INTRODUCTION TO FINANCIAL MANAGEMENT

Finance is regarded as “THE LIFE BLOOD OF BUSINESS ENTERPRIS”. It is

the backbone of every business employed in all business activities.
Financial management is the managerial activity which is concerned with the
planning and controlling of the firm’s financial resources.
The subject of financial management is of immense interest to both academicians
and practicing managers. It is of great interest to academicians because the subject is
still developing, and there are still certain areas where controversies exist for which
no unanimous solutions have been reached as yet.
Practicing managers are interested in this subject because among the most crucial
decisions of the firm are those which relate to finance, and an understanding of the
theory of financial management provides them with conceptual and analytical insights
to make those decisions skillfully.
The modern thinking in financial management accords a far greater. Importance
to management in decision-making and formulation of policy financial management
occupies key position in top management and plays a dynamic role in solving
complex management problems. They are now responsible for shaping the fortunes of
the enterprise and are involved in allocation of capital.

Definition:
Financial management is the area of the business management, devoted to a
judicious use of capital and care full selection of sources of capital in order to enable a
spending unit to move in the direction of reaching its.
-Prof. Bradely.

Functions of Financial management:

1. Investment Decision:
It relates to the allocation of capital are involve to decision to commit funds to
long-term assets which would yield benefits in future. It is one very significant aspect
is the task of measuring the prospective profitability of new investments future

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benefits are difficult to measure and cannot be predicted with continuity because of
the uncertain future capital budgeting involves risk.

2. Financing Decision:
Broadly a finance manager must declare when, where and how to acquire funds
to meet the firms investments needs. The finance manager must strive to obtain the
best financing mix or optimum capital structure of this firm. The use of debt affects
the return and rise of shareholders. It may increase the return of the equity funds. A
proper balance will have to be struck between rises and retain.

3. Dividend Decision:
The finance manager must decide whether the firm should distribute all profits or
certain term or distribute a portion and retain the balance.
The dividend policy should be determined in terms of its impact on the market
value of the firms share. Thus, shareholders are indifferent to the firm’s dividend
policy the finance manager must decide to the optimum dividend payout ratio.

4. Liquidity Decision:
Along with terms of funds current assets should also be managed efficiently for
safeguarding the firm against the dangerous of ill liquidity and insolvency. An
investment in current assets affects the firm profitability, liquidity and risk. In order to
ensure that neither insufficient nor unnecessary funds are invested finance manager
develops some techniques of managing current assets.

Financial Procedures and Systems:

For the execution of the finance functions, certain other functions have to be
routinely performed. They concern procedures and systems and involve a lot of paper
work and time. They do not require specialized skills of finance. Some of the
important routine finance functions are:
 Supervision of cash receipts and payments and safeguarding of cash balances.
 Custody and safeguarding of securities, insurance policies and other valuable
papers.
 Taking care of the mechanical details of new outside financing.

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  Record keeping and reporting.

The Changing Role of Financial Management:

Many changes in the contemporary world, financial management has undergone
significant changes over the years. The financial management has a very limited role
in business enterprise. Financial manager is responsible only for maintaining financial
records, preparing reports of the company’s status, performance and arranging funds
recorded by company so that it would meet its obligations in time.
Financial manager as a matter of act was regarded as specializes officers in the
company concerned only with administering sources of funds, he has called upon only
when the company experimental the problem relates the financial managers to locate
the suitable sources of funds and additional funds. The emphasis on decision-making
has continued in recent years.
 First there was been increased belief the cost of capital producer the
required accurate measurement of the cost of capital.

 Secondly, capital has been in short supplies the old interest in the ways
of raising funds.

 Thirdly, there was has been a continued managerial activity that has led
to revealed interests in takeovers

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 SCOPE OF THE STUDY

The scope of my study is constitutes to be one of the interesting and key areas of
working capital management.
The study concentrates on the financial status or affairs of the company and the
management of working capital in the company, which involves the study of
operating cycle and ratios of different periods and their comparison over the last three
years. It helps to present broader picture of the financial position of the company.
The required data for the study of the working capital management is collected
from the finance department, cost accounting and store system of the firm.

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 NEED FOR THE STUDY:
The study enables us to know up to what extent theoretical aspects can be put in

practice.

Working Capital gives an idea to the investor as well as the management of any firm
about the functioning of organization. Preparation of a separate statement of Working
Capital gives us an idea about the Gross as well as the Net Working Capital of the
statement one can know or plan about the day-to-day expenses.
Working Capital is the difference between the Current Assets and Current Liabilities.
This Working Capital must also be adequate not too much and not too low. An
optimum level of Working Capital is a good significance to the progress of the
organization.
A study of Working Capital Management in Exel rubber limited company gives out
the exact idea of Working Capital because it is an organization with huge production
and which also require huge funds to meet its day-to-day expenses.
In its endeavor to maximize shareholders wealth, a firm should earn sufficient return
from its operations. Earnings a steady amount of profit require successful sales
activity. Thus, the need for working capital arises due to the time gap between
production and realization of cash from sales.
Therefore to ensure efficient utilization of current assets and to meet day-to-day
obligations effectively, it is necessary for every organization to have a sound working
capital.

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 OBJECTIVES OF THE STUDY

To study the working capital management at EXEL Rubber Limited.

1. To measure the working capital management performance in EXEL Rubber
Limited with the technique of Ratio analysis.
2. To study the actual variables involved in working capital management of
EXEL Rubber Limited.
3. To study the liquidity position involved in the short run and long run.
4. To suggest pertinent ways and means for improving working capital
management performance of EXEL Rubber Limited

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 MEHOTDOLOGY OF THE STUDY

All the data required for completion of the study has been collected from both primary
and secondary sources.

1. Primary sources of Data:

The primary sources of data required for the study was collected by personal
interaction made with the staff and executives of the organization for the purpose
of collecting relevant information relevant.
The SWOT Analysis has also been done in order to identify the major
Strengths, Weakness, Opportunities and Threats of the company and the likely
strategies to adopt in order to improve the financial performances.

2. Secondary sources of Data:

This study has been done by gathering information from various sources such as
annual reports published by M/S Exel rubber limited company which are the main
sources to this study, magazines, journals, paper clippings etc. are also part of the
secondary data.

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 LIMITATIONS OF THE STUDY

The study was conducted with the data available and the analysis was made
accordingly.

- EXEL RUBBER LTD is only major organization engaged in producing rubber.

As such comparison with other organization is not possible.
- The variations in the profits of EXEL RUBBER LTD from year to year can be
partly attributed to changes in economic conditions, globalization, opining up
is the market due to policy changes by Government of India which are beyond
the control of EXEL RUBBER LTD.
- Deficiency arises while interpreting the due to inflationary situations and
changing price levels.

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 INDUSTRY PROFILE
The rubber industry provides the most important market for precipitated silica which
plays the role of white reinforcing filler in tires rubber diaphragm and mechanical
rubber goods. Precipitated silica provides excellent reinforcing properties such as
hardness, tensile tear and abrasion resistance. Its high purity makes possible the
manufacture of translucent and colored articles. It has fast incorporation and good
processing properties at low viscosity values reproducing excellent rheumatic and
mechanical properties depending on the formulation where is used. Rubber industry
develops and produces performance enhancing fillers such as precipitated silica and
precipitated calcium carbonate for rubber paper, plastics, healthcare and other
manufacturing industries. There are many advantages that industry can proudly offer
business.

GROWTH AND DEVELOPMENT:

Since the beginning of this year, rubber industry under the background of sharp price
rises of raw materials, has made positive efforts in adjustment of product mix, and
achieved a steady development. According to statics 500 members of the Exel rubber
industry association. Exel tyre output increased to 13.9% in the first half of this year,
output of rubber products went up 4.15%, that of transmission belt, up 20.4%, that of
black carbon, up 13.9%, and that of radial ply tyre detachable dye ,up 10%
consumption of rubber by member enterprises of the association reached 1.119
million tons in first half,up 20.23%year on year.

Indian Rubber Industries is 32 years old Co. & the brand owner of Maruti
Lawn Mower. It is one of the leading distributors in the field of horticulture tools and
equipment that include rotary slasher, brush cutter, hedge trimmer, long reach hedge
trimmer, chain saw, pole pruner, gang mower, cut-off saw, concrete cutter, power
sprayer, mist blower, vacuum shredder, earth auger, fogging machine and garden
roller, with manufacturing facilities of Lawn Mowers with Brand name Maruti Lawn
Mower in New Delhi India.

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 The company is very well positioned to support its customers through its world
class quality products, spare parts supply and prompt after sales service. With the state
of art service and training facilities at Nangloi New Delhi, the company is in a good
position to provide excellent technical, marketing and after sales support through its
trained service staff and efficient & dedicated worker

Indian Rubber Industries (IRI) offers wide range of manual lawn mowers,
electrical lawn mowers,engine operated lawn mowers by the brand maruti lawn
mower, chainsaws, brush cutters, hedge trimmers, blowers, vacuum shredders,
telescopic pruners, earth augers, rescue saw, cut –off saws by STIHL brand, fogging
machine, rotary slasher and garden roller etc.

Our Company‘s products are widely used in India by various end users related to
professional logging, landscaping, horticulture, agriculture, plantations and
government institutions like railways, disaster management and emergency services,
health services, municipal corporations and defence establishments etc.

RATIONALE OF RUBBER INDUSTRY

ORIGIN:

Although most rubbers are nowadays produced synthetically, originally rubber is a

natural product, known by natives of South-America already before the beginning of
our era. They found that by cutting the surface of a particular tree, white fluid started
to run down from it. During the ages the tears of these trees were also considered as
expressions of divinity. As far as is known, it was Kristopher Columbus who first
noticed, that American Indians utilized rubber in their religious ballgames in the end
of the 13th Century.

European scientists became interested in rubber as raw material in the 16 th Century. In

1736 explorer Charles Marie de la Condamine reported about his discovery of
waterproof dishes and footwear used by natives in South America. More extensive
applications of rubber were inhibited for years because of its poor heat exchange
tolerance and stickiness. Another significant invention within the rubber industry is
the discovering of air-filled tyre by John Boyd Dunlop in 1888.

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The demand for rubber products increased as well as the demand for technical rubber
due to general industrialization and increased traffic. The production of tubes began in
1925 and as the number of cars exceeded 35 000 in 1933, tyre production began.

The production ratio between footwear, tyres and technical rubber has changed during
the decades. The ratio has, for instance, been affected by economic cyclicity, general
standard of living, the oil crisis and wars. The demand for raw material has been
solved with recycling and with the increasing use of synthetic rubber.

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 COMPANY PROFILE

EXEL was incorporated on 1987 as a private limited company names

“EXEL RUBBER (P) LTD” by Sri.T.S.Manohar & Sri.G.J.K.Naveen and taken over
by Sri.P.Nagi Reddy & Sri.G.Raghunath Reddy and associates who has vast
experience in the rubber field. The company which made a small beginning as small
scale unit manufacturing Automotive Butyl Tubes with a turnover of Rs.20.00 lakhs
and with a work force of 20 has become a conglomerate to 2 manufacturing facilities
with a turnover of Rs.29.20 crores and a work force of over 500 people.

Exel is an Indian enterprise depending on the type companies for the

orders molded by quality aspirations. This has always demanded a preparedness and
long-term organization vision that can encompass the turbulences and paradoxes of
shifting terms and terrian’s of business. At Exel individual perspective are
harmonized with rapid growth into one organic and self-sustaining force. The
insistence on care, concern, responsibility and effectiveness run as concurrent themes.
Lending critical mass to the Company’s evolution as a transactional corporation.
Consistently ranked among the fastest growing rubber industry companies
in the Country, Exel is utilizing its collective past experience to kick start its future
plans as a global company. Respected for quality. For performance, for care, concern
and responsibility and equally much for the creation and maximization of wealth for
its shareholder. Exel Rubber Ltd represents a strategic stage in constant evolution as
the complete rubber industry.
Here are some of the advantages that our industry proudly offer business
- abundant raw material supply
- money saving enery use
- complete product line for tires
- pollution free technology
- development and research.
FACILITIES:
Exel own and operates 2 manufacturing facilities in covering almost every area of
tube manufacturing. Located in and around Hyderabad, they are built to accommodate
current and emerging international standards in Good Manufacturing Practices.

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ACFILITIES NUFACTURINFOR MAG: Butyl tubes are manufactured
from two large facilities in India. The facilities insist on rigorous quality stand and
follow good manufacturing practices prescribed by the tyre companies. Exel is
among who have achieved the ISO 9002 accreditation for its quality standards.

PRODUCTS:

Exel manufacture a comprehensive range of branded and generic butyl tubes like

- Specialty silicas
- Silica slab rubber
- Track plate
- Antistatic slab rubber
- High dot slab rubber
- Anti slippery rubber gasket
- Fluorine rubber sheet
- Fitness mat
- Thin strip slab rubber
- Rubber tubes
- Rubber sheets
- Rubber washers
- Rubber tyres
- Rubber gaskets
- Rubber diaphragm
- Rubber pads
- Rubber valve
- Rubber hose
- Calcium carbonate nano fillers

DOMESTIC MARKETING:

EXEL operates in the market place, implementing corporate strategies including one
for high value specialty products. A strong sales force supported by marketing
services, product management and commercial functions.

INTERNATIONAL BUSINESS:
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Offices in India, the USA, and the CIS facilitate Exel’s growing international presence
currently focused on the consolidation and expansion of business.

A multi pronged strategy including joint ventures, acquisitions, marketing alliances,

manufacturing tie – ups. Custom synthesis and other collaborative ventures are being
pursued for long-term growth.

THEORETICAL FRAMEWORK OF WORKING

CAPITAL MANAGEMENT

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 Working capital is the pre-requisite for smooth running of the business and
also for proper utilization of fixed assets. “Working capital” is the capital invested in
different items of current assets needs for day-to-day business, viz, ,debtors,
investments, cash and also other such as loans and advances to third parties connected
with the company. Thus it is primary objective of any company to maintain sufficient
level of working capital to achieve a given capacity and maximize return of fixed
assets. shortage in working capital leads to lower capacity utilization and consequent
lower profits. Working capital in excess of the amount required for full utilization of
the capacity result in idle funds and consequently results in decline profits.
Working capital consists broadly of that portion of the assets of a business
which are used in, or related to current operations, and operations, and represented at
any time by the operating cycle of such items as merchandise, notes or bills
receivables and cash. The assets of Working Capital is the difference between the
inflow and outflow of funds. It is defined as the excess of current assets over current
liabilities and provisions. It is often refereed to a "circulating capital". The use if the
term circulating capital instead of working capital indicates that its flow is circular in
nature.
At the beginning of a business venture, cash is provided by owners and
lenders. A part of this cash is invested in tools, machinery, furniture, equipment,
building and other forms of fixed assets, which are not to be sold throughout the year
during the normal course of business.
The remaining cash is used as working capital to meet the current requirements of a
business enterprise, such as the purchase of services, raw materials or merchandise.
When a firm's products or finished goods are sold, it has, what is known as cash or
receivable. When receivables are collected, more cash is available for the planning of
services and the purchase of raw materials.
This flow of cash into production, credit Sales, collection and then back into
inventories, production and so on illustrates the circular flow of working capital. The
term circulating capital is frequently used to denote those assets, which are changed
with relative rapidity from one form to another.

A.TYPES OF WORKING CAPITAL:

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There are a few types of working capital, which can be looked into. They are as
follows.

1. NET WORKING CAPITAL:

Net working Capital (NWC) is technically is difference between Current Assets and
Current Liabilities, whereas Gross Working Capital is the sum of Current Assets. Net
Working Capital is qualitative and Gross Working Capital is primarily quantitative.
Current credit soundness is indicated by NWC position and is of major concern to
investors and bankers. It is measured by Current ratio obtained by dividing current
assets by current liabilities. The Current ratio obtained by dividing current assets by
current liabilities. The falling prices, inflated values, the book value of current assets
could shrink considerably and the firm’s creditors would still be assured of payment.
Since excessive amount of funds are tied up in unproductive assets.

2. GROSS WORKING CAPITAL:

Gross working capital is the amount of funds invested in various components of

current assets. Gross Working Capital represents the commitment of funds to different
items of current assets and their relationship to turnover. As Working Capital moves
from one process to another, it changes from one asset to another from cash to
inventories, then to receivables and then back to cash.

3. PERMANENT WORKING CAPITAL:

Permanent working capital is the minimum amount of current assets, which is needed
to conduct a business even during the dullest seasons of the year. This amount varies
from year to year, depending on the growth of a business of the company and the
stage of the business cycle in which it operates. It is the amount of funds required to
produce the goods and services, which are necessary to satisfy demand at a particular
point. It represents the current assets, which are required on a continuing basis over
the entire year. It is maintained as the medium to carry on the operations at any time
(It is classified on the basis of the time factor, constantly changes from one asset to
another).

VARIABLE WORKING CAPITAL:

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 It represents the additional assets which are required at different times during the
operating cycle, particularly cash, receivables and inventory which is required during
the more active business seasons, of the year. It is temporarily invested in current
assets and possesses the two characteristics:
a) Is not gainful applied, though it may change from one asset to another, as
permanent working capital does:
b) It is particularly suited to a business of a seasonal or cyclical nature.
4. BALANCE SHEET WORKING CAPITAL:

The balance sheet capital is one, which is calculated from the items appearing in the
balance sheet. Gross working capital, which is represented by current assets, and Net
Working Capital, which is represented by the excess of current assets over current
liabilities, is examples of the balance sheet working capital.
5. CASH WORKING CAPITAL:

Cash working capital is one, which is calculated form the items appearing in the profit
and loss account. It shows the real flow of money at a particular time and is
considered to be the most realistic approach in working capital management. It is the
basis of the operating cycle concept, which has assumed a great significance in
financial management in resent. The main reason is that the cash working capital
indicates the adequacy of the cash flow, which is an essential pre-requisite of a sound
business activity.
6. NEGATIVE WORKING CAPITAL:

It emerges when current liabilities exceed current assets. Such a situation is not
absolutely theoretical, and occurs when a firm's is nearing a crisis of some magnitude
.FACTORS EFFECTING WORKING CAPITAL REQUIREMENT:

- Nature business
- Production policies
- Period of contracts
- Expansion of business
- Simultaneous multi contract execution
- Dividend policy
- Terms of purchase and sales
- Other unknown factors

Scope for Working Capital Management:

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- Maintain adequate level of working capital always to meet the raising turnover
through proper working capital planning. This way, peak level
- Sufficient liquidity to meet short term obligations as and when they arise. Also to
avail market opportunities like purchase at low prices or at attractive discounts.
- Avoid holding surplus current assets of any kind closely monitoring their usages and
turnover.
- Efficient policy making with reference to important current asset component such as
inventory, debtors or cash.
- Proper inter-departmental co-ordination to minimize the working capital.

B. DETERMINANTS OF WORKING CAPITAL:

The need for working capital varies with changes in the volume of business. A
considerable proportion of current assets is needed permanently as fixed assets. More
than one operating cycle may be in process at one and the same time, for a business
operates on a continuing basis. Materials are purchased and work is in progress,
finished good are sold. At the same time, new receivables accumulate and old ones
are converted into cash, cash is again utilized in the production process.

There are no set rules or formulate to determine the working capital requirements of
the firms. A large number of factors influence the working capital needs of the firms.
All factors are of different importance. Also, the importance of the factors changes
for a firm over time. Therefore, an analysis of the relevant factors should be made in
order to determine the total outlay or investment in working capital. The following is
the description of the factors, which generally influence the working capital
requirements of the firms.

1. NATURE AND SIZE OF BUSINESS:

The working capital requirements of a firm are basically influenced by the nature of
its business. Trading and financial firms have a very less investment in fixed assets.
But requires a large sum of money to be invested in working capital. Retail stores, for
example must carry large stock of a variety of goods to satisfy the varied and
continuos demand of their customers. Some manufacturing business, such as tobacco
manufacturers and construction firms, also have to invest substantially in working

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capital and have to invest abundantly in fixed assets. Their working capital
requirements are nominal because they have cash sales only and supply services, not
product. Thus no funds will be tied up in debtors and stock (inventories). The
working capital needs of most of the manufacturing concerns fall between the two
extreme requirements of trading firms and public utilities. Such concerns have to
make adequate investment in current assets depending upon the total assets structure
and other variables.
The size of the business also has an important impact on its working capital needs.
Size may be measured in terms of the scale of operation. A firm with large scale of
operation will need more working capital than a small firm.

2. MANUFACTURING CYCLE:

The manufacturing cycle starts from the purchase and use of raw materials and
completes with the production of finished goods. Longer the manufacturing cycle,
larger will be the firm’s working capital requirements. An extended manufacturing
time span means a larger tie-up of funds in inventories. Thus, if there are alternative
ways of manufacturing a product, the process has with the shortest manufacturing
cycle is completed within the specified period. This needs proper planning and
coordination at all levels of activity. Any delay in manufacturing process will result in
accumulation of work in process and waste of time. In order to minimize their
investment in working capital, some firms, especially the firms manufacturing
industrial products, have a policy of asking for advance payments from their
customers.

3. BUSINESS FLUCTUATIONS:

Most firms experience seasonal and cyclical fluctuations in the demand for their
products and services. These business variations affect the working capital
requirements. Specially the temporary working capital requirements of the firm.
When there is an upward swing in the economy, sales will increase; correspondingly
the firm’s investment in inventories and book debts will also increase. Under boom,
additional investment in fixed assets may be made by some firms to increase their
productive capacity. This act of the firms will require further additions of working

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capital. To meet their requirements of funds for fixed assets and current assets under
boom period, the firms generally resort to substantial borrowings. On the other hand,
when there is a decline in the economy sales will fall and consequently, the levels of
inventories and book to reduce their short-term borrowings. Seasonal fluctuations not
only affect the working capital requirements but also create production problems for
the firm

During the periods of peak demand-increasing production may be expensive for the
firm. Similarly, it will be more expensive during slack periods when the firm has to
sustain its working force and physical facilities without adequate production and
sales. A firm may, thus like to utilize its resources to the fullest extent. Such a policy
will require accumulation of inventories during the off-season and their quick disposal
during the peak season. The increasing levels of inventories

During the slack season will require increasing funds to be tied up in the working
capital for months. Unlike the cyclical fluctuations the seasonal fluctuations generally
conform to a steady pattern. Therefore, financial arrangements for seasonal working
capital requirements can be made in advance. However, the financial plan or
arrangements should be flexible enough to take care of some abrupt seasonal
fluctuations.

4. PRODUCTION CYCLE:

A category of constant production may be maintained in order to resolve the working

capital problems arising due to seasonal changes in demand for the firm’s product. A
steady production policy will cause inventories to accumulate during the off-season
periods and the firm will be exposed to greater inventory costs and risks. If the costs
and risks of maintaining a constant production schedules are high, the firm may adopt
the policy of varying its production schedules in accordance with the changing
demand. Those, firms whose productive capacities can be utilized for manufacturing
varied products, can have the advantage of diversified activities and solve their
working capital problems. They will manufacture the original product line during its
increasing demand when it has an off-season, other products may be manufactured to

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utilize the physical resources and working force. Thus, the production policies will
differ from firm to firm, depending on the circumstances of the individual firm.

5. FIRM’S CREDIT POLICY:

The credit policy of the firm affects working capital by influencing the level of book
debts. The credit terms to be granted to the customers may depend upon the norms of
the industry to which the firm belongs. But a firm has the flexibility of shaping its
credit policy within the constraint of industry norms and practices. The firm should be
discretionary in granting credit terms to its customers. Depending upon the individual
case, different terms may be given to different customers.

A liberal credit policy, without rating the credit worthiness of the customers, will be
detrimental to the firm and will create a problem of collecting funds later on. The firm
should be prompt in making collections. A high collection period will mean tie-up of
funds in book debts. Slack collection procedures can increase the chance of bad debts.

In order to ensure that unnecessary funds are not tied up in the book debts, the firm
should follow a rationalized credit policy based on the credit standing of the
customers and other relevant factors. The firm should evaluate the credit standing of
new customers and periodically review the credit worthiness of the existing
customers. The case of delayed payments should be thoroughly investigated.

6. AVAILABILITY OF CREDIT:

The working capital needs of the firm increases as it grows in terms of sales or fixed
assets. It is difficult to precisely determine the relationship between volume of sales
and the working capital needs the critical fact, however, is that the need for increased
working capital funds does not follow in growth in business activities but precedes it.
It is, therefore necessary to make advance planning of working capital for a growing
firm on a continuous basis.

A growing firm may need to invest funds in fixed assets in order to sustain its growing
production schedule and sales. This will in turn increase investment in current assets
to support enlarged scale of operations. It should be realized that a growing firm needs

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funds continuously. It uses external sources as well as internal sources to meet the
ever-increasing needs of funds. Such a firm faces further financial problems when it
retains substantial portion of its profits. It is therefore imperative that such companies
to finance their increasing needs for working capital may do proper planning.

7. PROFIT MARGINS AND PROFIT APPROPRIATION:

Firms differ in their capacity to generate profit from business operations. Some firms
enjoy a dominant position due to quality product or good marketing management or
monopoly power in the market and earn a high profit margin. Some other firms may
have to operate in an environment of intense competitions and may earn low margin
of profits. A high net profit margin contributes towards the working capital pool. In
fact the net profit is a source of working capital to the extent it has been earned in
cash. The cash profit can be found by adjusting non-cash items such as depreciation,
outstanding expenses, accumulated expenses and losses written-off, in the net profit.
But the net cash flows cannot be considered as cash available for use at the end of the
period. Even as the company’s operations are in progress cash is used up for
augmenting stocks, book debts or fixed assets. The financial manager must see
whether or not the cash generated has been used for rightful purposes or not. The
application of cash should be well planned.

Even if the net profits are earned in cash at the end of the period, whole of it is not
available for working capital purposes. The contribution towards working capital
would be effective by the way in which profits are apportioned. The availability of
cash generated from operations, depends upon taxation, dividend and retention policy
and depreciation policy.

Taxes must be paid out of profits. Tax liability is unavoidable and adequate provision
should be made for it in working capital planning. If tax liability increases it will
impose an additional strain on working capital. The financial manager must do tax
planning in order to avail the benefits of all sorts of tax concessions and incentives.

The firm’s policy to retain or distribute profits also has a bearing on the working
capital. Payment of dividend consumes cash resources and reduces firm’s working

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capital to that extent. If the profits are retained in the business the firm’s working
capital will be strengthened. The financial manager in deciding whether profits will be
retained or distributed should evaluate a number of factors. A firm may follow the
policy of paying a constant amount of dividend every year. In the years the firm
makes high profits its liquidity position will become strong; but in the years it does
not earn sufficient profits the preserved cash resources will be utilized to pay
dividends. Sometimes a company wants to pay dividend but at the same time does not
want to drain away its cash resources. The alternative in such cases is to declare bonus
share (Stock dividend) out of the past-accumulated profits.

The depreciation policy through its effect on tax liability and retained earnings has an
influence on the working capital. Depreciation is tax deductible. Higher the amount of
depreciation, lower the tax liability and more the cash benefits (profits). The amount
of net profits will be less if higher depreciation is charged. If the dividend policy is
linked with net profits, the firm can pay fewer dividends by providing more
depreciation. Thus, depreciation is an indirect way of retaining profits and preserving
the firm’s working capital position.

8. PRICE LEVEL CHANGES:

The increasing shifts in price levels make the functions of the financial manager
difficult. He should anticipate the effect of price level changes on working capital
requirements of the firm. Generally, rising price levels will require a firm to maintain
higher amount of working capital. The same levels of current assets will need
increased investment when prices are increasing. The companies, which can
immediately revise their product prices with rising price levels, will not face a severe
working capital problem. The firms will feel the effects of increasing general price
level differently as individual prices may move differently. It is possible that some
companies may not be affected by the rising prices while other may be badly hit by it.
The effects of rising prices will be different for different companies. Some will face
no working capital problem, while the working capital problems of others may be
aggravated.

9. OPERATING EFFICIENCY:

23
The operating efficiency of the firm relates to the optimum utilization of resources at
minimum costs the firm will be effectively contributing to its working capital if it is
efficient in controlling the operating costs. The use of working capital is improved
and pace of the cash cycle is accelerated with operating efficiency. Better utilization
of resources improves profitability and helps in releasing the pressure on working
capital. Although it may not be possible for a firm to control the prices of materials or
the wages of labor, it can certainly ensure efficient and effective use of its materials,
labor and other resources.

SIGNIFICANCE OF WORKING CAPITAL MANAEMGNT

Financial managers have to spend much of their time to the daily

operations relating to current assets and current liabilities of the firms. It is necessary
to manage working capital in the best possible way to get maximum benefit.A
significant portion of the total investment in assets in invested in current assets. It
comes to 60% of total net assets in the case of large and medium Public limited
companies.
There is a direct relation between sales and working capital needs. As sales
grow, the firm needs to invest more in inventories and debts.
The financial manager should pay particular attention to the levels of current assets
and the financing of current assets. The risk return implications must be evaluated for
deciding the levels and financing of current assets.

Working Capital is the life and nerve center of a business. No business can run
successfully without an adequate amount of working capital.

24
 ADVANTAGES OF ADEQUATE WORKING CAPITAL:
capital enables a business concern to make prompt payments and hence helps in
creating and maintaining good will.
- Easy Loan: The main advantages of adequate amount of working capital are as
follows:
- Good Will:
Sufficient Working
A concern having adequate working capital, high solvency and good credit standing
can arrange loans from banks and others on easy and favorable terms.
- Cash Discounts:
Adequate working capital also enables a concern to avail discounts on the purchases
and hence it reduces costs.
- Regular supply of Raw Material:
Sufficient Working Capital ensures regular supply of raw materials and continues
production.
- Regular payment of Salaries, wages and other day-to-day commitments:
A company which has sample Working Capital can made payment of salaries wages
and other day to day commitments which raises the morale of its employees, increases
their efficiency, reduces wastage, costs and enhances production and profits.

INADEQUATE WORKING CAPITAL:

Every business concern should have adequate working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortage of working capital. Both excess as well as short working
capital positions are bad for any business. However, out of the two, it is the
inadequacy of working capital, which is more dangerous from the point of view of the
firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE

WORKING CAPITAL:

- Excessive Working Capital means idle funds, which earn no profits for the
business, and hence the business cannot earn a proper rate on its investment.

25
 - When there is a redundant working capital, it may lead to unnecessary purchasing
and accumulation of inventories causing chances if waste and losses.
- Excessive working capital implies excessive debtors and defective credit policy,
which may cause higher incidence of bad debts.
- When there is excessive working capital, relations with banks and other financial
institutions may not be maintained.
- Due to low rate of return on investments, the value of shares may also fall.

ESTIMATING WORKING CAPITAL NEEDS:

A number of methods may be used to determine working capital needs in practice.

The most appropriate method of calculating the working capital needs of a firm is the
concept of operating cycle.
There are three approaches, which have been successfully applied in practice. They
are:

1. CURRENT ASSETS HOLDING PERIOD:

To estimate working capital requirements on the basis of average holding period of

current asset and relating them to costs based on the company’s experience in the
previous years. This method is especially based on the operating cycle concept.

2. RATIO OF SALES:
To estimate working capital requirements as a ratio of sales on the assumption that
current assets change with sales.

3. RATIO OF FIXED INVESTMENT:

To estimate working capital requirement as a percentage of fixed investment.

C) METHODS OF ESTIMATING WORKING CAPITAL

REQUIREMENTS:
There are two methods, which are usually followed in determining working capital
requirements. These are:
a. Conventional Method
b. Operating Cycle Method

26
Conventional method: According to the conventional method, cash inflows and
outflows are matched with each other Greater emphasis is laid in liquidity and grater
importance is attached to current ratio, liquidity ratio etc., which pertain to the
liquidity of a business.
Operating Cycle Method: The duration of time required to complete the
following sequence of events, in case of a manufacturing firm is called the operating
cycle.
a) Conversion of cash into raw materials
b) Conversion of raw materials in to work in progress
c) Conversion of work in progress in to finished goods
d) Conversion of finished goods in to debtors and bills receivables through sales
e) Conversion of debtors and bills receivable in to cash
This cycle will repeat again and again.

D) NEED FOR WORKING CAPITAL AND ITS MANAGEMENT:

A firm needs working capital (gross) because the production, sales and cash flows
(payments and relations) are not instantaneous. The firm needs cash to purchase raw
materials and pay expenses, as there may not be perfect matching between cash
inflows and outflows. Cash may also be held to meet the future exigencies. The stocks
of raw materials are kept in order to ensure smooth production and to protect against
the risk of non-availability of raw materials. Likewise stocks of finished goods have
to be carried to meet the demands of the customers on continuous basis and sudden
demands from some customers. Goods are sold on credit for competitive reasons.
Thus, an adequate amount of funds has to be invested in current assets for a smooth
and uninterrupted production and sales process. Because of the circulating nature of
the current assets, working capital is sometimes called circulating capital.
Sales do not convert into cash instantaneously; there is invariably a time lag between
the sale of goods and the receipt of cash. Thus, a need for working capital in the form
of current assets arises to deal with the problem arising out of the lack of immediate
realization of cash against goods sold. There fore, sufficient working capital is
necessary to sustain sales activities

27
 INVENTORY MANAGEMENT

This is a topic of considerable and widespread interest today. Broadly speaking an

inventory management problem is one of maintaining for a given financial investment
and adequate supply of inventory in order to meet un-expected pattern of demand.

The term “Inventory” has a very wide range of meaning from Raw Materials, Work in
progress, finished goods, Spare parts; Machine tools equipment etc., there is also
library’s inventory of books – the banks inventory of money or a consulting agencies
inventory of specialist’s skills.

To a surprising degree, many of these seemingly quite different problems have a great
deal in common when formulated mathematically. When the physical characteristics
of inventory and the procedural details of management are isolated both the demand
and supply fall in to recognizable statistical patterns. In order to enable a systematic
exposition of some of the many systems of scientific management it is proposed to
deal with inventories at the EXEL on 3 levels.

a) Types of inventory
b) Need to control inventory
c) Tools and techniques of inventory management

A) TYPES OF INVENTORIES:

1. Imported items, which have procurement lead time of 3 months.

2. Indigenous items, which have procurement, lead time of 45 days if they are
outstation and 15 days if they are local. The quantity of buffer stocks maintained
is based on the procurement lead-time for both internal and external materials.
The various methods of reducing this lead-time and thereby affecting a reduction
in inventory levels will be discussed in its proper sequence.

B) NEED TO CONTROL INVENTORY:

Stringent inventory control is necessary to avoid the timely evils of over stocking and
under provisioning. In a complex organization like EXEL it would be highly
uneconomical to allow manpower to remain idle and production stopped for want of

28
 materials. On the other hand it is not economical to procure, produce and stock huge
quantities of inventory thereby inflating inventory levels and increasing costs.
Shortages and surplus are inevitable results of poor inventory management
In the past with lower production and a small number of items carried as stocks it was
the order of the day to buy and stock huge quantities of materials against all future
needs.
The large stocks of inventories that are seldom or even used attract the dangers of
obsolescence and deterioration over a period of time.

C). TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

Inventory is now an integral part of almost every business operation and the most
important factor of inventory management in “the system” to involve decision rules
rather than the mechanical man adopted for controlling inventory.

STANDARDISATION:

Standardization and variety reduction are normally introduced together as a tool in

any programme of inventory management. It is the first step for the introduction of
the new technology in material management.
The benefits to be derived by Standardization are
1. Longer production seems with fewer changes
2. Reducing tools and setup time
3. Easier training of operations
4. Easier service and maintenance
5. Increased productivity leading to reduction of cost and price.
ABC Analysis:

This is the method of modifying control according to the value of an item. An

interesting feature of all inventories is that when they are arranged in a descending
order of value based on their annual usage, it becomes evident that a small percent is
responsible for a major portion of the total cost.
An ABC Analysis is based on the following data
1. Determine the unit cost of each item.
2. Estimate the anticipated usage for a given period (usually one year) based on
the previous consumption patterns.

29
 3. Ascertain the net value by supplying the unit cost by the estimated usage.
4. Arrange the items in descending order by total value.

CARRYING COST:

These cost covers the physical storage of Inventory plus the opportunity cost of the
money tied up in the inventory. It includes interest charges stores planning and ware
housing facilities plus insurance etc;
The Economic Order Quantity (How much to re-order) the (EOQ) formulae as it is
popularly known is the one most often used today.
1. Ordering costs
2. Carrying costs and that the average stock is half of the quantity
bought or a single purchase order
EOQ law can be calculated as under:
EOQ = 2AS/I
Where, A = Annual consumption of item in rupees
S = Set up cost or ordering cost
I = Inventory carrying cost

In EXEL the level of inventory holdings are fixed on a maximum and minimum
basis, depending on the administrative lead-time required for replenishment.

The reorder point is when stock fall below this minimum level of safety stocks and is
determined by the following analysis
1. Procurement lead time (the maximum time required to replenish the item this
is always assumed to be constant)
2. Consumption pattern (the annual monthly usage of the item - this fluctuates as
there are changes in the consumption figures based on actual usage) maximum
and minimum quantities (this is based on the predetermined lead time and the
actual consumption figures).
3. Quantity on order (the number of units yet to be received from the suppliers.
4. Inventory on hand (the actual quantity available in stores)
5. Replenishment level (the quantity to be ordered)

An example of the actual working of the system

30
Average monthly consumption of ‘X’ 1000 Nos

Maximum / Minimum lead time 1.2/6 months basis

Maximum / Minimum quantity 12000 / 60000 Nos

Stock on hand 3000 Nos

Quantity on order 1000 Nos

4000 Nos
Quantity to be ordered 8000 Nos

The quantity to be ordered at any given time can never be more than the already laid
down maximum. Recoupment action is initiated only when the stocks fall below the
predetermined minimum level.

The reorder quantity is the difference between the maximum a less stock on hand +
quantity on order. A recoupement memo the basic document for procurement in the
EXEL is raised for stock no. of ‘A’ items.

The clerical labor involved in this system of replenishment is no doubt considerable.

It could be streamlined by the use of modern data processing techniques, which would
help to reduce the executive work and the numerous calculations as to make it less
cumbersome and obsolete in operations when initiating changes, care should be taken
to see that the baby is not thrown out with the bath water.

The method of recoupment followed in the EXEL is a synthesis of the 3 basic systems
already referred to earlier in the report. Variant of these are usually used for all
inventory management practice.
a) The reorder point (when to order)
b) The replenishment system (fixed ordering time)
c) The economic order quantity (how much to order)

The major importance of the method of recoupment used in the company lies in the
following aspects.
a) Its sensitivity to change. It immediately responds to any changes in the
consumption pattern or procurement lead-time.

31
 b) Its flexible structure only the absolute minimum quantity required as safety
stock is held as inventory
c) Its accuracy. It does not depend on hypothetical figures to determine the no. of
safety stocks or the order quantity
d) To assist in a scientific control if its inventories

PURCHASING:

Apart from the various tools and techniques of inventory control purchasing is a basic
function of materials management. A wrong decision on purchase can inflate
inventory levels or alternatively lead to costly stock outs.

The effective performance of the purchase department is vital to the smooth operation
of the mechanical and other departments in the organization apart from it being an
important factor in inventory management.

It is mandatory for the purchase officer to obtain the best ultimate value for the money
spent. His aim should always be to buy for the best ultimate value not necessarily the
lowest initial price.
The five essentials of the right purchasing are:

a) Right quality
b) Right quantity
c) Right price
d) Right delivery
e) Right supplier

To the above may be added the cohesive ingredient “Right application” which
presupposes minimum quality of basic thinking which is required before effective
purchase techniques can be successfully applied to overcome many of the purchase
problems of the day.

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Purchasing process includes all the functions involved in the procurement of the
materials from the time the initial requisition document is received in the section until
the materials are actually received, accounted and stored.
The purchasing department maintains a vital link with the outside world depending on
the markets in which the organization obtains its suppliers of materials and others. An
important function of the purchasing department is to make this relationship of value
to the organization. Information in regard to the development of raw materials,
technological skills, new or alternative process in the field of activity of the
organization should be collected, screened, recorded and made available at board and
senior executive meetings.
Selecting the suppliers and whether to have single source or a multiple source of
supply for any particular item are questions the purchase officer has to decide. He has
to decide whether he should send limited tenders, public tenders, find out if the item is
a proprietary one or the rate contract etc. Each of these modes of procurement has
their own managements and has to be evaluated individually in each case.
A common problem with most suppliers is their failure to deliver the goods in time
and in accordance with the delivery schedules as laid down in the purchase orders.
The reason for such failures are legions, shortage of raw materials, import restriction,
restriction imposed by State Government or local bodies to meet the priorities of the
defenses et. As laid down by the Government, Labor problems, transport difficulties
etc to mention just a few. The buyer’s skill is tested when a seller fails to deliver the
goods. He must immediately find out the duration and the cause of the failure and
formulate an alternative plan to secure materials so as to avoid a shut down of
production in his own undertaking. It may also be necessary to start a second line of
supplier for the item. Many delivery failures could be prevented by a timely placed on
purchase orders.
There are certain basic steps, which must proceed in sequence and are common
practice in the process of purchasing goods in all-important organization. These are:
1. Initiation of request to purchase goods
2. Determination of source of supply from which the goods are to be purchased
and the price to be paid.
3. Entering into contractual relations with and agreement of the firm to supply
the goods
4. Securing delivery details from the seller

33
 5. Acceptance of goods and the transmission to the department.
6. Adjustment of any discrepancies in quality and quantity of goods delivered
and securing credit or replacement of faulty or short materials.
7. Payments for goods received

INITIATION OF REQUESTS:
The present method in the EXEL of raising the recoupment memo, the basis for
initiating procurement, has already been discussed at length. Much can be achieved so
as to furnish swift accurate and timely date to the purchase section. Decision rules for
effective purchase can build a feather of this document.
Streamlining the recoupment memo is a lengthy and involves process and must first
start with the method of posting and the pattern of work in the section of PPIC
(Production Planning Inventory Control department).
What is the basic function a recoupment memo has to perform does the present
management fulfill this requirement. A document initiating procurement must tell the
Purchase section exactly what the consumption figures are or where to purchase the
items, whether it is imported, indigenous or rate contract item, there is far too much
overlapping in this sphere.

Further to ensure effective purchase, it is absolutely necessary to indicate in the

enquiry the correct significations of the material required. There is no necessity to
purchase a quality higher than the one that would be reasonably satisfying the
functions expected to be performed by the material. Specifications must be drawn up
keeping in mind the changing market conditions, also taking in to account the national
standards with due consideration of the common market standard. It is economical to
insist on ISI standards. It is also easier to buy standard materials, which are available,
and adequate specification for effective purchase cannot be over emphasized.

In the purchase section of the EXEL as in many other there is a perpetual argument
with the consuming section over the quality of the material to be procured The
consuming departments naturally want the best, irrespective of price, where as the
purchasing department seeks to buy that which will satisfy the requirements at the
lowest price. Application of the modern technique of codification, standardization and

34
simplification would go a long way to reduce this point of friction by setting up
minimal standards for each type of material. This would lower procurement costs,
reduce initial delays and eliminate the chances of buying sub-standard materials
entirely thereby reducing over all costs.

DETERMINATION OF SOURCE OF SUPPLY:

To affect purchase of the right quantity of material, it is necessary that there should be
a proper selection of suppliers, boards offering competitive rates, the firm must be
reliable and ensure uninterrupted deliveries according to the delivery schedule laid
down in the purchase orders. The object of staggering suppliers and obtaining
qualities in statements spread over a period of time is to keep the inventory level at a
minimum and avoid locking of capital. This can be achieved without costly stock outs
only if the suppliers are reliable and adheres to the given delivery schedules, should
be helpful to effect supplies when due, that staggering of deliveries defeats its own
purpose.

To know the performance of the suppliers a system of “vendor rating” could be

introduced in the purchase section of the EXEL. This is a record of the performance
of all supplies in as far as they fulfill their obligations in regard to the quality and
delivery of the materials ordered. The suppliers could be graded under an ABC
classification dependent upon their performance in regard to:
a) Dependability for quality
b) Dependability for quantity
c) Dependability for delivery
Grade A: Most reliable
Grade B: Satisfactory but needs some watching and a close follow-up.
Grade C: Average needs constant watching and persistent follow-up.

Entering in to contractual relations, this is the main activity of the purchase section for
until the actual issue of a purchase order in materials will be supplied it is here that
the purchase section has the maximum contributions to make in the field of inventory
management.

35
A delivery schedule given in the purchase order is dependent upon the procure
material from the date the initiating document is received in the purchase section to
the actual receipt of materials in store. The volume of inventory varies in direct ratio
to procurement lead-time. A reduction in the procurement lead-time through proper
forecasting, planning and scheduling would result in a lower volume of inventories
with an overall reduction in costs. Procurement lead-time is classified under the
following heads.

a) Administrative lead-time: The time required by the purchase section to

procure the materials from the receipt of the requisition to the placing of the
purchase order.
b) Suppliers lead-time: The times required by the supplier to
manufacture/procure the material and have them ready
c) Delivery lead-time: The time required for transporting the materials from
the suppliers.

The procurement in the stores/purchase department of the company could be

streamlined at many stages so that the various lead times referred to above are
reduced to a bare minimum. There is at present, like in many Government
Departments a good deal for excessive paper work, which could be eliminated.
Unnecessary documentation could be avoided without in any way effecting the safety
and accuracy of the system of purchase. The purchase department should be able to
procure materials expeditiously, without cumbersome and avoidable delays.
Streamlining the work in a department begins with the scientific analysis of the
workloads and determining how the work should be done. The allocation of the work
with its corresponding responsibility and accountability.
Therefore the new tools and analytical techniques can be applied so as to eliminate
unnecessary documentation, delays and other minor problems while speeding up the
placing of purchase order.

36
A checklist of such tools would include:

1. O&M Study (organization and methods)

2. Operation Research Study
3. Methods Study, Work Study
4. Data Processing
5. Vendor Rating
6. Market Research, Market Survey, Market Analysis
7. Source Development

SECURING DELIVERY PERFORMANCE:

The maintenance of good buyer-seller relationships is an important factor in securing

prompt and reliable delivery of materials, like all human relationships, this is made up
of the psychological impact of correct attitudes. The purchase manager should view
the seller as his friend and not as a source of irritation.

The purchase department needs a through and up to date follow up machinery for
suppliers. Innumerable problems of late deliveries, amendments to delivery schedules
etc. are constantly cropping up and have to be dealt with individually. The
introduction of a system of adequate and prompt follow-up procedures would
eliminate delays and highlight irregularities so that remedial measures could be taken
in time. It is also essential that the follow-up department ensure that the bills of the
firms are paid promptly on receipt of materials. This will go a long way to establish a
ultimate good buyer-seller relationships, a very necessary pre-requisite in the purchase
department.

The importance of adequate and prompt follow-up action on all purchase orders can
hardly be overemphasized. Staggering of the supplies is an important key factor in the
hands of the purchase department for effective inventory control. Every effort must be
made to see that suppliers adhere to the delivery schedules as laid down in the
purchase orders, should suppliers fail to adhere to delivery of materials when due,
then costly stock outs are inevitable.

37
From the foregoing, it will be noticed that the real decision of the quantum of safety
stocks to be maintained for important items is based on the quotation of stock outs
how many and how far apart can they be permitted. All sorts of extraneous factors
have to be taken in to consideration, before it can be determined.

ACCEPTED OF GOODS & ADJUSTMENTS OF

DISCREPANCIES:

In EXEL both these are stores department functions. The receipt of materials, their
inspection and storage are directly under the stores manager who has the overall
responsibility of materials. The purchase manager merely procures them.
Nevertheless, the correspondence between the stores department and the suppliers in
regard to rejection in inspections, claims for replacements through breakage’s or loss
in transit, insurance, advance payments etc. are always referred back to the purchase
department via the production & planning control. A lot of duplication of the work in
this area could be eliminated without in any way effecting the safety and accuracy of
the overall procedures.

PAYMENT OF GOODS RECEIVED:

In EXEL all payments are made by the accounts department after due checking by the
audit department. This is based on the Government procedures of auditing and is a
permanent feature of the organizational structure. A lot of spadework has been done
and the process of payment is quite good nevertheless a number of avoidable delays
internally, which constantly arise and defer payment of bills could well be eliminated.

Prompt payment of bills is an important aspect of cordial buyer-seller relations. At

present the purchase department has very little control over this. All it can do is to
establish a good liaison between the accounts and the stores and the purchase
departments and create a climate of mutual trust and goodwill so that payments are
made promptly. This is hardly enough.

38
An unpaid bill is a source of constant anxiety to the purchase department, for apart
from the numerous personal and telephone calls, the unnecessary correspondings, the
most damaging aspect is the destruction of cordial relationships built up with so much
of care and trouble over the years. This also affects in as much as firms refuse to make
further deliveries until payment has bee received for materials already suppliers. Thus
the staggering supplies become ineffective.

Delays in payment also have an indirect bearing on the cost of procurement apart
from the cost of unnecessary clerical work, telephone calls postage etc. The dealers
tend to boost up their price to cover this excessive time lag in the payments. The
introduction of new tools and techniques of purchase together with a sophisticated
system of payment would go a long way to reduce the present requirement of a
minimum of 30 days for the payment of bills.

A scrutiny of the purchase procedures as indicated above, reveal that the purchase
department could well benefit from an extensive application of some of the basic tools
and analytical techniques of materials management, not only in the field of purchasing
and allied areas of stores, also in the sphere of accounts for the payment of bills. An
integrated approach to inventory management is necessary, if any long-term benefits
are to accrue. Today there is wider significance of the purchasing functions with
greater emphasis on the buyer-seller relationships.

He purchase department which procures materials worth more than 5,00, 00,000
rupees (5 crores) annually has to shoulder a large share of responsibility towards the
financial commitments of EXEL maximum efficiency of purchase can be achieved
only by an intensive application of the new tools and scientific techniques of
purchasing with an integrated approach to inventory control as part of the over all
programmed of materials management.
1. A sample checklist for efficient purchasing:
2. Are your purchasing personnel qualified and their duties clearly defined?
3. Have you a purchasing manual detailing policy and procedures?
4. Now extensive is suppliers’ background data? Are your suppliers relations
cordial?

39
 5. Are you abreast of marketing developments and are you getting lowest prices,
consistent with quality, services etc.?
1. Do specifications encourage broad supplier participation? Are you developing
a new supply sources?
2. Is the use of standard items and sizes promoted?
3. What are you doing to make substitute and new materials?
4. Are your vendor lists and vendor catalogues kept up to date and well
maintained?
5. Do you weigh outside purchase against inside production?
6. How efficient is your inventory control?
7. Do you have a purchase analysis programme?

It would be of considerable benefit, should the purchase department of EXEL

incorporate all the above aspects in the day to day working of their departments is
wholly dependent on its management.

Great emphasis has been laid on the purchasing function in this report as it is felt that
effective purchasing is possible through control over inventories, which starts with
right purchasing. A wrong decision to purchase could be a costly affair especially for
‘A type items of high value. Apart form locking up the capital. Incorrect purchasing
also leads to shortages, surpluses, deterioration, obsolescence etc. in short all the evils
of wrong and faulty inventory management.

i) OPERATION RESEARCH:

It is known popularly as Operation Research. It helps the material managers to single

out those critical issues which require executive appraisal and analysis. It is an
application of scientific attitude and asserted techniques of new tools of analysis
available to solve diverse business problems not the least of them being inventories.
There are 4 concepts of fundamentals importance in the application of Operation
Research to any problem.

40
 1. The Model
2. The measure of effectiveness
3. The necessity for decision
1. The role of experimentation

The most frequently encountered concept in operation research is that of the model. A
simplified representation of an operation containing only those features, which are of
primary importance to the problem under study.

Related to the concept of the model or theory of operation, is the measure of

effectiveness, whereby, the extent to which the operation is attaining its goal can be
explicitly determined. One common overall measure of the effectiveness in an
industrial operation, is return on investment, another is no profit. In inventory
management the measure of effectiveness is the optimum utilization of materials or
the optimization of inventory.

The third concept inherent in operation research is that of decision-making. An

essential element in all true courses of action with a choice to be made among them.
Otherwise the study of an operation becomes academic or theoretical. The objective
of operation research is to clarify the reaction between the several courses of action,
determine their outcome and indicate which of them measures up best in terms of goal
desired to be achieved.

I reconcilable objectives, is a very common mistake of inventory management in most

organizations. The EXEL being a Public Ltd. Enterprise the fundamental goal of the
organization is to produce economical, efficient, best quality products. When public
welfare is the first criterion then many costs necessarily have t be borne. This
becomes a part of the entire cost structure in as much heavier inventories would then
have to be maintained even though the cost of an occasional stock out be lower, so as
to avoid inconvenience to production.

Operational Research helps defining the goals of the organization. It seeks to

determine the best method of achieving the desired objective and indicate the course

41
of action to take from the various alternatives available, before management becomes
committed to any one of them.

The fourth significant concept that concerns the role of experimentation. Operation
Research is the application of experimentation science to the study of inventory
problems. The theory or model is generously built up from observed data or
experience or prior information. It must always be verified experimentally.

For the successful introduction of a programme of Operation Research in any

organization. There must be certain minimal requirements with regard to its authority
status and frame of reference even at the very outset it should be established at least
on a level at which decisions can be made and where there is easy access to the
executive and data bearing on the problem understudy. It should not be shut-off
restricted or circumscribed in any way. The group also needs the sustained interest
and encouragement from the top management, if it is to achieve its maximum level of
usefulness with the organization.

It is vitally important for the top management to think ahead about the future
implications of continuing and expediting this operation and research study. The
investment in knowledge and methodology is too valuable to be thrown away. Their
needs to be full recognition of the fact that operation research cannot be introduced at
will in a sporadic off hand or intermittent manner.

In as far as the introduction and application of operations research to inventory

management is concerned, it can be said to be useful tool which is slowly coming in
to wider acceptance on the Indian industrial scenario. Its use is based on the
mathematical process of the probability theory and is a strategy of management
control of money and materials in their mutual environment. Its specific technique is
to design a control over inventory by measuring, comparing, predicting the probable
behavior of materials through a scientific model of the situation. It seeks to minimize
input i.e. materials, while maximizing the function of outputs.
Operation Research is not the cure all for the twin maladies of over stocking and
under provisioning. Its application in the field of inventory management, no doubt,
would significantly contribute to minimizing the level of inventory while maintaining

42
its optimum usage, both all the resultant advantages of lowered costs, higher ratio and
maximum coverage, but it will not achieve the impossible no ‘stock outs’ or ‘never’
out of stocks.

Operation Research is not a source of automatic decision. It is limited to an analysis

of tangible, measurable factors, as an aid to intelligent decision-making. The many
tangible factors affecting business decisions must continue to be evaluated on the
basis of executive judgment. No method, machines or techniques is or can, be a
substitute for human judgments.

The main contribution of Operation Research is the fields of inventory management

are as follows.

1. The application of organized thin in 9.

2. The introduction of new concepts and new (thinking) methods of analysis.
3. The development of new techniques which make it possible to explore the effects
of alternative course of action before the management becomes committed to any
one of them.

INFORMATION TECHNOLOGY:

Management’s basic functions are planning, organizing, directing, controlling.

Inventory management is no exception to the rule. Decision-making is a major
function at all levels of management, and sound decisions are based on the availability
of accurate data. Thus an efficient information system is necessary pre-requisite for
effective inventory management.

It is very essential that accurate data be collected covering all aspects of inventory
management and be made available to the purchase department in time to be a useful
guide for procurement. The information to be useful, it must be capable of being
pinpoint, accurate and must be easily retrieved. This is an important characteristic of
modern systems.

43
Information handling itself is not new what is new is that in all progressive
undertakings manual labour has been reduced to a bare minimum by the introduction
of computers. A systematic handling of information increases the speed and accuracy
of production while significantly reducing wastage of time, unproductive labor
expensive storage space, thereby contributing substantially to a reduction in overall
costs.

In EXEL processing depends on computers. The advantages of such a system are

many as files become easy and fastly accessible it becomes easier to locate a
document.

All the departments have been computerized in EXEL which are properly being
handled by trained staff. Whatever the system that the company adopts for the basic
essentials are universal.

1. Keep it simple
2. Easily operative
3. Keywords are carefully selected with proper cross-reference.
4. Proliferation of information is tightly controlled.

44
 DATA ANALYSIS AND INTERPRETATION

RATIO ANALYSIS:
Current Ratio
Current Assets Current Liabilities
Year Ratios
Rs. Rs.
2013 27,50,405 53,34,424 0.516
2014 2,86,42,001 1,42,28,321 2.013
2015 4,03,58,761 1,55,72,754 2.592
2016 7,15,90,715 4,94,16,171 1.449
2017 1,01,00,563 6,20,50,277 1.628

Current ratio

3
2.592
2.5
2.013
Ratio

2 1.628
1.449
1.5

1
0.516
0.5
0
0
Year 2013 2014 2015 2016 2017
Year

Interpretation:
A relatively high value of current ratio is considered as an indicator that the firm is
liquid and has the ability to pay bills. On the other hand, a relatively low value of
current ratio is considered as an indicator that the firm will find difficulty in paying its
bills. As a conventional rule, a current ration of 2 to 1 or more is considered
satisfactory.
An increase in current ratio is observed from 2013 to 2015, the increment is from
0.516 to 2.592, but in the year 2016 there is a decrease in ratio, because of increment
in current liabilities.

45
The current liabilities are increased due to the large increment in creditors for supplies
and outstanding liabilities. The creditors for supply is increased from Rs.1,02,89,714
to Rs. 4,40,27,248 in 2017 it are increased from 1.449 to 1.628.

2. Quick Ratio:

Quick ratio = Quick or Liquid assets / Current liabilities

Quick Ratio
Quick Assets Current Liabilities
Year Ratios
Rs. Rs.
2013 7,50,917 53,34,424 0.141
2014 2,31,45,421 1,42,28,321 1.627
2015 3,40,97,964 1,55,72,754 2.190
2016 6,73,07,968 4,94,16,171 1.362
2017 8,89,40,804 6,20,50,277 1.433

Quick ratio

2.5 2.19

2
1.627
Ratio

1.362 1.433
1.5

0.5
0.141
0
0
Year 2013 2014 2015 2016 2017
Year

Interpretation:
Generally, a quick ratio of 1 to 1 is considered to represent a satisfactory current
financial condition. Although the quick ratio is more penetrating test of liquidity than
the current ratio it should be used cautiously. A quick ratio is 1 to 1 or more does not

46
necessarily imply sound liquidity position. Similarly a low quick ratio does not
necessarily imply bad liquidity position. Since all book debts (debts and bills
receivable) may not be liquid and cash may be immediately needed to pay operation
and expenses.
The quick ratio is increased from 2013 to 2015 from 0.141 to 2.190; it is decreased
from 2015 to 2016 from 2.190 to 1.362, since the increment in current liabilities, it is
increased from 2016 to 2017.

ACITIVITY RATO

Inventory Turnover Ratio

Sales Average Inventory

Year Ratios
Rs. Rs.

2013 2,34,000 19,99,488 0.117

2014 10,53,98,345 37,48,034 28.121

2015 15,08,27,610 57,71,576 26.133

2016 17,42,08,899 58,34,446 29.859

2017 24,17,91,946 81,71,275 29.590

47
 Inventory turnover Ratio

35
29.859 29.59
30 28.121
26.133
25
Ratio

20
15
10
5
0 0.117
0
Year 2013 2014 2015 2016 2017
Year

Interpretation:
The inventory turn over shows how rapidly the inventory is turning in to receivable
through sales. Generally a high inventory turn over is indicative of good inventory
management and a lower inventory turn over suggests an inefficient inventory
management. A low inventory turn over implies excessive inventory levels than
warranted by production and sales activities or a slow-moving or absolute inventory.
A high level of sluggish inventory amounts to unnecessary tie-up of funds,
impairment of profit and increases costs. If the absolute inventories have to be written
off this will adversely affect the working capital position and the liquidity of the firm.
Again a relatively high inventory turn over should be carefully analyzed.
In 2013, the inventory turnover ratio is 0.117, because the sales are very low from
2015 to 2016 the inventory turnover ratio is increased continuously from 28.121 to
29.590.

48
2. Debtors Turn over and Collection period ratio:

Debtors turn over =Total sales / Debtors

Debtors Turnover Ratio

Sales Debtors
Year Ratios
Rs. Rs.
2013 2,34,000 2,43,360 0.962

2014 10,53,98,345 2,16,53,018 4.868

2015 15,08,27,610 2,80,95,495 5.368

2016 17,42,08,899 3,12,81,173 5.569

2017 24,17,91,946 3,49,32,122 6.922

Debtors turnover ratio

8
6.922
7
6 5.368 5.569
Ratio

4.868
5
4
3
2
0.962
1 0
0
Year 2013 2014 2015 2016 2017
Year

Interpretation:

The turnover indicates the number of times on the average that debtor’s turnover each
year. Generally, the higher the value of debtor’s turnover the more efficient is the
management of assets. The higher the value of debtor’s turnover the more efficient is
management of assets. The ratio is increased continuously from 2013 to 2016.
3. Average collection period ratio:

49
Average collection period = Days in a year = Debtors x Days in year
------------------- ----------------------------
Debtors turn over Sale

Average Collection Period

Debtors
Year Days in a year Turnover Days
Ratio
2013 365 0.962 380

2014 365 4.868 75

2015 365 5.368 68

2016 365 5.569 66

2017 365 6.922 53

Average collection period

400
380
350
300
Days

250
200
150
100
75 68 66
50 53
0 0
Year 2013 2014 2015 2016 2017

Year

Interpretation:

50
The average collection period ratio measures the quality of debtors since it indicates
the rapidity or slowness of their collectibility. The shorter the average collection
period the better quality of debtors as a short collection period implies the prompt
payments by debtors. The average collection period should be compared against the
firms credit terms and policy to judge its credit and collection efficiently. An
excessively long collection period implies a too liberal and in efficient credit and
collection performance. This certainly delays the collection of cash and impairs the
firms’ debt paying ability. The changes of bad debt losses are also increased. On the
other hand too low a collection period not necessarily favorable. Rather it indicates a
very restrictive and collection policy.
In EXEL Rubber Ltd., the average collection is stable on whole, but in 2013 the
average collection period is 380 days, so much higher than that of 2017 which is 53,
EXEL made a big turn around by substantially reducing the average collection to 53
days, because of rise in sales on cash are higher than that of credit sales.

4. Fixed Assets Turn over Ratio:

51
Fixed assets turn over = Sales
------------------
Net fixed assets

Fixed Assets Turnover Ratio

Sales Fixed Assets

Year Ratios
Rs. Rs.
2013 2,34,000 1,93,94,550 0.012

2014 10,53,98,345 1,82,15,082 5.786

2015 15,08,27,610 1,84,23,241 8.187

2016 17,42,08,899 1,69,29,970 10.290

2017 24,17,91,946 1,53,29,174 15.773

Fixed assets turnover ratio

18 15.773
16
14
Ratio

12 10.29
10 8.187
8 5.786
6
4
2 0 0.012
0
Year 2013 2014 2015 2016 2017
Year

Interpretation:

52
The two times fixed assets turnover indicates that a rupee investment in fixed assets
generate a sales of two rupees to a firm acquires plant and machinery and other
productive fixed assets for the purpose of generating sales.
In EXEL Rubber Ltd., the fixed asset turnover ratio is very low in 2013 that is 0.012
and it is increased to 15.773 in 2017. A high fixed asset turnover ratio indicates
efficient utilization of fixed asset in generating sales. While the low ratio indicates
inefficient utilization of fixed assets.

5. Total Assets Turn over Ratio:

53
Total assets turn over ratio = Sales
--------------------
Total Assets

Total Assets Turnover Ratio

Sales Total Assets
Year Ratios
Rs. Rs.
2013 2,34,000 2,26,44,955 0.010

2014 10,53,98,345 4,68,57,083 2.249

2015 15,08,27,610 5,87,82,002 2.566

2016 17,42,08,899 8,85,20,729 1.968

2017 24,17,91,946 11,63,29,737 2.079

Total assets turnover ratio

3
2.566
2.5 2.249
1.968 2.079
ratio

1.5
1

0.5
0 0.01
0
Year 2013 2014 2015 2016 2017
year

Interpretation:
The total assets turn over ratio is a significant ratio since it shows the firm’s ability of
generating sales from all the financial resources committed to the firm as this ratio
increases. There is more revenue generated per rupee of total investment in assets.
The firm’s ability to produce a large volume of sales on a small total assets base is an
important part of the firm’s overall performance in terms of profits.

54
In such a case, the ratio is computed by dividing sales by total tangible asset. In 2013,
sales are very low, when compared to the other years. In 2015, it is very high in 2016,
it is decreased due to the high increment in tangible assets from Rs.5,87,82,002 to Rs.
8,85,20,729. But sales are not increased that much.

FINDINGS

55
From the study of working capital management in Exel Rubber Ltd by utilization of
ratio analysis techniques it has been found that

1. The current ratio is increased from 2013 to 2015; the increment is from 0.516 to
2.592, but in the year 2016 there is a decrease in the ratio, because of the
increment in current liabilities. The current liabilities are increased due to the large
increment in creditors for supplies and out standing liabilities. The creditors for
supply is increased from Rs1, 02,89,714 to Rs 4,40,27,248, in 2006 it is increased
from 1.449 to 1.628.
2. The quick ratio is also increased from 2013to 2015 from 0.141 to 2.190; it is
decreased from 2015 to 2016 since the increment in current liabilities, it is
increased from 2016 to 2017.
3. Inventory turnover ratio in 2013 is 0.117, it is very low because the sales are very
low from 2015 to 2017 the inventory turnover ratio is increased continuously from
28.121 to 29.590.
4. The higher the value of debtor’s turnover the more efficient is management of
assets. The ratio is increased continuously from 2013 to 2017.
5. In EXEL Rubber Limited., the average collection period is stable in whole, but in
the year 2013 the average collection period is 380 days, so much higher than that
of 2017 which is 53 days, EXEL made a big turn around by substantially reducing
the average collection to 53 days, by rising sales on cash than that of credit sales.
6. In EXEL Rubber Ltd., the fixed asset turnover ratio is very low in 2013 that is
0.012 and it is increased to 15.773 in 2015, a high fixed asset turnover indicates
inefficient utilization of fixed assets.
7. In 2013 the total asset turnover ratio is very low, because the sales are very low. In
2015 it is very high, in 2016 it is decreased to the high increment in tangible assets
from 5, 87,82,002 to 8,85,20,729.

56
 SUGGESTIONS
1. The excess cash lying with the company can yield better returns by investing
in marketable securities shares and fixed deposits. There is a necessity to
properly work out the working capital requirement and to invest the rest of
reserve in marketable securities. So that the returns from marketable securities
the major portion of interest payable on borrowings will reduce.
2. Strict credit norms and reduced credit period of 30 days should be adopted to
improve debtor’s turnover and average collection period.
3. Assets like machinery have to be used efficiently to their full capacity to
improve the turnover. The capacity of each machine is 500 tubes per day; there
are 35 machines in the company. The total capacity is 17500 tubes per day; but
they produce only 10500 only, by proper utilization of machinery they can
improve their production.
4. Inventory policies like JIT (Just in time) may be useful to the company.

57
 SUMMARY
1. A high current ratio implies inefficient utilization of current assets and excess
funds in the form of current assets.
2. The debtor’s turnover has increased as a result of increase in cash sales.
3. The average collection has been decreased with the increase in debtor’s
turnover ratio by the rise in sales on cash than that of credit sales.
4. The fixed asset turnover has been high indicating efficient utilization of fixed
assets.
5. The total asset turnover has been fluctuating and decreasing indicating an
increase in current assets.

58
 BIBLIOGRAPHY

1. Financial Management, I.M.Pandey, Eighth Edition, Vikas Publishing house

Pvt.ltd
2. Financial Management, Prasanna Chandra, Fourth Edition, Tata Mc Graw-
Hill publishing company Ltd, New Delhi.
3. Financial Management and policy, V.K.Bhalla, third Revised and Enlarged
Edition, ANMOL Publications Pvt.Ltd, New Delhi.
4. Financial Management& Policy, James c. Vam Horne, Twelth Edition,
prentice-hall of India Pvt.Ltd. New Delhi.
5. Accounting for Managers, G. prasad, V.Chandra Sekhara Rao, First
Edition, August 2002, Jai Bharat Publications.

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