CONTENTS _____________________________________________________________________ S. NO. 1. 2. 3. 4. 5. 6. 7.

CHAPTERS Company Profile Working Capital Finance Inventory Management Working Capital Management Management of Cash Management of Receivables Conclusion and Suggestions PAGE NO.

CHAPTER-1 COMPANY PROFILE

Major Unit of Subsidiary Company Introduction to Kota Unit The Essential DSCL The Business Roll of Honour Community Development Business Team

CHAPTER-1 COMPANY PROFILE

DCM Shriram Consolidated Limited A leading Indian organization, DSCL is aspires to become a world class enterprise that is responsive to change, outward-looking, competitive, delivers superior quality at low cost with focused business and robust financials. DSCL has been built on core values of being caring, credible and fair with all shareholders, committed to continuous improvement; and being a responsible corporate citizen. DSCL is a multi location conglomerate based New Delhi; India. It is diversified Industrial house with annual turnover above Rs. 10 billion. DSCL has a long history of accessing & employing the best technologies for its projects & has worked successfully with renowned international & domestic technology partners. As a learning organization DSCL has worked regularly with national & international consultant of reputed, in diverse area of business strategy, quality, organizational development etc. In an increasingly global business environment, DSCL region is to strengthen its commodity business while moving to Value added & Knowledge based product & services in the area of its operations. DSCL has built an enabling work culture and beliefs in releasing human energy within the organization through participation, teamwork, professionalism, entrepreneurship, openness and upholding human dignity. The company is committed to enhancing the employ ability of individuals through competence building via continuous training and development activities. DSCL believes in a pro-active industrial relation policy and has an enviable track record in this field. Employ welfare is given outmost priority and is institutionalized across the organization. DSCL has initiated several management initiatives in the recent past for upgrading the organization, the major one being institution building quality management

ISO9000certification and implementation of SAP R/3 ERP package in information technology. DSCL strongly believers in socially responsible activity as a responsible corporate citizen. DSCL has met significant contribution to the society in the field of environment health care, family planning, education, cultural heritage & rural development & promoting sports. Several prestigious institutions of higher learning & arts of DSCL are Lady Shriram College, Delhi Schools of Economics, Shriram Centre for performing arts etc.

MAJOR UNITES OF SUBSIDIARY COMPANY ARE 1. Shriram Fertilizer& Chemicals, Kota ( Raj.). 2. Shriram Cement Workes, Kota (Raj.). 3. Swatantra Bhart Mills & DCM Silks Mils (Dehli). 4. Shriram Alkali &Chemicals, Bharuch (Gujarat). 5. Shriram Environment & Allied Services. 6. Ghaghagra Suger, Lakshmipur Kehri (U.P.). 7. Shriram Bisoeed Limited, Hyderabad (Andhra Pradesh). 8. DSCL ESCO Limited, New Dehli. 9. Shriram Polytech Ltd. 10. DCM Shriram Credit and Investment Ltd. 11. DCM Shriram International Ltd. 12. DSCL Energy services Co. Ltd. 13. DCM Shriram Infrastructure Ltd. 14. DCM Shriram Power Supply Ltd. 15. DCM Shriram Aqua Foods Ltd. INTRODUCTION TO KOTA UNIT The vast fertilizer and chemical complex of DSCL at Kota Raj., Shriram fertilizer and chemicals and shriram Cement works a its flagship venture. Spread over 1000 acres, the complex was initiated in 1963.The unit expanded over the years, to build a name for itself with its products. The unit is run with its high degree of the professional and

technical competence and has grown at speedy pace, keeping with the technological advances in respective fields. This fertilizer plant at kota most energy efficient naphtha based fertilizer plant in India. After Promoting Sports DSCL has wide spread marketing/distribution n/w for customer satisfaction. Extensive and specialized services provided to farmers under Shriram integrated Rural Development Project (SIRDP). All these have given Shriram Brand ahigh market acceptance. SHRIRAM UREA An integral part of the grain sector, Shriram Urea helps to yield the rich harvest for the farmers in Raj., Punjab,Haryana & U.P. this plant was setup in 1969 in collaboration with Halder Topsoe and Stamicarbon through the Chiyoda Corporation . The current production is 4,00,000 MT urea per annum, its reflect tremendous technical strength and dedicated human resource in its 110% operating efficiency. It requires 2,00,000 MT Naphtha as raw material per annum . CHEMICAL AND CHLOR ALKALI The combined production capacity of the Chlor Alkali plants at Shriram Fertilizer & Chemicals, Kota and Shriram Alkali & Chemicals, Jhagadia 93,000 MT per annum Makes DSCL one of the largest Chlor Alkali (Caustic Lye , Liquid Chlorine & Caustic Soda Flakes) manufacturers in India. One of the largest manufacturers of Chlor Alkali in the country, comprises of two pants : SAD, JHAGADIA, GUJARAT Latest member cell technology Located in the chemical market of India 20 MV captive power plant

SFC, KOTA , RAJASTHAN Mercury cell technology with metal Anode

Anode Cathode Protection device for improved efficiency Power Supply for 75 MW captive power plant Mercury Bearing Effluent Treatment System ensuring pollution free operations.

CAUSTIC SODA PACK Caustic is an extremely important chemical used in the manufacture of paper, aluminum and variety of industrial products. The DSCL caustic soda plant was set up in collaboration with Shin Etsu and has seen a regular induction of modern technology and expansion. COMMISSIONED 1963 at Kota 1969 at Jhagadia (Gujarat)

PRODUCTION 43,000 MT/ Annum (At Kota) 50,000 MT/ Annum (AT Jhagadia) CAPACITY 12% (Kota) 100% (Jhagadia) COLLABORATION Shin Etsu Chemical Co. Ltd., Japan Asahi Chemical Industry Co. Ltd., Japan Betrams, Switzerland RAW MATERIALS REQUIREMENT (ANNUAL) Salt 70,000 MT Kota Jagadia PVC PLANT

Computer process controlled plant only manufacture five grade of resins comprising of two electrical furnaces of 12 MVA and 20 MVA rating. Calcium Carbide PVC Resin : : For captive conception For specific application, manufacture five specialized,grade of high and low k-value resin ranging from 56 to 71. PVC Compound : manufactures a wide range of high tech and customized compounds. SHRIRAM PVC RESIN AND COMPOUND COMMISSIONED 1964 at Kota (Raj.) PVC RESIN PRODUCTION 34000 MV / Annum CAPACITY UTILIZATION 100% COLLABORATION/TECHNOLOGY Shin-Etsu Chemicals Co. Ltd., Japan Kaneka, Japan PVC COMPOUNDS PRODUCTION/CAPACITY Up to 12000 MT / Annum customized production

COLLABORATION/TECHNOLOGY Zeon Kasei Co.Ltd., Japan RAW MATERIAL REQUIREMENT (ANNUAL) Charcoal/Coke/SLV etc. 80,000 MT CARBIDE PLANTThe carbide plant was commissioned in 1963in collaboration with Chiyoda of Japan of manufacture Calcuim Carbide and Acetylene. Acetylene in turn is used to manufacture PVC. The plant has been recently modernized with the state of art technology for product quality, efficiency and environment safety in technical collaboration with Mannesman. A by product of the process, Calcium Hydroxide is used by the company for manufacturing of cement. CEMENTShriram cement, a product with a difference from DSCL, Commissioned in 1986, this plant has a production capacity of 2,00,000 MT per annum and operates at the high utilization levels. A unique technology from Lafarge of France, for conversion of Calcium Hydroxide to Portland cement in a wet process totally computerized control and backed by X-Ray analyzes, gives consistent good quality. Making Shriram cement a premium brand in the market. A walk through the cement plant at Kota can indeed prove to be very refreshing as the cement plant works in a dust free environment due to large number of modern emission control equipment a measure taken for cleaner environment. FEATURESOnly plant in India converting a waste product, Calcium Hydroxide slued, into high grade cement. Pioneer in introducing 43 grade cement in India. Computer process controlled plant Electrostatic Precipitator (ESP) : Pollution control device leading to better efficiency and pollution free environment.

PRODUCTIONOPC 43 Grade PPC

COMMISSIONED1987 Kota (Rajasthan)

PRODUCTION2,71,000 MT / Annum

CAPACITY UTILIZATION135%

COLLABORATION / TECHNOLOGYLafarge Coppee Lavalin, France Holder bank, Switzerland

MARKETING NETWORK45 wholesalers and dump agant 900 dealers

RAW MATERIALS REQUIREMENT (ANNUAL)Lime Stone 4,25,000 MT

POWERPower is the most important infrastructure for growth and industrial development. To ensure a steady supply of power for critical areas and have smoother, more efficient operation, two captive thermal power plant with a generating capacity of 45 Mw were set up in collaboration with Mitsubishi, foster wheeler and Stall. These plants run at high capacity utilization and are fitted with electrostatic precipitators, which help in emission control-as DSCLs continuing commitment to protect environment. Power growth towards Self Reliance and cost reduction. 75 MW captive Thermal Power Plant at Kota. 20 MW diesel power plant at Jhagadia Meeting the need of complex reduces dependence on state power supply. Consultancy proven ability in ; erection, commissioning and operation of power plant. COMMISSIONED1969 at Kota (Rajasthan) 1988 at Kota (Rajasthan) 1994/95 at Kota ((Rajasthan) 1997 at Jagadia (Gujarat) 2000 at Kota (Rajasthan) 35 MW 10 MW 30 MW 20 MW 10.3 Mw

POWER GENERATION 85.5 MW (Kota) 20 MW (Jagadia)

CAPACITY UTILIZATION Over 90% (Kota) Over 90% (Jagadia)

COLLABORATION / TECHNOLOGY Mitsubishi Heavy Industries, Japan Siemens, Germany Wartsila, India/ Finland

RAW MATERIAL REQUIREMENT (ANNUAL) Steam Coal Diesel 5,50,000 MT

PLASTICSA world of unlimited demand has opened its door to a material of future PVC. With its varied used in agriculture, water transportation, health care, etc. PVC is at the industrial forefront with great potential for the coming years. The PVC plant was commissioned in 1964 in collaboration with Shin-Etsu with a production capacity of 6600 tones per year, which has today grown to 34000 tones. Modernized collaboration with Kanegafuchi Japan, the plant operate at over 100% capacity utilization. Today our range of five Shriram PVC Resins, each a special product for specific application is manufacture to meet the requirement of our image & quality conscious customer. THE ESSENTIAL DSCL MULTI BUSINESS PROXY Rs.920 crores assets company (approximately US $ 200 millions) A board presents in the growing agri , plastic and chemicals business One of the lowest cost manufacturers of its products Reinforced by a vertical, lateral and backward linkage across its product lines Ventured into value-added businesses for future growth MANAGEMENT

Headed by Mr. Ajay Shriram and Mr. Vikran Shriram A strong and independent Board of Directors Organized across Strategic Business Units-managed independently by professionals. Continuously enriched pool of skills and competences PERFORMANCE

Revenue of Rs.1,410 crores, a 28 % growth over 2002-03 a 35 % increased Merger of the sugar business into DSCL

ETHOS Excellence in financial performance Building a world-class organization Long- term relationships with all stakeholders Strong governance with corporate best practices Strong human resource practices, emphasis on Team Excellence

PRODUCTS AND TREIR LOCATION MANUFACTURE Location Kota, Rajasthan (1) Products Fertilizers, Chlor-alkali, Stable Bleaching Powder, Calcium Carbide, PVC resin, PVC compounds, Cement and PVC profits. Chlor-alkali Sugar Sugar Hybrid seed (under a joint venture) Innovative Polymer Application Centre Yarn

Bharuch, Gujarat (2) Ajbabur, Utter Pradesh (3) Rupapur, Utter Pradesh (4) Hyderabad, Andhra Pradesh (5) Vietnam and Philippines Gurgoan, Haryana (6) Tonk, Rajasthan (7)

Bhiwadi, Rajasthan (8)

Fenesta Windows and Doors systems

THE BUSINESS

DSCLs business and their Progressive migration along the value Chain are marked by the transition From commodity businesses to Knowledge services.

Commodity businesses

Value-added businesses Knowledge and service businesses

The progress on the value chain is captured by the movement from the inner circle to the outer one from commodity to value-added businesses.

Revenue Analysis

25% 44%

14%

17% Agri Plastics Chemicals Others

1.

Fertilisers (ESCO)

1. Caustic soda

1. PVC resins

1. Energy services

2.

Suger

2. Cholrine

2. Polymer compounds

2. Cement

3.

Hybrid seeds

3. Hydrochloric acid

3. UPVC Window and

3. Textiles

Door systems
4. Agri-inputs-trading 4. Bleaching powder 4. Calcium Carbide 4. Development

5.

Agri-retail

ROLL OF HONOUR Roll of honour 1993-94 NPC Runner up Award for, Best Productivity Performance in Cement Industry 1994.95 NPC Award for, Best Productivity Performance in Cement Industry 1995.96 FAIs Runner Up Award for, Best Production Performance of Nitrogenous Fertilizer Unit 1996.97 NPC Award for, Second Best Productivity Performance in Fertilizer Industry 1998.99 SAP R-3/SAP Star Customer Award 1998 1999-0 NCCBM Award for, Best Improvement in Thermal Energy Performance in

Cement Industry 2000.1 2001.2 2002.3 National Award for Energy Efficiency-SFC Kota & SAC Bharuch. National Award for Oil Conservation-SAC Bharuch. First TERI( TATA Energy Research Institute ) Award for environment conservationSAC Bharuch. 2002.3 2002.3 2nd Rank in Over all environment Rating of the Indian Caustic-Chlorine Sector By Center for Science & Environment (CSE), Under Their Green Rating Project. National Award for Oil Conservation By Ministry of Petroleum & Natural Gas,Govt. of India for Unique and Innovative Efforts in Energy Conservation for SAC Bharuch. 2002.3 2003.4 2004.5 National Award To DSCL ESCO as Best Esco Company in India By Ministry of Petroleum & Natural Gas Govt. of India. National Award for Pollution Control & Rajiv Gandhi Environment for Clean Technology For SAC Bharuch National Award for, Public Recognition of Outstanding Activity for Prevention & Control of Pollution

COMMUNITY DEVELOPMENT AGRICULTURE EXTENSION ACTIVITIES Shriram Krishi Vikas Kendras (SKVKs) impart Scientific knowledge to farmers across subjects like crop cycles and Harvesting, Helping them achieve richer harvests and profitable returns. WATER TO THE PEOPLE DSCL is countering the dearth of water in arid terrains through the digging of bore wells, the installation of submersibles pumps and the construction of water storage helped finance mare than 650 wells.

INFRASTRUCTURE DSCL has partnered with the local community to build vast stretches of roads benefiting the entire region in and around its cane-growing areas. EDUCATION DSCL continues to support education activities by running various schemes at primary and professionals levels with a special focus on protecting the future of the girl child. The company, around its sugar operations in UP, has invested in Sanskar Pariyojna, and integrated education program, in collaboration with the Vinobha Bhave Trust to inculcate Shiksha (education), Swasth (health), Safaai (cleanness) & Swabhiman (self-reliance) in individuals. It deputed trainers and officers across ten villages covering a population in excess of ten thousand. In kota, DSCL has instituted scholarship programmers that encourage students to peruse advanced academic studies. The infrastructure of a numbers of schools in the plants vicinities has been strengthened through the introduction of basic facilities, including safe drinking waters. The company has build a school at Nimoda Mines for students up to class ten. In Bharuch, it has funded a degree college and has instituted a scholarship programme that touches several villages around its facilities, with 25 students being eligible annually. DSCL responded to earthquake-torn, kutch region of Gujarat and re-built a school there. SPORT DSCL launched the DSCL Open National Tennis Championship to motivate sports persons and help India curve a niche in the international tennis arena. In appreciation of the companies ability of organized a tournament of such a stature, The game was awarded the National Status in 1996. The prize money, the largest in its category for a National

tournament, comprehensively covers the means, ladies, boys and girls (under 18,16 & 14 respectively) categories. HEALTH DSCL helped euip the Maharao Bhim Singh Hospital at Kota with a state of the art intensive care unit called the Shriram ICU and Private wards called The Shriram Wards . The company encourages and promotes family planning as a national imperative, running incentive schemes in the villages surrounding its facilities. It has also provided medical assistance consulting, medicines and campus-to select villages in eastern Utter Pradesh and conducted medicals camps in villages around Kota.

BUSINESS TEAM

BOARD OF DIRECTORS

Shri Ajay S. Shriram Chairman & Senior Managing Director Shri Vikram S. Shriram Vice- Chairman & managing director Shri Rajiv Sinha Dy. Managing Director Shri Ajit S. Shriram Director (Sugar)

Dr. S.S. Baijal Shri Arun Bharat Ram Shri Pradeep Dinodia Shri Vimal Bhandari Shri Sunil kant Munjai Shri D. Sengupta Shri O.V. Bundellu IDBI Nominee Shri S.L. Mohan GIC Nomiee Shri S.N. Chaturvedi UTI Nomiee COMPANY SECRETARY AUDIT COMMITTEE Shri V.P. Agrawal Dr. S.S. Baijal Chairman Shri Arun Bharat Ram Shri Pradeep Dinodia Shri O.V. Bundellu IDBI Nominee BANKERS Punjab National Bank Bank of Baroda Oriental Bank of Commerce State Bank of India AUDITORS REGISTERED OFFICE M/s. A.F. Ferguson & Co. New Delhi 6th Floor, Kanchenjunga Building, 18, Barankhamba Road, New Delhi 110 001 Tel No.: (91) 11-23316801 Fax No.: (91) 11-23357803 E-mail: [email protected]

CHAPTER 2

WORKING CAPITAL FINANCE

Introduction Trade Credit Bank Credit Short Term borrowing and current provisions Long Term Sources

Financing of Working Capital in DSCL Ltd.

CHAPTER-2 INTRODUCTION
The need for financing arises mainly because the investment in working capital / current assets, that is, raw materials, work / stock-in-process, finished goods and receivable typically, fluctuates during the year. Although long term funds partly finance current assets and provide the margin money for working capital, such assets/ working capital are virtually exclusively supported by short term sources. Let us discuss to sources of Working Capital in details. Main sources of Finance the Working Capital are Trade Credit

Bank Credit Current provisions and non bank short term borrowing, and Long Term Sources comprising Equity Capital and Long Term borrowing.

The relative importance of any of these sources vary from country to country and from time to time depending on prevailing environment, in India trade Credit and Short Term Bank Borrowing are the primary source of Working Capital. TRADE CREDIT Trade Credit is the important sources of the finance inventories. As trade credit is available in the from of goods or services only, this facility can be utilized only finance inventories and cannot be utilized for any other purpose. One of the main advantages of trade credit is that it is available without any cost. Second it is also easily assessable. It is available without any formality or fulfillment of documents. Any business irrespective of its size can avail this facility very easily. Because trade credit is one of the main weapons of capture the market. Wherever in any industry deficiency in short term borrowing anses, it is compensated by trade credit. Means it is the main source of finance, available to a business concern. Now the question arises to what extent a firm exploit the source. Firm may avail to facility till there is no loss of discount. Trade credit can be used for any other purpose inventories, if inventory turnover period is shorter than the credit period. BANK CREDIT The other primary source of working capital is the bank borrowing. Credit arrangement from bank may be in different ways such as loan arrangements where entire amount is granted as from loan and is rebate in instalments with interest. Overdraft arrangements where the borrower can over drop to certain limit at the time of necessity can repay as per his convenience. Cash credit arrangements- when bank sanctions a limit up to which borrower can drop the needed amount. It is provided generally against pledge or hypothecation of goods. Bills purchased & bills discounted arrangements introduced in 1970 in India, now the RBI envisages to practice as it certain advantage over the disadvantages of cash credit. Cash credit it many thimes has no

links with production. Second many times there is double finance over the same goods- such as goods purchased on trade credit and hypothecated to bank under cash credit arrangements. Under this arrangement before discounting the bill, the bank satisfies itself about the credit worthness of the drawer and geneuineness of the bill. To popularise the schemes, the discount rates are fixed at lower rates than those of cash credits. The discounting bankers ask the drawer of the bill (i.e. seller of goods) to have his bill accepted by the drawees (buyers ) bank before discounting it. The letter grants acceptance against the cash credits limit, earlier fixed by it. On the basis of the borrowing values of stocks. Therefore the buyer who buys goods on credit cannot use the same goods as the sources of obtaining additional bank credit. MODE OF SECURITY:Banks provide credit on the basis of the following modes of security. HYPHOTHICATION Under this mode of security, the banks provide credit of borrowers against security of movable property, usually and inventory of goods. The goods hypothecated, however continue to be in a possession of the owner of these goods (i.e., the borrower). Hypothecation facility is normally not available to new borrowers.

PLEDGE Pledge, as a mode of security, is different from hypothecation in that in the former, unlike in the latter, the goods which are offered as security are transferred to the physical possession of the lender. An essential prequisite of pledge, therefore, is that the goods are in the custody of the bank. He would be responsible for any loss or damage if he uses the placed goods for his own purposes. In case of none-payment of the loans, the bank enjoys the right to sell the goods.

LIEN The term lien refers to the right of a party to return goods belonging to another party until a debt due to him is paid. Lien can be of two types: (i) particular lien, and (ii)

general lien. Particular lien is a right to retain goods until a claim pertaining to these goods fully paid. MORTGAGE Mortgage is, conveyance of interest in the mortgaged in the property. The mortgage interest in the property is terminated as soon as the debt is paid. Mortgages are taken as an addition security for working capital credit by banks. CHARGE Where immovable property of one person is, by the act of parties or by the operation of law, made security for the payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge on the property and all the provisions of simple mortgage will apply to such a charge. Bank may demand any of the above securities, depending on the nature of advances or credit facilities availed. Generally in the case of advanced of movable goods required essentially for production activity are hypothecated to bank such as advanced for stock of inventory. Whereas the assets which can be parted with the borrower-such as excess inventories bills etc. are pledged or bank has line over those securities. Fixed assets as land, building, plant etc. are mortgaged or bank have charge over such securities through documents of transfer.

SHORT TERM BRROWING AND CURRENT PROVISIONS: Internal Financing and Short Term borrowings are also very important and prevalent of financing working capital. Internal Financing includes Retainations, Surplus and Reserves. Retained earning are the earnings of corporation which is not distributed among the shareholders. It is also known as ploughing back of profits. Ploughing back of profits has become popular because-it is an in expensive method of acquiring funds. It avoids taxation leakage and it stimulated high growth rate. As an organization has to maintain high solvency standard, retention of earning, helps in this task. Retained earning may represents in the high stock of inventories or may used to issue bonus shares. It may be used to finance the firms expansion plans, replace obsolete machinery or plants, redeem

debts or financing working capital. Retained earning is very much helpful during the period of inflection when costs are rising, it helps to maintain level of inventories and meeting the recurring expenses. Certain resources are also maintain by a corporation to meet contingencies and to provide additional capital. It is not charge against profits but an appropriation of profits. Resources are credited to prevent the dissipation of surplus in the form of dividends, to provide additional capital, to help anticipate emergencies. In a broad sense all allocation to reserves represent additions to capital. Reserves may for any specific purpose to just to increase capital. When it is created to meet any future meet it is called revenue reserve. On the other hand it is called capital resource which is payable only at the time of winding up of the corporation Resources never means additional cash with the firm, but it is always represent net increase in the assets. These reserves are also one of the main source of working capital. Now- a -days mobilization of funds through accepting public deposits is also gaining popularity. People as well as the corporation find the deposits more suitable to their requirement. As general public finds better interest rate. On the other hand corporation also find the public deposits more suitable to their requirements. While arranging funds from banks they have to go through many procedures and funds are availed on certain conditions and can be used for specific purposes only. Whereas the deposit from public does not suffer from such inhibitions. Corporation find such deposits at lower cost- even some times the deposit are used for the purpose for which they can not get credit under Government, anti inflationary policy. Therefore day by day the popularity of public deposits are increasing and this has become a good source to finance working capital after bank and trade credit. LONG TERM SOURCES As we know working capital has two main concepts permanent and temporary working capital, permanent Working Capital is the minimum requirement of Working Capital without which there will be no possibility of regular production. That portion of Working Capital generally financed by long- term resources as fund cannot be withdrawn from such portion.

FINANCING OF WORKING CAPITAL IN DSCL LTD. We have analysed in past chapters the position of Working Capital from the view point of size, composition & source. Now we will see that what are the sources of Working Capital. Table 2.1 Size and Sources of Working Capital Finance in DSCL Ltd. During 2000-2001 To 2004-2005 (Rs. in Crores) Years 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 Size of Working Capital 171.92 226.13 226.61 267.71 392.82 Unsecured loans 21.55 71.45 64.91 110.18 226.51 Reserve and Surplus 32.49 249.50 297.93 353.56 425.49 Secured loans 186.91 342.14 342.58 348.44 468.06

The above table shows the different sources, and size of Working Capital during our study period. The main source of Working Capital is secured loans. Thus the dependence of company for its Working Capital finance has increased towards secured loans. Second main source of Working Capital is reserve & surplus which is also increasing. We have already seen that company has adequate working Capital in comparison to its needs therefore company has managed funds from the above maintained sources.

CHAPTER-3 INVENTORY MANAGEMENT

Introduction Objectives Structure of Inventory

Need to Hold Inventory Benefits of Holding Inventory Techniques of Inventory Evaluation of Inventory Management in DSCL

CHAPTER - 3 INTRODUCTION
Inventory Management is critical area of Working Capital Management which plays a crucial role in the economic operation of the firm. Inventory is the first most important component of Working Capital. Inventory as a current assets, differs from other current assets because only financial managers are not involved. Rather all the functional area, marketing, production, finance & purchasing and involved. The

views conceming the appropriate level of inventory would differ among the different functional area. The term inventory refers to the stockpile of the products a firm is offering for sale and the components that make up the products. In other words, inventory is composed of assets that will be sold in future in the normal course of business operations. The assets which firms store as inventory in anticipation of need are (i) raw materials, (ii) work in process (semifinished goods) & (iii) finished goods .The raw material inventory contains item that are purchased by the firm from others and are converted into finished goods through the manufacturing (production) process. They are an important input of the final product. The work-in-process inventory consists of items currently being used in the production process. They are normally semi-finished goods that are at various stages of production in multistage production process. Finished goods are yet to sold. According to the Accounting Research and Terminology Bulletin, the term Inventory means the aggregate of those items of tangible personal property which (1) are held for sale in the ordinary course of business, (2) are in the process of production for such sales, or (3) are to be currently consumed in the production of goods or services to be available for sale. represents final or completed products which are available for sale . The inventory of such goods consists of items that have been produced but

OBJECTIVES Inventor should be turned over as quickly as possible, avoiding stock-outs that migst result in closing down the production line or lead to loss of sales. It implies that while the management should try to pursue the financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demands. In others words, the financial manager has to reconcile these to conflicting requirements. Stated differently, the objective of inventory management consists of to counter balancing parts: (i) to minimize investments to inventory, and (ii) to meet a demand for the product by efficiently organizing the production and sales operations. These two conflicting objectives of inventory management can also be

expressed in terms of cost and benefit associated with inventory. That the firm should minimize investment in inventory implies that maintaining inventory involves costs, such that the smaller the inventory, the lower is the cost to the firm. But inventories also provide benefits to the extent that they facilitate the smooth functioning of the firm: the larger the inventory, the better it is from this view point. An optimum level of inventory should be determined on the basis of trade-off between costs and benefits associated with the levels of inventory. An effective inventory management should Ensure a regular supply of materials to facilitate uninterrupted; Maintain adequate stock of raw materials in the period of scare supply and anticipated price changes; Maintain sufficient stock of finished goods for smooth sales operation and effective customers services. Minimize the carrying costs and time; and Control investment in inventories and keep it at an optimum level. STRUCTURE OF INVENTORY The term inventory comprises finished goods, semi-finished goods or work in progress, raw material and separates. RAW MATERIALSAs to avoid the interruption in supply of aw material certain level of stock of raw material is maintain. On the other hand bulk purchasing has its advantages too, such as credit facility, trade discount etc. Stock of raw material is also maintained in anticipation of price changes. STOCK OF FINISHED GOODSDemand and production both may never be in a synchronized way. Demand may depend upon season, occasions etc. on the other hand production may not increase beyond a certain level in short run. Therefore to meet the spontaneous

demand spurt, or to meet demand in a particular season, it is necessary to maintain a certain level of finished goods. WORK IN PROCESSProduction cycle indicates certain stages, therefore, as the material passes through many stages, stock is also pilled up in production cycle.This stock is of semifinished goods.Which wait for next processing stage. Therefore certain stock level is also be maintain as work in process. STORES AND SPARE PARTSBesides, Raw material and semi-finished goods, there is a good stock of tools and spare part of inventory. Which also involve a certain amount of cost. stock of such spare parts are to be maintained, as these are also among the necessary items in production. NEED TO HOLD INVERNTORY Need for management of inventory arises when the company holds inventory. Holding of inventory involves trying up of the companys funds due to storage and it also costs. There are three general motives for holding inventories.

(1) PRODUCTION AND SELES MOTIVE: Smooth production can be ensured only when the raw material required for the production is always available. Similarly, sales can go well if the concern has sufficient production. For smooth functioning these concern needs sufficient inventory. (2) PRCAUTIONARY MOTIVE: It necessitates holding of inventory to guard against the risk of unpredictable changes in demand and supply forces.

(3) THE SPECULATIVE MOTIVE: It influence the decision to increase or decrease inventory level to take advantage of price fluctuations. Due to the above reasons and to achieve excellence in the business operations. It has become necessary to hold inventory. An enterprise should maintain adequate stock of materials for continuous supply to the factory for an uninterrupted production. It is very difficult to procure raw materials whenever it is needed. A time lag always exists between demand for materials and its supply. The procurement of materials may be delayed because of such factors as strike, transport disruption short supply etc. Therefore, the concern should maintain sufficient stock of raw material at a given time to stream line the production. Others factors which may effect holding of inventory are quantity discounts and anticipated price increase. BENEFITS OF HOLDING INVENTORY He major benefits of holding inventory are the basic function of inventory. In the other word, inventories perform certain basic function which are of crucial importance in the firms production and marketing strateiges. The basic function of inventories is to act as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be pursued at exactly same rate. The key activities are: (i) purchasing, (ii) production, (iii) selling. The term uncoupling means that these interrelated activities of a firm can be carried on independently. Without inventories, purchasing and production would be completely controlled by the sale schedule. If the sales of the firm increase, these two would also increase and vice varsa. Since inventory enables uncoupling of the key activities of a firm, each of them can be operated at the most efficient rate. This has several benefits effects on the firms operation. In the other words, three types of inventory, raw materials, work-in-process and finished good, perform certain useful function. Alternatively, rigid trying of purchase and production to sales schedules is undersirable in the short run as it will deprive the firm of certain benefits. The effect of uncoupling (maintaining inventory) are as follows.

BENEFITS IN PURCHASINGIf the purchasing of raw material and other goods is not tide to production/sales, that is, a firm can purchase independently to ensure the most efficient purchase, several advantages would become available. A firm can purchase larger quantities than is warranted by usage in production or the sales level. This will enable it to avail of discounts that are available on bulk purchase. BENEFITS IN PRODUCTIONFinished goods inventory serves to uncouple production and sale. This enables production at rate different form that of sale. That is, production can be carried on at a rate higher or lower than the sale rate. This would be of special advantage to firms with seasonal sales pattern. In their case, the sales rate will be higher than the production rate during a part of the year (peak season) and lower during the off-season. The choice before the firm is either to produce at a level to meet the actual demand, that is, higher production during peak season and lower or nil production during off-season or production continuously throughout the year and build up inventory which will be sold during the period of seasonal demand. In brief, since inventory permits least cost production scheduling, production can be carried on more efficiently. BENEFITS IN WORK-IN-PROCESSThe inventory of work-in-process performs two functions. In the first place, it is necessary because production processes are not instantaneous. The amount of such inventory depends upon technology and the efficiency of production. Second purpose it uncouples the various stages of production so that all of them do not have to be performed at same rate. The stages involving higher setup cost may be most efficiently performed in batches with a work-in-process inventory accumulated during a production run.

BENEFITS IN SALESThe maintenance of inventory also helps a firm to enhance its sales efforts. If there are no inventories of finished goods, the level of sale will depend upon the level of current production. A firm will not be able to meet demand instantaneously. There will be a lag depending upon the production process. If the firm has inventory, actual sales will not have to depend on lengthy manufacturing processes. Thus, inventory serves to bridge the gap between current production and actual sales. A related aspect is that inventory serves as a competitive marketing tool to meet customer demands. TECHNIQUES OF INVENTORY An optimum level of inventory on the bases of the trade-off between cost and benefits to maximize of owners wealth. Many sophisticated mathematical techniques are available to handle inventory management problems. But they are more appropriately a part of production management and lie outside the scope of this book. Nevertheless, they involve in built financial costs. ECONOMIC ORDER QUANTITY (E.O.Q.)The optimum size is popularly known as the Economic Order Quantity. The economic order quantity is used to minimize the annual total costs for ordering and carrying the inventory as well. There are certain factors which affect the economic size of order to be placed, viz use of materials during the given period, costs of placing and order and costs of carrying the inventories. The size of inventory strikes a balance between the ordering costs and carrying costs and suggest the optimum size of the order to be placed. It can be shown as follows: _____ EOQ = 2 C0 1 Where EOQ = Economic Order Quantity C = Annual consumption in unites O = Ordering Costs per order I = Storage or carrying costs as a % of average stock.

Total Variable Cost = Order Cost + Carrying Cost Total Cost = Purchase Cost + Carrying Cost + Ordering Cost Purchase Cost = Annual Consumption Purchase price per unit

Carrying Cost = EOQ Carrying Cost per unite per year 2 Ordering Cost = Annual Consumption Ordering Cost per order EOQ Number of Orders = Annual Consumption EOQ Time gap between two orders = Numbers of days in a year No. of orders

RE-ORDER LEVELThe optimum order point or order level is the level of inventory at which the economic order quantity of additional stock should be ordered. It is the point at which the expected uses of an item of inventory would just exhaust the existing inventory during the time required in obtaining fresh delivery. Thus the reorder level can be determined by applying the following formula: Re-order Level = Max. Consumption Rate Max. Re-order period Re-order Level = (Lead Time Usage Rate per day) + safety stock

DANGER LEVELDanger level is such a level at which the firm may suffer heavy production and other type of loses. At this level the minimum required raw material is purchased at any price, the raw material at this level is arranged war level. The danger level

may be calculated with the help of following formula: Danger Level = Minimum Rate of Consumption Minimum Re-order Period AVERAGE STOCK LEVELAverage stock level represents the average stock which is maintained in the stores. This level is above the minimum level and below the max. level. The following formula is used to calculate average stock level: Average Level Stock = 1 (Max. Stock Level + Minimum Stock Level ) 2 Alternative formula = Minimum Stock Level + 1 Re-order Quantity Different Level of Stock can be indicated with the help of following diagram as:

Maximum Usage

Re-order point _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___________

Re Order Qty.

Minimum Usage _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _____

Purchasing Time

MAXIMUM STOCK LEVELThe Maximum stock level is that stock level, which shows the largest quantity of stock. The fixation of maximum stock level is essential to avoid unnecessary blocking up of capital in inventory.

Maximum stock level can be computed as under: (ROL + ROQ) (Minimum rate of consumption minimum reorder period) Here reorder refers the economic order quantity. Economic order quantity shows the size of order which is economical for the concern in all respects. MINIMUM STOCK LEVEL / SAFETY STOCKIt can be determined on the basis of past experience of delays in receiving suppliers fluctuations in the consumption rate plus other relevant factors such as transport bottlenecks, strikes or shutdowns. The minimum stock level may be calculated by applying the following formula Minimum level = [Re-order Level (Normal Consumption Rate Normal Reorder Period)] Or Minimum Level = Usage Rate per Day Days of Safety

EVALUATION OF INVENTORY MANAGEMENT IN DSCL LTD. An analysis has been made to examine size, structure & movement of inventories held By DSCL Ltd. SIZE OF INVENTORYThe table shows that the size of inventory during 2000-01 & 2001-02 was decreasing and increasing in 2002-03, 2003-04 and 2004-05. On the other hand sales is fluctuating which is a sign of efficient management.

Table 3.1 Size of Inventory In DSCL During 2000-2001 To 2004-2005 Year Amount in Crores

2000.2001 2001-2002 2002-2003 2003-2004 2004-2005

53.90 47.49 68.46 205.47 304.00

STRUCTURE OF INVENTORYIn a manufacturing company inventory can be divided into following groups: Raw Material Work in Process Store and spare parts and Finished Goods The share of each component varies from firm to firm. RAW MATERIALDSCL used mainly Naptha, Charcol, Kapas Cotton, Synthetic Yarn etc. as raw material. It produces mainly urea, caustic soda, cement, yarn and PVC resigns. Company maintains much more inventory of Stores & Spares compared to raw material. Thus investment in raw material is not much. STORES & SPARE PARTSIn manufacturing company the store and spare parts are the maximum proportion of aggregate inventory.

Table 3.2 Value and Percentage of stores and spare parts to Aggregate inventory in DSCL during 2000-2001 To 2004-2005

Year

Amount (in Crores) 33.44 33.73 25.87 35.02 54.39

% of store and spare parts to inventory 62.04 71.02 37.79 17.04 17.89

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

It is clear from the above table the % of store and spares has fluctuated from year to year. Also store and spare parts constitute the major portion of inventory. GOODS IN PROCESSIn a manufacturing company the size of goods in process depends upon the length of production cycle. This table shows the size and % of goods in process during last 5 years. Table 3.3 Value and % of goods in process to Aggregate inventory in DSCL during 2000-2001 To 2004-2005 Year Amount (in Crores) 17.66 13.76 42.59 170.45 190.65 % of goods in process to inventory 32.76 28.97 62.21 82.95 86.05

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

FINISHED GOODSThe size of finished goods in a company depend on market forces. Finished goods has to be maintained the meet the requirement of customers. A manufacturing concern wants to minimize the investment in finished goods.

This table shows the amount and % of finished goods to aggregate inventory during last 5 years. Table 3.4 Value and % of finished goods to Aggregate inventory in DSCL during 2000-2001 To 2004-2005 Year Amount (in Crores) 6.43 7.72 27.25 148.53 193.89 % of goods in process to aggregate inventory 15.00 16.20 39.80 72.28 88.75

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

This table shows that investment in finished goods is increasing which in not good sign for company. TURNOVER OF INVENTORY Rapid turnover means higher profit. On the other hand, slow turnover means lower profit. Inventory turnover has a direct impact on the profitability of the firm. Rapid turnover of inventory means minimum investment in inventory. Inventory Turnover is to be calculated by dividing the sales to inventory at the end of the year. Table 3.5 shows the turnover of inventory in DSCL during our study period. Table 3.5 Turnover of inventories in DSCL During 2000-2001 To 2004-2005 (Rs.in Crores)

Year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Sales 958.37 1053.67 1150.14 1475.62 1905.19

Inventory 53.90 47.49 68.46 205.47 304.00

Turnover Ratio 17.78 22.18 16.80 7.18 6.27

The turnover ratio shows that the company has good turnover in comparison to its investment in inventories.

CHAPTER 4 WORKING CAPITAL MANAGEMENT

 Concept of Working Capital Needs of Working Capital Types of Working Capital Components of Working Capital Uses of Working Capital Working Capital of DSCL Ltd.

CHAPTER 4 INTRODUCTION

In day to day working of business concern, Working Capital plays an important role, because Working Capital is required for payment of wages, expenses, raw materials and payment to creditors. Whether a business firm is earning profit or incurring loss or facing financial crises can be seen with the help of quantum of Working Capital due to shortage of Working Capital a business firm is lame, because there is no sufficient Working Capital a business can not run its business smoothly. Due to this reason working capital management has assumed greater importance in every business firm. The Management of Working Capital is concerned with the management of the firms current accounts, which includes current assets and current liabilities. Working Capital plays equivalent vital role in the business as blood plays in the human body. Shortage fixed can be tolerated by a business concern for short period but shortage of working capital can create lots of serious problems within a period of few days. In this modern area of cut throat competition, it has become essential to provide certain facilities to customers to capture the market; the credit facility is one of them. Thus working capital is required as there is a time gap between credit self and collection proceeds from the customers. Reciprocal relationship between current assets and current liabilities is the main these of the theory of working capital management. CONCEPTS OF WORKING CAPITAL Working Capital means the funds available for day to day operation of an enterprise. There are two concepts of Working Capital. (1) (2) GROSS WORKING CAPITAL NET WORKING CAPITAL

(1) GROSS WORKING CAPITAL

Gross concept of Working Capital is quantitative in nature. In represent the total of all current assets. It is also known as circulating capital or current capital. The word current assets means, those assets which can be converted into cash within an accounting period or trade cycle like: Inventory Trade debtors Loans and advances Investments Cash and Bank Balance Marketable securities Bills receivables

(2) NET WORKING CAPITAL Net Working Capital represents the excess of current assets over current liabilities or the portion of current assets which is financed by long term funds. It is known as net working capital. The net concept of Working Capital is qualitative in character. Net working capital may be negative or positive. When current assets exceed over correct liabilities there will be positive net working capital. If current liabilities exceed over current assets it will be negative working capital. Current liabilities are those usually repaid within an accounting you like. Account Payable / sundry creditors Bills Payable Trade Advances Outstanding Expenses Short Term Bonus Bank Overdraft

Both gross and net concepts have their own significance for management. The gross concept of Working Capital is a going concern concept, because current assets are necessary for the proper utilization of fixed assets. The net concept of Working Capital shows the financial soundness and liquidity of a firm. This concept creates the confidence to the creditors about the security of their amounts.

NEEDS OF WORKING CAPITAL Funds are required for an enterprise for day to day running. These funds are generated usually through sales. However, sales dont convert into cash instantaneously. This is always time gap between the sales activity and receipt of cash. Working Capital is required for this period in order to sustain operating activity of an enterprise. Therefore, it is clear that Working Capital is required because of time gap between sales and actual realization of cash. This time gap is technically termed as operating or cash cycle of business. OPERATING CYCLE The continuing flow from cash to suppliers to inventory, to accounts receivable and back into cash is what is called the term cash cycle refers to the length of time necessary to complete the following cycle of events: 1. The raw material and stores inventory stage 2. The working progress inventory stage 3. The finished goods inventory stage 4. The receivable stage

WORKING CAPITAL POLICIES

Conservative Working Capital Policies: - A conservative polices suggest to carry higher level of current assets in relation to sales. Surplus current assets enable the firm to absorb sudden variation in sales, production plan and procuremant time without disrupting production plans. Additionally, the higher liquidity levels reduse the risk of insolvency. But lower risk translate in to lower return. Large investment in current assets lead to higher interests, carrying cost and encouragement for sufficient. But conservative police will enable the firm to absorb the day to day business risks. It assures continuous flow of operation and eliminate worry about recurring obligations. Under this policy long term financing covers more than the total requirement for working capital. The excess cash is invested in shortterm marketable securities and in need, the securities are sold off in the market to meet the urgent requirement of working capital. TYPES OF WORKING CAPITAL In modern business world, Working Capital is of many types. Because to run the organization well,it is necessary to maintain funds in the organization. Generally, Working capital of every business firm may be of many types: Permanent, fixed or regular Working Capital Flexible or Temporary variable Working Capital Seasonal Working Capital or Special Working Capital Negative Working Capital Cash Working Capital and Balance Sheet Working Capital PERMANENT, FIXED OR REGULAR WORKING CAPITAL This working capital is the minimum quantity which required to run the organization every time, it also refers to the hard care Working Capital. If this quantity of Working capital is not maintained then the business may be greatly handicapped in day to day working. It is that the minimum level of investment in the current assets that is caved by the business at all times to carry out minimum level of its activities. This part of Working Capital is as permanent as the investment in fixed assets.

FLEXIBLE OR TEMPORARY WORKING CAPITAL It refers to that part of total Working Capital which is required by a business over and above permanent Working Capital. It is also called as variable Working Capital. Such type of Working Capital represents such amount of additional current assets which are required at different times during an accounting period of additional inventory and cash balance to cover the pick selling period as assured by changed circumstances since the volume of temporary Working Capital keeps on fluctuating from time to time according to the business activities it may be finance from the short term services. This type of Working capital changes with the charge into operational activities according to O.M. Joy, Any amount of over and above the permanent level of Working Capital is temporary fluctuating or variable Working Capital. SEASONAL WORKING CAPITAL OR SPACIAL WORKING CAPITAL It refers the extra Working Capital which are required due to additional demand on some special occasions. This working Capital is also additional amount of current assets like cash, receipts and inventory which are required during the accounting period of a business concern. Additional Working Capital may also be needed on account certain abnormal circumstances and it is termed as special Working Capital. Thus, this type of Working Capital is needed to meet extra ordinary requirements or contingencies. The classification of the seasonal Working Capital as regular and variable is also helpful in arranging finance for the business firm. NEGATIVE WORKING CAPITAL Negative Working Capital is when current liabilities exceed current assets. This position is not accurate theoretically and occur when a business firm is nearing a crisis. If any business concern to pay his liabilities, then it is called Negative Working Capital. CASH WORKING CAPITAL

This Working Capital is calculated at the time shown in profit and loss account of a business. It is the real flow of money or value at accurate time and is considered to be most realistic approach to Working Capital. BALANCE SHEET WORKING CAPITAL It is that Working Capital which is calculated from the items appearing in the balance sheet of organization. COMPONENTS OF WORKING CAPITAL Construction of Working capital is being made through current assets and current liabilities. Current assets involves cash, marketable securities, inventories and receivables and current liabilities involves o/d, creditors, bills payable and outstanding expenses. The main problem is that how Working Capital is recated in the business ? INVENTORY The inventory contributes a lot to the constitution of Working Capital. Before going to the process the inventory creates the working Capital. We must see that what inventory itself is ? There are differences brought by different authorities as regard to the meaning of inventory. It is very difficult to prepare a complete list of various components of inventory which can express a clear view of inventory. According to American institute of Accountants. The aggregate of those items of tangible personal property which (1) are held for sale in the ordinary course of business, (2) are in the process of production for sale and (3) are to be currently consumed in the production of goods or be available for sale. For the point of study the inventory can be divided into the following four categories :

RAW MATERIALS

Raw material is defined as the stock of materials on which manufacturing process is yet to be carried on. Means Raw Materials is the first step in the production process. A firm maintains proper stock of Raw Materials for uninterrupted production. It is not possible for a firm to purchase whenever it needed. There is a time lag between demand and supply of Raw Materials. There is a uncertainly in procuring raw material in time due to strike, flood, short supply etc. therefore a firm maintain a proper level of raw materials for uninterrupted production. GOODS IN PROCESS Goods in process indicates incomplete process of manufacturing. To make more clear, good in process means the stock of raw materials, which is still under manufacturing process and yet has not become a finished product. The size of good in process is determined by the length of the manufacturing cycle. Larger the time of manufacturing process, larger will be size of goods in process. On the other hand, if manufacturing process takes short time there will be low stock of goods in process. FINISHED STOCKFinished stock is the last resort of the manufacturing process. There is no room for the confusion in the definition of finished goods, because in the in the finished product, raw material is fully converted is into the saleable product. The stock of finished goods inventory is held by a firm to serve customers continuous basis and to meet fluctuating demand. STORE AND SPARE PARTSStores and spares consists of innumerable items. Store and spares are kept to fight to break dawn of machinery in the operation. The reasonable quantity and quality of spare parts must be kept to get away from the interruption in the production. In the engineering enterprise store and spare parts are the parts of Raw Material. Engineering and public utilities have high investment store and spare parts. RECEIVABLES-

Receivable is the second most important component of Working Capital next to inventory. It is essential for each and every business institution to sell their product on credit basis in this though competition in order to maximum the profits. Credit sale bring out the receivables. Looking to the profits we must consider both merits and demerits of credit sale. By merits we mean the profit involved and demerits we means the risk occurred in the proceeds collection. After all receivables effects profitability, liquidity and Working Capital of business concern. Therefore a proper level of receivables should be maintain for the proper profitability. Receivables plays an important roll in contributing the short term financial position and profitability. CASH Cash in the business may be compared to the back bone of the human body, back bone gives the strength to the human body and cash gives profit and solvency to the business. In a business ultimately a transaction results either in flow or out flow of cash. The term cash is used in two senses. In narrow sense it is used for cash, cheques, drafts and demand deposits in bank. In broad sense it also includes near cash assets like-marketable securities and fixed deposits in bank. Cash in hand, as an asset it has no any earning power in itself. But a minimum cash balance is essential to meet the requirements of the business. The question arise that what is the proper level of cash or how much cash be kept by a business. There is no any formula to determine the proper level of cash, which should be kept by a business. The proper level of cash depends on various factors like- nature of business, period of credit sale and the position of receivables and inventory. Now the question arise that what is the aim ti keeping cash. According to Keynes there are three motives for keeping cash: 1) 2) 3) Transaction motive Precautionary motive and Speculative motive

In general we can say that a business keeps cash to take day to day obligations, to take benefit from favourable market conditions and to allow for contingencies.

USES OF WORKING CAPITAL BUSINESS LOSSES Working capital is also used to finance operational losses of companies. On the other hand if a company is in profit then fund is created. Redemption of share capital and debentures or repurchase of debentures, When cash is paid to redeem preference shares or debentures or repurchase the debentures, the result is that Working Capital is reduced. PAYMENT OF LONG TERM LOAN It results in the reduction of current assets. Hence, there is use of Working Capital. Even if a long term debt is cancelled by issuing new securities, the cancellation is shown as a use of fund and issue of new security as a source of fund. PAYMENT OF DIVIDEND IN CASH There are two ways of dealing with proposed dividend and the subsequent payment. If the proposed dividend is treated as a current liability, actual amount will not be shown as a use of funds. PAYMENT OF TAXES Working Capital is also used to pay the taxes. When tax is paid from Working Capital, there is reduction in Working Capital and this means use of.

PURCHASE OF FIXED ASSETS -

The purchase of fixed assets such as plant machinery either reduces current assets or increase current liabilities. PAYMENT OF LONG TERM LIABILITIES Payment of long term liabilities reduces working Capital.

WORKING CAPITAL OF DSCL LTD. The following table shows excess of Current Assets over current liabilities or net Working Capital of the DCM Shriram Consolidated Ltd., Kota for the last five accounting years.

Table - 4.1

COMPUTATION OF WORKING CAPITAL IN DSCL DURING 2000-2001 TO 2004-2005 (Rs. In Crores) Particulars A) Current Assets Inventories Sundry debtors Cash and Bank Balance Loan and Advances 65.95 260.90 B) Current liabilities & Provisions Current liabilities Provisions 68.84 20.14 88.98 Working Capital (A-B) 171.92 86.67 22.78 109.45 226.13 56.88 25.24 82.12 226.61 234.62 33.09 267.71 252.97 337.11 55.71 392.82 336.9 120.17 335.58 107.83 308.73 90.57 520.68 96.61 729.72 53.90 127.04 14.01 47.49 153.06 14.86 68.46 124.37 8.07 205.47 182.51 42.13 304.00 303.61 25.50 2001 2002 2003 2004 2005

Above table shown that the size of Working Capital was decreasing in 2001 and increasing in the other following years. We know that size of Working Capital is influenced by various factors, In a given time period. Working Capital size may be influenced by sales, level of output nature of business, business cycles and length of the process etc.

CHAPTER 5

MANAGEMENT OF CASH

Introduction Motives for Holding Cash Objective of Cash Management Control Over Cash Flows Evaluation of Cash Management in DSCL Ltd.

CHAPTER 5

INTRODUCTION
Cash is the medium of exchange on the common purchasing power and which is the most significant components of working capital. Cash is the basis input required to keep the organization running on a continuous basis. At the same time it is the ultimate output which is expected to be realized by selling goods and services. An organization should hold sufficient cash, neither more, nor less. Since excessive cash remain idle which in turn increases the cost without contributing anything towards the profitability of the organization and in the opposite case, trading and / or manufacturing operation will be disrupted. In other words, it can be stated that the higher the level of unused cash, the greater is the cost of holding it in the form of loss of interest which could have been earned either by investing it in securities or by reducing the burdun of interest charges by paying off the loans taken previously. If the level of cash balance is more than the desired level it shows mismanagement of funds. Therefore, for smooth functioning and hjgher profitability, proper and effective cash management is of paramount importance. Cash is the most liquid asset that a firm owns. It includes money and instruments like cheque, money orders or bank drafts which banks normally accepts for deposit and immediately credit to the depositers account. Sometimes near- cash items, such as marketable securities or bank time deposits are also included cash. The basis characteristic of near- cash assets is that they can easily be converted into cash. MOTIVES FOR HOLDING CASH The term cash with reference to cash management is used in two senses. In a narrow sense, it is used broadly to cover currency and generally accepted equivalents of cash, such as cheques, drafts and demand deposits in banks. The broad view of cash also includes near cash assets, such as marketable securities and time deposits in banks. The main characteristics of these is that they can be readily sold and converted into cash. They serve as a reserve pool of liquidity that provides cash quickly when needed. There are four primary motives for maintaining cash balances : (i) Transaction motive; (ii) Precautionary motive; (iii) Speculative motive ; and (iv) Compensating motive.

TRANSACTION MOTIVE An important reason for maintaining cash balances is the transaction motive. This refers to the holding of cash to meet routine cash requirements to finance the transaction which a firm carries on in the ordinary course of business. A firm enters into a variety of transactions to accomplish its objectives which have to be paid for in the form of cash. Business concerns that have highly predictable inflows and outflows of funds can hold relatively less cash then firms that have irregular cash flows. PRECAUTIONERY MOTIVE It is also related to the nature and level of business activity. Precautionary balances are those which are set aside because cash inflows and outflows are not synchronized. For example, precautionary balance may be used to meet an unanticipated expenses as the result of an unanticipated decline in sales revenues. SPECULATIVE MOTIVE It refers to the desire of a firm to take advantage of opportunities which present themselves at unexpected moments and which are typically outside the normal course of business. The speculative balances are sensitive to interest rate changes and are usually hold in the form of interest hearing securities. COMPENSATING BALANCE A compensating balance is the fourth motive for holding cash. This motive is with commercial banks that require borrowers to leave a portion of their borrowed funds in deposit at the bank. Banks may require, that 10% of a loan be left in deposit. There are two reasons for requiring a compensating balance; it raise the effective interest rate for banks and it provides banks with funds to make additional loans.

OBJECTIVE OF CASH MANAGEMENT

The basic objectives of cash management are two fold : (a) to meet the cash disbursement needs (payment schedule); and (b) to minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management is to reconcile them. MEETING PAYMENTS SCHEDULE The important of sufficient cash to meet the payment schedule can hardly be overemphasized. The advantages of adequate cash are: (i) it prevents insolvency or bankruptc arising out of the inability of a firm to meets its obligations; (ii) the relationship with the bank is not strained; (iii) it helps in fostering good relations with trade creditors and suppliers of raw materials, as prompt payment may help their own cash management; (iv) a cash discount can be availed of if payment is made within the due date; (v) it leads to a strong credit rating which enables the firm to purchase goods on favourable terms and to maintain its line of credit with banks and other sources of credit; (vi) to take advantages of favourable business opportunities that may be available periodically; and finally, (vii) the firm can meet unanticipated cash expenditure with a minimum of strain during emergencies, such as strikes, fires or a new marketing campaign by competitors. MINIMISING FUNDS COMMITTED TO CASH BALANCES The second objective of cash management is to minimize cash balances. In minimizing the cash balances, two conflicting aspects have to be reconciled. A high level of cash balance will, as shown above, ensure prompt payment together with all the advantages. But it also implies that large funds will remain idle, as cash is a non-earning assets and the firm will have to forego profits. CONTROL OVER CASH FLOWS Drawing of cash plan is not enough, a strict compliance of plan is required through proper control of cash collections and payments. On the other hand inflow is to be accelerated, so as to cope with the growing requirements whereas outflow must be checked. There must also be a proper channedl of arrangement of investment of surplus cash. For this cash periodical reports are very much helpful. ALLOCATION OF CASH INFLOW-

Cash can be conserved through maximized inflow and lesser permanent investment. Collection can be accelerated by reducing the time gap caused by waiting time, To speed up collections the followings techniques may prove useful: LOCK BOX SYSTEM In this system, a firm establishes the collection centers in accordance with the concentration of customers hires a post office box and instruct its customer to remit the bills of cheques directly to this box. The firms authorized bank picks up the remittance collects for the gain and supply the detail of cheques collected. Although it is a costlier system but the cheques are collected immediately. PROMPT PAYMENT BY CUSTOMERS Prompt billing with the notification what the custmer has to pay, the period of payment is the way to ensure prompt payment from customers. Use of modern devices for billing and enclosure of a sell addressed return envelope will speed up collection from customers. Another technique which is commonly used is trade discount. PROMPT CONVERSION OF PAYMENTS INTO CASH There is a time lag between the cheque is prepared and mailed by the customer and the time the funds are converted into cash by the bank. The early conversion of payments into cash, as a technique to speed up collections, is done to reduce the time lag between posting the cheque by customer and the realization of cheque from bank. DECENTRALISED COLLECTIONS When a number of collection centers are operating instead of single collection centers at the head office, the time lag between mailing can be reduced. This is called decentralized system of collection of bill at multiply centers. This is useful technique to speed up the collection of accounts receivable.

Besides, collection of payments personally is one of the important means to accelerate the inflow of funds. SLOW DISBURSEMTNS A firm should make its payments using the credit terms to their fullest extent. There is no advantage in paying the amount sonner than expected or agreed to as this source is free from interest. But a firm must not make undue delays which may endanger its credit standing. In disbursement the centralized system for payment is also very much helpful in conversation of funds. Payment flot is also one of the resources of funds. Once a cheque is issued, it takes a particular time in transit and on the basis flow can be calculated. Finance Manager of a firm can take advantage of flot in disbursement but he must be careful, as it may prove riskly. EVALUATION OF CASH MANAGEMENT IN DSCL LTD. RESOURCES AND USES OF FUNDS Sources and uses of funds shown that how funds are acquired & utilized and its affects the amount of Working Capital. Table 5.1 shows the sources & uses of funds in DSCL.

Table 5.1 Sources and uses of funds or statement of changes in Net Working Capital in DSCL during 2000-2001 To 2004-2005 (Rs. In Crores) Particulars I) 1Schedule 2001 2002 2003 2004 2005

Sources of Funds Share holder funds : a) Share Capital b) Reserves and surplus 1 74.73 2 32.49 16.75 16.75 16.75 16.75 249.50 297.93 353.56 425.49

107.22 266.25 314.68 370.31 442.24 2Loan Funds : a) Secured Loans b) Unsecured Loans 3 186.91 21.55 208.46 3Deferred tax liabilities : (net) Total (1+2+3) II) 1Application of Funds Fixed Assets : a) Gross Block b) Less : Depreciation 352.77 c) Net Block 687.94 d) Capital work in progress 28.77 42.58 409.04 476.16 23Investments : Advances a) Inventories b) Sundry debtors 53.90 47.49 68.46 205.47 304.00 303.61 127.04 153.06 124.37 182.51 6 48.39 58.64 Current Assets Loans & 7 35.00 122.30 70.86 74.11 151.76 839.70 56.37 469.84 612.73 380.27 433.58 434.84 541.87 5 551.77 633.65 669.93 171.50 200.07 845.52 1040.71 235.09 303.65 4 342.14 342.58 348.44 468.06 71.45 64.91 110.18 226.51 413.59 407.49 458.62 694.57 89.83 96.58 110.88 96.16

208.46 769.67

818.75 939.81 1232.97

c) Cash & Bank Balances 14.01 d) Loans & Advances Less : Current Liabilities & Provisions Net Current Assets 336.90 4Miscellaneous Expenditure Total funds utilized 208.46 8 88.98 103.14 65.95

14.86

8.07

42.13 90.57

25.50 96.61

120.17 107.83

260.90 335.58 308.73 109.45 82.12

520.68 729.72 267.71 392.82

226.13 226.61 252.97 8.74 -

769.67 818.75 939.81 1232.97

This table shows that sources of funds are increasing slowly. The company is depending more on loan funds to finance its capital expenditure programme. SIZE OF CASH IN TERMS OF SALE Company keeps cash to meet its day to day operations and to maintain liquidity & solvency. This table shows the Table 5.2 Size of cash and their values of sales in DSCL. (Rs. In Crores) Year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 . Size of cash and bank balances in comparison of sales values. Analysis shows that on 2002-2003 cash balances decreased and the sales value increased year by year. Size of Cash 10.18 14.86 8.07 42.13 25.50 Value of Sales 958.37 1053.67 1150.14 1475.62 1905.19

CURRENT RATIO This ratio shows the short term solvency position or soundness of current financial position of the company, 2:1 Ratio is taken as satisfactory. Current Ratio of DSCL was upto the standard in 2001-02 but very high in 2002-03, 2003-04 and 2004-2005. QUICK RATIO To judge the liquid position of the firm or adequacy of cash quick ratio is to be calculated 1:1 is considered as satisfactory. This ratio has been very satisfactory in DSCL as it has been above from the standard during last 5 years. I have judged the performance of cash management of DSCL through various ratio and techniques. DSCL maintain adequate cash balance to meet day to day operations weekly reports are prepared to check the cash balances. Current and quick ratio of company are more than and ard. Company is in sound position of Working Capital.

CHAPTER 6 MANAGEMENT OF RECEIVABLES

Introduction Objective of Maintaining Receivables Factors Determinants the Size of Receivables Credit Policy Evaluation of Receivables in DSCL Ltd.

CHAPTER 6 INTRODUCTION
When a firm sells its products or services and does not receive cash for the same immediately, the firm is said to have granted trade credit to customers. Trade Credit, thus, creates receivables which represent an important component of current assets. Receivables occupy the second prominent place after inventories and constitute a substantial portion of current assets in most of the business house. According to Emerson, When goods or services are sold under an arrangement permitting the customer to pay for them at a later date, the amount due from the customer is recorded as an account receivables. Trade credit is granted to protect sales from competitors and to attract potential customers to buy product on favourable terms and condition, Granting credit and creating receivables amounts in blocking of firms funds The term receivables is defined by Hampton John J, as receivables are assets accounts, representing amount, owned to the firm as a result of the sale of goods or services in the ordinary course of business. Trade credits generate receivables, which the firm is expected to collect in the near future. They, therefore, represent the claims of a firm against its customers and are carried to the assets side of the balance sheet under titles such as account receivables, trade receivables, customer receivables or books debts. OBJECTIVE OF MAINTAINING RECEIVABLES The purpose of granting credit is to facilitate sales. It is valuable for customers as it augments their resources. It is particularly appealing to these customers who cannot borrow from other resources or find it very expensive to do so. In short, the main objectives of maintaining receivables are as follows :

1.

EXPANSION OF SALES Though, it is a good strategy to effect cash sales to the maximum possible extent, yet it may not always be possible to do so customers who are not willing to buy goods on cash basis, have to be encouraged with the offer of credit terms. In the absence of such an offer, a firm may not be able to sell goods at a desired level. Receivables enable it to push its sales effectively in the market.

2.

INCREASE IN PROFITS If the level of sales increases, the profit will also increase. This is ordinarily so because the marginal contribution affected by an increase in sales is higher than the additional costs associated with such an increase.

3.

MAINTAIN LIQUIDITY The concept of operating cycle explains that receivables are one step ahead of inventories. So, if facilities to maintain liquidity in the business because it can be easily converted into cash, whenever required. FACTORS DETERMINANTS THE SIZE OF RECEIVABLES There are different factors which determine the size of investment in receivables. These factors can be classified as general and specific factors. These are discussed below :

1.

GENERAL FACTORS General factors include those factors which affect every type of business they generally are concerned with investment in assets. These factors are nature and size of business, opinion of management, expected sales figure, quantity of business, normal economic position, changes in price level, availability of funds etc. all these factors are not in the hands of the concern and their effect is long term.

2.

SPECIFIC FACTORS These factors are those which can be controlled by the concern and they have a short term effect of investment in receivables. These factors include the following:

TERMS OF SALES The size of receivables is closely linked with a firms term of sales which include the period of credit, rate of discount, etc. if the concern does not sell goods on credit no receivable will come into account. but generally due to competition. Market condition a firm is forced to offer credit terms which are at least generous as those offered by competitors. THE VOLUME OF CREDIT SALES When the firm decides to give credit, the question that arises, is that how much credit must be offered. In other words, it can be said that what % of total sales would be credit sales. There is a positive relationship between volume of credit sales and size of receivables. Increase in credit sales means large size of receivables and decrease in credit sales means small size of receivables. STABILITY OF SALES If the business of the concern is seasonal in nature (example, woolen clothes, electric fans, ice cream etc.) than in a particular season there will be an increase in size of receivables. CREDIT POLICY OF THE FIRM A firm with a liberal credit policy may keep a higher level of receivables as compared to a form having tight/ rigid credit policy. Due to liberal credit policy a firm can offer more facilities to its customers for purchasing goods which increases level of sales and size of receivables. On the other hand tight credit policy decrease level of sales and size of receivables. Credit policy of the firm is affected by different factors which include (i) credit period, (ii) size of policy of cash discount, (iii) discounting and endorsement of bills receivables etc. all the above factors are discussed below : CREDIT PERIOD : The duration of time for which the credit is extended to the customers is referred to as credit period. Usually the credit period of the firm is governed

by the industry norms but the firm can extend credit for longer duration to increase sales. SIZE AND POLICY OF CASH DISCOUNT : Another important factor is cash discount. Many firms induce their customers to pay cash by providing them cash discount. The cash discount term indicates the rate of discount and the period for which discount has been offered. The most desirable credit terms which increase the overall profitability of the firm, should be offered to customers. CREDIT POLICY The credit policy of a firm provides the framework to determine (a) whether or not to extend credit to a customer and (b) how much credit to extend. The credit policy decision of firm has two broad dimensions: (i) Credit standards and (ii) Credit analysis. A firm has to establish and use standards in making credit decisions, develop appropriate sources of credit information and methods of credit analysis. We illustrate below how these two aspects are relevant to the accounts receivable management of a firm. CREDIT STANDARDS The term credit standards represents the basic criteria for the extension of credit to customers. The quantitative basis of establishing credit standards are factors such as credit ratings, credit references, average payments period and certain financial ratios. This means the criteria for the extension of credit to customers. In credit standard secondary factors such as collection cost, average collection period, level of bad debts in sales, certain financial ratios, credit references etc. For this a firm considers the cost benefit relation of the trade credit by considering the factors :

How much cost will be involved in particulars credit ? What will be the effect of relaxation of credit standard ? How much will be the capital cost to finance the credit ? and How much sales will increase and what will be the net return by credit ? These all will determine that a firm credit policy will be lenient or stringent.

CREDIT TERMS The condition under which the firm sells on credit to its customers are called terms. Two important components of credit terms are : (i) credit period, and (ii) cash discount terms. (i) CREDIT PERIOD The duration of time for which the credit is extended to the customers is referred to as credit period. Higher the credit period higher the sales figure. (ii) CASH DISCOUNT TERMS Cash discount is another component of credit terms. Many firms offer to grant cash discounts to their customers in order to induce them to pay, their liabilities on time. the cash discount term indicates the rate of discount and the period for which discount has been offered. If a customer does not utilize this opportunity he is expected to make the payment by the due date. Credit terms can be used as an instrument to push sales. The financial manager should compare costs and benefits of alternative terms to find out the most desirable credit terms. COLLECTION POLICY The collection policies and techniques used to collect delinquent account affect profitability. As a general rule the more guickly account receivables are converted into cash, the greater will be the profits of the firm. However, if

collection policies are too harsh, some potential customers may deal elsewhere, a collection policy is important for the following reasons :(i) (ii) (iii) (iv) Delinquent accounts become increasingly difficult and costly to collect as time passes. Sales to slow paying customers and inhibited by slow collections. The reputation for stringent credit policies discourages some customers from becoming delinquent. Delinquent receivables add to the volume of working capital that must be financed. Collection becomes a problem when customers do not pay for the goods or services according to the terms of trade and they become delinquent. Therefore, the collection policy should be designed to make payment as easy and convenient as possible. The determination of optimum credit policy in receivables involve a trade off between costs and benefits. The optimum credit policy will be determined by the trade off between liquidity and profitability as shown in the figure given below. It is indicated in the figure that the firm becomes less liquid, as its credit policy relaxes. But profitability increases as the credit policy becomes more and more liberal. The optimum credit policy should occur at a point where there is a trade off between liquidity and profitability. EVALUATION OF RECEIVABLES IN DSCL LTD. Evaluation of receivables management involve analysis of size and composition of receivables and efficiency of collecting. SIZE OF RECEIVABLES Table 6.1 shows the size of receivables in DSCL. There is downfall in 2001-2002 & 20032004. TABLE 6.1 Size of Receivables in DSCL during 2000-2001 To 2004-2005 (Rs. In Crores)

Years 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Trade Receivables 124.71 153.06 124.37 182.51 303.61

Loans and Advances 65.95 120.17 107.83 90.57 96.61

Total Receivables 190.66 273.23 232.20 273.08 400.22

PERCENTAGE OF TRADE RECEIVABLES TO SALES This ratio shows the position of receivables in relation of sales. Higher the ratio means higher investment in receivables on the other hand lower ratio means lower investment in receivables. Table 6.2 shows that % of trade receivables to sales is continuous decreasing means good control. Table 6.2 Percentage of Trade Receivables to Sales in DSCL during 2000-2001 To 2004-2005 (Amount in Crores) Years 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 Trade Receivables 124.71 153.06 124.37 182.51 303.61 Turnover 985.37 1053.67 1150.14 1475.62 1905.19 % of Trade Receivables 13.01 14.52 10.81 12.36 15.93

CHAPTER 7 CONCLUSION AND SUGGESTIONS

In this chapter main conclusions and findings of the study is discussed first and then in the last few suggestion for improvement of Working Capital of the unit is given. In previous chapters of this dissertation I have analysed the different aspects of Working Capital management in DSCL. Through various analysis for example analysis of inventory management, analysis of cash management, analysis of receivables, analysis of Working Capital Finance etc. Different analysis show different picture or it is not possible to draw complete picture of the management on the basis of individual analysis. For example inventory management analysis may show an efficient management of inventory, whereas on the other hand i.e. cash etc. the picture may be absolutely reverse. Therefore, it becomes essential for us to fuse all the pictures drawn from different analysis and create a realistic and complete image of the Working Capital management of the company. Let us briefly evaluate each aspect of the Working Capital management and their inter effects and the over all effects of each on Working Capital management. The size of Working Capital of the company, excepting the year 2000-2001 of the study period has always been increasing in comparison of turnover.

The state of affairs at inventory front was good. Further analysis of inventory structure reveals that a large amount of inventory is blocked in stores and spare parts. Similarly stock of goods in process and raw material are also largely maintained. Although management has tried to decrease its investment in inventories still it caused an increase in Working Capital of DSCL. Regarding cash management, company has substantial amount of loans and advances thus cash balance has lowered. Cash volume has increased and decreased with increase and decrease in sales respectively showing that company is in sound position of Working Capital regarding the aspect of cash management. The current & quick ration of the company is also above from the standard. Composition of receivables reveals that DSCL has taken preferential interest in trade receivables compared to loan and advances, that is a good for this company. Although DSCL % to trade receivables to sales during our study period is not satisfied. It is increasing and decreasing. Which is not good sign for company. As receivables constitutes a major role for Working Capital so some special techniques should be invented. The term finance of Working Capital in DSCL has good provisions. The main source of Working Capital is secured loan. Thus the dependence of company for its Working Capital finance has increased towards secured loans. On the whole, we can say that DSCL has maintained its Working Capital in efficient way, regarding the consequences of slow collection policy. The management has shown their intelligence in maintence of inventory although a large part of its constitutes spare & parts. To be on safer side company must review the position of inventory through periodical inventory reports. On the other hand, it must fix Economic order quantity for inventory. Thus company has must examine each and every aspect of Working Capital thoroughly and rectify the small loopholes in the management. Thus making it more efficient & successful.