Gtn Project Sub by Krishna

C O N T E N T S

DECLARATION

I, K. BALAKRISHNA, here by solemnly declare that the project report titled A STUDY ON WORKING CAPITAL MANAGEMENT IN GTN INDUSTRIES LTD. HYDERABAD submitted by me is a bona fide work done by me between 28th May 2007, 28th July 2007 and is not submitted to any other University or published any time before. This project work is submitted to S.V. University in partial fulfillment of the requirement for the award of MASTER OF BUSINESS ADMINISTRATION by me.

PLACE: NELLORE,

DATE: K.BALAKRISHNAACKNOWLEDGEMENTThe presentation of this project has given me the opportunity to express my profound gratitude to all those who have made it possible for me to accomplish this project work. At the first instance I would like to thank the GTN INDUSTRIES LTD., Hyderabad, for giving me the opportunity to do the project work in esteemed organization.

I am especially thankful to Mr.V.S.V.SWAMY, the Manager of Finance in GTN INDUSTRIES Ltd, Hyderabad for their valuable guidance.

I am especially thankful to Mr. Dr. N. THIRUPALU, Principal and also to Mr. SASIDHAR, Head of the department and other Faculty members of JAGANS INSTITUTE OF MANAGEMENT STUDIES for supporting me in all my deeds during my curriculum.

I would like to express my sincere thanks to Mr. Dr.N.THIRUPALU internal guide Principal of JAGANS INSTITUTE OF MANAGEMENT STUDIES for his kind guidance and support extended for completion of this project.

.

K.BALAKRISHNAC O N T E N T SSL. NO.PARTICULARSPAGE NOS.

1INTRODUCTION TO TEXTILE INDUSTRY01 02

2PROFILE OF THE COMPANY03 05

3DESIGN OF THE STUDY06 07

4WORKING CAPITAL MANAGEMENT AN INTRODUCTION08 40

5WORKING CAPITAL MANAGEMENT IN GTN GROUP41 57

6DATA ANALYSIS & INTERPRETATION58 60

7OBSERVATIONS & CONCLUSION61 62

8ANNEXURES

9BIBLIOGRAPHY

INTRODUCTION

TO

TEXTILE INDUSTRYINTRODUCTION TO TEXTILE INDUSTRY

Textile Industry in India is one of the oldest and key segments of our economy accounting for almost 14% of the industrial production of the country and providing direct and indirect employment to 35 million people. This industry is one of the largest net foreign exchange earner and accounting for almost 27% of the countrys total exports.

The cotton yarn exports from India have grown substantially in the last 20years and at present, it has 25% market share in the global cotton yarn trade. The exports of cotton yarn from India can be divided into three categories viz. Coarse counts (up to 30s), medium counts (30s to 50s) and fine and super fine counts (50s and above). Almost 85% of the cotton yarn exports from India are of coarser counts and the balance 15% comprises of medium, fine and super fine counts, which are mostly combed.

The share of the Indian cotton yarn exports in the world trade, which at present stands at 25%, has been stagnating due to recession in the world market and recent global events. Competition from countries like Pakistan, Indonesia, Syria, Egypt and Turkmenistan is also affecting the trade. These factors, however, affect mainly in the coarser count sector up to 30s, which constitutes 85% of the trade. Upon dismantling quota system under World Trade Organization (WTO), exports to EU and USA, will be completely freed from January, 2005 resulting in a freer world trade.

In a free market scenario, it is only the Units, which are more efficient and can produce goods in cost effective manner with strong emphasis on quality and customer services, will be able to survive and prosper.

Besides, the Indian Textile Industry has the inherent advantage of home grown cotton, comparatively cheaper labour and availability of experienced technical pool in the Country. At present, India which has the largest area under cotton cultivation has one of the lowest yield i.e. 300 Kg per hectare. The technological mission on cotton launched by the government recently is expected to improve the productivity to nearly double of the present yield, will help the industry to meet its growing needs of raw cotton at reasonable prices.

PROFILE

OF

GTN TEXTILES LIMITEDPROFILE OF M/S GTN TEXTILES LIMITEDGTN Group is headed by Chairman Sri M.L. Patodia and supported by Sri B.K. Patodia, Vice Chairman & Managing Director and Sri M.K. Patodia, Managing Director. Sri B.K. Patodia is an Engineering Graduate from BITS, Pilani and has about 37 years of experience in Textile Industry, Yarn marketing and Cotton Trade. Sri M.K. Patodia is a Chartered Accountant with over 28 years of experience in the same field.

GTN Textiles Limited, an ISO 9002 certified company, is mainly engaged in manufacture and exports of cotton yarn in the 15% segment of medium, fine and super fine combed yarns, where it has a strong presence and leadership. The Company has been targeting high end-users in sophisticated countries with specialized products. GTN pioneered exports of cotton yarn to Japan and Italy, where it has maintained its leadership. Besides, companys yarn has also been well accepted in other countries viz. South Korea, China, Hong Kong, Austria, Belgium, Israel, Australia, Taiwan, Malaysia, Mauritius, amongst others. The Company enjoys excellent relations with all of its overseas customers, which have been painstakingly built over the years by strictly adhering to delivery schedules, maintaining consistent quality and providing prompt after sales service. Vast experience and product specialization in the medium, fine and super fine segment of the world cotton yarn trade will help to maintain its leadership.

In recognition of the Companys excellent export performance, the Company has received Gold Trophies from the Cotton Textile Export Promotion Council (TEXPROCIL) for Excellence in exports of cotton yarn for the last 15 years continuously, a feat unmatched in the industry.

The group is mainly engaged in manufacturing of Cotton Yarn over last four decades. It commenced manufacturing of Cotton yarn in 1964 with 6,000 Nos. Spindles and has grown to 1, 77,640 Nos. Spindles as on date. The manufacturing facilities are located at Medak, Shadnagar, Nagpur, Alwaye and Palakkad. As per Dum & Bradstreet-1999 magazine, GTN Group is one of the Indias top 500 Companies.

The long term objective of the Company is to remain as strong player in the medium, fine and super fine segment of the world market with strong emphasis on product and market development, value added yarns, customer service and technology up-gradation.

GTN is also continuously improving its operational efficiency, productivity and cost control, which alone can improve the bottom line in future in a highly competitive environment. The Companys recent investments in compact spinning will help to move away from commodity segments to more and more specialized products. The company has established a strong marketing network in various countries and has been able to create GTN as a brand name in the global market.

The company is highly Information Technology driven and has wide area connectivity across all its plants and offices. In 1999, SAP-R/3-ERP software was implemented across the group, which resulted in a greater operational efficiency and quicker customer response.

As on March, 2004, the company has about 2,700 employees in its various offices and factories.

It has promoted a joint venture company namely Patspin India Limited, a 100% EOU in Palakkad to manufacture higher counts of fine and superfine yarn with M/s Itochu Corporation, Japan. The investment in this regard is Rs.135.00 Crores.

DESIGN OF THE STUDYDESIGN OF THE STUDY

OBJECTIVES

To study the production pattern of M/s GTN Textiles Limited Shadnagar unit in tandum with GTN Textiles ltd Debtors, stocks, other current assets and liabilities and suggest ways and methods of optimum utilisation of Working Capital. To study Working Capital requirement based on the production pattern, credit policy of the Company and other factors.

To study the Working Capital pattern over the last 5 years and find out the pattern of utilisation of Working Capital.

To find out the reasons behind profits & losses of the GTN INDUSTRIES LIMITED.

To know about the Textile Industry scenario.

METHODOLOGY

The methodology of the study involves the use of Primary data Secondary data

The Primary data was collected by interacting with the Senior Executives of the Company.

The Secondary data has been extracted from the Annual Reports and various MIS Reports.

SCOPE OF THE STUDY

This project is a brief study of the present pattern of utilisation of working capital and various components of Working Capital and management control on the same. It is mainly concentrated with assessment of present working capital requirement and reduction in interest cost there on.

LIMITATIONS

Collection of data relating to all units of GTN Group individually is not possible within a short span, as they are located in different places.

This study has been conducted internally and hence no comparison with any other industry is available.

WORKING CAPITAL MANAGEMENT

AN INTRODUCTIONWORKING CAPITAL - AN INTRODUCTION

Capital is defined as the sums of all the goods produced in the economy and are used for further production rather than immediate consumption.

Fixed Capital and Working Capital are two sides of a single coin called Capital. Investments in the purchase of fixed represent that part of firms capital that is blocked on a permanent basis and called fixed capital. Working Capital is that portion of total capital, which very much needed to manage the whole gamut of day-to-day running expenses to avoid technical insolvency of a concern.

Working Capital in business is just like blood in a human body. Optimum and appropriate movement blood through the body is extremely necessary to continue life. Like human blood, the proper circulation of funds (working / circulating capital) is utmost necessary to continue business. An enterprise should maintain optimum amount of working capital so as to carry on the productive and distributive activities smoothly.

In the words of Shubin, working capital is the amount of funds necessary to cover the cost of operating the enterprise.

Concept of Working Capital

a) Gross Working Capital: Gross Working Capital refers to the amount of funds invested in various components of current assets. It is also known as Circulating Capital or Current Capital. This concept focuses attention on two aspects of current assets and management.

It enables the firm to plan and control funds and to maximise the return on investment.

It provides the correct amount of working capital at right time

b) Net Working Capital: It refers to the difference between current assets and current liabilities. It can be either positive or negative. Negative Working Capital arises when current a liability exceeds current assets. The concept of Net Working Capital enables the firm to determine how much amount is kept for operational requirement. It indicates:

1. The liquidity position of the firm and

2. The extent of which working capital needs may be financed by the sources of funds

Current assets should be sufficiently in excess of current liabilities to constitute a margin or better for maturing obligations within the operation cycle of business.

Types of Working Capital

Working Capital can be divided into two categories:

1. Permanent or Fixed Working Capital: It is the minimum level of working capital that is necessary to carry on a business on a continuous and uninterrupted basis. This requirement will have to be met permanently as with the other fixed assets.

2. Temporary or Variable Working Capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This is required to meet the seasonal demand and some special emergencies. Temporary working capital defers from permanent working capital in sense that it is required for short periods and cannot be permanently employed gainfully in the business.

Amount of

Working

Capital

Permanent

Time

In the above figure permanent working capital is stable or fixed overtime while the temporary working capital fluctuates.

Temporary

Amount of

Working

Capital

Permanent

Time

In the above figure permanent working capital is also increasing with the passage of time due to expansion of business but even then it does not fluctuate as temporary working capital, it sometimes increases and sometimes decreases.

Working Capital Cycle

The Working Capital Cycle refers to the length of time between firms paying cash for materials, etc., entering into the production process/stock and the inflow of cash from debtors (sales).

For example - A company has a certain amount of cash. It will need raw materials. Some raw materials will be available on credit but, cash will be paid for the other part immediately. Then it has to pay labour costs and incur factory overheads.

These three combine together will constitute work-in-progress. After the production cycle complete, work in progress will get converted into sundry debtors.

Sundry debtors will be realized in cash after the expiry of credit period. This cash can

again be used for financing raw material, work-in-progress, etc. Thus there is a complete cycle from cash to cash wherein cash gets converted into raw material, work-in-progress, finished goods, debtors and finally cash again. Short term funds are required to meet the requirements of funds during this time period. The time period is dependent upon the length of time within which the original cash gets converted into cash again. This cycle is also known as operating cycle or cash cycle.

WORKING CAPITAL CYCLE

Cash

Raw Materials

Debtors

Labour

Overhead

Stock

WIP

Working capital cycle indicates the length of time between a companys paying for material, entering into stock and receiving the cash from sales of finished goods.

It can be determined by adding the number of days required for each stage in the cycle.

The determination of working capital cycle helps in the forecast, control and management of working capital. It indicates the total time lag and the relative significance of its constituent. The duration of working capital cycle may vary depending on the nature of the business.

The operating cycle (working capital cycle) consists of the following event which continues throughout the life of business.

1. Conversion of cash into raw materials

2. Conversion of raw materials into work-in-progress

3. Conversion of WIP into finished stock

4. Conversion of finished stocks into accounts receivables through sales and

5. Conversion of accounts receivables into cash

The duration of the operating cycle for the purpose of estimating working capital is equal to the sum of the duration of each of above said events, less the credit allowed by the creditors.

Operating Cycle = R+W+F+D-C

R = Raw material

W = Work-in-Progress

F = Finished goods

D = Debtors collection period

C = Credit period availedWorking Capital Administration

This is usually concerned with the administration of all the current assets and current liabilities. It is basically concerned with

a) determining the need for working capital

b) determining the optimal levels of investment in various current assets and

c) examining the salient points regarding each element of working capital .

It is obvious that given a constant level of production, higher the amount of working capital, the lower will be the return on investment since capital turnover ratio will be less. On the other hand, lower the amount of working capital, the higher would be the amount of risk since the company would not have adequate liquidity to meet its short-term obligations. In working capital management, therefore, we have to strike a balance between risk and profitability. We have to find out the level of investment in working capital which gives us a reasonable amount of liquidity subject to a good working capital turnover ratio. In fact, working capital management policies have a great influence on a firms profitability liquidity and structural health.

Importance of Adequate Working Capital

The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous to the firm.

The danger of excessive working capital

It results in un-necessary accumulation of inventories, thus, chances of inventory mishandling, waste, theft and losses increase. It is an indication of defective credit policy in stock collection period. Consequently, higher incidence of bad debts results, which adversely affect profits. Excessive working capital makes management complicate which degenerates into management inefficiency. Tendencies of accumulating inventories tend to make speculative profits growth.The danger of inadequate working capital

It stagnates growth. Then, it becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.

It becomes difficult to implement operating plans and achieve the firms profits target.

It becomes impossible to utilize effectively the fixed assets due to the non-availability of funds.

The rate of return on investments also falls with the shortage of working capital.Optimum Working Capital

Current ratio has traditionally been considered the best indicator of the working capital situation. Generally a manufacturing concern is said to be

a) Having optimum working capital if current ratio of a manufacturing firm is 2 (two).

b) Having adequate amount of working capital if the current assets are twice the amount of current liabilities. This is supplemented by Acid Test Ratio which should be at least 1 (one).

c) It is considered that there is a comfortable liquidity position if liquid current assets are equal to current liabilities.

An optimum working capital ratio is dependent upon the business situation as such and nature and composition of various current assets. Thus, in a company where the inventories are easily saleable and the sundry debtors are as good as liquid cash, the current ratio may be lower than 2 (two) and yet the firm may be sound. A company having short conversion cycle (from cash to cash) may have a lower current ratio.

Determinants of working capital

1. Production Policies: The production schedule has great influence on the level of inventories. In some cases, raw materials can be procured only in a particular season and have to be stocked for the production of the whole year. In many others, the production cycle is limited to a part of the year and raw materials have to be accumulated through the year.

In all such cases, the need for working capital will vary according to the production plans. In a labour intensive process, the requirements of working capital will be higher. In the case of a highly automatic plant, the requirement of long-term funds would be greater.

2. Nature of the business: The shorter the manufacturing process, the lower is the requirements for the working capital. This is because, in such a case, inventories have to be maintained at a low level. Longer the manufacturing process, the higher would be the requirement of working capital. Similarly, a trading concern requires lower working capital than a manufacturing concern.

3. Credit Policy: The credit policy of the company also determines the requirements of working capital. A company which allows liberal credit to its customers may have higher sales consequently will have larger amount of funds tied up in sundry debtors.

4. Similarly, a company which has a very efficient debt collection machinery and offers strict credit terms, require lesser amount of working capital than the one where debt collection system is not efficient or where the credit terms are liberal. The credibility of a company in the market also has an effect on the working capital requirements.

5. Inventory Policies: The inventory policy of a company also has an impact on the working capital requirement since a large amount of funds is normally locked up in inventories. An efficient firm may stock raw material for a smaller period and may, therefore, require lesser amount of working capital.

6. Abnormal Factors: Abnormal conditions like strikes and lockouts also require additional working capital. Recessionary conditions necessitate a higher

7. Amount of stock of finished goods of maintaining in stock. Similarly, inflationary conditions necessitate more fund for working capital maintain the same amount of current assets.

8. Market Conditions: Working capital requirements are also affected by market conditions and degree of competition. Large inventory is essential as delivery has to be off the shelf or credit has to be extended on liberal terms when market competition is fierce or market is not strong or is a buyers market.

9. Conditions of Supply: If prompt and adequate supply of raw materials, spares, stores is available it is possible to manage with small investment in inventory or work on Just In Time (JST) inventory principles. However, if supply is erratic, scant, seasonal, channelised through government agencies etc., it is essential to keep larger stocks, increasing working capital requirements.

10. Business cycle: Business fluctuations lead to cyclical and seasonal changes in production, sales and affect the working capital requirement.

11. Growth and expansion: The growth in volume and growth in working capital go hand to hand. However, the change may not be proportionate and the increased need for working capital is felt right from the initial stages of growth.

12. Level of taxes: The amount of taxes paid depends on taxation laws. These amounts initially have to be paid in advance. Thus need for working capital varies with tax rates and advance tax provisions.

13. Dividend Policy: Payment of dividend utilizes cash while retaining profits acts as a source of working capital. Thus working capital gets affected by dividend policies.18

14. Price level changes: Inflationary trends in the economy necessitate more working capital to maintain the same level of activity.

15. Operating efficiency: Efficient and co-ordinated utilisation of capital reduces the amount required to be invested in working capital.

SOURCES OF WORKING CAPITAL

Banks are the main institutional sources of working capital finance in India. Bank considers firms sales and production plans and the desirable levels of current assets in determining its working capital requirements. The amount approved by the bank for the firms working capital is called credit limit. Banks finance separate limits for the peak level credit requirements and normal non-peak level credit requirements indicating the periods during which separate limits will be utilized by the borrower. The banks determine the maximum credit based on the margin requirements of the security. The margin represents a percentage of the value of the asset offered as a security by the borrower. The margin is changed by the Reserve Bank of India from time to time to suit the requirements of the credit policy.

A Company has been defined as an association of persons formed to carry on trade or business which is incorporated under the Companies Act, 1956. In the course of this trade or business, a company incurs various types of expenditure. All these types of expenditure can be broadly divided into two types i.e. Capital Expenditure and Revenue Expenditure.

Capital Expenditure is usually one time expenditure or an expense incurred once in every few years and it involves large amount of money. Revenue expenditure, on the other hand, is any amount spent for earnings or providing revenue i.e. all establishments and other expenses incurred in the conduct and administration of the business are termed as Revenue Expenditure.

Capital Expenditure: It is sourced by the medium of project finance. Project finance involves large amounts of money and is therefore for the long term. Companies generally need their long term financial requirement by issuing equity or debt.

Revenue Expenditure: It is sourced by the medium of short term finance also known as working capital finance. The short term sources of finance are also as follows:

Book Debt Finance: In the ordinary course of events, a firm buys its raw materials on credit from other firms recording the debt as accounts payable. This is the single largest category of short term credit, representing about 40% of the current liabilities of non-financial corporations.

Credit terms refer to the conditions under which the supplier sells to the buyer and the buyer is required to repay the credit.

Hese conditions include the due date and the cash discount (if any) given for prompt payment. The due date is the date by which the suppliers expect payment. Cash discount is the concession offered to the buyer by the supplier to encourage him to make payment promptly.Commercial Paper: It is an instrument that has been growing in importance. It is a form of un-secured promissory note issued by firms to raise short term funds. The buyers of commercial paper include banks, insurance companies, unit trust and firms with surplus funds to invest for a short period with the minimum of risk.

In India, the issue of commercial paper is regulated by the RBI. Those companies are allowed to issue commercial paper which have a net worth of Rs.10.00 Crores, a maximum permissible bank finance of Rs.25 Crores and are listed on the stock exchange. The size of each commercial paper is not less than Rs.5.00 Lacs. These norms imply that only the large highly rated companies are able to operate in the commercial paper market in India.

Bank Credit: It is the single most important source of working capital finance available to a company. A bank considers firms sales and production plans and the prescribed norms for holding various current assets in determining its working capital requirement is called the credit limit. The credit limit specifies the maximum funds that a firm can obtain from the banking system.

In practice, banks do not lend up to 100% of the credit limit, they deduct margin money. The margin money requirement is based upon the principle of conservatism and is meant to ensure security. A firm can draw within the maximum credit limit sanctioned. It can draw these funds in the following forms :

1. Overdraft

2. Cash credit

3. Bill finance

Under the Overdraft facility, the borrower is allowed to withdraw funds in excess of the balance in his current account up to a certain specified limit during a stipulated period. Though the overdraft amount is repayable on demand, it continues for a long period by annual renewals of the limits.

It is very flexible arrangement from borrowers point of view because he can withdraw and repay funds whenever he decides, within the overall stipulations. Interest is charged on daily balance on the amount actually withdrawn subject to some minimum charges. The borrower operates the accounts through cheques.

The Cash credit facility is similar to the overdraft arrangement. It is the most widely used method of bank finance for working capital in India. Under the cash credit facility a borrower is allowed to withdraw funds from the banks upto the sanctioned credit limits. He is not required to borrow the entire sanctioned credit at one time.

The firm can draw small amounts periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit account. There is no commitment charge, therefore interest is payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned against the security of the current assets. Though the funds borrowed are repayable on demand, bank do not usually recall such advances unless they are compelled by adverse circumstances.

Bill finance is the third major source of finance from banks. The bill referred to, here is the bill of exchange. It is an unconditional order in writing addressed by one person (the drawer) to the another (the drawee) and signed by the person giving it requiring the drawee to pay on demand or at a fixed future time, a specified sum of money, to or to the order of a specified person.

If the bill is payable at a future time, the drawee signifies acceptance which makes him the party primarily liable upon the bill. A bill of exchange usually has a maturity period of 90 days. If as it often happens, the creditor needs the money before the bill matures, he can go to any commercial bank and have the bill discontinued. This discount is a deduction from a bill of exchange when it is purchased before its maturity date.

The party that discounts the bill usually a commercial bank, pays less than its face value and therefore makes a profit when it matures.

The amount of discount consists of the interest calculated at the bill rate for the length of time that the bill has to run. Before purchasing the bills, the bank satisfies itself as to the creditworthiness of the drawer. Though the term bill purchased implies that the bank becomes the owner of the bills, in practice the bank holds the bills as security for the credit.

All the above mentioned forms of working capital finance are funded sources of finance. There are two other forms of working capital finance, also involving commercial banks, which are together termed as the non-funded sources short term finance.

These are:

1. Letter of Credit

2. Bank Guarantees

A Letter of Credit is the most important mode of payment for trade through out the world as buyers and sellers are often not known to each other and bankers are well known for their credit standing, the banks creditworthiness is substituted for the buyers creditworthiness by this method.

The letter of credit is an undertaking given by the bank to pay or accept the bill, provided the beneficiary (the exporter) fulfils the terms of conditions of sale as set out in the application made to the bank by the importer (the buyer). The letter of credit protects the seller from the risk of loss of funds due to uncertain credit position of the buyer and promotes foreign trade and foreign investment.

The bank charges from the buyer-importer, the interest rate as admissible for the credits so granted and may or may not ask for a margin deposit of funds for the purpose. The banks also charge for the handling of the documents in the process of negotiation or collection.

Letter of credits are of two types i.e. revocable and irrevocable. A revocable letter of credit is not a legally binding undertaking between the bank or banks concerned and the beneficiary and can therefore be cancelled at any time without the concurrence of the beneficiary. An irrevocable letter of credit, on the other hand, is a definite undertaking on the part of the issuing bank and constitutes an obligation to the beneficiary to honour bills and drafts under the credit, provided the terms and conditions of the credit are complied with.

A Bank Guarantee is an undertaking given by the bank to settle a debt, should be the debtor fail do so. A bank guarantee can be used as a security for a loan but the banks themselves will require a good cover in cash or counter indemnity before they issue a guarantee. Such guarantees often contain indemnity clauses which place the direct onus on the guarantor liable in law in all eventualities.

Security Required in Bank Finance:

Banks usually do not provide working capital finance without obtaining adequate security. The following are the most important modes of security required by a bank:

1. Hypothecation: Under this arrangement, bank provides working capital finance against the security of movable property, usually inventories. The borrower does not give possession of the property to the bank. It remains with the borrower and hypothecation is merely a charge against property for the amount of debt. If the borrower fails to pay his dues to the bank, the banker may file a case to realize his dues by sale of the goods / property hypothecated.

2. Pledge: Under this arrangement, the borrower is required to transfer the physical possession of the property or goods to the banks as security. The bank will have the right of lien and can retain the possession of goods unless the claim of the bank is met. In case of default, the bank can even sell the goods after giving due notice.

3. Mortgage: In addition to the hypothecation or pledge, banks usually ask for mortgages as collateral or additional security. Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt. Although, the possession of the property remains with the borrower, the full legal title is transferred to the lender. In case of default, the bank can obtain decree from the court to sell the immovable property mortgaged so as to realize its dues.

WORKING CAPITAL MANAGEMENT

IN GTN TEXTILEWORKING CAPITAL MANAGEMENT IN GTN GROUP

GTN Textiles Limited was established in 1964 and was taken over by the PATODIA FAMILY in 1966 and since then it has expanded its activities to become the largest exporter from the country. The Company which started as a family concern, functioned as a Public Limited Company, was listed on all the major Stock Exchanges in India. Today, the Company has more than 40,000 shareholders and the core promoters i.e. Shri M.L. Patodia, Shri B.K. Patodia and Shri M.K. Patodia hold only 19% of the total equity directly and including family and friends altogether it is 57%. The equity held by Public, Financial Institutions and Banks is 43%, out of the total Rs.1055 lacs paid-up share capital.

The Company is strictly following Corporate Governance principles and is governed by Professional members in the board having rich experience in their own fields of industry and finance. Under the leadership and guidance of Managing Directors, a professional team of Senior Executives having rich experience in the area of Technical, Marketing and Finance are looking after the entire activities of the company. This could make possible the company to achieve its planned performance at optimum level year after year.

GTN Textiles Limited is a group company having its Registered / Head Office in Erumathala, Aluva, Kerala and Corporate Office in Mumbai. It is having its Spinning Units, Processing unit and offices in various locations.

Registered Office Address :

GTN Textiles Limited

Erumathal Post

Aluva

Ernakulam Dist

Kerala 683 105

Corporate Office Address :


43, Mittal Chambers

228, Nariman Point

Mumbai 683 105

Hyderabad Office Address :


Plot No. 29, Nagarjuna Hills

Punjagutta

Hyderabad 500 082

Plant Locations :

1) Aluva Unit

Erumathal Post

Aluva

Ernakulam Dist

Kerala 683 105

2) Medak Unit

Chitkul Village

Patancheru Mandal

Medak Dist.

Andhra Pradesh 502 329

3) Nagpur Unit

Khurajgaon Village

Saoner Tahsil

Nagpur Dist.

Maharastra 441 112

4) Doubling Unit

Chitkul Village

Medak Dist.


5) Shadnagar Unit

Gundlapotlappally

Balanagar, Nawdal

Near Shadnagar

Dist. Mehaboobnagar


WORKING CAPITAL MANAGEMENTThe basic goal of 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 i.e. it is neither inadequate nor excessive. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds which earn no profits for the business. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organisation. In this context, working capital management is three dimensional in nature:

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

2. Dimension II, is concerned with the decisions about the compositions and level of current assets.

3. Dimension III, is concerned with the decisions about the composition and level of current liabilities.

Profitability, Risk and

Liquidity

Dim.I

Composition

Composition and

And level of

level of current

Current Assets

Liabilities

Dim.III Dim.II

Principles of working Capital Management / Policy

The following are the general principles of a sound working capital management policy :

1. Principle of Risk Variation: Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current assets with less dependence on short-term borrowings increases liquidity reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investment in current assets with greater dependence on short-term borrowings increases risk, reduces liquidity and increases profitability. In other words, there is a definite direct relationship between the degree of risk and profitability. A conservative management prefers to minimise risk by maintaining a higher level of current assets or working capital. However, the goal of the management should be to establish a suitable trade off between profitability and risk.

2. Principle of Cost of Capital: The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.

3. Principle of Equity Position: This principle is concerned with planning the total investment in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in the current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two percentage of total sales. While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages.

4. Principle of Maturity Payment: This principle is concerned with planning the sources of finance for working capital. According to this principle, a firm should make every effort to relate maturities of payment to its flow of internally in risk assumptions and risk assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time.

To sum up, working capital management should be considered as an integral part of overall corporate management. In the words of Louis Brand, We need to know when to look for working capital funds, how to use them and how to measure, plan and control them. To achieve the above mentioned objectives of working capital management, the financial manager has to perform the following basic functions

1. Estimating the working capital requirements.

2. Financing of working capital needs

3. Analysis and control of working capital

Working Capital Management is management of Cash, Receivables and Inventory.Cash Management:

Cash Management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and it is unproductive when not used. Cash management deals with the following:

1. Cash inflows and outflows

2. Cash flows within the firm

3. Cash balances held by the firm at a point of time

Methods of Accelerating Cash Inflows:

Prompt payment by customers

Quick conversion of payment into cash

Decentralized collections

Lock Box SystemMethods of Slowing Cash Outflows:

Payment on last date Payments through Drafts Adjusting Payroll Funds Centralization of Payments Inter-bank Transfers Making use of FloatReceivables Management:

Receivables result from credit sales. Receivables are also known as accounts receivables, trade receivables, customer receivables or book debts. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. The period of credit and extent of receivables depends upon the credit policy followed by the firm. The purpose of maintaining or investing in receivables is to meet competition and to increase the sales and profit.

Factors influencing the size of receivables

Size of credit sales

Credit policies

Terms of Trade

Expansion Plans

Relation with Profits

Credit Collection Efforts

Habits of Customers

Receivables management is the process of making decisions relating to investment in trade debtors. In the words of Bolton, S.E., the objective of receivables management is to promote sales and profits until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

Receivables management involves careful consideration of the following aspects:

Forming of Credit Policy It is related to decisions such as credit standards, length of credit policy, cash discount and discount period. Executing the credit policy - It involves Collecting credit information, Credit analysis, Credit decision, Financing Investments in Receivables and Factoring. Formulating and executing collection policy The steps in collection policy are sending a reminder for payments, personal request through telephone, etc., personal visits to the customers, taking help of collecting agencies and taking legal action. The last step should be taken only after exhausting all other means because it will have a bad impact on relations with customers.Inventory Management:

Every enterprise needs inventory for smooth running of its activities. Inventory includes Raw material, Work-in-Progress, Consumables, Finished goods and Spares. An efficient system of Inventory Management will determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d) where to store, etc.

Tools and techniques of Inventory Management:

Effective Inventory Management requires an effective control system for inventories. A proper inventory control not only helps in solving the acute problem of liquidity but also

increases profits and causes substantial reduction in the working capital of the concern. The following are the important tools and techniques:

Determination of Stock Levels

Minimum Level

Re-order Level

Maximum Level

Danger Level

Average Stock Level

Determination of Safety Stocks

Selecting a proper System of Ordering Inventory

Determination of Economic Order Quantity (EOQ)

A.B.C. Analysis

V E D Analysis

Inventory Turnover Ratios

Aging Schedule of Inventories

Classification and Codification of Inventories

Preparation of Inventory Reports

NEW TRENDS IN FINANCING WORKING CAPITAL BY BANKS

Banks in India have been providing finance to industry and trade on the basis of security. To ensure its equitable distribution in the right channels bank credit has been a subject matter of regulation and control by the Government. Since November, 1965, a Credit Authorisation Scheme has been in operation as part of the Reserve Bank of Indias credit policy. Under this scheme, all scheduled commercial banks are required to

Obtain prior authorization of the Reserve Bank of India before sanctioning any fresh credit limits of Rs. One Crore or more to any single party or any limit that would enable the party to avail Rs. One Crore or more from the entire banking system on secured or unsecured basis. The limit of Rs. One Crore was subsequently raised to Rs. Five Crores.

To regulate and control bank finance, the Reserve Bank of India has been issuing directive and guidelines to the banks from time to time on the recommendations of certain specially constituted committees entrusted with the task of examining various aspects of bank finance to industry.

Daheja Committee Report

National Credit Council constituted a committee under the chairmanship of Shri V.T. Daheja in 1968, o determine the extent to which credit needs of industry and trade are likely to be inflated and how such trends could be checked and to go into establishing some norms for lending operations by commercial banks. The committee was of the opinion that there was also a tendency to divert short-term credit for long-term assets. Although committee was of the opinion that it was difficult to evolve norms for lending to industrial concerns, the committee recommended that the banks should finance industry on the basis of a study of borrowers total operations rather than security basis alone.

The committee further recommended that the total credit requirements of the borrower should be segregated into Hard Core and short-term component. The Hard Core component which should represent the minimum level of inventories which the industry

Was required to hold for maintaining a given level of production should be put on a formal term loan basis and subject to repayment schedule.

The committee was also of the opinion that generally a customer should be required to confine his dealings to one bank only.Tandon Committee Report

RBI set up a committee under the chairmanship of Shri P.L. Tandon in July, 1974. The terms of reference of the Committee were:

1. To suggest guidelines for commercial banks to follow up and supervise credit from the point of view of ensuring proper end use of funds and keeping a watch on the safety of advances;

2. To suggest the type of operational data and other information that may be obtained by banks periodically from the borrowers and by the RBI from the leading banks;

3. To make suggestions for prescribing inventory norms for the different industries, both in the private and public sectors and indicate the broad criteria for deviating from these norms;

4. To make recommendations regarding resources for financing the minimum working capital requirement;

5. To suggest criteria regarding satisfactory capital structure and sound financial basis in relation to borrowings;

6. To make recommendations as to whether the existing pattern of financing working capital requirements by cash credit/overdraft system etc., requires to be modified, if so, to suggest suitable modifications.

The recommendations of the committee regarding lending norms have been suggested under three alternatives. According to the first method, the borrower will have to contribute a minimum of 25% of the working capital gap from long-term funds i.e. owned funds and term borrowing; this will give a minimum current ratio of 1.17:1.

Under the second method the borrower will have to provide a minimum of 25% of the total current assets from long-term funds; this will give a minimum of current ratio of 1.33 : 1. In the third method, the borrowers contribution from long-term funds will be to the extent of the entire core current assets and a minimum of 25% of the balance current assets, thus strengthening the current ratio further.

Chore Committee Report

The RBI in March, 1979 appointed another committee under the chairmanship of Shri K.B. Chore to review the working of cash credit system in recent years with particular reference to the gap between sanctioned limits and the extent of their utilisation and also to suggest alternative type of credit facilities which should ensure greater credit discipline.

The important recommendations of the Committee are as follows:

1. The banks should obtain quarterly statements in the prescribed format from all borrowers having working capital credit limit of Rs.50 Lacs and above.

2. The banks should undertake a periodical review of limits of Rs.10 lacs and above.

3. The banks should not bifurcate cash credit accounts into demand loan and cash credit components.

4. If a borrower does not submit the quarterly returns in time the banks may charge penal interest of one per cent on the total amount outstanding for the period of default.

5. Banks should discourage sanction off temporary limits by charging additional one per cent interest over the normal rate on these limits.

6. The banks should fix separate credit limits for peak level and non-peak level, wherever possible.

7. Banks should take steps to convert cash credit limits into bill limits for financing sales.

WORKING CAPITAL ANALYSISThe analysis of working capital can be conducted through a number of devices, such as:

1. Ratio Analysis

2. Funds Flow Statement

3. Budgeting

Ratio Analysis:

A ratio is a simple arithmetical expression of the relationship of one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm.

The following ratios may be calculated for this purpose:

a) Current Ratio

b) Acid Test Ratio

c) Absolute Liquid Ratio or Cash position ratio

d) Inventory Turnover Ratio

e) Receivables Turnover Ratio

f) Payables Turnover Ratio

g) Working Capital turnover Ratio

h) Working Capital Leverage

i) Ratio of Current Liabilities to Tangible Net Worth

Funds Flow Analysis:

Funds flow analysis is a technical device designated to study the sources from which additional funds were derived and the use to which these sources were put. It is an effective management tool to study changes in the financial position (working capital) of a business enterprise between beginning and ending financial statement dates. The funds flow analysis consists of

a) Preparing schedule of changes in working capital

b) Statement of sources and application of funds

Working Capital Budget:

A budget is a financial and / or quantitative expression of business plans and policies to be pursued in the future period of time. Working Capital Budget plans and policies to be pursued in the future period of time.

Working Capital Budget, as a part of total budgeting process of a business, is prepared estimating future long-term and short-term working capital needs and the sources to finance them, and then comparing the budgeted figures with the actual performance for calculating variances, if any, so that corrective actions may be taken in the future. The objective of a working capital budget is to ensure availability of funds as and when needed, and to ensure effective utilisation of these resources.

The successful implementation of working capital budget involves the preparing of separate budgets for various elements of working capital, such as cash, inventories and receivables, etc.

FINANCIAL PERFORMANCE

(Rs. in lacs)

Particulars2000-012001-022002-032003-042004-05

2005-062006-07

Sales23347230012394121641240591471618697

Other Income231131391371555326

Operating Profit3876381041133661254918622306

Interest1835170114581008765492 862

PBDT2041210915432653178413701444

Profit Before Tax72666611121080155303187

Profit After Tax67638970887137037127

Amount of Equity

Dividend paid183166203217144164118

Rate of Dividend

Declared20%17.5%20% 20% 10%10%9%

GTN Textiles Limited is making profits since its inception. It is a dividend paying Public Limited Company. GTN Group is proud to have over one lakh spindles at various locations using state-of-the art technology in Spinning Industry coupled with ISO certification and un-parallel distinction of being honored with Gold Trophy, the highest Texprocil Award, for being the best cotton yarn mill exporter from India for the last 15 consecutive years. All units of GTN Group have been continuously modernized and upgraded with the best available technological advancements to remain competitive in the International market.

GTN Textiles Limited CMA DataCMA stands for Credit Monitoring Application. GTN Textiles Limited is having consortium Bankers for Working Capital. The lead banker in the Consortium is Central Bank of India. The Company submits its CMA data to the lead banker every year for renewal of working capital limits for the forthcoming year. This data will be prepared on the basis of Working Capital Cycle and projected Balance Sheet and Profit & Loss Account. Last year also, the company has submitted its CMA data during Nov, 2006 to the Central Bank of India for renewal of Working Capital Limits for the year 2006-07. The computation sheet for maximum permissible Bank Finance for Working Capital, submitted by GTN Group is as below :

( Rs. in lacs )

Particulars2000-01

Audited2001-02

Audited2002-03

Audited2003-04

Audited2004-05

Audited2005-06Audited2006-07Audited

(1) Total Current Assets104358743937911027969577149401

(2) Other Current Liabilities2300152112562347134721481843

(3) Working Capital Gap (WCG) (1-2)8135722281238680834855667558

(4) Minimum stipulated Net Working Capital i.e. 25% of WCG or 25% of Total Current Assets as the case may be depending upon the method of lending being applied (Export receivables to be excluded under both methods)2436209020102203208713921890

(5) Actual / Projected Net Working Capital2670226135534424509156546121

(6) Item No.3 Minus Item No.45698513261136734626141745668

(7) Item No.3 Minus Item No.55464496145704513325721392011

(8) Maximum permissible Bank Finance (Item No. 6 or 7, which ever is less)5664496145704513579448965369

PRODUCTION PROCESS - FLOW CHART

GTN Textiles Limited is a group Company with spinning and processing units. The Processing Unit is located at Shadnagar and known as Yarn Processing Unit (YPU). Rest of all units are spinning units. The Raw material for all spinning units is Cotton and finished product is Cotton Yarn. Yarn Processing Unit processes this yarn. As the management is having vast experience in the Textile Industry, the business transactions in the company will be in the well organized way and best decisions will be taken to maximize profits of the company.

Strategic Decisions:The Company has followed a strategy of product development in ring spun yarns by using various kinds of cotton blends to produce quality yarns, which helped the company to be away from traditional yarn segment where competition is very stiff. GTN Group has also adopted the latest technology in ring spinning known as Compact Spinning Technology and have installed 9648 spindles at Aluva Unit progressively from Mar, 2002 onwards. The company is one of the first in India, who has adopted the latest technology. Since, this is a new product; the company is making vigorous efforts to penetrate into various countries and customers where the end use of such yarns is being developed. Since this yarn has distinct benefits in the subsequent process due to reduced hairiness and higher strength, demand of such yarns in future will improve.

Present status of Sales Realization & Prices of Raw Material:

During the current year, sales realization in Dollar terms has dropped on an average by 8 to 11%. This has been partially compensated due to favorable exchange rate.

During the current cotton season the prices were reasonable for indigenous as well as imported cotton, which has directly contributed for improvement in profitability. The raw material prices have recently started moving up due to reports of lower crop estimates in domestic market. The prices on an average have firmed up in the local market by 10 to 15%. The prices of imported cotton, which were at historically low level till recently, have also started firming up on reports of lower planting in USA, Australia and China as well as due to failure of monsoon in India. Even though, the demand for cotton yarn in the international market continues to be better, price realization are yet to recover from the existing low levels.

The Project study reveals the following observations about the company.

Purchase of Raw Materials:

The raw material i.e. cotton is being purchased from various parties within the country and also from outside the country. A separate department i.e. Cotton department is available and raw material will be procured through this department. Well experienced people from this department will select good quality of raw material. The major purchases in India are from Guntur, Proddatur-Andhra Pradesh, Rayagarh-Orissa, etc. Imports are mainly from Egypt and

Switzerland. Local Raw material creditors will allow a credit period of 15 days and for imports an L/C will be opened. Centralized purchases results competitive rates.

Inventory of Raw Materials:

Raw material procured from different places will be stored in Cotton godowns and a 3 Months inventory level is being maintained.

Purchase of Stores, Spares & Consumables:

Stores and spares will be purchased from various parties within the country as well as outside the country. The purchase of these items will be done through Materials Dept. The manager of this department will procure the items as per maintenance schedule and maintains optimum levels of stocks.

The valuation of stores issues will be done in Weighted Average Method. Manager (Materials) will procure the material, in time by following EOQ & ROQ Methods so as to minimized non-moving and slow moving stocks.

Sundry Creditors:

Raw material creditors will be paid with in 15 days and Stores creditors within 45 days. The company plans in such a way that creditors will be paid on due date without any delay. This practice improved the credibility of the company and advance payments for stores items were reduced and credit purchases are increased. The creditors are also very happy and ready to give credit to the company as the company pays in time, to them.Production Process:

The Company produces various counts of cotton yarn with different mix by using cotton as raw material. The manufacturing cycle for converting cotton to cotton yarn i.e. raw material to finished goods will take 10 to 15 days time. The production will be done on the basis of contracts available. Hence, there is no delay in selling the finished products. The production schedule is pre-determined for coming 3 months. All units of the Company are run in three shifts of eight hours each.

Finished Goods Inventory:

After producing the goods, they will be sent for packing and after that to ware house for storage. These goods will be dispatched to the buyer within 2 to 3 days. Generally, 15 days inventory is maintained for finished goods.

Sales:

As far as Spinning Units are concerned, major portion of the sales are Exports and Stock transfers to Shadnagar Unit as the cotton yarn is raw material for this unit and balance are of local sales. Pre-shipment credit i.e. packing credit will be availed against export orders and bills will be negotiated to liquidate these packing credit amounts. These exports dispatches are against L/Cs with a credit period of 25 days. Pre-shipment credit period will be 6 Months.

Cash Management:The company is a having a strong finance department with qualified and well experienced people to control all its finance activities. The Finance Dept submits various MIS Reports in frequent intervals to the management for taking decisions with regard to finance and other activities, in time.

Cash Management in GTN Group includes preparation of Cash Flow Statement and Cash budget for controlling cash and bank transactions. It facilitates the management to forecast the cash requirement in advance and to arrange funds for various transactions.

The company has opened bank accounts with Standard Chartered Bank, ICICI and IDBI in which there is a facility of on-line accounting. The cheques / Drafts collected from the various debtors deposited in different locations will be credited to the companys account on the same day or next day, which facilitates immediate availability of funds.

Management of Sundry Debtors:

GTN Group is having export sales as well as local sales. Export sales are on the basis of L/C. After dispatching the goods to the buyer, the bill will be negotiated in the bank and packing credit against this bill will be liquidated.

On due date as per L/C terms, proceeds will be received from the importer/buyer. As the export sales are on the basis of L/C, there is no difficulty while collecting the amount from the buyer.

Local sales are of three types. They are on COD basis, L/C and Post Dated Cheque (PDC). Generally Debtors will be allowed for a credit period of 30 to 45 days. On COD basis, the transporter will deliver the goods to the party only on collection of cash / cheque / Draft. COD stands for Cash on Delivery. In other types, the debtors will be allowed 30 to 45 days credit period. The Marketing Dept will prepare a age-wise analysis statement for debtors and follow-up for recovery of dues from them time to time. Reminders will be sent to the parties time to time for collecting dues without any delay. Hence, there is no delay in receiving the proceeds from the debtors.

Therefore, debtors management in GTN Group is in a right way and there are no major long pending debtors.

Management of Inventories:

The raw material for spinning units of GTN Group is Cotton. This cotton can be purchased within India or outside India. The indigenous and imported cotton rates will be compared time to time and analyzed. A decision will be taken whether to purchase imported or indigenous cotton. In recent days, imported cotton is

Cheaper than indigenous, hence cotton is being imported and an inventory for 3 months will be maintained for smooth production.

A 15 days WIP inventory level is maintained.

Production is on the basis of orders on hand i.e. production in GTN is a pre-planned production as per orders given by the customers. Hence, the companies need not to search for a customer after producing finished goods.

It can immediately deliver the goods to the customers. Production plan is prepared well in advance i.e. before three months.

But, from procurement of imported raw material to dispatching the goods to the customer, will take 6 months, hence packing credit period will be for 6 months.

Hence, in GTN Group inventory levels are also maintained properly and non-moving stocks are very less.Salient features of GTN Group:

The Company is having a well experienced and qualified management

The Group is producing good quality of medium, fine and super fine counts since four decades

Excellent Exporter Award winner for last 15 years from TEXPROCIL

ISO 9002 Certified Company

Having sophisticated imported and indigenous machinery

As the company produces goods on the basis on orders on hand, hence no time lag in selling the finished goods.

Enjoying 101.00 Crores of Working Capital Limits

Timely decisions in expansion of the production facilities by using TUF loans

DATA ANALYSISG.T.NTEXTILES LIMITED

STATEMENT OF WORKING CAPITAL FOR THE YEAR 2002-2003*

PARTICULARSAMOUNT (RS)AMOUNT (RS)

1. CURRENT ASSETS:

Inventories4,873.11

Sundry Debtors 854.57

Cash & Bank Balances Interest accured on deposits1,463.33

8.22

Loans & Advances 2179.61

GROSS WORKING CAPITAL9378.84

LESS:

2. CURRENT LIABILITIES &

PROVISIONS

1666.76

NET WORKING CAPITAL ( 1-2)7712.08

*As per Audit Report

G.T.NTEXTILES LIMITED



1. CURRENT ASSETS:

Inventories7594.29


Cash & Bank Balances Interest accured on deposits 960.65

9.89



LESS:


PROVISIONS

2848.26






1. CURRENT ASSETS:

Inventories5865.92



10.01



LESS:


PROVISIONS

1512.54






1. CURRENT ASSETS:

Inventories4645.97



23.99



LESS:


PROVISIONS

2148.53






1. CURRENT ASSETS:

Inventories5135.84

Sundry Debtors1332.26


19.96

Loans & Advances2598.45


LESS:


PROVISIONS

1843.41



The Net Working Capital during the study period of GTN INDUSTRIES LIMITED.

Year20032004200520062007

Net Working Capital7712.088435.288182.615565.747557.96

On y axis 1unit = 1000 units

INFERENCE: It is found that the companys net working capital has been fluctuating during the period of study. It can be recommended that, the company has to maintain consistency in managing working capital.Explanation of Ratios:

Current ratio:

Current Assets

Current ratio: -------------------------------------

Current Liabilities.

Current ratios:

2007: 9401/1843

5.01

2006: 7714/2149

3.58

2005: 9695/1512

6.41

2004: 11283/2848

3.96

2003: 9379/1667

5.62

Note: In below graphs

On y axis 1unit = 1units

INFERENCE: The ideal current ratio is 2 to 1. The GTN INDUSTRIES LIMITED has an average current ratio of 4.934. It can be interpreted that it is sufficiently liquid. The higher the current ratio, the greater the margin of safety. From the ratios it is understood that the company position is sound enough. For every one rupee of current liability the enterprise has got on an average Rs. 5 of current asset.

Current Assets Inventories

Quick Ratios: --------------------------------------------------

Current Liabilities

20074266/1843

5.06

2006 3069/2148

1.42

20053830/1512

2.53

2004 3689/2848

1.29

20034505/1667

2.70



INFERENCE: It is the relationship between liquid asset and current liabilities. The ideal position is 1 to 1. From the ratios one can draw the conclusion that though they represent a satisfactory financial position, they are inconsistence. The enterprise has to take relevant steps to maintain consistency. The quick ratio is an index of the firms liquidity.

Sales

Debtors Turn Over Ratio: ----------------------------

Debtors

2007: 18696/1037

18.03

2006: 14175/756

19.46

2005: 24059/706

34.08

2004: 21641/750

28.85

2003: 23941/841

28.47



INFERENCE: Debtors are expected to be converted in to cash over a short period. The liquidity position of the firm depends on the quality of the debtors to a great extent. Debtors turnover ratio indicates the no. of times debtors turnover each year. Generally the higher the value of debtor turnover, the more efficient is the management of credit. From the ratio, it is found that the management has been efficient in the management of credit during the period. Understudy i.e. 2003_2007.

360 days

Average Collection Period : ----------------------------------------------

Debtors turnover ratio

2007: 360/18.03

19.97

2006: 360/19.46

18.50

2005: 360/34.08

10.56

2004: 360/28.85

12.48

2003: 360/28.47

12.64



INFERENCE: The average no. of days for which debtors remain outstanding is called the average collection period. The figures for the period understudy shows that the average collection period is highly favorable to the organization. But there has been a declaining trend from the year 2005. Hence necessary steps must be taken to check the declaining trend.

Sales

Current Asset Turn over Ratio: --------------------------------

Current Asset

2007: 18696/7557

2.47

2006: 14715/5565

2.64

2005: 24059/8182

2.94

2004: 21640/8435

2.56

2003: 23940/7712

3.10


On y axis 1unit = 0.5 units

INFERENCE: The figures indicate that GTN INDUSTRIES LIMITED turns its current assets efficiently in to sales. On an average, one may says that for generating a sale of one rupee, the firm needs respectively Rs.0.27 investment in current asset. The performance levels are satisfactory.

Sales

Working Capital Turn over Ratio: -------------------------------------

Working Capital

2007: 18696/7557

2.47

2006: 14715/5565

2.64

2005: 24059/8182

2.94

2004: 21640/8435

2.56

2003: 23940/7712

3.10


On y axis 1unit = 0.5 units

INFERENCE: A firm may also like to relate net working capital to sales. It is indicated that for Rs.1 of sales the firm needs Rs.0.27 of current assets. Here also the firms position with regards to performance is well.

Sales

Inventory Turn over Ratio: ----------------------- ------------ Average Inventory

2007: 18696/4890

3.82

2006: 14715/5255

2.80

2005: 24059/6730

3.57

2004: 21640/6233

3.47

2003: 23940/5063

4.73



INFERENCE: This ratio indicates the efficiency of the firm in producing and selling its products. The turning of inventory of finished goods in to sales of GTN INDUSTRIES LIMITED, on an average, is 3 times in a year. The performance level of the firm is not satisfactory. Hence it has to take measures to improve the efficiency level.

360 days

Inventory Conversion Period : --------------------------------------------

Inventory turnover ratio

2007: 360/3.82

94.24(days)

2006: 360/2.80

128.57(days)

2005: 360/3.57

100.84(days)

2004: 360/3.47

103.74(days)

2003: 360/4.73

76.11(days)



INFERENCE: This ratio explains how quickly the inventory is turning in to receivables through sales. Generally a high inventory turnover is indicative of good inventory management. A high level of slow inventory amounts to unnecessary locking up of funds, reduced profit and increased costs. It is evident from the ratios that there is inconsistency during the period. Understudy from 2003-2007. We can say that the position in the year 2007 is better than the previous year excepting in the year 2003.

Sales

Current liabilities turn Over Ratio: -------------------------------------- Fixed Assets

2007: 18696/1721

10.86

2006: 14715/2030

7.25

2005: 24059/1348

17.85

2004: 21640/2347

9.22

2003: 23940/1256

19.06



INFERENCE: The figures represent that for generating a sale of 1 rupee, it needs respectively Rs.0.13 investment in fixed assets. It is found that there has been inconsistency in the turnover ratio for the period under study form 2003-2007. This throws light on the inefficient management of fixed assets.

Cash + Marketable securities

Cash Ratios: -------------------------------------------------

Current Liabilities

2007: 314/7341

0.42

2006: 390/6338

0.61

2005: 880/6604

0.13

2004: 961/8267

0.12

2003: 1464/6092

0.24


On y axis 1unit =0. 1 units

INFERENCE: Since cash is the most liquid asset, a financial analyst may examine cash ratio to current liabilities. From the ratios ranging from the year 2003-2007. It is under stood that the organization carries a small amount of cash. It is clear that the company has got comparatively small cash to current liabilities. It must take necessary measures to improve the cash position.

Observations & Conclusion:

The management has taken decision for purchase of imported raw material instead of indigenous cotton as the imports cost cheaper and quality suits for Export Production. It saved raw material cost and helped for getting additional profits.

The management has taken decision for availing foreign currency pre-shipment finance instead of Rupee Packing Credit. It is a good decision and reduced interest cost drastically and helped for getting more profits during the year. The rate of interest for Rupee Packing Credit is 8%. But in case of foreign currency Packing credit the rate of interest is LIBOR+75 bps. LIBOR stands for London Inter Bank Offered Rate. This comes to 2% approximately. LIBOR also has favorably also drastically come down since last two years. During March, 2001, LIBOR was 4.71 and on 17th March, 2003 LIBOR was 1.17. There is a down trend in LIBOR. Due to this decision, the interest cost drastically has come down in GTN and resulted more profits during the year 2002-03.

Interest Charges during 2001-02 Rs.1644 lacs and 2002-03 Rs.1458 lacs. There is a difference of Rs.186 lacs. Interest has come down during 2002-03 by Rs.186 lacs which resulted more profits.

As the Management of the company is well experienced and they are in the same field since four decades, they are taking best decisions time to time to minimize expenditure and maximize profits. The are also taking decisions and implementing the expansion of productions facilities. The management is responding time to time with the market conditions and standing as best exporter in the Textile Industry.

The ideal current ratlio is 2 to 1. The GTN INDUSTRIES LIMITED has an average current ratio 4.934. That it is sufficient liquidity. It is the relationship between liquid assets and current liabilitiy. The ideal position is 1 to 1. Debtors are expected to be converted in to cash over a short period. The liquidity position of the firm depends on the quality of the debtors to a great extent. It is found from the ratios the management has been efficient in the management of credit during the period. It can be recommended that the company has to maintain consistency in managing working capital.

BIBLIOGRAPHYBIBLIOGRAPHY

1. I.M. Pandey, Vikas Publishing House Pvt Ltd, New Delhi, 1993, 6th Edition, Financial Management.

2. Prasanna Chandra, Tata Mc Graw-Hill Publishing Company Limited, New Delhi, 1998, 4th Edition, Financial Management.

3. R.K.Sharma&Shashi K. Gupta, Kalyani Publishers, Ludhiana, 1996, 7th Edition, Management Accounting-Principles & Practice.

4. CA Institute material, Final Group-I, Management Accounting and Financial Analysis.

5. Various MIS Reports and CMA Data of GTN Textiles Limited.

Principles of Working Capital Management

Principle of maturity of payment

Principle of Equity position

Principle of Cost of Capital

Principle of Risk Variation

BALE OPENER

MIXING

COMBING

BLOW ROOM

SIMPLEX

DRAWING

CARDING

DESPATCH

PACKING

CONE WINDING

[REWINDING]

GAS SINGEING

TWO FOR ONE TWISTER

CHEESE WINDING

AUTOCONER

RING DOUBLING

SPINNING

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Gtn Project Sub by Krishna

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