A

Project report on

“ANALYSIS OF WORKING CAPITAL IN RSWM INDUSTRIES LTD”

Special reference RSWM Ltd, JAIPUR”

Project report submitted to university of Pune

In partial fulfillment of Requirement for the Award of degree of

MASTER OF BUSINESS ADMINISTRATION

By

JAYDEEP KALAL

Under the guidance of

Prof. Neeta Shinde

SANKALP BUSINESS SCHOOL, PUNE

2011-2013

DECLARATION

I,Jaydeep Sukhlal Kalal the undersigned, hereby declare that the project report entitled

“ANALYSIS OF WORKING CAPITAL IN RSWM INDUSTRIES LTD”

written and submitted by me to the University Of Pune, in partial fulfillment of the

requirement for the award of degree of Master of Business Administration under the guidance

of Prof. Neeta Shinde is my original work and the conclusions drawn therein are based on

the material collected by myself.

Place:

Date: Jaydeep Sukhlal Kalal

ACKNOWLEDGEMENT

I take this opportunity as privilege to express my deep sense of to Dr

………………. (Director, SBS) for her continuous encouragement, invaluable guidance and

help for completing the present research work. She has been a source of inspiration to me and

I am indebted to her for initiating me in the field of research. So in the same sequence, I

would like to confer the flower of acknowledgment to Prof. Neeta Shinde who guided me

how to being and persue the research through tools & Techniques.

I take this opportunity as privilege to articulate my deep sense of gratefulness

to the manager and staff of the RSWM Ltd, Jaipur for their timely help and positive

encouragement.

I wish to express a special thanks to management of “SANKALP BUSINESS

SCHOOL”, Ambegaon (Bk), Pune for their forever support. Their encouragement and

valuable guidance in gratefully acknowledged. I would to acknowledge all my family

members and friends for their encouragement.

Place: Signature

Date: / /2012 Jaydeep Sukhlal Kalal

EXECUTIVE SUMMARY

Books are the treasures of knowledge and a theoretical base is pivotal for understanding the realities of practical field. But, at the same time, practical knowledge is crucial for having an insight into the implementation of theory in corporate world.

With the privilege of an opportunity provided to me by RSWM Ltd. Banswara, for the fulfillment of my purpose “bridging the gap between theory and practical”, I undertook forty-five days summer training at finance department of RSWM Ltd. Banswara. Working capital is a considered as a life - blood for any organization and the optimum utilization of its necessary from the profitability, liquidity and activity point of view. By considering the importance of the working capital, this report covers the following area.

1. Cash Management

2. Receivables (UGAI) Management

3. Working Capital Finance

4. Inventory Management

5. Sources and Application of Working Capital

Beside this the ratio given at the end of report reveals some facts about the

financial position of the company and performance during last five years. It

shows how company’s finance & accounts department takes their decisions and

run company efficiently and with handsome profit. This report is study of

various part of working capital like sources, application of funds done by Rswm

Ltd. in their daily practice.

Here I have mainly focus on the utilization of resources done by them and how

they control their debt time to time with hardly any bed debt for any unit till

dated with their firm policies and business tactics.

Finally, on the basis of the analysis and the conclusions draw a SWOT analysis

has been done and recommendations given. Therefore, a financial analysis of

working capital of RSWM realizes that the company has been able to manage

its working capital efficiently thereby strengthening its short term financial

position. However, there are certain areas where the company is lagging and is

required to take some effective steps.

INDEX

Sr.no. TABLE OF CONTENTS Page No.

1 CHAPTER I

1.1 Industry Scenario

1.2 Introduction of RSWM Group

1.3 Brief Introduction Of RSWM Ltd., Banswara

1.4 Objectives of the study

1.5 Methodology & Limitations

2 CHAPTER II

2.1 Introduction of Working Capital

2.2 Working Capital & Management

2.3 Issues & Factors Influencing for Working Capital

2.4 Assessment For The Sources & Application For WC

2.5 Needs Of & Resources Of Finance For WC

2.6 Fund Flow Statement

2.7 Uses of Working Capital In Business

2.8 Data Analysis of Working Capital Statements

2.9 Ratio Analysis & Interpretation

2.10 Estimation For Needs Of Working Capital

2.11 Importance Of MIS System (ERP) For Accounting

3 CHAPTER III

3.1 Conclusion

3.2 Bibliography

3.3 Annexure

Chapter – 1

COMPANY PROFILE

INDIAN TEXTILE INDUSTRYINDIAN TEXTILE INDUSTRY

The Indian Textile sector has its roots going back several thousand years. Over the last 50 years the textile industry is one of the largest in the world with a massive raw material and textile-manufacturing base.

Textile accounts for 14% of India’s industrial production and around 30% of its export earnings. Around 35 million people are directly employed in the textile manufacturing activities.

The textile policy of 2000 aims at achieving the target of textile and apparel exports of US $ 25 billion by 2010 of which the share of garments will be US $ 25 billion. The main markets for Indian Textile and apparels are USA, UAE, UK, Germany, France, Italy, Russia, Canada, Bangladesh and Japan.

At present India has the second largest spinning capacity and ranks among the world’s largest producers of cotton, cotton yarn, and manmade fibers and filament yarns; it also has a large domestic, fabric supply.

There has been a structural shift taking place in the global textiles industry with capacities moving from high cost developed economies to the developing countries. The end of the quota restrictions with the dismantling of Multi fiber agreement in 2005 further accentuated this trend. This has added further growth opportunities for cost efficient Indian Players who have the scale and produce quality products. Because of the lifting up of the import restrictions of the multi-fiber arrangement (MFA) since 1st January, 2005 under the world Trade Organization (WTO) Agreement on textile and clothing, the market has become competitive on closer look however; it sounds an opportunity because better material will be possible with the traditional inputs so far available with the Indian Market.

There will be opportunities as well as challenges for the Indian textile industry in the post-mfa era. But India has natural advantages, which can be capitalized on strong raw material base-cotton, man-made fibers, jute silk, large production capacity (spinning-21% of world capacity and weaving-33% of world capacity.)

The industry expects investment of Rs. 140000 crore in this sector in the post-MFA phase. A vision 2010 for textile formulated by the government after intensive interaction with the industry and export promotions councils to capitalize on the upbeat mood aims to increase India’s share in world textile trade from the current 4% to 8% by 2010 and to achieve export value of US $ 50 billion by 2010. Vision 2010 for textiles envisages growth in Indian textile

economy from the current US $ 37 billion to $ 85 billion by 2010; creation of 12 million new jobs in the textile sector; and modernization and consolidation for creating a globally competitive textile industry.

The future of textile industry in India will be amazing if we continuously improve over quality and give proper attention towards research and development and we can take lead of the world textile market. We have to accept the fact that no organization is too large or too powerful to be “unsinkable”. In a rapidly changing business environment companies which do not change disappear without a trace. Change and adaption is must for growth and prosperity. The fierce competition in the market realities dictate: “Perform or parish”.

Thus realizing the need of the hour various groups and individual shifted their focus of business rather than continuing in the same manner. One amongst them was Shri Laxmi Niwas Jhunjhunwala the founder of LNJ Bhilwara Group.

INTRODUCTION OF THE COMPANYINTRODUCTION OF THE COMPANY

Name of the concern RSWM Ltd.

Locations: Regd. Office

Corporate Office

Works

Kharigram, P>O> Gulabpura-311021, Distt. Bhilwara, Rajasthan.

Bhilwara Towers,A-12, sector-1, Noida-201301 (U.P.)

Kharigram, P.O. Gulabpura-301021, Distt. Bhilwara, Rajasthan.

Lodha, P.O. Banswara-327001, Rajasthan. Mordi, Banswara-327001, Rajasthan. Mandpam, Bhilwara-311001, Rajasthan. Rishabhdev-33802, Distt. Udaipur, Rajasthan. Ringas, Distt. Sikar, Rajasthan. Bidadi, Banglore, Karnataka.

Constitution Public Limited Company

Date of Incorporation 17/10/1960

Lines of Manufacture Manufacturing of synthetic, blended, grey/dyed yarn, cotton mélange yarn, and cotton blended yarn and fabric under the brand ‘Mayur’. Now also entered into Garment Business.

Date of commencement of commercial Business 1961

RSWM Ltd. (RSWM), the leading company of the LNJ Bhilwara Group, is principally engaged in the manufacturing of synthetic, blended, mélange and specialty yarns, fabric and garments Business.

RSWM Limited, the flagship Company of LNJ Bhilwara Group, is a professionally managed, progressive and growth-oriented  and  one of the  largest textile manufacturer  in the country, primarily producing  synthetic, blended, mélange,  cotton & specialty yarn, fabric and  denim.

RSWM was established  in 1960, an IS/ISO 9001:2001 and SA 8000:2008  accredited Company,  has  8 state-of-the-art manufacturing plants which moved from strength to strength and today, it operates about 3,60,000 spindles, having 1,00,000  MTA yarn capacity. It is equipped with in-house fabric weaving and processing facilities of about 35.6 MMA for  fabric  and  denim fabric. RSWM is self - reliant in Captive Power Generation of 46 MW that feeds all its integrated units spread across the state of Rajasthan. Modern technologies and world class skills have enabled the Company to produce the finest quality adhering to stringent international norms.

The main competitive strength of the Company is its innovative product range that includes specialty, functional, technical and eco-friendly yarn and fabric along with basic and commodity products. The Company recently has shifted its focus to produce more and more natural textiles in order to meet the emerging needs of the market.

RSWM exports a complete range of yarn and fabric to over 70 countries worldwide, giving the Company a large, visible presence across Europe, South Africa, North America, Australia, South Korea, Belgium, Singapore, Italy, Egypt and the Gulf countries.

The Company holds the prestigious ‘Three Star Export House’ status and has received  Export Awards from the Synthetic and Rayon Textiles Export Promotion Council consecutively for several years. The Company is a recipient of the “Rajiv Gandhi National Quality Award” received from the Bureau of Indian Standards for the years 2006 and 2007.  RSWM has also received "Niryat Shree" - Certificate of Excellence (Non-SSI) award for the catagory of textile and textile products.

RSWM’s one of the leading brand `Mayur Suitings’ enjoys a high brand equity in its target segment in the country.

Foundations that inspire -

"To me, the LNJ Bhilwara Group is not a business house; I see it as an

institution that is committed to seeking excellence."

BY L.N.Jhunjhunwala- Chairman Emeritus.

Mission

With unique insight into consumer behavior, we strive to offer the best. Following distinct business strategies, the company will continue its tradition of manufacturing the finest products.manufacturing the finest products.

Vision

RSWM envisages itself as a trend setter of the textile industry. It is committed to introduce innovative products in the industry which will set new standards.

COMPITITORS OF RSWM

1 MUDRA2 GRASIM3 RAYMOND4 SYNTAX5 INDORMA6 MARAL

ABOUT RSWM BANSWARA

Established in 1989, The Banswara unit is the only one of its kind in

India and the Company's largest manufacturing facility. The unit has the

capabilities to produce spun gray yarn out of any kind of fiber and blend it with

synthetic, regenerated cellulosic, natural, protein and cotton fiber.

The Banswara Unit has the exclusive rights for

spinning Tensel Fiber into yarn in India and is a

modern textile-spinning unit employing state-of-the-

art technology from Switzerland, Germany, UK,

Italy and Korea.

The unit's strength is its new product development. The unit can and does

manufacture any yarn delivering it in accordance with the customer's deadlines.

It is a 100% Grey Yarn Spinning unit producing Cotton blended gray yarns and

Polyester fibers. The unit has recently been expanded to strengthen its product

portfolio and giving it a greater product mix.

Raw Material Purchase

POLYESTER RELIANCEVISCOSE GRASIMCOTTON GUJARAT, RAJASTHAN, M.P., MAHARASTRAACRYLIC PRASUPATI

Products

The Banswara Unit manufactures the following product range: Grey Yarn Specialty YarnFunctional YarnBrand SpecialtiesRegular Products Cotton 100%

-

Nationwide Network

RSWM Ltd

GulabpuraSynthetic, Regenerated Cellulosic, Blended, Dyed Yarn & Fabric

BanswaraSynthetic, Regenerated Cellulosic & Cotton-Blended Grey Yarn

MandpamCotton Mélange Yarn, Cotton-Blended Mélange & Dyed Yarn

Rishabhdev Synthetic, Blended & Grey Yarn Ringas Synthetic & Blended Dyed Yarn Bangalore Apparels Mordi (Banswara)

Process House

HEG Ltd.

Mandideep Graphite Electrodes Durg SteelDurg Waste Heat Recovery Power Tawa Hydro Electric Power

Maral Overseas Ltd.

Maral SarovarCotton Yarn, Cotton-Knitted (100% EOU) Fabric & Cotton Knitwear

Jammu Cotton-Knitted Fabric, Cotton Knitwear & Sweaters Noida Knit wears

BSL Ltd.

Mandpam:Yarn, Worsted & Synthetic Fabric, Readymade Garments & Accessories

Bhilwara Spinners Ltd. Bhilwara Synthetic, Blended Grey & Dyed yarn

Bhilwara Melba De Witte Pvt. Ltd. Mordi (Banswara)

Specialized Automotive Fabric, Furnishing Fabric

Bhilwara Processors Ltd.

MandpamProcessing of Synthetic & Worsted Fabric, Tops Fiber Dyeing

Malana Power Company Ltd. Malana Hydro Electric Power (Kullu)

AD Hydro Power Ltd. Manali Allian-Duhangan Hydro Electric Power

Indo-Canadian Consultancy Services Ltd. Noida Power Engineering Services

Bhilwara Scribe Pvt. Ltd. Bhopal IT-Enabled Services

Corporate Office Noida National Capital Region and Delhi

Regional / Marketing OfficesMumbai KolkataBangaloreDelhi Ludhiana

AWARDS

The LNJ Bhilwara Group not only has several firsts to its credit but

also recognition for its commitment to quality and excellence with several

national awards and certifications.

Graphite Electrode

Awarded ISO 9001:2008 & ISO 14001:2004 Certifications.

Awarded 'Rajiv Gandhi National Quality Commendation Award 2001

for Quality" by the Bureau of Indian Standards, Government of India.

HEG Ltd bagged the prestigious National Export Award instituted by the

Ministry of Commerce, Government of India, for outstanding export

performace for the year 1997-98.

HEG has also won the country's top export award instituted by the

Chemical & Allied Products Export Promotion Council (CAPEXIL) for

outstanding exports for 18 consecutive years. For 2001-02, HEG was

awarded the “Highest” Export Award.

HEG has the largest Integrated Graphite Electrodes manufacturing plant

in South Asia and the Middle East. It is also the second largest in the

world.

HEG has been regularly exporting electrodes since 1981 and today

exports more than 80% of its production.

HEG's graphite electrodes are exported to 25 countries around the world,

including developed countries like USA, Canada, Germany, France, Italy,

South Korea, Australia etc. - a reward for our commitment to World

winning Quality and Performance.

Textiles: -

RSWM, Banswara unit has been awarded Ist Prize for the'' State

Energy Conservation Award 2010 '' for the Energy Conservation

Measures taken during 2010.

The coveted ISO 9001-2000 Quality Management System Certification

was received in January 1997, which speaks volumes about the

Company's.

RSWM is the winner of SRTEPC Highest Export Award for polyester /

viscose yarn exports for the last 13 years

RSWM bagged ‘The 2007 Excellence Award for Financial Performance

and Analysis’ instituted by Rajasthan Chamber of Commerce &

Industries, Jaipur

RSWM’s Rishabhdev unit bagged National Export Award, and the

SRTEPC Excellence award for highest production in export of 100%

Polyester Spun Yarn

An advanced machinery repertoire from world leaders ensures flawless

quality and more versatility at each and every stage.

Rajiv Gandhi National Quality Awards Commendation certificate in

Large Scale Textile Industry to Banswara and Kharigram unit in year

2006 and year 2007 respectively.

Our Banswara plant certified for producing and selling Organic Cotton

yarn from "Control Union Certification" (formerly known as SKAL)

Certificate of "Global Organic Textile Standard" (GOTS) for

producing and selling 100% Organic Cotton yarn to our Banswara plant.

Certificate of "Organic Exchange" (OE) for producing and selling

Blended yarns with Organic Cotton to our Banswara plant.

Certificate of SA-8000 speaks that all the material produced by the

RSWM Ltd. by respecting the environment and ethical values for our

Banswara unit.

Certificate of Fair Trade from Fair Trade Labelling Organization for

producing selling 100% Fair trade cotton and its Blended yarn, for

Banswara unit.

Certificate of Global recycle standards (GRS) for producing selling the

recycled cotton and Blended yarn with and without recycled manmade

fibers.

Having Oekotex standard 100 certificate for most of the products

Power: -

Malana Power bagged “Greentech Environment Excellence’ Award.

SWOT ANALYSIS

STRENGTH:-

Demand of blended yarn will increase as the production of cotton is

(limited attraction of PV is replacing cotton, great share in exports one of

the biggest earners).

Won SRTEPC highest export award for PV yarn exports it was also

accorded “golden trading house status”.

Experienced & enthusiastic marketing team. Strong sales depots &

marketing offices at Mumbai, Delhi, Bhilwara, Ludhiana, Ahemadabad

and Indore.

Brand Reputation Global Marketing – LNJ Bhilwara group is famous in

textiles in all over the world.

Well-equipped R&D SQC lab.

Modern machinery with latest techniques.

Not depended for power & water RSWM Banswara has its own power

generation plant & presently there are about 20000 surplus units of power

is available. The daily requirement of power for weaving project is only

93111 units per day. Water is also available in plenty at company’s own

campus & presently company has adequate water storage capacity.

Wide product range & flexibility in production according to requirement

of market. RSWM Banswara manufacturers various type of yarn of

different counts & blends.

All the units are connected through V-SAT Gulabpura, Mumbai, Delhi,

and Indore & Rishabdev.

The company has a great share in exports, one of the biggest earners.

Quality conscious approach as per ISO product & TQM gulabpura unit

was the first India composite textile unit to be certified with ISO 9002 1 st

September 1993, ISO certificate is necessary to penetrate in the export

market specially in the European in US market.

The most important thing is that they have good and healthy working

atmosphere in company and they provide ample no. of opportunities for

everyone to satisfy their job desire.

Better packaging, carriage and transportation system with all modern

equipments and good after sales services.

Regular seminars and meeting are conducted in entire department in order

to find their loopholes and solution for the same.

WEAKNESS:-

Banswara is not connected through railway line & condition of roads is

also poor so there is an infrastructure problem.

Skill labor is not available at Banswara and Purchase Raw Material from

one type of organization only and bigger process cycle causes higher

stock of raw materials.

Locations of depots (Consuming Centers) are far away from factory.

Hence transportation cost and time duration is increases in inventories.

Many process steps and process are more sensitive to normal process

variations and small error causes the big amount of wastage of material.

Being highly labor intensive unit, HR department is always under

pressure and many times fails to meet expectations of various

departments and employees.

OPPORTUNITIES:-

After starting weaving project, Rajasthan spinning & weaving mills Ltd.

Banswara may further go for forward integration in garments sector, as

people in domestic market are gradually moving towards ready-made

garments.

To develop & improve working environment of processing by using Eco-

Friendly methods.

The company can rush into retail business and support from government

like TUFF Schemes i.e. 5% interest rebates to enhance investment in the

textile industry.

Strategic alliances: Tie-ups with global manufacturers & brands for

technology & market.

Tilt towards ready-made. India can become a major player in the textile

export market at a global market at a global level given the declining

share of south-east Asian countries in this niche market & rising wages in

ASEAN region, wiping out their competitive edge.

RSWM may be innovating new product using different types of yarn &

fiber like lyre & tennel.

Increased export demand is expected from planning out of capacities in

developed world.

Efficiency can increase with the help of IT & ERP.

Post-MFA as on January-1, 2005, the world trade in textile & clothing

will be fully liberalized. It can capture a large market share if it provides

quality product as reasonable price.

Market share of India is world trade of textile is only 2.8% therefore,

another advantage that India could have is that for countries which are not

the member of WTO, imposing countries will have obligation to proceed

with removal of quota restriction. This is especially important with

respect to China, Taiwan, who accounts for 32% of world trade in textile,

but are still not a member of WTO.

THREATS:-

Today textile industry is planning through in unpredicted recession. The

reason for that is supply is more than demand.

Cheap imports textiles from China, that is increasing free trade &

competition.

Removal of quotas after – 2005 increasing more quality awareness i.e.

competition in quality.

Changing trend in textile Indus try, changing requirement as people now

preferring ready-made garments.

Polyester Viscose is a substitute of cotton & is made from wood pulp &

its supply is also limited.

Government policies are the main hurdles of division’s performance.

Finally, On the basis of preliminary discussions and referring to

document Projects were prepared and final reports were analyzed through

ratio analysis. Definitive views about the entire gamut of working capital

management were formed. The various issues connected with working

capital management were understood.

PROJECT INTRODUCTION

Working capital is as import in business firm as blood in a human life.

Each and every business concern should have adequate funds to meet out day-

to-day expenses and to finance current assets, debtors, receivables and

inventories. Proper management of working capital is necessary to maintain

both liquidity and profitability.

The goal of working capital management is to manage the firm’s current

assets and current liabilities in such a way that a satisfactory level of working

capital is maintained. It is the process of planning and controlling the level and

mix of the current assets of the firm as well as financing these assets.

SCOPE OF PROJECT

Scope of project is to determine the short-term debt paying capacity of

the firm through a financial analysis of Working capital. It tends to find out the

effectiveness in the management of Working capital at RSWM LTD.

For this purpose data were collected from the past financial statements of

the company.

2.1

RESEARCH METHODOLOGY

General Information

The research work carried out here was actually a study work conducted at

Rajasthan Spinning and Weaving Mills Ltd, Banswara in finance &

accounting department on the topic of the Working Capital Management.

The various data collected through method of discussion and no

questionnaire was designed for the purpose of the study. The information

about the design of sampling is given as under.

Research Tools

The figures of RSWM’s balance sheets are taken for last three years i.e.

from F.Y. 2009 - 10 to 2011 – 12. They are used for calculating the ratio

and also for interpreting the financial position of the organization during

that period of time. The annual reports of Rajasthan Spinning and Weaving

Mills Ltd are also used as a research tool for various other needs.

SECONDARY DATA

For secondary data, I have referred books related to working capital

management.

Information has been taken from the books and audited records of

RAJASTHAN SPINNING AND WEAVING MILLS LTD

I have collected information from RSWM annual reports and different

manuals referred by them.

Various web sites were also considered and taken data from there along

with network of RSWM LTD.

INTRODUCTON

OF

WORKING CAPITAL

WORKING CAPITAL INTRODUCTION

Working capital is as import in business firm as blood in a human

life. Each and every business concern should have adequate funds to meet out

day-to-day expenses and to finance current assets, debtors, receivables and

inventories. Proper management of working capital is necessary to maintain

both liquidity and profitability.

The goal of working capital management is to manage the firm’s current

assets and current liabilities in such a way that a satisfactory level of working

capital is maintained. It is the process of planning and controlling the level and

mix of the current assets of the firm as well as financing these assets.

SCOPE OF PROJECT

Scope of project is to determine the short-term debt paying capacity of

the firm through a financial analysis of Working capital. It tends to find out the

effectiveness in the management of Working capital at RSWM LTD.

For this purpose data were collected from the past financial statements of

the company.

There are two concepts of working capital

Gross Working Capital

Net Working Capital

Gross Working Capital: - Simply called as working capital, refers to the

firm’s investment in current assets. Current assets are the assets which can be

converted into cash within an accounting year (or operating cycle) and include

cash. Short-term securities, debtors, bills receivables and stock (Inventory).

Net Working Capital: - It refers to the difference between current assets and

current liabilities. Current liabilities are those claims of outsiders, which are

expected to mature to payment within an accounting year and include creditors,

bills payable and outstanding expenses. Net working capital can be positive and

negative. A positive working capital will arise when current assets excess

current liabilities and vice – versa.

The concept of working capital – gross and net – are not exclusive, rather they

have equal significance from management view point.

Focusing on Management of Current Assets

The gross working capital concepts focuses attention on two aspects of current

assets management: (A) How to optimize investment in current assets? (B)

How should current assets be financed?

The considered of the level of investment in current assets should avoid to

danger points – excessive and inadequate investment in current assets.

Investment in current assets should be just adequate, not more than less, to

needs of the business firm. Excessive investment in current assets should be

avoided because it impairs firm’s profitability, as idle investment earns nothing.

On the other hand, inadequate amount of working capital can threaten the

solvency of the firm because of its inability to meet its current obligations. It

should be realizing that the working capital needs of the firm might be

fluctuating with changing business activity. This may cause excess or shortage

of working capital frequently. The management should be too prompt to initiate

an action and current imbalances.

Another aspect of the gross working capital points in the need of arranging

funds to finance current assets. Whenever needs for working capital arise due to

do the increasing level of business activity or for any other reason, arrangement

should be made quickly. Similarly, if suddenly some surplus fund arises, then

they should not be allowed to remain idle, but should be invested in short term

securities. Thus financial manager should have knowledge of source of working

capital fund as well as investment avenues where idle fund may be temporarily

invested.

Focusing on Liquidity Management

Net working capital, begin the difference between current assets and current

liabilities, is a qualitative concept. It (A) indicates the liquidity position of the

firm and (B) Suggest the extent to which working capital needs may be finance

by permanent sources of funds. Current assets should be sufficiently in excess

of current liabilities to constitute a margin or buffer to maturing obligations

within the ordinary operation cycle of a business. In order to protect their

interest, short-term creditors always like a company to maintain current assets at

a higher level than current liabilities. However, the quality of current assets

should be considered in determinate the level of current assets vice-versa

current liabilities. A weak liquidity position poses a threat to solvency of the

company and makes it unsafe and unsound. A negative working capital means a

negative liquidity, and may prove to be harmful for the company. Excessive

liquidity is also bad. It may be due to mismanagement of current assets

therefore, prompt and timely action should be taken by management to improve

and current the imbalance in the liquidity position of the firm.

Net working capital concept also covers the question of judicious mix of long-

term and short-term funds for financing current assets. For every firm, there is a

minimum amount of net working capital, which is permanent. Therefore, a

portion of the working capital should be financed with permanent sources of

funds such as owner’s capital, debentures, long-term debts, preference capital or

retained earnings. Management must, therefore decide the extent to which

current assets should be financed with equity capital or borrowed capital.

In summary, it may be emphasized that both gross and net concepts of working

capital are equally important for the efficient management of working capital.

There is no precious way to determine the exact amount of gross, or net,

working capital for any firm. The data and problems of each company should be

analyzed to determine the amount of working capital. There is no special rule as

to how current assets should be financed.

WORKING CAPITAL AND MANAGEMENT

Working capital is concerned with management of current asset. It is an

important and integral part of financial management as short term survival is

prerequisite for long term success.

The divisional management of RSWM Ltd. manages the working capital

within the board frame work laid by and with consultation of Corporation

Finance Division (CFD). Decision regarding the utilization of the current assets

is made in accordance with the policy of company.

Working capital management or short term financial management is concerned

with decision relating to current assets and current liabilities.

WCM = Current Assets (CA) – Current Liabilities (CL)

The key difference between long-term finance management and short-term

financial management is in term of timing cash. While long- term financial

decision like buying capital equipments or issuing debentures involves cash

flows over extended period of time i.e. more than one to five years or even more

while short term financial decision typically involve cash flows within a year or

within the operating cycle of the firm.

WCM is management for the short- term which is critical to the firm. Managers

spent about 70% in managing for the short- term capital.

The operating cycle can be said to be at eh heart of the need for working capital.

The management of the finances of a business / organization is done in

order to achieve financial objective.

Taking a commercial business as the most common organizational structure, the

key objectives of financial management would be to:

Create wealth for business

Generate cash and

Provide an adequate return on investments bearing in mind the risks that

the business is taking and the resources invested.

There are three key elements to the process of financial management:

FINANCIAL PLANNING:

Management need to ensure that enough funding is available at the right time to

meet the needs of the business. In short term, funding may be needed to invest

in equipment and stocks, pay employees and fund sales made on credit. In the

medium and long term, funding may be required for significant additions to the

productive capacity of the business or to make acquisitions.

Cash

Receivable

Inventory

FINANCIAL CONTROL:

Financial control is a critically important activity to help the business ensure

that the business is meeting its objectives.

FINANCIAL DECISION-MAKING:

A key financing decision is whether profits earned by the business should be

retained rather than distributed to shareholders via dividends. If dividends are

too high, the business may be starved of funding to reinvest in growing

revenues and profits further.

ORGANIZATION STRUCTURE OF FINANCE DEPARTMENT

AREA WISE SALES OFFICE

ISSUES & FACTORS INFLUENCING FOR WORKING CAPITAL

Chief Financial Officer

Chief Operating Officer

Commercial Head

Accounts Head

Deputy Manager Cash

Deputy Manager Creditors

Deputy Manager Bank

OfficerOfficer

Officer Officer

Officer Officer

Deputy Manager Debtors

BANSWARAUNIT

Mumbai Amritsar Delhi Indore Bangalore

Sr. Manager Accounts

ISSUES IN WORKING CAPITAL

Working Capital refers to the administration of all components of working

capital-cash, marketable securities, debtors (receivable) and stock (inventories)

and creditors (payables). The financial manager must determine levels and

composition of current assets. He must that right sources are trapped to finance

current assets, and that current liabilities are paid in time.

There are many aspects of working capital management, which make it an

important function of the financial manager.

Time: - working capital management requires much of the financial manager

time.

Investment: - working capital represents a large portion of the total investment

in assets.

Critically: - working capital management has great significance for all firms

but it is very critical for small firms.

Growth: - the need for working capital is directly related to the firm’s growth.

FACTORS INFLUENCING WORKING CAPITAL

There is not set of rules or formula to determine the working capital

requirement of the firms. Therefore, an analysis of relevant factor should be

made in order to determine total investment in working capital.

The main factors are:

1. Nature of Enterprise

The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.

RSWM is a manufacturing organization, because of which it requires lot of funds to be blocked in raw materials for the production of Yarn. The cycle of operations at RSWM is quite long and thus it needs large amount of working capital. 48% of total funds are invested in raw materials.

2. Manufacturing/Production Policy

Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. RSWM follows continuous production policy. The plants are operated 24 hours in different shifts. Demand factor is not considered here as Yarn is sold by its marketing department. As the production continues for 24 hours, the investment in raw material inventories is very high as interruption in production causes increase in cost of production because of high set up cost of plants even need of raw material for power plant is always in demand for the same.

3. Operations

The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.

As RSWM has policy of continuous production, it does not have to consider seasonal factors for its working capital requirements. Its working capital does not vary with seasons.

4. Market Condition

If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.

RSWM have to depend on market conditions as Polyester, Viscose and Cotton are always considered essential for textile and for various manufacturing unit. So there is not much competition in this industry for example: - Grasim Ind. has the monopoly for Viscose in the whole industry and Reliance has the monopoly for Polyester.

5. Availability of Raw Material

If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same raw materials are very important aspect for arriving at working capital requirements at RSWM because of two reasons mainly.

First RSWM follows continues production policy so the raw materials are used in very large quantum and second the raw materials like Cotton, Polyester (Reliance), Viscose (Grasim) for manufacturing of Yarn. These raw materials are available in the lead time of maximum 4 days in each case thereby large inventory stock is not needed to maintain but the market prices are very much fluctuating therefore when the prices are favorable then raw material is purchased in adequate quantity.

6. Growth and Expansion

Growth and expansion in the volume of business results is enhancement of working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.

RSWM has grown incredibly since its inception. Because of high growth it needs large amount of working capital as the operations are handled at very large scale. RSWM has expanded its operations through investing in many other important projects which compel them to invest immensely in working capital.

7. Price Level Changes

Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. The price level changes in raw materials hit very hard to RSWM as the major investments are being done in raw materials. Most of the materials are imported for outside India which involves risk of exchange rate fluctuations thus it needs high amount of working capital.

8. Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital.

Manufacturing cycle affects a lot on working capital requirements at RSWM as the cycle takes lot of time to convert raw material into finished goods. It takes around 7 to 8 days to complete one process of converting raw material into final product. Therefore it is very necessary for RSWM to invest sufficient amount in working capital.

At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above.

9. Technology:

In Yarn Division, the technology used for production process is labor intensive in the manufacturing of yarn which also involves heavy machinery due to which requirement if working capital is high.

10. Credit Policy:

The credit policy of the firm affects working capital by influencing the level of the book debts. The RSWM division allows different credit periods to its customers depending on the type of yarn and from which depot it is purchased i.e. for SYNTHETIC YARN it is as follows:- a) Bhilwara- 7 days b) Ludhiana- 15 days c) except Bhilwara and Ludhiana- 10 days and for COTTON YARN it is 20 days. If the payment is not made, the high rate of interest is charged i.e. around 18 %. But for special customer they provide credit of around 3 months too. The company for the improvement of working capital ratio also allows the cash discount of 1% if the payment is received in advance or the cheque is deposited in bank on the next day of dispatch.

11. Banking Facility:

The RSWM Division mainly uses the banking facility of RTGS i.e. Real Time Gross Settlement for the payment of suppliers. RSWM Ltd. has major account and deals it’s transaction with State Bank of Bikaner and Jaipur and Punjab National Bank.

12. Business Fluctuation:

The Operating Efficiency of the firm relates to the optimum utilization of resources at minimum costs. Better utilization of resources improves profitability and thus helps in releasing the pressure on working capital.

APPLICATION FOR WORKING CAPITAL

The assessment of the working capital in the RSWM’s unit is done by the CFD

with the consultation with the management staff of the Co. and on the basis of

the Co.’s previous year experience. This helps to maintain efficiently fund for

operation of the organization. There are main four components which plays vital

role for it which are as follows:

INVENTORY

RECIEVABLE, (UGAI), (DEBTORS)

CASH MANAGEMENT

PAYABLES, (VENDORS), (CREDITORS)

INVENTORY

Inventory includes all types of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs should also be minimized. Business, therefore, should fix the minimum safety stock level, re-order level and ordering quantity so that the inventory cost is reduced and its management becomes efficient.

Following are the types of inventory, which the company generally holds.

1 Raw Material:-

A raw material is the goods, which are required to produce the product of the firm. Raw materials are the basic input of the production which is converted into finished goods after manufacturing process.

2 Goods in Production Process:-

These are the goods or inventories, which are under the production process, in other words we can say goods in process or semi finished goods. They represent the products that need more work before they become finished goods for sale.

3 Finished Goods:-

Finished goods inventory are those which are completely manufactured and

ready for sale. Stock of raw material or work in progress facilitates

production, while stock of finished goods is required for smooth marketing

operations.

4 Stock Of Stores Materials :-

Stock of store materials includes spare and tools. Spares means the parts of

the machinery and tools are equipment, which are provided to the employees

to the firm. These materials do not directly enter into production but they are

essential for production process.

NEEDS FOR HOLDING INVENTORY:-

Mainly there are two motives of holding inventories.

1. Transaction motive :-

A transaction motive emphasizes the need to maintain inventories to

facilitate smooth production operation

2. Precautionary motive:-

Precautionary motive necessitates holding of inventories to guard against

the risk of unpredictable changes in demand and supplies forces and other

factors.

TECHNIQUES OF INVENTORY MANAGEMENT

1. ABC ANALYSIS: - In ABC analysis, the entire goods in stores are

divided into three categories A, B, and C. it is the most effective way of the

inventory management. Most of the firms are adopting this technique. That

is why ABC is also known as ALWAYS BETTER CONTROL. How the

goods are divided into three categories is mentioned below:

“A” category goods: - A category goods are high value goods, which

incurred maximum cost of the total inventory cost.

“B” category goods:- “B” category goods are those, which costs between

Rs.10,000/- to Rs.50,000/-

“C” category goods:- “C” category goods involves goods which costs

below Rs.10,000/-

2. FSN ANALYSIS: - In FSN technique all goods are categorizes into three

categories. Fast moving goods, slow moving goods and non moving goods.

The rules of the FSN analysis may vary according to company’s norms.

The norms of FSN analysis at RSWM are mentioned below.

Fast Moving Goods: Fast moving goods are those, which are used within

three months.

Slow Moving Goods: Slow moving goods are those, which are used

between three to six months.

Non Moving Goods: Non moving goods are those, which are used since

in above six months

USE OF WORKING CAPITAL IN BUSINESS

The typical uses of working capital are as follows:

1. Adjusted net loss from operations.

2. Purchase of non-current assets:

Purchase of long-term investments like shares, bond / debentures etc.

Purchase of tangible fixed assets, like land, building, plant, machinery,

equipment etc.

Purchase of intangible fixed assets, like goodwill, patents, copyrights

etc.

3. Repayment of long-term debt (debentures or bonds) and short-term debt

(bank borrowing).

4. Redemption of redeemable preference shares.

5. Payment of cash dividend.

6. Payment of taxes and various other expenses.

7. Payment of other liabilities which are hidden but their payment plays

crucial role in production cycle and also in working capital cycle.

8. Provide more R&D options and wider scope as resources are more available

in terms of money for company.

9. To reduce one’s liabilities by paying them from making working capital

profit.

10. To keep control on providing credit to its debtor or customer.

11. To keep control on operational expenses and to know the requirement of

capital for inventory.

DATA ANALYSIS OF WORKING CAPITAL STATEMENTS

The working capital statement for the last six financial years and the comparison between two successive years are given in details as under. Along with the comparison the reasons for the changes in working capital is also given here under.Working Capital Statement comparison for the year 2009-10 and 2010-11

(All Figures are in Rs. Lakhs)

Particulars 31/03/2010

31/03/2011

Increase

Decrease

Current Assets, Loan & Advance:        

Inventories 6114.14 12972.27 6858.13  

Sundry Debtors 2863.65 5383.98 2520.33  

Cash & Bank Balance 18.33 15.67   2.66

Loan & Advances 310.4 729.18 418.78  

Other Current Assets 688.76 553.51   135.25

Export Incentive Receivables 435.68 947.7 512.02  

Inter Unit Balances 2210.57 -4435.34   6645.91

TOTAL (A) 12641.53 16166.97 10309.26

6783.82

Less:- Current Liabilities & Provisions:

       

Sundry Creditors 297.2 854.03   556.83

Interest accrued but not due on Loans

0.44 1.10   0.66

Security Deposits 109.75 225.05   115.3

Advances from customer 331.4 326.24 5.16  

Other Liabilities 858.42 1314.18   455.76

Working Capital Loans From Banks

3493.95 6515.24   3021.29

Provisions 74.13 134.58   60.45

TOTAL(B) 5165.29 9370.42 5.16 4210.29

Working Capital (A - B) 7476.24 6796.55 10314.42

10994.11

Decrease in Working Capital       679.69

Total     10314.42

10314.42

ANALYSIS & INTERPRETATION

From the working capital statement comparison for the year ended on 31st

March, 2010 and 31st March, 2011 given above some of the facts revealed are as

under:

The current assets increase in the latter year by Rs. 3525.44 Lacs.

The current liabilities increase in the latter year by Rs. 4205.13 Lacs.

The reasons behind the decrease in current assets are given as:

Increase in debtors due to competition for RSWM’s various units and

financial crises was over so more customers lead to increased demand in

market which resulted in increase debts in less credit period. Due it the

increase in amount is of Rs. 2520.33 Lacs.

Increase in inventories is due to low prices of raw material in market and

increased market demand leads to heavy production of final goods resulted

in heavy investment in inventories of around Rs. 6858.13 Lacs which was

a high application of funds requiring high working capital.

Increase in loans and advance given in order to take benefit of various tax

policies and made payments for various licenses renewal and also for

acquiring new ones which made effect of Rs. 418.78 Lacs for RSWM’s

Banswara unit. It has worked as more of application in working capital.

Decrease in cash balance was for the above reasons and also due to less

credit available for company in market for its credit due economy

meltdown and bad position of market along with it various unit’s

modernization for better performances. Hence due to this effect cash

balance reduced by Rs. 2.66 Lacs in latter year and it worked as

application of fund in working capital.

Due to high application of funds in inventories, debtors, etc. funds from

head office was not sufficient for meeting the requirements and therefore

more funds was required which was not available so the Inter Unit Balance

was got heavily decreased by Rs. 6645.91 Lacs.

The reasons for the increase in current liabilities are given as:

Increase in creditors because of sustaining their customer’s in this low

demand market. This has caused more days of credit and increased the

amount by Rs.556.83 Lacs for RSWM’s Banswara unit. Such effect has

worked as useful source of working capital for the company.

Due to addition in production and keeping the market scenario in mind,

RSWM has increased its other liabilities by Rs. 455.76 Lacs. Hence it

caused an effect of source of working capital.

RSWM also accepted more amounts of money as working capital loans

from banks as a short – term loans for its various units. Such loans are

always useful for any business as the generate sources of fund at very less

expense. Hence the generation was of Rs. 3021.29 Lacs more in latter

year to meet its daily requirements of working capital.

Seeing demand and production the provisions for taxed has also decreased

by Rs. 60.45 Lacs.

FUND FLOW STATEMENT

Meaning of Fund

Funds may means of changes in financial resources, arising from changes in

working capital items and from financing and investing activities of the

enterprise, which may only involve non - current items.

Fund Flow Statement

The statement of changes in financial position, prepared to determine only the

sources and uses of working capital between dates of two balance sheets, is

known as the funds flow statement.

As historical analysis, the statement of changes in working capital reveals to

management the way in which working capital was obtained. With this insight,

management can prepare the estimates of the working capital flows. A

statement reporting the changes in working capital is useful in addition to the

financial statements. A projected statement of changes in working capital is

immensely useful in the firm’s long-range planning.

The working capital flow of fund arises when the net effect of a transaction is to

increase or decrease the amount of working capital.

The concept of working capital flow may be summarized as follows:

The net working capital increases or decreases when a transaction

involves a current account and a non-current 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.

RATIO ANALYSIS AND INTERPRETATION

Ratio analysis helps in finding out the company’s position in the industry in

which it is working. It also helps in identifying the strengths and weakness of

the organization when compared with other organization of the same industry.

So, for the financial analysts keeping record of the ratio and tracking them

lighten their way of taking decision. The Various ratios and there analysis for

the “RSWM LTD. (RSWM LTD.)” for the financial years 2006-07, 2007-08,

2008-09, 2009-10, 2010-11 i.e. for 5 years are calculated and compared here

under. Here the purpose of finding and analyzing ratio is to compare the

activities of company during different financial years and to know the

efficiencies of finance department of the company and its management. It also

gives the knowledge how this ratio’s are helpful for decision making and to

know the strength and stability on a company not only for RSWM but for any

company.

Working capital Ratio helps in meeting or indicating the ability of a business

concern in meeting its current obligation as well as its efficiency in managing

the current assets for generation of sales. They are divided into three categories

which are as follows:

Liquidity Ratio: It consists of Current Ratio and Quick Ratio.

Efficiency Ratio: It consists of Working Capital to Sales, Inventory

Turnover Ratio, and Current Assets Turnover Ratio.

Structural Ratio: It consists of Current Assets to total net Assets,

Composition of Current Assets, Debtor Turnover Ratio, Debtors Collection

period, Creditors Payment Period.

Ratio’s like Return on Investment, Return on Equity, Cash Ratio also plays vital

role in decision making and also indicates the strength of company financial

wise and it also shows how efficient company is.

CURRENT RATIO

The current ratio is a measure of the firm’s short-terms solvency. It indicates the

availability of current assets in rupees for every one rupees of current liability.

Current ratio is defined as a ratio of the current assets to the current liabilities.

Mathematically it is given as.

Current Ratio = Current Assets Current Liabilities

  Year 31/03/2008 31/03/2009 31/03/2010 31/03/2011 31/03/2012

ACurrent Assets 13577.83 8394.48 12641.53 16166.97 8938.64

BCurrent

Liabilities5563.52 4078.93 5165.29 9370.42 2379.45

  Ratio (a/b)2.44 2.06 2.45 1.73 3.76

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 110

0.51

1.52

2.53

2.082.44

2.062.45

1.73

Current Ratio

Years

Curr

ent

Rati

c

ANALYSIS & INTERPRETATION:

As mentioned above, it shows the relationship between C.A. & C.L. according

to measure the ideal ratio is of 2:1 and min. required should be 1.33:1 for banks.

Here we can see that ratio is fluctuating every year and gone down below 2:1 in

the year 2010-11 and the max was 2.45:1 in 2009-10 financial year, up till

2010-11 analyses for last five years. Currently the ratio is of 1.73:1 and which

has reduced from previous year and has reached below min. level which is a

matter of concern. Hence RSWM Ltd. has to keep close watch on their current

ratio and will have to try to maintain their efficiency in working capital

management as well as of company among its shareholders.

QUICK RATIO

Quick ratio establishes the relationship between quick assets and current

liabilities. Generally it is used as a measure of company’s ability to meet its

current obligation. Mathematically it is given by

Quick Ratio = Current Assets – Inventories Current Liabilities

 Years 31/03/2007 31/03/20

0831/03/2009

31/03/2010

31/03/2011

aQuick Assets 4809.61 9023.99 5219.73 6519.41 3183.79

bCurrent

Liabilities4651.1 5563.52 4078.93 5165.29 9370.42

  Ratio (a/b)1.03 1.62 1.28 1.26 0.34

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 110

0.5

1

1.5

2

1.03

1.621.28 1.26

0.34

Quick Ratio Chart

Years

Quc

ik R

atic

ANALYSIS & INTERPRETATION:

It can be seen that quick ratio is also fluctuating with year changing. The ideal

ratio is considered of 1:1. RSWM was inefficient in the year 2010-11 and

doesn’t have sufficient fund to meet its current liability in this year. The highest

ratio of 1.62:1 in 2007-08 financial year in last five years. Currently the ratio is

of 0.34:1 which is a matter of concern and in order to maintain it to above ideal

ratio inventory should be decreased or increased in a appropriate ratio.

DEBT TO EQUITY RATIO

It is the ratio which indicates the relationship between loan funds and net worth

or share holder funds of the company, which is known as ‘gearing’. This ratio

helps in controlling debt, which is a part of working capital management. This

ratio also helps the stockholder in taking the decision of investment.

Mathematically it is given as

Debt to Equity Ratio = Loan Funds Share holder fund

  Year 31/03/200

731/03/2008

31/03/2009

31/03/2010

31/03/2011

A Total Debt 14342.34 17736.35 15587.43 15521.05 16173.11

BShareholder'

s Equity 5059.53 5576.26 3926.02 3231.25 2179.64

  Ratio (a/b) 2.83 3.18 3.97 4.80 7.42

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 1102468

2.83 3.18 3.97 4.8

7.42

Debt to Equity Ratio

Years

Deb

t to

Equ

ity

Rati

c

ANALYSIS & INTERPRETATION:

By seeing the above facts and figure it can be said that by time spend the ratio

have jumped from 2.83 to 7.42 and it has shifted company from low gearing to

high gearing and it can reap the benefit of trading on equity. RSWM’s long-

term solvency is more satisfactory. All the ratio of the respective year was very

much high in comparison to the accepted norm of 2:1 which shows company

high dependency on debt which is not good and to be taken care of in the

coming years.

LONG-TERM DEBT TO EQUITY RATIO

It is ratio of long-term debt to the net worth. This ratio would be of more

interest to the contributories of long-term finance to the firm, as the ratio gives a

factual idea of the assets available to meet long-term liabilities. It gives the idea

about long term debt like long-term loans, debenture, bonds etc. Mathematically

it is given by

Long-term debt to Equity = Long-term Debt Net Worth

  Year 31/03/200

731/03/2008

31/03/2009

31/03/2010

31/03/2011

aLong Term

Debt 10861.36 11186.22 11214.50 10434.02 9657.87

bShareholder'

s Equity 5059.53 5576.26 3926.02 3231.25 2179.64

  Ratio (a/b) 2.15 2.01 2.86 3.23 4.43

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11012345

2.15 2.012.86 3.23

4.43

Long-term Debt to Equity Ratio

Years

LTDE

Rati

c

ANALYSIS & INTERPRETATION:

This ratio also has same trend as debt to equity ratio had. In earlier years the

ratio was low and latter on it increased sharply. Hence by seeing the above

figures it can be said the RSWM is sound and secured along with better

position in terms of financial conditions. Though graph is showing fluctuation

in ratio’s every year as the current position is of 4.43 and it has increased from

last year of 3.23.

TOTAL ASSETS TURNOVER RATIO

It shows the part of the total asset turnover ratio in single financial year. It

focuses on the effectiveness and efficiency of management in taking decision

and using available resources. Mathematically it is given by

Total Asset Turnover Ratio = Net Sales Total Asset

Year 31-03-2007 31-03-2008 31-03-2009 31-03-2010 31-03-2011Net Sales 36303.09 40427.91 35393.08 39792.51 55755.48Total Assets 23114.76 22754.02 20096.44 21610.48 33306.58Ratio (a/b) 1.57 1.78 1.76 1.84 1.67

01/01/2007 01/01/2008 01/01/2009 01/01/2010 01/01/20110

10000

20000

30000

40000

50000

60000

1.4

1.45

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1.85

1.9

Net SalesTotal AssetsRatio (a/b)

ANALYSIS & INTERPRETATION:

From the years 2007-08 to 2009-10 it was over trading of total assets in RSWM

and finance department needs to control the same according to the ideal ratio

but in the financial year it came to 1.67 from 1.84 in the previous year. This

shows the caliber and efficiency of Finance department of the company and

there concern for the needs working capital.

TIME INTEREST EARNED RATIO

The amount of interest paid by the company should be compared with the

operating profit before interest, depreciation and tax. It shows how many times

interest charges are covered by funds that are available for payment of interest.

Mathematically it is given as

Time Interest Earned Ratio = PBI, Dep. & Tax. Interest

 

Year 31/03/2007 31/03/2008 31/03/2009 31/03/2010 31/03/2011

a PBDIT 4637.56 4918.55 2218.24 5327.43 10419.26

b Interest 897.62 1077.86 1063.18 664.82 1393.13

 Ratio (a/b) 5.17 4.56 2.09 8.01 7.48

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 1102468

10

5.17 4.562.09

8.01 7.48

Interest Covering Ratio

YearsInte

rest

Cov

erin

g Ra

tics

ANALYSIS & INTERPRETATION:

By seeing the above figures it can be said that RSWM was conservative in

using debt in 2006-07 and 2007-08. But in 2008 – 09 it started to use debt and

the ratio come down up to 2.09 but again it was conservative using debt in

further years due to recession year of 2008-09 when company suffered heavy

losses. An interest cover of more than 7 times is regarded as safe which was up

till 2007-08 and then again in 2009-10 and 2010-11. Cover of 2 times is min for

any company considered by financial institutions.

OPERATING EXPENSE RATIO

Operating profit is after deducting operating expenses from the gross profit. The

operating profit ratio is given by the between operating profit and net sales. It

means amount of operating profit for sales worth one rupee. It is calculated in

average. Mathematically it is given as

Operating Expense Ratio = 100%- Net Profit Ratio

 

Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

A

Net Profit Ratio (in %) 7.47 6.16 -0.55 8.54 13.74

  Ratio 92.53 93.84 100.55 91.46 86.26

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 1175.00%

85.00%

95.00%

105.00%

92.53% 93.84%100.55%

91.46%86.26%

Operating Expense Ratio

Years

Op

era

tin

g Ex

pe

nse

Rati

cs

ANALYSIS & INTERPRETATION:

RSWM has highest operating expense in the year 2008-09 i.e. 100.55% due to

increase in price of fuel, raw materials, and transportation for various materials and

also low market demand. But the fiancé department has showed the efficiency in

controlling the expenses of the unit and dropping down the ratio to 86.26% in the

year 2010-11 which is at its lowest in the last five years and except the year 2008-

09 the ratio for other years was not more than 95% which is also good.

NET PROFIT RATIO

Similar to gross profit ratio, the net profit ratio will show the amount of net

profit for the sales worth amount of 1 rupee. The net profit ratio shows the

profitability of the organization. Mathematically it is given as

Net Profit Ratio = Net Profit after TaxesNet Sales

  Year 31/03/20

0731/03/2008

31/03/2009

31/03/2010

31/03/2011

A Net Profit after taxes 2711.72 2489.76 -195.80 3397.41 7663.31

B Net Sales 36303.09 40427.91 35393.08 39792.51 55755.48

  Ratio (a/b*100) 7.47 6.16 -0.55 8.54 13.74

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%

7.42%6.16%

-0.55%

8.54%

13.74%

Net Profit Ratio

Years

Net

Pro

fit R

atics

ANALYSIS & INTERPRETATION:

It can be analyzed from above chart that net profit had a decline trend till the

year 2008-09 where it has been at its lowest point of -0.55% which was due to

hike in the prices of fuel and raw materials and recession era in the global

market. But the company then improved its performance and raised its profits

up to 13.74% in the year 2010-11 which was due to high demand of RSWM

products in market and efficient management of working capital requirements.

FIXED ASSETS TURNOVER RATIO

It shows the relationship between the fixed assets and the net sales. It gives the

amount of net sales in rupee of fixed assets. Mathematically it is given as

Fixed Assets Turnover Ratio = Net Sales Fixed Assets

 

Year 31/03/2007 31/03/2008 31/03/2009 31/03/2010 31/03/2011

ANet

Sales 36303.09 40427.91 35393.08 39792.51 55755.48

B

Net Fixed Assets 13597.61 13280.13 12191.09 11179.52 12704.27

 Ratio (a/b) 2.67 3.04 2.90 3.56 4.39

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11012345

2.67 3.04 2.93.56

4.39

Fixed Assets Turnover Ratio

Years

Fixe

d A

sse

ts t

urn

ove

r R

atics

ANALYSIS & INTERPRETATION:

It can be seen from the figures that management of RSWM has tried to improve

every year for the better usage of fixed assets. It can be seen that the graph have

shown upward sign only, no downfall have been recorded in last five years

except a small deflection in the year 2008-09. Hence it shows the efficiency of

finance department of RSWM. Currently the ratio is of 4.39:1 and in last five

years graph is on up trend for Banswara Unit.

CASH RETURN ON ASSETS RATIO

It is quite similar to the above ratio. The only change is that here the cash from

the operating activities are compared with the total assets of organization. The

effectiveness is measurement of cash management compares to the total assets

of the company. Here cash from operating activities is net profit + deprecation.

Mathematically it is given as

Cash Return on Assets Ratio = Cash from Operating Activities Total Assets

  Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

a

Cash from

operating activities 36776.00 40516.72 35626.14 39946.01 56002.56

bTotal Assets 23114.76 22754.02 20096.44 21610.48 33306.58

 Ratio (a/b) 1.59 1.78 1.77 1.85 1.68

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 111.41.51.61.71.81.9

1.59

1.78 1.771.85

1.68

Cash Return on Assets Ratio

Years

Cash

Ret

urn

on A

sset

s Ra

tics

ANALYSIS & INTERPRETATION:

Graphs of Cash return on assets ratio of RSWM have steeply fallen down in the

financial year 2008 – 09 and 2010-11. It can be seen that it has gone down from

1.85 to 1.68 and there is constant downfall no sign of improvement is seen. It

may due to inefficiency of growth business performance as per their investment.

It should be in increasing trend and for this total assets should be increased in

proportion with cash from operating activities.

RETURN ON EQUITY (%)

The return on equity shows the amount of net profit with respect to the net

worth of the company. Here net worth contains the total amount of share

holder’s fund i.e. equity share capital + reserves and surplus. This ratio helps in

comparing the performance of the company for two or more financial year and

also shows strength of the company in returns to its share holder.

Mathematically it is give as

Return on Equity Ratio = Net PAT Net Worth

  Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

a Net PAT 2711.72 2489.76 -195.80 3397.41 7663.31

bNet

Worth 7771.25 8066.02 3730.22 6628.66 9842.95

 Ratio

(a/b*100) 34.89 30.87 -5.25 51.25 77.86

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

38.89%30.87%

-5.25%

51.25%

77.86%

Return on Equity Ratio

Years

Retu

rn o

n Eq

uity

Rati

cs

ANALYSIS & INTERPRETATION:

Well it can be seen that RSWM’s performance has fallen down in the period of

2006-07 to 2008-09. The reasons are changes in government policies, increase

in various cost of raw materials, transportation, fuel cost etc. for various units.

Even market conditions have affected the business of RSWM too, as growth

business requires heavy capital investments and then to they are not able to

perform well due to economy crisis. Though RSWM’s didn’t had good

performance in those last three financial years but on the basis of good support

and faith of share holders and ability of stability to survive in worse to worse

conditions with the support of HEAD OFFICE the company managed well to

increase the ratio from -5.25% to 77.86% in the past five years which shows

the efficiency of the departments.

RETURN ON INVESTMENTS (%)

The return on investment shows the amount of net profit earned by the company

with respect to total amount invested as assets. It shows the profitability of the

company and measures effectiveness of decision making of the finance manager

and also shows stability of the company. It is also known as ROACE.

Mathematically it is given as

Return on Investment Ratio = PBIT * 100Total Assets

  Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

a PBIT 3951.89 3581.08 878.09 4062.23 9056.44

bTotal Assets 23114.76 22754.02 20096.44 21610.48 33306.58

 Ratio

(a/b*100) 17.10 15.74 4.37 18.80 27.19

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 110.00%5.00%

10.00%15.00%20.00%25.00%30.00%

17.10% 15.74%

4.37%

18.80%

27.19%

Return on Investment Ratio

Years

Re

turn

on

Inve

stm

en

t R

atics

ANALYSIS & INTERPRETATION:

It is seen that profits of RSWM have decreased in the years 2007-08 and 2008-

09. The reasons are highly competitive market with high cost of materials,

labor, transport etc. along with unfavorable government policies, poor condition

of market and economy has also played a vital role for such poor performance.

Reduction in profit margin of RSWM’s so that it can sale its product at more

cheaper and competitive rate in market from others to sustain its customers. But

the condition now improved a lot and RSWM has managed to bring up its

profits by 122.94% from the previous year’s profit due to improved market

condition, low prices of raw material, efficiency to top management and all

other coordinating departments etc.

WORKING CAPITAL TURNOVER RATIO

This ratio indicates the extent of working capital turned over in achieving sales of the firm. It also shows how efficiently firm or finance manager of a company is using capital or resources effectively for meeting the requirement of working capital.

Working Capital Turnover Ratio = Net Sales Working Capital

  Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

A Net Sales 36303.09 40427.91 35393.08 39792.51 55755.48

B

Net Working Capital 5028.05 8014.31 4315.54 7476.24 6796.55

 Ratio (a/b) 7.22 5.04 8.20 5.32 8.20

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 110

5

10

7.225.04

8.25.32

8.2

Working Capital Turnover Ratio

Years

Wor

king

Cap

ital

Turn

over

Rati

cs

ANALYSIS & INTERPRETATION:

From the above figures and graph it can be said that RSWM’s various units

finance managers and their departments have shown their efficiency and their

work from time to time, though working capital turnover ratio graph has shown

fluctuating figures from year to year. It shows how much concern of finance

department has for working capital. They have managed things were effectively

for every unit. RSWM has used working capital as per their needs and almost

accurate estimation and never blocked the fund unnecessarily. They have never

gone below 2:1 ratio up till date from last 5 years. Hence it shows their strength

and stability for usage and allocation of funds for its diversified business

portfolio.

DEBTOR’S COLLECTION PERIOD

Debtor’s collection period indicates days required to collect amount of credit

sales from debtors. This represents the number of days; the funds are blocked in

debtors for a firm sells goods for cash and credit. Credit is used as a marketing

tool by a number of companies. So a firm must manage its credit policy well.

Debtors Collection Period = Debtors * 365 Sales

Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

aAverage Debtors 2326.41 2534.46 2556.50 2593.86 4123.82

b Sales 36303.09 40427.91 35393.08 39792.51 55755.48

Ratio

(a/b*365) 23 23 26 24 27

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 1120

22

24

26

28

23 23

26

24

27

Debtors Collection Period

Years

De

bto

rs C

olle

ctio

n R

atics

ANALYSIS & INTERPRETATION:

RSWM’s has extended its collection period more in terms of days as per the

need of market in recent trends. From above it can be seen that as the year

passed days also increased and RSWM’s needs of working capital also

increased due to blocking money for around 27 days from 23 days previously,

then to they have very low bad debts. Finance & Accounts department has

worked very crucially on the extension of debtor’s collection period along with

marketing department. Hence the application of funds for working capital is

mainly done on this part along with inventories. The average collection period

or UGAI period is of 30 days given by RSWM’s various units to its premium

and major customers.

(Note: - As the figure of credit sales was not available, it has been assumed here

that all the sales are credit sales.)

CREDITOR’S DEFERRAL PERIOD

Creditor’s deferral period indicates the duration for which the suppliers provide

credit facility. This duration should be long enough so that company can

convert the raw material into finished goods and sell it in the market. Because

the main source of revenue for any organization is its sales. Purchase is equal to

Raw Material Consumption + Closing Stock of Raw Material-Opening Stock of

Raw Material. Hence the days are:

Creditors Collection Period = Creditors * 365 Purchase

Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

AAverage

Creditors 92.68 86.28 99.42 222.25 575.62B Purchase 22600.65 28482.94 21675.46 28680.39 44131.51

Ratio

(a/b*365) 1 1 2 3 5

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 110123456

1 12

3

5

Creditors Collection Period

Years

Cred

itor

s Co

llecti

on R

atics

ANALYSIS & INTERPRETATION:

The average deferral period of creditors is 2.5 days which represents its strong

liquidity position to pay its obligations within 10 days for various units of

RSWM. This ratio has gone down up till 3 days in 2008-09 year. In this year it

is 5 days currently in 2010 - 11 which shows the creditability of RSWM’s in

market and its strong position financial wise. The fluctuation is due to changes

in trends of market and creditor’s policy for giving credit and per agreement

dead. Such credit from creditor’s works as a use full source of working capital

for RSWM and it reduce burden for that year. It also reflects the reputation of

RSWM’s various units holds in market as creditors provide more service by

lending more days of credit to make more healthy terms and relation with

RSWM’s units for having business.

(Note: - As the figure of credit purchase was not available, it has been assumed

here that total purchases are credit purchase.)

INVENTORY TURNOVER RATIO

The Inventory Turnover ratio indicates the movement of average stock holding

of each item of material in relation of its consumption during accounting period.

Average stock is equal to opening stock + closing stock divided by 2 for that

year. Calculated days are as follows:

Inventory Turnover Ratio = Average Stock * 365 Cost of Material

  Year 31/03/2007 31/03/2008 31/03/200

931/03/2010 31/03/2011

A

Cost of Goods Sold 33098.83 38425.10 35386.40 36851.28 49385.46

BAverage

Stock 4489.56 2710.13 3640.49 3398.21 9055.08

 Ratio

(b/a*365) 50 26 38 34 67

2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 110

20406080

5026

38 34

67

Inventory Turn over Days

Years

Inve

ntor

y T

urn

ove

r Ra

tic

ANALYSIS & INTERPRETATION:

It can be said that RSWM on an average has inventory turnover within 75 days.

RSWM has high intensive manufacturing units like synthetic yarn, cotton yarn,

etc. which work 24 *7 for whole year. The raw material required for various

products are fetched from domestic market which require min.5 days after

giving order for procurement. They always try to minimize its days and always

try to block its fund as less as it can be possible and to minimize the application

of funds for working capital. They work accordingly so that they never get

shortfall of materials and do not suffer loss by shutting down plants or various

units due to such reasons.

ESTIMATION FOR NEEDS OF WORKING CAPITAL

The most appropriate method of calculated the working capital needs of a firm

is the concept of operating cycle. However, a number of other methods may be

used to determine working capital needs in practice.

Current assets holding period: to determine working capital requirements on

the basis of average holding period of current assets and related them to costs

based on the company’s experience in the previous years. This method is

essentially based on the operating cycle concept.

Ratio or Percentage of sales: It is a traditional and simple method of

determining the level of working capital and its components. In this method

working capital is determined on the basis of past experience. If over the years

the relationship may be taken as a base for determining the working capital for

future.

Ratio of fixed investment: To estimate working capital requirements as a

percentage of fixed investment.

Regression analysis method: It is useful statistical technique applied for

forecasting working capital relationship between sales and working capital and

its various components in the past years. The method of least squares is used in

this regard.

SUGGESTION AND FINDINGS

LIMITATIONS AND PROBLEMS FACED

Various information regarding unit is not shared in the report due to

maintaining secrecy of the company and following their terms and

regulation.

Various information regarding unit was also not shared with trainee by

company due to their rules, regulation and policies.

Working Capital is wider concept and it requires more time for learning

each and every aspect of it. Hence there was time constraint too.

Unfamiliarity with culture and department of the company was also

becoming a hurdle for producing efficient output for trainee.

Trainee had less time for practicing regarding the learning of ERP at the

time of training.

CONCLUSION

From the above report, I can conclude that at present peoples and connected

companies are 99% satisfied with RSWM Ltd. They are well known in market

for their business like Grey Yarn, Cotton Yarn, Dyed Yarn, Graphite

Electrodes, etc.

Any change in working capital will have an effect on business’s cash flows. A

positive change in working capital indicates that the business has paid out cash

for e.g. in purchasing or converting inventory, paying creditors etc. Hence an

increase in working capital will have a negative effect on the business’s cash

holding. However a negative change in working capital indicates lower funds to

pay off short term liabilities (current liabilities) which may have bad

repercussions to the future of the company.

Managing Working Capital is one of the pioneer’s and role-playing part of the

company. RSWM Ltd. manages its working capital very efficiently for its

business. Each & every component of working capital is dealt with expertise

and experience of the finance & accounting department. The procedure is very

simple for estimating working capital requirement. Predetermined norms are

applied wherever they are applicable. Mainly working capital management is

the function of finance department but many other departments like production,

purchase & marketing are involved in this procedure indirectly.Being the part

and unit of LNJ GROUP also follows the main company norms and terms for

calculation for accounting of its working capital.

Hence this training helped me a lot to know the importance and function of

working capital and its component. Here I was able to relate what I had read in

the books and learnt in class rooms. It is essential for a person to know about

the sources, application and needs of working capital for business in real life if

one will going to specialize in the field of finance and going to work for a

company or as entrepreneur. I also got a big opportunity to work in ERP

environment. I also got value able tips and guidance about how to use ERP for

increasing one’s performance, accuracy and speed towards work.

BIBLIOGRAPHY

Text References

Financial Management I.M. Pandey

Financial Management Ravi .M. Kishor

Management Accounting and Financial Analysis

Board of Studies, The Institute of Charted Accountants of India

Journals:-

Annual Reports of RSWM Ltd. for the years:

RSWM: 2009 – 10, 2010 – 11, 2011-2012

Revised Marketing Policy

Web References:-

www.rswm.in

www.scribd.in

www.lnjbhilwara.com