Jatiya Kabi Kazi Nazrul Islam University

Department of Finance and Banking

Assignment on

Topic: Implication of Working Capital Management at Square Textile LTD.

Course code: FB-304.

Course Title: Principles of Working Capital Management.

Submitted to
Chandon Kumar Pal,
Assistant Professor.
Department of Finance and Banking.
Jatiya Kabi Kazi Nazrul Islam University.

submitted by
Name:Group
Department of Finance and Banking.
Jatiya Kabi Kazi Nazrul Islam University.
Serial Number Name ID Regestration
no.
Implication of Working Capital Management in "Square Textile
LTD.”

Executive Summary:

The report contains the Square textiles profile and Implication of Working Capital Management.
The report also outlines financial highlights & product analyzing company’s long-term solvency.
Square is one of the biggest employees in Bangladesh. It has a personnel and administrative
department. The total numbers of employees are 1223. The strategic Goals and Objectives of
Square textile are to strive hard to optimize profit though conduction and transparent business
operations and to create more competitive in the internal and external market. For the employees
there are systematic in house training in home and abroad. The managing director, the CEO is
the head of the executive management team. Below in there are directors, executive directors and
general manager. Under the direct super vision of the general manager a number of departments
are controlled.
Table of Contents
Executive Summary

:..................................................................................................................................................................3
1.Overview of The Company:.....................................................................................................................4
2.Introduction of Working Capital management:......................................................................................9
3.Concepts of Working Capital:...............................................................................................................9
3.1. Gross working capital:.................................................................................................................9
3.2. Net working capital:....................................................................................................................10
4. Management of Working Capital:.....................................................................................................11
5. Approaches of Working Capital Management..................................................................................12
5.1. The Matching approach.:...............................................................................................................12
5.2. Conservative Approach:...............................................................................................................13
5.3. Aggressive Approach:..................................................................................................................13
6. Sources of credit Information:..............................................................................................................13
6.1. Seller’s prior experience with the customer:..............................................................................13
6.2. Credit agency and Reports:.........................................................................................................14
6.3. Personal Contact with the Applicant’s Bank and other Creditor’s:.........................................14
6.4. Analysis of financial statements:.................................................................................................14
6.5. Customer visit:..............................................................................................................................14
7.Traditional Approach:............................................................................................................................15
7.1. Capital: This refers to the financial position of the firm such as: Liquidity position, leverage
position, asset to debt position, capital invested and size of business....................................................15
7.2. Character: In assessing character the credit analyses consider all the information that relates to the
willingness to pay by the management..................................................................................................15
7.3. Collateral: Information on secure borrowing is gleaned from the applicant’s financial statements,
banks, credit reports on the applicant or directly from conversation with the applicant........................15
7.4. Capacity: Information gathered relating to the following 3 dimensions:.......................................15
7.5. Conditions: Synthesizing information about the industry of the applicant....................................15
8. Last Audited Financial Statement of Square Textile…………………………….. 15-26

9.Ratio Analysis9.1. Quick Ratio: 27

 9.2. Accounts Receivable Turnover:...................................................................................................27
9.3. Inventory Turnover Ratio:...........................................................................................................28
9.4. Return on Assets:..........................................................................................................................29
9.5. Return on equity:..........................................................................................................................30
10. Net Liquid Balance:.......................................................................................................................31
11. Conclusion..........................................................................................................................................32
12.Bibliography………………………………………………………………………………………………………………………………..32

1.Overview of The Company:

Square Textile is a subsidiary company of Square Group. The Company was

incorporated as a public limited company in the year of 1994. The operation was started
in 1997. It was enlisted in Dhaka Stock Exchange & Chittagong Stock Exchange in
2002. Within a very short time of span the company achieved some significance
success. Square Textile receives Ecotax standard 100 and ISO-9002 certificates in the
year 2000. Authorized capital of the company is tk. 1000 million. It’s paid- up capital is
tk. 251.90 million. 1,223 employees are working in this organization. The business lines
of Square Textiles Limited are manufacturing and marketing of yarn. The Net Profit after
Tax is 207.29 Million BDT of Square Textile in March 2011.

We in SQUARE, strive, above all, for top quality products at the least cost reaching the
lowest rungs of the economic class of people in the country. We value our social
obligations. We owe our shareholders and strive for protection of their capital as well as
ensure highest return and growth of their assets.

We strive for best compensation to all the employees who constitute the back bone of
the management and operational strength of the company through a pay-package
composing salary/wages, allowances, bonuses, profit participation, leave/ salary and
superannuation & retirement benefits and other emergency grants & gratis.
We strive for the best co-operation of the creditors & debtors the banks & financial
institutions who provide financial support when we need them, the suppliers of raw
materials & supplies who offer them at the best prices at the opportune moments, the
providers of utilities - power, gas & water etc. and the customers who buy our products
& services by redeeming their claim in time by making prompt payment and by
distributing proper product on due dates.

We strive for fulfillment of our responsibility to the Government through payment of

entire range of due taxes, duties and claims to various public agencies like
municipalities etc.

We strive as responsible citizen, for a social order devoid of malpractices, anti-

environmental behaviors, unethical and immoral activities and corruptive dealings

We keep away from any discriminatory practices between sexes, races, religions, colors
or political beliefs.

We strive for practicing good governance in every sphere of activities covering inter alia,
not being limited to, disclosure & reporting to shareholders holding AGM in time,
distribution of dividends and other benefits to shareholders, reporting/ dissemination of
price sensitive information, acquisition of shares by insiders, recruitment & promotion of
staff, procurement & supplies, sale of assets etc. All that directly and indirectly affect the
interest of concerned groups - the shareholders, the creditors, suppliers, employees,
government and the society in general.

Vision

Our conception of business germinated from our vision which sees it as a means to the
well-being of the investors, stakeholders, employees and members of the society at
large by creating new wealth in the form of goods and services that go to satisfy the
wants of all of them without disturbing or damaging the socio-ecologicaleconomic
balance of the Mother Earth and the process of human civilization leading to peaceful
co-existence of all the living beings.
Mission

Our mission is the polestar of our vision for maximization of production of quality
products and services strictly on ethical and moral standards at minimum costs to the
society ensuring optimum benefits to the consumers, the shareholders and other
stakeholders

Corporate Focus

Our vision is the polestar to our mission that fulfils our objectives with emphasis on the
quality of product, process and services blended with good governance that help build
the image of the most venerable corporate citizenship at home and abroad.

Objectives

To strive hard to optimize profit through conduction of transparent business operations

within the legal & Social framework with malice to none and justice for all in respective
of gender disparity, caste, creed or religion or region.

 To Increase productivity.

 To create more jobs with minimum investments.

 To be competitive in the internal as well as external markets.

 To maximize export earning with minimum imported in-puts.

 To reduce the income gap between top & bottom categories of employees.

 To promote corporate social responsibilities (CSR) amongst all.

REGISTERED & CORPORATE OFFICE

Square Center, 48 Mohakhali C/A, Dhaka-1212, Bangladesh

HEAD OFFICE

Mascot Plaza (11-12th Floor) Plot-107/A, Sector-7,Uttara Dhaka-1230, Bangladesh

Square Textile at a glance

2.Introduction of Working Capital management:
Working capital management is one of the major issues of corporate finance. The success of any
manufacturing company largely relies on the efficient management of working capital. There are
different theoretical developments and empirical issues but there is no unified rule that can
determine the optimal level of working capital. From the viewpoint of developing country like
Bangladesh the role of working capital should be highly emphasized. But our country is
characterized by low level of capital market development and inefficiency of financial market. In
such a situation, it is hardly possible to have the desired funds to maintain the liquidity of
business by collecting and investing funds as and when required.

The available literature suggests that static focusing on working capital management is not
extensive in Bangladesh. The study although will not give a clear idea to draw a conclusion
about the working capital management policy and practice of Bangladeshi Firms but will
definitely give an overall idea about working capital management practice of the particular
industry in Bangladesh.

This report focuses on the working capital management of a reputed firm of Bangladesh. In this
regard, we have selected Square Textile Ltd. We tried to link our findings in working capital in
Square Textile Ltd. and theoretical aspects. We have found some similarities and some
dissimilarity in this regard. We have particularly pointed in the inventory management, liquidity
management and credit policy of the company. Overall working capital management of square
textile has been stated in detailed.

3.Concepts of Working Capital:

The term working capital is commonly used for the capital required for day-to-day
working in a business concern such as for purchasing raw materials, for meeting day-to-
day expenditure on salaries, wages, rents advertising etc.
Working capital concept may be,
I. Gross working capital
II. Net working capital.
3.1. Gross working capital:
Gross working capital represents the amount of funds invested in current assets / the firm's
investment in current assets. The gross working capital concept focuses attention on two aspects
of current assets management.
a) Optimum investment in current assets and b). Financing of current assets. By
optimum investment in current assets means that investment should be neither
excessive nor inadequate. Excessive working capital will dilute the profitability
whereas inadequate working capital can threaten the solvency of the firm, if it fails to
meet its current obligations. The management should take immediate corrective
action to maintain the balance .Another aspect of gross working capital is that the
management should now the various sources of obtaining working capital so that it
may arrange :e working capital whenever need arises or it may invest the excess in
short term securities if they are not required presently.

3.2. Net working capital:

The net working capital concept (a) indicates the liquidity position of the firm, and (b)
suggests the extent to which working capital needs may be financed by permanent sources
of funds. The current assets should always be more than the current liabilities to provide a
buffer for meeting obligations within the operating cycle of the business. The firm should
avoid negative net working capital because it will pose a problem before the company.

4. Management of Working Capital:

Working capital management is to manage the current assets and current liabilities of a firm in
such a way that a satisfactory level of working capital is maintained. ie it is neither inadequate nor
excessive. As James C. Van Home defined that "Working capital management usually concerned
to involve the administration of these assets namely cash and marketable securities, receivable
and inventories and the administration of current liabilities”.

5.Approaches of Working Capital Management

 The Matching approach.

 Conservative approach
 Aggressive approach
  5.1. The Matching approach.:
Under matching approach, long term financing is used to finance fixed assets and permanent
current assets and short term financing is used to finance temporary current assets, thereby
making the average net working capital equal to zero.

5.2. Conservative Approach:

This approach suggest that the estimated requirements of total funds should met from long terms
sources; the use of short term funds should be restricted to only emergency situations or when
there is an unexpected outflow of funds. The short terms funds will be used to meet the
contingencies. With the conservative approach, the company does not use any of its short term
borrowings. Therefore the firm has sufficient short term borrowing capacity to cover unexpected
financial needs & avoid technical insolvency. The cost of finance under the conservative
approach is higher than the cost using the hedging approach. The conservative plan for financing
is more expensive because the available funds are not fully utilized during certain period,
moreover interest has to be paid for funds which are not actually needed.
 Conservative approach to asset financing

Total Assets
Short-term
Debt
Fluctuating Current Assets

Long-term
Permanent Current Assets Debt +
Equity
capital

Fixed Assets

Time

5.3. Aggressive Approach:

This approach uses relatively high proportion of short term debt. A firm that uses this unable to
obtain new financing as needed. In addition the greater possible fluctuation in interest expenses
associated with this financial plan also add on the firms risk. These higher risks are offset by the
higher expected after tax earning that results from the lower cost of short term debt.
6. Sources of credit Information:

Square Textiles has many foreign buyers as well as local buyers to whom it grants
credits. Local buyer do not hold a good percentage of total sales. Some significant foreign
buyers for Square Textile ltd are PUMAH, GAPE etc. In a wealth maximizing approach
to the credit granting decision, the selling firm evaluates the cash flow that would result
from granting credit to a credit applicant versus that would result it credit were not
granted to that applicant. As in terms of sale analysis these cash flow results from the cost
and revenue effect of the decision. These are changer in sales and collection the cost of
production, bad debt expense and so forth that are contingent on the granting or not
granting credit.

Estimates of these costs and revenues can be collected from different. These sources vary
in their cost and the type of information they provide. Several sources of information are
as follows:

6.1. Seller’s prior experience with the customer:

One of the cheapest and most reliable sources about expected future payment patterns
extracted from the customer’s history of dealing with the seller.

2.2. Credit agency and Reports:

The professional credit information sources such as financial information about vary
wide range of buyer including individuals and firms.

6.3. Personal Contact with the Applicant’s Bank and other Creditor’s:

Expensive way of gathering information from credit applicant’s bank and other creditors
but these sources is reliable too.

6.4. Analysis of financial statements:

It is testing the ability of generating the ability or repayment of debt.

6.5. Customer visit:

One of the most expensive source that give information about the management of the of
the firm directly

7.Traditional Approach:

traditional approach to the credit granting decision credit analysis synthesize all information that
has been collected and reach a judgment regarding the credit worthiness. For the synthesizing the
applicant is characterizing along 5 dimensions called five C’s –

7.1. Capital: This refers to the financial position of the firm such as: Liquidity position,
leverage position, asset to debt position, capital invested and size of business.
7.2. Character: In assessing character the credit analyses consider all the information that
relates to the willingness to pay by the management.
7.3. Collateral: Information on secure borrowing is gleaned from the applicant’s financial
statements, banks, credit reports on the applicant or directly from conversation with the
applicant.
7.4. Capacity: Information gathered relating to the following 3 dimensions:
a) Managerial Capacity to run the business.

b) Production and selling capacity

c) Product capacity to add profit margin.

7.5. Conditions: Synthesizing information about the industry of the applicant.

8. Last Audited Financial Statement of Square Textile
12. Analysis Through Ratios:

12.1. Current Ratio:

This is the ratio of current assets to current liabilities. The higher the ratio, the more liquid the
firm is said to be.

The current ratios of Square Textiles Ltd. from year 2021 as follow

Current Ratio =Total Current assets Divided by Total Current Liabilities

=9,197,615,462/5,661,519,456

=1.624

 Total Current assets 9,197,615,462

 Total Current Liabilities 5,661,519,456

12.2. Quick Ratio:

This is also called the ‘acid test’ ratio. Here, inventories are deducted from the current assets
account and the result is divided by current liabilities.

= (9,197,615,462-2,664,689,616)/ 5,661,519,456

= 1.1539

Comment:

The quick ratios are showing an increasing tendency over the period of time. So,
we can say that the inventory is not piling up and it is a good sign for the company.

12.3. Accounts Receivable Turnover:

This ratio is usually calculated as sales divided by accounts receivable. The higher the turnover
the more liquid will be the asset. The inverse of this ratio times the number of days in a year
gives average collection period.
The Accounts Receivable Turnovers and Average Collection Periods of Square Textiles Ltd.
from year 2003 to 2005 are as follow-

Year 2021:

Accounts Receivable Turnover = 13,293,569,580 /4,808,315,632

= 2.76 times

Average Collection Period = 360/2.76

= 130 days

Comment:

From the above graph we can find that the receivable turnover period has been increased and
average collection period has been decreased over the period. It means the company is requiring
lesser time to collect cash from its creditors. In spite of increased receivables the increment in the
ratio is an indicator of improvement in the efficiency of turning the receivables into cash quickly
and is a good sign for the company and it will be able to avoid liquidity crisis.

12.4. Inventory Turnover Ratio:

This is usually computed as cost of sales divide by inventory. The higher the turnover the
more liquid will be the asset. The inverse of this ratio times the number of days in a year
gives Inventory Conversion Period.

The Inventory Turnover ratios of Square Textiles Ltd. from year 2020 to 2021 are as
follow-
Year 2021:

Inventory Turnover Ratio = 11,858,829,437/2938722626

= 4.04 times

Inventory Conversion Period = 360/4.04

= 89.211 days

Comment:

Other things remaining the same, increasing trend in Inventory Turnover indicates that
the efficiency of the company to turn inventories quickly into sales is increasing. From
the above graph we can see that there is a declining tendency in the ratio and increasing
trend in the inventory conversion period. It is indicating that the company is not efficient
to turn its inventory into sales quickly and it is not a good sign.

12.5. Cash Conversion Cycle:

The cash conversion cycle is the net time interval between the expenditure of cash in paying
liabilities and the receipt of cash from the collection of receivables.

Cash Conversion Cycle = (Average collection period + Inventory conversion period) –

Payment deferral period

Payment Deferral Period = x 360

The Cash Conversion Cycles of Square Textiles Ltd. from year 2020 to 2021 is as follow-

Year 2021:

Average Collection Period = 130 days

Inventory Conversion Period = 89 days

Payment Deferral Period = (Average Accounts Payable / Cost of Goods Sold) x Number of Days

in the Accounting Period )

= 15 days

Cash Conversion Cycle = (130 + 89) – 15 = 204 days

Comment:

From the time series analysis of the cash conversion cycle we can see that the firm is requiring
cash for payment before collection. This is an indicator of liquidity crisis for the firm.

Return on assets

It is calculated by dividing a company’s net income for a period by the value

of the company’s total assets as follows:

= 671,862,451/ 16,261,828,767

=4.13%

Return On Equity

ROE, is a measurement of financial performance arrived at by dividing

net income by shareholder equity.

Return on equity is calculated as follows:

=671,862,451/7,632,190,882

=8.803%

Findings

Financial statement analysis is a judgmental process. One of the primary objectives is

identification of major changes in trends & relationships and the investigation of the reasons
underlying those changes. The judgment process can be improved by experience and the use of
analytical tools. Probably the most widely used financial analysis technique is ratio analysis, the
analysis of relationships between two or more line items on the financial statement. Financial
ratios are usually expressed in percentage or times. Generally, financial ratios are calculated for
the purpose of evaluating aspects of a company’s operations.
In this report we have tried to use different aspects of financial performance analysis to
determine the better usage of available resources and how well it manages its cash and other
working capital in day-to-day operations of the firm.

12.8. Terms of sale decision in case Square Textile Ltd:

 What will be the terms of sale –this decision is influenced mainly by the

–industry norm

–the market condition and

— Size of the account

Minimum credit period Square Textile is 180 days.

They do their aging of receivables in the following way:

Above 180 days———amount

Below 180 days———amount

 We have conduct time series analysis to measure the aggregate liquidity position of
square textiles ltd. from this analysis we have found that the traditional measures shows a
good liquidity position but when we have calculated the improved indices for measuring
liquidity, all the indices except net liquid balance are showing the firms weakness in
management of liquidity.

13. Conclusion

Success in working capital management can be achieved through:

 Managing inventories efficiently using computerized database management.

 Reducing the cost of sales by efficient management practice.
 Managing the company’s fixed as well as current asset efficiently to generate smooth
operation.
 Accelerating the sales volume through effective marketing and distributing channel.
  Accounts Receivable Turnover Ratio is showing that the company is requiring lesser time
to collect cash from its creditors. In spite of increased receivables the increment in the
ratio is an indicator of improvement in the efficiency of turning the receivables into cash
quickly and is a good sign for the company and it will be able to avoid liquidity crisis.
 Restructuring the capital format in such a way so as to the company can add some
leverage to its capital structure.

Biblography

 Annual report 2021,Square Textile Ltd