IILM INSTITUE OF INTEGRATED LEARNING AND

MANAGEMENT

GURGAON

PROJECT ON WORKING CAPITAL IN

PARLE BISCUIT PVT LIMITED

BAHADURGARH

PRIYANKA TYAGI

PGDM-3

SECTION-A

ACKNOWLEDGEMENT

I acknowledge the support and guidance provided by the Dean and the staff of

my institute, IILM (Institute of Integrated Learning and Management)

Gurgaon, Haryana.

I wish to express my sincere gratitude to MR. S.S. SHIVRAIN, General Manager,

who gave me the opportunity to complete my summer project at PARLE

BISCUITS PRIVATE LIMITED, Bahadurgarh.

.

My gratitude also extends to the head of the finance department at Parle,

Mr.Jaideep Bhala (Fin & Accounts), Mr. Akhil Rastogi, Mr.Parminder Singh,

Mr. S.N. Verma, Mr. Vinod Agrawal, Mrs. Santosh Narwal, Mr. Ajay Singal,

Mr. Vijendra Singh, Mr. R.K.Monga (Excise), Mr. Rajiv Singh (I.T. Manager)

Mr. Vidya Dhar Kaswan (Purchase Officer) who cooperated and guided me

throughout the project.

My sincere thanks to all staff members of the Finance, HR, Excise, Systems and

Purchase departments who encouraged me and gave me valuable insights about

the company.

(PRIYANKA TYAGI)

DECLARATION

I PRIYANKA TYAGI, the student of M.B.A. III Semester of IILM (INSTITUTE

FOR INTEGRATED LEARNING AND MANAGEMENT) hereby declare that the

Project Report on “WORKING CAPITAL MANAGEMENT in PARLE BISCUITS

PVT. LTD”. Is my original work and has not been submitted by any other person.

I also declare that I have done my work sincerely and

accurately even then if any mistake or error had kept in, I request to the readers

to point out these errors and guide me to remove theses errors in future.

(PRIYANKA TYAGI)

PREFACE

Practical work experience is the integral part of individual learning.

An individual who is learning managerial concepts has to undergo this practical

experience for being a future executive.

Master of Business Administration is a two-year programme that

inserts management knowledge in an individual to make that individual

completely professional for which practical experience is must.

Parle Biscuits Pvt. Ltd. is the market leader in biscuit industry.

Bahadurgarh plant of PBPL offered me a project on Working Capital

Management to understand the current position through dates provided by them.

TABLE OF CONTENTS

OBJECTIVE OF THE PROJECT

RESEARCH METHODOLOGY

COMPANY PROFILE

WORKING CAPITAL AT A GLANCE

METHOD OF ASSESMENT OF WORKING CAPITAL

THEORTICAL ASPECTS OF WORKING CAPITAL MANAGEMANT

WORKING CAPITAL MANAGEMENT

RECEIVABLES MANAGEMENT

INVENTROY MANAGEMENT

CASH MANAGEMENT

ANALYSIS OF WORKING CAPITAL MANAGEMENT

RATIO ANALYSIS

FUND FLOW ANALYSIS

CASH FLOW ANALYSIS

FINANCING OF WORKING CAPITAL

FINDINGS AND CONCLUSIONS

REFRENCES

BIBLIOGRAPHY

OBJECTIVE OF PROJECT

Right from the beginning and also in present scenario, Confectionary has carved for itself a strong place in the international market with around half of the global primary demand of confectionary products. This scenario likely to continue into the 21st century. Now-a-days confectionary products are also a means to economic power. Most of the nations including developing countries like INDIA have placed adequate emphasis on self-reliance technology in confectionary industry.

There has been a rapid and manifold increase in the activities of Parle Biscuits Pvt. Ltd. since past. These have been directed towards achieving of self-sufficiency in biscuit industry. In order to meet out the rising demand of biscuits in the country co-coordinated and consolidated efforts are required in the direction of exploration.

It is precisely in such a background, that the role of analysis of working capital and its various components, so as to manage them effectively, gets pronounced. The problems in managing Working Capital particularly in the context of the risk-return trade off associated to very little scientific and rational analysis. It is against this backdrop that the present study seeks to make an attempt to critically analyze the effectiveness of Working Capital Management of Parle Biscuits Pvt. Ltd. and offer suggestions for improvement wherever necessary.

1) To determine the extent to which advance and modern techniques of Working Capital Management are being applied in Parle Biscuits Pvt. Ltd.

2) To analyze the pattern and size of investment in current assets.

3) To analyze the pattern and size of investment in current liabilities.

4) To analyze the Working Capital and its structure and suggest optimum level of Working Capital keeping in view of risks and imponderables associates with exploration.

5) To suggest measures to improve the current assets structure and to reduce current liabilities of Parle Biscuits Pvt. Ltd.

RESEARCH METHODOLOGY

After knowing the job profile of every employee of finance department in Bahadurgarh plant of PBPL. I choose the project of Working Capital Management. I discussed the project with my instructor and coordinator Mr. JAIDEEP BHALA Deputy Manager of Finance Department.

He approved the project. After that a simple course of action has been followed for working on this project. All the data are gathered from the respective annual report of Parle Biscuits Pvt. Ltd. All the figures are taken from their balance sheet, profit & loss account of the respective years and other internal documents.

My instructor Mr. JAIDEEP BHALA in understanding the facts and figures provided a great help. Mr. BHALA made it possible for me to ask my queries from that person who can answer these best rather than anybody else in the company. Although is has been a difficult task but the availability of proper data and timely guidance given by Mr. BHALA made it a little simpler to complete this project.

In a lucid way I can summarize the steps of Research Methodology as-

1) Collection2) Organization3) Presentation4) Interpretation

METHODS OF DATA COLLECTION

1) COMMUNICATION METHOD2) OBSERVATION METHOD3) QUESTIONAIRE METOD

All the data has been collected from the primary sources.

COMPANY PROFILE

INTRODUCTION

“QUALITY, HEALTH AND GREAT TASTE”….

The Parle story unfolded in the year 1929, with the establishment of its first confectionery factory in the western suburbs of Mumbai, presently known as the landmark region of “Ville Parle”. Thereafter in 1939 Parle started the manufacture of biscuits which henceforth became its core activity. PARLE BISCUITS LIMITED is a subsidiary to PARLE PRODUCTS LIMITED, MUMBAI, which is a closely held company run by the CHAUHANS. The company commands a 40 percent market share in the Rs.35 billion biscuit markets in India.Parle-G; its first venture became an instant favorite amongst the masses, leading the glucose category with a huge market share of 65%. It topped charts worldwide by becoming the world’s largest biscuit selling brand as revealed by the US-based Bakery Manufacturers' Association in 2002. The product portfolio also comprises of krackjack, Monaco, hide ‘n’ seek and its variants.The success and survival of Parle is its adherence to quality and diversification in its core area. The strong and extensive distribution network assures the availability of Parle biscuits even in remote regions. Most of its offerings are in the low and mid price range making it affordable to the masses. Parle understands the psyche of the Indian consumer and provides them value–for-money. There are four factories of its own at Mumbai (head office), Bahadurgarh (Haryana), Neemrana (Rajasthan), and in Bangalore. The production, marketing and distribution of the biscuits are controlled by the “Business Development Department”, Mumbai office with assistance from the regional sales offices at New Delhi, Calcutta, Bangalore and Mumbai. To reduce freight rates and increase productions, Parle has tie-ups with contract manufacturing units supervised by a “Parle officer”. These units are provided with the processing charges for manufacturing biscuits which are transferred to depots established at strategic locations.

THE BISCUIT BASKET

Parle-G: The taste, energy and nourishment Parle - G offers, along with its quality and value-for-money, contribute to making it an unchallenged success. Apart from being India's largest selling biscuit, Parle - G is the winner of 8 Gold and 11 Silver awards at the Monde Selection.

Krackjack: A little sweet - A little salty… That's what makes Krackjack very, very delicious! This delightful biscuit is acclaimed in India and across the world for its controversial sweet and salty taste.Krackjack has won 11 Gold, 3 Silver and 1 Bronze award at the 'Monde Selection'.

Monaco: This original 'O' shaped salted biscuit makes people exclaim 'Oh, Monaco'. Whether plain or with toppings, Monaco is simply delicious. An ideal party time delicacy one can create more scrumptious snacks by combining Monaco with a choice of toppings. Light, crisp and fresh, it's no wonder that Monaco is India's largest selling salted biscuit. Variants include onion, methi, zeera and nimkin.

Marie Choice: “Solid Milk, Solid Taste" - this summarizes the qualities of this delicious biscuit.

Hide & Seek: This cookie biscuit is made up of large quantity of chocolate chips. Crunch into it or let it melt in the mouth to seek out the real taste of chocolate.

Fun Centre: Parle's Fun Centre range has the highest cream content amongst biscuits in the category. Best of all, one gets a choice of delicious, creamy flavors, such as, orange, elaichi (cardamom), and chocolate cream.

Cheeslings: The scrumptious, cheese-filled taste makes it difficult to stop with just a few. The little fluffy biscuits, called Cheeslings is a unique, high-count cheese biscuit. Cheeslings has won 1 'Trophy of the International High Quality', 2 'Gold with Palm Leaves', 1'Grand Gold', 14 Gold and 2 Silver at the Monde Selection' awards.

Jeffs: rectangular shaped, salted biscuit, flavored with cumin seed (Zeera) for that delicious, crunchy taste. The high-count of cumin seed makes Jeffs a more scrumptious savory - an absolute must, for munching just about anytime.

Sixer: This six-sided, salted delight is one hard-to-resist savory. Whatever the occasion, Sixer makes for a great salty snack. Be it a picnic, a party, or just any snack time, Sixer gives that crunchy, munchy, delicious, salty taste that leaves one wanting for more!

THE QUALITY COMMITMENT

Parle Product Private Limited has 3 manufacturing plants –

VILE PARLE in Mumbai (Maharashtra)BHUJ (Gujrat)BANGLORE (Karnataka)

Apart these plants Parle Product Pvt. Ltd. maintain 20 contract base manufacturing units in all over INDIA. These plants and CMU’s produce sweets and confectionary products.

Parle Product Pvt. Ltd. has also a subsidiary company, which is Parle Biscuit Pvt. Ltd. This subsidiary company produces only biscuits. It also has 2 manufacturing plants –

BAHADURGARH in Gurgaon (Haryana)NEEMRANA in Alwar (Rajasthan)

Apart these two plants Parle Biscuit Pvt. Ltd. maintain 11 contract base manufacturing units on different locations, which produce only biscuits.

All these factories are located at strategic locations, so as to ensure a constant output & easy distribution. Each factory has state-of-the-art machinery with automatic printing & packaging facilities.

All Parle products are manufactured under the most hygienic conditions. Great care is exercised in the selection & quality control of raw materials; packaging materials & rigid quality standards are ensured at every stage of the manufacturing process. Every batch of biscuits & confectioneries are thoroughly checked by expert staff, using the most modern equipment.

THE MARKETING STRENGTH

The extensive distribution network built over the years is a major strength for Parle Products. Parle biscuits and sweets are available to consumer even in the most remote places and in the smallest of villages with a population of just 500.

Parle Has nearly 1500 wholesalers catering to 4,25,000 retail outlets directly or indirectly. A two hundred strong dedicated field force services these wholesalers and retailers. Additionally there are 40 depots and C&F agents supplying goods to the wide distribution network.

The Parle marketing philosophy emphasizes catering to the masses.We constantly endeavor at designing products that provide nutrition & fun to the common man. Most Parle offerings are in the low & midrange price segments. This is based on our cultivated understanding of the Indian consumer psyche. The value for money positioning helps generate large sales volumes for the products.

Parle-G it’s first venture became an instant favorite amongst the masses, leading the glucose category with a huge market share of 65%. It topped charts worldwide by becoming the WORLD’S LARGEST BISCUIT SELLING BRAND as revealed by the US-BASED BAKERY MANUFACTURES ASSOCIATION in 2002.

The turnover of Parle Product Pvt. Ltd. is 1500 crores and the turnover of Parle Biscuit Pvt. Ltd. is 750 crores.

THE CUSTOMER CONFIDENCE

The Parle name conjures up fond memories across the length and breadth of the country. After all, since 1929, the people of India have been growing up on Parle biscuits & sweets.

Today, the Parle brands have found their way into the hearts and homes of the people of all over India & abroad. Parle Biscuits & Confectioneries, continue to spread happiness & joy among people of all ages.

The consumer is the focus of all the activities of Parle. Maximizing value to consumers and forging enduring customer relationships are the core endeavors at Parle.

Our efforts are driven towards maximizing customers’ satisfaction and this is in synergy with our quality pledge. “Parle Products Limited will strive to provide consistently nutritious & quality food products to meet consumers’ satisfaction by using quality materials and by adopting appropriate processes. To facilitate strive to continuously train our employee and to provide them an open and participative environment. “

EMERGING TRENDS OF THE BRANDSince its inception in the 30’s, Parle biscuits have prided itself in offering quality products that are affordable to the common man. The marketing mix has evolved with the times…

THE PRODUCT Parle biscuits have a range of variants in its product portfolio. The popular brands Parle g, krackjack, Monaco and its variants (zeera, onion and methi) are available in packets of various convenient sizes. New products like Hide & Seek are a foray into the premium segment.

THE PRICING STRATEGYThis biscuit major has not bothered to raise the price of its flagship brand “Parle g” for the past 6-8 years and has always tried to provide its offerings at nearly 33 per cent discount as compared to other competitive brands.

THE PROMOTION POLICYThe consumer is the focus of all activities at Parle. Maximizing value to consumers and forging enduring customer relationships are the core endeavors at Parle. Parle-G ‘My Dream Come True contest” – was one of its biggest promotional ventures (2.5 crore) which gave contestants a chance to fulfill their dreams. Discounts, gift offer schemes are other popular promotional offerings.

THE PLACE

A well-entrenched distribution system (the company covers 12-15 lakh outlets across the country), with 39 depots at strategic points all over the country. From the depots, the biscuits are sold to wholesalers and further to retailers.

THE PACKAGINGBiscuit packing has undergone a swift transformation. From the earlier waxed-paper packing, Parle’s BOPP offering is not only stylish and enticing but also increases the shelf life of the biscuits.

PARLE BISCUITS PRIVATE LIMITED (BAHADURGARH)

Parle Biscuit Pvt. Ltd. is a subsidiary of Parle Product Pvt. Ltd.The manufacturing at Bahadurgarh unit started in 1982 for Parle-G with a single plant. It is planted in near about 16 acres of land.

Including General Manager 78 employees of Managerial and Officer Class are working in this plant. Production is going on in this plant 24 hours in three shifts. Number of permanent workers of thrice shifts is 680 and around 400 workers are there on contract basis.

In 1990’s Krackjack production began followed by Monaco and Nimkin. Average Production capacity of Bahadurgarh unit per month is-

Parle-G 3500 Metric TonesKrackjack 1600 Metric TonesMonaco 800MetricTones

The plant works in coordination with the Mumbai office, Neemrana (Rajasthan) Plant of PBPL, 11-contract base manufacturing units and 40 depots. But the accounts are finalized of Neemrana plant and 11 CMU’S at Bahadurgarh Plant.

Location of the 11 CMU’S is as follows-

5 at Kanpur1 at Gorakhpur1 at Patna1 at Faizabad1 at Raipur1 at Varanasi1 at Ajmer

DEPARTMENTS IN PLANTFINANCE HR & PERSONNELQUALITY ASSURANCEPRODUCTION & PRINTINGEXCISE & DESPATCHENGINEERINGI.T.PURCHASESTORE

The organization follows a flat structure with less hierarchal levels. The heads of the different departments report to the General Manager through direct communication. The working atmosphere is not stressful with enough work-flexibility given to staff and managers.

The plant also has auditorium and viewing gallery, which is used during the visit of school children. A retail shop at the Plant provides Parle Products at M.R.P. rates.

WORKING CAPITAL AT A GLANCE

INTRODUCTION TYPES FEATURES DETERMINANTS COMPONENTS WORKING CAPITAL CYCLE

INTRODUCTION

A successful sales program is necessary for earning profits by any business enterprise. Sales don’t convert into cash instantly. There is a time lag between the sale of goods and receipt of cash.

Therefore, there is a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity.

FEATURES

1) Working capital is regarded as the excess of current assets over current liabilities.

2) Working capital indicates circular flow of funds in the day-to-day activities of business. That’s why it is also called circulating capital.

3) Working capital represents the minimum amount of investment in raw materials, work-in progress, finished goods, stores and spares, accounts receivables and cash balance.

TYPES

Working capital can be classified either on the basis of concept or on the basis of periodicity of its requirement.

1) ON THE BASIS OF CONCEPT On the basis of concept working capital is of 2 types.

A) Gross working capital - Gross working capital is represented by the total Current assets.

Gross working capital = Total current assets

B) Net working capital - Net working capital is the excess of current assets over current liabilities.

Net working capital = Current assets – Current liabilities

2) ON THE BASIS OF REQUIREMENT On the basis of requirement working capital is also of 2 types.

A) Permanent working capital - It is that amount of investment which should always be there in the fixes or minimum current assets like inventory, accounts receivables or cash balance etc. to carry out business smoothly. Such an amount cant be reduced if the firms wants to carry on business operations without interruption.

B) Variable working capital - The excess the amount of working capital over permanent working capital is known as variable working capital. It may also be subdivided into two parts.

a) Seasonal working capital - Such capital is required to meet out the seasonal demands of busy periods occurring at stated intervals.

b) Special working capital - Such capital is required to meet

out the extra-ordinary needs for contingencies. Events like strike, fire, unexpected competition, rising price tendencies, or initiating a big advertisement campaign require such capital.

DETERMINANTS

1) Nature of business – The effect of the general nature of the business on working capital requirements can’t be exaggerated. Rail, roads and other public utility services have large fixes investment so they have the lower requirements of current assets. Industrial and manufacturing enterprises, on the other hand, generally require a large amount of working capital.

2) Production policies – if the production is evenly spread over the entire year, working capital requirements are greater, because the inventories will be unnecessarily accumulated during of season period. But if the production schedule favors a varying production plan as per the seasonal requirements, working capital is required to a greater extent during a specified season only. The production policies are affected by so many factors availability of raw materials, labour, stocking facility etc & therefore, whatever the productions policies are, the firm has to arrange its working capital requirements accordingly.

3) Proportion of the cost of raw materials to total cost - In those industries where cost of proportion is a large proportion of total cost of the goods produced, requirements of working capital will be comparatively large.

4) Length of period of manufacturing – The time which elapses between the commencement and end of the manufacturing process has an important bearing upon the requirements of working capital. The manufacturing cycle may be shorter for certain concerns & longer for others- it depends on the type of the product to be manufactured, work to be done through machine labour & hand labour, degree of rationalization of manufacturing procedures through times, motion & fatigue studies etc.

5) Terms of purchase - If suppliers allow continuous credit, payment can be postponed for some time and can be made out of the sale proceeds of the goods produced. In such a case, the requirements of working capital will be reduced.

6) Dynamic Attitudes – As a company grows, it is logical to expect the large amount of working capital will be required.

7) Business cycles – Requirement of working capital also varies with the business. When the price level is up due to boom conditions, the inflationary conditions create demand for more working capital. During depression also

a heavy amount of working capital is needed due to the inventories being locked unsold and book debts uncollected.

8) Requirement of cash - The working capital requirements of a company are also influenced by the amount of cash required by it for various purposes. The greater the requirement of cash, the higher will be the working capital needs of the company.

9) Dividend policy of concern – If the management follows a conservative dividend policy the needs of working capital can be met with the retained earnings. The relationship between dividend policy and working capital is well established and mostly companies declare dividend after a careful study of their cash requirements.

10) Other Factors - Other factors, which affect the requirement of working capital, are lack of co-operation in production and distribution policies, transport and communication facilities, the fiscal and tariff policies of the government etc.

COMPONENTS

Main components of working capital are as follows:

1) Cash – Cash is the most liquid and important component of working capital. Holding cash involves cash in the sense that the present worth of cash held for a year is less than the value of cash on today. During inflationary situations as exist today the cost of holding includes the deterioration in the value of the cash due to inflation. Cash, therefore, results in enhanced liquidity, but lower profitability. Despite in the cost involved it is pertinent to hold cash because it facilitates the attainment of some important motives.

2) Marketable Securities – Though marketable securities provides a such lower yield that the firm’s operation assets. They serve two useful functions. Firstly, they act as a substitute for cash, and secondly, are used as temporary investment. Where these securities are held in lieu of the cash balance, they act as a substitute for transactional or precautionary balances. Normally, these aren’t used as speculative balances, but only as a guard against the possible shortage of bank credit.Marketable securities (as temporary investment) may be held for one of the following reasons:

Seasonal or cyclical operations

To meet known financial requirements. Construction of an additional plant.

Immediately after the sale of long-term securities.

3) Account Receivable - Though accounts receivable are a vital investment of any business organization, little analytical work as been done to determine credit policies. Maintaining account receivable has its cost implications in that the firm’s monetary resources are tied up. This is of greater significance in the inflationary economy, because of the depreciation in the value of money. Basically, this is a two-step account. When goods are shipped, inventories are reduced and accounts receivable is created. When payment is made, this account is reduced and the cash level increases. Accounts receivables are, therefore a function of the volume of credit sales and the average length of time between sales and collections.

4) Inventory – Inventories represent a substantial amount of a firm’s current assets. Management of inventories should be efficiently carried out so that this investment doesn’t become too large, as it would result in blocked

capital which could put to productive use elsewhere. On the other hand, having too small an inventory could result in loss of sale or loss of customer goodwill. An optimum level of inventory should therefore be maintained

.

WORKING CAPITAL CYCLE

Working capital cycle indicates the length of time between a firm’s paying for materials entering into stock and receiving the cash from sale of finished goods. In a manufacturing firm, the duration of time required to complete the sequence of events is called operating cycle.

In case of a manufacturing company, the operating cycle is the

length of time necessary to complete the following cycle of events: -

1) Conversion of cash into raw materials2) Conversion of raw materials into work-in-progress3) Conversion of work-in-progress into finished goods4) Conversion of finished goods into accounts receivable5) Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period depending upon the nature of the business & type of product etc. tne duration of the operating cycle for the purpose of estimating working capital is equal to the sum of duration allowed by the suppliers.Working capital cycle can be expressed as:

R+W+F+D-CWhere R=Raw Material Storage Period= Avg. Stock of Raw Material

Avg. Cost of Production per day

W=Work in Progress Holding Period = Avg. Work in ProgressInventory Avg. Cost of Production per day

F=Finished Goods Storage Period = Avg. Stock of Finished Goods Avg. Cost of Goods Sold per day

D=Debtors Collection Period = Avg. Book Debts Avg. Credit Sales per day

C=Credit Period Avail = Avg. Trade Creditors Avg. Credit Purchases per day

OPERATING CYCLE OF MANUFACTURING BUSINESS

REALIZATION Accounts SALES

Receivables

Cash Finished Goods

PURCHASE

PRODUCTION PRODUCTION PROCESS

Raw Materials Work-in-Process PROCESS

METHOD OF ASSESMENT OF WORKING CAPITAL

Operating cycle No. of days

Raw material = 916.53 = 7.9 114.84

Stock in Process = 10.12 = .088 114.84

Finished goods = 1054.1 = 9.13 115.36

Debt collection period = 4.22 (Calculating in ratios)

_______________

Total length of Operating Cycle = 21.34 Days

SALES per month 67829.07 = 5652.422 Rs. 12

Total EXPENSES 60450.77 = 5037.66 Rs. Per month 12

WORKING CAPITAL REQUIRED = Total Length of X Monthly Expenses Operating Cycle

__________________________________ 30

= 21.34 X 5037.66 30

= 3583.45Rs.

Working Notes:

1. Raw Material – (Mentioned in P&L Account) Opening Stock + Purchases – Closing Stock

2003-04:Annual Consumption = 36047.27Rs

1 Month’s Consumption = 36047.27/12 = 3003.94Rs

2004-05:Annual Consumption = 38058.07Rs

1 Month’s Consumption = 38058.07/12 = 3171.50 Rs.

2. Stock In Process -- Raw Material + Power + Labour + Repairs + Other Manufacturing Expenses + Depreciation + Opening Stock – Closing Stock

2003-04:Cost of Production = 40125.5 Rs.

1Month’s Stock In Process = 40125.5/12 = 3343.81Rs.

2004-05Cost of Production = 41315.08 Rs.

1Month’S Stock In Process = 41315.08/12 = 3442.92 Rs.

3. Finished Goods -- Cost of Production + Opening Stock - Closing Stock

2003-04:Cost of Goods Sold = 40275.31Rs.

1 Month’s Finished Goods = 40275.31/12 = 3356.27Rs.

2004-05:Cost of Goods Sold = 41529.54Rs.

1 Month’s Finished Goods = 41529.54/12 = 3460.85Rs.

Composition ofLevel of Current

Liabilities

THEORTICAL ASPECTS OF WORKING CAPITAL MANAGEMANT

WORKING CAPITAL MANAGEMENTNATURE OF WORKING CAPITAL MANAGEMENT

Working capital management is three dimensional in nature-

1) It is concerned with the formulation of policies with regard to profitability, liquidity and risk.

2) It is concerned with the decisions about the composition and level of current assets.

3) It is concerned with the decisions about the composition and level of current liabilities.

DIMENSIONS OF WORKING CAPITAL

Composition ofLevel of

Current Assets

Policies regarding to

ProfitabilityLiquidity and Risk

GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them.

The term current assets refer to those assets which is the ordinary course of business can be converted into cash within one year. Major current assets are cash, marketable securities, accounts receivable and inventory.

Current liabilities are those liabilities, which are intended, at their inception, to be paid in the ordinary course of business within a year, out of the current assets or earnings of the concern. Current liabilities are accounts payable, bills payable, bank overdraft, and outstanding expenses.

Working capital is that portion of firm’s assets which is financed by long-term funds.

Interaction between current assets and current liabilities is the main theme of the theory of working capital management.

Goal of working capital management is to manage the firm’s current assets and liabilities in such a way so that a satisfactory level of working capital is maintained.

The second important segment of working capital management is deciding the optimum level of investment in various current assets. There are three important current assets cash, accounts receivables and inventory

RECEIVABLES MANAGEMENT

INTRODUCTION The term receivable is defined as “debt owed to the firm by customers arising from sale of goods or services in the ordinary course of business”. When a firm makes an ordinary sale of goods or services and doesn’t receive payment, the firm grants trade credit accounts receivable, which could be collected in the future. Receivables Management is also called trade credit management.

OBJECTIVE

The objective of receivables management is “to promote sales and profits until that point is reached where the return on investment in further funding receivables is less than the cost of funds raised to finance that additional credit”.

BENEFITS

Investments in receivables involve both benefits and costs. The extension of trade credit has a major impact on sales, costs and profitability. Other things being equal, a relatively liberal policy and, therefore, higher investments in receivables, will produce larger sales. However, costs will be higher with liberal policies than with more stringent measures. Therefore, accounts receivables management should aim at a trade-off between profit (benefit) and risk (cost).

CREDIT POLICIY

The credit policy of a firm provides the framework to determine:1) Credit standards2) Credit terms3) Credit Analysis

Credit Standard

The term credit standards represent the basic criteria for the extension of credit to those customers to whom goods could be sold on credit. If a firm has more slow-paying customers, its investment in accounts receivables will increase. The firm will also be exposed to higher risk of default.

Credit Terms

Credit terms specify duration of credit and terms of payment by customers. Investment in accounts receivables will be high if customers are allowed extended time period for making payments.

Credit Analysis

Credit analysis and investigation is an aspect of credit policies of a firm. Two basic steps are involved in the credit investigation process:

A. Obtaining credit informationB. Analysis of credit information

It is on the basis of credit analysis that the decisions to grant credit to a customers as well as the quantum of credit would be taken.

CREDIT POLICY OF PARLE BISCUITS PVT. LTD.

Before coming to the credit policy it’s necessary to be aware with the goods distribution policy of Parle Biscuits Pvt. Ltd.

For fulfilling the demand of it’s customer’s timely Parle Biscuits Pvt. Ltd. maintains 40 DEPOTS in all over INDIA. Finished goods are transferred from production plants to these depots. According to their transportation facilities customers of Parle Biscuits Pvt. Ltd. ask their demand of different products to depots.Then it’s the responsibility of these depots to fulfill the demand of customers of Parle Biscuits Pvt. Ltd.

Parle Biscuits Pvt. Ltd. doesn’t has credit policy it deals in cash. For the collection of it’s payment PBPL deals with 5 banks which are as follows:

1) UTI2) STANDARD CHARTERED3) HDFC4) BANK OF PUNJAB5) CORPORATION BANK

After collecting the amount of sold goods it is deposited by the depots in any of these bank.Parle Biscuits Pvt. Ltd. divided its customers in 4 categories-

1) Cheque Parties – Cheque parties are those who send their blank cheques to Depots before receiving the finished goods. Depots fill the selling amount of the consignment in those cheques and then these cheques are deposited by the depots in the account of PBPL in any of these 5 banks.

2) Demand Draft Parties – In such cities where anyone of these 5 banks isn’t there customers of those come in this category.

Before receiving the finished goods customers send the draft of the consignment amount to production plants directly. Then consignment is sent to those customers by concerned depot.

3) Credit Parties – Those parties to whom maximum 4 days credit facility is provided are called credit parties. After 4 days these parties send cheque of consignment amount to depot. And then procedure just like first category is followed by depot.

4) Credit Demand Draft Parties - These are those parties to whom 4 days credit facility is provided but they also don’t have facility of any of those 5 banks in their city.

After 4 days just like the second category these parties send the draft of consignment amount directly to production plant.

INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the principal item in the working capital of the majority of trading and industrial companies. In inventory we include raw materials, finished goods, work-in-progress, supplies and other accessories. To maintain the continuity in the operations of business enterprises, a minimum stock of inventory is required.

Management of inventory is designed to regulate the volume of investment in goods on hand and the types of goods carried in stock to meet the needs of production and sales while at the same time, the investment in them is to be kept at a reasonable level.

CONCEPT

The term “inventory management” is used in two ways- Unit Control and Value Control. Production and purchase officials use this word in term of unit control whereas in accounting this word is used in term of value control. Investment in inventory is one the largest asset item of business enterprises particularly those engaged in manufacturing.

The proper management and control of the capital invested in the inventory should be the prime responsibility of accounting department because resources invested in inventory aren’t earning a return for the company. Rather, on the other hand, they are costing the firm money both in terms of capital costs being incurred and loss of opportunity income that is being foregone.

OBJECTIVES

The basic managerial objectives of inventory control are two-1) The avoidance of over-investment or under-investment in inventories.

2) To provide the right quantity of standard raw material to the production department at the right time.

TECHNIQUES OF INVENTORY CONTROL 1) The Selective Inventory Control or ABC System of Control2) Maximum Stock Limit3) Minimum Stock Limit4) Re-ordering Level5) Economic Order Quantity

ABC System of Control

The various inventory items are, according to this system, categorized into three classes-

I. AII. B

III. C

The item included in-group involve the largest investment. Therefore, inventory control should be the most rigorous and intensive and the most sophisticated inventory control techniques should be applied to these items. The C group consists of items of inventory which involve relatively small investments although the numbers of items is fairly large. These items deserve minimum attention. The B group stands midway. It deserves less attention than A but more than C. It can be controlled by employing less sophisticated techniques.

Maximum Stock Limit

This represents the quantity if inventory above which it should not be allowed to be kept. The following formula may be applied to calculate the maximum stock-

Maximum Stock = Reorder Level – Minimum Consumption during Minimum

Lead Time + Lot Size

Minimum Stock Limit

This represents the quantity below which stock should not be allowed to fall. The main purpose of this level is to ensure that production isn’t held up due to storage of any material.

Minimum Stock Limit = Re-order Level – Normal storage during Lead Time

Re- Ordering Level

It is the point at which if stock of the material in store reaches, the storekeeper should initiate the purchase requisition for fresh supplies of the material. This level is fixed somewhere between the maximum and minimum levels in such a way that the difference of quantity of the material between the reordering level and the minimum level will be sufficient to meet requirements of production upto the time of fresh supply of the material.

The reorder point = Lead time in days * Average daily usage of inventory

Economic Order Quantity

It is the quantity of inventory, which can be reasonably ordered at a time and purchased economically. It is also known as Standard Order Quantity or Economic Lot Size. By definition “Economic Order Quantity is that size or order at which the total cost of ordering and holding are the minimum.

In determining the economic order quantity the problem is one to set a balance between two opposing costs, namely, namely ordering costs and carrying costs. The ordering costs are basically the costs of getting an item into the firm’s inventory.

Carrying costs, sometimes also known as holding costs are the costs of possessing the materials. These costs are combinedly known as “Associated Costs”.

Hence, the management tries to reconcile them and this reconciliation point is economic order quantity.

INVENTORY MANMAGEMENT IN PARLE BISCUITS PVT. LTD.

For inventory management in Bahadurgarh plant of PBPL certain things are considered which are completely practical-

As market generally fluctuates so if there is any perception of the increment in the price level of any commodity in future then that particular commodity is stored.

All the materials of the mixture, which is used in making biscuits, can be stored maximum only for 3 days. Because store of plant is designed like this that more than 3 days storage can’t be maintained in it.

Minimum levels of inventories are maintained in plant in wake of lead-time, govt. policies, and one-day safety stock for transportation problem.

Re-order levels of inventories are maintained in the plant in wake of per day consumption level of inventories and lead-time in days.

The position of inventory at the end of last two years is as follows-

NAME OF THE COMMODITY YEAR AMOUNT (In Rs/-)

Stores and spares 2003-04 82, 91,0002004-05 57, 29,000

Raw Materials 2003-04 10, 21,52,0002004-05 8,11,54,000

Packing Material 2003-04 5,82,08,0002004-05 7,08,06,000

Finished Goods 2003-04 11,61,33,0002004-05 9,46,87,000

CASH MANAGEMENT

INTRODUCTION

Cash is the most important current asset for the smooth operations of the business. Now-a-days liquidity and solvency maintenance has become the main task of financial executives. Moreover, cash management assumes more importance than current assets because cash is the most significant and the least productive asset that a firm holds. Cash balance is an unproductive balance also. Idle cash produces nothing. Therefore, the aim of cash management may be said to maintain adequate cash position at one hand and to use excess cash in some profitable way on the other hand.

MOTIVES OF HOLDING CASH

Motives refer to rationale behind holding cash in hand or at bank. The great economist Prof. JOHN. M. KEYNES calls all these as –

1) Transaction Motive – An important reason for maintaining cash balance is the transaction motive. This refers to the holding of cash to meet routine cash requirements to finance the transactions which a firm carriers on in the ordinary course of business. For example, cash payments have to be made for purchases, wages, operating expenses, financial charges like interest, taxes, dividends, and so on.

2) Precautionary Motive - Precautionary motive of holding cash implies the need to hold cash to meet unpredictable obligations. Thus precautionary cash balance serves to provide a cushion to meet unexpected contingencies.

Floods, strikes and failure of important customers Bills may be presented for settlement earlier that expected. Unexpected slow down in collection of accounts receivables. Cancellation of some orders for goods as the customer is not satisfied. Sharp increase in cost of raw materials.

The cash balances held in reserve for such random and unforeseen fluctuations in cash flows are called as precautionary balances.

3) Speculative Motive - Speculative motive represents a positive and aggressive approach. Firms aim to exploit profitable opportunities and keep cash in reserve to do so. The speculative motive helps to take advantage of –

An opportunity to purchase raw materials at a reduced price on payment of immediate cash.

A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline.

Delay purchases of raw materials on the anticipation of decline in prices. Make purchase at favorable prices.

It refers to the desire of a firm to take advantage of opportunities which present themselves at unexpected moments and which are typically outside the normal course of business.

FACTORS DETERMINING LEVEL OF CASH

Maintenance of the optimum level of cash is the main problem around which the financial managers do the exercise of cash management. Level of cash holding differs from industry to industry, organization to organization but the factors determining its level are common to all, which can be summarized as follows-

1) Credit Policy – Credit policy is a very critical problem. It affects productivity and liquidity of the business considerably. If credit policy is liberal cash level will be higher and vice versa.

2) Distribution Channel – Distribution channel refers to the number of middlemen in the process of distribution of product. If the distribution channel is long and the credit policy liberal, the level of cash may be higher.

3) Nature of the product - Nature of goods produced by the organization to a great extent exercises influence on cash reserve. If the produce comes in necessity class, the level of cash holding will differ in comparison to luxury necessity.

4) Size and area of operation – Area of operation reefers to the geographical area in which the organization is operating. If the organization is working on a large scale, it is quite possible that organization would have to keep higher cash balance. On the contrary, limited area of operations will require less cash balance.

5) Duration of Production Cycle - It refers to the time period taken by the raw material to become finished product/marketable produce. In case of long production cycle, the level of cash holding is likely to be high and vice-versa.

6) Policy followed by the Organization as to disbursement of Salaries, Bonus, Dividend etc. - If salaries are being distributed after 15 days the organization would have to manage a high level of cash reserve, while the weekly payment of wages and salaries will require still more funds. On the contrary, monthly payments will reduce the need of funds.

CASH MANAGEMENT IN PARLE BISCUITS PVT. LTD.

Cash management in Parle Biscuits Pvt. Ltd. is as follows-

Average daily collection of the Parle Biscuits Pvt. Ltd. is 2 crores.

Salaries and Wages are distributed in Parle Biscuits Pvt. Ltd on monthly basis. 50,00,000-75,00,000 salaries and wages are distributed in one month. Like this all other daily transactions are completed by daily collection.

In case of strike or any contingency supply of demand is completed by another plant of Parle Biscuits Pvt. Ltd. and by 11 CMU’S. Supply doesn’t disturb.

Authority for getting the benefit of any opportunity is given to Mumbai office of Parle Biscuits Pvt. Ltd. That decides the policy regarding to any market opportunity.

Parle Biscuits Pvt. Ltd. doesn’t have any credit policy. It deals in cash. That’s why it doesn’t has any cash problem.

Distribution channel of Parle Biscuits Pvt. Ltd. is very short only depots are there as a middleman between plant & open market. That’s why there isn’t any necessity of more cash.

Biscuits come in FMCG product. So circulation of cash is smooth & fast.

Production cycle is short. That’s why Parle Biscuits Pvt. Ltd has less demand of cash.

ANALYSIS OF WORKING CAPITAL MANAGEMENT

In this chapter an analysis over the Working Capital of Parle Biscuits Pvt. Ltd. has been done. But before going further let us have a look on the current position of Working Capital.

The Working Capital of the last two years is as follows –

(Amount in Lacs Rs/-)

YEAR SALES INVESTMENTSWORKING CAPITAL

% OF WORKING CAPITAL

TO SALES

% OF WORKING

CAPITAL TO INVETSMENTS

2003-04

68000 33540.19 6596.16 9.70 19.67

2004-05

70000 27390.76 5294.01 7.56 19.32

In year 2002-03 Working Capital of Parle Biscuits Pvt. Ltd. was 2500 lacs Rs/- while in the same period the sales was noticed 65,000 lacs Rs/- then % of Working Capital to sale was 3.84 but in the next year 2003-04 sales was 50,000 lacs Rs/- and Working Capital was 3,000 lacs Rs/-. So in year 2003-04 % of Working Capital to sales was 6.

In year 2002-03 Investments were 20,000 lacs Rs/- so % of Working Capital to Investments was 12.5 and in year 2003-04 Investments were 15,000 lacs Rs/- so % of Working Capital to Investments was 20.

RATIO ANALYSIS

It is a powerful tool of financial analysis. A ratio is defined as “the indicated quotient of two mathematical expressions” and as “the relationship between two or more things”. Ratio helps to summaries the large quantities of financial data and to make qualitative judgment about the firm’s financial performance. The point to note is that a ratio indicates a quantitative relationship, which can be turn, used to make a qualitative judgment.

Here are some of the calculated ratios of the financial year of Parle Biscuits Pvt. Ltd. All the ratios are calculated in Lacs Rs/- figures.

Net Working Capital Ratio

Net Working CapitalCapital Employed

2003-04 2004-05

Net Working Capital 6596.16 5294.01

Net Assets or Capital employed 29340.48 35093.56

Ratio .22: 1 .15: 1

The difference between Current Assets and Current Liabilities excluding short-term borrowings is called Net Working Capital or Net Current Assets. The position of Net Working Capital in the year 2003-04 is better as compared with the year 2002-03. The important thing to say is that this organization has healthy Current Assets.

Current Ratio

Current AssetsCurrent Liabilities

2003-04 2004-05

Current Assets 26686.68 28602.82

Current Liabilities 20090.52 23308.81

Ratio 1.33: 1 1.23: 1

Current Assets include cash and those assets, which can be converted into cash within a year. All obligations maturing within a year are included in current liabilities.

As a conventional rule a current ratio 2: 1 or more is considered satisfactory. The current ratio doesn’t represent margin of safety i.e. a “cushion” of protection for creditors.

Average Collection Ratio

Debtors*360 Sales

2003-04 2004-05

Debtors*360 1217.16*360 821.90*360

Sales 68000 70,000

Days 6.45 4.22

The average collection period shows the efficiency of debtors. It tells that Parle Biscuits Pvt. Ltd doesn’t has credit policy and if is given then in rare cases.

Quick Ratio or Acid Test

Current Assets - InventoriesCurrent Liabilities

2003-04 2004-05

Current Assets-Inventories 26686.68-2869.33= 28602.82 -2524.98=

23817.35 26077.84

Current Liabilities 20090.52 23308.81

Ratio 1.18: 1 1.12: 1

Generally a quick ratio of 1:1 is considered to represent a satisfactory position. But it can’t be said that a company having quick ratio of less than 1:1 isn’t financially sound, Because it depends upon the nature of debtors. If the debtors are slow paying the quick ratio of more than 1:1 can become harmful. But if debtors are liquid like in this organization than even less than 1:1 can work out to be satisfactory.

As debtors of this organization aren’t slow paying so that quick ratio is satisfactory.

The above made calculation of various ratios has told us about the various aspects of Working Capital of Parle Biscuits Pvt. Ltd. The system is well under control an effective but still in some areas a little more concentration to be needed.

FUND FLOW ANALYSIS

The statement of change in financial position, prepared to determine only the sources and uses of working capital between dates of the two Balance Sheets is known as the Fund Flow Statement. Working Capital is defined as the difference between Current Assets and Current Liabilities. Working determines the liquidity of the firm.

The Working Capital flow or fund arises when the net effect of transaction is to increase or decrease the amount of Working Capital. Normally, a firm will have some transactions that will change Net Working Capital and some that ill cause no change in Net Working Capital. The transaction will cause Net Change of Working Capital only when one of the accounts affected is a current account (Current Liability) and account is non-current account (Long-term Assets or Long term Liability).

The concepts of Working Capital may be summarized as follows:

The Net Working Capital increases or decreases when a transaction involves a current account and a non-current asset account.

The Net Working Capital remains unaffected when a transaction involves only Current accounts.

The Net Working Capital remains unaffected when a transaction involves only non current accounts.

Now let us examine the Working Capital flow of Parle Biscuits Pvt. Ltd. through the statement of change in Working Capital.

FINANCING OF WORKING CAPITAL

INTRODUCTION

A firm has to decide how it is to be financed. The need for financing arises mainly because the investment in Working Capital/Current Assets that is raw materials, work/stock-in-progress, finished goods and receivables typically fluctuates during the year.

The main sources of Working Capital financing are Trade Credit, Bank Credit, RBI framework/regulation of bank credit/finance/advances, Factoring, Commercial Papers and Internal Sources.

TRADE CREDIT

Trade Credit refers to the credit extended by the supplier of goods and services in the normal course of transaction/business/sale of the firm. According to trade practices, cash is not paid immediately for purchases but after an agreed period of time. Thus, deferral of payment (trade credit) represents a source of finance for credit purchases.

BANK CREDIT

Bank Credit is the primary institutional source of Working Capital finance in India. In fact, it represents the most important source for financing of Current Assets.

Working Capital finance is provided by banks in five ways:

1) Cash Credits/Overdrafts2) Loans3) Purchase/Discount Bills4) Letter of Credit5) Working Capital term loans

RESERVE BANK OF INDIA FRAMEWORK FOR /REGULATION OF BANK CRDIT

In order to secure alignment of Bank Credit with planning priorities and measures to direct Bank Credit to priority sectors and enforce a measure of financial discipline among industrial borrowers.

However, the basic character of Bank financing of Industry, namely over borrowing and domination of cash credit system did not materially alter.

COMMERCIAL PAPERS

Commercial Paper is a short-term unsecured negotiable instrument, consisting of usance promissory notes with a fixed maturity. It is issued on a discount on face value basis but it can also be issued in interest bearing form. A Commercial Paper when issued by a company directly to the investor is called a Direct Paper. The companies announce current rates of Commercial Papers of various maturities, and investors can select those maturities, which closely approximate their holding period. When Commercial Papers are issued by security dealers/dealers on behalf of their corporate customers, they are called Dealer Paper. They buy at a price less than the commission and sell at the highest possible level.

FACTORING

Factoring provides resources to finance receivables as well as facilitates the collection of receivables. Although such services constitute a critical segment of the financial services scenario in the developed countries, they appeared in the Indian financial scene only in the early nineties as a result of RBI initiatives. There are two bank-sponsored organizations, which provide such services:

1) SBI Factors and Commercial Services Ltd.

2) Canbank Factors Ltd.

The first private sector factoring company, Foremost Factors Ltd, started operations since the beginning of 1997.

INTERNAL SOURCES

This is also another major source for financing of Working Capital. Internal Sources include profits, reserves etc.

FINANCING OF WORKING CAPITAL IN PARLE BISCUITS PVT. LTD.

In Parle Biscuits Pvt. Ltd financing of Working Capital is done through only internal sources. Profits and reserves of Parle Biscuits Pvt. Ltd. are enough to fulfill the demand of it’s Working Capital.

Parle Biscuits Pvt. Ltd. doesn’t use any other source apart internal for financing it’s Working Capital

FINDINGS & CONCLUSIONS

The project is developed keeping in mind the security of Working Capital of the company. Means that no one can enter in the confidential data of the company and without permission the senior officer one can’t enter in the main programme whether he is Manager, Employee or the Guest.

It is very difficult to make the project or the analysis in such a way that can solve all the problems according to the requirements. In this project it is being tried to give more and more facilities but in a short period of training time, as much as possible has been done.

1) It is easy to understand and operate this project.

2) It provides the facility to update the records.

3) It is found that the various components of Gross Working Capital (Total Current Assets) have shown a change in their respective sizes.

4) In relation to the above said statement we can say that the investment in Current Assets by the organization has gone down during the year 2003-04 as compared to the previous year 2002-03. Though, there has been as increase in the Working Capital.

BIBLIOGRAPHY

1) Management Accounting by D.C.Sharma & K.G.Gupta

2) Financial Management by M.Y.Khan & P.K.Jain

3) Managerial Accounting by S. N. Maheswari

4) Parle Biscuits Pvt. Ltd. annual report 2001-02

5) Parle Biscuits Pvt. Ltd. annual report 2002-03

6) Parle Biscuits Pvt. Ltd. annual report 2003-04