A project report based on the

ANALYSIS OF WORKING CAPITAL REQUIREMENTS IN THE CURRENT MARKET SCENARIO

BY MADHUMITA JAYAGOPAL BBA- 3RD YEAR BIYANI GIRLS COLLEGE JAIPUR

ABSTRACT

The project titled Analysis Of Working Capital Requirements in the current market scenario aims at understanding and analyzing the Working Capital TLT( Structure of line the plant, plant a Pondicherry transmission towers)

manufacturing unit of Larsen & Toubro Limited (L&T). Working capital management comprises of four major parts Inventory management, Receivables management, Payable Management and Cash management. There are a number of tools available for a proper working capital management. Most of them are studied as a part of the project. As a part of inventory management, various inventory management techniques are studied. Most of these are being implemented in the plant (like ABC Analysis, JIT, EOQ etc). Even those tools, which are not practically implemented (like Reorder Point, Safety Stock etc) are studied. These methods, along with their working and importance, are studied in detail. As far as receivables management is concerned, Credit Terms, Credit Policy, and Collection Policy and Procedure are understood, giving special focus on how they are being implemented practically.

ACKNOWLEDGEMENT
This project report bears the imprint of many persons. I would like to express my sincere gratitude to Mr. Sandeep for giving me his guidance and help in carrying out my project. I am also thankful to Mr. Ganesh TLT ECC plant head Pondicherry for useful suggestions and important

contribution. They have always been kind enough to provide all kinds of assistance and encouragement. I would like to express my gratitude to my Project supervisor Mr. G.N. Gaur who has given me lot of insight and helped me in learning new things and helped me in the completion of the project. Working on this project was an exposure to corporate environment. It gave a learning experience and helped me learn about corporate finance and its components. I am

thankful and acknowledge all those who helped me and put aside their precious time in ordered to help me complete the project successfully.

CONTENTS

COMPANY PROFILE INTRODUCTION AND RESEARCH METHODOLOGY CONCEPT OF WORKING CAPITAL WORKING CAPITAL CYCLE

OVER ASSESSMENT AND UNDER ASSESSMENT OF WORKING CAPITAL WORKING CAPITAL IN CURRENT MARKET SCENARIO FACTORS AFFECTING WORKING CAPITAL

 WORKING CAPITAL LEVEL INVENTORY MANAGEMENT CASH MANAGEMENT RECEIVABLES MANAGEMENT PAYABLES MANAGEMENT CONCLUSION BIBLIOGRAPHY

COMPANY PROFILE The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry.

Henning Larsen

Soren Kristian Holck-Toubro (27.02.1906 4.3.1982) -

(4.7.1907 - 27.7.2003)

Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity. Larsen & Toubro Limited (L&T) is a technology, engineering,

construction and manufacturing company. It is one of the largest and most respected companies in India's private sector. More than seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision

EARLY DAYS Henning Holck-Larsen and Soren Kristian Toubro, schoolmates in Denmark, would not have dreamt, as they were learning about India in history classes that they would, one day, create history in that land. In 1938, the two friends decided to forgo the comforts of

working in Europe, and started their own operation in India. All they had was a dream. And the courage to dare. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected.

THE JOURNEY In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass. In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for marketing earthmoving equipment. At the end of the war, large numbers of war-surplus Caterpillar equipment were available at attractive prices, but the finances required were beyond the capacity of the partners. This prompted them to raise additional equity capital, and on

7th February 1946, Larsen & Toubro Private Limited was

Independence and the subsequent demand for technology and expertise offered L&T the opportunity to consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in Powai. Today, Powai stands as a tribute to the vision of the men who transformed this uninhabitable swamp into a manufacturing landmark. EXPANDING HORIZONS By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had become one of the Top-25 Indian companies. In 1976, Holck-Larsen was awarded the Magsaysay Award for International Understanding in recognition of his contribution to India's industrial development. He retired as Chairman in 1978. In the decades that followed, the company grew into an engineering major under the guidance of leaders like N. M. Desai, S.R. Subramaniam, U. V. Rao, S. D. Kulkarni and A. M. Naik.

Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence.

COMPANYS CONNECTIONS

EDRC ( Drawings) Contracts FACTORY Clients and CRM

Steel (Raw materials)

L&T is one of the leading companies in transmission tower lines. Its major competitors are KEC, Kalpaduru and Jyoti.

Introduction Types of Research Methodology

Objective of study Scope and limitation of the study Introduction: Research is the systematic process of collecting and analyzing information (data) in order to increase our understanding of the phenomenon about which we are concerned or interested. Research is systemic quest of undiscovered knowledge. Therefore the discovery and creation of knowledge is the heart of the research. It is a never ending process. Discoveries and creations lead to new discoveries and new creation. Types of research methodology: In most of the cases, the data is collected on the spot from the persons involved in the different processes. As far as possible, I have tried to collect data by myself. Apart from selfexperimenting and observing, I constantly interacted with various employees of the Company and gathered useful information on related matters, which were used in the report as well as for my personal knowledge.

Various books and internet sites, including that of L&T itself, have also helped me a lot in collecting data and understanding concepts.

Objective of the Study: Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company cannot earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis 1. To study the working capital management of L&T(ECC) Construction and Engineering works, Pondicherry 2.. To study the working capital components such as receivables accounts, cash management, Inventory position. 3.. To study the way and means of working capital finance of the L&T(ECC) Construction and Engineering works, Pondicherry 4.. To estimate the working capital requirement L&T(ECC) Construction and Engineering works, Pondicherry. 5.. To study the operating and cash cycle of the company.

SCOPE: The report comprises of various suggestions, regarding the proper management of the working capital, at each and every

step of the processes that are taking place at the Pondicherry factory. Suggestions for improving the overall efficiency of the plant, by improving the working capital structure of the plant, have been provided. This is be done by suggesting ideas to improve inventory management, receivables management and cash management processes; separately, as well as collectively.

LIMITATIONS: The report covers the practices followed at one plant of the company, so the study that is being carried, may be useful for just one factory, and not for others, as there may be difference in the business module from one factory to another. Therefore, a generalization of this report, to judge the efficiency of L&T Limited as a whole, cannot be done. In addition, the project -span of 9-weeks, was insufficient for understanding, and analyzing the working capital structure of a plant completely. Apart from this, the suggestions being made in this report may or may not be practically applicable in the all types of industries.

WORKING CAPITAL: CONCEPT What is Working Capital? Working capital is the cash needed to pay for the day- to- day operations of the business. In simple words it is the difference between current assets and current liabilities. The

management of the working capital is equally important as the management of long-term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without (i) (ii) (iii) (iv) Adequate supply of raw materials for processing; Cash to pay for wages, power and other costs; Creating a stock of finished goods to feed the market demand regularly; and, The ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a business. Working Capital = Current Assets Current Liabilities

It can be explained with the help of the diagram below..

CURRENT ASSET LESS CURRENT LIABILITIES

Stock, Debtors, Cash and Investments

Trade Creditors, Taxation, Dividends

and Short term loans

Objective:
Objective of the firm is to maximize the shareholders wealth. In its endeavour to do so, a firm should earn sufficient return from their operations. Earning a steady amount of profit requires successful bid activity but the completed projects cannot be realized instantaneously. So there is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against the project done. Therefore sufficient working capital is necessary to sustain bidding activity. Technically this is called operating cycle. The Operating Cycle and Working Capital Needs

The working Capital requirement of firm depends, to a great extent upon the operating cycle of the firm. The operating cycle may be defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization. The length and nature of the operating cycle may differ from one firm to another depending upon the size and nature of the firm. In case of manufacturing concern, this series starts from procurement of raw materials and ending with the sales

realization of finished goods. There is a time gap between happening of the first event and happening of the last event. This time gap is called the operating cycle.

Working capital Cycle

Cash Creditors

Debtors

Raw material

Value Addition Finished Goods

Working Expenses

Value Addition Work in Process

Thus, the operating cycle of a firm consists of the time required for the completion of the chronological sequence of some or all of the following: i. ii. iii. iv. Procurement of raw materials and services. Conversion of raw materials into work-in-progress. Conversion of work-in-progress into finished goods. Sale of finished goods (cash or credit).

v.

Conversion of receivables into cash.

Assessment of working capital The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous. CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to nonavailability of working capital. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilisation of fixed assets may not be achieved due to non-availability of the working capital.

 The business may fail to honour its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, overassessment of working capital also has its own dangers. CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency.

 Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimise profit. WORKING CAPITAL MANAGEMENT: AN OVERVIEW Management of working capital plays a very important role in the success or failure of an organization. If the organization has inadequate amount of working capital it may face the problem of liquidity. If it has excess amount of working capital circulating in the business it may pose serious consequences as the excess cash is being accumulated rather than being used for investment in profitable ventures. Working capital management consists of the following: 1. Inventory management 2. Cash and Receivables management 3. Payables management.

WORKING CAPITAL REQUIREMENTS IN THE CURRENT MARKET SCENARIO

A)

The

relevance

of

Working

Capital

in

the

present

economy For young economies, the implications are as follows. 1. In young economies the first industries to develop are those with low or negative Working Capital % to sales. Negative Working Capital is where the organisation uses supplier credit or customer Prepayments to fund their day to day needs. Banks and financial services, retailers, distribution, payments industries with cash signature of sales or advance printers). on contract (e.g.

Organisations with negative Working Capital use the money from their customers with which to invest and to pay suppliers.

2. Competition is fiercest among industries with low or negative Working Capital / sales % figures. Financial entry barriers are lower and these industries are easier to expand. However profit margins are often lower because of the competition (but not always!) and the failure rate among such industries among developed countries is usually higher.

3. Banks are attracted to industries with low or negative Working Capital / sales % figures as cash and profits are earned more quickly.

4. Entrepreneurs are attracted to industries with low or negative Working Capital % figures.

5. The concept applies equally to state enterprises and nonprofit making organisations. If cash and profits are generated more quickly, new titles can be commissioned sooner, staff and suppliers paid promptly. Bank interest is reduced.

6. Where producers are dominant, their customers will have to accept higher levels of Working Capital. Where customers are dominant, the producers have to accept a greater burden. may In have some a young policy economies, of holding the key government

organisations in the state sector or as majority owned state enterprises rather than encouraging a free-for-all enterprise policy.

As the Recession Bites - Working Capital is Vital Most businesses like to plan ahead mainly focusing on setting targets and monitoring performance for sales growth, cost

control and profit improvement, however the Management of Working Capital is often missed from the plan. In these times of credit crisis, trying to monitor and improve sales and profit performance may be difficult and suddenly Working Capital becomes vital. Yes, it is still important to control costs, but if the business is experiencing falling demand for its products and services, or pressure to lower prices, then Cash is King and the importance of control over working capital (stock levels, customer debts, amounts owed to suppliers and bank facilities) comes into sharp focus . It is seen that In such difficult times strong management of working capital can make the difference between success and failure, particularly with the tightening credit lines available from the banks. Even a profitable company can struggle to survive if the working capital is out of control.

STOCK LEVELS Reducing stock requires careful analysis to identify slowmoving / surplus items and attempt to turn those into cash. At the same time re-order levels need to be reviewed to see whether certain lines can be reduced or discontinued could a Just-in-Time policy be adopted? Care is needed here to ensure that the business can still react to customer demands and not get caught without stock and lose the trade. CUSTOMERS DEBTS

Tightening up on credit control and customer payment terms also needs careful consideration and is unlikely to be resolved overnight. It is important to handle this steadily, systematically and sensitively to avoid losing customers. However there is a point when slow payers may become uneconomical if profit margins are being eroded by the cost of the money outstanding, the time and effort to collect it or both. PAYING SUPPLIERS Finally the possible impact of slightly relaxing the time taken to settle suppliers invoices needs to be considered. Deferring payment for too long may cause undesirable reactions from suppliers they may perceive you to be a poor credit risk and reduce your permitted order levels, or consider stopping supply. This could cause a problem when trying to accommodate your own customers on time and force you to pay higher (non-discounted) terms to obtain the supplies.

ITS A BALANCING ACT Strong Working Capital Management can have a dramatic effect on the cashflow of a business, but behind it lies some careful planning and control to achieve the best results in short it is a Balancing Act and businesses need to take time to control and manage their working capital to help survive in these difficult trading conditions.

Importance

of

working

capital

Some time, If creditors demands their money from company, at this time company's high working capital saves company from this situation . You know that selling of current assets are easy in small period of time but Company can not sell their fixed assets with in small period of time. So, If Company have sufficient working capital , Company can easily pay off the creditors and create his reputation in market . But If a company have zero working capital and then company can not pay creditors in emergency time and either company becomes bankrupt or takes loan at higher rate of Interest . Positive working capital enables also to pay day to day expenses like wages, salaries, overheads and other operating expenses. Because sufficient working capital can not only pay maturity liabilities but also outstanding liabilities without any more delay. One of advantages of positive working capital that Company can do every risky work without any tension of self security. Factors affecting working capital The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below:

i. 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.

ii. 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. iii. 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. iv. 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. v. 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.

vi. Growth and Expansion Growth and expansion in the volume of business results in enhancement of the 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.

vii. 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.

viii. 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 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. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion.

Working Capital Level

The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firms profitability, as idle investment earns nothing.

On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet its current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.

Optimal level of working capital is that level where company is capable to pay day to day expenses and company has enough cash to buy the stocks in case if it does not receive money from debtors on the time. This level is achieved by thinking and using the techniques of working capital management. We all know that both low level or over level of working capital is harmful for development of business. If company has not enough cash to repay its liability, it will create the risk

of solvency and liquidity and liquidation.

company

may

go

for

In case, company has over working capital, it will be misuse of money because that money is not gaining any earning and its opportunity cost will suffer by shareholders and ultimately it will decrease the value of share in share market.

So, as finance manager, you should try to create equilibrium or optimal or optimum level of working capital.

WORKING CAPITAL LEVEL OF L&T (TLT) Pondy

MARCH- 2011 Value- L MARCH- 2010 Value- L YTD MARCH- 2009 Value- L Qnty- FTM YTD MT 1068 5749 2618 8476 445 3159 965 2362 527 1444 2305 6642 1782 1866 401 2078 6197 2619 197 2416 1704 5126 2611 805 156 1180 6635 9350 4674 1028 265 2890

Parameters Qnty- FTM YTD Qnty- FTM MT Debtors Stock Steel 3311 Billets 4573 Zinc 264 WIP 1790 753 4596 1416 1611 241 983 1405 6156 1850 1496 357 1996 MT

Others

345

459

451

515

373

493

Total stock OCA Gross WC Vendor credit OCL Advances Net WC

9938 9938

5349 951 6300

7562 883 8445

14698 6817 721 14698 7538 4598 236 2704

8947 1387

11428

6830 1758 8588 1288 168 0

15985 1881 17866 161 87 98 17618

10334 11428 2308 195 3 7831 11482

10719 3654 252 11 9938 -4671 129 200 4662 14698

7132

Inventory Management 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 minimised. 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. In financial view, inventory defined as the sum of the value of raw material and supplies, including spares, semi-processed material or work in progress and finished goods. The nature of inventory is largely depending upon the type of operation carried on. It is possible to reduce the inventory to a certain level without affecting production and sales, by using simple inventory planning and controlling technique. The reduction in excessive inventories carries a favourable impact on the

companys profitability. Maintaining inventories involves tying up of the companys funds and incurrence of storage and handling cost. There are three components: Raw material, Work in progress; and finished goods involved in inventory management.

Objectives of Inventory management a. To ensure a continuous supply of raw materials to facilitate uninterrupted production. b. To maintain sufficient stock of raw materials in periods of short supply and anticipate price changes. c. To control inventory investment by maintaining

optimum Inventory. d. To minimize investment in inventory and to ensure maximum turnover of inventory in an accounting period. e. To ensure stocking of relevant materials in adequate quantities and to ensure that unwanted or slow- moving items and/or non-moving items do not pile up. f. To minimize inventory carrying costs in business- both ordering cost and carrying cost.

g. To

eliminate

waste

and

delays

in

the

process

of

manufacturing at all stages so as to reduce inventory pile up. h. To ensure adequate and timely supply of finished goods to the market through proper distribution.

Cost of holding Inventory Every firm maintains some stock of raw materials, workin-progress and finished goods depending upon the requirement and other features of the firm. It is

benefited, by holding inventory but there is cost involved with it. had these cost not there, there would not have been any problem of inventory management and every firm would have maintained higher and higher level of inventories

Ordering Cost- The cost associated with the acquisition or ordering of inventory is known as ordering cost. Firms have to place order with suppliers to replenish inventory of raw materials. Such expenses involved are referred to as ordering cost. The ordering cost may have fixed component which is not affected by the order size; and a variable component which changes with the order size.

 Carrying Cost: The very fact that the items are required to be kept in stock means additional expenditure to the organization. The

different elements of costs involved in holding inventory are as follows: (a) Interest on capital / cost of capital / opportunity costs (b) Obsolescence and depreciation (c) The cost of storage, handling and stock verification (d) Insurance Costs Total Cost The total cost associated with inventory is the sum of ordering and carrying cost i.e.

Total cost= Carrying Cost+ Ordering Cost

Techniques used for inventory management The finance department of every organization aims at maintaining an optimum level of inventory inorder to maximize the owners wealth. There are various tools for effective inventory management. The tool depends upon the type of inventory, namely materials, work-in-progress or finished goods. some of these tools have an impact not only on inventory but on whole structure of the organization. They help in reducing cost and improving the efficiency of organization as a whole.

ABC Analysis This is done to solve in classification problem. The most is

important

thing

inventory

control

management

classification of different types of inventories to determine the type and control required for each. The ABC analysis is based on the assumption that same degree of control should not be exercised on all items of inventory. The ABC analysis classifies various inventory items into three sets of groups of priority and allocates managerial efforts in proportion of the priority. The most important items are classified as class A , those of

intermediate importance are classified as class B and the remaining items are classified as class C.

The

financial

Manager

should

monitor

different

items

belonging to different groups in that order of priority. Utmost attention is required for class A items, followed by items in class B and then items in class C.

This is done based on the experience That 10% of items in the inventory accounts for 70% of consumption in value so they are classified as A class items

20% of items in the inventory account for 20% of consumption in value so they are classified as B class items

70% of the items in the inventory accounts for 10% of consumption in value so they are classified as C class items.

No Class Items (%) A B C Total 10 20 70 100

Of Inventory Value (%)

70 20 10 100

Table :- ABC Analysis

Benefits Of ABC analysis It serves as a tool for classification for inventory.

Each item can be given appropriate attention as per classification.

Limitations of ABC analysis This system suffers from major drawback. An item of inventory may not be very expensive, but may be very

critical to production process and/ or may not be easily available; still it will be classified under group C. It would require serious attention but due to this classification, it will receive less attention. Similarly a not very important

component may receive extra attention then it deserves . In either case it is detrimental to the growth of the company. This is a serious limitation of ABC analysis.

Practical Implementation ABC analysis is strictly followed in L&T. It keeps an eye on those items which are more crucial for production process than others, such items are given due attention so that there is neither an excess nor deficit of such materials. On the other hand there is not much to worry about class B and class C items. Economic Order Quantity Model: This is to solve order quantity problem. After ABC analysis we get to know which item deserves how much attention. The next Problem is to determine the lot size in which a particular item of inventory will be required. The importance of effective inventory management is directly related to size of the

inventory. A firm should neither place too large or too small orders. The inventory management basically focuses on maintaining an optimum level of inventory in order to minimize the cost attached with different inventory levels. The optimum level of inventory is known as Economic Order Quantity (EOQ) or Economic lot size. This refers to that quantity per order, which ensures that total of carrying and ordering cost is minimum. The approach to determine EOQ is based on the following assumptions: The total usage of particular item for a given period (usually a year) is known with certainty and the usage rate is even throughout the year. There is no time gap between placing an order getting its supply The cost per order of an item is constant and the cost of carrying inventory is also fixed and is given as a percentage of average value of inventory. There are only two costs associated with the inventory, and these are the cost of ordering and the cost of carrying the inventory. and

 The formula for estimating EOQ is:

EOQ= (2C*O)/I

Where, A = annual requirement of a particular material in units or numbers Or Kgs O = Ordering cost per order C = carrying cost per unit

Benefits of EOQ

It makes sure that there is neither an excess nor deficit of inventory.

It saves cost as it saves carrying and ordering cost. It also results in strong relationship with vendors. It results in saving of time.

Reorder point is that level of inventory at which an order should be placed for replenishing the current stock of inventory. It may be defined as level of inventory when fresh order should equal be to placed the for procuring order

additional

inventory

economic

quantity. It is the inventory level which is equal to consumption during the lead time.

Safety stock: To overcome unexpected situations

The EOQ and the reorder point have some assumptions, which are not possible practically. For instance, the demand for inventory is like to fluctuate from time to time. The demand may exceed the anticipated level. Similarly, the receipt of inventory from the suppliers may be delayed beyond the expected lead time. The delay may be due to strikes, floods, transportation, and other bottlenecks. To avoid such undesirable situations safety stock is maintained. Safety Stock may be defined as the minimum additional inventory to serve as a safety margin or buffer or cushion to meet an unexpected increase in usage resulting from an unusually high demand and/or an uncontrollable late receipt of incoming inventory.

Benefits of Safety Stock

It is useful as it makes sure that even after reorder point is passed, the plant is able to maintain its immediate demand.

It acts as a buffer. It is an effective tool to minimize shortage cost.

Just in Time Concept: The basic philosophy behind JIT is that the firm should keep minimum level of inventory on hand relying on suppliers to furnish stock just in time as and when required. This is in direct contrast to the traditional inventory philosophy which emphasizes keeping sufficient levels of safety stocks to ensure that production will not be interrupted. Thus JIT system benefits in two ways: By reducing the ordering cost. This is attempted by locating inventories supplies in convenient locations. By reducing the safety stock . This is attempted by developing a strong relationship with suppliers and setting up restocking strategies that cut time.

RAW MATERIALS

WORK IN PROGRESS

FINISHED GOODS

L&T mainly deals with procurement of steel and conversion to galvanized tower parts. Galvanizing is a process of coating steel members with zinc.

The process of

galvanizing involves the process of dipping

steel into pure zinc to get the finished product after processing for sale and export purposes.

The following processes takes place in manufacturing: 1. Procurement of raw materials. 2. Cutting, punching and numbering of steel takes place. 3. Then comes the semi finished goods inspection. 4. Then the steel members are galvanized using zinc. 5. The finished goods are in hand 6. In the final stage the finished goods thus realized are sent to various client end or project sites.

Cash Management
Cash is the most liquid current asset. It is of vital importance to the daily operations of business. While the proportion of assets held in the form of cash is very small, its efficient management is crucial to the solvency of the business. Therefore, planning cash and controlling its use are very important tasks. It is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e. inventory and receivables get eventually converted into cash. This clearly underlines the significance and essence of cash management. Cash can be defined in many ways, its not only the money in hand or bank, it is much more than that.

Cash includes: Currency Cheques Drafts Demand deposits Marketable securities Time deposits

NEED FOR LIQUIDITY MANAGEMENT (CASH) Cash, of all types, acts as a reserve pool of liquidity that provides cash quickly, as and when needed. They also provide a short-term investment outlet for excess cash and are also useful for meeting planned outflows of funds. The major reasons of keeping cash are: It is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e. inventory and receivables get eventually converted into cash. This clearly underlines management. the significance and essence of cash

Cash can be defined in many ways, its not only the money in hand or bank, it is much more than that.

Transaction motive this refers to the holding of cash to meet routine cash requirements Precautionary motive these refer to the cash balances held in reserve for random and unforeseen fluctuations in cash flows Speculative motive it refers to the desire of a firm to take advantage of opportunities which present

themselves at unexpected moments.

BENEFITS OF CASH MANAGEMENT: Some of the major benefits of cash management are: a. To prevent insolvency or bankruptcy arising out of inability of a firm to meet its obligations. b. The relationship with bank is not strained. c. It helps in fostering good relations with trade creditors and suppliers of raw materials, as prompt payment may help their own cash management.

d. A cash discount can be availed if payment is made within the due date. e. It leads to a strong credit rating f. To take advantage of favorable business opportunities that may be available periodically. g. The firm can meet unanticipated cash expenditure within a minimum of strain during emergencies (strikes, fire, new market strategy by competitor etc.)

Cash Budget Cash budget basically incorporates estimates of future inflows and outflows f cash over a projected short period of time which may usually be a year ,half or a quarter year. Effective cash management is facilitated if he cash budget is further broken down into month, week or even on daily basis. There are two components of cash budget (i) cash inflows and (ii) cash outflows. The main sources for these flows are given here under:

Cash Inflows (a) Cash sales (b) Cash received from debtors (c) Cash received from loans, deposits, etc (d) Cash receipt of other revenue income (e) Cash received from sale of investments or assets.

Cash Outflows (a) Cash purchases (b) Cash payment to creditors (c) Cash payment for other revenue expenditure (d) Cash payment for assets creation (e) Cash payment for withdrawals.

A suggestive format for Cash Budget is given below:

Cash Budget of M/s

Particulars January March

Estimated cash inflows ----------------------

Months Feburary

I. Total cash inflows

Estimated cash outflows ----------------------

II. Total cash outflows

III. Opening cash balance

IV. Add/Deduct surplus/Deficit during the month (III) V. Closing cash balance (IIIIV)

VI. Minimum level of cash Balance VII. Estimated excesses or shortfall ofcash (VVI)

RECEIVABLES MANAGEMENT

The term Receivables is defined as debt owed to the firm by customers arising from the sale of goods and services in the ordinary course of business. Receivables are a type of loan extended by the seller to the buyer to facilitate purchase process. When companies sell their products they sometimes demand cash on delivery, but in most cases they sell goods on credit and allow a delay in payment. Most of the businesses today sell goods and services on credit and it takes times for the receivables to realize. Hence Receivables management forms an important part of working capital management. Need of Receivables The sale of goods on credit is an essential part of working capital management. Credit sale are treated as marketing tool to aid sale of goods. As a marketing tool, they are intended to promote sales and increase profits. Hence Receivables management assumes significance in the context of overall working capital management. Objective of Receivables management In a competitive environment, sometimes the firms are compelled and sometimes the firms desire to adopt liberal credit policies for pushing up the sales. Higher credit sales at more liberal terms will no doubt increase the profits of the

firm, but simultaneously also increases the risk of bad debts as well as result in more and more funds blocking in the receivables. Thus, the objective of receivables management is matching the cost of increasing sales with the benefits arising out of increases sales with the objective of maximizing the return on investments of the firm. Credit Policy A firm makes significant investment by extending credit to its customers and thus requires a suitable and effective credit policy to control The the basic level of decision total to investment be made in the receivables. regarding

receivables is to decide how much credit be extended to a customer and on what terms. This is what is known as credit policy. The credit policy may be defined as set of parameters and principles that govern the extension of credit to its customers. This requires the determination of i) Credit standard ii) Credit terms The Credit Standards: When a firm sells on credit, it takes a risk about the paying capacity of the customers. Therefore to be on safer side, it must set credit standards which should be applied in selecting customers for credit sales. The following points should be noted while setting the credit standard for a firm: Effect of particular standard on sales volume.

 Effect of a particular standard on the total bad debts of the firm Effect of a particular standard on the total collection cost. Credit Terms: It refers to set of stipulations under which the credit is extended to the customers. The credit terms specify how the credit will be offered, including the length of the period for which the credit will be offered, the interest rate on the credit and the cost of default. Credit period: It refers to the length of time over which the customers are allowed to delay payments. Lengthening the credit period increases the sales by attracting more and more customers, whereas squeezing the credit period has the distracting effect. The firm must consider the cost involved in increasing the credit period which will result in increase in the investment in receivables. L&T has a credit period of 180 days for which it pays 13% interest and gives 90 days for its debtors

Control of Receivables Once the credit has been extended to a customer as per credit policy, the next important step in the management of receivables is the control of receivables.

The things to be taken into consideration are:The collection Procedure: The firm should have a built in system under which customer may be reminded a few days in advance about the bill becoming due. The collection procedure of the firm should neither be too lenient nor too strict. A strict collection policy can affect the goodwill and damage the growth prospects of the sales. If the firm has a lenient credit policy, the customers with a natural tendency towards slow payment may become even slower to settle his accounts. Thus, the objective of collection procedure and policies should be to speed up the slow paying customers and reduce the incidents of bad debts. L&T uses the help of ICICI bank and SBI bank in collecting amount from its debtors. 2. Monitoring of Receivables:The financial mangers should keep a watch on the credit worthiness of all the individual customers as well as the total credit policy of the firm. A common method to monitor receivables is the collection Period or number of days outstanding receivables. Average collection period= Average Receivables * 365 Credit sales per day

.Accounting Ratios: Two accounting ratios may be calculated in particular may be calculated to find out the changing pattern of receivables. These are i) Receivables Turnover Ratio ii) Average collection Period Both the ratio should be calculated on a continuous basis to monitor the receivables. The ratios so calculated for the firm must then be compared with the standard for that industry or with past ratios of the same firm.

PAYABLE MANAGEMENT

As the firm sells goods on credit it may also procure/purchase raw material and finished goods on credit basis. The payment for these purchases may be postponed for the period of credit allowed by suppliers. So, the supplier of the firm in fact provides working capital to the firm for the credit period. Since, Working Capital is the difference between current assets and current liabilities and creditors form an important part of current liabilities. So, a firm can save a considerable amount if these creditors are managed. The extent, to which the payment to these current liabilities is delayed, the firm gets the availability of funds for that period. So, a part of the funds required to maintain current assets is provided by current liabilities and the firm will be required to invest the funds in only those current assets which are not financed by current liabilities. So, the aim of the firms is to realize its debtors as fast as possible but too pay its creditors as late as possible.

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following:

Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people?

Are purchase quantities geared to demand forecasts? Do you use order quantities which take account of stockholding and purchasing costs? Do you know the cost to the company of carrying stock ? Do you have alternative sources of supply ? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier.

How many of your suppliers have a returns policy ? Are you in a position to pass on cost increases quickly through price increases to your customers ? If a supplier of goods or services lets you down can you charge back the cost of the delay ? Can you arrange (with confidence !) to have delivery of supplies staggered or on a just-in-time basis ?

Conclusion

The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.

Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance.

Bibliography
BOOKS Financial Management By M.R. Agarwal

WEBSITES www.larsentoubro.com www.scribd.com

Mission: L&T Precision Corporation's mission is to increase our share of the precision metal fabrication market and be a leader in this industry. The Philosophy: L&T Precision Corporation's philosophy is to achieve excellence in our relations with... Customers By consistently producing satisfaction through a high level of service, product quality, and on-time delivery at an acceptable price/value relationship.

Employees

By providing equal opportunity, a climate conducive to a high degree of personal development, a high degree of economic satisfaction, and an opportunity for personal involvement in the company's endeavors. By dealing fairly and ensuring mutual respect through full disclosure of the objectives and relationships. By recognizing our social and local community responsibility and encouraging positive involvement.

Vendors

Social Environment

BOARD OF DIRECTORS
A. M. Naik Chairman & Managing Director J. P. Nayak Whole-time Director & President (Machinery & Industrial Products) Y. M. Deosthalee Whole-time Director & Chief Financial Officer K. Venkataramanan Whole-time Director & President (Engineering & Construction Projects) R. N. Mukhija Whole-time Director & President (Electrical & Electronics) V. K. Magapu Whole-time Director & Senior Executive Vice President (IT & Technology Services) K. V. Rangaswami Whole-time Director & Senior Executive Vice President (Construction) M. V. Kotwal Whole-time Director & Senior Executive Vice President (Heavy Engineering) S. Rajgopal Nominee UTI B. P. Deshmukh Nominee GIC Kranti Sinha Nominee LIC S. N. Talwar Non-Executive Director M. M. Chitale Non-Executive Director Lt. Gen. Surinder Nath (Retd.) Non-Executive Director U. Sundararajan Non-Executive Director A. K. Shukla Nominee LIC COMPANY SECRETARY N. Hariharan REGISTERED OFFICE : L&T House, Ballard Estate, Mumbai 400 001

Conclusion:
Working capital management is important aspect of financial management. The study of working capital management of ARSS Infrastructure Projects ltd. has revealed that the current ratio was as per the standard industrial practice but the liquidity position of the

company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiently and effectively. Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. Positive working capital indicates that company has the ability of payments of short terms liabilities. Current assets are more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. The company has very high amount of inventories as 370.10 crore in the year 2010. It means that companys efficiency in bidding is very less. The inventory holding period of the company is continuously increasing because of the increase in the work in progress conversion period. The company takes three month in changing raw materials into finished goods. The working capital leverage is in negative from previous three years of the company which shows the inefficiency of the management as the return on capital employed is very less compared to its total asset employed. The liquidity ratio of the company is in excellent position as the current assets and the quick current assets both are very high. The company can pay its current liabilities and quick current liabilities. The current asset turnover ratio of the years 2007-08, 2008-09, 2009-10 are low. It means that companys ability to put its current assets into sales are very low.

Recommendation:
Recommendation can be use by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend; Company should maintain its current assets for meeting its short term obligation.

Suggestions:
Page 51 The following suggestions are only for the beneficiary of the company. These are totally based according to my point of view after examine the project; Company should reduce the inventory holding period with use of zero inventory concepts.

APPENDICES
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