PROJECT REPORT

ON
"WORKING CAPITAL MANAGEMENT IN HCL "WORKING CAPITAL MANAGEMENT IN HCL
Repot is submitted in partial fulfillment of the requirement
for the award of degree
Of

2011201!
"nder the super#ision of$ %"&'(TTE) &*$
+++++ ,20111!-
Roll no.

1

TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION
1.1 Introdut!on o" t#$ Or%&n!'&t!on( L!t$r&tur$ r$)!$*.
1.+ O,-$t!)$. o" t#$ Pro-$t.
1./ N$$d o" t#$ 0ro-$t
1.1 So0$ &nd L!2!t&t!on o" t#$ .tud3.
CHAPTER + RESEARCH METHODOLOG4
+.1 R$.$&r# D$.!%n
+.+ D&t& Co55$t!on Sour$.
+./ D&t& o55$t!on M$t#od
CHAPTER / FINDING ANAL4SIS
/.1 Con$0t o" *or6!n% &0!t&5
/.+ F!nd!n% 7 An&53.!.
CHAPTER 1 CONCLUSION AND
RECOMMENDATION
Con5u.!on
R$o22$nd&t!on
CHAPTER 8 BIBLIOGRAPH4
B!,5!o%r&0#3.
2

C/0PTER 1 1
(NTRO)"CT(ON
3

1.1 INTRODUCTION OF THE ORGANI9ATION
HCL Infosystems Ltd. Is one of the pioneers in the It market, with its origin in 1976.
the company has een in the forefront in introd!cing new techno"ogies and
so"!tions. It has drawn its strength since 3# years of e$perience in hand"ing the e%er
changing I& scenario, strong c!stomer re"ationships, ai"ity to pro%ide the c!tting
edge techno"ogy at est %a"!e for money and on the top of it, an e$ce""ent ser%ice
and s!pport infrastr!ct!re. &oday HCL is the co!ntry's premier information
ena"ing company. It offers one stop shop con%enience to its di%erse c!stomers
ha%ing a di%erse set of re(!irements.
)ince, "ast 3# years HCL has een contin!ing the re"ationship with the c!stomer,
therey increasing c!stomer confidence in it.
T#$ .tr$n%t#. o" t#$ o20&n3 &r$:
*i"ity to !nderstand c!stomers !siness and offer right techno"ogy.
Long standing re"ationship with c!stomers.
+est %a"!e for money offerings.
T$#no5o%3 L$&d$r.#!0:
,

HCL Info systems is known to haringer of techno"ogy in the co!ntry. &he company
has done techno"ogy introd!ctions in the co!ntry either thro!gh research and
de%e"opment or thro!gh partnerships with wor"d techno"ogy "eaders. -sing own
research and de%e"opment the company has.
Created own -/I0 and 12+3) capai"ity 4in'5#s6.
2e%e"oped firewa""s for enterprise and persona" system sec!rity.
La!nched own range of enterprise storage prod!cts.
La!nched own range of enterprise networking prod!cts.
HCL Info systems Ltd. has initiated se%era" pioneer techno"ogies. )ome of
them are as !nder.
.Co!ntry's first desktop 7C8 +!sy +ee in 1959.
Co!ntry's first home 7C8 +eansta"k in 1999
Co!ntry's first 7enti!m I: ased 7C at s! ,#k price point.
Co!ntry's first media centre 7C.
9

/C2
(N3O%*%TE'%
2T).
6

;ISION AND MISSION
;ISION STATEMENT
;&ogether we create the enterprises of tomorrow;
MISSION STATEMENT
;&o pro%ide wor"d8c"ass information techno"ogy so"!tions and ser%ices to ena"e o!r
c!stomers to ser%e their c!stomers etter;
<UALIT4 POLIC4
;<e de"i%er defect8free prod!cts, ser%ices and so"!tions to meet the re(!irements of
o!r e$terna" and interna" c!stomers, the first time, e%ery time;
OUR OB=ECTI;ES
OUR MANAGEMENT OB=ECTI;ES
&o f!e" initiati%e and foster acti%ity y a""owing indi%id!a"s freedom of action and
inno%ation in attaining defined o=ecti%es.
OUR PEOPLE OB=ECTI;ES
&o he"p peop"e in HCL Info systems Ltd. share in the company>s s!ccesses,
which they make possi"e? to pro%ide =o sec!rity ased on their performance? to
recogni@e their indi%id!a" achie%ements? and he"p them gain a sense of satisfaction
and accomp"ishment from their work.
CORE ;ALUES
<e sha"" !pho"d the dignity of the indi%id!a"
<e sha"" honor a"" commitments
<e sha"" e committed to A!a"ity, Inno%ation and Browth in e%ery endea%or
<e sha"" e responsi"e corporate citi@ens
7

HISTOR4 OF THE COMPAN4
HCL Info systems Ltd is one of the pioneers in the Indian I& market, with its origins
in 1976. Cor o%er (!arter of a cent!ry, we ha%e de%e"oped and imp"emented so"!tions
for m!"tip"e market segments, across a range of techno"ogies in India. <e ha%e een
in the forefront in introd!cing new techno"ogies and so"!tions. &he high"ights of the
HCL saga are s!mmari@ed e"ow.
4 E A
R
H I G H L I G H T S
1>?@
8 Co!ndation of the Company "aid
8 Introd!ces microcomp!ter8ased programma"e ca"c!"ators with wide
acceptance in the scientific D ed!cation comm!nity
1>??
8 La!nch of the first microcomp!ter8ased commercia" comp!ter with a
1E3 8ased +asic interpreter
8 -na%ai"ai"ity of programming ski""s with c!stomers res!"ts in HCL
de%e"oping espoke app"ications for their c!stomers
1>?A
8 Initiation of app"ication de%e"opment in di%erse segments s!ch as
te$ti"es, s!gar, paper, cement , transport
1>AB
8 Cormation of Car Fast Comp!ters Ltd., a pioneer in the )ingapore I&
market, for )I 4)ystem Integration6 so"!tions
1>A1
8 )oftware F$port 2i%ision formed at Chennai to s!pport the espoke
app"ication de%e"opment needs of )ingapore
1>A/
8 HCL "a!nches an aggressi%e ad%ertisement campaign with the theme >
e%en a typist can operate> to make the !sage of comp!ters pop!"ar in the
)3F 4)ma"" G 3edi!m Fnterprises6 segment. &his proposition in%o"%ed
men!8ased app"ications for the first time, to increase ease of operations.
&he response to the ad%ertisement was phenomena".
8 HCL de%e"ops specia" program generators to speed !p the de%e"opment
of app"ications
1>A8 8 +ank trade !nions a""ow comp!teri@ation in anks. Howe%er, a
comp!ter can on"y r!n one app"ication s!ch as )a%ings +ank, C!rrent
acco!nt, Loans etc.
8 HCL sets !p core team to de%e"op the re(!ired software 8 *L73
4*d%anced Ledger 7osting 3achines6. &he team !ses re!sa"e code to
red!ce de%e"opment efforts and prod!ce more re"ia"e code. *L73
ecomes the "argest se""ing software prod!ct in Indian anks
8 HCL designs and "a!nches -ni$8 ased comp!ters and I+3 7C c"ones
5

8 HCL promotes 3rd party 7C app"ications nationa""y
1>A@
8 Hona" offices of anks and genera" ins!rance companies adopt
comp!teri@ation
8 7!rchase specifications demand the a%ai"ai"ity of 12+3) prod!cts on
the s!pp"ied so"!tion 4-nify, Erac"e6. HCL arranges for s!ch prod!cts to
e ported to its p"atform.
8 HCL assists c!stomers to migrate from f"at8fi"e ased systems to
12+3)
1>>1
8 HCL enters into a =oint %ent!re with Hew"ett 7ackard
8 H7 assists HCL to introd!ce new ser%ices. )ystems Integration, I&
cons!"ting, packaged s!pport ser%ices 4asic "ine, team "ine6
8 HCL esta"ishes a 1esponse Centre for H7 prod!cts, which is connected
to the H7 1esponse Centre in )ingapore.
8 &here is a %ertica" segment foc!s on &e"ecom, 3an!fact!ring and
Cinancia" )er%ices
1>>1
8 HCL ac(!ires and e$ec!tes the first offshore pro=ect from I+3 &hai"and
8 HCL sets !p core gro!p to define software de%e"opment methodo"ogies
1>>8
8 )tarts e$ec!tion of Information )ystem 7"anning pro=ects
8 F$ec!tion pro=ects for Bermany and *!stra"ia
8 +egins He"p desk ser%ices
1>>@
8 )ets !p the )&7 4 )oftware &echno"ogy 7ark 6 at Chennai to e$ec!te
software pro=ects for internationa" c!stomers
8 +ecomes nationa" integration partner for )*7
1>>?
8 Io"kata and /oida )&7s set !p
8 HCL !ys ack H7 stake in HCL Hew"ett 7ackard
1>>A 8 Chennai and Coi7B23tore de%e"opment faci"ities get I)E 9##1
certification
9

1>>>
8 *c(!ires and sets !p f!""y owned s!sidiaries in -)* and -I
8 )ets !p f!""y owned s!sidiary in *!stra"ia
8 HCL ties !p with +road %ision as an integration partner
+BBB
8 )ets !p f!""y owned s!sidiary in *!stra"ia
8 Chennai and Coi7B23tore de%e"opment faci"ities get )FI Le%e" ,
certification
8 +ags *ward for &op 7C :endor In India
8 +ecomes the 1st I& Company to e recommended for "atest %ersion of
I)E 9##1 . 2###
8 +ags 3*I&>s *ward for +!siness F$ce""ence
8 1ated as /o. 1 I& Bro!p in India
+BB1
8La!nched 7enti!m I: 7Cs at e"ow 1s ,#,###
8I2C rated HCL Info systems as /o. 1 2esktop 7C Company of 2##1
+BB+
82ec"ared as &op 7C :endor y 2ata(!est
8HCL Info systems G )!n 3icrosystems enters into a Fnterprise
2istri!tion *greement
8 1ea"igns !sinesses, increasing foc!s on domestic I&, Comm!nications
G Imaging prod!cts, so"!tions G re"ated ser%ices
+BB/
8 +ecame the first %endor to register sa"es of 9#,### 7Cs in a (!arter
8 Cirst Indian company to e n!mero !no in the commercia" 7C market
8 Fnters into partnership with *32
8 La!nched Home 7C for 1s 19,999
8 HCL Info systems> Info )tr!ct!re )er%ices 2i%ision recei%ed I)E
9##1.2### certification
8 La!nches Infiniti 3oi"e 2esktops on Inte" 7"atform
8 La!nched Infiniti 7Cs, <orkstations G )er%ers on *32 p"atform
1#

+BB1
8 1st to anno!nce 7C price c!t in India, post d!ty red!ction, offers
F@eeee at 1s. 1799#
8 I2C India82A C!stomer )atisfaction *!dit rates HCL as /o.1 +rand in
2esktop 7Cs
8 3aintains /o.1 position in the 2esktop 7C segment for year 2##3
8 Fnters into partnership with 7ort <ise to s!pport G distri!te sec!rity
G :7/ so"!tions in India
8 7artners with 3icrosoft G Inte" to "a!nch +eansta"k /eo 7C
8 +ecomes the 1st company to cross 1 "ac !nit mi"estone in the Indian
2esktop 7C market
8 7artners with -nion +ank to make 7Cs more afforda"e, introd!ces
"owest e%er F3I for 7C in India
8 La!nched 172 systems to o%ercome power pro"em for 7C !sers
8 1egisters a market share of 13.7J to ecome /o.1 2esktop 7C
company for year 2##,
8 Crosses the "andmark of K 1 i""ion in re%en!e in =!st nine months
11

2004
La!nch of HCL 7C for India, a f!""y f!nctiona" 7C priced at 1s.
9,99#D8
1ated as the L/o.1 2esktop 7C' company y I2C India M
2ata(!est
L+est Fmp"oyer 2##9' with fi%e star ratings y I2C India M
2ata(!est
L&he 3ost C!stomer 1esponsi%e Company 2##9'
I& Hardware Category y the Fconomic &imes 8 *%aya B"oa"
Connect
L7th IF&F MCorporate *ward 2##9' for performance e$ce""ence
in the fie"d of Comp!ters G &e"ecomm!nication )ystems y IF&F
L+est +hoomi +rand 2##9' y 36# maga@ine.
In 7c Category
In the LC2 3onitor Category
LIndia's /o.1 %endor' for sa"e of *3 si@e &oshia 3!"ti
C!nctiona" 2e%ices for the year L#,8L#9 y I2C
&oshia L)!per *ward 2##9' towards !siness e$ce""ence in
distri!tion of &oshia 3!"tif!nctiona" 7rod!cts
)trategic 7artners in F$ce""ence *wards y Infoc!s Corporation
for pro=ectors
L3ost :a"!ed +!siness 7artner' *ward for pro=ectors y Infoc!s
Corporation in 2##9
2005 La!nches +eansta"k 2##7 co""ection M a range of fo!r new HCL
+eansta"k 2igi"ife ena"ers, +eansta"k /ano, +eansta"k )"im,
+eansta"k Lifesty"e G +eansta"k 2ominator
N79,### machines prod!ced in a sing"e month
Fnters into a partnership with &oshia to he"p them e$pand their
retai" presence in India y !n%ei"ing Lshop&oshia'
/okia Corporation and HCL Infosystems anno!nce a "ong term
12

distri!tion strategy
-n%ei"s India's first segment specific range of noteooks' rand
LHCL Leaptops'
)howcases Comp!ter )o"!tions for the r!ra" market in India
Cirst in India to "a!nch the new generation of high performance
ser%er p"atforms powered y Inte" 2!a" M Core 0eon 9###
processor
Corms a strategic partnership with *pp"e to pro%ide sa"es G
ser%ice s!pport for i7ods in India
1ated as n!mer one 2esktop 7C Company y I2C, si$th year
s!ccessi%e"y
)!stains its Commercia" 2esktop 7C Leadership for the fifth
consec!ti%e year
La!nches India's first high performance Fnterprise )er%er
7"atform powered y d!a" core Inte" titani!m processors
Creates 2!a" Core 0eon )er%er at a price point of 1s. ,3,9##D8
Comp"etes 3# years in India
In association with &he 3!sic *cademy, Chennai rings LHCL
Concert )eries' to the city
Fnter into partnership with Casio
Fsta"ishes its man!fact!ring faci"ity in -ttarancha"
L&op 9# fastest growing &echno"ogy Companies in India' G
L&op 9## fastest Browing &echno"ogy Companies in *sia 7acific'
y 2e"oitte G &o!che
2006
2007
2##7
+reaks the one terayte storage arrier in comp!ters y
"a!nching India's first Lone terayte' persona" comp!ter
Introd!ces eco8efficient /oteook 7Cs comp"ying with
13

1oH) directi%e
-n%ei"s initiati%e to create ind!stry ready IC& professiona"s
M "a!nches HCL Career 2e%e"opment centers
Iodak and HCL ink agreement to distri!te digita" cameras
in India
La!nches India's first m!"ti"ing!a" 7E) printer LHCL )tar' M
&)7 7##, designed e$c"!si%e"y for the needs of r!ra" retai"ers
-n%ei"s enterprise c"ass 16 core ser%er M India's first ser%er
with 16 comp!ting cores in a 78inch 4,!6 form factor
La!nches a new range of eco8efficient desktop 7Cs,
comp"ying with 1oH) directi%e
La!nches /F&3*0 s!ite of networking prod!cts G
so"!tions e$panding its portfo"io for emerging enterprises
*nno!nces L36# 2egrees &echno"ogy 1efresh 7rogram' M
new initiati%e aimed at capt!ring "atest trends in techno"ogy
G de"i%ering them to Indian enterprises
*nno!nces "a!nch of its workstation 2##5 series for 3C*2
G 2CC professiona"s
I2+I se"ects HCL as )I partner for 1## ranches IC&
infrastr!ct!re ro""o!
2##5
-n%ei"s the f!t!re of persona" comp!ting M ne$t generation,
!"tra porta"e, s! 1s. 1,,##D8 "aptops for the first time in
India.
Connect India8*frica to imp"ement I& infrastr!ct!re for
prestigio!s 7an8*frican e8network pro=ect for &e"e8ed!cation
G &e"e8medicine.
La!nches ne$t generation L2atacentre in a +o$' M simp"ified
I& infrastr!ct!re with power8packed "ade ser%ers in one
system that integrates storage, comp!ting G networking
*nno!nces a pioneering initiati%e in the India IC& sector to
f!rther strengthen its C!stomer Care )er%ices
Introd!ces L)afe )tate' M a 1##J s!sidiary to pro%ide
1,

)ystem Integration )o"!tions for sec!rity G s!r%ei""ance
Introd!ces LLaptop )eries 39' M e$ce""ent therma"s, Fnergy
)tar ,.# comp"iance and imprint designs c!stomi@ed for
Indian cons!mers
F(!ips 2e"hi 7o"ice with techno"ogy to fight crime
La!nches L3iLeap 3H #.,'
7artners with Fche"on to ring L)mart 3etering' to India M
impro%ing e"ectricity s!pp"y and red!cing energy theft are
key goa"s
Connect India8*frica to imp"ement I& infrastr!ct!re for
prestigio!s 7an8*frican e8network pro=ect for &e"e8ed!cation
G &e"e8medicine
)trengthens its +C)I system integration portfo"io y
ac(!iring a niche anking software prod!ct company
-n%ei"s the f!t!re of persona" comp!ting M ne$t generation,
!"tra porta"e, s! 1s. 1,,##D8 "aptops for the first time in
India
2008
2010 *warded L+est &e"ecom )!pport )er%ices Company' at the
9th /ationa" &e"ecom *ward y C3*I *ssociation of India.
HCL awarded F"ectronics Company of the Oear 2##9.
HCL Infosystems rated /o.1 Fmp"oyer y 2A8I2C 2##9
/okia Corporation anno!nces a =oint %ent!re with HCL
Infosystems to se"" moi"e %a"!e added ser%ices direct"y to
cons!mers in India
Iick8starts LBreen +ag' campaign to faci"itate e<aste
co""ection
+ags +)/L I& dea" M a system integration pro=ect worth 1s
2,# cr. for imp"ementation and s!pport
*nno!nces a tie8!p with Iorean ma=or /a!ti"!s Hyos!ng, to
pro%ide comp"ete *&3 so"!tions for Indian anks across the
co!ntry
19

<ins L2A. I2C +est Fmp"oyer *ward 2##9'

2011
2012 2#11
+ags the :*1India 2#11 award for L+est 7ro=ector 2L7
4Infoc!s6', L+est 7C Indian +rand' and L/o. 1 2istri!tor'.
<ins 22I's LBrow yo!r own Leaders' award for o%era""
management c!"t!re and effecti%eness of the organi@ation's
ta"ent management system.
>/o. 1 Fmp"oyer of the Oear' y 2A8C31 +est Fmp"oyer
)!r%ey M 2#11
<ins )koch 2igita" Inc"!sion *ward in the &echno"ogy in
)er%ice 2e"i%ery category for s!ccessf!" imp"ementation of
Ioh"ap!r 3!nicipa" Corporation e8Bo%ernance 7ro=ect
1ated /o. 2# in the Breat 7"ace to <ork )!r%ey
La!nches its new s"eek /e$t8Ben 3F &a"et, the 01
La!nches India's first +FF8)tar comp"iant "aptop
Cirst e%er HCL f"agship store "a!nched in 2e"hi8/C1
2#12
HCL 2esktops rated /o. 1 in the 2ata(!est Channe"s M
Cyer3edia 1esearch Channe" )atisfaction )!r%ey.
HCL Infosystems ranked /o.1 for I& )er%ices in 2A8C31
C)* 2#12
HCL 2igischoo" wins >+est I&C Fnae"ed Content for I 12
Fd!cation> at /ationa" Fd!cation *wards presented y )tar
/ews
HCL 2igicamp!s wins >+est &echno"ogy +ased )o"!tion for
Higher Fd!cation Instit!tes> at the /ationa" *wards
presented y )tar /ews
HCL Instit!te 3anagement )ystem awarded the >+est C"o!d
ased Fd!cation Instit!te 3anagement )ystem>, at the +8
)choo" F$ce""ence *wards 2#12
HCL Learning wins 7th eI/2I* P!ry *ward for the >+est
16

Epen and 2istance Learning 7ractices in Higher Fd!cation>
+agged the Q<inner *wardR for dri%ing Q*sha BrowthR at
the /okia I3F* 7artner Conference in +er"in
Ceat!red amo!ng the &op 1# +rands. 1anked o%er )ony,
*pp"e, Leno%o, *cer and &oshia in the Laptop category y
Fconomic &imes.
+agged 3ee )e%a *ward for F$ce""ence in 2e"i%ery from
the Bo%ernment of *ndhra 7radesh. HCL Infosystems was
awarded the honor for its o!tstanding contri!tion in the
s!ccessf!" imp"ementation of 3ee )e%a, an integrated
ser%ice de"i%ery initiati%e.
HCL 3y Fd!&a wins L+est &a"et 7ro%iders in Fd!cation'
*ward at the <or"d Fd!cation *wards 2#12

2019
HCL 2igischoo" wins Best Smart Classroom Solution
Provider at the prestigio!s )hiksha 1atan *ward 8 )tate
Fd!cation )!mmit 2#13
Effice *!tomation 4E*6 +!siness agged the )i"%er *ward for
&echnica" 7roficiency in Co"or Category at the 19th A!a"ity )er%ice
Campaign cond!cted y &oshia8*7*C among 29 participants from
%ario!s co!ntries.
+agged L7artner of the Oear *ward' for the *sia 7acific G Papan
region as part of C* &echno"ogies 7artner for Impact *wards, he"d
at the *nn!a" -ser Conference, C* <or"d >13 in Las :egas. HCL
Infosystems was honored for its commitment and e$pertise in
taking C* &echno"ogies so"!tions portfo"io to market, and its efforts
in dri%ing new contracts and !siness opport!nities.
+agged QCor0or&t$ C B$.t Go)$rn2$nt to C!t!'$n. DG+CE
In!t!&t!)$ o" t#$ 4$&rR award at the $CM&#&r&.#tr& Su22!t +B1/.
HCL Infosystems was awarded the honor for imp"ementing t!rnkey
IC& so"!tions in design, s!pp"y, insta""ation, a!tomation,
integration, and s!se(!ent maintenance of Ind!&F. "!r.t .t&t$Co"C
t#$C&rt Bord$r C#$6 Po.t DBCPE pro=ect !ndertaken y the
M&#&r&.#tr& Go)$rn2$nt.
17

+agged the prestigio!s Go5d$n P$&o6 Eo Inno)&t!on
A*&rd +B1/ for e/+* pro=ect d!ring the 18t# Wor5d Con%r$.. on
En)!ron2$nt M&n&%$2$nt .HCL was honored for pro%iding I&
)o"!tions to /ationa" +oard of *ccreditation which res!"ted in eco
inno%ation, cost sa%ing and transparency in the accreditation
process
*warded PC <u$.t B$.t IT I205$2$nt&t!on. o" t#$ 4$&r +B1/
!nder the category Pro-$t *!t# M&G!2u2 So!&5 I20&t "or
F!n&n!&5 In5u.!on 0ro-$t o" B&n6 o" B&rod&. &he pro=ect
aims at pro%iding easy access to afforda"e financia" ser%ices to
those who are depri%ed of it so far therey ringing the !nanked
and !nder anked %i""ages into the forma" financia" stream.
<on $INDIA Pu,5! S$tor Ent$r0r!.$. A*&rd +B1/ for the
pro=ect $Prour$2$nt ,3 Ind!&n R&!5*&3..HCL was honored for
a!tomating the tendering process of Indian 1ai"ways which
red!ced the proc!rement cyc"e time of materia" from 23 days to
instantaneo!s .
*warded PC <u$.t B$.t IT I205$2$nt&t!on. of the Oear 2#13
!nder the category B$.t Edu&t!on Pro-$t DS!5)$rE "or $NBA.
&he pro=ect has ro!ght comp"ete transparency and red!ced the
accreditation process time from 1.9 years to , months for higher
ed!cationa" instit!tions seeking accreditation

15

1 .+ OB=ECTI;E OF THE PRO=ECT
<orking capita" is synonymo!s with c!rrent assets. &here is no denying
the fact that working capita" is one of the most important too" in the hands of
the company for the s!ccessf!" operation of the !siness. It is imperati%e for
the finance manager to proper"y assess the f!t!re re(!irement of working
capita" in the company. Ieeping in the %iew this o=ecti%e in mind, the
company assigned me this cha""enging pro=ect of estimating the f!t!re needs
of working capita" of the company. &he pro=ect itse"f speaks for the
importance of the st!dy.
&o st!dy organi@ation's working capita" financia" mi$.
&o access the working capita" re(!irement.
&o know ao!t the "ength of operati%e cyc"e.
&o st!dy the financia" pattern of
&o st!dy the earning and payment of the organi@ation.
&o find c!rrent assets and c!rrent "iai"ities
&o know ao!t the optim!m maintaina"e.
&o st!dy the growth and performance
&o st!dy the inf"ow and o!tf"ow of f!nds.
&o "ocate weakness and s!ggest %ario!s s!ggestion.
O,-$t!)$ o" t#$ .tud3
19

Crom this pro=ect we ha%e a road know"edge on different aspects of
working capita" management. )ome of the aspects of working capita" management
are.
Concepts of working capita" management.
/eed of working capita".
&ypes of working capita" management.
Eperating cyc"e or working capita" cyc"e
Cactors affecting working capita" re(!irements.
:ario!s components of working capita" and hydro power p"ants.

1./ NEED OF THE PRO=ECT
*t HCL a s!stantia" part of the tota" assets are co%ered y c!rrent assets.
C!rrent assets form aro!nd 5#J of the tota" assets. Howe%er this co!"d e "ess
profita"e on the ass!mption that c!rrent assets generate "esser ret!rns as compared
to fi$ed assets.
+!t in today's competition it ecomes mandatory to keep "arge c!rrent assets
in form of in%entories so as to ens!re smooth prod!ction an e$ce""ent management
of these in%entories has to e maintained to strike a a"ance etween a"" the
in%entories re(!ired for the prod!ction.
)o, in order to manage a"" these in%entories and determine the in%estments in
each in%entories, the system ca"" for an e$ce""ent management of c!rrent assets
which is rea""y a to!gh =o as the amo!nt of in%entories re(!ired are "arge in
n!mer.
2#

Here comes the need of working capita" management or managing the
in%estments in c!rrent assets. &h!s in ig companies "ike HCL it is not easy at a"" to
imp"ement a good working capita" management as it demands indi%id!a" attention
on its different components.
)o, I ha%e een gi%en this topic to make an in8depth ana"ysis and detai"ed
st!dy to come o!t with a c"ear magnified %iew as to whether the management of
working capita" at HCL is so!nd or not.
21

1. 1 LIMITATIONS AND SCOPE OF THE STUD4:
&he topic working capita" management is itse"f a %ery %ast topic yet %ery
Important a"so. 2!e to time restraints it was not possi"e to st!dy in depth
in get know"edge what practices are fo""owed at HCL Info systems.
/e%erthe"ess, many facts and data are s!ch that they are not to e
disc"osed eca!se of the confidentia" nat!re of the same. Hence
eca!se of that I cannot e$press any opinions !pon %ario!s iss!es which
itse"f "imits the scope of my st!dy. Howe%er I ha%e tried to gi%e an
-nderstanding of <orking capita" management in as m!ch as detai" as
possi"e.
22

CHAPTER +
RESEARCH
METHODOLOG4
23

RESEARCH METHODOLOG4
3ethodo"ogy inc"!des the o%era"" research proced!res, which are fo""owed in the
research st!dy. &his inc"!des 1esearch design, the samp"ing proced!res, and the
data co""ection method and ana"ysis proced!res. &o road methodo"ogies can e
!sed to answer any research (!estion8e$perimenta" research and non8
e$perimenta" research. &he ma=or difference etween the two methodo"ogies
"ies in the contro" of e$traneo!s %aria"es y the inter%ention of the in%estigator
in the e$perimenta" research.
+.1 RESEARCH DESIGN
* research design is defined, as the specification of methods and
proced!res for ac(!iring the Information needed. It is a p"ant or organi@ing
framework for doing the st!dy and co""ecting the data. 2esigning a research p"an
re(!ires decisions a"" the data so!rces, research approaches, 1esearch instr!ments,
samp"ing p"an and contact methods.
1esearch design is main"y of fo""owing types. 8
1. F$p"oratory research.
2. 2escripti%e st!dies
3. Cas!a" st!dies
2,

EHPLORATOR4 RESEARCH
&he ma=or p!rposes of e$p"oratory st!dies are the identification of
pro"ems, the more precise Corm!"ation of pro"ems and the form!"ations of new
a"ternati%e co!rses of action. &he design of e$p"oratory st!dies is characteri@ed y a
great amo!nt of f"e$ii"ity and ad8hoc %eracity.
DESCRIPTI;E STUDIES
2escripti%e research in contrast to e$p"oratory research is marked y the
prior form!"ation of specific research A!estions. &he in%estigator a"ready knows a
s!stantia" amo!nt ao!t the research pro"em. 7erhaps as a 1es!"t of an
e$p"oratory st!dy, efore the pro=ect is initiated. 2escripti%e research is a"so
characteri@ed y a 7rep"anned and str!ct!red design.
CASUAL OR EHPERIMENTAL DESIGN
* cas!a" design in%estigates the ca!se and effect re"ationships etween
two or more %aria"es. &he hypothesis is tested and the e$periment is done. &here
are fo""owing types of cas!a" designs.
I. *fter on"y design
II. +efore after design
III. +efore after with contro" gro!p design
I:. Co!r gro!ps, si$ st!dies design
:. *fter on"y with contro" gro!p design.
:I. Cons!mer pane" design
:II. F$posit facto design
+.+ DATA COLLECTION SOURCES
29

Bo%ernment p!"ication
1eport committees
7ri%ate p!"ication
1esearch instit!te
3aga@ines
/ews paper artic"es
BE +./ DATA COLLECTION METHOD
PRIMAR4
SECONDAR4

2irect persona" Inter%iew
Indirect persona" Inter%iew
Information from correspondents Bo%t.p!"ication
3ai"ed (!estionnaire 1eport Committees G
Commissions
A!estion fi""ed y en!merators. 7ri%ate 7!"ication
1esearch Instit!te
26
Published Sources
-np!"ished )o!rces

PRIMAR4 DATA
&hese data are co""ected first time as origina" data. &he data is recorded as oser%ed
or enco!ntered. Fssentia""y they are raw materia"s. &hey may e comined, tota"ed
!t they ha%e not e$tensi%e"y een statistica""y processed. Cor e$amp"e, data
otained y the peop"es.
SECONDAR4 DATA
)o!rces of )econdary 2ata
Co""owing are the main so!rces of secondary data.
1. O""!!&5 Pu,5!&t!on.. 7!"ications of the HCL INFOS4STEM LTD. or
the y the corporate office of HCL INFOS4STEM LTD..
2. Pu,5!&t!on. R$5&t!n% to Tr&d$. 7!"ications of the trade associations,
stock e$change, trade !nion etc.
3. =ourn&5( N$*.0&0$r. $t.. )ome newspapersD Po!rna"s co""ect and p!"ish
their own data, e.g. Indian Po!rna" of economics, economist, Fconomic
&imes.
,. D&t& Co55$t$d ,3 Indu.tr3 A..o!&t!on.. Cor e$amp"e, data a%ai"a"e with
HCL INFOS4STEM LTD..
9. Un0u,5!.#$d D&t&. 2ata may e otained from se%era" companies,
organi@ations, working in the same areas. Cor e$amp"e, data on HCL
INFOS4STEM LTD. y maga@ines.
27

D&t& Co55$t!on M$t#od
&he fo""owing methods of data co""ection are genera""y !sed.
4i6 Eser%ation 3ethod
4ii6 7ersona" Inter%iew
4iii6 Case )t!dy 3ethod
O,.$r)&t!on M$t#od:
&his is the most common"y !sed method of data co""ection especia""y in st!dies
re"ating to eha%io!ra" sciences. *cc!rate watching and noting of phenomenon as
they occ!r in nat!re with regard to ca!se and effect or m!t!a" re"ation is ca""ed
oser%ation method of data co""ection.
C#&r&t$r!.t!. o" O,.$r)&t!on M$t#od &hese are as fo""ows.
1. D!r$t M$t#od: In oser%ation method data is co""ected thro!gh direct
contact with phenomenon !nder st!dy. In this method sensory organs
partic!"ar"y eye, ear, %oice are !sed.
R$Iu!r$. !nCd$0t# .tud3: In this method, the oser%er goes to the fie"d and
makes the st!dy of the phenomenon in an in8depth company to ac(!ire data.
Co55$t!on "o55o*. o,.$r)&t!on: In this method, the in%estigator first of a""
oser%es the things and then co""ects the data.
R$5&t!on.#!0 ,$t*$$n t#$ &u.$ &nd $""$t: Eser%ation method "eads to
de%e"opment of re"ationship etween the ca!se and effect of the e%ents.
S!$nt!"! 2$t#od "or o55$t!n% d$0$nd&,5$ d&t&: &his is the most
25

scientific method for co""ection of dependa"e data. Eser%ations are p"anned
and recorded systematica""y. &here sho!"d e checks and a"ances on this
methodo"ogy.
S$5$t!)$ &nd 0ur0o.$"u5 o55$t!on: &he oser%ations are made with definite
p!rpose. Co""ection of materia"s is done according to a partic!"ar p!rpose.
+. Int$r)!$* M$t#od
-nder this method of we co""ect data in HCL INFOS4STEM LTD. and face to
face contact with the persons from whom the information is to e otained
4known as informants6. &he inter%iewer asks them (!estions pertaining to
the s!r%ey and co""ects the desired information. &h!s, the we co""ect data
ao!t the working conditions of the workers of HCL INFOS4STEM LTD.? we
worked at HCL INFOS4STEM LTD. contact the workers and otain the
information. &he information otained are first hand or origina" in character.
CHARACTERISTICS OF INTER;IEW METHOD:
a6 It is c"ose contact or interaction inc"!ding con%ersation etween the manageria"
"e%e" and F$ec!ti%es of HCL INFOS4STEM LTD..
6 &he inter%iew we took in the HCL INFOS4STEM LTD., s!ch as knowing
the ideas and %iews of others.
/. C&.$ Stud3 M$t#od
Case st!dy method may e defined as sma"" inc"!si%e and intensi%e st!dy of an
indi%id!a" in which in%estigator rings to ear a"" his ski""s and methods or as a
systematic gathering of eno!gh information ao!t a person to permit one to
!nderstand how he or she f!nctions as !nit of society. &he case st!dy is a form of
(!a"itati%e ana"ysis in%o"%ing a %ery caref!" and comp"ete oser%ation of a person,
sit!ation or instit!tion.
29

Case st!dy is a method of e$p"oring and ana"y@ing !siness aspects of an
ind!stria" !nit, e%en entire ind!stry.
CHARACTERISTIC OF A CASE STUD4
&he important characteristics of case st!dy method are as !nder.
i6 Stud3 o" & un!t: &he case st!dy method st!dies a s!=ect matter which forms a
cohesi%e, who"e and may e treated as a !nit. &he !nit can e indi%id!a", a fami"y,
an instit!tion.
ii6 Int$n.!)$ or InCd$0t# .tud3: Case st!dy attempts a deep and detai"ed st!dy of
the !nit. It is a method of st!dy in depth rather than readth. It p"aces more
emphasis on the f!"" ana"ysis of a "imited n!mer of e%ents or conditions and their
inter8re"ations.
6i6 Kno*5$d%$ o" ,$#&)!our 0&tt$rn.: &he case st!dy method dea"s with oth
what and why of the s!=ect. It tries to descrie the comp"e$ eha%io!ra" pattern
of a !nit and ha%ing done this, tries to disco%er the factor which wi"" rationa""y
acco!nt for them. In rief, case st!dy method aims at description as we"" as
e$p"anation of the !nit it st!dies. It a"so e$p"ains the p"ace and ro"e of a !nit in its
s!rro!nding socia" mi"ie!.
i%6 T#$ .tud3 o" t#$ *#o5$ un!t: &he case st!dy method tries to percei%e the
!nitary forces of the s!=ect matter and organi@es
3#

C/0PTER 1 9
3(N)(N: 0N) )0T0
0N02*%(%
31

Con$0t o" *or6!n% &0!t&5
<orking Capita" 3anagement is concerned with pro"ems that arise in
attempting to manage the c!rrent assets, the c!rrent "iai"ities and the
interre"ationship that e$ist etween them. &he term c!rrent assets refer to those
assets which in ordinary co!rse of !siness can e, or wi"" e con%erted into cash
within one year witho!t !ndergoing a dimin!tion in %a"!e and witho!t disr!pting
the operations of the firm. &he ma=or c!rrent assets are cash, marketa"e sec!rities,
acco!nts recei%a"e and in%entory. C!rrent "iai"ities are those "iai"ities which are
intended, at their inception, to e paid in the ordinary co!rse of !siness, within a
year, o!t of c!rrent assets or earnings of the concern. &he asic c!rrent "iai"ities are
acco!nts paya"e, i""s paya"e, ank o%erdraft and o!tstanding e$penses. &he goa"
of <orking Capita" 3anagement is to manage the firm's c!rrent assets and c!rrent
"iai"ities in s!ch a way that a satisfactory "e%e" of <orking Capita" is maintained.
&his is so eca!se if the firm cannot maintain a satisfactory "e%e" of <orking
Capita", it is "ike"y to ecome inso"%ent and may e%en e forced into ankr!ptcy.
&he c!rrent assets sho!"d e "arge eno!gh to co%er its c!rrent "iai"ities in order to
ens!re a reasona"e margin of safety. /e%erthe"ess the "e%e" of c!rrent assets sho!"d
not e too high since in that case it wi"" affect the o%era"" profitai"ity of the firm.
&he interaction etween c!rrent assets and c!rrent "iai"ities is, therefore the main
theme of <orking Capita" 3anagement.
32

CONCEPT AND DEFINITIONS OF WORKING CAPITAL:
&here are two concepts of working capita" gross and net.
&he term gross working capita", a"so referred to as working capita", means
the tota" c!rrent assets.
&he term net working capita" is asica""y the difference etween c!rrent
assets and c!rrent "iai"ities. Ffficient working capita" management re(!ires that the
firm sho!"d operate with some amo!nt of net working capita", the e$act amo!nt
%arying from firm to firm and depending, among other things, on the nat!re of the
ind!stry. &he theoretica" =!stification for the !se of net working capita" is ased on
the premise that greater the margin y which the c!rrent assets co%er the short term
o"igations, the more is the ai"ity to pay o"igations when they ecome d!e for
payment. &he net working capita" is necessary eca!se cash o!tf"ows and inf"ows
do not coincide. &he cash o!tf"ows are re"ati%e"y predicta"e, howe%er cash inf"ows
are diffic!"t to predict. &he more predicta"e the cash inf"ows are, the "ess net
working capita" is re(!ired.
/et working capita" can a"ternati%e"y e defined as that portion of c!rrent
assets which is financed with "ong8term f!nds. )ince c!rrent "iai"ities represent
so!rces of short8term f!nds, as "ong as the c!rrent assets e$ceed the c!rrent
"iai"ities, the e$cess m!st e financed with "ong8term f!nds.
&he task of financia" manager in managing working capita" efficient"y is to
ens!re s!fficient "i(!idity in the operations of the enterprise. &he "i(!idity of a
!siness is meas!red y the firm's ai"ity to satisfy short8term o"igations as they
ecome d!e. &he three asic meas!res of a firm's o%era"" "i(!idity are i6 the c!rrent
ratio, ii6 the acid test ratio, and iii6 the net working capita".
&h!s the goa" of working capita" management is to manage the c!rrent assets
and "iai"ities in s!ch a way that an accepta"e "e%e" of net working capita" is
maintained.
33

TRADECOFF BETWEEN PROFITABILIT4 AND RISK:
&he "e%e" of net working capita" has a earing on profitai"ity as we"" as risk.
Hence in e%a"!ating firms net working capita" position an important consideration is
the trade8off etween profitai"ity and risk. 7rofitai"ity refers to the net profits and
risk refers to the proai"ity of eing inso"%ent so that the firm wi"" not e a"e to
meet its o"igations when they ecome d!e for payment.
DETERMINING FINANCING MIH:
Ene of the most important decisions in%o"%ed in the management of working
capita" is how c!rrent assets wi"" e financed. &here are road"y two so!rces from
which f!nds can e raised for asset financing. i6 short8term so!rces 4c!rrent
"iai"ities6 ii6 "ong8term so!rces, s!ch as share capita", "ong term orrowings,
interna""y generated reso!rces "ike retained earnings and so on. /ow what portion of
c!rrent assets sho!"d e financed y c!rrent "iai"ities and how m!ch y "ong8term
reso!rcesS
&here are asica""y three approaches to determine an appropriate financing
mi$. i6 Hedging approach 4or 3atching approach6 ii6 Conser%ati%e approach iii6
&rade8off etween these two.
3,

H$d%!n% A00ro&#:
<ith reference to appropriate financing mi$, the term hedging can e
defined as a process of matching mat!ring of dets with the mat!rities of financia"
needs. *s per this approach the mat!rity of the so!rces of f!nds sho!"d match the
nat!re of the assets to e financed. &his approach s!ggest that "ong8term f!nds
sho!"d e !sed to finance the fi$ed portion of c!rrent assets re(!irements whereas
the temporary re(!irements, that is, the seasona" %ariations o%er and ao%e the
permanent financing needs sho!"d e appropriate"y financed with short8term f!nds.
&his approach is a high profit high risk approach to determine an appropriate
financing mi$.
39
Short Short- -Term vs. Long Term vs. Long- -Term Term
Financing Financing
3inan;ing
'aturit<
0sset
'aturit<
%/ORTTER' 2ON:TER'
2ow
Ris=Profitabilit<
'oderate
Ris=Profitabilit<
'oderate
Ris=Profitabilit<
/igh
Ris=Profitabilit<
%/ORTTER'
,Temporary Temporary-
2ON:TER'
,Permanent Permanent-

36
Hedging (or Maturity
Hedging (or Maturity
Matching) Approach
Matching) Approach
0 method of finan;ing where ea;h asset would be offset with 0 method of finan;ing where ea;h asset would be offset with
a finan;ing instrument of the same appro>imate maturit<. a finan;ing instrument of the same appro>imate maturit<.
T('E
R
"
P
E
E
%

0
'
O
"
N
T
2ongterm finan;ing
Fixed assets Fixed assets
urrent assets! urrent assets!
%hortterm finan;ing??

Con.$r)&t!)$ A00ro&#:
&his approach s!ggests that the estimated re(!irements of tota" f!nds sho!"d
e met y "ong8term so!rces. &he !se of short8term so!rces sho!"d e restricted to
on"y emergency sit!ations or when there is an !ne$pected o!tf"ow of f!nds. &his
approach is high cost "ow risk approach to determine an appropriate financing mi$.
37
"is#s vs. osts Trade
"is#s vs. osts Trade
-
-
$%%
$%%
(onservative Approach)
(onservative Approach)
3irm ;an redu;e ris=s asso;iated with short 3irm ;an redu;e ris=s asso;iated with short term borrowing term borrowing
b< using a larger proportion of long b< using a larger proportion of long term finan;ing. term finan;ing.
T('E
R
"
P
E
E
%

0
'
O
"
N
T
2ongterm finan;ing
Fixed assets Fixed assets
urrent assets urrent assets
Short Short- -term %inancing term %inancing

Tr&d$Co"" ,$t*$$n t*o:
/either of the ao%e two approaches wo!"d ser%e the p!rpose of efficient
working capita" management eca!se of their e$treme nat!re. * trade8off etween
these two wo!"d gi%e an accepta"e financing strategy.
A%%r$..!)$ &00ro&#:
&his approach towards risk and profitai"ity is s!ch where the firm !ses tota"
short term orrowings for financing its working capita" needs. &his approach is %ery
risky and a"ways there is a chance of ankr!ptcy.
35

WORKING CAPITAL C4CLE:
&he term operating cyc"e refers to the "ength of time necessary to comp"ete the
fo""owing cyc"e of e%ents.
1. Con%ersion of cash into in%entory.
2. Con%ersion of in%entory into recei%a"es.
3. Con%ersion of recei%a"es into cash.
Cash f"ows in a cyc"e into, aro!nd and o!t of a !siness. It is the !siness>s
"ife "ood and e%ery manager>s primary task is to he"p keep it f"owing and to !se
the cash f"ow to generate profits. If a !siness is operating profita"y, then it
sho!"d, in theory, generate cash s!rp"!ses. If it doesn>t generate s!rp"!ses, the
!siness wi"" e%ent!a""y r!n o!t of cash and e$pire.
&he faster a !siness e$pands the more cash it wi"" need for working capita"
and in%estment. &he cheapest and est so!rces of cash e$ist as working capita"
right within !siness. Bood management of working capita" wi"" generate cash
wi"" he"p impro%e profits and red!ce risks. Ene m!st ear in mind that the cost of
pro%iding credit to c!stomers and ho"ding stocks can represent a s!stantia"
proportion of a firm>s tota" profits.
&here are two e"ements in the !siness cyc"e that asor cash 8 In)$ntor3
4stocks and work8in8progress6 and R$$!)&,5$. 4detors owing yo! money6. &he
main so!rces of cash are P&3&,5$. 4yo!r creditors6 and EIu!t3 &nd Lo&n..

39

Fach component of working capita" 4name"y in%entory, recei%a"es and
paya"es6 has two dimensions........ T!2$ ......... and Mon$3. <hen it comes to
managing working capita" M T!2$ !. Mon$3. If yo! can get money to mo%e faster
aro!nd the cyc"e 4e.g. co""ect monies d!e from detors more (!ick"y6 or red!ce the
amo!nt of money tied !p 4e.g. red!ce in%entory "e%e"s re"ati%e to sa"es6, the
!siness wi"" generate more cash or it wi"" need to orrow "ess money to f!nd
working capita". *s a conse(!ence, yo! co!"d red!ce the cost of ank interest or
yo!>"" ha%e additiona" free money a%ai"a"e to s!pport additiona" sa"es growth or
in%estment. )imi"ar"y, if yo! can negotiate impro%ed terms with s!pp"iers e.g. get
"onger credit or an increased credit "imit? yo! effecti%e"y create free finance to
he"p f!nd f!t!re sa"es.
,#


It can e tempting to pay cash, if a%ai"a"e, for fi$ed assets e.g. comp!ters, p"ant,
%ehic"es etc. If yo! do pay cash, rememer that this is no "onger a%ai"a"e for working capita".
&herefore, if cash is tight, consider other ways of financing capita" in%estment 8 "oans, e(!ity,
"easing etc. )imi"ar"y, if yo! pay di%idends or increase drawings, these are cash o!tf"ows and,
"ike water f"owing downs a p"!g ho"e, they remo%e "i(!idity from the !siness.
Co20ut&t!on o" O0$r&t!n% C35$:
Eperating Cyc"e T 1N<NCN28C
,1
If you....... Then......
Co""ect recei%a"es
4detors6 faster
Oo! re"ease
cash from the
cyc"e
Co""ect recei%a"es
4detors6 s"ower
Oo!r
recei%a"es
soak !p cash
Bet etter credit 4in
terms of d!ration or
amo!nt6 from
s!pp"iers
Oo! increase
yo!r cash
reso!rces
)hift in%entory
4stocks6 faster
Oo! free !p
cash
3o%e in%entory 4stocks6
s"ower
Oo! cons!me
more cash

1T 1aw materia" storage period
<T <ork8in8progress period
CT Cinished goods storage period
2T 2etors co""ection period
CTCreditors deferra" 7eriod
&he %ario!s components of operating cyc"e may e ca"c!"ated as shown e"ow.
416 1aw 3ateria" storage period T *%erage stock of raw materia"
*%erage cost of raw materia" cons!mption per day

426 <ork8in8progress ho"ding period T *%erage work8in8progress in%entory
*%erage cost of prod!ction per day
436 Cinished goods storage period T *%erage stock of finished goods
*%erage cost of goods so"d per day
4,6 2etors co""ection period T *%erage ook dets
*%erage credit sa"es per day
496 Credit co""ection period T T *%erage trade creditors
*%erage credit p!rchases per day
PERMANENT AND TEMPORAR4 WORKING CAPITAL:
7ermanent working capita" is the minim!m "e%e" of working capita" re(!ired on a
contin!o!s and !ninterr!pted asis. *ny amo!nt o%er and ao%e the permanent "e%e" of
,2

working capita" is temporary, f"!ct!ating or %aria"e working capita". &his portion of the
re(!ired working capita" is needed to meet f"!ct!ations in demand conse(!ent !pon changes
in prod!ction and sa"es as a res!"t of seasona" changes.
DETERMINANTS OF WORKING CAPITAL:
G$n$r&5 n&tur$ o" ,u.!n$..: &he working capita" re(!irements of an enterprise depend !pon
the nat!re of the !siness. &he proportion of c!rrent assets to tota" assets meas!res the re"ati%e
re(!irements of working capita" of %ario!s ind!stries. )ome pec!"iar feat!res app"ica"e in
,3
Temporary Temporary
&or#ing apita' &or#ing apita'
The amount of ;urrent assets that #aries The amount of ;urrent assets that #aries
with seasonal requirements. with seasonal requirements.
Permanent current assets Permanent current assets
T('E
R
"
P
E
E
%

0
'
O
"
N
T
Temporary current assets Temporary current assets

some ind!stries which ha%e a earing !pon their working capita" needs co!"d e i6 the cash
nat!re of !siness i.e. cash sa"e ii6 sa"e of ser%ices rather than commodities.
Produt!on 35$: 7rod!ction cyc"e i.e. the time in%o"%ed in the man!fact!re of goods has
a"so a earing !pon the (!ant!m of working capita". It co%ers the time span etween the
proc!rement of raw materia"s and the comp"etion of man!fact!ring process "eading to the
prod!ction of finished goods. C!nds ha%e to e necessari"y tied !p d!ring the process of
man!fact!re, necessitating enhanced working capita". &hat is there is some time gap efore
raw materia"s ecome finished goods. &o s!stain s!ch acti%ities the need of working capita" is
o%io!s. &he "onger the time span or prod!ction cyc"e, the "arger wi"" e the tied !p f!nds and
therefore, "arger the working capita" needed and %ice8%ersa. In some cases a part of financia"
!rden re"ating to man!fact!ring cyc"e time is passed on to others "ike in case of companies
man!fact!ring hea%y machinery and e(!ipment minimi@e the in%estment in in%entory or
working capita" y re(!iring ad%ance payments from c!stomers as work proceeds against
orders.
Bu.!n$.. 35$: &he working capita" re(!irements are a"so determined y the nat!re of the
!siness cyc"e. +!siness f"!ct!ations "ead to cyc"ica" and seasona" changes which, in t!rn,
ca!se a shift in the working capita" position, partic!"ar"y for temporary working capita"
re(!irements. &hese %ariations may take p"ace in two directions i6 !pward phase when oom
conditions pre%ai" ii6 downsi@ing phase when economic acti%ity is marked y a dec"ine.
2!ring the !pswing of !siness acti%ity, the need of working capita" is "ike"y to grow to co%er
the "ag etween increased sa"es and receipt of cash as we"" as to finance p!rchase of additiona"
materia"s to cater to the e$pansion of the "e%e" of acti%ity. &he downsi@ing phase of the
!siness cyc"e has e$act"y an opposite effect on the "e%e" of working capita" re(!irements. &he
dec"ine in the economy is associated with a fa"" in the %o"!me of sa"es which, in t!rn, "eads to
a fa"" in the "e%e" of in%entories and ook dets. &he need for working capita" in recessionary
conditions is o!nd to dec"ine. In short, !siness f"!ct!ations inf"!ence the si@e of working
capita" main"y thro!gh the effect on in%entories.
Produt!on 0o5!3: &he (!ant!m of working capita" is a"so determined y prod!ction po"icy.
In case of certain "ines of !siness, the demand for prod!cts is seasona", that is, they are
p!rchased d!ring certain months of the year.
,,

Cr$d!t 0o5!3: &he credit po"icy re"ating to sa"es and p!rchases a"so affects the working
capita" in two ways. i6 thro!gh credit terms granted y the firm to its c!stomersD !yers of
goods ii6 credit terms a%ai"a"e to the firm from its creditors. &he credit sa"es res!"t in higher
ook dets. Higher ook dets mean more working capita". En the other hand, if "iera" credit
terms are a%ai"a"e from the s!pp"iers of goods 4trade creditors6, the need of working capita" is
"ess. Hence, adoption of rationa"i@ed credit po"icies wo!"d e a significant factor in
determining the working capita" needs of an enterprise. Howe%er s!ch discretion may not e
a%ai"a"e to a company which operates in a high"y competiti%e market. &he degree of
competition is, therefore, an important factor inf"!encing working capita" re(!irements.
Gro*t# &nd $G0&n.!on: *s a company grows, it is o%io!s to e$pect a "arger amo!nt of
working capita". Howe%er, it is diffic!"t to determine precise"y the re"ationship etween the
growth and %o"!me of the !siness of a company and the increase in its working capita".
*d%ance p"anning of working capita" is, therefore, a contin!ing necessity for a growing
concern.
;&%&r!$. &nd &)&!5&,!5!t3 o" r&* 2&t$r!&5.: In case of chances of interr!ption of a%ai"ai"ity
of certain raw materia"s on a contin!o!s asis wo!"d sometimes affect the re(!irement of
working capita". &here may e some materia"s which cannot e proc!red easi"y either eca!se
of their so!rces are few or they are irreg!"ar. Hence to s!stain smooth prod!ction, therefore,
the firm might e compe""ed to p!rchase and stock them far in e$cess of gen!ine prod!ction
needs. &his wi"" res!"t in e$cessi%e in%entories of s!ch materia"s. *"so some raw materia"s
may e a%ai"a"e on"y d!ring certain seasons. &hey wo!"d ha%e to e necessari"y otained,
when a%ai"a"e, to pro%ide for a period when s!pp"ies are "ean.
Pro"!t L$)$5: &he net profit is a so!rce of working capita" to the e$tent it has een earned in
cash. Higher profit margin wo!"d impro%e the prospects of generating more interna" f!nds,
therey contri!ting to the working capita" poo". Cash profit refers to the profit earned after
ad=!sting non8cash items s!ch as depreciation, o!tstanding e$penses, and "osses written off.
&he a%ai"ai"ity of interna" f!nds for working capita" re(!irements is determined not mere"y
y the profit margin, !t a"so y the manner of appropriating profits. &he a%ai"ai"ity of s!ch
f!nds wo!"d depend !pon the profit appropriations for ta$ation, di%idend, and reser%es. Cor
e.g. the ta$es to e paid is determined y the pre%ai"ing ta$ reg!"ations. &he management has
,9

no discretion in this respect. 3any times ta$es ha%e to e paid in ad%ance on the asis of the
profit and management has no discretion in regard to the payment of ta$es, in some cases non8
payment may attract pena" action.
&a$ p"anning can, therefore, e said to e an integra" part of working capita" p"anning.
)imi"ar"y, di%idend po"icy a"so has a earing on working capita" re(!irements. &he payment of
di%idend cons!mes cash reso!rces and, therey, affects working capita" to that e$tent.
Con%erse"y, if the firm does not pay di%idends !t retains the profit, working capita" increases.
In theory, a firm sho!"d retain profits to preser%e cash reso!rces and, at the same time, it m!st
pay di%idends to satisfy the e$pectations of the in%estor. &he choice whether to retain or
dis!rse profits m!st e made after taking into consideration a"" the re"e%ant factors. 2i%idend
po"icy, is th!s, a significant e"ement in determining the "e%e" of working capita" in an
organi@ation. 2epreciation po"icy a"so e$erts an inf"!ence on the (!ant!m of working capita".
2epreciation charges do not in%o"%e any cash o!tf"ow. &he effect of depreciation po"icy on
working capita" is, therefore, indirect. 2epreciation affects the ta$ "iai"ity and retention of
profits. Fnhanced rates of depreciation "ower the profits and, therefore, the ta$ "iai"ity and,
th!s, more cash profits. Higher depreciation a"so means "ower disposa"e profits and,
therefore, a sma""er di%idend payment. &h!s, cash is preser%ed.
Pr!$ 5$)$5 #&n%$.: Changes in price "e%e" a"so affects the re(!irement of working capita".
1ise in prices necessitate the !se of more f!nds for maintaining an e$isting "e%e" of acti%ity.
Cor the same "e%e" of c!rrent assts, higher cash o!t"ays are re(!ired. &he effect is that higher
working capita" is re(!ired. Howe%er, if the firm is a"e to increase the prices proportionate"y,
there is no serio!s pro"em as regards working capita".
O0$r&t!n% E""!!$n3: &he operating efficiency of the management is a"so an important
determinant "e%e" of working capita". &he management can contri!te to a so!nd working
position thro!gh operating efficiency. *"tho!gh the management cannot contro" the rise in
prices, it can ens!re the efficient !ti"i@ation of reso!rces y e"iminating waste, impro%ing co8
ordination, and a f!""er !ti"i@ation of e$isting reso!rces, and so on.
&o conc"!de the "e%e" of working capita" is determined y a wide %ariety of factors
which are part"y interna" to the firm and part"y e$terna" to it. Ffficient working capita"
management re(!ires efficient p"anning and a constant re%iew of the needs for an appropriate
,6

working capita" strategy
COMPUTATION OF WORKING CAPITAL:
&he two components of working capita" are c!rrent assets and c!rrent "iai"ities. In order
to ca"c!"ate the working capita" needs what is re(!ired is the ho"ding period of %ario!s types
of in%entories, the credit co""ection period and the credit deferra" period. &he working capita"
a"so depends on the !dgeted "e%e" of acti%ity in terms of prod!ctionDsa"es. &he ca"c!"ation is
ased !pon the ass!mption that the prod!ctionDsa"es is carried o!t e%en"y thro!gho!t the year
and a"" costs accr!e simi"ar"y. &he steps in%o"%ed in estimating the different items of c!rrent
assets and c!rrent "iai"ities are as fo""ows.
ESTIMATION OF CURRENT ASSETS :
R&* M&t$r!&5. In)$ntor3: &he f!nds to e in%ested in raw materia"s in%entory may e
estimated on the asis of prod!ction !dget, the estimated cost per !nit and an a%erage
ho"ding period raw materia" in%entory y !sing the fo""owing form!"a.
+!dgeted prod!ction $ Cost of raw materia"s per !nit $ *%erage raw materia"
ho"ding
period in daysDmonths
12monthsD369 days
Wor6C!n 0ro%r$.. In)$ntor3 : &he f!nds to e in%ested in work8in8progress can e estimated
y the fo""owing form!"a.
+!dgeted prod!ction $ Cost of <8I87 per !nit $ *%erage <.I.7 ho"ding
period in daysDmonths
12monthsD369 days
,7

F!n!.#$d %ood.: &he f!nds to e in%ested in finished goods can e estimated y the fo""owing
form!"a.
+!dgeted prod!ction $ Cost of 7rod!ction per !nit $ *%erage finished goods
ho"ding
period in daysDmonths
12monthsD369 days
D$,tor. : &he f!nds to e in%ested in detors can e estimated y the fo""owing form!"a.
Fstimated credit sa"es $ Cost of )a"es per !nit $ *%erage detors co""ection
period in daysDmonths
12monthsD369 days
C&.# B&5&n$: 3inim!m desired cash and ank a"ances to e maintained y the firm has to
e added in c!rrent assets for comp!tation of comp!tation of working capita"
E.t!2&t!on o" Curr$nt L!&,!5!t!$. : &he amo!nt of working capita" is "owered to the e$tent of
c!rrent "iai"ities arising in the norma" co!rse of !siness.
Tr&d$ Cr$d!tor.: &his can e estimated y the fo""owing form!"a.
Fstimated credit p!rchases $ 1aw 3ateria"s 1e(!irement per !nit $ Credit period granted
y
s!pp"iers in
daysDmonths
12monthsD369 days
D!r$t W&%$.: &his can e estimated y the fo""owing form!"a.
+!dgeted prod!ction $ 2irect Lao!r per !nit $ *%erage time "ag in
payment in daysDmonths
,5

12monthsD369 days
O)$r#$&d.: &his can e estimated y the fo""owing form!"a.
Fstimated year"y prod!ction $ E%erhead costs per !nit $ *%erage time "ag in
payment in daysDmonths
12monthsD36# days
/ote. &he amo!nt of o%erheads may e separate"y ca"c!"ated for different types of o%erheads.
In case of se""ing o%erheads the re"e%ant item wo!"d e sa"es %o"!me instead of
prod!ction %o"!me.
WORKING
,9

CAPITAL
FINANCING
9#

Tr&d$ Cr$d!t:
&rade credit refers to the credit e$tended y the s!pp"ier of goods and
ser%ices in the norma" co!rse of transactionD!sinessDsa"e of the firm. i.e. cash is not
paid immediate"y for p!rchases !t after an agreed period of time. &h!s, deferra" of
payment represents a so!rce of finance for credit p!rchases.
&here is howe%er, no forma" forma"Dspecific negotiation for trade credit. It is
an informa" arrangement etween the !yer and se""er witho!t any "ega" instr!ments
or acknow"edgements of dets. )!ch credit appears in the record of !yer of goods
as s!ndry creditorsDacco!nts paya"e.
Ad)&nt&%$.:
&rade credit, as a so!rce of short working capita" finance has certain ad%antages.
&hese are as fo""ows.
16 It is easi"y, a"most a!tomatica""y a%ai"a"e.
26 It is f"e$i"e and spontaneo!s so!rce of finance.
36 It is free from restrictions associated forma" negotiated so!rce of
finance.
,6 &rade credit does not in%o"%e any e$p"icit charges.
B&n6 Cr$d!t:
+ank credit is the primary instit!tiona" so!rce of working capita" finance in India. In
fact, it represents the most important so!rce of financing c!rrent assets.
For2. o" r$d!t:
<orking capita" finance is pro%ided y anks in fi%e ways. 4i6 cash
creditsDo%erdrafts. 4ii6 Loans. 4iii6 p!rchaseDdisco!nt i""s, 4i%6 "etter of credit, and
4%6 working capita" term "oans.
C&.# Cr$d!t(o)$rdr&"t.. -nder cash creditDo%erdraft formDarrangement of
ank finance, the ank specifies a predetermined orrowingDcredit "imit. &he
91

orrower can orrowDdraw !p to the stip!"ated creditDo%erdraft "imit. <ithin the
specified "imitD5!n$ o" r$d!tJ any n!mer of drawa"sDdrawings is possi"e to the
e$tent of his re(!irements periodica""y. )imi"ar"y, repayments can e made
whene%er desired d!ring the period. &he interest rate determined on the asis of
r!nning a"ance act!a""y !ti"i@ed y the orrower and not the sanctioned "imit.
Howe%er, a minim!m 4commitment6 charge may e paya"e on the !n!ti"i@ed
a"ance. &his form of financing is con%enient and f"e$i"e for the orrowers.
Lo&n.: -nder this arrangement, the entire amo!nt of orrowing is credited to the
c!rrent acco!nt of the orrower of or rea"i@e in cash. &he orrower has to pay the
interest on the tota" amo!nt. &he "oans are repaya"e on demand or in periodic
insta""ments. &hey can a"so e renewed from time to time.
B!55. 0ur#&.$d(D!.ount$d: &hese i""s work as a so!rce of working capita"
finance and arise o!t of trade sa"e, p!rchase transaction on credit. &he se""er of
goods draws the i"" on the p!rchaser of goods, paya"e on demand or after a !sance
period not e$ceeding 9# days. En acceptance of i"" y the p!rchaser, the se""er
offers it to the ank for disco!ntDp!rchase. En disco!nting the i"" the ank rea"i@es
the f!nds to the se""er. &he i"" is presented y the ank to the p!rchaser on d!e date
for payment.
L$tt$r o" Cr$d!t: * Letter of Credit 4more correct"y ca""ed a Documentary Credit6
is an arrangement wherey a ank, operating on the instr!ctions of an importer,
a!thori@es another ank to pay a fi$ed s!m to an e$porter on prod!ction of specified
doc!ments. &he r!"es go%erning the !se of Letters of Credit are contained in
-niform C!stoms and 7ractice for 2oc!mentary Credits 4ICC /o. ,##6 a%ai"a"e
from most +anks.
Wor6!n% C&0!t&5 T$r2 Lo&n.: -nder this arrangement, ank ad%ances "oans
for 3 to 7 years repaya"e in year"y or ha"f8year"y payments.
Mod$ o" S$ur!t3: +anks pro%ide credit on the asis of the fo""owing modes of
sec!rity.
92

16 Hypothecation. -nder this mode the anks pro%ide credit to
orrowers against the co""atera" sec!rity of mo%a"e property, !s!a""y
in%entory of goods. &he goods hypothecated howe%er, contin!e to e
in the possession of the owner of these goods i.e. the orrower.
*"tho!gh the ank does no ha%e the physica" possession of the
goods, it has the "ega" right to se"" the goods to rea"i@e the
o!tstanding "oan.
26 7"edge. 7"edge, as a mode of sec!rity, is different from hypothecation
eca!se in case of p"edge the goods are transferred to the physica"
possession of the "ender. &he orrower, who offers the sec!rity is,
ca""ed a Lpawnor' 4p"edgor6, whi"e the ank is ca""ed the Lpawnee'
4p"edgee6. Howe%er the ank m!st take reasona"e care of the goods
p"edged with it i.e. care which a pr!dent person wo!"d take to protect
his property.
36 Lien. it refers to a right of a party to retain goods e"onging to
another party !nti" a det d!e to him is paid. It can e of two types. i6
partic!"ar "ien, and ii6 genera" "ien. 7artic!"ar "ien is a right to retain
goods !nti" a c"aim pertaining to these goods is f!""y paid. <hereas
genera" "ien can e app"ied ti"" a"" d!es of the c"aimant are paid.
,6 3ortgage. It is the transfer of a "ega"De(!ita"e interest in specific
immo%a"e property for sec!ring the payment of det. &he person
who parts with the interest in the property is ca""ed Lmortgagor' and
the ank in whose fa%o!r the transfer takes p"ace is the Lmortgagee'.
It is th!s the con%eyance of interest in the mortgaged property.
COMMERCIAL PAPERS:
Commercia" paper is a short8term !nsec!red negotia"e instr!ment,
consisting of !sance promissory notes with a fi$ed mat!rity *n !nsec!red
o"igation iss!ed y a corporation or ank to finance its short8term credit needs,
93

s!ch as acco!nts recei%a"e and in%entory. 3at!rities typica""y range from 2 to 27#
days. Commercia" paper is a%ai"a"e in a wide range of denominations, can e either
disco!nted or interest8earing, and !s!a""y ha%e a "imited or none$istent secondary
market. Commercia" paper is !s!a""y iss!ed y companies with high credit ratings,
meaning that the in%estment is a"most a"ways re"ati%e"y "ow risk.
Fr&2$*or6 o" Ind!&n CP 2&r6$t: Commercia" papers are reg!"ated y the
1+I. &he main e"ements of the present framework are as fo""ows.
C7s can e iss!ed for a period ranging etween 19 days and 1 year. 1enewa"
of C7s is treated as fresh iss!e.
&he minim!m si@e of an iss!e is 29 "akhs and minim!m !nit of s!scription
is 9 "akhs.
&he ma$im!m amo!nt that a company can raise y way of C7s is 1##J of
the working capita" "imit.
* company can iss!e C7s on"y if it has a minim!m tangi"e net worth of 1s.
, crores, a f!nd ased working "imit of 1s. , crores or more, at "east a rating
of 72 4 C1I)IL6 , *24IC1*6,etc.
&he ho"der of Cps wo!"d present them for payment to the iss!er on mat!rity
FACTORING:
Cactoring pro%ides reso!rces to finance recei%a"es as we"" as faci"itates the
co""ection of recei%a"es. Cactoring can e road"y defined as an agreement in
which recei%a"es arising o!t of sa"e of goodsDser%ices are so"d y a firm4c"ient6 to
the factor4a financia" intermediary6 as a res!"t of which the tit"e of goodsDser%ices
represented y the said recei%a"es passes on to the factor. Hence, factor ecomes
responsi"e for credit contro", sa"es acco!nting and det co""ection from the !yers.
9,

In case of factoring witho!t reco!rse faci"ity, if any detor fai"s to pay the d!es as a
res!"t of financia" inai"ity or inso"%ency the factor has to asor the "oss.
FUNCTIONS OF THE FACTOR:
Cinancing faci"ity.
3aintenance and administration of sa"es "edger.
Co""ection of acco!nt recei%a"es.
7ro%ision of ad%isory ser%ices.
*ss!mption of credit risk and contro".
AD;ANTAGES OF FACTORING:
O" B&5&n$ .#$$t F!n&n!n%. )ince the c"ient's dets are p!rchased y the
factor, the finance pro%ided y him is off the a"ance sheet and appears in
the a"ance sheet on"y as a contingent "iai"ity in case of reco!rse factoring.
R$dut!on o" urr$nt L!&,!5!t!$..
I20ro)$2$nt !n urr$nt r&t!o. *s the factoring transaction off the a"ance
sheet, it remo%es from the asset side the recei%a"es factored to the e$tent of
the pre8payment made and on the "iai"ities' side the c!rrent "iai"ities are
a"so red!ced.
H!%#$r r$d!t .t&nd!n%: <ith cash f"ow acce"erated y factoring, the c"ient
is a"e to meet its "iai"ities prompt"y as and when they arise. &he factor's
acceptance in the c"ient's recei%a"es itse"f speaks high"y of the (!a"ity of
the recei%a"es.
I20ro)$d $""!!$n3. In order to acce"erate cash f"ow it is essentia" to
ens!re the f"ow of critica" information for decision making and fo""ow8!p
and e"iminate de"ays and wastage of man8ho!rs.
99

Mor$ t!2$ "or 05&nn!n% &nd 0rodut!on: &he factor !ndertakes the
responsii"ity for credit contro", sa"es "edger administration and det
co""ection pro"ems. &h!s, the c"ient can concentrate on f!nctiona" areas of
the !siness p"anning, p!rchase, prod!ction, marketing and finance.
R$dut!on o" o.t &nd $G0$n.$.: )ince the c"ient need not ha%e a specia"
administrati%e set!p to "ook after the credit contro" he can ha%e the enefit of
red!ced o%erheads y way of sa%ings on man8power, time and effort.
96

CASH
MANAGEMENT
INTRODUCTION:
Cash management is one of the key areas of working capita" management.
*part from the fact that it is the most c!rrent "i(!id assets, cash is the most common
denominator to which a"" the c!rrent assets can e red!ced eca!se the other ma=or
"i(!id assets, that is, recei%a"es and in%entory get e%ent!a""y con%erted into cash.
&his !nder"ines the significance of cash management.
MOTI;ES FOR HOLDING CASH:
97

&he term cash with reference to cash management is !sed in two senses. In a
narrow sense, it is !sed to co%er c!rrency and genera""y accepted e(!i%a"ents of
cash, s!ch as che(!es, drafts, demand deposits in anks. &he road %iew of cash
a"so inc"!des near8cash s!ch as marketa"e sec!rities and time deposits in anks.
&he main characteristics of these are that they can e readi"y so"d and con%erted into
cash. Here, the term cash management is emp"oyed in the roader sense.
Irrespecti%e of the form in which it is he"d, a disting!ishing feat!re of cash, as an
asset, is that it has no earning power. If cash does not earn any ret!rn why it is he"dS
&here are fo!r primary moti%es for maintaining cash a"ances.
16 Tr&n.&t!on Mot!)$:
&his is a moti%e of ho"ding cashDnear8cash to meet ro!tine cash re(!irements
to finance the transactions which a firm carries on in the ordinary co!rse of the
!siness. * firm enters into a %ariety of transactions to accomp"ish its o=ecti%es
which ha%e to e paid for in the form of cash. Cor e.g. cash payments ha%e to e
made for p!rchases, wages, operating e$penses, financia" charges, and so on.
)imi"ar"y, there is a reg!"ar inf"ow of cash to the from sa"es operations, ret!rns on
in%estments and so on. &hese receipts and payments constit!te a contin!o!s two
way of cash, !t they do not coincide or synchroni@e. Hence, in case, the
dis!rsements are in e$cess of c!rrent receipts the need of cash a"ance is o%io!s.
26 Pr$&ut!on&r3 Mot!)$:
In addition to the non8synchroni@ation of anticipated cash inf"ows and
o!tf"ows in the ordinary co!rse of !siness, a firm may ha%e to pay the cash for the
p!rposes which cannot e predicted or anticipated. &he !ne$pected cash needs at
the short notice may e the res!"t of f"oods, strikes, and i""s may e presented for
sett"ement ear"ier than e$pected, !ne$pected s"owdown in co""ection of acco!nts
recei%a"es, cance""ation of some order of goods from c!stomers, sharp increase in
cost of raw materia"s, etc. hence preca!tionary a"ances to meet !npredicta"e
o"igations are re(!ired to pro%ide a c!shion to meet !ne$pected contingencies.
)!ch cash a"ances are !s!a""y he"d in the form of marketa"e sec!rities so that they
earn a ret!rn.
95

/E S0$u5&t!)$ Mot!)$:
It refers to the desire of the firm to take ad%antage of opport!nities which
present themse"%es at !ne$pected moments and which are typica""y o!tside the
norma" co!rse of !siness. <hi"e the preca!tionary moti%e is defensi%e in nat!re,
that firms m!st make pro%isions to hand"e !ne$pected contingencies, the spec!"ati%e
moti%e represents a positi%e and aggressi%e approach. Cirms' aim to e$p"oit
profita"e opport!nities and keep cash in reser%e to do so. &he spec!"ati%e moti%e
he"ps to take ad%antage of. an opport!nity to p!rchase raw materia" at a red!ced
price on payment of immediate cash, a chance to spec!"ate on interest rate
mo%ements y !ying sec!rities when interest rates are e$pected to dec"ine.
1E Co20$n.&t!)$ Mot!)$:
Oet another moti%e to ho"d cash a"ances is to compensate anks for
pro%iding certain ser%ices and "oans. +anks pro%ide a %ariety of ser%ices s!ch as
c"earance of che(!es, s!pp"y of credit information and so on. <hi"e for some of this
ser%ices anks charge a commission or fee for other they seek indirect
compensation. -s!a""y, the c"ients are re(!ired to maintain a minim!m a"ance of
cash at the ank and the ank co!"d ret!rn on s!ch a"ances. Compensating
a"ances are a"so re(!ired y some "oan agreements etween a ank and its
c!stomers.
FACTORS DETERMINING CASH NEEDS:
S3n#ron!'&t!on o" &.# "5o*.: &he need of maintaining cash a"ances arises from
the non8synchroni@ation of the inf"ows and o!tf"ows of cash. Hence the e$tent of
non8synchroni@ation of cash receipts and dis!rsements determines the cash needs.
Cor this a proper forecast o%er period of time has to e made y making cash
!dgets.
S#ort o.t.: another factor to e considered in determining cash needs is the costs
associated with the shortfa"" in the cash needs. )ome of the costs inc"!ded in short
costs are as !nder.
&ransaction costs associated with raising cash to co%er the shortage.
99

+orrowing costs associated with the orrowing to co%er the shortage "ike
interest, commitment charges, etc.
Loss of cash disco!nt which cannot e a%ai"ed eca!se of the shortage of
cash.
Cost associated with the deterioration of the credit rating which is ref"ected
in higher ang charges, stoppage of s!pp"ies, ref!sa" to se"", "oss of image.
7ena"ty rates y the ank to meet short fa"" in compensating a"ances.
EG$.. &.# ,&5&n$ o.t.: &he cost of ha%ing e$cessi%e"y "arge a"ances is known
as e$cess cash a"ance cost. +asica""y it is the "oss of interest on id"e f!nds which
co!"d ha%e een earned if in%ested somewhere.
Prour$2$nt &nd 2&n&%$2$nt: &hese are the costs associated with esta"ishing
and operating cash management staff and acti%ities. &hese are main"y fi$ed in
nat!re "ike sa"aries, etc.
Un$rt&!nt3: &he impact of !ncertainty on cash management strategy is a"so
re"e%ant as cash f"ows cannot e predicted with precise acc!racy. &he moti%e is to
pro%ide a preca!tionary c!shion to cope !p with irreg!"arities in cash f"ows,
!ne$pected de"ays in co""ections and dis!rsements.
CASH BUDGET:
* firm is we"" ad%ised to ho"d ade(!ate cash a"ances !t sho!"d a%oid
e$cessi%e a"ances. &he firm has? therefore, to assess its cash needs proper"y. &he
cash !dget is proa"y the most important too" in cash management. It is a de%ice
to he"p a firm to p"an and contro" the !se of cash. It is a statement showing inf"ows
and o!tf"ows of cash o%er a period of time.
Pur0o.$. o" &.# ,ud%$t:
&o co8ordinate the timings of cash needs.
It pin8points the period when there is "ike"y to e e$cess cash.
6#

It ena"es a firm which has s!fficient cash to take ad%antage of cash
disco!nts on its acco!nts paya"e, to pay o"igations when d!e, to take
di%idend decisions.
It he"ps to arrange needed f!nds on the most fa%o!ra"e terms and pre%ents
the acc!m!"ation of e$cess f!nds.
ELEMENTS OF CASH BUDGET:
&he principa" aim of cash !dget, as a too" to predict cash f"ows o%er a gi%en
period of time, is to ascertain whether at any point of time there is "ike"y to e an
e$cess or shortage of cash. &he e"ements of cash !dget are as fo""ows.
&he first e"ement of cash !dget is the se"ection of the period of time to e
co%ered y the !dget. It is referred to as the p"anning hori@on. &he
co%erage of the cash !dget wi"" differ from firm to firm depending !pon its
nat!re and the degree of acc!racy with which the estimates can e made.
Howe%er, the period se"ected sho!"d neither e too short or too "ong. If it is
too short, many important e%ents which "ie =!st eyond the period cannot e
acco!nted for and the work associated with the preparation of the !dget
ecomes e$cessi%e. If it is too "ong, the chances of inacc!racy wi"" e high.
&he p"anning hori@on of cash !dget depends !pon the circ!mstances and
re(!irements of a partic!"ar case. If the f"ows are e$pected to e sta"e and
dependa"e, s!ch from may prepare a cash !dget co%ering a "ong period.
Howe%er, in case of a firm whose f"ows are !ncertain a short period !dget
may e appropriate.
&he second e"ement of cash !dget is the se"ection of the factors that ha%e a
earing on the cash f"ows. &he items inc"!ded in cash !dget are on"y cash
items? non8cash items s!ch as depreciation and amorti@ation are e$c"!ded.
&*+LF 1
Cash +!dget for the UUU3onths
Fnded UUUUUUUUUUUUUU
Worksheet Oct. Nov. Dec. Jan. Feb.
June July Aug.
)a"es
Co""ections.
61

Cirst month 43#J6
)econd month 49#J6
&hird month 42#J6
&ota"
7!rchases
7ayments 4one8month "ag6
Cash receipts.
Co""ections
Cash dis!rsements.
7!rchases
<ages and sa"aries
1ent
Ether e$penses
&a$es
7!rchase of e(!ipment
Loan repayment
&ota" dis!rsements.
/et month"y charge
7"!s. +eginning cash a"ance
Less: Interest on short8term orrowing
F(!a"s. Fnding cash a"anceVno orrowing
Cinancing needed
Fnding cash a"ance
C!m!"ati%e orrowing
a
&he amo!nt of financing that is re(!ired to raise the firm's ending cash a"ance !p
to UUUUUUU 1!"!!! desired cash a"ance.

/egati%e financing needed simp"y means the firm has e$cess cash that can e !sed
to retire a part of its short8term orrowing from prior months
CASH MANAGEMENT TECHNI<UES:
S0$$d3 &.# o55$t!on.: &he c!stomers sho!"d e enco!raged to pay as (!ick"y as
possi"e. Ene way to ens!re prompt payment to y the c!stomers is prompt i""ing.
<hat the c!stomer has to pay and when has to e specified c"ear"y in ad%ance.
*nother techni(!e for enco!raging prompt payment y c!stomers is to offer cash
disco!nts. &he a%ai"ai"ity of disco!nt imp"ies considera"e sa%ings to the
c!stomers. &o a%ai" the faci"ity, c!stomers wo!"d e eager to make payment.
)econd"y, the payment from c!stomers sho!"d e con%erted into cash witho!t any
de"ay. &hat as once the c!stomers makes the payment y writing a che(!es in fa%o!r
of the firm, the co""ection can e e$pedited y prompt encashment of the che(!es.
&here is a "ag etween the time a che(!es is prepared and mai"ed y the c!stomer
and the time the f!nds are inc"!ded in the cash reser%oir of the firm. &he co""ection
62

of acco!nts recei%a"e can e considera"y acce"erated, y red!cing transit,
processing and co""ection time. *n important cash management techni(!e is
red!ction in deposit f"oat. &his co!"d e possi"e if the firm adopts a po"icy of
decentra"i@ed co""ections. &he princi9pa" methods of esta"ishing a decentra"i@ed
co""ection network are.
Con$ntr&t!on ,&n6!n%: In this system of decentra"i@ed co""ection of
acco!nts recei%a"e, "arge firms ha%ing "arge ranches, se"ect strategica""y
some of the ranches as co""ection centre for recei%ing payments from
c!stomers. Instead of a"" the payments eing co""ected at head office, the
che(!es are co""ected at the "oca" co""ection centre and the c!stomers are
re(!ired to send their payments to the co""ection centre co%ering the area in
which they "i%e. &he f!nds co""ected are then transferred to concentration or
centra" ank.
Lo6 BoG: &his is asica""y a co""ection proced!res in which payers send
their paymentsD che(!es to a neary post o$ that is emptied y the firm's
ank se%era" times and the ank deposits the che(!es in the firm's acco!nt.
&h!s, the "ock o$ system is "ike concentration anking in that the co""ection
is decentra"i@ed. &his arrangement is an impro%ement o%er concentration
anking as some e$tra sa%ing in the mai"ing time is pro%ided y this system
as the che(!es recei%ed in the post o$ are not de"i%ered y the firm itse"f to
the ank? rather the ank itse"f co""ects them !p.
S5o*!n% D!.,ur.$2$nt.: *part from speedy co""ections of acco!nts recei%a"e,
the operating cash re(!irements can e red!ced y s"ow dis!rsements of acco!nts
paya"es. &he %ario!s techni(!es to de"ay payment of acco!nts paya"e are.
A)o!d&n$ o" $&r53 0&32$nt.: It is not ad%isa"e for a firm to make
payments to the parties ear"y, that is, efore its d!e date. Howe%er payments
sho!"d not e de"ayed after d!e date otherwise the credit standing may e
ad%erse"y affected and the firm wi"" not e a"e to sec!re trade credit in
f!t!re.
63

C$ntr&5!'$d D!.,ur.$2$nt.: &he payments sho!"d e made y the head
office from a centra"i@ed dis!rsement acco!nt. )!ch an arrangement wo!"d
ena"e a form to de"ay payments and in t!rn wi"" e a"e to conser%e cash
since it wi"" increase the transit time. &he remittance from the head office to
its c!stomers at distant p"aces wo!"d in%o"%e more mai"ing time than a
decentra"i@ed payment y a "oca" ranch. /ot on"y this ha%ing a centra"i@ed
dis!rsement arrangement, is a re"ati%e"y sma""er cash a"ance needed since
there is no need to maintain cash a"ance at ranches.
F5o&t: * %ery important techni(!e of s"ow dis!rsement is f"oat. &he term
f"oat refers to the amo!nt of money tied !p in che(!es that ha%e een
written, !t ha%e yet to e co""ected and en8cashed.
P&3!n% "ro2 & d!.t&nt ,&n6: &he firm may iss!e a che(!e on anks away
from its creditors. &his wo!"d in%o"%e "onger transit time for the creditor's
ank to get payment and, th!s, ena"e a firm to !se its f!nds "onger.
C#$Iu$C$n&.#2$nt &n&53.!.: *nother way to make !se of f"oat is to
ana"y@e, on the asis of past e$perience, the time "ag in the iss!e of che(!es
and their encasements.
Aru&5.: Cina""y, a potentia" too" for stretching acco!nts paya"e is accr!a"s
which are defined as c!rrent "iai"ities that represent a ser%ice or goods
recei%ed y a firm !t not yet paid for. Cor instance, payro"", i.e.
rem!neration to the emp"oyees who render ser%ice in ad%ance and recei%e
payment "ater. In a way, they e$tend credit to the firm for a period at the end
of which they are paid, say, a week or a month.
6,

RECEI;ABLES
MANAGEMENT
69

INTRODUCTION:
&he recei%a"es represent an important component of the c!rrent assets of
any firm. &he term recei%a"es are defined as Ldet owe to the firm y the c!stomers
arising from sa"e of goods and ser%ices in the ordinary co!rse of !siness'. <hen a
firm makes an ordinary sa"e of goods or ser%ices and does not recei%e payment, the
firm grants trade credit and creates acco!nts recei%a"e. It is a"so referred as trade
credit management. 3anagement sho!"d way the enefits as we"" as the costs to
determine the goa" of recei%a"es management.
OB=ECTI;ES:
&he credit sa"es are genera""y made on open acco!nt in the sense that there
are no forma" acknow"edgements of det o"igations thro!gh a financia" instr!ment.
*s a marketing too", they are intended to promote sa"es and therey profits.
Howe%er, e$tension of credit in%o"%es risks and costs. &he o=ecti%e of recei%a"es
management is Lto promote sa"es and profit' !nti" that point is reached where the
ret!rn on in%estments in f!nding recei%a"es is "ess than the cost of f!nds raised to
finance the additiona" credit. &he specific costs and enefits which are re"e%ant to
the determination of o=ecti%es of recei%a"e management are stated e"ow.
Co.t.: &he ma=or categories of costs associated with acco!nts recei%a"e
are. i6 co""ection costs ii6 capita" costs iii6 de"in(!ency cost i%6 defa!"t costs.
Co55$t!on o.t.: &hese are administrati%e costs inc!rred in
co""ecting the recei%a"es from the c!stomers to whom credit sa"es
ha%e een made.
C&0!t&5 o.t.: &he increased "e%e" of acco!nt recei%a"e is an
in%estment in assets. &hey ha%e to e financed in%o"%ing a cost. &he
cost on the !se of additiona" capita" to s!pport credit sa"es co!"d e
profita"y emp"oyed.
66

D$5!nIu$n3 o.t.: It is the costs arising o!t of fai"!re of c!stomers
to pay on d!e date. &he important components of this cost are. i6
"ocking of the f!nds for an e$tended period ii6 costs associated with
steps that ha%e to e initiated to co""ect the o%erd!es.
D$"&u5t o.t.: &hese are the o%erd!es that cannot e reco%ered. )!ch
dets are treated as as dets and ha%e to e written8off as they
cannot e rea"i@ed.
B$n$"!t.: &he enefits are the increased sa"es and anticipated profits
eca!se of a more "iera" po"icy. <hen firms e$tend trade credit, i.e. in%est
in recei%a"es, they intend to increase the sa"es. &he impact of the "iera"
trade credit po"icy is "ike"y to take two forms. Cirst, it is oriented to sa"es
e$pansion. In other words, a firm may grant trade credit either to increase
sa"es to e$isting c!stomers or attract new c!stomers. &his moti%e for
in%estment in recei%a"es is growth oriented. )econd"y, the firm may e$tend
credit to protect its c!rrent sa"es against emerging competition. Here, the
moti%e is sa"es retention. *s a res!"t of increased sa"es the profit of the firm
wi"" increase.
Cr$d!t Po5!!$.: It is the determination of credit standards and credit ana"ysis.
&he credit po"icy of a firm pro%ides the framework to determine. a6 whether or not
to e$tend credit to a c!stomer and 6 how m!ch credit to e$tend. &he credit po"icy
decision of a firm has two dimensions. i6 credit standards ii6 credit ana"ysis.
Cr$d!t .t&nd&rd.: &hese are the asic criteriaDminim!m re(!irement for
e$tending credit to a c!stomer. &he factors for esta"ishing standards are
67

credit rating, credit references, a%erage payment period, and financia" ratios.
&he trade8off with reference to credit standards co%er i6 the co""ection costs
ii6 a%erage co""ection periodDcost of in%estment in acco!nts recei%a"e iii6
"e%e" of ad det "osses i%6 "e%e" of sa"es. &he imp"ications of the fo!r factors
are e$p"ained e"ow.
Co55$t!on o.t.: &he imp"ications are. i6 more credit ii6 a "arge
credit department to ser%ice acco!nts recei%a"e iii6 increase in
co""ection cost.
In)$.t2$nt !n r$$!)&,5$.: &he in%estment in acco!nt recei%a"e
in%o"%es a capita" cost as f!nds ha%e to e arranged y the firm to
finance them ti"" c!stomers make payments. Higher the a%erage
acco!nts recei%a"e, the higher wi"" e the capita" or carrying costs.
B&d d$,t 5o..$.: &hese can e e$pected to increase with re"a$ation
in credit standards and decrease if credit standards ecome more
restricti%e.
L$)$5 o" S&5$.: *s standards are re"a$ed, sa"es are e$pected to
increase? con%erse"y, a tightening is e$pected to ca!se a dec"ine in
sa"es.
Cr$d!t &n&53.!.: It in%o"%es otaining credit information
and ana"ysis of credit information. It is on the asis of credit ana"ysis that the
decisions to grant credit to a c!stomer as we"" as the (!ant!m of credit
wo!"d e taken.
O,t&!n!n% r$d!t !n"or2&t!on: &he first step is to
otain credit information on which the ase is the e%a"!ation of the
c!stomer. &he so!rces of information are. i6 interna" ii6 e$terna".
Int$rn&5: &he firm re(!ires the c!stomers to fi"" %ario!s forms and
doc!ments gi%ing detai"s ao!t financia" operations. *nother interna"
65

so!rce is deri%ed from the records of the firm contemp"ating an
e$tension of credit.
EGt$rn&5: &he a%ai"ai"ity of information from e$terna"? so!rces to
assess the credit worthiness of the c!stomers depends !pon de%e"opment
of instit!tiona" faci"ities and ind!stria" practices. &he e$terna" so!rces are
financia" statements, ank references, trade references and credit !rea!
reports.
An&53.!. o" r$d!t !n"or2&t!on: Ence the credit information has
een co""ected from different so!rces, it sho!"d e ana"ysed to determine
the credit worthiness of the app"icant. It co%ers two aspects. i6
(!antitati%e and ii6 (!a"itati%e.
<u&nt!t&t!)$: It is ased on the fact!a" information a%ai"a"e from
financia" statements, the past records of the firm and so on.
<u&5!t&t!)$: It wo!"d co%er aspects re"ated to (!a"ity of
management. Here, the references from other s!pp"iers, ank references
and specia"ists !rea! reports wo!"d form the asis for conc"!sions to e
drawn.
Cr$d!t t$r2.: It specify the repayment terms re(!ired of recei%a"es. Credit
terms ha%e three components. i6 credit period, in terms of d!ration of time for which
trade credit is e$tended to c!stomers in case of credit sa"es ii6 cash disco!nt is the
incenti%e to the c!stomers to make ear"y payment of s!m d!e iii6 cash disco!nt
period is the d!ration of the period d!ring which disco!nt can e a%ai"ed off. &he
credit terms "ike credit standards, affect the profitai"ity as we"" as the cost of the
firm. * firm sho!"d determine the credit terms on the asis of cost enefit trade8off.
It sho!"d e noted that the foc!s in ana"y@ing credit terms is from the %iew point of
s!pp"iers of trade credit and not for the recipients for whom it p"ays a so!rce of
financing.
69

IN;ENTOR4
MANAGEMENT
7#

Introdut!on:
&he term in%entory refers to the stock of the prod!cts a firm is offering for
sa"e and the components that make !p the prod!ct. &hat is, in%entory is composed
of assets that wi"" e so"d in f!t!re in the norma" co!rse of !siness operations.
&hese assets are i6 1aw materia"s, ii6 <ork8in8progress and iii6 Cinished goods. &he
%iews concerning the appropriate "e%e" of in%entory wo!"d differ among the
different f!nctiona" areas.
O,-$t!)$.:
Ffficient management of in%entory sho!"d !"timate"y res!"t in the
ma$imi@ation of owners' wea"th. &he in%entory sho!"d e t!rned o%er as (!ick"y as
possi"e, a%oiding stock8o!ts that might res!"t in c"osing down the prod!ction "ine
or "ead to a "oss of sa"es. It imp"ies that whi"e the management sho!"d try to p!rs!e
the financia" o=ecti%es of t!rning in%entory as (!ick"y as possi"e, it sho!"d at the
same time ens!re s!fficient in%entories to satisfy prod!ction and sa"e demand, that
is, these two conf"icting re(!irements ha%e to e reconci"ed. *"ternati%e"y, we can
say that the o=ecti%e of in%entory management is to minimi@e in%estment is
in%entory and a"so to meet a demand for the prod!ct y efficient"y organi@ing the
prod!ction and sa"es operation. &hat is to say, an optim!m "e%e" of in%entory sho!"d
e determined on the asis of the trade8off etween costs and enefits associated
with the "e%e" of in%entory.
COST OF HOLDING IN;ENTOR4:
&he o=ecti%e of in%entory management is to minimi@e costs. &he costs
associated with the in%entory fa"" into two asic categories. i6 ordering costs, and ii6
carrying costs. &hese costs are an important e"ement of the optima" "e%e" of
in%entory decisions and are descried as !nder.
Ord$r!n% o.t.K these are the costs associated with the ac(!isition or
ordering of in%entory. It is the fi$ed cost of p"acing and recei%ing an
71

in%entory order. Inc"!ded in the ordering costs are costs in%o"%ed in one
i6preparing a p!rchase order or re(!isition form and ii6 recei%ing,
inspecting and recording of the goods recei%ed to ens!re oth (!a"ity and
(!antity. &hese are genera""y fi$ed irrespecti%e of the amo!nt of order.
Hence, s!ch costs can e minimi@ed y p"acing fewer orders for a "arger
amo!nt. Howe%er, ac(!isition of "arge (!antity wo!"d increase the costs
associated with the maintenance of the in%entory, that is, carrying costs.
C&rr3!n% o.t.: these costs are the %aria"e costs per !nit of ho"ding an
item in in%entory for a specified time period. &hese costs can e di%ided
into two categories. i6 those that arise d!e to storing of in%entory. the main
components of this category of costs are a6 the storage costs, ins!rance,
maintenance of the !i"ding 6 ins!rance of in%entories against fire and
theft, c6 deterioration in in%entory eca!se of pi"ferage, fire, technica"
oso"escence, d6 ser%ing costs s!ch as "ao!r for hand"ing, ii6 opport!nity
costs. this consists of e$penses in raising f!nds. If f!nds were not "ocked
!p in in%entory, they wo!"d ha%e earned a ret!rn. &his is the opport!nity
cost of f!nds.
&he s!m of ordering and carrying costs represents the tota" cost of in%entory.
B$n$"!t. o" #o5d!n% !n)$ntor3:
&he secondary e"ement in the optim!m in%entory decision dea"s with the
enefits associated with ho"ding in%entory. &he ma=or enefits of ho"ding in%entory
is that they ena"e firms in the short r!n to prod!ce at a rate greater than p!rchase of
raw materia"s and %ice8%ersa, or se"" at rate greater than prod!ction and %ice8%ersa.
IN;ENTOR4 MANAGEMENT TECHNI<UES:
72

3any sophisticated mathematica" techni(!es are a%ai"a"e to hand"e
in%entory management pro"ems.
C5&..!"!&t!on S3.t$2: A B C S3.t$2K &he *+C system is a wide"y !sed
c"assification techni(!e to identify %ario!s items of in%entory for the
p!rposes of in%entory contro". &his techni(!e is ased on the ass!mption
that firm sho!"d not e$ercise the same degree of contro" on a"" items of
in%entory. It sho!"d rather keep a more rigoro!s contro" on items that are
most cost"y and or s"owest t!rning, whi"e items that are "ess e$pensi%e
sho!"d e gi%en a "ess contro". Hence, *+C system is an in%entory
management techni(!e that di%ides in%entory into three categories of
descending importance ased on r!pee in%estment in each. &he items
inc"!ded in gro!p * in%o"%e the "argest in%estment. &herefore, in%entory
contro" sho!"d e most rigoro!s and intensi%e and the most sophisticated
in%entory contro", techni(!es sho!"d e app"ied to these items. &he C gro!p
items consist of items of in%entory which in%o"%e re"ati%e"y sma""
in%estments, a"tho!gh the n!mer of items is fair"y "arge. &hese items
deser%e minim!m attention. &he gro!p + stands mid8way. It deser%es "ess
attention than * !t more than C. It can e contro""ed y emp"oying "ess
sophisticated techni(!es.
&he task of in%entory management is to c"assify a"" the in%entory
items into one of these gro!psDcategories.
Ord$r Iu&nt!t3 0ro,5$2: EO< 2od$5K Fconomic order (!antity mode" is
the in%entory management techni(!e for determining items optim!m order
(!antity which is the one that minimi@es the tota" of its ordering and
carrying costs. It a"ances fi$ed ordering cost against %aria"e ordering
costs. It is a"so known as economic "ot si@e. 3athematica""y it can e
ca"c!"ated y the fo""owing e(!ation.
FEAT W2 *E
WC
<here *T *nn!a" !sage in !nits
73

+T Erdering Cost
CT Carrying Cost
S$tt!n% o" )&r!ou. .to6 5$)$5.:
M!n!2u2 5$)$5K It indicates the "owest fig!re of in%entory a"ance,
which m!st e maintained in hand at a"" times so that there is no
stoppages of prod!ction d!e to non8a%ai"ai"ity of in%entory. &he
main considerations for fi$ation of minim!m "e%e" of in%entory are
as fo""ows.
1. Information ao!t ma$im!m cons!mption period and
ma$im!m de"i%ery period in respect of each item to
determine its re8order "e%e".
2. *%erage rate of cons!mption for each in%entory.
3. *%erage de"i%ery period for each item.
&he form!"a for ca"c!"ation is as !nder.
M!n!2u2 5$)$5 o" !n)$ntor3 L R$Cord$r 5$)$5 DA)$r&%$ r&t$ o"
on.u20t!on G A)$r&%$ t!2$ o" !n)$ntor3 d$5!)$r3E
M&G!2u2 L$)$5: It indicates the ma$im!m fig!re of in%entory
(!antity he"d in stock at any time. &he important considerations
which sho!"d go%ern the fi$ation of ma$im!m "e%e"s of in%entory are
as fo""ows.
1. &he information ao!t its re8order "e%e" since it itse"f depends
!pon its ma$im!m rate of cons!mption and ma$im!m
de"i%ery period.
2. Inow"edge ao!t minim!m cons!mption and minim!m
de"i%ery period for each in%entory sho!"d a"so e known.
3. &he fig!re of FEA.
,. *%ai"ai"ity of f!nds, storage space, nat!re of items and their
price per !nit are a"so important for the fi$ation of ma$im!m
"e%e".
7,

&he form!"a for ca"c!"ation is as !nder.
M&G!2u2 5$)$5 o" !n)$ntor3 L R$Cord$r 5$)$5 M r$Cord$r Iu&nt!t3
C DM!n!2u2 on.u20t!on G M!n!2u2 r$Cord$r 0$r!odE
R$Cord$r L$)$5: &his "e%e" "ies etween the ma$im!m and
minim!m "e%e"s in s!ch a way that efore the materia" ordered is
recei%ed into the stores, there is s!fficient (!antity on hand to co%er
oth norma" and anorma" cons!mption sit!ations. In other words, it
is the "e%e" at which fresh order sho!"d e p"aced for rep"enishment
of the stock.
&he form!"a for ca"c!"ation is as !nder.
R$Cord$r 5$)$5 o" !n)$ntor3 L M&G!2u2 r$Cord$r 0$r!od G
M&G!2u2 u.&%$ OR M!n!2u2 L$)$5 M DA)$r&%$ R&t$ o"
on.u20t!on G A)$r&%$ T!2$ to o,t&!n "r$.# .u005!$.E
D&n%$r L$)$5: It is the "e%e" at which norma" iss!es of the raw
materia" in%entory are stopped and on"y emergency iss!es are made.
&he form!"a for ca"c!"ation is as !nder.
D&n%$r 5$)$5 o" !n)$ntor3 L A)$r&%$ on.u20t!on G L$&d t!2$ "or
$2$r%$n3 0ur#&.$.
Cont!nuou. .to6 )$r!"!&t!on: &he checking of physica" in%entory is an
essentia" feat!re of e%ery so!nd system of materia" contro". )!ch a checking
may e periodic or contin!o!s.
79

76

77
2#1# 2##9 2##5 2##7 2##6

75

79

5#

51
+a"ance )heet for the Oear Fnded as on 31
st
march 2#13
2#13 2#12

52
7rofit and Loss *cco!nt for the Oear Fnded as on 31
st
march 2#13
2#13 2#12

53
C0%/ 32O@ %T0TE'ENT 3OR T/E *E0R EN)E) 91
%T
'0RC/A 2019
+B1/ +B1+

5,
C0%/ 32O@ %T0TE'ENT 3OR T/E *E0R EN)E) 91
%T
'0RC/A 2019

+B1/ +B1+

F!nd!n% &nd An&53.!.
WORKING CAPITAL POSITION
+B1/ +B1+ +B11 +B1B
C-11F/& *))F&) 51933 9,#91 ,9#,2 99959
/F& CI0F2 *))F&) 9329 ,929 ,99, 9992
&E&*L *))F&) 99139 57#76 71259 792#9
C* D &* 52.2, 62.11 63.15 7,.,,
/F& C-11F/& *))F&) 3,7,2 1,3#1 15792 27#69
&he 1,3 percent increase in /et C!rrent *ssets is d!e to the fact that there
has een an increase in the C!rrent *ssets y 9#.73J and increase in C!rrent
Liai"ity has een on"y 17.9#J o%er that of the pre%io!s year. &he firm's "e%e" of
"i(!idity eing high we need a check on whether it affects the ret!rn on assets. /ow
there is a s!stantia" increase in the c!rrent assets to tota" assets. &his co!"d e "ess
profita"e on the ass!mption that c!rrent assets generate "esser ret!rn as compared
with ret!rn on fi$ed assets.
59

RISKCRETURN ANAL4SIS
+B1/ +B1+ +B11
)*LF) 199556 19,299 1666#,
F+I& 1963, 1,923 11,91
1F&-1/ E/ I/:F)&3F/& 4J6 39 79.9
In case instead of /et C!rrent assets and net "ock if tota" assets had een !sed in
comp!tation of 1EI then
&E&*L *))F&) 923,5 ,7256
1F&-1/ E/ I/:F)&3F/& 4J6 6#.36 3#.3
56

CURRENT ASSET SCENARIO
COMPONENT +B1/ +B1+
I/:F/&E1O 23.#7 29.51
)-/21O 2F+&E1) ,9.37 9,.,9
C*)H */2 +*/I *))F&) 17.55 5.29
E&HF1 C-11F/& *))F&) 9.7, 2.65
LE*/ */2 *2:*/CF) 3.93 ,.79
<hi"e there has een increase in the %a"!e of a"" components of the C!rrent
*ssets the proportion of in%entory detors and "oans and ad%ances to the c!rrent
assets ha%e dec"ined. <hether this proportionate dec"ine to c!rrent assets is as a
res!"t of red!ced "ead time and etter operating cyc"eS &his might direct"y imp"icate
etter recei%a"es management and in%entory contro".
IN;ENTOR4 MANAGEMENT
COMPOSITION +B1/ +B1+ N INC
1*< 3*&F1I*L ,1.,3 35 27.2
)&E1F) */2 )7*1F) 19.55 16.29 13.9,
CI/I)HF2 BEE2) 35.91 ,#.3, 11.36
<E1I I/ 71EB1F)) ,.16 9., 81#.#3
57

&he increasing component of raw materia"s in in%entory is d!e to the fact
that the company has gone for !"k p!rchases and has increased cons!mption d!e to
a fa"" in prices and red!ced margins for the year.
&o the (!estion as to whether the increasing costs in in%entory are =!stified y the
ret!rns from it the answer co!"d e fo!nd in the HCL retai" e$pansion. &hey are
more into it than ear"ier and at present more than 69# retai" o!t"ets randed with
HCL signages and more are in the pipe"ine. &his a"so ens!res a%ai"ai"ity of
prod!cts to meet the increasing sa"es.
A n$%&t!)$ %ro*t# !n WIP ou5d ,$ ,$&u.$ o"
16 +etter and efficient con%ersion of raw materia"s to finished goods i.e. the
time taken to con%ert raw materia"s after proc!rement to the end prod!ct is
%ery minima".
26 &his a"so is d!e to capacity eing not !ti"i@ed at the optim!m which sho!"d
mean that more of goods are stagnant at the operations. +!t this is not the
% INC
-15
-10
-5
0
5
10
15
20
25
30
RAW
MATERIAL
STORES
AND
SPARES
FINISHED
GOODS
WORK IN
PROGRESS
(NBENTOR*
C
(
N
C
R
E
0
%
E
% INC
55

scenario witnessed here as co!"d e easi"y seen from the increased !ti"i@ation
of p"ant capacity.
&he 69.9J rise in %a"!e is primari"y d!e to the increase in the cons!mption of raw
materia"s in processors. &his shifting %a"!e has to e traced ack to the sa"es of
comp!ters D micro processor ased systems i.e. whether sa"es =!stify this increase.
&he sa"es in %a"!e ha%e increased y 3#J 4,295,.79D1,21,5.966. this is a marked
increase from the pre%io!s year where despite the increase in the %a"!e of raw
materia"s cons!med there was a dec"ine in the %a"!e of sa"es.
&he c!rrent ratio after a dec"ine in 2##, has increased which means an increase in
"i(!idity and so"%ency position of the firm. &his reaffirms what had een stated
ear"ier firms c!rrent assets are at an a"" time high. &his they might ha%e done to
co%er the risk in%o"%ed in their e$panding operations. &he present ratio of 1.7,2.1
co!"d e c"aimed to e optima" as the desired ratio of the company is ao!t is ao!t
1.33.1. !t how far has een the ratio s!ccessf!" in indicating the re"ati%e "i(!idity
of c!rrent assets and "iai"ities ha%e not een answered.
&he %a"!e of imported and indigeno!s raw materia" cons!med gi%e a c"ear
pict!re that if there is a change in the F0I3 po"icy of the go%ernment it is o!nd to
affect the company ad%erse"y as more than7#Jof their cons!mption is from
imports. +!t this is a scenario witnessed in the ind!stry as a who"e and tho!gh HCL
is into e$panding its operations to -ttarancha" it is a"so o!nd to e affected y a
change in the import d!ty str!ct!re.
CASH MANAGEMENT
In cash management the co""ect f"oat taken for the che(!es to e rea"i@ed
into cash is irre"e%ant and non8 interfering here eca!se anks s!ch as )tandard
Chartered, H2CC and CI&I who gi%e credit on the asis of these che(!es after
charging a %ery sma"" amo!nt. F%en otherwise the time taken for the che(!es to e
processed is instantaneo!s. &heir Cash 3anagement )ystem is (!ite efficient.
59

WORKING CAPITAL 7 SHORT TERM FINANCING
NAME OF THE BANK
FUND
BASED
NON FUND
BASED
)&*&F +*/I EC I/2I* 36## 13###
ICICI +*/I 1252 ,79#
H2CC +*/I 12## 6#29
)&*/2*12 CH*1&F1F2 +*/I 12## ,###
)&*&F +*/I EC )*-1*)H&1* 719 ,###
)&*&F +*/I EC 7*&I*L* 13## 339#
C*/*1* +*/I 12#3 2339
)ECIF&F BF/F1*LF 1### 1###
&E&*L 119## 359##
&he consorti!m of anks pro%ide a f!nd ased "imit of 119 crores which
comprises of cash credit and working capita" demand "oans and non f!nd ased
"imits which has ank g!arantee and "etter of credit s!=ect to a "imit of 359
crores.*ny iss!e of the commercia" paper in the part of the firm "eads to a dec"ine in
the "imit of f!nd ased "imits. C!rrent"y the firm ha%ing iss!ed commercia" papers
worth rs3#crores for the year 2##6 has asked the "ead ank to ded!ct the f!nd ased
"imit from 119 crores to 59 crores.
In terms of desirai"ity the commercia" papers are cheaper and ad%antageo!s
to the firm compared to the consorti!m financing. +!t the firm depends on oth and
for working capita" financing is depended on the anks for f!nds s!ch as working
capita" demand "oans and cash credits.
SECURED LOANS +B1B +BB> +BBA
)HE1& &F13 ,991.25 69#3.7 ,957.92
LE/B &F13 93#.#7 # 3,61.36
&E&*L 9921.39 69#3.7 5,,5.55
J )HE1& &F13 9#., 1## 99.#3
UNSECURED LOANS +B1B +BB> +BBA
)HE1& &F13 2993.39 63.9, 76.5,
LE/B &F13 17 169.91 3261.,2
&E&*L 261#.39 233.,9 3335.26
J )HE1& &F13 99.3,5 27.35 2.3
9#

&he preference of short term financing to "ong term as s!ch is not the part of
any po"icy emp"oyed y the firm !t d!e to the reason that they were cheaper and
the interest rates "ower.
&he other nota"e feat!re in HCL statements has een the growing di%idend
po"icy of the firm which has meant that the firm doesn't ha%e at its disposa" too
m!ch cash in hand. &hat is the firm dis!rse as di%idends profits which co!"d ha%e
either een retained in the !siness for capita" e$pendit!re. +!t rather than in%esting
more in p"ant and machine which they can at any point in time y adding on a
additiona" "ine if need e they wo!"d "ike to optimi@e their !ti"i@ation in fi$ed assets
at present.
91

DI;IDEND POLIC4
+B1B +BB> +BBA
2I:I2F/2 7*I2 4 I/CL-2I/2 C2&6 11729.69 7723.22 3999.79
71ECI& *C&F1 &*0 13276.79 12#59.6, 6172.59
2I:I2F/2 7*O8E-& 1*&IE 55.3, 63.55 95.31
&he di%idend pay8o!t ratio is increasing tremendo!s"y o%er the years.
2i%idends imp"y o!tf"ow of cash and "owers f!t!re growth. Howe%er a high
di%idend pay8o!t ratio may "ead to a rise in prices of shares.
LOANS AND AD;ANCES
)FC-1F2 LE*/)
+B1B +BB> +BBA
&E&*L +E11E<I/B) 9921.39 69#3.7 5,,5.55
)HE1&8&F13 ,991.25 69#3.7 ,957.92
7F1CF/&*BF )HE1&8&F13 9# 1## 99
-/8)FC-1F2 LE*/)
+B1B +BB> +BBA
&E&*L +E11E<I/B) 261#.39 233.,9 3335.26
)HE1&8&F13 2993.39 63.9, 76.5,
7F1CF/&*BF )HE1&8&F13 99.36 27.39 2.3
&he company is going for more and more shore8term financing, co!"d e
eca!se of the fact that it is considered as a cheaper so!rce than "ong8term
financing.
92

/.+ANAL4SIS
&he *na"ysis of working capita" is primari"y a test of short8term so"%ency. &here is
danger in ha%ing too "itt"e or too m!ch working capita".
Objective of Analysis
&o maintain ade(!ate working capita" at e%ery time.
&o minimi@e the cost of short term financing.
&o p"ant the %ario!s so!rces of short8term finance we"" in ad%ance in
case of the need.
&o st!dy the trends in the working capita" positions.
G$nd$r R&t!o
Ino2$ r&t!o
93

A%$ Grou0 o" r$.0ond$nt
9,

99

&here has een a significant dec"ine in %o"!me o%er the years from
2##98#6 to 2##981# as can e seen in the graph e"ow.
&he %o"!me decreased y 17##9 in 2##68#7 as compared to that in
2##98#6.
&here has een increased in the %o"!me y ,939 in 2##78#5 as
compared to
that in 2##68#7.
&here has een increased in the %o"!me y 61,6 in 2##58#9 as
compared to
that in 2##78#5.
&he %o"!me decreased y 2271 in 2##981# as compared to that in 2##58
#9.

96

&he *3B co!"d on"y achie%e the fo""owing percentage of its !dgeted
%o"!mes .
OF*1 J of +-2. :EL-3F
2##68#7 76
2##78#5 9#.#3
2##58#9 73
2##981# 76
&hese percentages can e e$p"ained y the graph.
&hese differences can e e$p"ained d!e to drop in act!a" sa"es as per the fo""owing
reasons.
)"!mp in the market
)tiff competitions
Fmergence of foreign p"ayers
97

CHAPTER 1
CONCLUSION 7
RECOMMENDA
TION
95

CONCLUSION
)a"es are decreasing d!ring the year 2##981#. Hence profitai"ity has
dec"ined o%er this time period
2!e to increase in the time period for the rea"i@ation of detors, cash and
ank a"ance has decreased.
)tock t!rn o%er ratio is decreasing, it shows that capita" is "ocked into the
in%entory.
Ci$ed asset t!rno%er ratio has decreased this year, which shows that assets
ha%e not een !sed efficient"y as they had een !sed in the pre%io!s year.
A55 t#$ &,o)$ r&t!o. .#o* & d$r$&.$d or un"&)or&,5$ .!tu&t!on ,$&u.$ o" t#$
*or6 o" $nt!r$ r$05&$2$nt o" oo5&nt #&nn$5J du$ to *#!# t#$ 0rodut!on
0ro$.. #&d ,$$n .to00$d.
99

RECOMMENDATION
Lo&n. 7 Ad)&n$.
)pecia" efforts sho!"d e made to ana"y@e "oans G ad%ances, which are etween
39J to 96J of c!rrent assets. &his can e c"assified etween prod!ction D operation
re"ation re"ated and non8prod!ction D operation re"ated. /o prod!ction re"ated cases
might e financed from other so!rces "ike deent!re etc. and treated separate"y.
In)$ntor3
In%entory sho!"d e re%iewed constant"y to identify show D dead D oso"ete item and
then disposed !nti" 2###8#1 "e%e" is again achie%ed.
Eptim!m "e%e" sho!"d e re%ised periodica""y, keeping in %iew, distance of
s!pp"iers, prod!ction "ead time of s!pp"ier, transport pro"em if any and re"iai"ity
of s!pp"iers. &his wi"" he"p to a%oid oso"esce and dead in%entory.
D$,tor.
* st!dy may e cond!cted if re(!ired y e$perts to pinpoint reason ehind HCL
I/CE)O)&F3 L&2. high correction period of 99 days in 2##,8#9 against 9# days
of &C) It is d!e to (!a"ity of prod!cts, (!a"ity of c!stomer, the segment of
c!stomers marketing effort, distri!tion pattern or other reasons.
Cr$d!tor.
&ho!gh high payo!t days may e apparent"y eneficia" for the company. It has it
%ery hea%y "ong term cost "ike high interest cost, ad credit ratings and shyness of
good (!a"ity D standard s!pp"iers.
C&.# 7 B&n6
1##

&his is the most "i(!id e"ement in c!rrent asset and target sha"" e fi$ed most
ca!tio!s"y. &oo "ow a fig!re of ,.,J of tota" c!rrent assets of HCL I/CE)O)&F3
L&2. in 2##38#, as against 19.9J of &C) may e apparent"y too good to "ook at,
!t this may e "ead to payment crisis at %ario!s sorts.
R&t!o.
&he company sho!"d try to impro%e its c!rrent sit!ation. &he ratios, which are taken
in this research to e%a"!ate the company's position, are C!rrent ratio, A!ick ratio
and *cti%ity ratio. &hese ratios show the act!a" position of the company. &he A!ick
ratio is dec"ining since 2##18#2 ti"" now. &here is a drastic dec"ining in the working
capita" t!rno%er ratio. &his ratio goes to M%e position in c!rrent year compared to
pre%io!s. &he 2ets co""ection period is 399 days for F$porters. &his shows the
poor co""ection po"icy. &he c!rrent ratio is 1.#2 in 2##98#6, which is not !pto the
idea" ratio. &his shows that the c!rrent assets are e(!a" to the c!rrent "iai"ities. /ot
satisfactory.
<UESTIONNAIRE
/*3F.
1#1

2F)IB/*&IE/.
CE37*/O.
I/)&I&-&FDCE17E1*&F HE-)F.
A1. <HF/ <*) &HF E1B*/IH*&IE/ F)&*+LI)HF2S
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a6 /E. EC ECCICF) I/ I/2I*XXXXX
6 */O *+1E*2 71FCF/)FXXXXXXXXX..
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A9 .<HICH )FB3F/& 2E OE- +FLE/BS
a6 L*1BF
1#2

6 3I22LF
c6 )3*LL
A6.*1F OE- *<*1F EC &HF CELLE<I/B I& ECCICF
*-&E3*&IE/ 71E2-C&)S
a6 2IBI&*L CE7IF1
6 )C*//F1
c6 2IBI&*L 2-7LIC*&F1)
A7. <H*& I) OE-1 *BF S
*6 19829
+6 268,#
C6 ,186#
26 61 N
A5. <H*& I) OE-1 I/CE3FS
*6 Y #.9L*IH
+6 #.9L*IH 81L*IH
C6 1L*IH82L*IH
262*+E:F
A9. <H*& I) OE-1 BF/2F1S
*63*LF
+6 CF3*LF
1#3

CHAPTER 8
BIBLIOGRAPH4
1#,

BIBLIOGRAPH4
R$"$rr$d S!t$.
1. www.goog"e.com
2. www.answers.com
3. www.yahoo.com
,. www.ama@on.com
9. www.hc"infosystems.com
R$"$r$n$ Boo6.
1. I 3 7andey
2. IC*I's 3od!"e.
Ot#$r M&t$r!&5
1. +a"ance )heet of HCL Infosystems Ltd.
2. 7rofit and Loss *Dc for the year ending.
3. *nn!a" 1eport of HCL Infosystems .
1#9