE STUDY

The objectives of the study are as follows:
 To analyze the working capital management of the company.
 To determine the operating cycle of the unit.
 To know the future need of working capital in the running organization.
 To render recommendations for the effective management of working capital.
SCOPE OF THE STUDY

The study is conducted at “VTM –LUDHIANA” for 6 weeks duration. The study of W.C.
management is purely based on secondary data and all the information is available within
the company itself in the form of records. To get proper understanding of this concept, I
have done the study of the balance sheets, profit and loss a/c’s, cash accounts, trial
balance, cost sheets. I have also conducted the interviews with employees of accounts and
finance department and stores department. So, scope of the study is limited up to the
availability of official records and information provided by the employees. The study is
supposed to be related to the period of last four years.
RESEARCH METHODOLOGY
 To recognize the various type of information which are necessary for the study of
working capital management.
 Collection of data from various department of VTM to analyze the working
capital management of VTM.
 For understanding the various reports, personal interviews are conducted.
 With the help of various techniques like:
- Ratio Analysis
The overall position of VTM is studied and analyzed
 Suggestions are given on the basis of findings for better understanding of working
capital management.
SOURCES OF INFORMATION
 Primary Data – The personal interview with senior officials and various members
of finance and accounts department and also with other departments and collected
the data.
 Secondary Data – All the details necessary for the study was available within the
company itself.
LIMITATIONS OF THE STUDY

 As central purchase office purchase raw material and central marketing yarn make
sales. So more detailed information cannot be received about these.
 Cash from debtors are collected by the corporate office through commission
agents. So efforts for collection of debtors cannot be clearly known from VTM
Ludhiana.
 Investment of funds are also made by corporate office, so it becomes difficult to
know that how much investment is made in different ways for continuous
availability of funds.
Chapter- 5

1.OPERATING CYCLE ANALYSIS

Operating cycle refers to the time period which starts from the raw material purchases
and ends with realization of receivable. So it is total time gap between raw material
purchases to total debtors’ collection. This is also known as working capital cycle.
Operating cycle is therefore expressed in terms of months or weeks or days. The higher
the operating cycle period, higher the working capital requirement. It comprises of raw
material conversion period, WIP conversion period, FG conversion period and debtors’
conversion period and creditors period. The basic reason for calculating operating cycle is
to find out the means for reducing the duration of operating cycle because if duration of
operating cycle will be less than working capital requirement will be less.
OC = R + W + F + D – C
Where,
R = raw material conversion period
W = work in process period
F = finished goods conversion period
D = debtor collection period
C = creditors payment period
(1) Raw Material Conversion Period (RMCP)

= Average Raw Material Stock X 360
Raw Materials consumed during the year
FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average raw
material stock 183071228.14 227150926.07 218046754.94 328005499.45
Raw material
consumed 385430133.40 309974487.22 410666073.76 495453061.76
during the year
RMCP 169.2 DAYS 263.8 DAYS 191.1 DAYS 238.3 DAYS
300
250
200
150
RMCP
100
50
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average raw
material stock - 15012815.54 16023458.66 11108879.34
Raw material
consumed - 122961363.25 263718304.68 338194022.33
during the year
RMCP - 43.9 DAYS 21.9 DAYS 11.8 DAYS
45
40
35
30
25
20 RMCP
15
10
5
0
2004-05 2005-06 2006-07 2007-08
(2) Work in Progress Conversion Period (WIPCP)

= Average stock in progress X 360
Cost of Production
FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average stock in
progress 4046698.00 3388006 6406842 8595640.40
Cost of
production 500317045.88 426414576.75 608858271.37 751824244.94
WICP 2.91 DAYS 2.9 DAYS 3.8 DAYS 4.1 DAYS
4.5
4
3.5
3
2.5
2 WICP
1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average stock in
progress 1021072 5791673 6692336 4917031.00
Cost of
production 25254802.19 219005634.76 404498734.7 524670967.58
WICP 14.6 DAYS 9.5 DAYS 5.9 DAYS 3.4 DAYS
16
14
12
10
8
WICP
6
4
2
0
2004-05 2005-06 2006-07 2007-08
(3) Finished Goods Conversion Period (FGCP)

= Average Finished good inventory
X
X 360
360
Cost of goods sold
FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average
finished goods 18939831.18 9473270 12545845 39817039.68
inventory
Cost of goods
sold 500317045.88 426414576.75 751824244.94
608858271.37
FGCP 13.6 DAYS 7.9 DAYS 7.4 DAYS 19.1 DAYS
20
15
10
FGCP
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average - 5857416 6745966 10034498
finished goods
inventory
Cost of goods - 219005634.76 404498734.7 524670967.58
sold
FGCP - 9.6 DAYS 6 DAYS 6.9 DAYS
10
6
FGCP
4
0
2004-05 2005-06 2006-07 2007-08
(4) Debtors’ Conversion Period (DCP)

= Average Debtors X 360
Credit Sales
FOR SPINNING MILL :

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average debtors 37279070.84 37279070.84 92312638.13 29970369.49
Credit sales 596069587.62 543167006.35 588183650.23 730047747.60
DCP 22.4 DAYS 24.7 DAYS 56.5 DAYS 14.8 DAYS
60
50
40
30
DCP
20
10
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:
PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average debtors 247769 28959455.84 48904270.97 99301521.09
Credit sales 212240 202379449.81 492529652.69 610863493.76
DCP 420.3 DAYS 51.5 DAYS 35.7 DAYS 58.5 DAYS
450
400
350
300
250
200 DCP
150
100
50
0
2004-05 2005-06 2006-07 2007-08
(5) Credit Conversion Period (CCP)

= Average Creditors
X 360
Credit Purchases
FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08
Average creditors 4316518.31 5840979.88 5294945.83 23709393.26
Credit purchases 385430133.40 309974487.22 410666073.76 495453061.76
CCP 4.03 DAYS 6.8 DAYS 4.6 DAYS 1.7 DAYS

7
6
5
4
3 CCP
2
1
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:
16
14
12
10
8
CCP
6
4
2
0
2004-05 2005-06 2006-07 2007-08
PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average creditors - 5449322.89 1203818.69 1767614.89
Credit purchases - 122961363.25 263718304.68 338194022.33
CCP - 15.9 DAYS 1.6 DAYS 1.9 DAYS

GROSS OPERATING CYCLE FOR SPINNING MILL:
YEAR RMCP WICP FGCP DCP GOC
2004-05 169.2 DAYS 2.91 DAYS 13.6 DAYS 22.4 DAYS 208.1 DAYS
300
250
200
150
GOC
100
50
0
2004-05 2005-06 2006-07 2007-08
NET OPERATING CYCLE FOR SPINNING MILL:

YEAR GOC CCP NOC
2004-05 208.11 DAYS 4.03 DAYS 204.08 DAYS
2005-06 299.3 DAYS 6.8 DAYS 292.5 DAYS
2006-07 258.8 DAYS 4.6 DAYS 254.2 DAYS
2007-08 276.3 DAYS 1.7 DAYS 274.6 DAYS
300
250
200
150
NOC
100
50
0
2004-05 2005-06 2006-07 2007-08
GROSS OPERATING CYCLE FOR DYE HOUSE:

YEAR RMCP WICP FGCP DCP GOC
2004-05 - 14.6 DAYS - 420.3 DAYS 434.9 DAYS
2006-07 21.9 DAYS 5.9 DAYS 6 DAYS 35.7 DAYS 69.5 DAYS
450
400
350
300
250
200 GOC
150
100
50
0
2004-05 2005-06 2006-07 2007-08
NET OPERATING CYCLE FOR DYE HOUSE:

YEAR GOC CCP NOC
2004-05 434.9 DAYS - 434.9 DAYS
2005-06 114.5 DAYS 15.9 DAYS 98.6 DAYS
2006-07 69.5 DAYS 1.6 DAYS 67.9 DAYS
2007-08 80.6 DAYS 1.9 DAYS 78.7 DAYS
450
400
350
300
250
200 NOC
150
100
50
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
It is claimed that gross operating cycle of VTM for spinning mill is increasing in year
2004-05 and 2005-06 and it is decreasing for dye house in year 2004-05 and 2005-06. For
spinning mill in year 2004-05 it is 208.11 days then it increased to 299.3 days in year
2005-06. In 2006-07, it is decreased to 258.8 days. The main reason of increasing gross
operating cycle in 2004-05 and 2005-06 is due to more availability of raw material in the
stores but in year 2006-07 there is less GOC due to less availability of raw material in
stores. The GOC for dye house has shown a significant decreament from 434.9 days in
2004-05 to 69.5 days in year 2006-07. In year 2007-08, it came out to be 80.6 days. The
GOP for dye house is not satisfactory as it has decreased to a great extent.
2.ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON

BASIS OF THE HISTORICAL DATA
There are number of devices to analyze working capital like ratio analysis, common size
statement etc. We will discuss them one by one as follows:
1. RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is
the process of establishing and interpreting various ratios for helping in making decisions.
It only means of better understanding of financial strengths and weaknesses of a firm.
The main emphasis has been on calculating the ratios related to a working capital
management.
LIQUIDITY RATIOS
These are the ratios which measures the short term solvency or financial position of a
firm. In other words, it refers to the ability of a concern to meet its current obligations as
and when these become due. To measure the liquidity of a firm, the following ratios can
be calculated.
CURRENT RATIO – It may be defined as the relationship between current assets and
current liabilities. This ratio is also known as working capital ratio and measures the
ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and
has the ability to pay its current obligations in time as and when they become due.
A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current
liabilities is considered to be satisfactory.
Current Ratio = Current Assets

Current Liabilities
Current Ratio of VTM
FOR SPINNING MILL:
YEAR CURRENT CURRENT CURRENT RATIO

ASSETS LIABILITIES (CR)
2004-05 329780134.40 22952307.82 14.4
2005-06 337914119-55 25398799.03 13.3
2006-07 372031954.03 29553280.08 12.6
2007-08 462706185.06 47891481.92 9.7
16
14
12
10
8
CR
6
4
2
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:

YEAR CURRENT CURRENT CURRENT RATIO
ASSETS LIABILITIES (CR)
2004-05 9633007.63 10462522.55 0.9
2005-06 64846029.63 13090777.94 4.9
2006-07 92984361.6 8735151.3 10.6
2007-08 148537709.99 5975377.17 24.9
25
20
15
CR
10
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
The current ratio of the spinning mill is above the standard and it guarantees the payment
of dues in time. The current ratio of the company has been considerably high because
they had made over investment in inventories which is the main reason for the high ratio
of current assets. Inventories are high because of seasonal availability of raw material.
The overall position of current ratio for spinning mill is satisfactory.
The current ratio of dye house has shown a remarkable increament from 0.9 in 2004-05
to10.6 in 2006-07 and then to 24.9 in 2007-08. Initially in 2004-05, the ratio was not
satisfactory but it is quite satisfactory for the years after 2004-05 and especially for the
year 2007-08.
LIQUID RATIO – This ratio is also known as quick ratio or acid test ratio. It is a more
rigorous test of liquidity than the current ratio. It is based on those current assets which
are highly liquid. Inventory and prepaid expenses are excluded because they are deemed
to be least liquid component of current assets. A high quick ratio is the indication that the
firm is liquid and has the ability to meet its current liabilities in time and on the other
hand low ratio represents liquidity position is not good.
Quick Ratio = Quick or Liquid Assets
Current Liabilities
Quick Assets = Current Assets – Inventory – Prepaid Expenses
Quick Ratio of VTM
FOR SPINNING MILL:
YEAR LIQUID ASSETS CURRENT LIQUID RATIO

LIABILITIES (LR)
2004-05 120598521 22952307.82 5.3
2005-06 89811409.92 25398799.03 3.5
2006-07 127216004.91 29553280.08 4.3
2007-08 81358926 47891481.92 1.7
3
LR
2
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:

YEAR LIQUID ASSETS CURRENT LIQUID RATIO
LIABILITIES (LR)
2004-05 6123027.86 10462522.55 0.6
2005-06 33218697.57 13090777.94 2.5
2006-07 56812234.26 8735151.3 6.5
2007-08 115776657.53 5975377.17 19.4
20
15
10
LR
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
According to rule of thumb, it should be 1:1. For spinning mill, the liquid ratio has
decreased over the past four years. It was 5.3 in 2004-05 and decreased to 4.3 in 2006-07
and then to 1.7 in 2007-08. The decreament in the ratio is not satisfactory, however the
ratio 1.7 in 2007-08 matches the rule of thumb but it should be quite more than the rule of
thumb.
For dye house,the liquid ratio has shown a significant increament over the past four years.
It increased from 0.6 in 2004-05 to 6.5 in 2006-07 and then to 19.4 in 2007-08. The
increament in the ratio is quite good for the dye house. This shows that the investment in
liquid assets has increased over the past years.
ABSOLUTE LIQUID RATIO – Although receivables are generally more liquid than
inventories yet there may be doubt regarding their realization into cash in time. Absolute
liquid ratio shows the relationship between liquid assets which include cash, bank and
marketable securities.
Absolute Liquid Ratio = Absolute Liquid Assets
Current Liabilities
Absolute Liquid Ratio of VTM

FOR SPINNING MILL:
YEAR ABSOLUTE CURRENT ABSOLUTE

LIQUID ASSETS LIABILITIES LIQUID RATIO
(ALR)
2004-05 435629.36 22952307.82 0.01
2005-06 569656 25398799.03 0.02
2006-07 5210807.58 29553280.08 0.18
2007-08 395884.64 47891481.92 0.01
0.18
0.16
0.14
0.12
0.1
0.08 ALR
0.06
0.04
0.02
0
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:

YEAR ABSOLUTE CURRENT ABSOLUTE
LIQUID ASSETS LIABILITIES LIQUID RATIO
(ALR)
2004-05 - - -
2005-06 233902 13090777.94 0.01
2006-07 253609 8735151.3 0.02
2007-08 - - -
0.02
0.015
0.01
ALR
0.005
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
The acceptable standard for this ratio is 0.5:1. Thus spinning mill and dye house, we can
say that in all the years, it is below the standard due to very less cash and bank balance
maintained because major cash receipts and payments are handled by corporate office. It
is very less in 2005-06, 2006-07 due to increased cost of production both for spinning
mill and dye house.
WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio

indicates the velocity of the utilization of net working capital. This ratio measures the
efficiency with which the working capital is being used by a firm.
Working Capital Turnover Ratio = Sales

Net Working Capital
Working Capital Ratio of VTM
FOR SPINNING MILL:
YEAR SALES NET WORKING WCTR
CAPITAL
2004-05 596069587.62 306883587.58 1.9
2005-06 543167006.35 312620335.52 1.7
2006-07 588183650.23 342591885.95 1.7
2007-08 730047747.60 415076656.14 1.8
1.9
1.85
1.8
1.75
WCTR
1.7
1.65
1.6
2004-05 2005-06 2006-07 2007-08
FOR DYE HOUSE:
YEAR SALES NET WORKING WCTR

CAPITAL
2004-05 - - -
2005-06 202379449.81 51755251.69 3.9
2006-07 492529652.69 84249210.4 5.8
2007-08 610863493.76 142581027.83 4.3
3
WCTR
2
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
This ratio indicates the number of times the working capital is turned over in the course
of a year. A high working capital ratio indicates the effective utilization of working
capital and less working capital ratio indicates less utilization. For spinning mill, the ratio
is quite same for the past four years. It is 1.9 in 2004-05, 1.7 in years 2005-06 and 2006-
07 and 1.8 in 2007-08. For dye house, the ratio is more than that of spinning mill. It
shows increament from 3.9 in 2005-06 to 5.8 in 2006-07 and then decreased to 4.3 in
2007-08. The ratio is satisfactory for dye house but it should not decrease further.
2. COMMON SIZE STATEMENT ANALYSIS
This analysis is mainly to see the composition of working capital. Its purpose is to see the
%age of each asset to the total asset and %age of each liability to total liability.
COMMON SIZE STATEMENT
FOR SPINNING MILL:
FOR YEAR 2004-05:
PARTICULARS AMOUNT ( IN RS.) %

FIXED ASSETS
Net block 570440434.93 62.18
Capital work-in-progress 17200494.12 1.87
Project & Pre-operative
expenses - -
Total fixed assets 587640929.05 64.05
CURRENT ASSETS
Inventories 208195599.41 22.69
Sundry debtors 37039996.26 4.04
Cash & Bank Balances 435629.36 0.05
Loans & Advances 84108909.37 9.17
Total current assets 329780134.4 35.95
Total assets 917421063.45 100
SHARE CAPITAL &
RESERVES
Inter unit balances 567503938.84 61.94
Secured loans 336825183.77 36.76
Reserves & Surplus (9804605.98) (1.07)
Total Capital & Reserves 894524516.63 97.64
CURRENT LIABILITIES
Sundry creditors 3014518.31 0.33
Other liabilities 16627112.73 1.81
Interest accrued but not
due 668837 0.07
Security deposits &
Retention money 1339839.78 0.14
Total current liabilities 21650307.82 2.36
Total of liability side 916174824.45 100
FOR YEAR 2005-06:
PARTICULARS AMOUNT (IN RS.) %

FIXED ASSETS
Net block 565709880.59 49.8
Capital work-in-progress 227016140.46 20
expenses 4400478.52 0.39
CURRENT ASSETS
Inventories 246141889.88 21.69
Cash & Bank Balances 569656 0.05
Loans & Advances 53923502.83 4.75
Total assets 1135040619.12 100
SHARE CAPITAL &
RESERVES
Secured loans 425924449.39 31.95
Reserves & Surplus 24531788.78 1.84
CURRENT LIABILITIES
due - -
Security deposits &
FOR YEAR 2006-07:

FIXED ASSETS
Net block 873085829.95 67.94
expenses - -
CURRENT ASSETS
Inventories 240453655.62 18.71
Loans & Advances 34054852.70 2.65
Total assets 1285106467.6 100
SHARE CAPITAL &
RESERVES
Secured loans 532957606.95 41.47
CURRENT LIABILITIES
due - -
Security deposits &
FOR YEAR 2007-08:

FIXED ASSETS
Net block 822992994.43 62.69
expenses - -
CURRENT ASSETS
Inventories 379510100.55 28.91
Loans & Advances 52829830.38 4.02
Total assets 1312865150.41 100
SHARE CAPITAL &
RESERVES
Secured loans 431510188.42 31.06
CURRENT LIABILITIES
due - -
Security deposits &
Retention money - -
FOR DYE HOUSE:
FOR YEAR 2004-05:

FIXED ASSETS
Net block 186017879.85 93.34
expenses - -
CURRENT ASSETS
Inventories 3247313.77 1.63
Sundry debtors 247769 0.12
Cash & Bank Balances - -
Loans & Advances 6137924.86 3.08
Total assets 199292469.25 100
SHARE CAPITAL &
RESERVES
Secured loans 59872920 (6.02)
Reserves & Surplus (11994678.41) 30.04
CURRENT LIABILITIES
due - -
Security deposits &
FOR YEAR 2005-06:

FIXED ASSETS
Net block 184248879.27 73.72
expenses - -
CURRENT ASSETS
Inventories 31300541.06 12.52
Total assets 249944005.36 100
SHARE CAPITAL &
RESERVES
Secured loans 59872920 5.22
Reserves & Surplus (14177921.30) 22.06
CURRENT LIABILITIES
due - -
Security deposits &
FOR YEAR 2006-07:

FIXED ASSETS
Net block 220213154.5 70.24
Capital work-in-progress 300237 0.096
expenses - -
CURRENT ASSETS
Inventories 35816899.3 11.42
Total assets 313497752.6 100
SHARE CAPITAL &
RESERVES
Secured loans 59872920 92.6
CURRENT LIABILITIES
due - -
Security deposits &
FOR YEAR 2007-08:

FIXED ASSETS
Net block 209812946.08 58.39
expenses - -
CURRENT ASSETS
Inventories 32341614.46 9
Cash & Bank Balances - -
Loans & Advances 16894574.44 4.70
Total assets 359334193.13 100
SHARE CAPITAL &
RESERVES
Secured loans 131435332.52 12.56
CURRENT LIABILITIES
due - -
Trade deposits and other
Advances 131757.07 0.03
ANALYSIS
For spinning mill, the major part of current assets involves inventories. It covers more
than 50% of total current assets. The debtors also have significant part of current assets. It
contributes approximate 11% to 30% part of current assets for all the years from 2004-05
to 2007-08. The least contribution is thus of cash and bank balance. On the other hand,
current liabilities consist of mainly creditors and other liabilities. In 2007-08, current
assets have increased due to increase in inventories and loans & advances, and current
liabilities have also shown increament. So the working capital is more for year 2007-08
as compared to last year’s working capital.
For dye house, the inventories form a good portion of current assets and contribute 30%
to 50% of the total current assets over the past years. The sundry debtors also show
fluctuating proportions in the total current assets over the years. The proportion is quite
less for year 2004-05 but it increased significantly for the next years and contributed
about 66% to the total current assets in year 2007-08. The current liabilities mainly
consist of sundry creditors and other liabilities. The sundry creditors have decreased over
the past years. The other liabilities have shown increament from year 2004-05 to year
2006-07 but it has decreased in year 2007-08.
3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING

CAPITAL
SCHEDULE OF CHANGES IN WORKING CAPITAL:
FOR SPINNING MILL:

ANALYSIS:
PARTICULARS 2004-05 2005-06 INCREASE DECREASE

CURRENT
ASSETS:
Inventories 208195599.41 246141889.88 37946290.47
S. debtors 37039996.26 37279070.84 239074.58
Cash & Bank 435629.36 569656 134026.64
Balances
Loans & 84108909.37 53923502.83 30185406.54
Advances
Total current 329780134.4 337914119.55
assets (A)
CURRENT
LIABILITIES:
S. creditors 4316518.31 5840979.88 1524461.57
Other liabilities 16627112.73 18036489.88 1409377.15
Int. accrued but 668837 - 668837
not due
Security 1339839.78 1521329.27 181489.49
deposits &
Retention
money
Total current 22952307.82 312515320.52
liabilities (B)
Working capital 306827826.58 312515320.52
(A-B)
Net increase in 5687493.94 5687493.94
working capital
312515320.52 312515320.52 38988228.69 38988228.69
FOR YEARS 2004-05 AND 2005-06:

CURRENT
ASSETS:
Inventories 240453655.62 379510100.55 139056444.93
S. debtors 92312638.13 29970369.49 62342268.64
Cash & Bank 5210807.58 395884.64 4814922.94
Balances
Loans & 34054852.70 52829830.38 18774977.68
Advances
Total current 372031954.03 462706185.06
assets (A)
CURRENT
LIABILITIES:
S. creditors 5294945.83 23709393.26 18414447.43
Trade deposits - 706233.46 706233.46
Security 2938714.93 - 2938714.93
deposits &
Retention
money
Total current 29553280.08 47891481.92
liabilities (B)
Working capital 342478673.95 414814703.14
(A-B)
Net increase in 72336029.19 72336029.19
working capital
414814703.14 414814703.14 160770137.54 160770137.54
As we have a look on the schedule of changes in working capital for the spinning mill
over the years 2004-05 and 2005-06, we find that, among current assets,inventories,
sundry debtors and cash & bank balances have shown increament from year 2004-05 to
year 2006-07. The Loans & advances have got decreased in the same years. Among the
current liabilities, the sundry creditors and other liabilities have increased. So the overall
net working capital has increased.
FOR YEARS 2006-07 AND 2007-08:

Among the current assets,inventories and loans & advances have increased and sundry
debtors and cash & bank balances have shown decreament. The total current assets have
increased. Among the current liabilities,sundry crditors and other liabilities have
increased. So the net working capital has also increased.
FOR DYE HOUSE:

CURRENT
ASSETS:
Inventories 3247313.77 31300541.06 28053227.29
S. debtors 247769 28959170.26 28711401.26
Cash & Bank - 233902 233902
Balances
Loans & 6137924.86 4352416.31 1785508.55
Advances
Total current 9633007.63 64846029.63
assets (A)
CURRENT
LIABILITIES:
S. creditors 8359951.15 5449322.89 2910628.26
Other liabilities 1429726.92 6821847.92 5392121
Security 672844.48 819607.13 146762.65
deposits &
Retention
money
Total current 10462522.55 13090777.94
liabilities (B)
Working capital (829514.92) 51755251.69
(A-B)
Net increase in 52584766.61 52584766.61
working capital
51755251.69 51755251.69 59909158.81 59909158.81
CURRENT
ASSETS:
Inventories 35816899.34 32341614.46 3475284.88
S. debtors 48904270.97 99301521.09 50397250.12
Cash & Bank 253609 - 253609
Balances
Loans & 8009581.93 16894574.44 8884992.51
Advances
Total current 92984361.24 148537709.99
assets (A)
CURRENT
LIABILITIES:
S. creditors 1203818.69 1767614.89 563796.2
Trade deposits - 131757.07 131757.07
Security 195567.89 - 195567.89
deposits &
Retention
money
Total current 8735151.11 5975377.17
liabilities (B)
Working capital 84249210.13 142562332.82
(A-B)
Net increase in 58313122.69 58313122.69
working capital
142562332.82 14256332.82 62737569.84 62737569.84
ANALYSIS
FOR YEARS 2004-05 AND 2005-06:

Among the current assets, inventories, sundry debtors and cash & bank balance have
increased but the loans & advances have decreased. The total current assets have
increased. Among the current liabilities, sundry creditors have decreased and other
liabilities have increased. The total current liabilities have increased. So, the net working
capital has increased.
FOR YEARS 2006-07 AND 2007-08:
Among the current assets, inventories and cash & bank balances have decreased. On the
other hand, sundry debtors and loans & advances have increased. The total current assets
have increased. Among the current liabilities, sundry creditors have increased but other
liabilities have decreased. So, the net working capital has increased.
Chapter- 6
CASH MANAGEMENT
CASH MANAGEMENT
Cash management refers to management of cash balance and the bank balance and also
includes the short term deposits. The cash is important current asset for the operation of
the business. Cash is the most liquid and can be used to make immediate payments.
Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or
force it to sell its other assets immediately. On the other hand extreme liquidity may take
uneconomic investments. This underlines the significance of cash management.
The term cash includes coins, currency and cheques held by the firm ad balances in its
bank accounts. Sometimes near- cash items such as marketable securities of bank item
deposits are included in cash.
A financial manager is required to manage the cash flows (both inflows and outflows)
arising out of the operations of the firm. For this he will have to forecast the cash inflows
from sales and outflows for costs etc. This will enable the financial manager to identify
the timings as well as amount of future cash flows. Cash management does not end here
and the financial manager may also be required to identify the sources from where cash
may be produced on a short term basis or the outlets where excess cash may be invested
for a short term.
Cash is the basic input needed to keep the business running on continuous basis. It is also
the ultimate output expected to realize by selling the product manufactured by the firm.
Cash shortages will simply disturb the firm’s manufacturing operations where excessive
cash will simply remain idle. Thus, firm should keep sufficient cash neither more nor
less. Hence, a major function of the financial manager is to maintain a sound cash
position. Cash management is one of the key areas of working capital management. A
part from the fact that it is the most liquid current asset
, cash is the common denominator to which all the current assets can be reduced because
the major liquid asset i.e. receivables and inventory get eventually converted into cash.
Cash management is concerned with the managing of:
 Cash inflows and outflows of the unit
 Cash flows within the unit
 Cash balance held by the unit at a point of time by financing deficit or investing
surplus cash
MOTIVES FOR HOLDING CASH
Transaction Motive
It means a firm holds cash for conduct of business. The daily requirements of cash come
under this motive. So enough cash for smooth business is required for transaction motive.
Precautionary Motive
Under this motive cash is held for most contingencies in future. There may be so many
reasons due to which the emergency of cash arises. These reasons can be:
(i) Sudden rise in the demand which leads to more production
(ii) Due to inflation
(iii) Due to any miss-happening in future like loss by fire theft etc. the cash is held
for precautionary motive in advance. This cash may be held as marketable
securities which are highly liquid and low risky.
Speculative Motive
The speculative motive relates to holding of cash for investing in profit making
opportunity as and when arises. The opportunity may arise in securities, in material
purchasing or in any other type. By holding cash for speculative motive, the firm can
choose most profitable opportunity, yet by enlarge, business firm do not engage in
speculations because the primary motive to hold cash are transaction and precautionary
motive.
In VTM, it holds cash only for transaction motive. Speculation and precautionary motives
cash is held by corporate office. If the VTM requires some more cash to meet any future
contingency then it informs about it to corporate office and corporate office sends cash to
VTM as per requirement. But the VTM has to give the reasons for extra cash to
corporate office.
The firm should evolve strategies regarding the following four facts of cash management:
(1) Cash Planning
(2) Managing the cash flow
(3) Optimum cash level
(4) Investing surplus cash
1. CASH PLANNING
Cash planning is a technique to plan to control the use of cash. Cash planning can help to
anticipate future cash flows and the need of the form and reduces the possibility of idle
cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the
most significant device to plan for and control cash receipt and payments.
The unit under the study makes cash planning through following tools:
 Cash Budget
 Rolling cash flow statement
 Daily cash flow statement
The cash budgets are prepared by the firm on monthly and yearly basis. Through cash
budget the unit can make estimates of cash receipts and disbursement during a future
period of time. There estimates show the requirement of cash in the unit.
Another device used for cash planning is six monthly rolling cash flow statement
prepared on monthly basis. This statement shows the projections of inflows and outflows
of cash during the next six months.
This statement can help in taking various decisions, if the unit wants to make any capital
payment, these statements can tall when there is surplus of cash and payments can be
made during the month.
Daily cash flow statement is prepared to see the daily cash position. There estimations are
sent to corporation office at Ludhiana so that needed cash is obtained at night time.
2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and
outflows without any loss to the unit and without impairing its goodwill in the market.
These are made at head office Ludhiana so the main source of cash inflows to VTM is the
cash credit limit, which is as follows:
Banks Main Limit Sub-limit transfer to
(in crores) LDH Unit (in crores)
Peak Normal
Punjab National Bank. 2 crores 2 crores 5 crore in month.
The main limits are controlled by H.O. The sub-limits have been allocated to the unit for
fulfilling day-to-day requirements of working capital. The daily bank-position of sub-
limits is fixed to H.O. for monitoring daily bank position. In case of drawn in sub-limits
the funds get transferred from main limits. The interest rate paid for this is near about
11.25%. The cash credit limits are sanctioned by the bank against the hypothecation
stocks and fluctuating assets as security.
The unit can withdraw from these limits as and when needed. The amount received from
the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash
management the surplus funds are transferred to other units if those units need cash thus
increasing the overall profitability.
Main outflow of the unit is on raw material cost. Different types of raw material are
purchased from different states. Normally cotton is purchased during peak season when
good quality cotton is available, generally payment for cotton is made when cotton is
received in the mill, and credit period depends upon the states from which cotton is
purchased.
Cash outflows also arise on account of purchase of stores, spares and all other material
normal credit for these products is mainly 30 to 60 days and full credit period is used.
3. DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the
optimum level i.e. neither it is too high that it remains idle and the firm losses interest on
it, nor it is too low that the firm is always in cash tight position. The unit always keep 1.5
lacs for the routine expenses, around the days of wages the amount is approx. 4 lacs per
day is kept in hand, thus the unit maintains the appropriate amount of cash balance and
meets the firms obligations as and when they due.
4. INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to
maintain high level of assets during cotton season, which falls between October to March.
During April to September the company gets its cash credit limits reduced in the
respective banks. The company has very good system of managing its current assets. The
current assets of the unit are managed at corporate level and the unit seeks funds
according to their requirements calculated on day-to-day basis. Hence there are no idle
funds at unit level.
As the funds are monitored / controlled at corporate level, therefore, it becomes the prime
responsibility of H.O. to have a good policy of investing idle funds in an appropriate
security keeping in view the requirement of funds in the future and liquidity of the
security in which the investment is being made.
Chapter- 7
Accounts receivables are simply extension of credit to the firm’s customers, allowing
them a reasonable period of time in which to pay for the goods. Most firms treat accounts
receivables as a marketing tool to promote sales and profits. They represent extension of
credit and investment of funds and must be carefully managed. Every firm must develop
a credit policy that includes setting credit standard, defining credit terms and employing
methods for timely collection of receivables. The receivables (including the debtors and
the bills) constitute a significant portion of working capital and are an important element
of it. The receivables emerge whenever goods are sold on credit and customers
receivables are created when a firm sells goods or services to its customers and accepts,
instead of the immediate cash payment the promise to pay within specified period. Thus,
receivables are a type of loan extended by the seller to the buyer to facilitate the purchase
process. As against the ordinary type of loan the trade credit in the form of receivables is
not a profit making service but an inducement or facility to the buyer-customer of the
firm.
Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up
the sale, which ultimately results in pushing up the profits earned by the firm. At some
time selling goods on credit result in blocking of funds in accounts receivables.
Additional funds are required for operating needs of business, which involves extra costs
in terms of interest. Moreover, increase in receivables also increase chances of bad debts.
The creation of accounts receivables is beneficial as well as dangerous. The finance
manager has to follow a policy which uses cash funds as economically as possible by
extending receivables without adversely affecting the chance of increasing sales and
making more profits. Receivables Management generally means what type of credit
policy a firm should adopt so that sales and profits can be promoted on the one hand and
funds can be economically utilized on the other hand.
So the receivables management must be attempted by adopting a systematic approach and
considering the following of receivables management:
(1) THE CREDIT POLICY
(2) CREDIT CONTROL
1. CREDIT POLICY
It may be defined as the set of parameters and principles that govern the extension
of credit to the customers. This requires the determination of
(i) The credit standard i.e. The conditions that the customers must meet
before being granted credit and
(ii) The credit terms i.e. the terms and conditions on which the credit is
extended to the customers.
These are discussed as follows:
The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of
the customers. Therefore, to be on a safer side, it must set credit standard which should be
applied in selecting customers for credit sales. The credit standards of a firm represent the
basic criteria for the extension of a credit to customer.
So the credit standard is the combination of three C’s
These are:
(i) Character of a person
(ii) Capacity of a person
(iii) Condition of a person
Credit Terms
The credit terms refers to the set of stipulation under which the credit is extended to the
customers. The credit terms may relate to the following:
(a) Credit Period – The credit period is an important aspect of the credit policy.
It refers to the length of time customers are allowed to pay for their purchases. It
may differ from one market to another market. The credit period generally varies
from 15 days to 60 days. In some cases the credit period may be zero and only
cash sales are made. It refers to the time duration in terms of net date e.g. if a
firm’s credit terms are “net 30”; it means the customers are expected to pay within
30 days from the date of sales. As much the credit period will be shorter, it will be
beneficial for a firm. But the firm has to lengthen its credit period to increase
sales. But one must compare the cost of extended credit with the incremental
profits. If this cost is less then it will be beneficial for company to increase the
credit period.
(b) Discount Terms – It is reduction in payment offer to customer to induce them
to repay credit obligation within a specified period of time. In practice credit
terms would include:
(i) The rate of cash discount
(ii) The cash discount period
(iii) The net credit period
2. CREDIT CONTROL
The next important step in the management of receivables is the control of these
receivables. Following are the directions for controlling the receivables.
(1) The Collection Procedure – The overall collection procedure of the firm
should neither be too lenient nor too strict. A strict collection policy can affect the
goodwill and damage the growth prospects of the sales. If a firm has a lenient
credit policy, the customer with a natural tendency towards slow payments may
become slower to settle his accounts. One possible way of ensuring early
payments from customers may be to charge interest on over due balances.
(2) Monitoring of receivables – To control the level of receivables, the firm
should apply regular checks and there should be a continuous monitoring system.
For this, number of measures are available as follows:
(i) A common method to monitor the receivables is the collection period
or number of day’s outstanding receivables.
(ii) Another technique available for monitoring the receivables is known
as ageing schedule. Ageing schedule down book debts according to the length of
time of which they have been outstanding. The ageing schedule provides more
information about collection experience. It helps to shot out the slow paying
debtors. The Performa of the ageing schedule prepared by the VTM is as follows:
AGEING SCHEDULE
Age Classification Amount % age of Total
0 – 15 days 35330987.21 22
15 – 30 days - 0
31 – 60 days 24148419.61 15
61 – 90 days 29297084.01 17
91 – 120 days 8852629.46 19
121 – 180 days 13217364.67 6
More than 180 days 14510162.71 12
Total O/S Amount 157577760.10 100
RECEIVABLES MANAGEMENT IN VTM

As earlier discussed, credit sales are too much necessary to increase the total sales. The
main reason behind this is cut-throat competition. There are also many competitors of
VTM in the market, s to compare with them; VTM has to make credit sales. 20% to 30%
of current assets of VTM are sundry debtors. VTM has a good receivable policy as it has
large amount of credit sales.
I. CREDIT POLICY OF VTM

VTM not directly make sales. Sales are made by corporate office directly. So the sales
process is centralized. As the sales process, debtors are also collected by the corporate
office directly. Corporate office just receives the amount from the debtors. But it does not
have any record of outstanding debtors. It sends the credit note to VTM after receiving
amount against any debtors. So record for outstanding debtors is maintained by VTM
itself. VTM sends fortnightly reports to corporate office which records the data about the
outstanding debtors for different periods. In these reports debtors outstanding for one
month or six months are shown separately. In this way, corporate office comes to know
about age segments of different customers. Corporate office may avoid selling goods to
those customers who have not paid for a long period.
CREDIT POLICY VARIABLES
1. Credit Standards – VTM provides credit to customers after getting
information about that customer. For this market research is done by
marketing department to know about reputation of customer in the market and
financial position of him. From the records of customers having VTM and
from financial record of those customers, the ability to pay is checked. Thus
customer is only known after getting information about him and then credit is
provided.
2. Credit Terms
(a) Credit Period – For different products VTM provide different credit
period. These credit terms are according to the nature of product which are
following:
Scrap / waste - cash basis

Dyed yarn - 40 days
Grey yarn -15 days
(b) Cash Discount –
In case of 100% cotton yarn
Advance payment - 1 % C.D. prior to material dispatch
15 days credit - Interest free
Afterwards - 18 % p.a. interest chargeable
In case of Polyster Cotton Yarn
Payment within 48 hours - 1 % CD
Interest @ 18 % p.a., if payment is not made within the prescribed limits.
II. CREDIT CONTROL

Collection efforts made by VTM:
Due to cut-throat competition VTM has to make credit sales. To collect the funds Oswal
group has adopted a decentralized method. Oswal group has established its collection
centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from
the debtors and send it to corporate office. The number of collection centers in a
particular city depends upon the number of customers to minimize the bad debts and to
accelerate the collections.
Commission is also paid to agents This percentage is only on the basis of the realization
amount.
YARN COMMISION ON COMMISION ON

DOMESTIC EXPORTS
GREY 1.5% 3%
DYED 2% 3%
ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VTM
DEBTORS TURNOVER RATIO

This ratio indicates the number of times average debtors are turned over during a year.
The higher the value of debtor turnover ratio the more liquid is the debtors. Similarly low
debtor turnover ratio implies less liquid debtors.
Debtors turnover ratio = Sales
Avg. Debtors
FOR SPINNING MILL:
YEAR SALES AVG DEBTORS DTR

2004-05 596069587.62 37039996.26 16.09 times
2005-06 543167006.35 37279070.84 14.6 times
2006-07 588183650.23 92312638.13 6.37 times
2007-08 730047747.60 29970369.49 24.36 times
25
20
15
DTR
10
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS:
As we can observe that, the debtors turnover ratio of the company has increased from
16.09 times in year 2004-05 to 24.36 times in year 2007-08. Increasing DTR is good for
the company as it assures that the sundry debtors are more liquid.
FOR DYE HOUSE:

YEAR SALES AVG DEBTORS DTR
2004-05 212240 247769 0.9 times
2005-06 202379449.81 28959170.26 6.99 times
2006-07 492529652.69 48904270.97 10.1 times
2007-08 610863493.76 99301521.09 6.2 times
12
10
6
DTR
4
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS:
The DTR for dye house has shown increament from 0.9 in 2004-05 to 10.1 in 2006-07
but it again decreased to 6.2 in 2007-08. It is not good for the company that DTR has
declined in 2007-08 as it assures less liquid debtors.
Debtor Conversion Period (DCP)

The average no. of days for which a firm has to wait before its receivables is converted
into cash.
DCP = 360
DTR
FOR SPINNING MILL:
YEAR DTR DCP

2004-05 16.09 22.4 days
2005-06 14.6 24.7 days
2006-07 6.37 56.5 days
2007-08 24.36 14.8 days
60
50
40
30
DCP
20
10
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS:
The DCP of the spinning mill has decreased from 22.4 in year 2004-05 to 14.8 in year
2007-08 which is quite a good fact as lower DCP assures less time period for the
conversion of receivables into cash.
FOR DYE HOUSE:
YEAR DTR DCP

2004-05 0.9 400 days
2005-06 6.99 51.5 days
2006-07 10.1 35.6 days
2007-08 6.2 58.1 days
400
350
300
250
200
DCP
150
100
50
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS:
The DCP ratio for dye house has decreased a lot from 400 days in year 2004-05 to 58.1
days in year 2007-08. It’s a promising fact because it takes very less time period to
convert the receivables into cash.
Chapter- 8
Inventory is very important part of current assets. Approximately 60% part of current
assets is inventories. So the proper management of inventory is required for successful
working capital management. As the larger amount of funds is involved in the
inventories, so it must be carried with care for proper utilization of funds.
Nature of Inventories
In inventories we include:
(a) Raw Material: There are those basic inputs which are
converted into work-in-progress after the manufacturing process. Raw materials
are purchased for production and storage purpose.
(b) Work-in-Progress: These inventories are semi-manufactured
products. These products are those which are ready for sale.
(c) Finished Goods: These are completely manufactured
products. These products are those which are ready for sale.
Here is one another type of inventory also which is not directly related with
production but facilitate in production process. These inventories are known as
supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.
OBJECTIVES OF INVENTORY MANAGEMENT

There are so many objectives of inventory management. These objectives may differ
from firm to firm. The main objectives of inventory management are:
 To make adequate investment in inventories so that funds can be best utilized.
 Smooth production in present and future.
 Time availability of inventories.
 Smooth and uninterrupted sale processes.
 Minimize the cost related with inventories.
 To meet the future price change.
 To get adequate return on investment.
INVENTORY MANAGEMENT TECHNIQUES

For inventories management the two questions must be answered. First, that how much
be ordered in one order so that excess or insufficient inventories can be avoided.
Secondly, when the order should be placed, so that timely availability of inventory is
there. To get answer of these two questions we use two techniques which are following:
1) ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to
know how much we must order in single time. So that all the cost related with inventory
are minimum. Determining an optimum inventory level involves two types of costs (a)
Ordering Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes
the total of ordering and carrying costs.
(a) Ordering Costs – All these costs which are incurred in placing one order. It
includes; requisition, transportation, receiving, inspecting, clerical and staff
services. Ordering costs are fixed per order. Therefore they decline as the order
size increases.
(b) Carrying Costs – Cost incurred for maintaining a given level of inventory are
called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs
vary with inventory.
To calculate economic order quantity there is formula:
EOQ = 2AO/C
Where,
A = Annual requirement
O = Ordering cost per order
C = Carrying cost of inventory
2) REORDER POINT
Reorder point is that inventory level at which an order should be placed to replenish the
inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage
(c) EOQ
Lead Time is the time normally taken in replenishing inventory after the order has been
placed.
Average Usage is the inventory used on average daily basis or average weekly basis.
So, Reorder Point = Lead Time x Average Usage
If the firm also maintains safety stock then the reorder point will be:
Reorder Point = (Lead Time x Average Usage) + Safety Stock
So when the inventory of reorder point will be in store then the order will be placed for
purchase of inventory. In this way, the production process will not stop because the
inventory will be available for that period.
INVENTORY MANAGEMENT IN VTM

Inventory Management of VTM is good. VTM has a different stores department. All the
inventories except raw material purchases are handled by stores department. Stores
department does its work very efficiently.
INVENTORY PLANNING
For the planning of inventory requirement, budgets are prepared by different departments
as per requirements. The material issued during the budget period will not be more than
the budget. This rule is strictly followed. For cotton, requirements are planned in
consultation with production department. Stores department have nothing to do with it.
PURCHASE OF RAW MATERIAL

As in VTM raw material is cotton. First of all the requirement for cotton are determined
by the production department than this requirement is sent to commercial departments.
Commercial departments send these requirements to corporate office in detail. Then
corporate office directs the cotton purchase office to purchase cotton in bulk not only for
VTM but also for the other units of Oswal Group. Cotton is generally received in lots so
one lot consists of 55 or 110 bales.
As the cotton has seasonal availability, so the purchasing of cotton is made within the
period of October to march. For the other months, cotton is purchased within these
months. That is the reason VTM has high investment in cotton.
DAILY REQUIREMENT OF COTTON

For production daily requirement of cotton is 180 bales and when the full capacity of unit
gets started then the average requirement of cotton bales will reach to 200 bales.
The total daily production is 55 Tons /day.
STORAGE CAPACITY OF VPL

Regarding Raw Material Inventory, VTM has 10 godowns.The capacity of 10 godowns
is 45000 bales approximately.
If capacity of store is exhausted in unit then it has private storage facility to store cotton.
These godowns do not have electric fitting because cotton is highly inflammable.
ISSUING OF INVENTORY
When any department requires any inventory, it sends its requirement to stores
department. The maximum time within the requirement must be met is 72 hours.
Material is issued on the basis of monthly weighted average method.
INSPECTION OF INVENTORIES
Inspection of inventory is made at the end of month randomly. The stock taking of all the
items is not possible keeping in view number of items.
SAFETY STOCK OF INVENTORIES

For the continuous production process, safety stock of inventories is maintained. In case
of cotton atleast 15 days requirements must be in hand every time. For other inventories
stock is maintained according to supply period and as per their requirement.
INVENTORY CONTROL
Inventory control is done by budgets. As the budgets are prepared for the planning
purpose. Total requirements for inventory during financial period are determined by
budget. When the material is issued to any department then the total amount of material
issue is deducted from the budget of that good and balance is calculated, only this balance
quantity of inventories will be issued during the remaining financial period. These
records are maintained on daily basis. For different units, the records are prepared
separately.
For inventory control not any ABC analysis or VED analysis is done. The company also
doesn’t follow standardized system of inventory like EOQ. In case of raw material as the
input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the
cotton season. In case of spares & stores, the inventory is easily available in market;
therefore, the same is procured on requirement basis. The company always maintains
stock of critical items, the failure / non-availability of which can cause less of production.
As all the units of group are in spinning the stock of critical items, where the high value is
involved in financial terms, the inventory is maintained in single unit. This could save lot
of money which can be utilized in another area and it also helps to maintain inventory at
optimum level.
So we can say that overall inventory management of VTMis quite satisfactory.
ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VTM
INVENTORY TURNOVER RATIO

It indicates the number of times the stock has been turned over during the period and
evaluates the efficiency with which the firm is to manage inventory. A high inventory
turnover indicates efficient management of inventory because more frequently the stocks
are sold, the lesser amount of money is required to finance the inventory.
Inventory (Raw Material) Turnover Ratio = Cost of Goods sold.
Average Raw Material Stock
FOR SPINNING MILL:

YEAR COST OF GOODS AVERAGE RAW INVENTORY
SOLD MATE TURN
RIAL OVER
STOC RATI
K O(ITR
)
2004-05 568168331.8 183071228.14 3.10 times
2005-06 468091135.05 227150926.07 2.1 times
2006-07 533565522.12 218046754.94 2.45 times
2007-08 757225990.36 328005499.45 2.31 times
3.5
3
2.5
2
1.5 ITR
1
0.5
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS:
The ITR ratio of spinning mill does not show wide fluctuations over the past years. It
almost remains constant around 3.1 and 2.3. However , the ratio must increase for better
management of inventories.
FOR DYE HOUSE:
YEAR COST OF GOODS AVERAGE RAW INVENTORY

SOLD MATE TURN
RIAL OVER
STOC RATI
K O(ITR
)
2004-05 - - -
2005-06 204971625.4 15012815.54 13.7 times
2006-07 438273468.85 16023458.66 27.35 times
2007-08 522017545.97 11108879.34 46.9 times
50
40
30
ITR
20
10
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
The inventory turnover ratio has increased from 13.7 times in 2005-06 to 46.9 times in
2007-08. It is quite a good fact and shows that inventory is managed in an efficient way
for the dye house.
INVENTORY TO WORKING CAPITAL RATIO:
This ratio is usually calculated to study the liquid financial position of business
enterprises.
Inventory to working capital ratio = Inventory
Working Capital
FOR SPINNING MILL:

YEAR INVENTORY WORKING RATIO IN %AGE
CAPITAL
2004-05 208195599.41 306827826.58 67.9
2005-06 246141889.88 312515320.52 78.8
2006-07 240453655.62 342478673.95 70.2
2007-08 379510100.55 414814703.14 91.5
100
80
60
INVENTORY TO
40 WORKING CAPITAL
20
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS:
We can observe that investment in inventories out of the woking capital has increased
from 67.9% in 2004-05 to 91.5% in 2007-08. But investment in inventories should be
neither too high nor too low. So it should be maintained near 60% to 70%.
FOR DYE HOUSE:

YEAR INVENTORY WORKING RATIO IN %AGE
CAPITAL
2004-05 - - -
2005-06 31300541.06 51755251.69 60.5
2006-07 35816899.3 84249210.13 42.5
2007-08 32341614.46 142562332.82 22.7
70
60
50
40
INVENTORY TO
30 WORKING CAPITAL
20
10
0
2004-05 2005-06 2006-07 2007-08
ANALYSIS
The investment in inventories has decreased from 60.5% in 2004-05 to 22.7% in 2007-
08. So, it is not a good fact about the dye house and the company should increase the
investment in inventories for the dye house.
Chapter- 9
FINDINGS, SUGGESTIONS AND

CONCLUSION
FINDINGS
 Due to seasonal availability of raw material is purchased in bulk during the

months between March to Oct. so the most part of current assets is covered by
inventories.
 Liquidity ratios of VTM are too high because of maintaining more inventory
stock of raw material.
 Raw material is purchased by corporate office for all the units in bulk to get the
advantages of bulk purchasing.
 The cost of raw material fluctuates depending upon the availability of crop in the
particular season, so it effect the finished product price.
 The operating cycle of VTM is very high due to the high raw material conversion
period because raw material is a seasonal product.
 Now VTM has increased its share in the domestic market by reducing the exports.
 For filling its fund requirement VTM depends upon the State bank of India.
 It holds the cash only for transaction purpose. Corporate office holds the cash for
major receipts & payments.
 EOQ technique is not followed by VTM for purchasing cotton because cotton is a
seasonal product. Also EOQ is not followed in stores.
SUGGESTIONS
 Management should make the proper use of inventory control techniques

like fixation of minimum, maximum and ordering levels for all the items for less
blockage of money.
 The unit should also adopt proper inventory control like ABC analysis etc.
This inventory system can make the inventory management more result oriented.
The EOQ can be followed in stores.
 Due to competition, prices are market driven and for earning more margin
company should give the more concentration on cost reduction by improving its
efficiency.
 The investments of surplus funds are made by the corporate office and the
unit is not generally involved while taking decisions with regard to structure of
investment of surplus funds. The corporate office should involve the units so as to
better ascertain the future requirements of funds and accordingly the investments
are made in different securities.
 The company is loosing its overseas customers due to decrease in exports
so the sufficient amount of exports should the maintained.
 Company’s average debtor collection period is 55 days. So company
should try to reduce it for improving the efficiency.
By conducting the study about working capital management it is found out that working
capital management of VTM is too good. VTM has sufficient funds to meet its current
obligation every time which is due to sufficient profits and efficient management of
VTM.
Cash management and receivable management are too much good because of centralized
control on these. Raw material for the all units of OSWAL group is purchased by
corporate office in bulk which is the best way. Safety measures for inventories are also
quiet sufficient in VTM. Overall the working capital management of VTM is very much
efficient.
APPENDIX
REFERENCES AND BIBLIOGRAPHY
 Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd.

 Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc
Graw Hill.
 Van Horne, Jame C; Fundamentals of Financial Management.
 Rustagi R.P.; Principles of Financial Management.
 Annual Reports of VINAYAK TEXTILE MILLS LTD..

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SUMMER TRAINING REPORT

In partial fulfillment of requirement for the award of degree in

First of all, I wish to express my profound gratitude and sincere thanks to

It gives me immense pleasure to acknowledge my deep sense of gratitude

I am extremely grateful to MISS. KAWALPREET KAUR and other

In last, I express my profound gratefulness and indebtedness to the

REFERENCES AND BIBLIOGRAPHY

WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD.

OBJECTIVES OF THE STUDY:

To analyze the working capital management of the company.

The project report is prepared in three parts.

- Operating Cycle analysis

CONCEPT OF WORKING CAPITAL:

1. Gross Working Capital

2. Net Working Capital

TYPES OF WORKING CAPITAL:

1. Permanent Working Capital:

2. Temporary Working Capital:

So operating cycle can be known as following:-

Credit Cash Sales

1. Gross Operating cycle

2. Net Operating Cycle

B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

Followings are the main determinants of working capital.

8. Earning Capacity & Dividend Policy:

9. Price Level Changes:

10. Condition of Supply:

11. Other Factors:

MEANING AND NATURE OF WORKING CAPITAL

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

2. Determining a Short Term and Long Term Financing Mix for

In this approach there is more reliance on long-term financing in comparison to short-

Temporary Current Assets

Temporary current assets Short term financing

HISTORY OF THE INDIAN TEXTILE

PROFILE OF THE GROUP AND UNIT

CURRENT SET UP:

Location Installed Production Product Range

Issue of Cotton Bales

Breaker Draw Frame Unilap

Finisher Draw Frame Comber

Packing for Single Yarn Packing for Double Yarn

Storage & Dispatch

OUTLINE OF THE STUDY

OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

LIMITATIONS OF THE STUDY

WORKING CAPITAL ANALYSIS

1.OPERATING CYCLE ANALYSIS

(1) Raw Material Conversion Period (RMCP)

FOR SPINNING MILL:

FOR DYE HOUSE:

(2) Work in Progress Conversion Period (WIPCP)

FOR SPINNING MILL:

FOR DYE HOUSE:

(3) Finished Goods Conversion Period (FGCP)

FOR SPINNING MILL:

FOR DYE HOUSE:

(4) Debtors’ Conversion Period (DCP)

FOR SPINNING MILL :