Working Capital Management of Shakti Engineering LTD

Evaluation and Analysis of Working Capital Management
of
Shakti Engineering Limited

Submitted by
WWW.ASSIGME!"#I!.C#M
1
$$$.Assignment"oint.%om
&.'& Introdu%tion
Working capital management implicates the administration of current assets as well as
current liabilities. It is the main part of a firms short-term financial planning since it
encompasses the management of cash, inventory and accounts receivable. Working
capital management is most important for several reasons. The current assets of a typical
manufacturing firm account for over half of its total assets. !cessive levels of current
assets can easily result in a firm reali"ing a substandard return on investment. #owever,
firms with too few currents assets may incur shortages and difficulties in maintaining
smooth operations.
$or small companies, current liabilities are the principal source of e!ternal financing. The
fast growing but larger company also makes use of current liability financing. $or these
reasons the financial manager and stuff devote a considerable portion of their time to
working capital matters. The management of cash, accounts receivable, accounts payable,
accruals and other means of short term financing is the direct responsibility of the
financial manager.
Through the survey I tried to find out how efficiently %&hakti ngineering 'imited(
manages their working capital.
&.'( #b)e%tive of !he *eport
The primary ob)ective of this report is to fulfill the re*uirement of the ++, program.
,nother ob)ective of the report is to prove my e!perience through internship program.
The specific ob)ectives of this report are
valuation of working capital management
valuation of 'i*uidity position - working capital utili"ation
,naly"ing the level of current assets with relation to current liabilities
.
&.'+ S%ope of !he *eport
The report will focus on the practices of working capital management in &hakti
ngineering 'td. This report has been prepared on the basis of e!perience gathered
during the period of internship. /ost of the data used in the reporting of the study are
from secondary sources. ,ll the data related to the reporting re*uirements are not
available due to confidential reservation practices for the benefit of the organi"ation.
There are very few similar organi"ations in our country. &o I was not able to compare
with other companies.
&.', Methodology
Two types of data are collected, one is primary data and second one is secondary data.
0rimary data were collected from the employees of the division in the branch while
working there as an internee. ,nd the details were collected from a number of secondary
sources.
"rimary data %olle%tion "ro%ess-
$ace to face conversation with officers and staff
Se%ondary data %olle%tion "ro%ess-
1ifferent file study.
1ifferent books.
Analyti%al tools-
/icrosoft e!cel was used to analy"e the data.
1ifferent tables and graphs were used to represent the analysis.
&.'. Limitation
It is observable that almost all studies have some boundaries. 1uring performing my
work, I had to face some unavoidable limitations.
There were some confidential issues like financial issues, for which they were very strict
and careful in revealing those information. ,lthough they have provided all the possible
2
information but there were some inade*uacy of information.
'ack of enough materials like books, )ournals and other papers capture me for severe
brainstorming during working this report.
(.'& About the Company
&hakti ngineering 'imited was established in 1345. The primary ob)ective of the
6rgani"ation is to provide engineering, engineering-management and manufacturing
services in various fields. The corporate operational spirit since inception - recogni"ing
the sever resource constrains in the country has been %0rogress through innovation and
fficiency.(
(.'( Company Management
A. M. M. Nurul Anam
Managing Director
Lutful Anam
Executive Director
Md. Imazul Islam
Assistant General Manager
Sharif Md Naimul Amin
Assistant General Manager (Finance &
Admin)
(.'+ Mission Statement...
To be a 0rofitable nterprise of International &tandards,
6rgani"ed and run 0rofessionally,
With #igh fficiency.
$inancial 7rowth of the 8ompany must ensure a proportional
improvement in long term financial prospects of the people working in the
company.
9
(.', /uality Assuran%e
To ensure the *uality of products, the company follows a standard *uality control system
and maintains strict vigil throughout the production process. The company has promptly
inspects of the *uality of raw materials used at its manufacturing unit. $urther the
finished products are again scrutini"ed by the *uality control inspection to prevent any
sub standard product to reach the hands of the customer. In addition to it the company
takes pride to ac*uire with the fact that the company has not received any complaints
from the customers.
(.'. !he Manufa%turing 0ivision
The 6rgani"ation is manufacturing electrical e*uipment - mainly 1istribution
Transformers, &witchgear and 0$I 0lant. &' has successfully designed and
manufactured transformer in 11:;.91< => 2 phase and 5.2.<:;..9 => 1-phase ranges,
besides other special transformers. The organi"ation is recogni"ed as manufacturer of
transformer by all 0ower &upply ?tilities in the country dealing with electric power
systems.
The firm has attained capacity of manufacturing transformers from < k>, to . />, of
voltage up to 22 k>. The company has supplied more than 1;;; transformers to
7overnment, &emi-government ,uthorities and 0rivate companies. The maintenance and
repairing section of &hakti ngineering 'imited has repaired nearly .;;; transformers.
/anufacture, supply and installation of #igh-tension switchgear, 'ow tension &witchgear
and 0ower $actor Improvement @0$IA plant are also undertaken by the company.
&hakti ngineering 'imited has manufactured and supplied voltage regulators, ?0&,
changeover switches, etc, and has provided services for installation and maintenance of
<
thesecustomers.
(.'1 "rodu%t *ange
!ransformer
"hase
2olt3
Amp
4k2A5
"rimary to
Se%ondary 2oltage
4k25
6re7uen%y
4895
+ .' : (''' && ; '.,&. ++ ; ,&. .';1'
& . : <.
1.+. ;
'.(,
&& ; '.,&. .';1'
8! S$it%h3gear 4$ith
2C=> L=S and S615
2oltage 4k25 Current 4A5
&&
1+' ; ?'' ; &(.' ;
other
L! S$it%h3gear &'' A to ?''' A
"6I plant &' k2Ar to (''' k2Ar
I"G up to &.'' 2A
2oltage Stabili9er up to &''' k2A
Auto %hangeover s$it%h 3
Isolation and #ther Spe%ial
!ransformers
as per order

5
(.'< !ele%ommuni%ation 0ivision
&hakti ngineering 'td is providing point-to-point &atellite Telecommunication 'inks
through >&,T as representative of 0,= 1,T,86/ 'I/IT1, 0akistan. Till date such
satellite telecommunication 'inks have been provided to ?&,, &ingapore, Thailand and
#ong =ong.
&ince 133<, &hakti ngineering 'imited has been working in the field of satellite
telecommunication system. The first >&,T @>ery &mall ,perture TerminalA link was
commissioned by the company as +angladesh Bepresentative of 0ak 1atacom 'td.
&everal international >&,T links connected to #awaii, &ingapore, #onk =ong and
+angkok and domestic links located between 1haka, 8hittagong, =hulna, +arisal and
&ylhet have been provided by the company. &' provides full after sales service and
.9!C!25< network monitoring and maintenance.
(.'? Servi%es
0oint to point >&,T link to Internet &ervice 0roviders @I&0A and 8orporate ?sers
0oint to 0oint and 0oint to /ultipoint Badio 'inks
(.'@ Company "rovides
8ustomi"ed solution.
.9!C!25< network monitoring.
.9!C!25< network maintenance.
Duick /aintenance &ervice and network e!pansion.
1ata circuit available from 59 kbps to 4 /bps and +road +and Badio up to 11 /bps.
#igh Duality and wide footprint coverage through 'oral 8yberstar@,gila . and otherA,
&hin &atellite @ThaicomA, ,siasat, ,pstar, Intelsat.
C
$le!ible packaging- *uipment, space segment, full circuit, half circuit basis as per
customer choice.
Eetwork availability of 33.4F and above.
(.&' "artners A Asso%iates
0,= 1atacom 'imited
&ingapore Technologies lectronics
&#IE &atellite
&ing Tel
Badyne 8om&tream
7/I 0ramac 7roup
/icroelectronics Technologies inc.
'6B,' &kynet
&?/,E
Eippon &teel
/i-8heng
&avita 8hemicals
4
+.'& Cash Management
8ash is the important current asset for the operations of the business. 8ash is the basic
input needed to keep the business running on a continuous basis it is also the ultimate
output e!pected to be reali"ed by selling the service or product manufactured by the firm.
The firm should keep sufficient cash, neither more nor less. 8ash shortage will disrupt the
firms operations while e!cessive cash will simply remain idle, without contributing
anything towards the firms profitability. Thus a ma)or function of the $inancial /anager
is to maintain a sound cash position.
8ash is the money which a firm can disburse immediately without any restriction. The
term cash includes currency and che*ues held by the firm and balances in its bank
accounts. &ometimes near cash items, such as marketable securities or bank time deposits
are also included in cash. The basic characteristics of near cash assets are that they can
readily be converted into cash. 8ash management is concerned with managing ofG
iA 8ash flows in and out of the firm
iiA 8ash flows within the firm
iiiA 8ash balances held by the firm at a point of time by financing deficit or inverting
surplus cash.
&ales generate cash which has to be disbursed out. The surplus cash has to be invested
while deficit cash has to be borrowed. 8ash management seeks to accomplish this cycle
at a minimum cost. ,t the same time it also seeks to achieve li*uidity and control.
Therefore the aim of 8ash /anagement is to maintain ade*uate control over cash
position to keep firm sufficiently li*uid and to use e!cess cash in some profitable way.
3
The 8ash /anagement is also important because it is difficult to predict cash flows
accurately. 0articularly the inflows and that there is no perfect coincidence between the
inflows and outflows of the cash. 1uring some periods cash outflows will e!ceed cash
inflows because payment for ta!es, dividends or seasonal inventory build up etc. 6n the
other hand cash inflows will be more than cash payment because there may be large cash
sales and more debtors reali"ation at any point of time. 8ash /anagement is also
important because cash constitutes the smallest portion of the current assets, yet
managements considerable time is devoted in managing it. ,n obvious aim of the firm
now-a-days is to manage its cash affairs in such a way as to keep cash balance at a
minimum level and to invest the surplus cash funds in profitable opportunities. In order to
resolve the uncertainty about cash flow prediction and lack of synchroni"ation between
cash receipts and payments, the firm should develop appropriate strategies regarding the
following four facets of cash management.
&. Cash "lanning- 3 8ash inflows and cash outflows should be planned to pro)ect cash
surplus or deficit for each period of the planning period. 8ash budget should prepared
for this purpose.
(. Managing the %ash flo$s- 3 The flow of cash should be properly managed. The cash
inflows should be accelerated while, as far as possible decelerating the cash outflows.
+. #ptimum %ash level- 3 The firm should decide about the appropriate level of cash
balances. The cost of e!cess cash and danger of cash deficiency should be matched to
determine the optimum level of cash balances.
,. Investing surplus %ash- 3 The surplus cash balance should be properly invested to
earn profits. The firm should decide about the division of such cash balance between
bank deposits, marketable securities and inter corporate lending.
The ideal 8ash /anagement system will depend on the firms products, organi"ation
structure, competition, culture and options available. The task is comple! and decision
taken can affect important areas of the firm.
1;
+.&.'&6un%tions of Cash Management-
8ash /anagement functions are intimately, interrelated and intertwined 'inkage among
different 8ash /anagement functions have led to the adoption of the following methods
for efficient 8ash /anagementG
?se of techni*ues of cash mobili"ation to reduce operating re*uirement of cash
/a)or efforts to increase the precision and reliability of cash forecasting.
/a!imum effort to define and *uantify the li*uidity reserve needs of the firm.
1evelopment of e!plicit alternative sources of li*uidity
,ggressive search for relatively more productive uses for surplus money assets.
The above approaches involve the following actions which a finance manager has to
perform.
1. To forecast cash inflows and outflows
.. To plan cash re*uirements
2. To determine the safety level for cash.
9. To monitor safety level for cash
<. To locate the needed funds
5. To regulate cash inflows
C. To regulate cash outflows
4. To determine criteria for investment of e!cess cash
3. To avail banking facilities and maintain good relations with bankers
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+.&.'(Motives for holding %ash-
There are four primary motives for maintaining cash balancesG
1. Transaction motive
. .0recautionary motive
2. &peculative motive
9. 8ompensating motivess
4&5 !ransa%tion MotiveG This motive refers to the holding of cash in order to meet the
day-to-day e!penses of the business. These transactions including purchase of raw
material, packing materials, wages, operating e!penses, ta!es, dividend etc. @1A since the
timing of cash inflows and the cash outflows differ significantly, a minimum cash balance
is re*uired. ,t the same time, there is regular inflow of cash from sales proceeds, income
from investments etc. +ut inflows and outflows-of cash do not perfectly coincide. @.A
&ometimes the firm has surplus cash in certain periods, which the firm invests in easily
marketable securities. These are sold and cash reali"ed when need for payment arises in
business. @2A &ome firms keep cash on hand to meet some anticipated payments. It may
invest such surplus cash in such a way that it will mature when anticipated payment is to
be made. @9A The company is also re*uired to keep some cash on hand to make regular
annual payments, e.g. once in a year, cash is needed to pay dividend. &imilarly, advance
ta! is payable every three months for which a firm is re*uired to hold some cash. #ere
again it can be invested in short term marketable securities.
4(5 "re%autionary MotiveG This motive for holding cash refers to maintaining a cash
balance to meet une!pected contingencies, which may arise as a result of
- ?ncontrollable circumstances, such as floods, strikes, earth*uakes etc.
- &harp increase in the cost of materials, labor etc.
- ?ne!pected delay in collection of accounts receivables.
1.
Thus precautionary balance is re*uired to meet unforeseen contingencies. If the event for
which cash balance is kept is more unpredictable, the larger would be the cash needed. If
there has been a careful planning, less cash would be re*uired.
If the firm has a good prestige in the market, it can borrow from banks or from other
sources at a short notice, it will re*uire less cash to be maintained for contingencies.
Insurance against some of the risks may also come to the help, in the sense that money
can be recovered from insurance company and so less cash may be maintained. +ut no
cut and dried formula can be suggested. 8onditions would differ from industry to
industry and also from firm to firm. It is for the finance manager to determine the cash to
be held looking to the circumstances available. 7enerally such cash is held in the form of
marketable securities, so that it can earn some return.
4+5 Spe%ulative MotiveG It refers to the desire of a firm to keep cash to take advantage of
profitable opportunities, which are outside the normal course of business. It helps to take
advantage of
- 0urchasing raw materials at reduced prices by availing the benefits of cash discount.
- &peculating on interest rate movements etc.
The holding of cash for speculative motive by a business firm is debatable. It is believed
that business firms should not indulge in speculative transactions, as it involves risks that
can put firm in trouble. ,nother viewpoint is that surplus cash, if any, should also be
invested in sound securities, so that it earns some return. &uch transactions made at times
will raise the profitability of business. #owever, it re*uires caution, foresight and skill.
#ence, the best way is not to hold cash for speculative motive.
4,5 Compensating MotiveG +anks provide different types of services to the firms, e.g.
clearance of che*ue, transfer of funds etc. against a nominal fee or commission.
7enerally, clients @firmsA are re*uired to maintain a minimum cash balance at the bank
which cannot be utili"ed by them for transaction purpose. The bank can use the same for
generating returns. To get compensated for free services, they provide to customers, the
12
banks re*uire the clients to always keep a bank balance sufficient to earn a return e*ual to
the cost of services. &uch balances are called compensating balance.
19
+.&.'+ Cash Management #b)e%tives
The +asic ob)ective of cash management is two foldG
@aA To meet the cash disbursement needs @payment scheduleAH
@bA To minimi"e funds committed to cash balances. These are conflicting and mutually
contradictory and the task of cash management is to reconcile them.
4a5 Meeting the payments s%hedule- 3 , basic ob)ective of the cash management is to
meet the payment schedule, i.e. to have sufficient cash to meet the cash disbursement
needs of the firm. The importance of sufficient cash to meet the payment schedule can
hardly be over emphasi"ed. The advantages of ade*uate cash are G @iA it prevents
insolvency or bankruptcy arising out of the inability of the firm to meet its obligationsH
@iiA the relationship with the bank is not strainedH @iiiA it helps in fostering good relations
with trade creditors and suppliers of raw materials, as prompt payment may also help
their cash managementH @vA it leads to a strong credit rating which enables the firm to
purchase goods on favorable terms and to maintain its line of credit with banks and other
sources of creditH @viA to take advantage of favorable business opportunities that may be
available periodicallyH and @viA finally the firm can meet unanticipated cash e!penditure
with a minimum of strain during emergencies, such as strikes , fires or a new marketing
campaign by competitors.
4b5 Minimi9ing funds %ommitted to %ash balan%es- 3 The second ob)ective of cash
management is to minimi"e cash balances. In minimi"ing cash balances two conflicting
aspects have to be reconciled. , high level of cash balance will, ensure prompt payment
together with all the advantages, but it also implies that large funds will remain idle
ultimately results less to the e!pected. , low level of cash balances, on the other hand,
may mean failure to meet the payment schedule that aim of cash management should be
to have an optimal amount of cash balances
1<
+.&.', Elements of a Cash Management System
The basic premise of sound cash management is to ensure that cash inflows and outflows
are effectively controlled and utili"ed. To effectively control cash flow, institutions must
implement ade*uate cash management techni*ues to e!pedite cash collections and check
clearing in order to access and use the funds. Institutions must also develop cost-effective
disbursement mechanisms for transferring funds. The board and management are
ultimately responsible for selecting the best collection and payment mechanisms as well
as adopting appropriate oversight and review guidelines, operating policies and
procedures, and audit re*uirements. In some cases, institutions may deploy other
financial institutions and organi"ations for cash management related services that can be
performed more economically or efficiently. &uch services include transfer and payment
of funds, collection and concentration of funds, sweep account services, information
reporting, and so on.
Colle%tion I ,n important component of the cash management function is the collection
of funds. This process involves speeding up the conversion of receipts into available
funds. +y minimi"ing the float time associated with collection of accounts receivable and
e!tending the float on the accounts payable side, institutions can more effectively manage
cash. #ence, institutions should effectively develop a system to collect payments from
customers.
Con%entration I This is the movement of funds from outlying depository locations to a
central bank account, commonly called a concentration account, where the funds can be
more efficiently used. The most fre*uently used methods for concentration are depository
transfer checks @1T8sA, electronic depository transfers @1TsA, and wire transfers. ,
1T8 is an unsigned paper instrument payable only to the bank of deposit for credit to a
specific account. Instead of writing and depositing checks to concentrate funds, an
institution instructs a concentration bank to prepare 1T8s drawn for deposit into the
concentration account. ,fter a 1T8 is deposited, it clears in the same manner as a regular
check. ,n 1T is simply an electronic version of the paper 1T8 @also known as an ,8#-
15
1T8A and is normally more cost-effective. Wire transfers may also be used for
concentration but is the most e!pensive method. They are generally used when the
amounts are large enough to )ustify their cost and where funds are immediately needed.
0isbursement I This involves controlling the release and timing of outgoing funds.
>arious disbursement techni*ues are available for institutions to effectively manage the
disbursement process. These include checks, "ero balance accounts, controlled
disbursement, payable through drafts, and electronic disbursement methods.
Che%ks I 8hecks are still the most fre*uently used payment instrument
for bill paying and provide the payor with disbursement float. #owever,
technological advances have increased the sophistication of check fraud.
These technological advances include color copiers, high-resolution laser
printers, and hand-held document scanners for use with a personal
computer. lectronic payments methods help prevent check fraud by
eliminating the check. Without a negotiable instrument, the counterfeiter
has nothing to alter or copy. $urthermore, electronic payments @e.g., ,8#A
also offer strong cost savings potential by eliminating check printing costs,
postage for mailing checks, and bank fees associated with check
processing, account reconcilement, and check fraud prevention services.
Bero =alan%e A%%ounts 4B=As5 I , J+, is a disbursement account on
which checks are written even though the balance in the account is "ero. ,
transfer of funds from the institutionKs master account covers the checks.
$unding of the J+, account is automatic and involves only an accounting
entry by the bank. 8redits and debits are posted )ust before the close of
business when a credit from the master account is posted to bring the
balance back to "ero. If there is a credit balance in the J+, account, the
J+, will be debited and a credit made to the master account.
Controlled 0isbursement I ,nother method used to minimi"e balances
in disbursement accounts is controlled disbursement. This is a bank
1C
service that provides same-day notification, usually by mid-morning, of
the dollar amount of checks that will clear against the controlled
disbursement account that day. The disbursement bank receives
information from the local $ederal Beserve +ank early in the morning so
that the checks can be sorted and the institution notified of its funding
re*uirement.
"ayable !hrough 0rafts 4"!0s5 I , 0T1 is a payment instrument
resembling a check that is drawn against the payor, not the bank, and on
which the payor has a period of time to honor or refuse payment. 0T1s are
used fre*uently to fund loans on capital items purchased by the borrower
@e.g., e*uipment or livestockA. The use of drafts gives the institution an
added measure of disbursement control and additional time to ensure that
all terms have been met or e!penditures authori"ed. lectronic 0T1s are
simply ,8# debits to an institutionKs account in which the institution is
notified in time to pay or re)ect each item. They are used for similar
purposes as paper 0T1s.
Ele%troni% 0isbursements I ,s with collection and concentration
systems, disbursements can also be made electronically. ,s indicated
previously, funds operated by wire transfers are moved almost
instantaneously, thereby reducing float time, but are a costly way to
disburse funds compared to checks and ,8# transactions. Image
technology can also be used to facilitate the processing of payments. This
technology allows paper documents @e.g., checksA to be scanned and
converted to digital information. The images may be transmitted to a
computer and stored there, or sent to a fa! machine. The increasing use of
electronic commerce and potential cost savings are e!pected to stimulate
growth in electronic payment systems as discussed in the following
section.
14
Ele%troni% "ayment Systems I The growing use and the reliance on the electronic
transfer of funds e!pose an institution to additional risk in the management of cash. ach
day, the institutionKs customers may make thousands of payments that result in the
transfers of balances among the institutions, depository banks, and $ederal Beserve
+anks. In addition, institutions make their own payments in connection with carrying out
their business. +ecause of electronic commerce, information moves faster and with
greater accuracy. 8onse*uently, the access and speed capabilities can magnify risk in an
electronic environment. &ince cash is a highly li*uid asset, it can be easily transferred,
concealed, and converted into other assets. $or these reasons, institutions must have an
ade*uate and effective information system @I&A in place. 8oordination with I& e!aminers
will be necessary to comprehensively evaluate an institutionKs electronic environment.
While the range of electronic funds transfer may vary from institution to institution, the
most common types of electronic payment systems include the following.
Automated Clearinghouse 4AC85 System I The ,8# system was
developed as an electronic alternative to checks. It comprises a network of
regional associations, interbank associations, and private sector
processors. The $ederal Beserve is the principal ,8# operator, and the
ma)ority of financial institutions are members of an ,8# association. In
an ,8# transaction, payment information is processed electronically
instead of manually, thereby increasing reliability, efficiency, and cost-
effectiveness. Institutions can make both credit and debit transactions with
an ,8#. In addition, an ,8# transaction is capable of transferring more
information about a payment than is possible with a check. Transactions
are settled 1 or . business days after the payment information is entered
into the payment system. In general, ,8# payments can be used in place
of more costly wire transfers when the amounts are known at least 1 day in
advance.
13
6edWire I The $edWire is the $ederal Beserve funds transfer system. It is
a real-time method of transferring immediate funds and supporting
information between two financial institutions using their respective
$ederal Beserve accounts. The system is reliable and secure but relatively
e!pensive for institutions compared to checks and ,8# transactions. The
$edWire functions as both a communication @i.e., clearingA and a
settlement facility. The $edWire service may be accessed by direct
computer interface or off-line by telephone through a personal computer
based electronic delivery system named $ed'ine. $unds are moved almost
instantaneously once the originating bank has received the re*uest. The
transaction is final and irrevocable once the originating bank has sent the
funds and the $ederal Beserve confirms receipt. In the event of the
sending bankKs failure to settle, the $ederal Beserve guarantees the
transferred funds to the receiving bank. Therefore, there is no settlement
risk to the recipient of a $edWire transfer. Eevertheless, other types of risk
associated with the $edWire funds transfer method include potential loss
because of errors, omissions, and fraud.
Clearinghouse Interbank "ayments System 4C8I"S5 I This is a funds-
transfer network owned and operated by the Eew Lork 8learinghouse
,ssociation to deliver and receive ?nited &tates @?.&.A dollar payments
between domestic or foreign banks that have offices located in Eew Lork
8ity. 8#I0& was established to substitute electronic payments for paper
checks arising from international dollar transactions, such as urodollar
investments or foreign e!change contracts. The network is composed of a
small number of settling participants @large ?.&. chartered banks that settle
end-of-day balances between each otherA and a larger number of non-
settling participants who maintain accounts with one of the settling banks.
?nlike $edWire funds transfers, 8#I0& transfers are not settled at the time
the payment instructions are delivered. Instead, the transfers are settled at
.;
the end of the day through a net settlement arrangement established with
the $ederal Beserve +ank of Eew Lork.
So%iety for World$ide Interbank 6inan%ial !ele%ommuni%ations
4SWI6!5 I This is a nonprofit cooperative of member banks serving as a
worldwide interbank telecommunications network based in +russels,
+elgium. It is the primary message system employed by financial
institutions worldwide to transmit either domestic or international payment
instructions. ?nlike electronic funds transfer systems, &WI$T only
provides instructions to move funds. /essages are transferred re*uesting
debits and credits and other types of messages to correspondent accounts.
&WI$T does not have a settlement mechanism. &ettlement occurs through
$edWire, 8#I0&, or other means.
8omplete elimination of risk from electronic funds transfer is an impossible task.
#owever, the increasing use of electronic transfer activities makes it essential that each
&ystem institution clearly understands the risks inherent in these activities and be aware
of the methods for possibly reducing these risks to an acceptable level. The ne!t section
provides a brief discussion of some of the sources of risk involved in the overall cash
management operations.
.1
+.&.'. Evaluation #f Cash Management "erforman%es
6ne of the most important )obs of the $inance /anager is to maintain sufficient li*uidity
to enable the firm to pay off its obligations when they fall due. To test a firms li*uidity
and solvency we commonly use current and *uick ratios. Traditionally .G1 current ratio
and 1G1 *uick ratio are taken as satisfactory standards for the purpose. The former
indicates the e!tent of the soundness of the current financial position of a firm and the
degree of safety provided to the creditors, the later signifies the ability of a firm to settle
all its current obligations on a particular date.
Current ratio
Lear 8urrent ,ssets 8urrent 'iabilities 8urrent Batio
.;;<-;5 19;949495 2<;.1C;; ,.'&
.;;5-;C 15<<45.;; 99C<5.C5 +.<'
.;;C-;4 .1.C25;;; C4C9<<5; (.<'
.;;4-;3 2;1525;;; 11.1424;; (.1@
.;;3-1; .<;;953;; 3;113592 (.<<
..
The above chart is showing that the current ratio is decreasing. ,lthough it is over .G1 in
the < years study period. &o, I can say that the company has very sound position
regarding li*uidity.
/ui%k *atio
Lear Duick Batio
.;;<-;5 ..<.
.;;5-;C ..13
.;;C-;4 1.95
.;;4-;3 1.<C
.;;3-1; 1.C2
.;;3-1;
The above chart is showing that the *uick ratio is decreasing during the < years study
period. Traditionally 1G1 *uick ratio is taken as satisfactory standards for the purpose. The
*uick ratio is over 1G1 in the < years study period. &o, I can say that the company has very
sound position regarding li*uidity.
.2
+.'( Management of Inventory
Inventories are the stock of the product made for sale by the company or semi finished
goods or raw materials. Inventory of finished goods which are ready for sale is re*uired
to maintain smooth marketing operation. The inventory of raw material and work in
progress is re*uired in order to maintain an unobstructed flow of material in the
production line. These inventories serve as a link between the production and
consumption of goods.
The aspect of management of inventory is especially important in respect to the fact that
in country like +angladesh, the capital block in terms of inventory is about C;F of the
current assets. It is therefore, absolutely imperative to manage efficiently and effectively
in order to avoid unnecessary investment in them. ,lthough to maintain low inventories
may prove to be profitable but to maintain very low inventories may prove risky on the
contrary.
This aspect of management if tackled in a proper way may prove to be a boon its
effective and efficient management would result in the maintaining of optimum level of
inventories. ,t this level the profitability of the organi"ation will not be )eopardi"ed at the
cost of inventory.
Eow from the above stated facts it is clear that maintaining of optimum level of inventory
involves huge cost, so why should keep the inventories at all. +asically there are three
main reasons for which inventories are stocked and they areG-
&. !ransa%tion Motive- This motive lays emphasis on maintaining of inventories in
order to maintain a smooth and unobstructed supply of materials for the sales and
production operations.
(. "re%autionary Motive- This motive emphasi"es on the stocking goods in order
to guard against the uncertainties of future i.e. unpredictable changes in the forces
of demand, supply and other forces.
.9
+. Spe%ulative Motive- This motive influences the decisions regarding the increase
or decrease in the level of inventory in order to take advantage of price fluctuations.
, company should maintain ade*uate stock of materials for a continuous supply to the
factory for an uninterrupted production. It is not possible for a company to procure raw
material instantaneously whenever needed. , time lag e!ists between demand and supply
of material. ,lso, there e!ists an uncertainty in procuring raw material in time at many
occasions. The procurement of materials may be delayed because of factors beyond
companys control e.g. transport disruption, strike etc. Therefore, the firm should keep a
sufficient stock of raw material at a time to have streamline 6ther factors which may
incite us to keep stock of inventories is the *uantity discounts, e!pected rise is price.
The work in process inventory builds up because of the production cycle. 0roduction
cycle is the time span between the introduction of raw material in to the production and
the emergence of finished goods at the completion of production cycle. Till the
production cycle completes, the stock of work in process has to be maintained.
fficient firms constantly try to make the production cycle smaller by improving their
production techni*ues.
The stock of finished goods has to be held because production and sales are not
instantaneous. , firm can not produce immediately when goods are demanded by
customers. Therefore to supply finished goods on regular basis, their stock has to
maintain for sudden demand of customers, in case the firm sales are seasonal in nature,
substantial finished goods inventory should be kept to meet the peak demand. $ailure to
supply products to customer, when demanded, would mean loss of the firms sales to the
competitors.
.<
Ma)or *a$ Material used by the Company-
&l
no
0articulars ,nnual
usage
1aily
?sage
&afety
&tock
'ead
time in
days
F of product
used for
production
1 8opper .;; tons <;; 1ton 19 .;
. stamping
materials
2;;tons 422 2 tons 19 2;
2 stator frames 94;;pieces 1; pieces 2;;
pieces
2; .;
9 8 - E8
covers
35;; pieces .; pieces .<;
pieces
19 1;
< I0 coils C.;;;
pieces
.;;
pieces
<;;
pieces
19 ;<
5 Bubber <;; kg . kg <; kg 1< 5MCM4M3N1<
C Euts and bolts 1;;; kg 9 kg 1;; kg 19
4 Washers <;; kg . kg <; kg 19
3 /O& component .;;; 1; .<; 19
,+8 system of segregation of inventory at %&hakti ngineering 'td(.
.5
Group A materials Group = materials Group C materials
8opper stator frames Bubber materials
stamping materials &till keys Euts - bolts
8 - E8 covers Washers
I0 coils /O& components
Analysis
$rom above table clearly showing the classification of materials in to three groups
7roup ,
materials are 8opper, stamping materials, 8 - E8 covers, I0 coils
7roup +
&tator frames, still keys
7roup 8
Bubber materials, Euts - bolts, Washers, /O& 8omponents
$rom the above analysis I can interpret that &' adopted ,+8 techni*ue based on 8osts
and usage and it is using to maintain the inventory in warehouse it reduces the damages
of goods in warehouse so it increases *uality of production and same time it gives
information about re ordering point order delivery period.
!able sho$s per%entage $ise Costs in%urred for ra$ materials
.C

0articulars F of cost
8opper 2;F
&tamping .<F
/ild still 1<F
6thers 2;F
Analysis
,bove pie diagram is showing the cost incurred for the different raw materials. 8ompany
is spending 2;F on 8opper, .<F on &tamping, 1<F /ild still, 2;F on others.
6rgani"ation is spending more money on getting the raw materials of 8opper, &tamping
and /ild still from different vendors. ,nd it helps to maintain safety stock in unit.
!able sho$s lead time of ra$ materials
0articulars 'ead time in days
8opper 19
.4
stamping materials 19
stator frames 2;
8 - E8 covers 19
I0 coils 19
Bubber 1<
Euts and bolts 19
Washers 19
/O& component 19
Analysis-
The graph shows that &' gets 8opper within 19 days of ordering, &tamping materials
within 19 days, &tator $rames within 2; days, 8 - E8 8overs within 19 days, I0 8oils
within 19 days, Bubber within 1< days, Euts and +olts within 19 days, Washers within 19
days and /O& components within 19 days of ordering
It can be interpreted as procuring of &tator $rames is consuming more time and the
company has to concentrate on this and should try to reduce the 'ead time of
procurement of &tator $rames. If lead time is high its indirectly effects to dispatching of
goods and sales.
Cal%ulations
*e order point
6ormulae- ormal usage in lead time C Safety sto%k
Copper
.3
,nnual usage ., ;;,;;; @. tonsA
'ead time 19 days
<'''C&''' D ?''' kg
Stamping
,nnual usage 2, ;;,;;; @. tonsA
'ead time 19 days
&&>11( C +''' D &.11( kg
Stator frames
,nnual usage 94;; pieces
'ead time 2; days
+'' C +'' D 1'' 6rames
CE A C %overs
,nnual usage 35;;
'ead time 19 days
(?' C .'' D <?' %overs
I" %oils
,nnual usage C.;;;
'ead time 19 days
(?'' C .'' D <?''
!able sho$s the re order point of ra$ materials
2;
Analysis
,bove graph is showing the reordering of raw materials to the vendors. When copper
reaches to the 4;;;=gs , &tamping materials reaches 1155.=gs, &tator frames reaches
5;; units, 8 - E8 reaches to <2; units and I0 coils reaches to C4;; units. The company
will go for re order.
Beordering point plays key role to maintain the stock in proper order to avoid the out of
stock in the company.
+.(.'& Evaluation #f Inventory Management-
21
0articulars Be ordering point
8opper 4;;; @in =7sA
&tamping materials 1155. @in =7sA
&tator frames 5;; units
8 - E8 covers <2; units
I0 coils C4;; units
Inventory Conversion "eriod
Lear Inventory &alesO25< 1ays
.;;<-;5 <.2;C59; <45493.2. 43
.;;5-;C 5CCC5529 5<C9C3.9< 1;2
.;;C-;4 34;<4;;; 31;549.32 1;C
.;;4-.;;3 1.<;292.; 112.;<9.4 11;
.;;3-1; 39953CC9 324924.25 1;;
Analysis
The graph is showing that in .;;<-;5 inventory conversion period was 43 days. It was
increasing in the < years study period. It shows that the stock retention period is on
fluctuating trend.
Inventory !urnover *atio
Lear &ales Inventory Batio
2.
.;;<-;5 .19.;;;;; <.2;C59; ,.'@
.;;5-;C .2334;;;; 5CCC5529 +..,
.;;C-;4 22.9;;;;; 34;<4;;; +.+@
.;;4-.;;3 912.;;;;; 1.<;292.; +.+'
.;;3-1; 29.<2;;;; 39953CC9 +.1+
Analysis
Inventory turnover ratio is generally regarded as indicator of inventory efficiencies. It
establishes a relationship between the total sales during a period and average inventory
22
hold to meet that *uantum. In .;;<-;5 it was 9.;3 it shows very slow moving of
inventory. +ut during the < years study period it was in decreasing trend.
+.'+ Management #f *e%eivables
Trade credit, the tool which as a bridge for movement of goods through production and
distribution stages to customer, is a force in the present day business and a essential
device. Trade credit is granted with a motive of protecting the sale from ones, competitors
and attaching more of the potential customers. Trade credit is said to be e!tended to a
customer when a firm sell its services or goods and does not receive the payment for
them immediately. Thus trade credit creates receivable which refer to the amount which a
firm is e!pected to collect in near future.
+.+.'& Aspe%ts of Credit "oli%y-
The important aspects of credit policy should be identified before establishing an
optimum credit policy. The important decision variables of the credit policy areG
Credit !erms- 8redit terms are the conditions or stipulations under which the
firm e!tends credit. The terms and conditions can be clubbed according to the
period for which they are e!tended and according to the amount of discount
offered thereby there are two important components of trade credit namely cash
period and cash discounts. 8redit terms can be effectively used as a tool to boost
sales. The most desirable credit terms which increases the overall profitability of
the firm, should be offered to the customers cost benefit trade off between credit
terms should be done to choose the best one.
Cash period- The time duration for which the credit is e!tended to
the customers is referred to as credit period. ?sually the credit
period of the firm is governed by the industry norms, but firms can
e!tend credit duration to stimulate its sales.
Cash dis%ounts- 8ash discounts are the offer made by the firm to
customer to pay less if the re*uired amount is paid earlier. The cash
discount terms indicate the rate of discount and the period for
29
which discount has been offered. If the customer does not avail this
offer, he is e!pected to make the payment by the due date.
Credit Standards- The credit standards followed by the firm have an impact on
sales and receivable. The sales and receivable levels are likely to be high if the
credit standards of the firm are relatively loose. In contrast, if the firm has
relatively tight credit standards, the sales and receivable are e!pected to be low.
The credit standards are governed by various aspects such as the willingness of
the customer to pay, the ability of the customer to pay in the economic conditions
etc.
Colle%tion "oli%y- The need to collect the payments early gave rise to a policy
regarding it, called as the collection policy. It aims at the speed recovery from
slow payers and reduction of bad debts losses. The firm has to very cautious while
it goes in for collection from slow payers. The various aspects such as
willingness, capabilities, and e!ternal conditions should be taken care of before
you go in collection procedure. The optimum collection policy will ma!imi"e the
profitability and will be consistent with the ob)ective of ma!imi"ing the value of
the firm.
2<
+.+.'( "erforman%e Evaluation #f *e%eivables Management
,verage collection period e!plains how many days of credit, a company is allowing to
the customer, a higher collection period indicates towards a liberal and inefficient credit
and collection performances shorter the collection period the better the credit
management and li*uidity of accounts receivable.
Average %olle%tion period
Lear 1ays
.;;<-;5 99
.;;5-;C <1
.;;C-;4 9<
.;;4-;3 52
.;;3-1; 9C
Analysis- The above graph is showing that average collection period of receivable is in
fluctuating trend during the < years study period. It was 52 days in the year .;;4-;3. It
25
shows the collection period of receivable is too high. The collection period of debtors
should be kept at lowest level for the reduction in cost of capital and better productivity
+.', Management #f "ayables
, substantial part of purchase of goods and services in business are on credit terms rather
than against cash payment. While the supplier of goods and services tends to perceive
credit as a lever for enhancing sales or as a form of non-price instrument of competition,
the buyer tends to look upon it as a loaning of goods or inventory. The suppliers credit is
referred to as ,ccounts payable, Trade 8redit, Trade +ill, Trade ,cceptance, commercial
drafts of bills payable depending on the nature of the credit.
+.,.'& 0eterminants #f !rade Credit
Si9e of the firm-
&maller firms have increasing dependence on trade credits as they find it difficult to
obtain alternative sources of finance as easily as medium or large si"ed firms. ,t the same
time, larger firms that are less vulnerable to adverse turns in business can command
prompt credit facility from supplier, while smaller firms may find it difficult to sustain
creditworthiness during periods of financial strain and may have reduced access to credit
due to weak financial position.
Industrial Credits-
1ifferent categories of industries or commercial enterprises show varying degree of
dependence on trade credit
ature of "rodu%t-
0roducts that sell faster or which have higher turnover may need shorter term credit.
0roducts with slower turnover take longer to generate cash flows and will need e!tended
credit terms.
6inan%ial "osition of Seller-
2C
The financial position of the seller will influence the *uantities and periods of credits he
wishes to e!tend. $inancially weak suppliers will have to be strict and operate on higher
credit terms to buyers. $inancially stronger suppliers, on the other hand, can dictate
stringent credit terms but may prefer to e!tend liberal credit so long as the transactions
provide benefits in e!cess of the costs of e!tending credit.
6inan%ial position of the buyer-
+uyers creditworthiness is an important factor in determining the credit *uantum and
period. It may be logical to e!pect large buyers not to insist on e!tending credit terms for
small suppliers with weak bargaining power. Where goods are supplied on a consignment
basis, the supplier provides e!tra finance for the merchandise and pays commission to
consignee for the goods sold.
Cash dis%ounts-
8ash discount influences the effective length of credit. $ailure to take advantage of the
cash discount could result in the buyer using the funds at an effective rate of interest
higher than the alternative sources of finance available.
0egree of risk-
stimates of credit risk associated with the buyer will indicate what credit policy is to
adopt the risk may be with reference to the buyers financial standing or with reference to
the nature of the business the buyer is in.
24
+.,.'( Evaluation of "ayables Management
Average "ayment "eriod
Lear 1ays
.;;<-;5 &(
.;;5-;C &+
.;;C-;4 &+
.;;4-;3 &.
.;;3-1; ('
Analysis- Table shows that the minimum average payment period is 1. days and
ma!imum is .; days. The payment period of creditors should be kept at highest level for
the reduction in cost and better productivity Table reveals the increasing trend in average
payment period which is good for the company.
23
6indings
The company is in a sound position regarding li*uidity. In the < years study
period its current ratio is over .G1 and *uick ratio is over 1G1.
The company uses ,+8 techni*ues to maintain its inventory efficiently and to get
information about reordering point.
The inventory conversion period is too high of the company. It is in increasing
trend. It is not good for the company.
Inventory turn over ratio is too high. It shows very slow moving of inventory.
The average collection period of receivable is too high. I t increases the cost of
capital.
The average payment period of payables is too low. The company pays its
payables too earlier.
9;
*e%ommendation
The inventory conversion period is too high of the company. It is in increasing
trend. The company should take possible initiatives to reduce its inventory
conversion period.
The company should keep its inventory turnover ratio in a lower point.
To reduce cost of capital the company should take proper steps to keep receivable
collection period in a lower point.
The company should take the advantages of deferral payments of payables.
91
9.

Working Capital Management of Shakti Engineering LTD

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Evaluation and Analysis of Working Capital Management

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