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INTRODUCTION
Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and payments.
Understanding a company's cash flow health is essential to making investment
decisions. A good way to judge a company's cash flow prospects is to look at its
working capital management
(WCM).
Working capital refers to the cash a business requires for day-to-day operations or,
more specifically, for financing the conversion of raw materials into finished goods,
which the company sells for payment. Among the most important items of working
capital are levels of inventory, accounts receivable, and accounts payable. Analysts
look at these items for signs of a company's efficiency and financial
strength.
The Problems
In the management of working capital, the firm is faced with two key problems:
1. First, given the level of sales and the relevant cost considerations, what are the
optimal amounts of cash, accounts receivable and inventories that a firm should choose
to maintain?
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2. Second, given these optimal amounts, what is the most economical way to finance
these working capital investments? To produce the best possible results, firms
should keep no unproductive assets and should finance with the cheapest available
sources of funds. Why? In general, it is quite advantageous for the firm to invest in
short term assets and to finance short-term liabilities.
PURPOSE OF STUDY
The objectives of this project were mainly to study the inventory, cash and
receivable at PEC LTD., but there are some more and they are
ratios.
To suggest ways for better management and control of working capital at the
concern.
Company profile
2
Our clients can make use of our resources and expertise at any stage of a
transaction.
PEC thus offers:
Review and refinement of trade objectives thus helping a client to
craft a strategic plan for building a profitable business.
Advising clients on adapting products, pricing and distribution to
meet local needs and preferences in new markets.
Generation of a wealth of data on any transaction that a client may
contemplate, from cost estimates to the creditworthiness of
customers.
Negotiation of transactions on behalf of a client anywhere in the
world taking into account the different cultures, customs, languages
and monetary systems prevalent in that particular market.
Prepare all the necessary and indispensable paperwork required by
each legal and regulatory jurisdiction that touches a clients
transactions.
Line up the funds required to set a clients transaction in motion
and oversee payment and collection at its conclusion.
MISSION
Export and Import of bulk items viz. commodities, raw materials and bullion
etc. and develop new products and new markets.
VISION
To see new opportunities in the global and domestic market in order to sustain
a reasonable rate of growth in business.
Import of Bullion.
Chapter-2
6
RESEARCH METHODOLOGY
Then comes the financing of working capital requirement, i.e. how the
working capital is financed, what are the various sources through which it is
done.
Through this project I would study the various methods of the working
capital management.
The project would also be an effective tool for credit policies of the
companies.
7
This will show different methods of holding inventory and dealing with
cash and receivables.
This will show the liquidity position of the company and also how do they
maintain a particular liquidity position.
DATA SOURCES:
The following sources have been sought for the preparation report:
gathered.
While doing this project, the data relating to working capital, cash
management, receivables management, inventory management and short
intranet, PECs annual reports and CMA Data of the last three years.
A detailed study on the actual working processes of the company is also
done through direct interaction with the employees and by timely studying
Khan& Jain,
We cannot do comparisons with other companies unless and until we have the
end details.
Future plans of the company will not be disclosed to the trainees.
Lastly, due to shortage of time it is not possible to cover all the factors and
details regarding the subject of study.
The latest financial data could not be reported as the companys websites have
not been updated.
.
WORKING CAPITAL MANAGEMENT
CONCEPTUAL FRAMEWORK
Inventories,
Marketable securities.
It refers to firm's investment in current assets. Current assets are the assets, which
can be converted into cash with in a financial year. The gross working capital
points to the need of arranging funds to finance current assets.
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It refers to the difference between current assets and current liabilities. Net
working capital can be positive or negative. A positive net working capital will
arise when current assets exceed current liabilities. And vice-versa for negative net
working capital. Net working capital is a qualitative concept. It indicates the
liquidity position of the firm and suggests the extent to which working capital
needs may be financed by permanent sources of funds. Net working capital also
covers the question of judicious mix of long-term and short-term funds for
financing current assets.
11
For
thing,
one
PAYMENT TO SUPPLIERS
the
DIVIDEND DISTRIBU-TION
INCREASE EFFECIENY
current assets of a typical manufacturing firm account for half of its total assets.
For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has
the effect on company's risk, return and share prices,
There is an inevitable relationship between sales growth and the level of current
assets. The target sales level can be achieved only if supported by adequate
working capital Inefficient working capital management may lead to insolvency
of the firm if it is not in a position to meet its liabilities and commitments.
decision on how much working capital be maintained involves a trade off- having a
large net working capital may reduce the liquidity risk faced by a firm, but it can
have a negative effect on the cash flows. Therefore, the net effect on the value of the
firm should be used to determine the optimal amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They are the
determination of:
Flexibility
But short-term financing is more risky than long-term financing. Following table
will summarize our discussion of short-term versus long-term financing
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Maintaining a policy of short term financing for short term or temporary assets
needs (Box 1) and long- term financing for long term or permanent assets needs
(Box 3) would comprise a set of moderate risk profitability strategies. But what one
gains by following alternative strategies (like by box 2 or box 4) needs to weighed
against what you give up.
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ON THE BASIS
OF CONCEPT
ON THE BASIS
OF TIME
GROSS
WORKING
CAPITAL
NET
WORKING
CAPITAL
REGULAR
WORKING
CAPITAL
FIXED
WORKING
CAPITAL
RESERVE
WORKING
CAPITAL
VARIABLE
WORKING
CAPITAL
SEASONAL
WORKING
CAPITAL
SPECIAL
WORKING
CAPITAL
The need for current assets tends to shift over time. Some of these changes reflect
permanent changes in the firm as is the case when the inventory and receivables
increases as the firm grows and the sales become higher and higher. Other changes
are seasonal, as is the case with increased inventory required for a particular festival
season. Still others are random reflecting the uncertainty associated with growth in
sales due to firm's specific or general economic factors.
must be maintained by any firm all the times, is known as permanent working
capital for that firm. This amount of working capital is constantly and regularly
required in the same way as fixed assets are required. So, it may also be called fixed
working capital.3
The permanent level is constant while the temporary working capital is fluctuating
increasing and decreasing in accordance with seasonal demands as shown in the
figure. In the case of an expanding firm, the permanent working capital line may not
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be horizontal. This is because the demand for permanent current assets might be
increasing (or decreasing) to support a rising level of activity. In that case line would
be rising.
There are many factors that determine working capital needs of an enterprise. Some
of these factors are explained below:
PEC has the following banks available for the fulfillment of its working capital
requirements in order to carry on its operations smoothly:
Banks:
These include the following banks
o Indian Bank
o Syndicate Bank
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NAME OF BANK
FUND BASED
INDIAN BANK
300
250
SYNDICATE BANK
200
100
TOTAL
500
350
The upper portion of the diagram below shows in a simplified form the chain of
events in a manufacturing firm. Each of the boxes in the upper part of the diagram
can be seen as a tank through which funds flow. These tanks, which are concerned
with day-to-day activities, have funds constantly flowing into and out of them.
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RAW MATERIAL
CASH
OPERATING CYCLE
SALES
WORK IN PROGRESS
FINISH GOODS
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firms work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished product.
When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.
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Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors, cash
(positive or negative) and trade creditors can be viewed as tanks into and from
which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount of
cash.
Shareholders (existing or new) may provide new funds in the form of cash
Long-term loan creditors (existing or new) may provide loan finance, loans will
Unlike, movements in the working capital items, most of these non-working capital
cash transactions are not every day events. Some of them are annual events (e.g. tax
payments, lease payments, dividends, interest and, possibly, fixed asset purchases and
sales). Others (e.g. new equity and loan finance and redemption of old equity and loan
finance) would typically be rarer events.
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INVENTORY MANAGEMENT
Inventories
Inventories constitute the most important part of the current assets of large majority of
companies. On an average the inventories are approximately 60% of the current assets
in public limited companies in India. Because of the large size of inventories
maintained by the firms, a considerable amount of funds is committed to them. It is
therefore, imperative to manage the inventories efficiently and effectively in order to
avoid unnecessary investment.
Nature of Inventories
Inventories are stock of the product of the company is manufacturing for sale and
components make up of the product. The various forms of the inventories in the
manufacturing companies are:
Raw Material: It is the basic input that is converted into the finished product
through the manufacturing process. Raw materials are those units which
have been purchased and stored for future production.
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ordering costs will be relatively small. Thus, ordering costs decrease with the
increasing size of inventory.
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value and would require simple control. B items fall in between the two
categories and require reasonable attention of management.
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Chapter 3
DATA ANALYSIS AND INTRPRETATION
YEARS
2011
2012
2013
2014
2015
CR
1.044
1.062
1.074
1.095
1.042
Table 1.1
1.1
1.09
1.08
1.07
1.06
Column3
1.05
1.04
1.03
1.02
1.01
2011
2012
2013
2014
2015
Figure 1.1
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Interpretation:
YEARS
2011
2012
2013
2014
2015
LR
0.789
0.915
0.399
1.026
0.971
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1.2
1
0.8
0.6
Column3
0.4
0.2
0
2011
2012
2013
2014
2015
Figure 1.2
Interpretation:
years
2011
2012
2013
2014
2015
ROA
0.024
0.027
0.029
0.011
0.038
0.04
0.04
0.03
0.03
0.02
Column3
0.02
0.01
0.01
0
2011
2012
2013
2014
2015
Interpretation:
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years
2011
2012
2013
2014
2015
DTR
3.38
2.98
0.55
3.20
2.33
32
3.5
3
2.5
2
Column3
1.5
1
0.5
0
2011
2012
2013
2014
2015
Interpretation:
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years
2011
2012
2013
2014
2015
CTR
2.10
0.417
3.047
3.341
3.5
3
2.5
2
Column3
1.5
1
0.5
0
2011
2012
2013
2014
2015
Interpretation:
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YEARS
2011
2012
2013
2014
2015
D/E
20.1
16.80
14.81
9.66
22.19
35
25
20
15
Column3
10
0
2011
2012
2013
2014
2015
INTERPRETATION:
years
NPR
2011
2012
2013
2014
2015
0.711
0.720
0.832
0.007
-3.370
1
0.5
0
-0.5
-1
2011
2012
2013
2014
2015
Column3
-1.5
-2
-2.5
-3
-3.5
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Interpretation:
years
WCTR
2011
2012
2013
2014
2015
2.60
3.11
3.19
3.42
2.32
38
3.5
3
2.5
2
WCTR
1.5
1
0.5
0
2011
2012
2013
2014
Interpretation:
39
years
2011
2012
2013
2014
2015
NWC
0.026
0.031
0.03
0.034
0.023
0.04
0.03
0.03
0.02
Column3
0.02
0.01
0.01
0
2011
2012
2013
2014
2015
Interpretation:
CONCLUDING ANAYSIS
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The working capital position of the company is sound and the various sources
through which it is funded are optimal.
The company has used its purchasing, financing and investment decisions to good
effect can be seen from the inferences made earlier in the project.
The debts doubtful have been doubled over the years but their percentage on the
debts has almost become half. This implies a sales and collection policy that get
along with the receivables management of the firm.
The various ratios calculated are an indicator as to the fact that the profitability of
the firm and sales are on a rise and also the deletion of the inefficiencies in the
working capital management.
The firm has not compromised on profitability despite the high liquidity is
commendable.
PEC ltd. has reached a position where the default costs are as low as negligible and
where they can readily factor their accounts receivables for availing finance is
noteworthy.
BIBLIOGRAPHY
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Following sources have been sought for the preparation of this report:
Corporate Intranet
CMA Data
Internet ----
www.PEC.co.in
www.scribd.com
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