2010-11

SUBMITTED TO :- CHAND TANDON

ASSIGNMENT ON WORKING CAPITAL 2
MANAGEMENT
Working Capital Management of DLF
SUBBMITED BY:-VIVEK KUMAR GUPTA; ROLL NO: 106
 3

TABLE OF CONTENT
Pg no.

➢ Company Profile
3
➢ Working Capital Management
4
• Meaning
• Factors Affecting working capital
• Working capital cycle
➢ Working capital management
6
➢ Kinds of Working capital
8
➢ Inventory management at Dlf
13
➢ Methods used for inventory control
4
15
➢ Cash management at dlf
15
➢ Receivable management at dlf
16
➢ Key working capital ratios
17
➢ Interpretation of ratios
19
➢ Calculation of working capital
24
• Current asset holding period
• Ratio to sales
• Ratio to fixed investment

WORKING CAPITAL MANAGEMENT

For
 DELHI LAND AND FINANCE 5

(DLF)
DLF Limited or DLF (Delhi Land and Finance) is the India's
biggest real estate developer based in New Delhi, India. The DLF
Group was founded by Raghuvendra Singh in 1946. DLF developed
residential colonies in Delhi such as Shivaji Park ( which was
actually its first one), Rajouri Garden, Krishna Nagar, South
Extension, Greater Kailash, Kailash Colony and Hauz Khas. In
1957, with the passage of Delhi Development Act, the local
government assumed control of real estate development in Delhi
and banned private real estate developers.
As a result DLF began acquiring land at relatively low cost outside
the area controlled by the Delhi Development Authority, in the
district of Gurgaon, in the adjacent state of Haryana. In the mid-
1970s, the company started developing DLF City project at
Gurgaon. Its upcoming
planinclude hotels, infrastructure and special economic zones-
related development projects.

• In this report I have highlighted the (working capital

management of DLF), focusing on different components of
working capital like, cash management, inventory
management etc. Various necessary ratios have been
 calculated in order to analyze the financial stability of the
6
company.
• Thereafter the working capital requirement of overall DLF has
been calculated. After that analysis of working capital has
been done.

WORKING CAPITAL MANAGEMENT

(WORKING CAPITAL (DEFINITION)

Working capital refers to the funds invested in current assets i.e.

sundry debtors, inventories, cash & bank balance and other current
assets. In other words, the fund requires supporting day to day
operations such as purchase of raw materials, payments of wages
and defraying other expenses for operations

FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS

Nature of business: The nature of business influences to a great

extent the amount of working capital to be required to run the
business.

Size of business: Large business requires large amount of

working capital than a small business where operations are
relatively less, though they engaged in the same type of business
operations.
Production policy: The need for working capital will vary
7
according to production plans.

Operating efficiency: Optimum utilization of resources at

minimum costs as a result of which profitability increases. It helps
in increasing generation of internal funds which reduces the
pressure on working capital.

Credit policy: The credit policy of the firm also determines the
working capital requirement.

Supply of raw materials: If supply of raw materials is regular

then there is no necessary to maintain a huge level of inventory &
no blocking of working capital unnecessarily.

Market Conditions: Working Capital requirements are also

affected by market conditions like degree of competition.

Condition of supply: The inventory of raw materials, spares

and stores depends on the conditions of supply.

Dividend Policy: Dividend policies affect Working Capital.

Growth and Expansion: Growth and expansion of a firm

requires adequate working capital.

Abnormal Factors: Working Capital requirement is also affected

by the abnormal factors like strikes, lockout, inflationary
conditions etc.
8

1. Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the

business's life blood and every manager's primary task is to help
keep it flowing and to use the cash flow to generate profits. If a
business is operating profitably, then it should, in theory, generate
cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire.

The faster a business expands the more cash it will need for
working capital and investment. The cheapest and best sources of
cash exist as working capital right within business. Good
management of working capital will generate cash will help
improve profits and reduce risks. The business should bear in mind
that the cost of providing credit to customers and holding stocks
can represent a substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash -
Inventory (stocks and work-in-progress) and Receivables
(debtors owing you money). The main sources of cash are
Payables (your creditors) and Equity and Loans.
 9

WORKING CAPITAL MANAGEMENT

The term Working capital management refers to the management

efforts for optimizing the working capital and improving the
productivity of the short term capital invested in the Business. It
includes decisions relating to working capital and short term
financing and involves managing the relationship between a firm's
short-term assets and its short-term liabilities. The goal of working
capital management is to ensure that the firm is able to continue
and that it has sufficient cash flow to satisfy both maturing short-
term debt and upcoming operational expenses.
• Cash management - Identify the cash balance which allows
10
for the business to meet day to day expenses, but reduces
cash holding costs.

• Inventory management - Identify the level of inventory

which allows for uninterrupted production but reduces the
investment in raw materials - and minimizes reordering costs
- and hence increases cash flow.

• Debtor’s management - Identify the appropriate credit

policy, i.e. credit terms which will attract customers, such that
any impact on cash flows and the cash conversion cycle will
be offset by increased revenue and hence Return on Capital
(or vice versa); see Discounts and allowances.

• Short term financing - Identify the appropriate source of

financing, given the cash conversion cycle: the inventory is
ideally financed by credit granted by the supplier; however, it
may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".
 11
• Managing payables - Creditors are a vital part of effective
cash management and should be managed carefully to
enhance the cash position.

KINDS OF WORKING CAPITAL

Kinds of working capital are shown in the following chart:-

CONCEPTS OF WORKING CAPITAL

The concept of Working Capital includes Current Assets and

Current Liabilities both. There are two concepts of Working Capital
they are Gross and Net Working Capital.

1. Gross Working Capital: Gross Working Capital refers to the

firm's investment in Current Assets. Current Assets are the assets,
which can be converted into cash within an accounting year or
operating cycle. It includes cash, short-term securities, debtors
(account receivables or book debts), bills receivables and stock
(inventory).
2. Net Working Capital: Net Working Capital refers to the
12
difference between Current Assets and Current Liabilities are those
claims of outsiders, which are expected to mature for payment
within an accounting year. It includes creditors or accounts
payables, bills payables and outstanding expenses. Net Working
capital can be positive or negative. A positive Net Working Capital
will arise when Current Assets exceed Current Liabilities and vice
versa.

On the basis of TIME, working capital may be classified as:

➢ Permanent Working Capital - Permanent or fixed working

capital is the minimum amount which is required to ensure
effective utilization of fixed facilities and for maintaining the
circulation of current assets. As the business grows, the
requirements of permanent working capital also increases due o
the increase in current assets.
The permanent working capital can further be classified as
regular working
Capital. Working capital required to ensure circulation of current
assets from cash to inventories, from inventories to receivables
and from receivables to cash and so on is known as regular
 working capital. Reserve working capital is the excess amount
13
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. it is required by
the enterprise to carry out its normal business operations.

➢ Temporary or Variable Working Capital - Temporary or

variable working capital is the amount of working capital which
is required to meet the seasonal demands and some special
exigencies. Variable working capital can be further classified as
seasonal working capital and special working capital. Most of the
enterprises have to provide additional working capital to meet
the seasonal and special needs. The capital required to meet the
seasonal needs of the enterprise is called seasonal 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.

DIFFERENCE BETWEEN TEMPORARY WORKING CAPITAL AND

PERMANENT WORKING CAPITAL
Temporary working capital differs from permanent working capital
14
in the sense that it is required for short periods and cannot be
permanently employed gainfully in the business.

OBJECTIVES OF WORKING CAPITAL

Every business needs some amount of working capital. It is needed
for following purposes-
• For the purchase of raw materials, components and spares.
• To pay wages and salaries.
• To incur day to day expenses and overhead costs such as fuel,
power, and office expenses etc.
• To provide credit facilities to customers etc.

ADVANTAGES
• It helps the business concern in maintaining the goodwill.
• It can arrange loans from banks and others on easy and
favorable terms.
• It enables a concern to face business crisis in emergencies such
as depression.
• It creates an environment of security, confidence, and overall
efficiency in a business.
• It helps in maintaining solvency of the business.

ADEQUACY OF WORKING CAPITAL

A firm must have adequate working capital. It should neither be
15
excessive nor inadequate. Excessive working capital is a situation
where in the firm invests excessive funds in working capital. These
excessive or idle funds earn no profit for the firm.

DANGERS OF EXCESS WORKING CAPITAL

• It may result in unnecessary accumulation of inventory which

may lead to increase in wastage due to mishandling, theft etc.

• It is an indication of defective credit policy. There is the

possibility of higher incidence of bad debts.

• It may lead to complacency in managing day-to-day expenses

of the firm.

• Executives may be tempted to spend more

• Excessive working capital means idle funds which earns no

profit for the business, and thus cannot earn proper rate of
return on its investments.

• It may result into overall inefficiency in the organizations.

• When there is excessive working capital relation with banks

and other financial institutions may not be maintained.
 • The redundant working capital gives rise to speculative
16
transactions.

• Due to low rate of return on investments the value of shares

may also fall.

• In case of redundant working capital there is always a chance

of financing long term assets from short term funds which is
very harmful in long run for any organization

Inadequate working capital is a situation where in the firm

does not have sufficient funds to meet day to day running
expenses. This ultimately results in interruption in the
production process.

DANGERS OF INADEQUATE WORKING CAPITAL

• Operating inefficiencies creep in when it becomes difficult of

meet day-to-day commitments.

• It becomes difficult to implement operating plans and achieve

firm’s targets.

• It directly affects firm’s liquidity position and the firm may find
it difficult to honor short-term obligations.
 • It cannot by its requirements in bulk and cannot avail of
17
discounts it stagnates growth.

• It becomes difficult for the firm to exploit favorable market

conditions and undertake profitable projects due to non
availability of working capital funds.

• It becomes impossible to utilize efficiently the fixed assets

due to non availability of liquid funds thus the firm’s
profitability would deteriorate.

ii) SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT OF DLF

INVENTORY MANAGEMENT AT DLF

The investment in inventory in production is a dominant

determinant of working capital management. It holds much
important in context of DLF as it is having a long production cycle
where a good amount of capital is tied up in form of raw material,
work in progress and conversion cost. Production planning and
control department plays a pivotal role in inventory management.
The engineering department plays a supporting role and provides
the
requisition regarding technology to be applied and material
18
requires to PPC department. In DLF the inventory control is perform
with following steps: -

1. Planning -
This is done by PPC department is consultation with purchase,
commercial, design and manufacturing department prepares the
planning schedule. This schedule along with information provided
by engineering and design department helps in material planning
and inventory control.

2. Procurement –
The procurement is done by purchase department. It is done with
the assistance of PPC and commercial department for maintaining
a tradeoff between carrying costs and ordering cost. A single
purchase order is placed for the entire quantity of a specific item
and its scattered delivery over a period of time is received. This
method helps in obtaining cash and quantity discounts and saving
carrying cost. In case of foreign purchase also one order is placed
for the full requirement of an item and scattered delivery is opted
because variation caused in material cost due to fluctuation in
exchange rate is much less than the carrying cost of the material
19
which is approximately 25% of the total price.
3. Receipt and Custody
For the proper inventory control on receipt of material in store,
quality control department checks the material as per
specification. The cost section fills details of all the purchase by
issuing store receipt voucher and material issue voucher.
4. Issue
After receiving the material and storing, the management keeps
the information whether these material are being issued to desired
destination. Full record of every issuing of material is kept for the
proper inventory control.
5. Accounting-
The record of every transaction regarding the use of
Material in every department is kept. These records give the
Overall view of how and where inventories have been used.

Methods Used For Inventory Control

In DLF, planning and control of inventory is done by
20
Using two methods —
(i) ABC analysis
(ii) Slow moving and non-moving goods Analysis.
(iii) Budgeting material requirements
(iv) Fixation of raw material levels
(v) Variety reduction
(vi) Codification of materials
(vii) Control of work in progress

In case of manufacturing company like DLF, the number of items of

raw material runs into thousands. From the point of view of
monitoring information for control, it becomes extremely difficult to
consider each one of these items. In this case ABC analysis
becomes useful and enables management to concentrate attention
and keeps a close watch on a relatively less number of items,
which account for a high percentage of annual usage value of all
items of inventory.
Annual usage value = Annual requirement per unit cost.

CASH MANAGEMENT AT DLF

 21
In D.L.F., the centralized cash credit system is followed.
From 24-09-80 all the banking transactions of the company have
been centralized at corporate office, New Delhi. Under this system
all the sales proceeds of the units are deposited in a centralized
account. This account number is universal for all the units of
ROD’s. For meeting day to day expenses, the units have to
prepare the estimates of such expenses, which are then sent to
corporate office weekly, or monthly, or both. At unit level, the cash
budget is prepared on yearly basis for estimating the expected
cash inflows and outflows. The yearly budget is broken down into
monthly and weekly intervals. The inflows and outflows are
estimated on the following basis. The only source of cash inflow for
unit is corporate office. The sale proceeds cannot be directly
utilized. Based on the above requisitions, the corporate office
allocates the funds. For cash credit, corporate office will negotiate
with consortium of Banks for total cash credit required for the
company as the whole. A consortium deed for hypothecation of
stocks and stores of company is executed by corporate office. All
the information, documents etc. required in this connection will be
called for by the corporate office from the division.\ Arrangements
have been already been made by the State Bank of India, HDFC
Bank, Canara Bank, Bank of Baroda and Indian Overseas Bank for
22
centralizing total cash credit limits at New Delhi.

RECEIVABLE MANAGEMENT AT DLF

DLF grants liberal terms regarding trade credit to lure the potential
customers to buy its product at favorable selling prices. To utilize
its excess capacity, DLF is granting liberal trade credit terms to its
customers. All the DLF units are having their commercial
department. Commercial department and Regional Operational
Divisions (RDOs) primarily carry out the job of recovery from the
customers. The sales section of finance department also actively
takes part in receivable management by preparing and sending
invoices and reminders to customers at appropriate time. They
keep track of money received from customers as advances, as
against dispatch of finished goods and money recoverable on
account of price variation claims and conversion of deferred debts into
debtors. This monitoring is done work order wise. The aging
schedule of customers is also prepared which gives the record
regarding period of outstanding balances. The terms and
conditions with the customers are finalized according to the credit
policy laid down by corporate office, DLF. However deviations are
permitted with the due approval from corporate office. While lying
down of credit policy by the head office, industry conditions are
23
taken into consideration. Seeing huge investment in execution of
work order, DLF demands considerable payment in advance in
different phases of completion of work i.e. erection, installation,
commissioning, maintenance etc. Despite all these DLF is presently
facing cash crunch because a major chunk of DLF’s customers
consists of government bodies, which are very casual in clearance
of dues.

KEY WORKING CAPITAL RATIOS AND THEIR

INTERPRETATIONS

DEBTORS TURNOVER RATIO

This ratio shows how many times sundry debtors (accounts

receivable) turn over during the year. It is defined as Net credit
sales / Average sundry debtors. A high ratio is indicative of
shorter time lag between credit sales and cash collection. A low
ratio shows that debts are not being collected rapidly. The analysis
of the debtor’s turnover ratio supplements the information
regarding the liquidity of one item of current assets of the firm.
After analyzing the debtors’ turnover of DLF it is clear that DLF
follows a liberal credit policy.
DEBTORS HOLDING PERIOD (in days)
24
DEBTORS/
MAR2006 MAR2007 MAR2008 MAR2009 (TURNOVER/365)
180 188.98 204.25 208.04

CREDITORS HOLDING LEVEL

CREDITORS/(PURCHASE/365)

On average, you pay your suppliers every x days. If you negotiate

better
(in days) (or Purchases) credit terms this will increase. If you pay
earlier, say, to get a discount this will decline. If you simply defer
paying your suppliers (without agreement) this will also increase -
but your reputation, the quality of service and any flexibility
provided by your suppliers may suffer.
MAR2006 MAR2007 MAR2008 MAR2009
121 123 129 115

Creditors holding period is decreasing which is a good sign for the

company because it shows that the creditors are being paid in
time.
 25
STOCK TURNOVER IN DAYS

Stock Turnover Average Stock * 365/ = x days on average, you

turn over the value of your entire stock every x days.
(In days) Cost of Goods Sold You may need to break this down into
product groups for effective stock management.

Obsolete stock, slow moving lines will extend overall stock

turnover days. Faster production, fewer product lines, just in time
ordering will reduce average day
 PARTICULARS FORMULA (2006- (2007- (2008- 26

SL.N 2007) 2008) 2009)

O
1 RAW 10281. 11850. 17625.
MATERIAL(RM) 86 87 05
CONSUMPTION
2 PER DAY 1/365 28 32 48
3 RM 1942.4 2632.6 3582.8
BALANCESHEET 9 4 3
4. HOLDING LEVEL 3/2 70 81 74
5. COST OF 14049. 16074. 22438.
PRODUCTION 92 99 5
6. PER DAY 5/365 38.48 44.02 61.48
7. STK IN 1875.6 2548.5 3612.5
PROGRESS 3 3 9
(BALANCESHEET
)
8. HOLDING LEVEL 7/6 49 58 59
9 COST OF SALES 14506. 17145. 24024.
72 35 27
10. PER DAY 9/365 39.74 46.97 65.82
CURRENT RATIO
27
CURRENT ASSET/CURRENT LIABILITY

The current ratio measures the company’s ability to pay its current
debt. The current assets are used to pay current debts as current
assets get converted into cash in the operating cycle of the firm.
C.R 2:1 is taken as standard which means that each rupee of
current liabilities should be backed by current assets valued two
rupees. Normally a ratio under 1 suggests that the company would
be unable to pay off its obligations if they become due at that
point.

MAR 2006 MAR 2007 MAR 2008 MAR 2009

1.58 1.46 1.39 1.30

QUICK RATIO

QUICK RATIO
MAR MAR MAR MAR
2006 2007 2008 2009
1.22 1.17 1.11 1.02
An Acid test ratio 1:1 is considered normally to be satisfactory. The
28
acid test ratio of DLF is still at a comfortable level. This means for
any immediate requirements or payments of current liabilities
enough current assets exist. Payments. Acid test ratio of DLF also
signifies that without debtors & inventories as part of current
assets the firm still has a good liquidity position.

WORKING CAPITAL RATIO

Mar Mar Mar’0

'07 '08 9
12 12 12
PARTICULARS mont mont Mont
hs hs hs
Working capital turnover
ratio=Cost of goods 2.14 2.14 2.80
sold/Net working capital
Inventory To Working
Capital 0.91
0.62 1.52
Ratio=Inventory/Working
Capital
Ratio of Current Assets to
Fixed Ratio=Current 16.24 16.90 14.01
Assets/Fixed Assets
 ANALYSIS
29
• After analyzing the above ratios it is evident that Working capital
turnover ratio is fluctuating due to the fluctuating cost of capital
& amount of net current assets. For the first two financial years
the ratio remained constant as the proportion of increment of
cost of capital & w/c is same as the previous year’07. The overall
ratio does not indicate any steady growth of w/c.

• Inventory to working capital ratio has increased in 2008-09 due

to the increase in cost of inventories.

• Ratio of current assets to fixed assets is gradually decreasing. It

is because of the increase of fixed assets. It indicates the strong
fixed assets in the company balance sheet.

CALCULATION OF WORKING CAPITAL OF DLF

 30
PARTICULARS ACTUAL ACTUAL ACTUAL ACTUAL
2005- 2006- 2007- 2008-
2006 2007 2008 2009
Crores (Rs. (Rs. (Rs.
Crores) Crores) Crores)
CURRENT ASSETS
INVENTORY 3744.37 4217.67 5736.40 7837.02

SUNDRY DEBTORS 7168.07 9701.82 11976.87 15978.50

CASH & BANK 4135.97 5808.91 8386.02 10314.67

BALANCES

OTHER CURRENT 84.50 199.70 421.09 350.21

ASSETS

LOANS&ADVANCES 1199.87 1140.87 1387.80 2423.67

TOTAL A 16332.7 21069.97 27908.18 36904.07

8
CURRENT
LIABILITIES&
PROVISIONS B

CURRENT LIABILITIES 8807.74 11897.87 16576.45 23357.32

PROVISIONS 1512.28 2522.24 3445.85 4975.58

TOTAL B 10320.0 14420.11 20022.30 28332.90

2
NET CURRENT A- 6012.7 6649.86 7885.88 8571.17
ASSETS B 6
31
GRAPH SHOWING NET CURRENT ASSETS OVER THE YEARS
32

In the above figure we find that the working capital of DLF is

constantly growing. Therefore it is seen that working capital is
being adequately maintained each year which also means that DLF
plans very well the various sources of short term finance DLF not
only studies the trend of its working capital positions but also
efficiently minimizes the cost of short term finance.

USING DIFFERENY APPROACHES OF ESTIMATING WORKING CAPITAL

THE WORKING CAPITAL REQUIREMENT OF DLF IS DETERMINED

Estimating working capital requirements

The basic formulae for calculating working capital is the difference

between current assets and current
Liabilities (working capital = current assets – current liabilities) and
33
a ratio of 2:1 is considered as ideal or
Standard i.e. for every 1 unit of current liability there should be 2
units of current assets. However, there are
few approaches which have been successfully applied in practice.
1. Current assets holding period: To estimate working capital
requirements on the basis of average holding period of current
assets and relating them to costs based on the company’s
experience in
the previous years. This method is essentially based on the
operating cycle concept.
2. Ratio to sales: To estimate working capital requirement as a
ratio of sales on the assumption that current assets change with
sales.
3. Ratio to fixed investment: To estimate working capital needs
as a percentage of fixed investment.

(ALL FIGURES IN INR CRORES ASSUMPTIONS MADE AS PER 1

MONTH)

(ALL FIGURES IN INR CRORES ASSUMPTIONS MADE AS PER 1

MONTH)

1. CURRENT ASSET HOLDING PERIOD

Calculating the 12 months average holding period of current

assets,

A. INVENTORY
(a) Raw material (one month’s supply)
= Raw material consumed in a year /12 34

(MARCH 2009)1762.05/12 = 1469

(b) WIP

Work-in-progress (one month’s supply)

= Work-in-progress/12
(MARCH 2009) 3612.59/12 =301

(C) FINISHED GOODS

Finished goods3 (one month’s supply)

Finished goods/12
(MARCH 2009) 22246/12 = 1854

TOTAL INVENTORY NEEDS- (1468+301+1854) = 3623

B.SUNDRY DEBTORS (1 month’s sale)

ANNUAL SALES (2008-2009)/12

28033/12 =2336

C.CASH AND BANK BALANCES (1 months total production cost)

Total production cost as per schedule/12

22439.5/12 = 1870
Therefore adding A, B, &C we get total working capital requirement
35
3623+2336+1870 = 7829

However, this method is subject to error if the business is prone to

seasonal fluctuations.

2. Ratio to Sales:
The average percentage is calculated based on the assumption
that sales of next FY 2010 will grow by 22.60%

AVERAGE % OF CURRENT ASSET TO SALES

PARTICULARS MARCH MARCH2008 MARCH
2007 2009
SALES 18738 21402 28033
CURRENT 21069.97 27908.18 36904.07
ASSETS(C.A)
% OF(C.A) TO 112.40% 130.40% 131.63%
SALES
AVG % 124.81
or 125

It is assumed that in FY 2010, increase in sales is 22.60%. Hence,

the sales in FY 2010 is 28033*122.60/100 = INR 34368.45 crores.
Average sales growth = Sales growth rate over past three
years/number of years
= [22.60 (FY2009) + (31) (2008) + 14.21(2007)]/3
= 22.60
Therefore, the amount of working capital requirement is 125% of
sales (2009), INR 28033 crores, which is 36
INR 35041 crores
This approach has limited reliability because it depends on the
accuracy of sales estimation. In case of inaccurate sales
estimation, the percentage calculation of current assets to sales
will go wrong and hence the working capital requirement will also
go wrong.

3. Working capital ratio of Fixed Investment: This method is

generally not used in practice as this method also depends on the
level of accuracy of fixed investments calculation.

However, it is observed that every approach of estimating working

capital requirements have some limitations. It depends on the
nature of the industry and company’s capability in managing
current assets which determine the working capital requirements.