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CHAPTER 1
INTRODUCTION
1.1 MEANING OF WORKING CAPITAL:In simple words working capital means that which is issued to carry out the day to day
operations of a business. Capital required for a business can be classified under two main
categories

Fixed capital

Working capital

Every business needs funds for two purposes, for its establishment and to carry on its day to day
operations. Long term funds are required to create production facilities through purchase of fixed
assets such as plant and machinery, land, building, furniture etc. Investment in these assets
represents that part of firm capital, which is blocked on a permanent or fixed basis called fixed
capital. Funds are also needed for short term purposes i.e. for the purchase of raw material,
payment of wages and other day to day operations of business. These funds are known as
working capital. In other words, working capital refers to that firms Capital, which is required
for short term assets or current assets. Funds thus invested in current assets keep revolving last
and being constantly converted into cash and this cash flow is again converted into other current
assts. Hence it is known as circulating or short term capital.

SIGNIFICANCE OF ADEQUATE WORKING CAPITAL

Circulations of blood are essential in the human body for maintaining life similarly. Working
capital is the lifeblood of a business. It is very essential to maintain the smooth running of a
business. Even a fully equipped manufacturing firm is sure to collapse without an adequate
supply of raw material to process, cash to meet the wage bill, the capacity to wait for the market
for its finished product and the ability to grant credit to its customers. The main advantages of
maintaining adequate amount of working capital are as follows:

 Solvency of Business: Solvency of the business can be maintained by regular and

constant production process. An adequate working capital makes it possible.
Regular Supply of Raw Material: Sufficient working capital provides uninterrupted
flow of production by regular supply of raw materials and continuous production.
Regular payment of day - to day commitments: Regular payments of salaries, wages
and other day-to-day commitments which raises the moral of its employers, increases
their efficiency, reduces wastages and costs and enhances production and profits and
result of ample working capital.
Exploitation of Favorable Market Conditions: Favorable market conditions such as
purchase in bulk when the prices are lower and by holding its inventories for higher
prices is possible only if adequate working capital is available.
Goodwill: Sufficient working capital enables firm to make prompt payment and it
increases the firms credit or says goodwill.
Easy Loans: Solvency and good credit standing of the firm enables it to get easy debt
money on favorable terms.
Ability to face crisis: Adequate working capital enables the firm to maintain it prompt
position in critical situation.
Quick and Regular Return on Investment: Quick and regular return on investments
receives the confidence of its investors and crates favorable market to raise additional

funds in future. It is possible only by sufficient working capital.

High Morale: Adequacy of working capital creates an environment of security,
confidence, and high morale and creates overall efficiency in a business.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL:

Deficiency or excess of nutrients causes deceases. Inadequate working capital is dangerous sign
for the existence of the firm. It should have neither redundant not short working capital. Both
positions are bad for the firm. However, from the point of firms view, the inadequacy of
working capital is more dangerous. Disadvantages of Excessive Working Capital
Excessive working capital means motionless funds which can not result in profit or in

earning on investments
Redundant working capital may drag to unnecessary purchase and accumulation of
inventories.
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 Redundant working capital may create wrong impression and in defective credit policy
which may causes higher incidence of bad debts.
Overall inefficiency in the organization may be the only outcome.
The excessive working capital may draw to speculative transactions.
Due to low rate of return on investments, the value of shares may also fall.
DISADVANTAGES OF SHORT WORKING CAPITAL
Irregularity or late payment in short term liabilities results in loose of reputation and also
makes firm unable to get good credit facilities.
Regular supply of material cannot be maintained due to inadequate working capital. This
affects the whole production cycle.
It cannot buy its requirements in bulk and can not avail of discounts.
It can not undertake profitable projects due to lack of working capital.
It becomes difficult to pay day to day expenses of firms operations and it creates
inefficiency, increases cost and reduces the profits of the business.
The rate of return on investments also falls with the shortage of working capital.
COMPONENTS OF WORKING CAPITAL
Working Capital is made of two components i.e. current assets and current liabilities. Lets check
the items comprised in current assets and current liabilities. Current Assets are made of Cash,
Account Receivables, Inventory, and Marketable Securities.
CURRENT ASSETS
Cash: Cash is a basic need to start any business. Initially cash is required to procure
fixed assets like plants machinery which enables a firm to produce products and generate
cash by selling them. Cash is also required as a working capital that is require, as firms
have to store certain quantity of raw materials and finished goods and also for providing
credit terms to the customers.
Accounts Receivable: Credit sales add in the total amount of sales of a business, as it is
a competitive pressure forces most firms to offer credit. Selling goods or providing
services on credit basis leads to accounts receivable. When credit is allowed to the
customers in turn the business unit expects credit from its suppliers to match its

investment in credit extended to consumers. The granting of credit from one business
firm to another for purchase of goods and services is popularly known as trade credit.
Inventories: Inventories consist of raw materials, stores, supplies, spares, work in
progress and finished goods. Men using machines and tools convert the materials into
finished goods. The success of any business goods. The success of any business unit
depends on the extent to which these are efficiently managed. Inventory consists a good
portion of working capital in manufacturing organization.
Marketable Securities: Marketable securities are treated as cash in analysis of current
assets although its convertibility is not so that it can be converted to cash at a very short
notice. Excess cash is normally invested in marketable securities, which serves two
purposes namely, provide liquidity and also earn a return.
CURRENT LIABILITIES
Current Liabilities are made of goods purchased on credit, expenses incurred in the course of
the business of the organization (e.g. wages or salarie3s, rent, electricity bills, interest
etc.)which are not yet paid for ) temporary or short term borrowings from banks, financial
institutions or other parties, advances received from parties against goods to be sold or
delivered, or as short term deposits, other liabilities such as tax and dividends payable. The
above components of current liabilities are used to meet the need for funds to finance the
current assets. It means the amount of needed current assets may be met from supply of
goods on credit, and deferment on account of custom usage or arrangement of payment for
expenses. The short term borrowing from banks fills in the balancing amount of needed
working capital.
CLASSIFICATION OF WORKING CAPITAL: Working capital can be classified on
the following bases:
On The Basis Of Concept: There are two concepts of working capital, namely
Gross Concept
Net Concept
Gross Working Capital: According to this concept the term working capital refers to
the gross working capital and represents the firms investments in current assets. In gross
concept of working capital current liabilities are not considered to be deducted from the
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current assets. Thus, the gross working capital is capital invested in total current assets of
the enterprise. In the ordinary course of business current asset are those assets that can be
converted into cash within a short period of one accounting year. Constituents of Current
Assets includes: cash in hand and cash in bank, sundry debtors (less provision for bad
debts), bills receivables, short term loans and advances, inventories of stock as: raw
materials, work in progress, stores and spares, finished goods, temporary investments of
surplus funds.
1. Prepaid expenses
2. Accrued incomes
The proponents of the gross working capital concept advocate this for the following reasons:

It enables the enterprise to provide current amount of working capital at the right time.
An increase in the overall investment in the enterprise also brings about an increase in

the working capital.

Management is more concerned in the total current assets with which it has to operate

then the sources from where it is made available.

This concept is more useful in determining the rate of return on investments in working
capital.

Net Working Capital: The net working capital refers to the difference between current
assets and current liabilities.
Net Working Capital = Current Assets Current Liabilities
Current liabilities are those claims of outsiders which are expected to mature for payment within
an accounting year. Net working capital can be positive or negative. When the current assets
exceed the current liabilities the working capital is positive and negative working capital results
when the current liabilities are more than current assets.
Constituents Of Current Liabilities:
1. Bills payable
2. Sundry Creditors
3. Accrued expenses
4. Short term loans, advances and deposits
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5. Dividends payable
6. Bank overdraft
7. Provision for taxation, if it does not amount to appropriation of profits.

IMPORTANCE OF NET WORKING CAPITAL CONCEPT: The net working

capital concept however, it also important for the following reasons:

Seeing the net working capital of the firm creditors and investors judge the financial

soundness of the enterprise.

It is a qualitative concept which indicates the firms ability to meet its operating expenses

and short term liabilities.

It suggests the need for financing a part of the working capital requirements out of

permanents sources of funds.

It helps to ascertain the current comparative financial position of companies having the
same amount of current assets.

Both the concepts have operational significance for the management and there for neither can be
ignored. While the net concept of working capital emphasizes the qualitative aspects, the gross
concept underscores the quantitative aspect.
DISTINGUISH BETWEEN GROSS WORKING CAPITAL AND NET WORKING
CAPITAL: Gross working capital and net working capital are quantitative concepts that

differ from each other in various respects. The distinguishing points are as follows.
Gross working capital is total current assets and net working capital is excess of current

assets over current liabilities.

Gross working capital is a quantitative concept while net working capital is a qualitative

concept.
Gross working capital indicates the quantum of working capital available to meet current
liabilities while net working capital is the portion of current assets which is financed by

long term funds.

Gross working capital is the current liabilities of the business cannot be used to indicate
the changes in working capital while net working capital being the difference of current

assets and current liabilities is widely used in measuring the changes in the financial

position of any business.

The strength of current position of business unit is to be indicated by gross working
capital while the index of solvency and liquidity of the business is considered by net

working capital.
Gross working capital can be measured by resorting to borrowings whole net working
capital cannot be easily measured except by profitable business operations over a
considerable number of accounting periods.

CLASSIFICATION OF WORKING CAPITAL ON THE BASIS OF TIME: On the

basis of time working capital may be classified as

Fixed working capital
Fluctuating working capital

Fixed Working Capital: Fixed working capital is the minimum amount that is needed to
maintain the circulation of current assets and for ensuring effective utilization of fixed
facilities. There is continuously required a minimum level of current assets by the
business unit to overcome its normal or regular transactions. E.g. every firm has to
maintain a minimum level of production and it concerned with maintaining a minimum
level of raw material, work-in-progress, finished goods and cash balance. And this is
what we call a fixed, regular or permanent working capital. A part of a capital that
continuously remains in a business unit as current assets simply known as a fixed
working capital. Permanently fixed working capital can further be classified as regular
working capital and reserve working capital which complete an operating cycle i.e.
circulation of current assets from cash to inventories from inventories to receivables and
from receivables to cash and so on reserve working capital is the excess amount over the
requirement for regular working capital which may be provided for contingencies that
may arise at unstated periods such as strikes, rise in prices, depression etc.
Fluctuating Working Capital: Change in production and sales create the need of
working capital over and above the permanent working capital which is termed as
temporary, variable or fluctuating working capital. Fluctuating working capital may be
required due to change in seasonal demand or some special exigencies. Variable working
capital, thus, can be classified as seasonal working capital and special working capital.
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Most of business units have to provide additional working capital to meet the seasonal
and special needs. The essential capital required to meet the seasonal need is called
seasonal working capital. And similarly the essential capital required to meet the special
need is called special working capital. Special working capital is that part of working
capital which is required to meet special exigencies such as launching of extensive
marketing campaigns for conducting research, etc. Fluctuating working capital differs
from fixed working capital as fluctuating working capital is not permanent requirement of
a business unit but a short period requirement.
DISTINGUISH BETWEEN FIXED WORKING CAPITAL AND FLUCTUATING
WORKING CAPITAL: Fixed and fluctuating working capital is bases on the time
factor and is more useful compared to quantitative basis classification. Fixed and
fluctuating working capital differ from each other in various respects which are as
follows:
Fixed working capital remains permanently in the business while fluctuating working

capital disappears from the business once the purpose is served.

The requirement of the fixed working capital remains as long as the business exists as

a going concern.
The fixed working capital is the quantum of funds required permanently while
fluctuating working capital is circulating working capital required for irregular

expenses.
The need of fixed working capital increases with the growth of business. While the
change in fluctuating working capital is not necessarily related with the growth of
business.

OBJECT OF WORKING CAPITAL

The need of working capital cannot be ignored as well as over emphasized. Working
capital is a need of every business unit. The need of working capital comes into existence
due to the time gap between production and realization of cash from sales and it is known
as operating cycle. There are time gap between purchase of inventory items and
production, production and sales and sales its conversion into cash. Thus, working
capital is needed to fulfill the following objects :
For the purchase of inventories, components and spares.
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To overcome day-to-day expenses and overheads cost such as fuel, power or electricity,

office expenses.
To pay wages and salaries to the employees.
To provide the credit facilities to the customers.
To meet the selling expenses i.e. packing, advertising, etc.
For maintaining sufficient stock of raw material, work-in-process, stores and spares and
finished goods. These are the objects, which can be fulfilled by ready cash i.e. working
capital.

NEED FOR WORKING CAPITAL:

The need for working capital cannot be overemphasized. The need of working capital arises due
to the time gap between production and realization of cash from sales. So the working capital or
investment in current assets becomes necessary need for working capital. It arises due to
following reasons:A.

OPERATING CYCLE
Operating cycle is the time duration requires for converting sales into cash after the

conversion of resources into inventories.

First of all a firm purchase Raw Material, then after some processing it is
converted into workinprogress and after this further processing is done to convert workin
progress in finished goods. After the raw material is converted into finished goods, sales are
made. Sales are no always full cash sales; there are credit sales also. These credit sales after some
period are converted into cash. So the whole process takes the time. This time taken is known as
the length of operating cycle. So operating cycles includes:1.

Raw Material conversion period (RMCP)

2.

Workin progress conversion period (WIPCP)

3.

Finished goods conversion period (FCP)

4.

Debtors Conversion period (DCP)

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So operating cycle can be known as following:Raw Material

Work in Progress

Cash Collection from

Debtors

Sales
Finished Goods
Credit Sales

Cash Sales

If the length of the operating cycle has short length period then less working capital is required.
So working capital requirement is directly related with operating cycle.
Operating cycle may be of two types

Gross Operating cycle

Net operating cycle

Gross Operating Cycle

Gross Operating cycle is the total time period from the conversion of Raw Material into
finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP

Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to us for
payment to them. So this reduces our requirement of working capital. This also affects the
operating cycle. Operating cycles length reduces with so many days as provided by the
creditors to us. The difference between gross operating cycle and period allowed by the
creditors for payment is known as net operating cycle.

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NOC = GOC CPP

B.WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS FOR
FUTURE:These needs may be of Raw Material or Finished Goods. Sometimes because of non-availability
of Raw Material or due to seasonal availability of Raw Material some advances stock of Raw
Material becomes necessary for company. In the similar way due to sudden arise of demand of
finished goods in future more finished goods are kept in stock. For both reasons more working
capital is required because funds will be involve in these safeties stocks.
DETERMINENTS OF WORKING CAPITAL: Followings are the main determinants
of working capital.

Nature and Size of Business: The working capital of a firm basically depends upon
nature of its business for e.g. Public utility undertakings like electricity; water supply
needs very less working capital because offer only cash sales whereas trading & financial
firms have a very less investment in fixed assets but require a large sum of money invested
in working capital. The size of business also determines working capital requirement and
it may be measured in terms of scale of operations. Greater the size of operation, larger
will be requirement of working capital
Manufacturing Cycle: The manufacturing cycle also creates the need of working capital.
Manufacturing

cycle

starts with the purchase and use of Raw Material and completes with the production of
finished goods. If the manufacturing cycle will be longer more working capital will be
required or vice versa.
Seasonal variation: In certain industries like VTM raw material is not available
throughout the year. They have to buy raw material in bulk during the season to ensure an
uninterrupted flow and process them during the year. Generally, during the busy season, a
firm requires large working capital than in the slack season.

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 Production Policy: Production policy also determines the working capital level of a firm.
If the firm has steady production policy, it may require need of continuous working
capital. But if the firms adopt a fluctuating production policy means to produce more
during the lead demand season then the more working capital may require at that time but
not in other period during a financial year. So the different productions policy arises
different type of need of working capital.
Firms Credit Policy: The firms credit policy directly affects the working capital
requirement. If the firm has liberal credit policy, hence the more credit period will be
provided to the debtors so this will lead to more working capital requirement. With the
liberal credit policy operating cycle length increases and vice versa.
Sales Growth: Working capital requirement is directly related with sales growth. If the
sales are growing, more working capital will be needed due to arises need of more Raw
Material, finished goods and credit sales.
Business Cycle: Business cycle refers to alternate expansion and contraction in general
business. In a period of boom, larger amount of working capital is required where as in a
period of depression lesser amount of working capital is required.
Earning Capacity & Dividend Policy: If the firm has enough earnings and it is not
paying dividend then it will not be in need of external borrowings. If firm wants to
increase its earning power then more working capital will be required also to pay more
dividend more profits are needed which give rise to more working capital. Company is
paying 42% dividend to its shareholder.
Price Level Changes: Changes in the price level also effects the working capital
requirements. Generally, the rising prices will require the firm to maintain larger amount
of working capital as more funds will be required to maintain the same current assets.
Condition of Supply: The inventory of raw material, spares and stores depends on the
condition of supply. If the supply is prompt the firm can manage with small inventory.
However if the supply is unpredictable then the firm to ensure continuity of production,
should acquire stocks as and when they are available and have to carry larger inventory on
an average.
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 Other Factors: Certain other factors such as operating efficiency, management ability,
irregularities of supply, import policy, asset structure, importance of labour, banking
facilities, time lag. Etc. also influence the requirement of working capital.
So these are the main determinants of working capital. The importance of influence of
these determinants on working capital may differ from firm to firm.
MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT
The management of working capital is concerned with two problems that arise in
attempting to manage the current assets, current liabilities and the inter relationship that
asserts between them. The basic goal is working capital management is to manage current
assets and current liabilities of a firm in such a way that a satisfactory of optimum level of
working capital is maintained i.e. it is neither inadequate nor excessive. This is so because
both inadequate as well as excessive working capital position is bad for business.
FUNCTIONS OF WORKING CAPITAL MANAGEMENT: Working capital
management is an integral part of financial management as well as overall corporate
management. We need to know when to look for working capital funds, how to use them
and how to measure, plan and control them.
According to this statement a firm willing to achieve a good management of
working capital, the financial manager has to perform the following basic functions:

Forecasting the need of working capital

Sources of working capital
Analysis and control of working capital

Forecasting The Need Of Working Capital:

Working capital is the life-blood and controlling nerve center of a business. It is impossible to
run a business successfully without an adequate amount of working capital and it is also not
possible to run a business successfully with a shortage of working capital. To avoid both the
situations arrangements can be made to procure adequate working capital. But the estimation of
working capital is not an easy task and there are many factors to be faced. With an example we
can get an idea. Of complexity in forecasting the working capital need.
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Methods Of Forecasting The Need Of Working Capital: There are two methods for
forecasting the need of working capital i.e. conventional Method and operating cycle
method. In conventional method greater emphasis is laid down on liquidity of a business
and cash inflows and outflows are matched with each other. While operating cycle
method is more dynamic as working capital is decided on the basis of length of the
operating cycles.

Following aspects are considered while forecasting the need of working capital:
Level of Activity: Level of activity is an important aspect while estimating working
capital needs. This estimation is normally based on past experience, installed and utilized
capacity of the factory and likely demand
Raw Materials: Raw materials consist a good portion of working capital which can be
estimated based on the level of activity. Besides the length of production cycle i.e. time
period during which material gets converted into produced goods is also to be considered.
And storage expenses are also added with the same.
Labour and Overheads: Method for the payment of wages i.e. daily payment, weekly
payment or monthly payment and of overhead expenses decides on the working capital

need of a business.
Work in Progress: The period of process is an important aspect as longer the
processing cycle, greater will be the working capital requirement. For this period the cost
of raw materials, wages and overheads are to be considered. If wages and overheads
accrue evenly during the time the process of manufacture is in progress, then on an

overage, the total cost of labor and overheads outstanding will only be for half the time.
Finished Goods: Time period for which the finished goods remains in godowns before it
is converted into sales plays an important role in deciding the amount of working capital.
If the items produced by the firm are seasonal, godown expenses increase as the finished
goods are to be kept for the long period.
Sundry Debtors: Credit period allowed to debtors affects the working capital need.
Longer the credit period allowed to debtors, greater will be the working capital
requirements. Some analysts, while calculating the time lag on payments by debtors,
estimate the book debts less the profit element in tem while other analysts take debtors at
book values inclusive of the profit element.
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 Cash and Bank Balances: On the basis of past experience the necessity of cash and
bank balances to meet the day-to-day payments can be estimated and the amount is to be
added to the working capital requirements.
Sundry Creditors: Credit period allowed by creditors affects the working capital need.
Longer the credit period allowed by creditors, lower will be the working capital needs
Creditors for Expenses: Time tag in payments of wages and overheads also decide
the amount of working capital. If there is no time- lag involved in payments of wages and
overheads, more working capital will be required and less, if there is a time lag in
payments of wages and overhead.
Contingencies: Beyond the all planning the contingencies affect the amount of working
capital need. There are always an unforeseen expenses and the amount of same is added
to working capital needed.
For a manufacturing organization, the following factors have to be taken into consideration
while making an estimate of working capital requirements:
Factors to be considered while estimating working capital.
(1) Total cost of material, wages & overheads.
(2) The length of raw material cycle.
(3) The length of production cycle.
(4) The length of sales turnover period.
(5) The average period of credit allowed to customers
(6) The amount of cash need to pay day to day transactions.
(7) The average amount of cash need to make advance payments, if any
(8) The average credit period expected to be allowed by suppliers.
(9) Time lag in the payment of wages and other expenses.
From the total amount blocked in current assets estimated on
the basis of the first seven items given above, the total of current liabilities i.e. the last two items
is deducted to find out the need of working capital.
SOURCES OF WORKING CAPITAL:
The working capital need of a business unit can be classified as

Fixed Working Capital Need

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Variable Working Capital Need

In a business unit, a part of working capital need remains permanently blocked in current assets
to carry out day to day transactions and its minimum and cant be expected to reduce at any time.
This minimum level of current assets is permanent investment in fixed assets. The other part of
working capital is to be required to meet the seasonal demands and some special exigencies such
as ruse in prices, strikes etc. this part of working capital is variable which cannot be permanently
employed gainfully in business. The fixed portion of working capital should be generally
financial from the fixed capital sources while the variable working capital needs of a business
unit may be met from the short term sources of capital.
The various sources of working capital are as follows under two headings
1. Sources of Fixed Working Capital
2. Sources of Variable Working Capital
SOURCES OF FIXED WORKING CAPITAL:
Sources of fixed working capital should facilitate an uninterrupted use for a sufficiently long
period. The important five sources of fixed working capital are; owners capital, borrowed
capital, internal sources, public deposits and loans. Let us discuss them in detail.
Owners Capital (Shares): Owners capital is an important source for permanent or
fixed working capital. For company different types of shares like equity shares,
preference shares, differed shares are sources of a long-term working capital. Preference
shares enjoy the preferential right over equity shares in receiving dividend at a fixed rate
and in regard to the payment of capital at the time of winding up the company. While
equity shares do not have any fixed rate of dividend to receive and is to be paid subject
to the availability of sufficient profits. A company can raise it fixed working capital by
the issue of shares.
Borrowed Capital (Debtors): Barrowed capital is a good and important source of
raising long term or fixed working capital. For companies debentures is an instrument to
obtain capital from outside i.e. borrowed capital. The debenture holders are the
creditors of the company and they are paid interest at fixed rate. Interest on debenture is
an expense for the company which is charged against profit and loss account. The
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debentures are generally given floating charge on the assets of the company. Company
can issue different types of debentures like simple, naked or unsecured debentures,
secured or mortgaged debentures, redeemable debentures, irredeemable debentures,
convertible and non-convertible debentures. It is a good source of finance and beneficial
for both the parties i.e. investors and the company. The interest on debentures is paid
periodically on fixed rate. It is considered expense for the company so deducted from the
profit and also debentures get priority on repayment at the time of liquidation. The firm
issuing debentures also enjoys a number of benefits such as trading on equity, retention

of control, tax benefits, etc.

Internal Sources (Ploughing Back of Profit): Internal sources refer to the surplus
earnings in a business by the firm. It is a suitable source for an established firm for its
expansion modernization and replacement etc. A surplus profit is ploughed back in a
business and the firm is not required to pay any fixed rate interest, there is no need to
keep securities, there is no dilution of control, it ensure stable dividend policy and gains
confidence of the public, excessive finance by internal source may lead to misuse of

funds, monopolies, over capitalization and speculation, etc.

Public Deposits: Now a day the public deposits are replaced by banking facilities.
Public deposits are accepted directly from the public as fixed deposits by a business
enterprise for raising short term and medium term finance. Public deposits as a source of
finance have a large number of advantages such as very simple, and commitment source
of finance, taxation benefits, trading on equity, no need of securities and an inexpensive
source of finance. Against it, it has certain dangers such as; it is uncertain, unreliable,
unsound and inelastic source of finance. The RBI has also laid down certain limits on
public deposits. Non banking concerns cannot borrow by way of public deposits more

than 25% of its paid up capital and free reserves.

Loans: The word Loan has been popular after the banking facilities came into
existence. Loans are one type of borrowed capital, a fixed rate interest is charged on it
and the amount of the loan is to be paid by way of installment in a number of years.

SOURCES OF VARIABLE WORKING CAPITAL:

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Sources of variable or short term working capital are; Sharafs (indigenous bankers), trader credit,
installment credit, advances, factoring or accounts receivables, accrued expenses, deferred
incomes, commercial paper, commercial banks.
Sharafs (Indigenous Bankers): Sharafs and Seths were the only source of finance in
the early stage of monetary development. Before the establishment of commercial banks
these indecencies bankers (Sharafs) used to charge very high rates of interest and the
consumers were exploited to the large extent possible. Though today their monopoly has
been broken, some business houses have to depend upon indigenous bankers for
obtaining loan to meet their working capital need.
Trade Credit: Trade credit is a good source for short term financing and also shows a
healthy atmosphere in the business market. Trade credit refers to the credit extended by
suppliers of goods in the normal course of business. Confidence of suppliers in firms
credit worthiness is the base of trade credit. Here, suppliers send goods to the buyers for
the payment to be received at future date as per terms of sales invoice. Amount payable
at future date should be paid at decided date. Delay in such payment is called stretching
accounts payable, and interest is charged for the delayed period. If firms delay, the
payments frequently, it adversely affects the credit worthiness of the firm and it may not
be allowed such credit facility in future. Trade credit is an easy convenient, flexible and
spontaneous source of finance at the cost of cash discount and higher prices have to be
paid.
Installment Credit: In this method goods or assets are purchased and immediately the
possession is received while the payment is made in the installment. Amount payable
should be paid within a decided time period and interest is charged on due amount. Thus
the payment of large amount can be avoided at a time and the working capital need can

be maintained.
Advances: Advances from customers and agents against their order is one of the
cheapest sources of short term finance. Advance payment can be received from the
customers and agents only if the demand of products or services rendered by a business

unit is higher and no near substitute is available in the market

Factoring or Accounts Receivables: When commercial banks offer finance for bills
receivable it becomes a good source of raising short term capital. After discounting the
bill bank pays immediately for sales made on credit. A factor is a financial institution
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which offers services relating to management and financing of debts arising out of credit
sales. Such financing facilities provided by banks or factors are becoming more popular
as they include administration of credit sales including maintenance of sales ledger.
Collection of accounts receivable, credit control and protection from bad debts, provision
of finance and rendering of advisory services to their clients. At present factoring is not
popular in India and only a few institutions render the services. The negative side of the
source is it is costly compared to other short term finance and the tough stance taken by
factor may affect adversely.
Accrued Expenses: Accrued expenses refer to expenses already incurred and hence not
yet paid. Such expenses are recorded in the books under the heading of liabilities for
which the services are already received. Wages, salaries, interest taxes are the important
items of accrual expenses, which are paid periodically. Generally taxes and interest are
paid at the end of the year while wages and salaries are paid monthly, fortnightly or
weekly basis for the services already rendered by employees. The longer the payment
period the greater is the amount of liability towards employees or the funds provided by
them. Thus, all accrued expenses can be used as a source of finance. The amount of
accruals varies as the level of activity of a firm changes. As the level of activity expands,
the accruals also increase and hence they provide a spontaneous source of finance. No
interest is charged on accruals make it cost free source of finance. At the same time it
must not be forget that the payment cannot be postponed for a long period. The payment
period of wages and salaries is determined by provisions of law and practice in industry.
Similarly, the payment dates of taxes are governed by low and delay may attract
penalties. This spontaneous, interest free and limited source of short term finance is
beyond the control of the management.
Deferred Incomes: Deferred incomes refer to the advance payment by the customers
before supplying goods or services. Such funds are available to a firm only when it is
having a great demand for its goods or services with good reputation in market. It is a
good source of short term finance as it increases the liquidity of a firm.
Commercial Paper: Commercial paper is the source of short term funds for the large
companies enjoying high credit rating and sound financial health. The concept of
commercial paper, an unsecured provisory notes issued by firms to raise short term
finance has come from advanced countries like USA. In India, only a comparing listed
20

on the stock exchange, having a net worth of at least Rs. 10 crores and a maximum
permissible bank finance of Rs. 25 crores can issue commercial paper not exceeding 30
percent of its working capital limit with a maturity period of 91 to 150 days. Investors
including banks, insurance companies, unit trusts and firms to invest surplus funds for a
short period usually buy commercial paper. A credit rating agency, called CRISIL, has
been set up in India by ICICI and UTI to rate commercial paper. Commercial paper
becomes a easier and cheaper source of finance against the bank credit and during period
of tight bank credit. Hence, only large companies enjoying high credit rating and sound
financial health can use it as a source of finance. The drawback of the easy finance
method is that it cannot be redeemed before the maturity date. Even if the issuing firm
has surplus funds to pay.
Commercial Banks: Commercial banks are most popular source providing short-term
finance in forms of loans and advances. The different forms of loans and advances. The
different forms of loans and advances are as follows: Loans, Overdrafts, Cash Credit,
Purchasing and Discounting of Bills
Loans: A loan is an advance in lump sum against some security. In case of a loan, the
specified amount is given to the customer on whom he is required to pay interest from
the date of the sanction. A loan may be repaid in lump sum or installments; the interest is
calculated at quarterly rests on the reduced balances. Generally commercial banks
provide short term loans up to one year but now a days term loans exceeding one year
are also provided.
Cash Credit: A bank allows his customer to borrow money up to a certain limit against
some tangible securities is known as cash credit. The customer can withdrawn money
according to his need up to cash credit limit and required to pay an interest on daily
balance than the entire amount of the account. Surplus amount also can be deposited in
the same amount. Thus, it becomes the most favorite mode of short-term finance.
Purchasing and Discounting of Bills: Today credit is the base of commerce so
purchasing and discounting of bills has become the most important source of short term
finance. The seller receives a bill of exchange accepted on the goods sold from the buyer
immediately. The bank purchases the bills payable on demand and credits the customers
amount with the amount of bill less discount. At the maturity of bill, it is presented to the
acceptor for payment. In case the bill discounted is dishonored by nonpayment, the bank
21

recovers the fall amount of the bill from the customer along with expenses in that
connection.

ANALYSIS AND CONTROL OF WORKING CAPITAL: Blood circulation is must to

maintain a life in human body. Working capital being lifeblood for the business is
essential for the smooth and profitable running of a business. No business can run
without an adequate amount of working capital. However. It must also be noted that
working capital is a means to run the business smoothly, and not an end. Generally a
business unit has a positive balance of working capital i.e. the excess of current assets
over current liabilities, but sometimes due to more uses of working capital results in the
negative balance of working capital. This can be covered after other transaction in the
following period. At this time it becomes necessary to study the changes in the use and
sources of working capital to evaluate the efficiency with which the working capital is
employed in a business. It creates the need of working capital analysis. The means for
working capital analysis are; ratio analysis, funds flow analysis, budgeting.
Ratio Analysis: A ratio show the relationship between two numbers in a simple
arithmetic form. A short term liquidity of a capital i.e. working capital position of a firm
can be measured by the technique of ratio analysis. The following ratios may be

calculated for this purpose.

Current ratio
Acid test ratio
Absolute liquid ratio, Cash position ratio
Inventory turnover ratio
Receivables turnover ratio
Payables turnover ratio
Working capital ratio
Working capital leverage
Ratio of current liabilities to tangible net worth.

Funds Flow Analysis: Funds flow analysis is a technique of finding out a total inflow of
funds through out an accounting period against a total out flow of funds through the
same. It is an effective tool to study changes in the financial position of a business
enterprise between beginning and ending financial statements dates.
22

Preparing schedule of changes in working capital and

Statement of sources and application of funds are consisting in funds flow analysis.

Budgeting: Estimation of the expenses to be occurred in the next financial period is

known as budgeting. It is an expression of business plans and policies to be pursued in
the future period of time. Being a part of total budgeting process of a business, working
capital is prepared for long term and short term requirement of working capital observing
the available sources form the market according to the need of the business, and then
comparing the budgeted figures with the actual performance for calculating variances, if
any, so that corrective actions may be taken in the future. The objective of a working
capital budget is the same as the objective of overall budgeting of the process of business
i.e. to ensure availability of funds as and when needed and to ensure effective utilization
of these resources.

DETERMINE THE WORKING CAPITAL FINANCING MIX: Mainly, there are

two sources of financing working capital requirements i.e. long terms sources and short
term sources as discussed earlier. Now question arises to decide the proportion of
working capital obtained from different sources. What portion of working capital should
be financed by long term sources and how much by short term sources? There are three
basic approaches for determining an appropriate working capital financing mix.

Hedging or Matching Approach

Conservatives Approach
Aggressive Approach

Hedging or Matching Approach: The term Matching usually refers to matching the
transactions of a simultaneous but opposite in nature and the effect of each other is
counterbalanced with reference to financing mix, the term heading and matching refer to
A process of matching maturities of debt with the maturities of financial needs.
According to this approach the maturity of funds should match with need of working
capital therefore it is known as matching approach. According to this approach need of
working capital is classified into two categories.
23

Permanently required working capital i.e. fixed working capital

Temporary required working capital i.e. variable working capital

According to heading approach permanent requirement of working capital is financed with long
term sources while short term requirement is financed with short term sources.
Conservative Approach: According to this approach overall finance of working capital
in a business is considered as a long term requirement and satisfied from long term
sources and the short term sources are used only for emergency requirements. This
conservative approach increases the liquidity and minimizes the risk. On other hand the
negative aspect of the approach is that the cost of financing is higher and interest has to
be paid even in season for entire period.
Aggressive Approach: Aggressive approach is exactly inverse in nature while compared
with the conservative approach. According to this approach overall finance of working
capital in a business is financed with short term sources. Even a part of fixed assets
investments be financed from short term sources. This approach makes the finance mix
more risky, less costly and more profitable.

APPROACH IN FINANCING WORKING CAPITAL

Banks, on the basis of security, provide finance to industry and trade. It becomes the subject of
government to ensure equitable distribution in the right channels. Since November 1965, a Credit
Authorization Scheme has been in operation s part of the Reserve Bank of Indias credit policy.
Under this scheme, all scheduled commercial banks are required to obtain prior authorization of
the Reserve Bank before sanctioning any fresh credit limits of Rs. One crore or more to any
single party or any limit that would enable the party avail Rs. One crore or more from the entire
banking system on secured or unsecured basis. The limit of Rs. One crores was subsequently
raised to Rs. Five crores. The Reserve Bank of India regulates and controls bank finance and
from time to time provides directions and guidelines to the bank by the recommendations of
certain specially constituted committees entrusted with the task of examining various aspects of

24

bank finance to industry. Bellow, the important findings and recommendations of the following
committees are discussed.

Dehejia Committee
Tandon Committee
Chore Committee
Marathe Committee
Chakravarty Committee
Kannan Committee Report

Dehejia Committee: National credit council constituted a committee under the

chairmanship of Shri V.T. Dehejia in 1968 to determine the extent to which credit needs
of industry and trade are likely to be inflated and how such trends could be checked and
to go into establishing some norms for lending operations by commercial bank.
Finding and Report: Short term credit can be diverted for long term assets was prevailing
tendency.
Evolvement of norms for lending to industrial concerns was difficult.
A study of borrowers total operations should be the basis of finance rather than security basis
alone.
The total need of the borrower should be segregated according the minimum level of
inventories which the industry was required to hold for maintaining a given level of production
should be put on a format term loan basis and subject to repayment schedule.
Tandon Committee: Under the chairmanship of Shri P.L. Tandon in July, 1974. Reserve

Bank of India set up a committee. The terms of reference of the committee were.
To suggest sound financial basis in relations to borrowings and criteria regarding

satisfactory capital structure.

To recommend sources for financing the minimum working capital needs
To make suggestions for prescribing inventory norms for both private and public sectors.
To recommend the change in the existing pattern of financing working capital, if required
To suggest guidelines for commercial banks to ensure proper end use of funds and

keeping a watch on the safety of advances.

To suggest the information or data to be collected periodically from borrowers and by the
RBI from the leading banks.

Opinion Report:
25

Bank credit is extended on the amount of security available not considering the level of

operations.
Finance from bank should be treated as the first source instead of being taken as a

supplementary to other sources of finance.

To control the bank finance, certain modifications are suggested for the continuation of

the existing cash credit system.

To control the ban finance, certain modifications are suggested for the continuation of

the existing cash credit system.

Operational plans of customers should be known in advance by the bank.

Recommendation regarding lending norms have been suggested under three

alternatives
Minimum 25% of the working capital is to be financed from long term funds.
Minimum 25% of the total current assets from long term funds.
Contribution from long term fund will be to the extent of the entire core current assets
and a minimum of 25% of the balance current assets.

Chore Committee: Under the chairmanship of Shri K.B. Chore in March, 1979. Reserve
Bank of India set up a committee. The term of reference of the committee was to review
the working of cash credit system in recent years with particular reference to the gap
between sanctioned limits and the extent of their utilization and also to suggest
alternative type of credit facilities which should ensure greater credit discipline.
Recommendation of the Committee:
The banks should obtain quarterly statements in the prescribed format from all barrowers

having working capital credit limit of Rs. 50 lack and above

The banks should undertake a periodical review of limits of Rs. 10 lack and above.
The banks should not bifurcate cash credit accounts into demand loan and cash credit

components.
If a borrower does not submit the quarterly returns in time the banks may charge penal

interest of one percent on the total amount outstanding for the period of default.
Banks should discourage sanction of temporary limits by charging additional one per

cent interest over the normal rate on these limits.

The banks should fix separate credit limits for peak level and non peak level, wherever

possible.
Banks should take steps to convert cash credit limits into bill limits for financing sales.

26

 Morathe Committee Report: Under the chairmanship of Marathe in 1982, Reserve

Bank of India set up a committee to review the working of credit authorization scheme
(CAS) and suggest measures for giving meaningful directions to the credit management
function of the Reserve Bank. Reserve Bank of India accepted the recommendations of

the committee with minor modifications. Recommendation by the Committee:

The third method of lending suggested by the Tandon Committee was dropped. Hence,

the second method of lending is accepted.

The committee has suggested the introduction of the Fast Track Scheme to improve the
quality of credit appraisal in banks. It recommended that commercial banks can release
without prior approval of the Reserve Bank 50% of the additional credit required by the

borrowers where the following requirement are fulfilled :

The projections in regard to production, sales chargeable current assets, other current
assets, current liabilities other than bank borrowings and net working capital are
reasonable in terms of the past, trend and assumptions regarding most likely trends
during the future projected period.
The classification of assets and liabilities as current and noncurrent is in conformity
with the guidelines issued by the Reserve Bank of India.
The projected current ratio is not below 1.33%
The borrower has been submitting quarterly information and operating statements for the
past six months within the prescribed time and undertakes to do the same in future also.
The borrower undertakes to submit to the bank his annual account regularly and
promptly further, the bank is required to review the borrowers facilities at least once in a
year even if the borrower does not need enhancement in credit facilities.
Chakravarty Committee: The Reserve Bank of India appointed another committee
under the chairmanship of Sukhamoy Chakravarty to review the working of the monetary
system of India. The committee submitted is report in April 1985. The committee made
two major recommendations in regard to the working capital finance:
(i) Penal Interest for Delayed Payments: The committee has suggested that the government
must insist that all public sector units, large private sector units and government departments
must include penal interest payment clause in their contracts for payments delayed beyond a
specified period. The penal interest may be fixed at 2 percent higher than the minimum lending
rate of the suppliers bank.
27

(ii) Classification of Credit Limit Under Three Different Heads: The committee further
suggested that the total credit limit to be sanctioned to a borrower should be considered under
three different heads.

For Cash Credit Portion :

Maximum prevailing lending rate of the bank

For Bill Finance Portion :

2% below the basic lending rate of the bank

For Loan Portion:

The rate may vary between the minimum and maximum lending rate of the bank.
Kannan Committee: Under the chairmanship of Shri K. Kannan, a Managing Director
of Bank of Baroda in 1996, the Indian Banks Association constituted a committee to
examine all the aspects of working capital finance including assessment of maximum
permissible bank finance. Major recommendations of the committee Report
The arithmetical rigidities of MPBF as suggested by Tandon Committee and reinforced

by Chore Committee should be scrapped.

To serve various borrowers more effectively freedom to each bank be given in regard to

faster credit delivery.

The committee suggested shifting emphasis from the liquidity level lending to the cash

deficit lending called desirable bank finance.

Banks may now adopt cash budgeting system for assessing the working capital finance in

respect of large borrowers.

The banks have also been allowed to retain the present method of MPBF with necessary

modification or any other system as they deem fit.

Banks should lay down transparent policy and guidelines for credit dispensation in
respect of cash broad category of economic activity.

28

1.2 VARDHMAN TEXTILES LIMITED

Vardhman, a household name in Northern India, has carved out a niche for itself in textile
industry. The Vardhman group was setup in 1962 by late Lala Rattan Chand Oswal, father of
present Chairman cum Managing Director, Sh. S.P. Oswal. Vardhman aims to be world class
textile organization producing diverse range of products for the global textile market. Vardhman
seeks to achieve customer delight through excellence in manufacturing and customer service
based on creative combination of state-of-the-art technology and human resources.
Vardhman deals with Fabrics, Sewing Thread, Fibre and Alloy Steel. It became India's first
textile company to be awarded ICO9002/ ISO 14002 Certification and has received many other
awards since the beginning. It lays a lot of emphasis on building and sustaining an excellent
organizational climate based on human performance and works for the betterment of its human
resource. It has adopted international accounting standards for the presentation of the financial
statements and has a centralized accounting system. The company works on its technological up
gradation and always works on expanding its base.
The company believes in its corporate social responsibility and takes full pride in fulfilling them
through various means. It is affected tremendously by the political, economic, social and
technological environment. The company has high gross profit margin ratio and can make profits
while controlling its costs. Also it has greater assets than liabilities and is performing well. Even
during the times of recession the company kept on providing superior quality goods and has been
able to survive.

29

 ORGANISATIONAL PROFILE
Vardhman group is a leading textile conglomerate in India having a turnover of $700 mn.
Spanning over 24 manufacturing facilities in five states across India, the Group business
portfolio includes Yarn, Greige and Processed Fabric, Sewing Thread, Acrylic Fibre and Alloy
Steel.
Vardhman Group manufacturing facilities include over 8,00,000 spindles, 65 tons per day yarn
and fibre dyeing, 900 shuttleless looms, 90 mn meters per annum processed fabric, 33 tons per
day sewing thread, 18000 metric tons per annum acrylic fibre and 100,000 tons per annum
special and alloy steel.
Vardhman has evolved through history from a small beginning in 1965 into a modern textile
major under the dynamic leadership of its chairman, S.P.Oswal. His vision and insight has given
Vardhman an enviable position in the textile industry. Under his leadership, Vardhman is
efficiently using resources to innovate, diversify, integrate and build its diverse operations into a
dynamic modern enterprise.
HISTORY
The industrial city of Ludhiana, located in the fertile Malwa region of Central Punjab is
otherwise known as the "Manchester of India". Within the precincts of this city is located the
Corporate headquarters of the Vardhman Group, a household name in Northern India. The
Vardhman Group, born in 1965, under the entrepreneurship of Late Lala Rattan Chand Oswal has
today blossomed into one of the largest Textile Business houses in India.
At its inception, Vardhman had an installed capacity of 14,000 spindles, today; its capacity has
increased multifold to over 8 lacs spindles. In 1982 the Group entered the sewing thread market
in the country which was a forward integration of the business. Today Vardhman Threads is the
second largest producer of sewing thread in India. In 1990, it undertook yet another
diversification - this time into the weaving business. The grey fabric weaving unit at Baddi (HP),
commissioned in 1990 with a capacity of 20,000 meters per day, has already made its mark as a
quality producer of Grey poplin, sheeting, and shirting in the domestic as well as foreign market.
This was followed by entry into fabric processing by setting up Auro Textiles at Baddi and
30

Vardhman Fabric at Budhni, Madhya Pradesh. Today the group has 900 shuttleless looms and
has processing capacity of 90mn meters fabrics/annum.
In the year 1999 the Group has added yet another feather to its cap with the setting up of
Vardhman Acrylics Ltd., Bharuch (Gujarat) which is a joint venture in Acrylic Fibre production
undertaken with Marubeni and Exlan of Japan. The company also has a strong presence in the
markets of Japan, Hong Kong, Korea, UK and EU in addition to the domestic market. Adherence
to systems and a true dedication to quality has resulted in obtaining the coveted ISO 9002/ ISO
14002 quality award which is the first in Textile industry in India and yet another laurel to its
credit.

MISSION
Vardhman aims to be world class textile organization producing diverse range of products
for the global textile market. Vardhman seeks to achieve customer delight through
excellence in manufacturing and customer service based on creative combination of stateof-the-art technology and human resources. Vardhman is committed to be responsible
corporate citizen.
HOLDINGS
Vardhman Holding Limited
Vardhman Textiles Ltd.
Vardhman Acrylic Ltd
VMT Spinning Company Ltd
Vardhman Yarns and Threads Ltd

31

Business Wise Turnover for the financial Year 2008-09

 PORTFOLIO-The group portfolio includes Yarn, Fabrics, Sewing Thread, Fibre and
Alloy Steel.

Actual 2008-09

Group Total( Rs crore) USD Million

% Share

Yarn

1513

329

47%

Fabric

689

150

22%

Sewing Thread

337

73

11%

Steel

327

71

10%

Power plant

66

14

2%

Fibre

254

55

8%

Total

3186

693

100%

MARKET SHARE OF VARDHMAN TEXTILES LTD

Spinning Business
Spindle Capacity (financial year 2005 -06 )
Existing About 600,000
Post Expansion 800,000
Fabric Business
Fabric Production in Lac (100 thousand) Meters/Month
32

Auro Textiles (Existing) 42

Post Expansion 85-90
Sewing Thread Business
Production in Metric Tonnes/Day
Total 28.30
Dyeing (Yarn & Fibre) & Mercerizing
Production in Metric Tonnes/Day
Total 54.5
Steel Business
Production in Metric Tonnes/Annum
SMS 100000
Rolling Mill 84000
Acrylic Fibre Business
Production in Metric Tonnes/Annum
Total 18500
YARNS
Yarn Manufacturing is the major activity of the group accounting for 47 percent of the
group turnover. Vardhman is virtually a supermarket of yarns, producing the widest range
of cotton, synthetics and blended, Grey and Dyed yarns and Hand Knitting Yarns, in
which Vardhman is the market leader in India. The group has twenty one production plants
with a total capacity of over 8 lacs spindles, spread all over the country. In many of the
yarn market segments, Vardhman holds the largest market share. Vardhman is also the
largest exporters of yarn from India, exporting yarns worth more than USD 150 million.
SEWINGTHREADS
Vardhman is the second largest producer of sewing thread in the country. The sewing
thread manufacturing capacity is being expanded from 17 tons per day to 33 tons per day
33

in its sewing thread plants located at Hoshiarpur, Baddi and Ludhiana. Sewing threads
contributes 11 percent of the group turnover.

FABRICS
The group has created state-of-the-art fabric weaving and processing facilities in its plant
at Baddi, Northern India. The group has installed 900 shuttles less looms and a fabric
processing capacity of 90 million meters per annum in collaboration of Tokai Senko of
Japan. Fabrics business contributes 22 percent to the group turnover.

FIBRE
The group has set up an Acrylic Staple Fibre plant at Bharuch in Gujarat in collaboration
with Marubeni and Japan Exlan of Japan. The plant has annual capacity of 18000 tons per
annum. Fibre contributes 8 percent to the total turnover of the group.
STEEL
The Group is also present in upper-end of the steel industry. The group has manufacturing
capacity of 100000 tons of special and alloy steel. The group supplies its steel products to
some of the most stringent quality steel buyers like Maruti and Telco. It contributes 10
percent to the total turnover of the group.
QUALITY ACCREDITATION
A Vardhman fabric is dedicated to meet customer demand for top quality finished fabric through
product innovation, world class quality, state-of-art technology and excellence in service.

Quality policy

They believe in acceptance of customers. The specifications and standards of civil engineering
have to be transformed to fulfil the needs and requirements, of customer. At Vardhman they
strive to achieve engineering excellence and design their projects to deliver cost effective and
comfortable apartments for customers.
Quality with timely completion of project is key of their success.
PRODUCT PROFILE
34

YARNS
Overview
Yarn is the largest strategic business unit of the Vardhman Group with 8,00,000 spindles and 65
MT tons per day yarn and fibre dying capacity. The Group offers one-stop solution for variety of
yarn requirements of the leading customers in India and the international markets. Vardhman
offers the widest range of specialized Greige and dyed yarns (NE 10 to NE 200) in cotton,
polyester, acrylic and varieties of blends. The group offers value added products like Organic
Cotton, Melange, Lycra, Ultra yarns (contamination controlled), gassed mercerized, super fine
yarns and fancy yarns for hand knitting. Vardhman is India's largest exporter of cotton yarn to the
most quality conscious markets like EU, USA and Far Eastern countries.
Products
Cotton Yarn
Organic Cotton Yarn
Fair Trade cotton Yarn
Organic Fair Trade Cotton Yarn
Elli twist
Vortex Yarn
Slub Yarn
Acrylic Yarn
Poly -Cotton Yarn

Special Blended Yarn

Core Spun Yarn
Melanges
Gassed Mercerised
Modal Yarn
Tencel Yarn
Viscose Yarn
Hand Knitting Yarn
Speciality Yarn

Yarn product profile

Grey cotton yarn
Grey acrylic yarn
Grey polyester cotton yarn
Special blended yarn
Crayons
Rainbow
Rangoli
Gassed mercerised cotton yarn
35

 Paragon
Harmony
Padam
Daffodil
Hank dyed acrylic yarn
Vardhman knitting yarn
Speciality yarns

Yarn machinery
Preparatory reiter, trutzschler
Pre-spinning reiter, cherry hara, toyoda
Spinning lakshmi reiter, kriloskar toyoda
Post spinning - schlaforst, murata
Doubling volkman, leewha, vijaylakshmi

Integrated yarn dyeing unit

1994 has witnessed a milestone toward our mission, to supply value added product i.e. cone and
fibre dyed yarn and tops. A fully integrated dye house plant with technology from Nihon Synmo,
Japan, the leader in dyeing technology in the world, emerged on the landscape of Vardhman.
With setting up of this new dye house , the installed capacity to process has increased to 20 tons
of Yarn and 15 ton of Fibre per day.
Technological collaboration with Nihonsanmo, Japan.
Dyeing capacity: - fiber dyeing 15 tons per day and yarn dyeing 20 tons per day.
36

 Facility of dyeing a vast range 100% cotton, P/C blends, cotton/ wool, cotton/ viscose,
acrylics/ cotton, 100% acrylics.
Lot size flexibility.

Yarn operation
The unique combination of man and machine, competing and supplementing each other with
continuous increase in productivity has enable Vardhman to dexterously ripe the fruit of
economies of scale and process variety of raw material required for variety of end products to
textile.

Evenness Results fall in 5% to 15% of Uster standards, achieved through

Proper selection of Raw Material

World class Pre-spinning and Spinning Facilities

Technical Know How

Human Skills

100% Quality Assurance System

THREADS
37

Overview
Vardhman is a leading player in the Indian sewing thread market. The joint venture with A&E
Threads of USA offers complete thread solutions from tailoring to industrial applications. With
33 tons per day capacity spread over three plants located in North and South India, Vardhman is
uniquely positioned to serve the garment manufacturers across the world. Vardhman customer
value proposition includes threads made from cotton, polyester, core spun, nylon and filaments,
which are AZO free and meet OEKO Tex Standards.
Embroidery
They manufactured products through following ways: Machine
Hand / Needle
Schiffli / Lace

MACHINE
Vardhman textiles ltd. Manufacture the following machine stitched embroidered products: Polymerized: - Pride is a 100 % Trilobal polyester continuous filament thread ideally suited
for embroidery on high speed machines. It offers sparkling luster and enhanced productivity
due to low breakages. The dye fastness rating is also very good.
Metallic: - Eureka metal is a metallic embroidery thread with a nylon core and a metalized
foil cover. A special lubrication ensures proper running of the thread on high speed machines.
Available in 36 colours including Gold and Silver.
Specials -- Puff is a 100 % Acrylic thread which is ideal for raised effect embroidery. It can
be used on Multi head machines as well as manual machines
Cotton embroidery threads Super seam is a 100% extra long staple mercerized cotton
thread. Its available in Tex 35.
HAND/NEEDLE
38

People have always found deep personal pleasure and sense of satisfaction in creating articles of
daily use and artistic works from basic equipment and materials. One of the crafts practiced since
times immemorial is needlecraft and embroidery - the urge to create with colourful threads.
Embroidery was used in Ancient Egypt to decorate the hems of royal robes, in tapestries in the
middle Ages, and in ladies' samplers during the Colonial and Victorian eras. It continues as an art
form today.
Hand embroidery is used to decorate wall hangings, pillowcases, quilts and table runners. Hand
embroidery differs from counted cross stitch in that it uses many different types of stitches to
achieve texture and interest, whereas counted cross stitch uses a single stitch and relies on color
and shading for texture. Five stitches form the basis for hand embroidery. The stitches are
outline, satin, lazy daisy, cross and French knot.
Hand embroidery is a beautiful art that almost anyone can learn. It is an art that should be
preserved and well worth learning. The hand embroidery market in India is segmented into three
segments.
Premium Embroidery Threads
Popular Embroidery Threads
Crochet Threads
Usage of Hand Embroidery Thread
Cross stitch
Counted thread work
Embroidery
Smocking
Tapestry
Appliqu work
Quilting
SCHIFFLI/LACE
39

Embroidery, the art of forming attractive designs with hand or machine needlework, has been
around virtually as long as clothing itself.
Schiffli embroidery is a single needle and single/multi head machine embroidery. Both
mercerized cotton as well as staple polyester fibers is used to manufacture this thread. It gives
excellent resistance to heat and organic solvent and good resistance to alkalis but sensitive to
acids.
INDUSTRIAL PRODUCTS
Apparel: - They manufacture the following categories of threads for industrial application
Knits
Wovens
Denim
Over dyed
Special application
Shoes, leather & non apparel: Footwear
Leather garments
Leather accessories
Automotive seating and upholstery
Luggage
Mattress and quilting
Saddler industrial
Filter
Compressor
Winding curtains and tents
Book binding

40

 FIBRES
Overview
The acrylic fiber of Vardhman is acclaimed for a wide variety of textile applications. The modern
manufacturing plant based on renowned Japan Exlan Wet Spun technology produces 18000 MT
per annum acrylic fiber at Gujarat (Western India). The fiber marketed under the brand name
VARLAN has achieved high level of recognition in the Indian market because of super soft touch
and silky appearance.
Product features
Superb soft touch & silky appearance; resilience; excellent dye -ability; brilliant shades, high
bulk yarn products incorporating shrinkable fibers; low pill formation; better crease recovery;
high resistance to chemicals, light, weathering and midew make VARLAN a preferred fibre in
knitted, woven and other applications.
Product Range
Acrylic Bright & Semi-dull Non shrinkable fibre in 1.5,2,3,5,7,10,15 deniers in a wide range
of cut lengths.

Acrylic Bright & Semi-dull Shrinkable fibre with different shrinkage levels in 2,3,5
deniers in a wide range of cut lengths

Acrylic Tow endless Bright & Semi dull in 2,3 denier.

Specialty acrylic fibers suitable for Open end spinning; Soft handle, Water absorbent
applications etc.

PROCESS

41

Process Features
1. Continuous aqueous suspension polymerization of reactive ingredients in a precisely
controlled reactor system.
2. Constant composition of polymer and close control of molecular weight.
3. Polymer in water slurry dissolved with highly concentrated solvent, deaerated, heated and
filtered to convert into dope suitable for spinning.
4. Dope extruded through spinnerets in spin bath filled with dilute coagulant to form gel
fibre which is washed, stretched and made void free to provide a dense and compact
structure of the fibre.

42

5. Tow is crimped and heat set to acquire stress and strain property. High quality finish
applied for antistatic and lubrication purpose.
6. Tow is dried, cut and baled as staple or packed as tow as per requirement.
7. Weak solvent from spinning sent to solvent recovery for purification and evaporation to

INTERNAL AND EXTERNAL ENVIRONMENT

INTERNAL ENVIRONMENT

Human Resources/Industrial Relations:

Vardhman textiles continue to lay emphasis on building and sustaining an excellent
organizational climate based on human performance. Performance management is the key word
for the company. During the year the Company employed over 23,350 employees. Pursuit of
proactive policies for industrial relations has resulted in a peaceful and harmonious situation on
the shop floors of the various plants.
It works for its workers by training them through HRD centers and it has In house training and
development center for staff and management. It organizes various competitions for workers like
Olympiads which is a contest based on workers skills and productivity.

Organizational hierarchy chart

CHAIRMAN CUM-MANGING DIRECTOR

CORPORATE GENERAL MANAGERS

43

VICE PRESIDENT

MANAGERS (M1-M4)

EXECUTIVES (E1-E2)

OFFICERS (O1-O2)

STAFF (S1-S4)

SUBSTAFF

Internal Control System:

The Company has well defined internal control system. The Company takes abundant care to
design, review and monitor the working of internal control system. Internal Audit in the
organization is an independent appraisal activity and it measures the efficiency, adequacy and
effectiveness of other controls in the organization. All significant issues are brought to the
attention of the Audit Committee of the Board.
44

 FINANCE DEPARTMENT
There have been efforts at the international level to bring about uniformity in the presentation of
the financial statements by formulating and adopting international accounting standards.
Thus the role of accounting is to provide an effective measurement and reporting system.
This is possible only when accounting is based on certain coherent set of logical principals that
forms the general frame of reference for evaluation and development of sound accounting
practices
Vardhman Spinning & General Mills, finance department is headed by Mr. Bhushan Punj
(Chief Manager, Commercial finance); Mr. Munish Jain (manager) .all the working of the
finance department is done through ERP (Enterprise Resource Planning) system, which was
installed in August 2003

NEED OF FINANCE DEPARTMENT

Economic activities are those which includes buying and selling of goods and services for
purpose of profit. These activities are related to business. The main objective of the business is to
earn profits. This exchange is termed as TRANSACTION. A transaction means a transfer from
one person to another in money or moneys worth. Hence, exchange of money, goods or services
between persons or parties is known to have resulted in a transaction. In each organization
transactions are affected. The goods are purchased from one market at a certain rate and then
these goods are sold in another market at higher price. However, in some cases organizations
incur some losses instead of profits, which may occur due to anyreasons. So to achieve the
purpose of recording a will devised system plays a dominant role in an organization.
In VARDHMAN SPINNING AND GENERAL MILLS there is a finance department headed by
Mr. Bhushan Punj. ERP system is installed to deal with the finance problems and to derive the
maximum benefits of ERP system a concept of CENTRALISED ACCOUNTING CELL.
Under this concept of centralization, all types accounting of Debtors and Creditors of all units at
one single platform i.e. at accounts department VARDHMAN Ludhiana. The basic reason behind
its implementation was to improve the accounting relating to the customers and suppliers
45

 CENTRALIZED ACCOUNTING SYSTEM

Centralized Accounting System means the accounting system, which is maintained centrally for
the units or branches located at different locations. With this system, the company can maintain
the accounts for the different units at the head office or the desired place where ever they want to
keep those.
In VARDHMAN TEXTILES LIMITED, LUDHIANA, they have the centralized accounting cell
at there corporate office. This office is situated at Vardhman Spinning & General Mills,
Ludhiana. The corporate offices as well as the accounts department, which controls the
centralized accounts, are situated in this.
This computerized centralized accounting cell has four departments and they performed there
specialized type of functions only as specified by the management which can be altered time to
time as per the need of the organization or as the organization suits better, which are shown as
under

Accounts Department

Accounts Payable
ACP

46

Accounts
Receivable
ACR
Business Planning

Exports Import Cell

Control System

EXIM Cell

BPCS

TECHNOLOGICAL UPGRADATION
The Company has been proactively moving towards more liberalized domestic and international
trade regime. The company chalked out fresh investments amounting to about Rs.2000 crore by
way of capacity expansion and modernization. The company commissioned a new yarn unitVardhman Yarns at Satlapur (M.P.) in 2007 with initial capacity of 30,000 spindles. The capacity
has since been expanded to present level of 1,23,552 spindles. Vardhman Yarns is well on its way
of achieving the ultimate capacity of approx. 2,30,000 spindles. The unit is also establishing its
own captive power plant of 24 MW which is likely to be operational during the current year.
The integrated textile unit of the Company- Vardhman Fabrics at Budni (M.P.) has also started
commercial production in 2007-2008. Vardhman Fabrics will have 60,000 spindles for yarn
spinning, 2,830 rotors and 400 Airjet looms, besides having yarn dyeing capacity of 10 TPD and
Fabric processing capacity of 60 million meters per annum. Out of the above, 40,800 spindles,
2,160 rotors, 310 looms and fabric processing capacity of 40 million meters per annum have
already become operational during 2007-2008 and the remaining capacity is likely to be
operational during the current financial year. Further, the unit also has its own captive power
plant of 24 MW, which has become operational during 2007-2008. However, the optimum level
of utilization of the increased capacities could also not be achieved in 2007-08 because of initial
hiccups which are expected to normalize over a period of time.

47

With these projects, Vardhman Group will emerge as a strong integrated textile house, catering to
the diverse requirements of the customers. The planned increase in capacity will generate
economies of scale and adoption of technology will boost the productivity and quality to
customers delight.
Vardhman is working on the expansion plans and technology advancement with the help of
grants given by the government under the Technology Up gradation Fund (TUF) scheme to
boost the textile industry.
PERFORMANCE
In markets like the EEC, USA, Canada, China, Japan, Korea, Mexico, Brazil and Mauritius,
Middle East. Vardhman has a share of more than 6% in total Yarn exports from India.
Its trusted, tested and reliable workforce, coupled with the latest technology, quality
consciousness, customer oriented services and strong logistics has given Vardhman an edge over
its competitors and in the worlds most quality conscious and price sensitive markets. Thereby
making Vardhman a truly international organization in terms of sourcing from and catering to the
world market.

FINANCIAL STATUS

PARTICULARS
Yarns
Sewing thread
Steel
Fabric

SALES REVENUE (RS CRORE)

102873.31
29634.83
34702.19
33239.58

% SALES REVENUE

48

During the last 5 years, Vardhman Group has recorded 10 percent top line growth rate, which is
higher than the industry average growth rate. The Group turnover has grown from Rs 723 Crores
in 1995 to Rs 3186.32 crores (about USD 700 million) in 2008-09. The exports has grown from
negligible level in early nineties to Rs 689 crores (USD 150 million) in 2008-09.

CORPORATE SOCIAL RESPONSIBILITY

Some of CSR activities Sri Aurobindo Socio-Economic and Management Research Institute is engaged in the
promotion of education, research and publications highlighting social and economic
issues facing the society. The Institute runs a Human Resource Development Centre for
providing career counseling and guidance to college students in Punjab. The teams of

49

experts also visit the colleges in the state to prepare college students for gainful
employment in the industry.

Sprung from a keen desire to set up an educational institution in Ludhiana and inspired
by the writings of Sri Aurobindo and the Mother, the Trust has set up a college - Sri
Aurobindo College of Commerce and Management (affiliated to the Punjab University)
with the mission to create an institution with distinction dedicated to the ideals of creating
disciplined career oriented young people ready for going for administrative and
management roles in enterprises or to set up their own business as entrepreneurs.

A Vardhman initiative to improve the yield of cotton in Punjab in 2001 when the State
had suffered a shock of crop devastation and area under cotton cultivation was dwindling,
led to the experiment to adopt villages and see whether concerted efforts in bringing
knowledge to farmers could improve the yield of cotton. The experiment was successful
as it improved the yield of cotton to 873 kg/hectare in 2005 in adopted villages where the
average yield of cotton in the State of Punjab was 587 kg/hectare.

Vardhman is actively engaged in the activities of Nimbua Greenfield Punjab

Limited

(www.ngpl.co.in) formed by a consortium of Industries of Punjab for developing a

common facility for storage, treatment and disposal of hazardous wastes generated by the
Industry with a Government of India grant. www.ngpl.co.in

50

 EXTERNAL ENVIRONMENT
PEST ANALYSIS
Political
The principal government policies affecting consumer prices for textile products are excise taxes
charged on products as they leave the factory and import tariffs charged on raw and intermediate
products used in manufacturing. Historically, both excise taxes and tariffs have been used to
discourage domestic use of manmade fibers, which are based heavily on imported raw materials,
and to promote the use of cotton, most of which is produced domestically. Both excise taxes and,
to a lesser extent, tariffs on manmade fibers have been reduced during the past decade as part of
policy reforms aimed at reducing protection and regulation throughout the industrial sector.
Overall, excise tax rates on manmade and blended products have been reduced nearly 40 percent
since the mid-1990s, while taxes on cotton goods have been reduced about 25 percent. Tariff
reductions on manmade raw materials and goods have been more recent and less significant than
the excise tax cuts. Despite the cuts, taxation of manmade goods remains high relative to cotton
goods.
Tariff and excise tax policies that have discriminated against manmade fibers have played a key
role in shaping relative consumer prices and consumption patterns for cotton and manmade
products. Recent tariff and excise tax adjustments have reduced discrimination against manmade
fibers, but with continued high differentials in taxes on cotton and manmade goods, there is
considerable scope for future tariff and tax reductions to further reduce prices for manmade
products
Economic
India has already emerged as a small but growing market for U.S. cotton in recent years, driven
by the price and quality consciousness of export-oriented mills and garment makers. India has
been a competitive producer of raw cotton and mostly self-sufficient. It is not clear, however, if
domestic producers will be able to meet the quantity and quality demands of a rapidly expanding
textile sector that, according to government targets, aims to more than triple its exports by 2010.
On January 1, 2005, developed countries removed import quotas on textile products previously
sanctioned by the 1974 Multifiber Arrangement (MFA). This change provides a major
51

opportunity for India to expand production and exports of textiles and apparel to developed
country markets.
The elimination of MFA quotas induced Indian policymakers to relax investment restrictions and
to adopt market liberalization measures in the textile sector, although these reforms have been
slower than developments in some other key countries ,most notably China. However, the
opportunity created by the elimination of MFA quotas, together with Indias rapid economic
growth and demonstrated comparative advantage in production of both raw cotton and textiles,
increases the likelihood that India will continue to adopt policies aimed at expanding its capacity
to produce and export cotton and textiles.
Social
One of the most interesting social features of the textile industry is that, it migrates from high
cost nations to the low cost nations. The growth of the domestic demand for clothing in India is
linked with the success of the retailing sector. India presently has entered the second phase of
growth and is witnessing a massive rise in the domestic demand. This is primarily due to the rise
in the standard of living caused by the rise in the middle-income groups. In our present economic
world of demand and supply, price and quality are the key factors, which determine the success
of any business. The key element here though, is the cost of labor. India and China have a
comparative advantage in this industry though, their vast labor forces and the relatively low cost
Since, India and China have the advantage of making textiles and so fabric costs are lower than
in other countries, they have become the Apparel sourcing choice for many international
companies. Sourcing choices arise from profitability. This includes considering costs, such as,
buying factors of production, like land, buildings and machines versus factors affecting revenues,
including pricing, marketing, and distribution. The issues of labor, material, shipping costs and
tariffs structure also affect the sourcing choices. Since, apparel production is a labor-intensive
activity, wage rates are also a major factor in sourcing decisions. This gives immediate
competitive advantage to producers in countries like India and China to export to more
developed and high cost countries like the United States and the European Union.

52

Technology
To facilitate needed structural transformation, the Government established TUFS to provide
subsidized, low-interest loans to purchase imported shuttleless looms. To encourage additional
participation, the Government recently reduced interest rates to 2.5-3.0 percent for investments
made by larger cotton-processing units.
The heavily protected handloom sector is growing much more slowly (about 3 percent annually)
than the power loom and hosiery sectors but still accounts for about 13 percent of cloth output.
Handlooms, which are highly labour intensive and viewed as a source of employment and
supplementary income for 6-7 million people in over 3 million weaver households, will likely
continue to receive preferential policy treatment. The Government provides handloom operations
with tax exemptions, low-interest loans, and rebates on fabrics sold through cooperatives, and
also reserves exclusive rights for handloom operators to produce 11 items, such as non- terry
towels and some varieties of bed sheets.
In 2001, the Government established the high-level Technology Mission on Cotton (TMC) to
direct, coordinate, and fund initiatives to raise the productivity and quality of Indian cotton and
strengthen returns to growers. TMC activities focus on four program areas, including (1) research
and technology generation, (2) transfer of technology to farmers, (3) improvement of marketing
infrastructure, and (4) modernization of gins. Although it is too early to evaluate TMC impacts
on research and extension, progress in improving market facilities and, particularly, cotton gins is
evident in cotton-producing areas.

1.3 OBJECTIVES OF THE STUDY:

To study working capital management of the company.

To study the operating cycle of the unit.

To study the future need of working capital in the running organization.

To study profitability position of the company.

53

To study the relationship between profitability and liquidity.

1.4 LIMITATIONS OF THE STUDY

As central purchase office purchase raw material and central marketing yarn make sales.

So more detailed information cannot be received about these.

Cash from debtors are collected by the corporate office through commission agents. So

efforts for collection of debtors cannot be clearly known from VTM Ludhiana.
Investment of funds are also made by corporate office, so it becomes difficult to know
that how much investment is made in different ways for continuous availability of funds.
54

55

CHAPTER 2
REVIEW OF LITERATURE
National Council of Applied Economic Research (1966) 1 was first study working capital
management in three industries namely cement, fertilizer and sugar. This was the first study on
nature and norms of working capital management in countries with scarcity of investible
56

resources. This study was mainly devoted to the ratio analysis of composition, utilization and
financing of working capital for the period 1959 to 1963. This study classified these three
industries into private and public sector for comparing their performance as regards the working
capital management. The study revealed that inventory constituted a major portion of working
capital i.e. 74.06 per cent in the sugar industry followed by cement industry (63.1%) and
fertilizer industry (59.58%). The study observed that the control of inventory had not received
proper attention. The inventory control was mainly confirmed to materials management leading
to the neglect of stores and spares. So far as the utilization of working capital was concerned,
cement and fertilizer industry had a more efficient utilization of working capital. The sugar
industry had inefficient utilization of working capital largely due to the accumulation of stock
with the factories. As regards financing of working capital, the study showed that internal
sources had contributed very little towards the financing of working capital. It was 11.87 per cent
in the cement industry, 15.03 per cent in sugar and 31.25 per cent in fertilizer industry, 17.78 per
cent being the average. However, this study failed to put into sharp focus the various problems
involved in the management of specific working capital accounts.
Appavadhanulu (1971)2 recognizing the lack of attention being given to investment in working
capital, analyzed working capital management by examining the impact of method of production
on investment in working capital. He emphasized that different production techniques require
different amount of working capital by affecting goods-in-process because different techniques
have differences in the length of production period, the rate of output flow per unit of time and
time pattern of value addition. Different techniques would also affect the stock of raw materials
and finished goods, by affecting lead-time, optimum lot size and marketing lag of output
disposals. He, therefore, hypothesized that choice of production technique could reduce the
working capital needs. He estimated the ratio of work in progress and working capital to gross
output. and net output in textile weaving done during 1960, on the basis of detailed discussions
with the producers and not on the basis of balance sheets which might include speculative
figures. His study could not show significant relationship between choice of technique and
working capital. However, he pointed out that the idea could be tested in some other industries
like machine tools, ship building etc. by taking more appropriate ratios representing production
technique correctly.
57

Chakraborty (1973)3 approached working capital as a segment of capital employed rather than a
mere cover for creditors. He emphasized that working capital is the fund to pay all the operating
expenses of running a business. He pointed out that return on capital employed, an aggregate
measure of overall efficiency in running a business, would be adversely affected by excessive
working capital. Similarly, too little working capital might reduce the earning capacity of the
fixed capital employed over the succeeding periods. For knowing the appropriateness of working
capital amount, he applied Operating Cycle (OC) Concept. He calculated required cash working
capital by applying OC concept and compared it with cash from balance sheet data to find out
the adequacy of working capital in Union Carbide Ltd. and Madura Mills Co. Ltd. for the years
1970 and 1971. He extended the analysis to four companies over the period 1965-69 in 1974
study. The study revealed that cash working capital requirement were less than average working
capital as per balance sheet for Hindustan Lever Ltd. and Guest, Keen and Williams Ltd.
indicating the need for effective management of current assets. Cash working capital
requirements of Dunlop and Madura Mills were more than average balance sheet working capital
for all years efficient employment of resources. For Union Carbide Ltd., cash working capital
requirements were more in beginning years and then started reducing in the later years as
compared to conventional working capital indicating the attempts to better manage the working
capital.
4
Misra (1975) studied the problems of working capital with special reference to six selected
public sector undertakings in India over the period 1960-61 to 1967-68. Analysis of financial
ratios and responses to a questionnaire revealed somewhat the same results as those of NCAER
study with respect to composition and utilization of working capital. In all the selected
enterprises, inventory constituted the more important element of working capital. The study
further revealed the overstocking of inventory in regard to its each component, very low
receivables turnover and more cash than warranted by operational requirements and thus total
mismanagement of working capital in public sector undertakings.
Agarwal (1983)5 also studied working capital management on the basis of sample of 34 large
manufacturing and trading public limited companies in ten industries in private sector for the
58

period 1966-67 to 1976-77. Applying the same techniques of ratio analysis, responses to
questionnaire and interview, the study concluded the although the working capital per rupee of
sales showed a declining trend over the years but still there appeared a sufficient scope for
reduction in investment in almost all the segments of working capital. An upward trend in cash to
current assets ratio and a downward trend in cash turnover showed the accumulation of idle cash
in these industries. Almost all the industries had overstocking of raw materials shown by increase
in the share of raw material to total inventory while share of semi-finished and finished goods
came down. It also revealed that long-term funds as a percentage of total working capital
registered an upward trend, which was mainly due to restricted flow of bank credit to the
industry.
Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh (1986)6 examined
various aspects of working capital management in fertilizer industry in India during the period
1978-79 to 1982-93. Sample included public sector unit, Fertilizer Corporation of India Ltd.
(FCI) and its daughter units namely Hindustan Fertilizers Corporation Ltd., the National
Fertilizer Ltd., Rashtriya Chemicals and Fertilizers Ltd. and Fertilizer (Projects and
Development) India Ltd. and comparing their working capital management results with Gujarat
State Fertilizer Company Limited in joint sector. On the basis of ratio-analysis and responses to a
questionnaire, study revealed that inefficient management of working capital was to a great
extent responsible for the losses incurred by the FCI and its daughter units, as turnover of its
current assets had been low. FCI and its daughter units had high overstocking of inventory in
respect of each of its components particularly stores and spares. Similarly, quantum of
receivables had been excessive and their turnover very low. However, cash and liquid resources
held by FCI and its daughter units had been much lower in relation to operation requirements. So
far as financing of working capital was concerned, long-term funds had been financing a low
proportion of current assets due to rapid increase of current liabilities. The profitability providing
an internal base for financing of working capital had been very low in these undertakings.
Verma (1989)7 evaluated working capital management in iron and steel industry by taking a
sample of selected units in both private and public sectors over the period 1978-79 to 1985-86.
Sample included Tata Iron and Steel Company Ltd. (TISCO) in private sector and Steel
59

Authority of India Ltd. (SAIL) and Indian Iron and Steel Company, a wholly owned subsidiary
of SAIL, in public sector. By using the techniques of ratio analysis, growth rates and simple
linear regression analysis, the study revealed that private sector had certainly an edge over public
sector in respect of working capital management. Simple regression results revealed that working
capital and sales were functionally related concepts. The study further showed that all the firms
in the industry had made excessive use of bank borrowings to meet their working capital
requirement vis--vis the norms suggested by Tandon Committee.
Vijaykumar and Venkatachalam (1995)8 studied the impact of working capital on profitability
in sugar industry in Tamil Nadu by selecting a sample of 13 companies; 6 companies in cooperative sector and 7 companies in private sector over the period 1982-83 to 1991-92. They
applied simple correlation and multiple regression analysis on working capital and profitability
ratios. They concluded through correlation and regression analysis that liquid ratio inventory
turnover ratio, receivables turnover ratio and cash turnover ratio influenced the profitability of
sugar industry in Tamil Nadu. They also estimated the demand functions of working capital and
its components i.e. cash, receivables, inventory, gross working capital and net working capital,
by applying regression analysis. They showed the impact of sales and interest rate on working
capital and its components. When only sales was taken as independent variable, coefficient of
sales was more than unity in all the equations of working capital and its components showing
more than unity sales elasticity and diseconomies of scale. When sales and interest rate were
taken as independent variable, sales elasticity was again more than unity in demand functions of
working capital and its components except cash. So far as capital costs were concerned, these
had negative signs in all the equations but significant only in inventory, gross working capital
and net working capital showing negative impact of interest rates on investment in working
capital and its components. Thus study showed that demand for working capital and its
components was a function of both sales and carrying costs.
Dr. Bimal Jaiswal, Ms. Namita Nigam, Ms Shikha Pandey (2006.) 9 studied working capital
management of Ranbaxy laboratory limited. They concluded that efficient management of
working capital is one of the pre-condition for the success of any enterprise, because inadequate
amount of working capital impairs the firms liquidity and holding of excess working capital
60

results in the reduction of the profitability. This paper makes an attempt to examine the efficiency
of working capital management of Ranbaxy Laboratory Ltd. during 2002 to 2006 for the period
of 5 years. For measuring the efficiency of working capital management & liquidity management
ratio analysis, liquidity ranking as well as detailed analysis of various components of working
capital are being used as important tool.
Jani, Virendra C.(2007)10 studied Working Capital Management of Fertilizer Industry.
According to him Liquidity and profitability are the two aspects of paramount importance in a
business. Liquidity depends on the profitability of business activities and profitability is hard to
achieve without sufficient liquid resources. Both the aspects are closely inter related. Working
capital is the warm blood passing through the arteries and veins of the business and sets it
ticking. Even giants tumble like pack of cards through the drying up of working capital
reservoirs. Working capital, like many other financial and accounting terms have been used by
different people in different senses. According to them, the excess of current assets over current
liabilities is to be rightly considered as the working capital of a business organization. Before
providing the act definition of working capital needed for our discussion in this chapter, let us
analyses a few more definitions available on working capital. Hoagland defines working capital
as, working capital descriptive of that capital which is not fixed. But, the more common use of
working capital is to consider it as the difference between the book value of the current assets
and the current liabilities. The heading of the research study is, Working Capital Management of
Fertilizer Industry of Gujarat. The samples of the study are the units working in the state i.e.
Gujarat Nerada Valley Fertilizers Company, Gujarat State Fertilizers Corporation, Liberty
Phosphate Ltd., and Indian Farmers Fertilizers Company. Two hypotheses will be used in this
study. One, hypothesis based on Chi-square test is to understand interplant working capital
direction and growth / efficiency. The statement of null hypothesis is, The working capital
indices of the sample units can be represented by the straight line trend based on the least square
method. The other null hypothesis to be tested is based on Kruskal Wallis one way analysis of
variance test. It has been tested to see whether there is any significant difference between
working capital ratios of the sample units. The statement of null hypothesis is, There is no
significant difference between the working capital of the sample units. The acceptance of the

61

said hypothesis would reveal that the working capital of various sample units is approximately
equal.
Mohammad Alipour Islamic Azad University, Khalkhal Branch, Iran (2011) 11 studied the
relationship between working capital management and profitability. Cash conversion cycle is one
of the important measuring tools to calculate the efficiency of working capital management. The
time realm of the research was 2001-2006 and the studied companies have been the ones
accepted in Tehran stock exchange. In general, out of 2628 companies; the company has been
selected as a top company for 1063. Then multiple regression and Pearsons correlation was used
to test the hypothesis. The results of the statistical test of the hypothesis indicate that there is a
negative significant relation between number of days accounts receivable and profitability, a
negative significant relation between Inventory turnover in days and profitability, a direct
significant relation between number of days accounts payables and profitability and there is a
negative significant relation between cash conversion cycle and profitability. The results of the
research show that in the studied companies, there is a significant relation between working
capital management and profitability and working capital management has a great effect on the
profitability of the companies and the managers can create value for shareholders by means of
decreasing receivable accounts and inventory.

62

CHAPTER 3
RESEARCH METHODOLOGY
Research is a common parlance refers to a search for knowledge. One can also define research as
a scientific search for pertinent information on a specific topic. In fact, research is an art of a

63

scientific investigation. This chapter includes scope of the study, research design, source of data
collection and camels model tools & techniques used to interpretation the data.
RESEARCH DESIGN
To achieve the objective of the study, the researcher had done descriptive, cum exploratory
research.
DATA SOURCES
Secondary data: The data collected for the study includes secondary data. The various sources
used to collect secondary data includes research papers, journals, banks annual reports and
internet.

http://www.vardhman.com/Vardhman-Textile 2006-2007.pdf

http://www.vardhman.com/Vardhman-Textile 2007-08.pdf

http://www.vardhman.com/Vardhman-Textile 2008-2009.pdf

http://www.vardhman.com/Vardhman-Textile 2009-2010.pdf

http://www.vardhman.com/Vardhman-Textile 2010-2011.pdf

Primary Data: The data is also collected by personal interview with the employees of Vardhman
textiles limited.
TOOLS FOR DATA ANALYSIS

Operating cycle analysis

Ratio analysis

Schedule of changes in working capital

Trend analysis

64

65

CHAPTER- 4
WORKING CAPITAL ANALYSIS & INTERPRETATION

1.OPERATING CYCLE ANALYSIS

Operating cycle refers to the time period which starts from the raw material purchases and ends
with realization of receivable. So it is total time gap between raw material purchases to total
debtors collection. This is also known as working capital cycle. Operating cycle is therefore
expressed in terms of months or weeks or days. The higher the operating cycle period, higher the
working capital requirement. It comprises of raw material conversion period, WIP conversion
period, FG conversion period and debtors conversion period and creditors period. The basic
reason for calculating operating cycle is to find out the means for reducing the duration of
operating cycle because if duration of operating cycle will be less than working capital
requirement will be less.
OC = R + W + F + D C
Where,
R = raw material conversion period
66

W = work in process period

F = finished goods conversion period
D = debtor collection period
C = creditors payment period

(1) Raw Material Conversion Period (RMCP)

=

Average Raw Material Stock

X 360

Raw Materials consumed during the year

TABLE -1
PARTICULARS
Average

2006-07

consumed
the year
RMCP

2008-09

2009-10

2010-11

raw

material stock
Raw

2007-08

37619.28

46505.59

41216.245

51614.44

89128.77

95822.41

110251.7

124502.34

135720.59

187048.21

141.33

151.85

119.17 DAYS

136.91

DAYS

DAYS

171.54
DAYS

material
during

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART-1

67

DAYS

RMCP
RMCP
141.33

151.85

2006-07

2007-08

171.54
136.91

119.17

2008-09

2009-10

2010-11

INTERPRETATION: Chart 1 show Raw Material Conversion Period in 2006-07 is 141.33

days, 151.85 days in 2007-08,119.17 days in 2008-09,136.91 days in 2009-10 & 171.54 days in
2010-11. Lower the RMCP better will be the position because it leads to quickly conversion of
raw material into Work- In Progress.
(2)

Work in Progress Conversion Period (WIPCP)

=

Average stock in progress

X 360

Cost of Production

TABLE -2
PARTICULARS

2006-07

2007-08

2008-09

2009-10

2010-11

4981.77

6441.39

6778.98

6689.10

8794.66

production

160410.68

183227.57

194887.67

212206.06

273678.91

WIPC

11.18 DAYS

12.66 DAYS

12.52 DAYS

11.35

11.57

Average stock in
progress
Cost

of

DAYS
SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf
CHART 2

68

DAYS

WIPC
WIPC
12.66

12.52

11.35

11.18

2006-07

2007-08

2008-09

2009-10

11.57

2010-11

INTERPRETATION: Chart 2 shows Work In Progress Conversion Period. In 2006-07 WIPCP

is 11.18 days, 12.66 days in 2007-08, 12.52 days in 2008-09, 11.35 days in 2009-10 & 11.57
days in 2010-11. Lower the WIPCP better will be the working capital position because it leads to
quickly conversion of Work- In Progress into finished goods
(3)

Finished Goods Conversion Period (FGCP)

=

Average Finished goods inventory

X
360
X 360
360

Cost of goods sold

TABLE 3
PARTICULARS

2006-07

2007-08

2008-09

2009-10

2010-11

15234.4

19031.37

20438.04

21250.4

29877.37

sold

160410.68

183227.57

194887.67

212206.06

FGCP

34.19 DAYS

37.39 DAYS

37.75 DAYS

36.05 DAYS

273678.91
39.30 DAYS

Average finished
goods inventory
Cost of goods

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 3

69

FGCP
FGCP
39.3
37.75

37.39

36.05
34.19

2006-07

2007-08

2008-09

2009-10

2010-11

INTERPRETATION: Chart 3 shows Finished Goods Conversion Period. In 2006-07 FGCP is

34.19 days, 37.39 days in 2007-08, 37.75 days in 2008-09, 36.05 days in 2009-10 & 39.3 days in
2010-11. Lower the FGCP better will be the working capital position because it leads to quickly
conversion of finished goods into sales to debtors
(4)

Debtors Conversion Period (DCP)

Average Debtors
Credit Sales

X 360
TABLE - 4

PARTICULARS

2006-07

2007-08

2008-09

2009-10

2010-11

Average debtors

23722.64

23655.46

27518.31

33650.24

44290.39

Credit sales

209677.73

229466.61`

245364.51

274295.36

360681.16

DCP

40.73

37.11 DAYS 40.37

44.16

44.21 DAYS

DAYS

DAYS

DAYS

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 4
70

DCP
DCP

40.73

44.16

44.21

2009-10

2010-11

40.37
37.11

2006-07

2007-08

2008-09

NOTE: - SALES ARE ASSUMED TO BE CREDIT SALES

INTERPRETATION: Chart 4 shows Debtors Conversion Period. In 2006-07 DCP is 40.73
days, 37.11 days in 2007-08, 40.37 days in 2008-09, 44.16 days in 2009-10 & 44.21 days in
2010-11. Lower the DCP better will be the working capital position because it leads to quickly
conversion of debtors into cash.
(5)

Credit Conversion Period (CCP)

=

Average Creditors
Credit Purchases

X 360

TABLE -5
PARTICULARS

2006-07

2007-08

2008-09

2009-10

2010-11

Average

7995.89

9963.80

7359.28

5650.25

7205.17

Credit purchases

103853.82

123185.85

107146.54

176869.76

222712.33

CCP

27.72

29.12

24.73

11.50DAYS

11.65DAYS

DAYS

DAYS

DAYS

creditors

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 5

71

CCP
CCP
27.72

29.12
24.73

11.65

11.5

2006-07

2007-08

2008-09

2009-10

2010-11

NOTE: PURCHASES ARE CONSIDERED TO BE CREDIT PURCHASES

INTERPRETATION: Chart 5 shows Creditors Conversion Period. In 2006-07 CCP is 27.72
days, 29.12 days in 2007-08, 24.73 days in 2008-09, 11.5 days in 2009-10 & 11.65 days in 201011. Lower the CCP better will be the liquidity because it leads to quickly payment of creditors.

GROSS OPERATING CYCLE = RMCP + WIPCP + FGCP + DCP CCP

TABLE 6
YEAR
2006-07

RMCP

WICP
141.33 11.18 DAYS

FGCP

DCP

GOC

34.19 DAYS

40.73 DAYS

227.43 DAYS

2007-08

DAYS
151.85 DAYS

12.66 DAYS

37.39 DAYS

37.11 DAYS

239.01 DAYS

2008-09

119.17 DAYS

12.52 DAYS

37.75 DAYS

40.37 DAYS

209.81 DAYS

2009-10

136.91 DAYS

11.35 DAYS

36.05 DAYS

44.16 DAYS

228.47 DAYS

2010-11

171.54 DAYS

11.57 DAYS

39.30 DAYS

44.21 DAYS

266.62 DAYS

CHART - 6
72

GOC
GOC
266.62
227.43

239.01

2006-07

2007-08

228.47

209.81

2008-09

2009-10

2010-11

INTERPRETATION: Chart 6 shows Gross Operating Cycle. In 2006-07 GOC is 227.43 days,
239.01 days in 2007-08, 209.81 days in 2008-09, 228.47 days in 2009-10 & 266.62 days in
2010-11. Lower the GOC better will be the liquidity position because it leads to faster
conversion of raw material into cash.
NET OPERATING CYCLE= GOC - CCP
TABLE - 7
YEAR

GOC

CCP

NOC

2006-07

227.43 DAYS

27.72 DAYS

199.71 DAYS

2007-08

239.01 DAYS

29.12 DAYS

209.89 DAYS

2008-09

209.81 DAYS

24.73 DAYS

185.08 DAYS

20009-10

228.47 DAYS

11.50 DAYS

216.97 DAYS

2010-11

266.62 DAYS

11.65 DAYS

254.97 DAYS

CHART 7

73

NOC
NOC
254.97
199.71

209.89

2006-07

2007-08

216.97
185.08

2008-09

2009-10

2010-11

INTERPRETATION: Chart 7 shows net operating cycle. in 2006-07 NOC is 199.71 ,209.89
days in 2007-08,185.08 days in 2008-09,216.97 days in 2009-10, 254.97 days in 2010-11

2. ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS OF

THE HISTORICAL DATA
There are number of devices to analyze working capital like ratio analysis, common size
statement etc. We will discuss them one by one as follows:
1. RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the
process of establishing and interpreting various ratios for helping in making decisions. It only
means of better understanding of financial strengths and weaknesses of a firm. The main
emphasis has been on calculating the ratios related to a working capital management.

74

LIQUIDITY RATIOS
These are the ratios which measures the short term solvency or financial position of a firm. In
other words, it refers to the ability of a concern to meet its current obligations as and when these
become due. To measure the liquidity of a firm, the following ratios can be calculated.
CURRENT RATIO It may be defined as the relationship between current assets and current
liabilities. This ratio is also known as working capital ratio and measures the ability of the firm to
meet current liabilities. High current ratio indicates firm is liquid and has the ability to pay its
current obligations in time as and when they become due.
A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is
considered to be satisfactory.

1. Current Ratio

Current Assets
Current Liabilities
TABLE - 8

YEAR

2006-07
2007-08
2008-09
2009-10
2010-11

CURRENT

CURRENT

ASSETS(in lacs)

LIABILITIES(in

139800.01
153628.45
161172.29
203654.93
258801.21

lacs)
27398.34
26204.85
24142.11
26702.47
25989.01

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 8
75

CURRENT RATIO
(CR)
5.10
5.86
6.68
7.63
9.96

C.R
C.R
9.96

5.1

2006-07

5.86

2007-08

7.63

6.68

2008-09

2009-10

2010-11

INTERPRETATION:
The current ratio of the Vardhman textiles is above the standard ratio 2 : 1 according to thumb
rule and it guarantees the payment of dues in time. The current ratio of the company has been
considerably high because they had made over investment in inventories which is the main
reason for the him ratio of current assets. Inventories are high because of seasonal availability of
raw material. The overall position of current ratio for Vardhman textiles is satisfactory.
LIQUID RATIO This ratio is also known as quick ratio or acid test ratio. It is a more rigorous
test of liquidity than the current ratio. It is based on those current assets which are highly liquid.
Inventory and prepaid expenses are excluded because they are deemed to be least liquid
component of current assets. A high quick ratio is the indication that the firm is liquid and has the
ability to meet its current liabilities in time and on the other hand low ratio represents liquidity
position is not good.
Quick Ratio

Quick or Liquid Assets

Current Liabilities

Quick Assets = Current Assets Inventory Prepaid Expenses

TABLE -9
YEAR

LIQUID ASSETS

CURRENT

2006-07

70215.17

LIABILITIES
27398.34

2.56

2007-08

66592.12

26204.85

2.54

76

LIQUID RATIO
(LR)

2008-09

99162.24

24142.11

4.11

2009-10

92909

26702.47

3.48

2010-11

98961.75

25989.01

3.81

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART-9

LIQUIDITY RATIO
LIQUIDITY RATIO
4.11
2.56

2006-07

3.48

3.81

2.54

2007-08

2008-09

2009-10

2010-11

INTERPRETATION
According to rule of thumb, it should be 1:1. Liquid ratio of Vardhman textiles from 2006-11 is
above the standard, so the liquidity position of Vardhman textiles is satisfactory.
ABSOLUTE LIQUID RATIO Although receivables are generally more liquid than
inventories yet there may be doubt regarding their realization into cash in time. Absolute liquid
ratio shows the relationship between liquid assets which include cash, bank and marketable
securities.
Absolute Liquid Ratio

Absolute Liquid Assets

Current Liabilities

Absolute Liquid Assets = Cash + Bank + Marketable Securities

77

TABLE - 10
YEAR

ABSOLUTE LIQUID CURRENT

ABSOLUTE

ASSETS

LIABILITIES

LIQUID

2006-07

21673.36

27398.34

(ALR)
0.79

2007-08

6269.97

26204.85

0.24

2008-09

35721.30

24142.11

1.48

2009-10

22207.01

26702.47

0.83

2010-11

4876.99

25989.01

0.19

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 10

ABSOLUTE LIQUID RATIO (ALR)

ABSOLUTE LIQUID RATIO (ALR)
1.48

0.83

0.79

0.24

2006-07

2007-08

0.19

2008-09

INTERPRETATION:
78

2009-10

2010-11

RATIO

The acceptable standard for this ratio is 0.5:1. It is below the standard in 2007-08 & in 2010-11
due to very less cash and bank balance maintained. In 2010-11 liquidity position of Vardhman
textiles is not satisfactory.

WORKING CAPITAL TURNOVER RATIO Working capital turnover ratio indicates the
velocity of the utilization of net working capital. This ratio measures the efficiency with which
the working capital is being used by a firm.
Working Capital Turnover Ratio

Sales
Net Working Capital

Net Working Capital = Current Assets Current Liabilities

TABLE 11
YEAR

SALES

NET WORKING CAPITAL

2006-07
2007-08
2008-09
2009-10

209677.73
229466.61
245364.51
274295.36

112401.67
127423.6
137030.18
176952.46

1.87
1.80
1.79
1.55

2010-11

360681.16

232812.20

1.55

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 11

79

WCTR

WCTR
WCTR
1.87

2006-07

1.8

2007-08

1.79

2008-09

1.55

2009-10

1.55

2010-11

INTERPRETATION:
This ratio indicates the number of times the working capital is turned over in the course of a year.
A high working capital ratio indicates the effective utilization of working capital and less
working capital ratio indicates less utilization. For Vardhman textiles, the ratio is quite same for
the past five years. It is 1.87 in 2006-07, 1.8 in years 2007-08, 1.79 in 2008-09 and 1.55 in 2009.
3. ANALYSIS THE AFFECT OF LIQUIDITY ON PROFITABILITY: Profitability
ratio tells about the profitability position. Generally more liquid position of the company
has affects on profitability position because more liquid position leads to keep the money
in the form of cash which otherwise invest somewhere else and leads to profits.
1. GROSS PROFIT MARGIN RATIO = GROSS PROFIT SALES 100
GROSS PROFIT = SALES COGS
TABLE 12
YEAR
2006-07
2007-08
2008-09
2009-10
2010-11

GROSS PROFIT
49267.05
46239.04
50476.84
62089.3
87002.25

SALES
209677.73
229466.61
245364.51
274295.36
360681.16

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 12

80

G.P.M(%)
23.50
20.15
20.57
22.64
24.12

G.P.M(%)
G.P.M(%)
24.12

23.5
22.64
20.57

20.15

2006-07

I.

2007-08

2008-09

2009-10

2010-11

PROFITABILITY RATIO
NET PROFIT MARGIN RATIO = NET PROFIT SALES 100
TABLE 13
YEAR

NET PROFIT

SALES

NPM(%)

2006-07

17170.08

209677.73

8.19

2007-08

12254.46

229466.61

5.34

2008-09

14076.84

245364.51

5.74

2009-10

21376.80

274295.36

7.80

2010-11

46970.49

360681.16

13.02

SOURCE: http://www.vardhman.com/Vardhman-Textile 2006-2011.pdf

CHART 13

81

NPM(%)
NPM(%)
13.02

8.19

7.8
5.34

2006-07

2007-08

5.74

2008-09

2009-10

2010-11

NOTE: NET PROFIT AFTER TAX IS TO BE TAKEN

INTERPRETATION: From chart 12 & shows gross profit margin ratio & net profit margin
ratio. From the above analysis it is clear that liquidity position in 2010-11 is not satisfactory, but
GPM is 24.12% in 2010-11 & NPM is 13.02% which is more as compared with other years. So it
shows that profitability & liquidity positions are negatively correlate.
4. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING
CAPITAL:
In the preparation of funds flow statement, the first step is to find out the net amount of increase
or decrease of working capital, as increase in net working capital is a use of funds and decrease
in net working capital is a source. Since net working capital is excess of current assets over
current liabilities, the increase or decrease in the net working capital can be found out by
comparing the current assets and current liabilities contained in the balance sheets of two
following dates. For this purpose, a statement is prepared which is called statement or schedule
of changes in net working capital. This statement helps to identify the change in position of the
working capital. While preparing the statement of changes in working capital, the following
points are taken into account.

Increase in current assets, increase in net working capital

82

Decrease in current assets, decrease in net working capital

Increase in current liabilities, decrease in net working capital
Decrease in current liabilities, increase in net working capital

SCHEDULE OF CHANGES IN WORKING CAPITAL

FOR 2006-07 & 2007-08
PARTICULARS

2006-07

2007-08

INCREASE

CURRENT
ASSETS
Inventories

69584.83

87036.33

17451.5

S. debtors

25241.09

27469.83

2228.74

Cash & Bank

Balances

21673.36

6269.97

Loans & Advances 23300.73

32852.32

Total current
assets (A)

153628.45

139800.01

83

DECREASE

15403.39
9551.59

CURRENT
LIABILITIES:
Liabilities

27985.13

24655.08

Provisions

(586.79)

1549.77

Total current
liabilities (B)

27398.34

26204.85

Working capital
(A-B)

112401.67

127423.6

Net increase in
working capital

15021.93
127423.6

3330.05
2136.56

15021.93
127423.6

32561.88

32561.88

For 2007-2008 &2008-2009

PARTICULARS

2007-08

2008-09

INCREASE

Inventories

87036.33

62010.05

S. debtors

27469.83

27566.78

96.95

Cash & Bank

Balances
Loans & Advances

6269.97

35721.30

29451.33

32852.32

35874.16

3021.84

Total current
assets (A)

153628.45

161172.29

Liabilities

24655.08

23902.39

752.69

Provisions

1549.77

239.72

1310.05

DECREASE

CURRENT
ASSETS:
25026.28

CURRENT
LIABILITIES:

84

Total current
liabilities (B)

26204.85

24142.11

Working capital
(A-B)

127423.6

137030.18

Net increase in
working capital

9606.58
137030.18

9606.58
137030.18

85

34632.86

34632.86

FOR 2008-09 & 2009-10:

PARTICULARS

2008-09

2009-10

INCREASE

DECREASE

Inventories

62010.05

110745.93

48735.88

S. debtors

27566.78

39733.69

12166.91

Cash & Bank

Balances

35721.30

22207.01

13514.29

Loans & Advances

35874.16

30968.30

4905.86

Total current
assets (A)

161172.29

203654.93

Liabilities

23902.39

24828.93

926.54

Provisions

239.72

1873.54

1633.82

Total current
liabilities (B)

24142.11

26702.47

Working capital
(A-B)

137030.18

176952.46

Net increase in
working capital

39922.28

CURRENT
ASSETS:

CURRENT
LIABILITIES:

176952.46

39922.28

176952.46

86

60902.79

60902.79

FOR 2009-10 & 2010-11:

PARTICULARS

2009-10

2010-11

INCREASE

Inventories

110745.93

159839.46

49093.53

S. debtors

39733.69

48847.09

9113.4

Cash & Bank

Balances

22207.01

4876.99

DECREASE

CURRENT
ASSETS:

17330.02

Loans & Advances 30968.30

45237.67

14269.37

Total current
assets (A)

203654.93

258801.21

Liabilities

24828.93

24285

543.93

Provisions

1873.54

1704.01

169.53

Total current
liabilities (B)

26702.47

25989.01

Working capital
(A-B)

176952.46

232812.20

Net increase in
working capital

55859.74

CURRENT
LIABILITIES:

232812.20

55859.74

232812.20

87

73189.76

73189.76

TRENDS OF CHANGE IN WORKING CAPITAL:

TABLE- 14
YEAR

2006-07

2007-08

2008-09

2009-10

2010-11

WORKING
CAPITAL

112401.67

127423.6

137030.18

176952.46

232812.2
0

CHANGE IN
WORKING
CAPITAL

15021.93

9606.58

39922.28

55859.74

CHART 14

60000
50000
40000
30000
20000
10000
0
2007--08

2008-09

2009-10

2010-11

INTERPRETATION: Chart 14 shows the trend of change in working capital. From 2006-07 to
2007-08 working capital is increased by Rs. 15021.92, from 2007-08 to 2008-09 it is increased
by Rs 9606.58, from 2008-09 to 2009-10 it is increased by Rs 33922.28 and from 2009-10 to
2010-11 it is increased by Rs 55859.74.So it is clear that working capital shows the increasing
trend, so there is need of more working capital in future.

88

89

CHAPTER 5
RESULTS & DISCUSSIONS
FINDINGS & CONCLUSION

It was found that NOC in 2006-07 is 199.71 , 209.89 days in 2007-08,185.08 days in
2008-09, 216.97 days in 2009-10, 254.97 days in 2010-11

It was found that current ratio is above the standard ratio 2: 1 according to thumb rule
and it guarantees the payment of dues in time.

It was found that Liquid ratio of Vardhman textiles from 2006-11 is above the standard
ratio 1:1, so the liquidity position of Vardhman textiles is satisfactory.

It was found that absolute liquid ratio is below the standard in 2007-08 & in 2010-11 due
to very less cash and bank balance maintained. So liquidity position is not satisfactory in
2007-08 & 2010-11

It was found that working capital turnover is 1.87 in 2006-07, 1.8 in years 2007-08, 1.79
in 2008-09 and 1.55 in 2009-10 & 2010-11.

It was found that gross profit margin ratio & net profit margin ratio is good. It also clear
that liquidity position in 2010-11 is not satisfactory, but GPM is 24.12% in 2010-11 &
NPM is 13.02% which is more as compared with other years, so it shows that
profitability & liquidity positions are negatively correlated.

It was found that the trend of change in working capital is increasing day by day. From
2006-07 to 2007-08 working capital is increased by Rs. 15021.92, from 2007-08 to 200809 it is increased by Rs 9606.58, from 2008-09 to 2009-10 it is increased by Rs 33922.28
and from 2009-10 to 2010-11 it is increased by Rs 55859.74.

90

RECOMMENDATIONS & SUGGESTIONS

It is suggested to Vardhman textiles to maintain proper cash & bank balance in future in
order to meet the requirements of working capital in future because working capital has

increasing trend.
It is suggested to Vardhman textiles to control over indirect expenses in order to improve

profitability position.
It is suggested to Vardhman textiles to made investment in current assets in future so that

it can easily convert into cash and payments will be made in time.
Sufficient cash & bank balance is to be maintained because to keep excess of cash
balance has also affect profitability position.

REFERENCES
91

JOURNALS
1. NCAER (1966), Structure of Working Capital, New Delhi.
2. Appavadhanulu, Working Capital and Choice of Techniques, Indian Economic
Journal, July-Sept. 1971, Vol. XIX, pp. 34-41.
3. Chakraborty, Use of Operating Cycle Concept for Better Management of Working
Capital, The Economic and Political Weekly, August, 1973, Vol.8, pp. M69-M76.
4. Misra, Problems of Working Capital (With Special Reference to Selected Public
Understandings in India), Somaiya Publications Private Limited, Mumbai, 1975, Vol
7,pp.35-42
5. Agarwal, Management of Working Capital, Sterling Publication Pvt. Ltd., New Delhi,
1983,Vol 8,pp.95-115
6. Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh, Management of
Working Capital in India, Janaki Prakashan, New Delhi, 1986,vol 16,pp.25-36
7. Verma, Management of Working Capital, Deep and Deep Publication, New Delhi,
1989.
8. Vijaykumar and A. Venkatachalam, Working Capital Capital and Profitability An
Empirical Analysis, The Management Accountant, October 1995 p-748-750, Working
Capital Management in Sugar Mill of Tamil Nadu A Cash Study, Management and
Labour Studies, Vol. 20, No.4, October 1995, pp. 246-354.
9. Dr. Bimal Jaiswal, Ms. Namita Nigam, Ms Shikha Pandey (2006.)-A case study of
Ranbaxy laboratory limited on liquidity management,pp.1-14
10. Jani, Virendra C.(2007) Working Capital Management of Fertilizer Industry of
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BOOKS

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd,pp-210-230

Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc Graw Hill,pp-

65-89
Van Horne, James C; Fundamentals of Financial Management,pp-78-97
Rustagi R.P.; Principles of Financial Management,pp-100-143

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