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I. EXECUTIVE SUMMARY
The term working capital has several meanings in business and economic development finance. Working capital means a businesss investment in short-term assets needed to operate over a normal business cycle. Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact: accounts receivable (current asset) ,inventory (current assets), accounts payable (current liability). Use of working capital is providing the ongoing investment in shortterm assets that a company needs to operate. A second purpose of working capital is addressing seasonal or cyclical financing needs. Working capital is also needed to sustain a firms growth, to provide liquidity and to undertake activities to improve business operations and remain competitive, such as product development, ongoing product and process improvements, and cultivating new markets. Raymond Ucodenim Ltd. was incorporated in 1925 and is now a Rs.1, 400 crore plus conglomerate having varied businesses like Textiles, Readymade Garments, Denims, Engineering Files & Tools, Aviation and Designer Wear. The company is one of the largest players in the core worsted fabric business with over 60% domestic market shares. Objectives of the Project are to study working capital management process, to study receivable management of the company and to study the process of cash and inventory management.

Page |2 Working capital management is management for the short-term current assets and current liabilities, which is of critical importance to a firm. Cash management is to identify the cash balance which allows the business to meet day to day expenses, but reduces cash holding costs. Inventory management is to identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and minimizes reordering costs and hence increases cash flow, supply chain management. Debtors management is to identify the appropriate credit policy. A business need for working capital can come as a result of several reasons that include increasing sales growth or seasonal growth, customers paying slower, need to increase inventory to support sales growth and/or adding product lines, etc. Though there is no set of universally applicable rules to ascertain working capital needs, but these are some of the factors which could be considered: nature of the product, manufacturing cycle, depreciation policy, seasonal variation, etc. Working capital can be financed by trade credit, bank credit, cash credit, loans, letter of credit, commercial paper, etc. In the year 2010 the inventory period for Raymond Ucodenim Ltd. has increased tremendously from 106 days in 2009 to 272 days in 2010. This is also supported by the decline in the inventory turnover ratio to a meager of 1.34 times in 2010. Since the company is in the textile industry therefore the inventory varies according to seasonal and festive demands.

Page |3 The current ratio is a reflection of financial strength. The current ratio measures the ability of the firm to meets its current liabilities. Current assets get converted into cash and provide the funds needed to pay current liabilities. The current ratio has decreased from 2.68:1 (2009) to 2.33:1 in the year 2010. Current liabilities have increased by 34.67% from the last year 2009. Provisions have increased by 20.78%, thus the total current liabilities have increased by 31.42%. Hence as the increase in the current liabilities is much more than the increase in the current assets, the current ratio has declined slightly. The debtors turnover ratio has improved further in 2010 as it has

increased to 5.50 times. Hence as an effect of the increase in the debtors turnover ratio, there is a significant improvement in the credit period as it has reduced to 66 days from 77 days. For the year ended 2009-2010, the cash ratio has fallen from 2.46:1(2009) to 1.73:1 in 2010. Hence better cash management is needed at Raymond Ucodenim Ltd. The extra money could be utilized to push sales and to pay the increase in the current liabilities. Measures have to tightened to earn larger profits.

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II. INTRODUCTION
Three Meanings of Working Capital:
The term working capital has several meanings in business and economic development finance. In accounting and financial statement analysis, working capital is defined as the firms short-term or current assets and current liabilities. Net working capital represents the excess of current assets over current liabilities and is an indicator of the firms ability to meet its short-term financial obligations. From a financing perspective, working capital refers to the firms investment in two types of assets. In one instance, working capital means a businesss investment in short-term assets needed to operate over a normal business cycle. This meaning corresponds to the required investment in cash, accounts receivable, inventory, and other items listed as current assets on the firms balance sheet. In this context, working capital financing concerns how a firm finances its current assets. A second broader meaning of working capital is the companys overall nonfixed asset investments. Businesses often need to finance activities that do not involve assets measured on the balance sheet. For example, a firm may need funds to redesign its products or formulate a new marketing strategy, activities that require funds to hire personnel rather than acquiring accounting assets.

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Working capital is a valuation metric that is calculated as current assets minus current liabilities. Also known as operating capital, it represents the amount of day-by-day operating liquidity available to a business. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact: accounts receivable (current asset) inventory (current assets), and accounts payable (current liability) In addition, the current (payable within 12 months) portion of debt is critical, because it represents a short-term claim to current assets. Common types of short-term debt are bank loans and lines of credit. Any change in the working capital will have an effect on a business's cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital will have a negative effect on the business's cash holding. However, a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad repercussions to the future of the company.

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Business Uses of Working Capital:

Just as working capital has several meanings, firms use it in many ways. Most fundamentally, working capital investment is the lifeblood of a company. Without it, a firm cannot stay in business. Thus, the first, and most critical, use of working capital is providing the ongoing investment in short-term assets that a company needs to operate. A business requires a minimum cash balance to meet basic day-to-day expenses and to provide a reserve for unexpected costs. It also needs working capital for prepaid business costs, such as licenses, insurance policies, or security deposits. Furthermore, all businesses invest in some amount of inventory, from a law firms stock of office supplies to the large inventories needed by retail and wholesale enterprises. Without some amount of working capital finance, businesses could not open and operate. A second purpose of working capital is addressing seasonal or cyclical financing needs. Here, working capital finance supports the buildup of short-term assets needed to generate revenue, but which comes before the receipt of cash. For example, a toy manufacturer must produce and ship its products for the holiday shopping season several months before it receives cash payment from stores. Since most businesses do not receive prepayment for goods and services, they need to finance these purchases, production, sales, and collection costs prior to receiving payment from customers. Another way to view this function of working capital is providing liquidity. Adequate and appropriate working capital financing ensures that a firm has sufficient cash flow to pay its bills as it awaits the full collection of revenue. When working capital is not sufficiently or appropriately financed, a firm can run out of cash and face bankruptcy.

Page |7 A profitable firm with competitive goods or services can still be forced into bankruptcy if it has not adequately financed its working capital needs and runs out of cash. Working capital is also needed to sustain a firms growth. As a business grows, it needs larger investments in inventory, accounts receivable, personnel, and other items to realize increased sales. New facilities and equipment are not the only assets required for growth; firms also must finance the working capital needed to support sales growth. A final use of working capital is to undertake activities to improve business operations and remain competitive, such as product development, ongoing product and process improvements, and cultivating new markets. With firms facing heightened competition, these improvements often need to be integrated into operations on a continuous basis. Consequently, they are more likely to be incurred as small repeated costs than as large infrequent investments. This is especially true for small firms that cannot afford the cost and risks of large fixed investments in research and development projects or new facilities. Ongoing investments in product and process improvement and market expansion, therefore, often must be addressed through working capital financing. Working capital management is a continuous planning process wherein the manager has to take appropriate decisions, as and when required, the failure of which can result in huge losses for the company. This challenging aspect of working capital management influenced me to choose this topic as my project.

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III. COMPANY PROFILE

Raymond Ucodenim Ltd. was incorporated in 1925 and is now a Rs.1, 400 crore plus conglomerate having varied businesses like Textiles, Readymade Garments, Denims, Engineering Files & Tools, Aviation and Designer Wear. The company is one of the largest players in the core worsted fabric business with over 60% domestic market share. The denim division has an installed capacity of 30 million meters and produces high quality ring denims. The company currently ranks among the top 3 producers in India. The engineering files & tools division constitutes around 12% of the total revenues and is comparatively a smaller division. However, Raymonds is the largest manufacturer of engineering files & tools in the country. The company has entered into global tie-ups and this is expected to add additional revenues to Raymond Ucodenim Ltd. over the next two years. Recognized as the most respected Textile Company of India, Raymond Ucodenim Ltd. Limited is amongst the first three fully integrated manufacturers of Worsted Suiting in the world. As the flag-bearer of the multi-product, multi-divisional Raymond Ucodenim Ltd. Group, it enjoys over 60% share of Indian Worsted Suiting Market. It produces 25 million meters of high-value pure-wool, wool blended and premium polyester viscose suiting in addition to half a million blankets and shawls, all marketed under the flagship brand "Raymond" - a worldwide trusted name since 1925.

Page |9 It also produces and markets plush-velvet furnishing fabric in wide array of designs and colors including carpeting for the niche markets of India and Middle East. Manufacturing facilities include three world-class fully integrated plants in India, employing state-of-the-art technology from wool scouring to finishing stage and modern quality management (ISO 9001) as well as Environment Control Systems (ISO 14001). All the plants are self-sufficient in terms of providing educational, housing, recreation and spiritual support system for the employees and connected townships. Today the mill has turned into a Rs. 1400 crores conglomerate and is Indias leading producer of worsted suiting fabric with 60% market share. It is also the largest exporter of worsted fabrics and readymade garments to 54 countries including Australia, Canada, USA, the European Union and Japan. The Raymond Ucodenim Ltd. group is also the leader among ready-mades in India with a turnover of Rs. 2000 million with its three brands Park Avenue, Parx and Manzoni. Customers today the world over, are looking at one-stop shops that can fulfill all their needs. At Raymond, they offer fully finished products that span various garment categories that has been made possible by a seamless horizontal and vertical integration across divisions. Their textile solutions encompass everything - from worsted suiting to denim and shirting. Its not just range but volume and quality that make them the textile major that they are today. Their plants have a capacity of 31 million meters in producing the finest worsted fabrics and wool blends. The blends comprise of exotic fibres like cashmere, Mohair or Angora or blends of wool with casein and bamboo or the ultimate in fine pure wool Super 230s.

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Raymond Ucodenim Ltd. continues to achieve enhanced customer satisfaction through ongoing innovation. Internationally renowned menswear designers today, style their latest collections from Raymond- the fabric in fashion.

About the company:

Raymond Ucodenim Ltd. is the worlds largest producer of worsted suiting fabrics, commanding an over 60% market share in India. With a capacity of 31 million meters, they are among the few companies in the world, fully integrated to manufacture worsted fabrics, wool & wool blended fabrics. They also convert these fabrics into suits, trousers and apparels that are exported to over 55 countries in the world; including European Union, USA, Canada, Japan and Australia amongst others.

P a g e | 11 A trendsetter and an innovator in the Indian textile market, their expertise has been brought to bear by their in-house research & development team. Their innovations have become milestones in the worsted suitings industry. They mastered the craft of producing the finest suiting in the world using super fine wool count (from 80s to 230s) and blending the same with superfine polyester and other specialty fibres, like Cashmere, Angora, Alpaca, Pure wool and Linen. Raymond Ucodenim Ltd. is amongst the few companies in the world with the expertise to manufacture even finer worsted suiting fabricthe Super 230s. Today they are recognized as a pioneer in manufacturing worsted suiting in India, producing nearly 20,000 designs and colors of suiting fabrics, which are retailed through 30,000 stores in over 400 towns across India. From fabric to fine tailored clothing, Silver Spark Apparel Ltd. marks the Group's foray into the global apparel market.

P a g e | 12 World-class facilities: Raymonds manufacturing facilities include three worldclass fully integrated plants in India, deploying state-ofthe-art systems technology like ISO modern 9001 and quality management Control Environment

Systems (ISO 14001). All their plants are self-sufficient and provide staff welfare measures such as education, housing, recreation and support systems their employee. Raymond Ucodenim Ltd. plants are located in India at the following locations: Thane, near Mumbai, Chhindwara in Central India and Vapi in Gujarat, near Mumbai. Thane Plant: This is the mother plant and is the center of competence for worldclass manufacturing and design facilities. With decades and expertise and finely honed skills, this plant is a treasure house of knowledge for producing superfine worsted suiting fabrics. Chhindwara Plant: The Raymond Ucodenim Ltd. Chhindwara plant, set up in 1991, is a state-of-the-art integrated manufacturing facility located 57 kms away from Nagpur in Central India. Built on 100 acres of land, the plant produces premium pure wool, wool blended and polyester viscose suiting. This plant has achieved a record production capacity of 14.65 million meters, giving it the distinction of being the single largest integrated worsted-suiting unit in the world.

P a g e | 13 Vapi Plant: Raymond Ucodenim Ltd. has increased its worsted suiting capacity by 3 million meters, as part of the second developmental phase of the Vapi plant. After this expansion, Raymond Ucodenim Ltd. will have a total capacity for manufacturing 31 million meters of worsted suiting per annum. Modeled to meet international standards, the Vapi plant has been set up on 112 acres of lush green land with Hi-tech machinery such as warping equipment from Switzerland, weaving machines from Belgium, finishing machines, automatic drawing-in and other machines from Italy. Investment Rationale Core business to add growth: The worsted fabric business registered single digit growth over the last two-three years. This business is likely to take off in the near future and improved product mix and volume growth will drive growth for the main business of the company. The company is expanding the capacity of its worsted fabric business by 3 million meters to 28 million meters through expansion at Vapi plant. This would yield significant improvement in the operational margins on back of reduced labor cost. The company is also expected to benefit from the increased outsourcing opportunity in the worsted fabric segment. Performance of subsidiaries to fuel profitability: Raymond Ucodenim Ltd. has formed many subsidiaries like Raymond Ucodenim Ltd. Apparel Limited, Colourplus Fashions Ltd, and Hindustan Files Limited etc. The double-digit growth rate in these companies would significantly improve the consolidated revenues of Raymond Ucodenim Ltd. resulting in healthy consolidated numbers. They expect these subsidiaries to register 12-14 % CAGR over the next two years thereby contributing to the improved profitability of the company.

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Advantage of integrated business: Raymond Ucodenim Ltd. has an opportunity to take advantage of the post quota regime through its increased scalability and ability to move up the value chain right from yarn to retailing, through its vertically integrated business model. The company has made capacity additions at opportune time to take advantage of promising business situation. Global Tie-ups to establish international presence: Raymond Ucodenim Ltd. has entered into joint ventures with Gruppo Zambiati of Italy for manufacturing high value cotton shirts and cotton linen shirting fabric. It has also entered into a joint venture with Lanificio Fedora Italy for manufacture of blankets, shawls, and will transfer its Jalgaon unit to the venture for its 50% stake. These tie-ups would lead to international branding and a unique growth opportunity for Raymond. Strong retail penetration & prime real estate value: Raymond Ucodenim Ltd. has one of the largest retail penetrations through its 300 odd stores in prime locations, in 150 cities in India. It also has around 25 shops in 15 plus cities of Middle East, Sri Lanka, Bangladesh and Nepal. The Raymond Ucodenim Ltd. Shop retail chain occupies a space of 1 million square feet built-up area. This is apart from around 160 acres of land at Thane a suburb of Mumbai. The current buoyancy in the real estate rates is likely to give significant value to Raymond Ucodenim Ltd. for its property, which is estimated around Rs.100 crore. Foray in the Chinese market: The company is planning entry into Chinese market, which impacts the global textile business; this is a step ahead towards establishing Raymonds presence in the global market. The Chinese venture could help Raymond Ucodenim Ltd. through sourcing of raw material and

P a g e | 15 intermediate products for the companies manufacturing facilities in India and marketing its products in Chinese market.

Details of all Raymond Ucodenim Ltd. products are enlisted below:

Raymond Ucodenim Ltd. Incorporated in 1925, Raymond Ucodenim Ltd. Limited has five divisions comprising of Textiles, Denim, Engineering Files & Tools, Aviation and Designer Wear. Raymond Ucodenim Ltd. Textile is India's leading producer of worsted suiting fabric with over 60% market share. Raymond Ucodenim Ltd. Textiles is the worlds third largest integrated manufacturer. Raymond Ucodenim Ltd. Textile has developed strong in-house skills for research & development and is thus, perceived as pioneer and innovator. Furnishings: The company is known in the market for trend setting designs in furnishings (home & office) and product innovations.

Product portfolio:
Plain - Hotels & Auditoriums in India. Shadow Velvet shadow

effect in the plain fabric for elegant appearance -leading hotels in India.

P a g e | 16 Stencil Sole producer. Shades of Plain Velvet. Dobby - Back-coated plush fabrics that improves the binding strength of pile to the base fabric. Targeted at the automotive upholstery market. Also used in office chairs and panels. Full Pile Jacquard - The entire fabric range is treated with Flurogard to make it stain resistant. Fire resistance treatment on Raymond Ucodenim Ltd. velvet: To cater to the specific requirements of auditoriums, theatres & automobile industry, the facility to treat the entire product range is available. The fabric is treated with special chemicals to impart fire resistant property to the fabric.

The company exports 55% of its production to around 20 countries around the world and to leading denim wear brands like Levi's, Pepe, Lee Cooper and retail brands like Zara, H&M, Gap, Tommy Hilfiger, etc. Raymond Ucodenim Ltd. UCO Denim is a Joint Venture between Raymond Ucodenim Ltd. Indias largest textile and apparel major and UCO NV of Belgium. We produce and market specialty ring color and stretch denim. With a combined capacity of 80 million and manufacturing facilities across 3 continents US, Europe and Asia, Raymond Ucodenim Ltd. UCO is in a best position to develop an optimal and flexible service to meet global requirements of large international brands.

IV. OBJECTIVES AND SCOPE OF THE PROJECT

P a g e | 17 Objectives of the Project: To study working capital management process. To study receivable management of the company. To study the process of cash and inventory management. Scope of the project: The scope of the project includes elaborate discussion on: Statement of working capital. Inventory management Cash management. Debtors management. The above-mentioned topics form the core part of working capital management. Limitations: Not considered other current assets and their ratios, which form a part of working capital like Stock of raw material, work in progress, outstanding expenses, labor, etc as too many calculations may lead to confusion. Methodology: Acquisition of primary and secondary data. Primary data: The first hand data obtained from the company sources (E.g.; information about the company. Secondary data: Annual reports, balance sheets, trial balance, etc.

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V. WORKING CAPITAL
Working capital management is management for the short-term current assets and current liabilities, which is of critical importance to a firm. Lack of efficient and effective utilization of working capital leads to earn low rate of return on capital employed. The requirement of working capital varies from firm to firm depending upon the nature of business, production policy, market conditions, seasonality of operations, conditions of supply, etc. Working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders.

P a g e | 19 Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above.

Management of working capital:

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. It simply refers to management of the working capital, or in more precise terms, the management of current assets. A firms working capital consist of its investment in current asset which include short term asset such as cash and bank balance, inventories, receivables, and marketable securities. Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow, supply chain management ; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ). Debtors management: Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); Discounts and allowances.

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Short term financing: Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

Need for adequate working capital:

Every firm must maintain a sound working capital position otherwise; its business activities may be adversely affected. The excess working capital, i.e. when the investment in working capital is more than the required level, it may result in unnecessary accumulation of inventories resulting in waste, theft, damage etc. Delay in collection of receivables resulting in more liberal credit terms to customers than warranted by the market conditions. Adverse influence on the performance of the management. On the other hand, inadequate working capital is not good for the firm. It may result in the following: The fixed asset may not be optimally used. Firm growth may stagnate. Interruptions in production schedule may occur ultimately resulting in lowering of the profit of the firm. The firm may not be able to take benefit of an opportunity. Firm goodwill in the market is affected if it is not in a position to meet its liabilities on time.

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Working Capital Needs:

A business need for working capital can come as a result of several reasons that include the following: Increasing sales growth or seasonal growth. Customers paying slower. Need to increase inventory to support sales growth and/or adding product lines. Desire to take discounts on purchases from vendors. Recent operating losses have reduced your cash reserves. Increased expenses due to additional marketing efforts, new employees, office relocation, etc.

Factors determining working capital requirement:

Though there is no set of universally applicable rules to ascertain working capital needs, the following factors may be considered: Nature of business: The Working capital requirement depends upon the nature of business carried on by the organization. In a manufacturing firm the requirement is generally high, but it also depends on the type and nature of the product. The proportion of current asset to total assets measures the relative requirements of working capital of various industries.

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Manufacturing cycle: Time span required for the conversion of raw materials into finished goods is a block period. The period in reality extends a little before and after the work-in-progress. The manufacturing cycle and the fund requirements vary in direct proportion. The funds blocked in manufacturing cycle vary from industry to industry. Further, even within the same group of industries, the operating cycle may be different due to technological considerations. Business cycle: Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a shift in working capital position particularly for working capital requirement. The variations in business conditions may be in two directions: Upward phase when boom conditions prevail, and Downswing phase when economic activity is marked by a decline. During the upswing of business activity, the need for working capital is likely to grow and during the downswing phase the working capital requirement is likely to be less. The decline in economy is associated with a fall in the volume of sales, which, in turn, leads to a fall in the level of inventories and book debts. Seasonal variation: Variation apart, seasonally factor creates production or even shortage problem. This is the reason as to why manufacturing concerns producing seasonal products purchase their raw material throughout the year and carry on the manufacturing activity. For example woolen garments have a demand during winter. But the manufacturing

P a g e | 23 operation for the same has to be conducted during the whole year resulting in working capital blockage during off-season.

Credit policy:
The credit policy influences the requirement of working capital in two ways: Through credit terms granted by the firm to its customers/buyers of goods. Credit terms available to the firm from its creditors.

Growth and expansion:

It is, of course difficult to determine precisely the relationship between the growth and volume of business and the increase in working capital. The composition of working capital also shifts with economic circumstances and corporate practices. However, it is to be noted that the need for increased working capital funds does not follow the growth in business activity but precedes it.

Dividend policy:
The payment of dividend consumes cash resources and, thereby, effects working capital to that extent. However, if the firm does not pay dividend but retains the profit, working capital increases. There are wide variations in industry practices as regards the inter relationship between working capital requirement and dividend payment. In some cases, shortage of working capital is sometimes a powerful reason for reducing or even skipping dividends in cash (resolved by payment of bonus shares).

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Depreciation policy:
There is an indirect effect of depreciation policy on working capital. Enhanced rates of depreciation lower the profits and tax liability and, thus, more cash profits. Higher depreciation means lower disposable profits and a smaller dividend payment. Thus cash is preserved. If the current capital expenditure falls short of the depreciation provision, the working capital position is strengthened and there may be no need for short-term borrowing.

Sources of working capital finance:

Working Capital Finance - Gives your business the money it needs to grow. Working capital finance makes it possible for the business to obtain capital if the business has been denied for a bank loan, or if it has little cash flow. Traditional funding through a standard bank can be difficult to obtain, but they also don't satisfy the needs of expanding companies. Without capital a business will have to slow down their growth, which can hurt a business. Working capital finance makes it possible for any business to have access to the cash it needs, when it needs it. Working capital finance allows a company to turn their income streams into instant capital. They can turn their accounts receivables into cash by selling them to a lender who specializes in accounts receivable factoring. Another method for obtaining working capital is to lease equipment or to obtain credit from a company (for eg. Companies like Office Depot or Lowes in US) that sells items that the business needs. Obtaining lines of credit from a company are easier than going after a bank loan. If at all possible obtain a line of credit from a company that

P a g e | 25 will report your business credit scores to the major business credit bureaus. This will help build your business credit scores, so it is easier to qualify for large bank loans. Another popular method of working capital finance is utilizing assetbased financing. That means that the company would use assets from their own business to secure loans. They could pledge any commercial real estate their business owns, business vehicles, equipment, etc. Lending institutions approve asset-based loans quicker because the risk isn't as high. Small companies often can obtain more cash with an asset-based loan. Commercial banks are the largest financing source for external business debt including working capital loans, and they offer a large range of debt products. With banking consolidation, commercial banks are multistate institutions that increasingly focus on lending to small business with large borrowing needs that pose limited risks. Consequently, alternate sources of working capital debt become more important. Savings banks and thrift lenders are increasingly providing small business loans, and, in some regions, they are important small business and commercial real estate lenders. Although savings banks offer fewer products and may be less familiar with unconventional economic development loans, they are more likely to provide smaller loans and more personalized service. Commercial finance companies are important working capital lenders since, as non -regulated financial institutions, they can make higher risk loans. Some finance companies specialize in serving specific industries, which allows them to better assess risk and

P a g e | 26 creditworthiness, and extend loans that more general lenders would not make. Another approach used by finance companies is asset-based lending in which a lender carefully evaluates and lends against asset collateral value, placing less emphasis on the firms overall balance sheet and financial ratios. An asset-based lending approach can improve loan availability and terms for small firms with good quality assets but weaker overall credit. Commercial finance companies also are more likely to offer factoring than banks. Trade credit extended by vendors is a fourth alternative for small firms. While trade credit does not finance permanent or long-term working capital, it helps address short-term borrowing needs. Extending payment periods and increasing credit limits with major suppliers is a fast and cost-effective way to finance some working capital needs that can be part of a firms overall plan to manage seasonal borrowing needs. Other working capital finance options exist beyond these three conventional credit sources. Business development corporations (BDCs) are a second alternative source for working capital loans. BDCs are high-risk lending arms of the banking industry that exist in almost every state. They borrow funds from a large base of member banks and specialize in providing subordinate debt and lending to higher-risk businesses. While BDCs rely heavily on bank loan officers for referrals, economic development practitioners need to understand their debt products and build good working relationships with their staffs. Venture capital firms also finance working capital, especially

permanent working capital to support rapid growth. While venture capitalists typically provide equity financing, some also provide debt

P a g e | 27 capital. A growing set of mezzanine funds,7 often managed by venture capitalists, supply medium-term subordinate debt and take warrants that increase their potential returns. This type of financing is appropriate to finance long-term working capital needs and is a lowercost alternative to raising equity. However, the availability of venture capital and mezzanine debt is limited to fast-growing firms, often in industries and markets viewed as offering the potential for high returns. Government and nonprofit revolving loan funds also supply working capital loans. While small in total capital, these funds help firms access conventional bank debt by providing subordinate loans, offering smaller loans, and serving firms that do not qualify for conventional working capital credit. Many entrepreneurs and small firms also rely on personal credit sources to finance working capital, especially credit cards and second mortgage loans on the business owners home. These sources are easy to come by and involve few transaction costs, but they have certain limits. First, they provide only modest amounts of capital. Second, credit card debt is expensive with interest rates of 18% or higher, which reduces cash flow for other business purposes. Third, personal credit links the business owners personal assets to the firms success, putting important household assets, such as the owners home, at risk. Finally, credit cards and second mortgage loans are not viable for entrepreneurs who do not own a home or lack a formal credit history. Immigrant or low-income business owners, in particular, are least able to use personal credit to finance a business. Given these many limitations, it is desirable to move entrepreneurs from informal and

P a g e | 28 personal credit sources into formal business working capital loans that are structured to address the credit needs of their firms.

Working capital finance may be classified into the following:

Spontaneous source of finance: Finance that naturally arises in the course of business is called as spontaneous financing. For example: Trade creditors, credit from employees, credit from suppliers of services etc.

Negotiated financing:
Financing which has to be negotiated with lenders (commercial banks, financial institutions, and general public) is called as negotiated financing. This kind of financing may short term or long term in nature. Between spontaneous and negotiated sources of finance, the latter is more expensive and inconvenient to raise. Spontaneous source of finance reduces the amount of negotiated financing. The working capital may be financed in either of the following ways, keeping in view of accessibility to different sources as well as the cost factor-

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Hedging Approach to Working Capital Financing: Under hedging approach to financing working capital requirements of a firm each asset in the balance sheet asset side would be off set with a financing instrument of the same approximate maturity. The basic approach of this method of financing is that the permanent component of current assets and fixed assets would be met with long-term funds and the short term or seasonal variation in current assets would be financed with short-term debt. If the long-term funds are used for short-term needs of the firm, it can identify and take steps to correct the mismatch in financing.

Trade credit: Trade credit refers to the credit extended by suppliers of goods and services in the normal course of transaction/ business/ sales. It is an informal spontaneous source of finance. Not requiring negotiation and formal agreement trade credit is free from the restrictions associated with formal/negotiated source of finance/ credit. It does not involve any explicit interest charge, however there is an implicit cost of trade credit. As, the cost of trade credit is generally very high beyond the discount period; the firms should avail of the discount on prompt payment. Bank Credit: It is the primary institutional source of working capital finance in India. Banks in five ways provide working capital finance: Cash credit/ Overdraft:

P a g e | 30 Under cash credit/ overdraft form the banks specify, a pre-determined borrowing/ credit limit. The borrower can draw/ borrow upto the stipulated credit/ overdraft limit. This form of bank financing of working capital is highly attractive to the borrowers because, firstly, it is flexible in that although the borrowed funds are repayable on demand, banks usually do not recall cash advances/ roll them over and, secondly the borrower has the freedom to draw the amount in advance as and when required, while the interest liability is only on the amount actually outstanding. Loans: Under this arrangement the entire amount of borrowing is credited to the current account of the borrower or released in cash. The borrower has to pay interest on the total amount. The loans are repayable on demand or in periodic installments. They can also be renewed form time to time. As a form of financing, loans imply a financial discipline on the part of the borrowers. From the modest beginning in the early nineties, at least 80 % of MPBF/ credit limit must be in the form of loans in India. Bills purchased/ discounted: Under this arrangement, a bill arises out of a trade sale-purchase transaction on credit. The seller of goods draws the bill on the purchaser of goods, payable on demand or after a usance period, not exceeding 90 days. On acceptance of bill by the purchaser, the seller offers it to the bank for discount/ purchase. On discounting the bill, the bank releases the funds to the seller. The bill is presented by the bank to the purchaser / acceptor of the bill on due date for payment. The bills can also be rediscounted with the other banks / RBI. Term loans:

P a g e | 31 Under this arrangement the banks advance loans for three to seven years repayable in yearly or half yearly installments. Letter of credit: It is an indirect form of working capital financing and banks assume only the risk, the credit being provided by the supplier himself. The purchaser of goods on credit obtains a letter of credit from a bank. The bank undertakes the responsibility to make the payment to the supplier in case the buyer fails to meet his obligation. Commercial paper: Commercial paper is a debt instrument used for short term financing that enables highly rated corporate borrowers to diversify their sources of short-term borrowings and provide an additional financial instrument to investors to a freely negotiable interest rate. The maturity period ranges from three months to one year. Since it is short-term debt, the issuing company is required to meet dealers fees, rating agency fees, and any other relevant charges. It is a short term unsecured promissory note issued by corporations with high credit ratings. Inter corporate loans and deposits: In the present corporate world, it is a common practice that the company with surplus cash will lend other period for short period normally ranging from 60 to 180 days. The rate of interest will be higher than the bank rate of interest and depending on the financial soundness of the Borrower Company. This source of finance reduces the intermediation of funds in financing. Public Deposits:

P a g e | 32 The period of public deposits is usually restricted to a maximum of 5 years at a time. Thus, this source can provide finance only for short term to medium term, which could be useful for meeting working capital needs of the company. It is therefore advisable to use the amounts of public deposits for acquiring assets of long-term nature unless its pay back period is very short. Funds generated from operations: Funds generated from operations during an accounting period increase working capital by an equivalent amount. The two main components of funds generated from operations are profits and depreciation. Working capital will increase by the extent of funds generated from operations. Deferred tax payment: Under this arrangement the tax authorities supply the credit. This is created by the interval that elapses between the earning of the profits of the company and the payment of the taxes due on them.

Accrued Expenses: For most firms accrued expenses act as a spontaneous source of shortterm finance. One such example would be that of employees accrued wages. For large firms, the accrued wages held by the firm constitute an important source of financing. In case of Raymond Ucodenim Ltd. Limited, this would amount to wages and salaries of about 6000 employees and workers.

P a g e | 33

VI. STATEMENT OF WORKING CAPITAL

Changes In W-cap PARTICUL ARS
Current Assets

For the year ended 2004 2009 2010

Increase
2004-05

Decrease
2004-05

2009-06 2004-05

Inventories 29490.66 Sundry Debtors Cash and Bank Other Current Assets Loans and Advances
Total Current Assets Current Liabilities

28756.59 22627.67 1324.83 2277.72 12206.35 67193.16

31904.1 6 24846.74 2503.17 3315.06 14442.06 77011.19

3147.57 2219.07 1178.34 389.93 84.21 1037.34 2235.71 9818.03

734.07 1986.85 1351.09

24614.52 2675.92 1887.79 12122.14 70791.03

3597.87

Acceptances Sundry Creditors Advances against sales Due to Subsidiary Cos Deposits from Dealers and Agents

89.75 10491.99 449.05

42.17 11009.37 459.52

45.09 16427.41 560.35 517.38 10.47

2.92 5418.04 100.83

47.58

137.82

207.25

177.84

69.43

29.41

4874.25

5134.95

5318.21

260.7

183.26

P a g e | 34 Overdrawn Bank Balances Other liabilities Interest accrued but not due Provisions
Total Current Liabilities Net Working Capital (CA CL)

186.60 1491.91

484.16 1689.99

1125.67 2044.72

297.56

641.61

198.08

354.73 50.85

528.05 315.87 8373.15 26410.39 44380.64 477.20 5605.17 25109.78 42083.38 6770.84 26227.34 50783.85

161.33

1165.67 1117.56 8700.47

2767.98 1300.61

2297.26

VII. INVENTORY MANAGEMENT

Inventory refers to the stock of products a firm is offering for sale and the components that make up the product. It includes raw materials; work in process (semi-finished goods). Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly the overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business.

P a g e | 35

Inventory Financing:
As with accounts receivable loans, inventory financing is a secured loan, in this case with inventory as collateral. However, inventory financing is more difficult to secure since inventory is riskier collateral than accounts receivable. Some inventory becomes obsolete and looses value quickly, and other types of inventory, like partially manufactured goods, have little or no resale value. Firms with an inventory of standardized goods with predictable prices, such as automobiles or appliances, will be more successful at securing inventory financing than businesses with a large amount of work in process or highly seasonal or perishable goods. Loan amounts also vary with the quality of the inventory pledged as collateral, usually ranging from 50% to 80%. For most businesses, inventory loans yield loan proceeds at a lower share of pledged assets than accounts receivable financing. When inventory is a large share of a firms current assets, however, inventory financing is a critical option to finance working capital. Lenders need to control the inventory pledged as collateral to ensure that it is not sold before their loan is repaid. Two primary methods are used to obtain this control: (1) warehouse storage; and (2) direct assignment by product serial or identification numbers. Under one warehouse arrangement pledged inventory is stored in a public warehouse and controlled by an independent party (the warehouse operator). A warehouse receipt is issued when the inventory is stored, and the goods are released only upon the instructions of the receipt-holder. When the inventory is pledged, the lender has control of the receipt and can prevent release of the goods until the loan is repaid. Since

P a g e | 36 public warehouse storage is inconvenient for firms that need on-site access to their inventory, an alternative arrangement, known as a field warehouse, can be established. Here, an independent public warehouse company assumes control over the pledged inventory at the firms site. In effect, the firm leases space to the warehouse operator rather than transferring goods to an off-site location. As with a public warehouse, the lender controls the warehouse receipt and will not release the inventory until the loan is repaid. Direct assignment by serial number is a simpler method to control inventory used for manufactured goods that are tagged with a unique serial number. The lender receives an assignment or trust receipt for the pledged inventory that lists all serial numbers for the collateral. The company houses and controls its inventory and can arrange for product sales. However, a release of the assignment or return of the trust receipt is required before the collateral is delivered and ownership transferred to the buyer. This release occurs with partial or full loan repayment. While inventory financing involves higher transaction and administrative costs than other loan instruments, it is an important financing tool for companies with large inventory assets. When a company has limited accounts receivable and lacks the financial position to obtain a line of credit, inventory financing may be the only available type of working capital debt. Moreover, this form of financing can be cost effective when inventory quality is high and yields a good loan-to-value ratio and interest rate.

P a g e | 37 Factors to be considered when determining optimum stock levels include: What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can the company remove slow movers from their product range without compromising best sellers? It should be noted that stock sitting on shelves for long periods of time ties up money, which is not working. For better stock control, the following may be considered: Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer the company keeps it. Consider having part of the companys product outsourced to another manufacturer rather than make it yourself. Review your security procedures to ensure that no stock is going out the back door! Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges.

P a g e | 38

The inventory of a manufacturing concern usually includes: Raw material Work-in-Progress Finished goods

Inventory management at Raymond Ucodenim Ltd.

The inventory of Raymond Ucodenim Ltd. ltd. includes the following: Raw material Work-in-Progress Stores and Spares Finished goods.

The table below gives a brief description of all the types of inventory, the components included, the valuation methods Followed and other relevant details: Particulars Raw Material WIP Finished Goods Stores & Spares

P a g e | 39 Component s i. Wool (Australia) (Fine micron, coarse) __ ii. Polyester (Reliance Ltd.) iii. Viscose (Locally) iv. Yarn (RSM) (Rajasthan) v. Camel hair (Locally) vi. Soya bean fiber (Locally) Fine micron-July and Stored for the entire year Fabric Oils, Lubricants etc.

At its peak

Valuation Method

Specific Identification

Weighted Average

Value as in March 2010 (Rs.Crores)

20

68-70

Managed by

Production & Planning dept.

Production & Planning dept.

Wedding and festive Seasons. Stable: AprilAugust And Dec-Jan. Weighted Average Cost or market value Whichever is less. 110 (In accordance with AS-2 Including Excise duty) Production and Planning Dept, Warehouse dept & Marketing dept.

Weighted Average

8-9

Ratios:
Ratio used for evaluation Formula used Ratio for the financial year ended 2010 2009 2004

P a g e | 40

Inventory Turnover ratio (Times) Inventory Period (Days) Current Ratio

COGS Average Inventory 1.34 3.43 2.84

365 Inventory Turnover Ratio

272

106

129

Current assets, loans and advances Current liabilities and provisions

2.33

2.68

2.68

Interpretation:
Inventory Turnover ratio:

This ratio measures the number of times a companys inventory is turned over in a year. A high turnover ratio is considered good. From working capital point of view, a company with a high turnover requires a smaller investment in inventory than one producing the same sales with a low turnover. This ratio indicates managements efficiency in turning over the companys inventory, which can be compared with other companies in the same field. It also suggests how adequate a companys inventory is for its business volume. There is no standard yardstick for this ratio since inventory turnover rates, vary from industry to industry. If a company has an inventory turnover rate thats above average for its industry, it will generally mean that a better balance is being maintained between inventory and sales volume. So there will be less risk of

P a g e | 41 Being caught with a top-heavy inventory position in the event of a decline in the price of raw materials, or in the market demand for end products, and Wastage through materials and products standing unused for longer periods than anticipated with consequent possible deterioration in quality and/or marketability. On the other hand, if inventory turnover is too high compared to industry norms, problems could arise from shortages in inventory, resulting in lost sales. Since much of a companys working capital is usually tied up in inventory, how the inventory position is managed has an important and direct effect on earnings. For Raymond Ucodenim Ltd. the inventory turnover ratio has increased from 2.84 times (2004) to 3.43 times (2009), but showed a major decline in the year 2009-06 indicating that inventory management has to be taken due attention. But the decline in the inventory turnover ratio could be attributed to many reasons and not just poor inventory management. Inventory Period had shown a downward trend from 129 days (2004) and 106 days (2009) corresponding to then increase in the inventory turnover period in the same period. But there is major variation to the earlier years. In the year 2010 the inventory period has increased tremendously from 106 days in 2009 to 272 days in 2010. This is also supported by the decline in the inventory turnover ratio to a meager of 1.34 times in 2010. Since the company is a textile industry therefore the inventory varies according to seasonal and festive demands.

Current ratio:

P a g e | 42 The current ratio is a reflection of financial strength. The current ratio measures the ability of the firm to meets its current liabilitiescurrent assets get converted into cash and provide the funds needed to pay current liabilities. A current ratio can be improved by increasing current assets or by decreasing current liabilities. Steps to accomplish an improvement include: Paying down debt. Acquiring a long-term loan (payable in more than 1 year's time). Selling a fixed asset. Ploughing back profits into the business. A high current ratio may mean that cash is not being utilized in an optimal way. For example, the excess cash might be better invested in equipment. The higher the current ratio, the greater the margin of safety, the larger the amount of current assets in relation to current liabilities, the more the firms ability to meet its current obligations. The current ratio for Raymond Ucodenim Ltd.. was 2.68:1 in 2004. The current ratio stood at 2.68:1 for the year ended 2009.If we compare current ratio of 2009 with 2004,we can see that the percentage of the ratio remains same for both years but here cash bank balance has decreased by 51%. Other current assets have increased by 20.6% compared with 2004. And provisions has decreased by 33.05%, current liabilities so the current ratio for both the years has remained constant i.e. 2.68:1. When one sees the changes in assets, cash and bank balance has increased tremendously by 79.07 %. This is because company has

P a g e | 43 received prompt payments from debtors. Other current assets have decreased by 25%. The overall decrease in earning of interest and dividend was 70%. The Current Liabilities, provisions have increased by 22.42 %. This is because the provision made by the company such as proposed dividend, tax on dividends, retirement benefits and excise duties has increased by 22%. But the current ratio has decreased from 2.68:1 (2009) to 2.33:1 in the year 2010. This is the result of the changes in current assets and current liabilities or changes in the working capital. Current assets comprises of Inventory, Debtors, Cash & Bank balances, Other Current Assets and Loans & Advances. The percentage of inventory held by Raymond Ucodenim Ltd. Increased by 10%, which is evident form the decline in the inventory turnover ratio and the increase in the inventory period. Debtors have increased by 7% compared to the previous year. That means sales and marketing efforts needs a push because inventory is pilling up. Inventory has increased and so has the debtors. Cash and bank balances have increased drastically by 88% in 2010 as in the year 2009. Attention has to be paid to the increase in the amount of cash balances. Other current assets have also increased by 45.54%. Loans and advances have also increased by 37.35%. Thus the overall current assets have increased by 17.57%. Dividend and interest subsidy receivable has increased as compared to the last year.

P a g e | 44

VIII.

CASH MANAGEMENT

There are four primary motives for maintaining cash balances. Transactions Motive - to meet payments arising in the ordinary course of business. Speculative Motive opportunities Precautionary Motive - to maintain a cushion or buffer to meet Unexpected cash needs Compensating motive - Hold cash balances to compensate banks for providing certain services and loans. The basic objectives of cash management are: To meet the cash disbursement needs. To minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management is to reconcile them. Cash Management Techniques: The strategic aspects of efficient cash management are: Efficient inventory management Speedy collection of accounts receivables Delaying payments on accounts payable. There are some specific techniques and processes for speedy collection of receivables from customers and slowing disbursements. - to take advantage of temporary

P a g e | 45

Speedy Cash Collections:

Expedite preparing and mailing the invoice Accelerate the mailing of payments from customers Reduce the time during which payments received by the firm remain uncollected Prompt payment by customers Early conversion of payments into cash. Concentration Banking Lock Box System Slowing disbursements: Avoidance of early payments Centralized disbursements Float Paying from a distant bank Cheque encashment analysis Accruals (goods and services accrued but not paid for)

Cash Management At Raymond Ucodenim Ltd.

For early conversion of its receivables into cash, some of the incentives offered by Ucodenim Ltd. for early payment are as under: Cash discounts for payment made within the due period. Bonuses given to the party vary with the volume as well as value of sales. One-third of advertising expenses of retailers and franchisees are borne by the company.

P a g e | 46

Raymond Ucodenim Ltd. ltd. has invested about Rs. 600 crores (approx.), which stands as their core investment. In order to diversify its risk the company has invested this amount in various instruments including Mutual funds, debt instruments, corporate deposits, equity markets, etc. Amongst others alternatives the company prefers to invest an amount of Rs.2-5 crores (or the adjusted amount after considering the daily requirements) in mutual funds on a daily basis (temporary investment) and play safe with their core investment amount. Another reason for this decision is the tax-free dividend income (5%-6%) earned by investing in Mutual funds. Raymond Ucodenim Ltd. Ltd. generally experiences surplus profits. Om Kotak Mahindra ltd., DSP Meryll Lynch are the chief corporate advisors for the company. However the Board of Directors takes the final decision. One such decision taken by the B.O.D includes that the companys investment in the equity market should not exceed Rs.50 crores (keeping the volatility of the stock markets in mind). Finally, it can be seen that the Average Rate of Return on Investment is 5%-6%. All the decisions regarding investments and cash management are looked after by the Finance Department (Corporate division).

P a g e | 47

Ratios:
Ratio used for evaluation Formula used Ratio for the financial year ended 2010 Cash Ratio Cash & Book Balances + Current Investments Current Liabilities 1.73 2009 2.46 2004 2.35

Sales to Cash Ratio

Sales_

51.34

84.19

37.15

Cash Cash Profit Ratio Cash Profit Sales * 100 17.72 18.68 22.75

Notes:
In all the calculations involving Net Sales, the amount is taken net of excise duties paid. Net sales = Net sales Excise duty

(Rs. In lakhs) Particulars Net sales (Net of excise) 2010 132275. 51 2009 111534.4 4 2004

99431.64

P a g e | 48

IX. RECEIVABLES MANAGEMENT (DEBTORS)

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed. Late payments can erode profits and lead to bad debts Slow payment has a crippling effect on business. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. Establish clear credit practices as a matter of company policy. Make sure that these practices are clearly understood by staff, suppliers and customers. Be professional when accepting new accounts, and especially larger ones. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. Establish credit limits for each customer... and stick to them. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. Keep very close to your larger customers. Invoice promptly and clearly.

P a g e | 49 Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example......... Longer credit terms taken with approval, particularly for smaller orders. Use of post-dated cheques by debtors who normally settle within agreed terms. Evidence of customers switching to additional suppliers for the same goods. New customers who are reluctant to give credit references. Receiving part payments from debtors.

Profits only come from paid sales. The act of collecting money is one, which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer.

P a g e | 50 Here are a few ideas that may help you in collecting money from debtors: Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem. When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying. Make it your objective is to get the money - not to score points or get even.

Accounts Receivable Financing:

Some businesses lack the credit quality to borrow on an unsecured basis and must pledge collateral to obtain a loan. Loans secured by accounts receivable are a common form of debt used to finance working capital. Under accounts receivable debt, the maximum loan amount is tied to a percentage of the borrowers accounts receivable. When accounts receivable increase, the allowable loan principal also rises. However, the firm must use customer payments on these receivables to reduce the loan balance. The borrowing ratio depends on the credit quality of the firms customers and the age of the accounts receivable. A firm with financially strong customers should be able to obtain a loan equal to 80% of its accounts receivable. With weaker credit customers,

P a g e | 51 the loan may be limited to 50% to 60% of accounts receivable. Additionally, a lender may exclude receivables beyond a certain age (e.g., 60 or 90 days) in the base used to calculate the loan limit. Older receivables are considered indicative of a customer with financial problems and less likely to pay. Since accounts receivable are pledged as collateral, when a firm does not repay the loan, the lender will collect the receivables directly from the customer and apply it to loan payments. The bank receives a copy of all invoices along with an assignment that gives it the legal right to collect payment and apply it to the loan. In some accounts receivable loans, customers make payments directly to a bank-controlled account (a lock box). Firms gain several benefits with accounts receivable financing. With the loan limit tied to total accounts receivable, borrowing capacity grows automatically as sales grow. This automatic matching of credit increases to sales growth provides a ready means to finance expanded sales, which is especially valuable to fast-growing firms. It also provides a good borrowing alternative for businesses without the financial strength to obtain an unsecured line of credit. Accounts receivable financing allows small businesses with creditworthy customers to use the stronger credit of their customers to help borrow funds. One disadvantage of accounts receivable financing is the higher costs associated with managing the collateral, for which lenders may charge a higher interest rate or fees. Since accounts receivable financing requires pledging collateral, it limits a firms ability to use this collateral for any other borrowing. This may be a concern if accounts receivable are the firms primary asset.

P a g e | 52

Receivables (Debtors) Management At Raymond:

At Raymond Ucodenim Ltd. the sales process is as follows:

P a g e | 53

P a g e | 54 Raymond Ucodenim Ltd. has one agent for each area (state). These agents are the delcredere agents, and receive commission of up to 2.5 % to 4% (approx). The amount of commission however varies according to the quality as well as the quantity of the goods. Under these agents are the various dealers, wholesalers, retailers and franchisees. The amount invested by the wholesalers is 4 crores and above, therefore they are given more credit. Whereas, franchisees invest 1 to 3 crores. Retailers on the other hand invest less as compared to wholesalers and franchisees. Retailers pay to the company either directly or through the bank dealers (250 in number). In case of direct payments the company keeps 12.5% as advance deposits. In case of payment through bank dealers factoring service is being used. The bills would be earlier discounted with the various banks. These banks included amongst others, a few Nationalized Banks, UTI, Standard Chartered, Bank Of India, etc. The payments are usually in the form of demand drafts or cheques. Almost 50 % of these payments are received through CMS (Cheque Management Services), and as this facility is obtained free of cost from UTI bank the company is availing it to its maximum possible benefit. This definitely very much in favors of the company as it reduces the delay in collections, as it would otherwise take at least 10 days for the transactions without the facility. The company has now started using the factoring service. The main factoring agents with which the company deals include: HSBC Bank Standard Chartered Bank

P a g e | 55 UTI Bank. Kotak Mahindra Bank At present Raymond Ucodenim Ltd. is using the factoring services for its 15 parties, which are as follows: B.R. Textiles Motilal Vijaysain Pokarna Fabrics Pvt. Limited R.S. Textiles Woollen Collections Shyam Brothers Kamdev Pushpak Rahul Textiles Varun Textiles Shantilal Raichand Sha Shantilal Manshalal Abhisekh Enterprises R. R. Apparels Fashion Apparels The company uses with recourse as well as the without recourse factoring facility (single channel financing) .The rates vary with the type of facility i.e. with or without recourse as well they vary with respect to the different banks. However these rates are recovered entirely from the various agents and dealers. Thus they dont burden the company at all .The rates are roughly around 6.25 % for with recourse and varies from 10 % to 16 %.

P a g e | 56 The services without recourse (single channel financing) are availed from the following banks: ABN AMRO Bank, CENTURION Bank, HSBC Bank, ICICI Bank. The credit period given by Raymond Ucodenim Ltd. [(as not due)- for MIS purpose]: Retailers Franchisees Wholesalers - 16 days - 45 to 60 to 90 days. - 60 to 90 days

The provision regarding bad debts is not thought as very essential as the company as never had any bad debts till date; this is attributed to the credit policy as well as the Collections policy of the company. The company never writes off any party or any amount Disbursements collection as bad, it tries of every possible measure to recover their payments, when not received directly the company adjusts for the same from the agents commission. The receivables overdue are against invoices as well as against debit notes. When the overdue is against the invoices aggressive actions are take by the company. The company withholds commission for its habitual defaulters. However on an average the credit given is for 104 days.

Marketable securities Investment

= Information Flow = Funds Flow

CONTROL THROUGH INFORMATION REPORTING

P a g e | 57

Ratios:
Ratio used for evaluation Ratio for the financial year ended 2010 Debtors Turnover Ratio (times) Credit Period Net Sales Avg. Debtors 2009 2004

Formula used

5.50

4.72

3.70

365 Debtors Turnover Ratio

66

77

99

Interpretation:
Debtors Turnover Ratio: The debtors turnover ratio has been gradually increasing over the years from 2004 to 2009, from 3.70 to 4.72 respectively. This indicates that the credit period has declined from 99 days (2004) to 77 days (2009). This implies that for the year ended 2009 debtors on an average are collected in a period of 77 days. A turnover ratio of 4.72 (2009) signifies that debtors get converted into cash (4.72) approximately 5 times in a year. Raymond Ucodenim Ltd. is a cash rich company. The liberal policy is adopted to augment its sales thereby not losing its key customers. It is suggested that the company should adopt stringent credit practices for its debtors thereby, having more funds at its disposal for investments as well as for daily operating requirements and thus saving on the

P a g e | 58 interest costs. In order to keep up with the industry credit standards Raymond Ucodenim Ltd. has been gradually reducing its credit period. For the previous year the debtors turnover ratio has increased by almost 28 % from 3.70 to 4.72 thereby reducing the collection period to a meager 77 days. The debtors turnover ratio has improved further in 2010 as it has increased to 5.50 times. Hence as an effect of the increase days. in the debtors turnover ratio, there is a significant improvement in the credit period as it has reduced to 66 days from 77

X. CONCLUDING OBSERVATIONS
Every organization should closely watch the movement of current assets and current liabilities after certain fixed intervals to maintain healthy working capital in the organization. It helps to keep a record of cash management, debtors management and inventory management, which forms a major part of working capital. Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly the overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. For Raymond Ucodenim Ltd. the inventory turnover ratio has increased from 2.84 times (2004) to 3.43 times (2009), but showed a major decline in the year 2009-06. In the year 2010 the inventory period has increased tremendously from 106 days in 2009 to 272 days in 2010. This is also supported by

P a g e | 59 the decline in the inventory turnover ratio to a meager of 1.34 times in 2010. Since the company is a textile industry therefore the inventory varies according to seasonal and festive demands. However, it is seen that as the inventory carrying cost is reducing because of the falling interest rates, the company may stock more if desired. There are no norms or standards followed by the company for the raw material, in process and finished goods inventory due to quantity restrictions and price fluctuations. The current ratio is a reflection of financial strength. The current ratio measures the ability of the firm to meets its current liabilitiescurrent assets get converted into cash and provide the funds needed to pay current liabilities. The current ratio has decreased from 2.68:1 (2009) to 2.33:1 in the year 2010.This is the result of the changes in current assets and current liabilities or changes in the working capital. Current assets comprises of Inventory, Debtors, Cash & Bank balances, Other Current Assets and Loans & Advances. The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. It is also called liquidity ratio or cash asset ratio. For the year ended 2009-2010, the cash ratio has fallen from 2.46:1(2009) to 1.73:1 in 2010. Current investments have not fluctuated as compared to the earlier year. Increase in the current liabilities by 1117.56 lakhs can also be attributed to the fall in the cash ratio. Sales have registered an increase of 15%. The increase in the current liabilities is much

P a g e | 60 more than the increase in the current assets, hence there is a decline in the cash ratio.

XI. RECOMMENDATIONS
The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. Cash management: Here Raymond Ucodenim Ltd.. already is holding the cash so the goal is to maximize the benefits from holding it and wait to pay out the cash being held until the last possible moment. The goal for cash management here is to shorten the amount of time before the cash is received. Firms that make sales on credit are able to decrease the amount of time that their customers wait until they pay the firm by offering discounts. By offering an inducement, the 3% discount (for e.g.), Raymond Ucodenim Ltd. will able to cause their customers to pay off their bills early. This results in the firm receiving the cash earlier. The goal here is to put off the payment of cash for as long as possible and to manage the cash being held. By using a JIT inventory system, a firm is able to avoid paying for the inventory until it is needed while also avoiding carrying costs on the inventory. Approaches to Working Capital Management: The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for

P a g e | 61 as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.

Working capital management takes place on two levels: Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management. The individual components of working capital can be effectively managed by using various techniques and strategies. When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments in Raymond Ucodenim Ltd. have significant inventory levels; others have little if any inventory. Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance. Financial ratio analysis calculates and compares various ratios of amounts and balances taken from the financial statements.

The main purposes of working capital ratio analysis are:

P a g e | 62 To indicate working capital management performance; and To assist in identifying areas requiring closer management.

Three key points need to be taken into account when analyzing financial ratios: The results are based on highly summarized information. Consequently, situations, which require control, might not be apparent, or situations, which do not warrant significant effort, might be unnecessarily highlighted. Different departments face very different situations. Comparisons between them, or with global "ideal" ratio values, can be misleading. Ratio analysis is somewhat one-sided; favorable results mean little, whereas unfavorable results are usually significant. However, financial ratio analysis is valuable because it raises questions and indicates directions for more detailed investigation. The following ratios are of interest to those managing working capital: Working capital ratio; Liquid interval measure; Stock turnover; Debtors ratio; Creditors ratio.

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There is no particular benchmark value or range that can be recommended as suitable for all government departments. However, if the departments in Raymond Ucodenim Ltd. tracks its own working capital ratio over a period of time, the trends-the way in which the liquidity is changing-will become apparent.

Stock turnover ratio: The figure produced by the stock turnover ratio is not important in itself, but the trend over time is a good indicator of the validity of changes in inventory policies. In general, a higher turnover ratio indicates that a lower level of investment is required to serve the department. Most departments do not hold significant inventories of finished goods, so this ratio will have only limited relevance. Debtor turnover ratio: The debtor ratio does not solve the collection problem, but it acts as an indicator that an adverse trend is developing. Remedial action can then be instigated.

Creditors ratio: There is no need to pay creditors before payment is due. Raymond Ucodenim ltds objective should be to make effective use of this source of free credit, while maintaining a good relationship with creditors.

Getting the right mix of inventory is necessary because:

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Costs of carrying too much inventory are: Opportunity cost of foregone interest; Warehousing costs; Damage and pilferage; Obsolescence; Insurance.

Costs of carrying too little inventory are: Stockout costs: Lost sales. Delayed service. Ordering costs: Freight. Order administration. Loss of quantity discounts. Making frequent small orders can minimize carrying costs but this increases ordering costs and the risk of stock-outs. Risk of stock-outs can be reduced by carrying "safety stocks" (at a cost) and reordering ahead of time. The best ordering strategy requires balancing the various cost factors to ensure the department incurs minimum inventory costs. Analytical review of inventories can help to identify areas where inventory management can be improved. Slow moving items, continual

P a g e | 65 stockouts, obsolescence, stock reconciliation problems and excess spoilage are signals that stock lines need closer analysis and control. However, it is important to keep an overall perspective. It is not costeffective to closely manage a large number of low value inventory lines, nor is it necessary. A usual feature of inventories is that a small number of high value lines account for a large proportion of inventory value. The "80/20" rule (PARETO) predicts that 80% of the total value of inventory is represented by only 20% of the number of inventory items. Those high value lines need reasonably close management. The remaining 80% of inventory lines can be managed using "broad-brush" strategies. The overall management philosophy of Raymond Ucodenim Ltd. can affect the way in which inventory is managed. For example, "Just In Time" (JIT) production management organizes production so that finished goods are not produced until the customer needs them (minimizing finished goods carrying costs), and raw materials are not accepted from suppliers until they are needed. Thus, JIT inventory strategies reduce bottlenecks and stock holding costs. In summary: There is a trade-off to be made between carrying costs, ordering costs, and stockout costs. This is represented in the Economic Reorder Quantity (ERQ) model. Inventories should be managed on a line-by-line basis using the 80/20 rule.

P a g e | 66 Analytical review can help to focus attention on critical areas. Inventory management is part of the overall management strategy.

Pre-sale strategies include: Offering cash discounts for early payment and/or imposing penalties for late payment. Agreeing payment terms in advance. Requiring cash before delivery. Setting credit limits. Setting criteria for obtaining credit; Billing as early as possible Requiring deposits and/or progress payments. Post-sale strategies include: Placing the responsibility for collecting the debt upon the center that made the sale. Identifying long overdue balances and doubtful debts by regular analytical reviews. Having an established procedure for late collections, such as a reminder, letter, cancellation of further credit, telephone calls, use of a collection agency, legal action. Payments management: While it is unnecessary to pay accounts before they fall due, it is usually not worthwhile to delay all payments until the latest possible date. Regular weekly or fortnightly payment of all due accounts is the simplest technique for creditor management.

P a g e | 67 Electronic payments (direct credits) are cheaper than cheque

payments, considering that transaction fees and overheads more than balance the advantage of delayed presentation. Some suppliers are reluctant to receive payments by this method, but in view of the substantial cost advantage (and the advantages to the suppliers themselves) departments may wish to encourage suppliers to accept this option. However, electronic payments are likely to be used in conjunction with, rather than as a replacement for, cheque payments. Good cash management requires regular forecasts. In order for these to be materially accurate, they must be based on information provided by those managers responsible for the amounts and timing of expenditure. Capital expenditure and operating expenditure must be taken into account. It is also necessary to collect information about impending cash transactions from other financial systems, such as creditors and payroll. Balance Management: Those responsible for balance management must make decisions about how much cash should at any time be on call in the Departmental Bank Account and how much should be on term deposit at ERQ the various terms model. available. Linear There are various models types of mathematical model that can be used. One type is analogous to the inventory programming have been developed for cash management, subject to certain constraints. There are also more sophisticated techniques. Cash receipts should be processed and banked as quickly as possible because they cannot earn interest or reduce overdraft until they are banked, information about the existence and amounts of cash receipts is usually not available until they are processed.

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Internal Control: Cash and cash management is part of a department's overall internal control system. The main internal cash control is invariably the bank reconciliation. This provides assurance that the cash balances recorded in the accounting systems are consistent with the actual bank balances. It requires regular clearing of reconciling items. Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of Raymond Ucodenim Ltd. Optimum use will help to generate maximum returns. Ratio analysis can be used to identify working capital areas, which require closer management. Various techniques and strategies are available for managing specific working capital items. Debtors, creditors, cash and in some cases inventories are the areas most likely to be relevant to departments.

BIBLIOGRAPHY

P a g e | 69 Khan M. Y. and Edition Chandra Prasanna,Financial Management (Theory & Problems) Tata McGraw-Hill Publishing Co. Ltd., New Delhi, Fifth Edition Rustagi R. P., Financial Management (Theory Concept Problems) Edition Galgotia Publishing Co., New Delhi , Second & Jain P. K.,Financial Management (Text &

Problems) Tata McGraw-Hill Publishing Co. Ltd., New Delhi, Third

Revised

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XII. REFERENCES:

Annual report of Raymond Ucodenim Ltd. for 2009-10 M Y Khan & P K Jain, Financial Management, Tata McGraw-Hill Publishing Company Limited, Third Edition. Paper on working capital finance by Seidman. Prasanna Chandra, Financial Edition. Ravi Kishore, Financial Management, Fourth edition. Working Capital management-by Hrishikesh Bhattacharya. www.bseindia.com www.economictimes.com www.financemaster.com www.indiainfoline.com www.indiabulls.com www.icicidirect.com www.moneycontrol.com www.raymondindia.com ManagementTheory and Practice, Tata McGraw-Hill Publishing Company Limited, Fifth