TRAINING REPORT ON WORKING CAPITAL MANAGEMENT OF SURYA TELECOM PRIVATE LIMITED

in partial fulfillment of the requirement for Master of Business Administration (Year- I) 2004-2005 Of

Kurukshetra University Kurukshetra

Project Coordinator: Mr. Roshan Lal

Submitted By: Rajan Verma

Supervised By: Ajay Vir Sehgal (Managing Director)

The Head of Commerce Department Kurukshetra University Kurukshetra, Haryana

Sub: TRAINING OF RAJAN VERMA

Sir,
It is certified that Rajan Verma, a student of MBA of your Institute has under gone six weeks training commencing from 1st December 2005 in our company. His project during the training was Working Capital Management. During this period He was sincere, hardworking and his performance was satisfactory. Thanking you,

Yours truly, SURYA TELECOM (P) LIMITED

AUTHORISED SIGNATORY

ACKNOWLEDGEMENT
It gives me immense pleasure to express my deep sense of gratitude to Mr. Roshan Lal, Finance Manager of Surya Telecom Private Limited, who gave me an opportunity to undertake training in this organization. I have appreciation and regards for his constant encouragement. Constructive criticism and sympathetic understanding throughout the course of this training. I also thank the management and staff members of Surya Telecom Private Limited, For providing me the relevant information in preparing my training report. I thank them for taking Keen interest in my training and guiding me, despite their busy schedule. Lastly, I am also thankful to the Faculty members of Kurukshetra University for their help, from time to time.

PLACE: KALKA

(RAJAN VERMA)

PREFACE
On the job training in business organization infuses among students a sense of critical analysis of the real managerial situations to which they are exposed. This gives them an opportunity to apply their conceptual, theoretical and imaginative skills to real life situations and evaluate the results there of. I was lucky to have got an opportunity to work at Surya Telecom (P) Limited. And to get project of my interest. I studied WORKING CAPITAL MANAGEMENT in Surya Telecom (P) Limited. I visited the Head office of Surya Telecom (P) Limited and prepared my project report on the topic study is divided into various chapters to get full knowledge. I also considered some written material on the particular topic as well as about me in boosting up my confidence & determination, which will help me to face any situation in years to come. This report is a written account of what I learnt and experienced during my training. I wish, those going thought it, will not only find it readable but will also find useful information.

STUDENT DECLARATION

I do hereby declare that this project report entitled a study of working capital management of SURYA TELECOM (P) LIMITED has been prepared by me during the year 2005, in the partial fulfillment of the requirement for the degree of Master of Business Administration to Kurukshetra University, Kurukshetra. I have prepared this report under the guidance of Mr. Roshan Lal Account Manager. The empirical findings in this report are based on the data collected by myself. This is my original work and not submitted for the award of any other degree, diploma, fellowship or other similar title.

(Rajan Verma)

CONTENTS

OVERVIEW OF INDUSTRY AS A WHOLE SURYA GROUP OF COMPANIES A PROFILE ORGANISATION STRUCTURE OF SURYA TELECOM (P) LIMITED FINANCIAL RECORD WINDOW SWOT ANALYSIS PROJECT REPORT

INTRODUCTION TO THE SURYA TELECOM AS A WHOLE

OVERVIEW OF SURYA TELECOM INDUSTRY AS A WHOLE

Telecom industry is the largest agro industry of India. India occupies the 3rd position among the countries preparing handset and wireless set in the world. Industry gives employment to 2.5 lakh laborers. Besides this industry provides indirect employment to 0.25 lakh labourers who prepairs covers & boxes. In 2001 total turnover of handset was 20 lakh piece. Telecom companies were mostly localized Karnatka & Andhra Pradesh states. But now most of the companies have been installed in Chandigarh, Haryana & Punjab.

BRIEF HISTORY
India has been preparing handset, wireless phone & codeless phone since long time. But the modern telecom industry came into being in 1923 when first telecom companies was installed in Karnatka. Second telecom company was set up in 1955 in Maharashtra. Initially the progress of this industry was very slow and till 1970 there were only 45 telecom company in the country. But after 1975 telecom companies progress very fast and covered large area of country. Now in 1990 there were 105 telecom company in the country.

TELECOM INDUSTRY AND FIFE-YEAR PLANS (1) FIRST PLAN:

In 1951 there were 3 telecom companies preparing 7.5 thousand telecom product. In the first plan actual outlay on the development of telecom industry.

(2) SECOND PLAN:

During the second plan large number of telecom companies were set up in cooperative sector in Maharashtra, Andhra Pradesh, Karanatka, etc.

(3) THIRED PLAN:

In the third plan cooperative sector was given more encouragement. Number of telecom companies rose to 35, of which companies were in the cooperative sector.

(4) FOURTH PLAN:

During this plan all new telecom companies were started in private sector. Number of telecom companies went up to 79 and production rose to 40 lakh sets.

(5) FIFTH PLAN:

By the end of this plan, production of telecom product rose to 63 lakh sets. Number of companies rose in private sector.

(6) SIXTH PLAN:

Production during this plan rose to 70 lakh sets. Number of telecom companies rose to 90 companies.

(7) SEVENTH PLAN:

In this plan production of sugar was 110 lakh sets. In 1989-90 there were 102 telecom companies.

(8) EIGHTH PLAN:

In the eighth plan, target of telecom product was fixed at 160 lakh set. In 1996-97, there were 117 telecom companies.

(9) NINTH PLAN:

In the fourth year i.e. 2000-2001 of ninth plan the production of telecom products increased to 192 lakh. Telecom product worth Rs. 85 crore was exported.

PROBLEM OF TELECOM INDUSTRY

Major problems of telecom industry of India are as under: (1) PROBLEM OF CONTROL: Following problems arise with regard to raw material of the industry (i) (ii) (iii) supply of raw material is less than its demand. Per set productivity of telecom in India is less than many countries of the world. Percentage of telecom product in India is much less than many other countries of the world.

(2) PROBLEM OF CONTROL:

Another problem is government control. Since 1952 this industry has been subjected periodically to government control on price and distribution. As a result the industry had to sell large part of its production at govt. fixed price to the govt.

(3) PROBLEM OF TAXES:

Taxes on telecom product are imposed at high rate. Consequently price of sugar goes up. Burden of taxes on telecom product much higher.

(4) PROBLEM OF UTILIZATION OF WASTAGE:

(5) IMCOMPLETE UTILIZATION OF ESTABLISHED CAPACITY:

Much of the production capacity remains unutilized. These industries function for demand. So they do not make full use if their production capacity.

(6) HIGH COST PROBLEM:

Cost of problem of telecom product in India is relatively high. The reason being poor quality of raw material.

(7) PROBLEM OF MODERNIZATION:

Its machinery and technique have been grown obsolete. Consequently cost of production is high and efficiency low. It has therefore, become necessary to modernization of telecom industry.

SUGGESTIONS FOR THE IMPROVEMENT OF TELECOM INDUSTRY

Following suggestions are offered to develop telecom industry PROPER SUPPLY OF RAW MATERIALS IMPROVEMENT IN PRODUCTIVITY OF LABOURS CONTROL OVER WASTAGE REDUCTION IN TAXES: Taxes on telecom product is brought down so that market price of telecom product could be lowered. MODERNIZATION: Special efforts are made to modernize telecom industry. For this purpose financial institutions should make cheap credit facility available to the industry in large measure. REDUCTION IN COMPETITION FACILITIES TO NEW UNITS: New unit be given financial and other facilities. Wherever feasible they may be higher technologies & techniques.

INTRODUCTION TO THE COMPANY

SURYA TELECOM (P) LIMITED A PROFILE

Surya Telecom (P) Limited is an integrated telecom company with a capacity to crush 5000 sets of wireless per year and facilities for co-generation of 20mw of power. The project is situated at Parwanoo, Tehsil Solan, District Solan, Himachal Pradesh. Initially the project was set up with a capacity of 2500 TCD along with facilities for generation of 5 mw of power. The cost of the project was Rs. 23.65 crores and it was funded by equity share capital of Rs. 15.35 crores , term loans of Rs. 8.30 crores. The project went into commercial production from December 1993. the capacity of company is 1000 set per year. November, 1998 with a capital outlay Rs. 14.10 crores. The plant & machinery for the power plant is supplied by reputed suppliers viz Bart Heavy Electricals LTD, Walchand Nagar Industries Ltd,. & Siemens Ltd. The project is being funded by Equity share capital & Unsecured Loans from Ajay Vir Sehgal & Sheela Rani. The project has already commenced commercial production from March 2002. With the implementation of the above said scheme the company is expected to supply about 8000 sets per year.

Registration year of Surya Telecom (P) Limited is 1990

Management:
Organization is the backbone of management. Without efficient organization no management can perform its function smoothly. Sound organization contributes greatly to the continuity and success of the enterprises. It is the framework of relationship of persons operation at various levels with vertical or horizontal dimensions. Type of organization in a company depends upon its size, technology & the range of production. Being a manufacturing organization the company is organized on functional level and its organizational set up is very well designed. There is a clearly defined line of authority. The responsibility of higher level for the acts of its subordinates is absolute. The structure is simple and flexible. Unity of direction is there. At upper level persons are confined to a single major function. They work in harmony and co-operation without creating any confusion or conflicts. That makes the working of organization highly efficient and speedy. Span of management is neither too narrow nor too wide. Board of directors comprises of 11 director who are noted industrialists, professionals and technocrats with a rich experienced and exposure administration, law and finance. The company is managed by Board of Directors comprising of 11 directors with Smt. Sheela Rani, as the Chairman & Mr. Ajay Vir Sehgal as the managing director. The day-to-day affairs of the company are being looked after by Ajay Vir Sehgal, managing director with the assistance of qualified and experienced personnel in different lines such as Production, Finance and Marketing, etc.

Detail of management is as under:

Sr. no. 1 2 3 4 5 6 7 8 9 10 11 Name Smt. Sheela Rani Ajay Vir Sehgal Anil Sehgal Inder Partap Mrs. Anjana Kapoor Sh. Rajnish Tuli Miss. Anjali Sharma Sh. S. S. Sekhon Sh. A.S. Sodhi Sh. S. A. S. Bajwa Dr. Y. P. Abbi Designation Chairman Managing Director Promoter Director Promoter Director PAIC Nominee PAIC Nominee PEDA Nominee PEDA Nominee Outsider Professional Director Outsider Professional Director IREDA Nominee

SURYA GROUP OF COMPANIES

ASSOCIATE COMPANIES: 1. SURYA POLYCOT (P) LIMITED 2. A.V.S. INFRASTRUCTURES (P) LIMITED 3. SURYA FUND & INVESTMENT (P) LIMITED 4. SHEELA FORESTS (P) LIMITED 5. SEHGAL FABRICS (P) LIMITED 6. SYNAPPS TECHNOLOGIES (P) LIMITED 7. SEHGAL GLOBAL TRADE (P) LIMITED 8. FORTUNE ON-LINE MARKETING NETWORK (P) LIMITED 9. AJAY INFORMATICS (P) LIMITED 10. VIR PAPERS (P) LIMITED 11. SEHGAL LEATHERS (P) LIMITED But out of these eleven associate companies only SURYA POLYCOT (P) LIMITED is in manufacturing process.

THE BRIEF FINANCIAL PERFORMANCE OF SURYA TELECOM (P) LIMITED IS AS UNDER: FINANCIAL PERFORMANCE 31.03.2004 (Audited) NET SALES NET PROFIT AFTER TAX SHARE CAPITAL RESERVE & SURPLUS NET WORTH 14.86 1.52 7.85 3.54 13.10 (RS. IN CRORES) 31.03.2005 (Audited) 18.62 2.45 9.52 4.43 15.23

__________________________________________________________________________ __________________________________________________________________________

PERFORMANCE AND FINANCIAL INDICATORS:

Particulars Net Sales Profit before tax Profit after tax Cash accruals Share capital

31/03/2002 8.92 0.78 0.65 2.45 4.07

(Rs.Incrores)___________________ 31/03/2003 31/03/2004 31/03/2005 11.65 1.31 1.07 4.35 5.53 14.86 1.90 1.52 5.20 7.85 18.62 2.80 2.45 6.28 9.52

Tangible Net Worth 6.50 8.25 10.85 14.65 __________________________________________________________________________ __________________________________________________________________________

SWOT ANALYSIS

SWOT ANALYSIS
SWOT is acronym for the internal strengths and weaknesses of the business and environmental Opportunities and threats being faced by that business. SWOT analysis is a systematic indenti- fiction of these factors and strategy that reflects the best match between them. It is based on the logic that an effective strategy, maximize its weaknesses and threats. The simple assumption if accurately applied has powerful implications for successfully choosing and designing an effective strategy. SWOT analysis provide a logical framework guiding systematic discussion of the business situation, alternative strategies and ultimately the choice of strategy, what one manager sees in an opportunity, another may see it as potential threat, likewise a strength to one manager may be a weakness from other prospective. The key point is that SWOT analysis ranges all aspects of a firms situation. As a result it provides a dynamic and useful framework for choosing a strategy.

SWOT ANALYSIS: STRENGTHS:

1. Surya Telecom (P) Limited has well developed production cilities and have undertaken intensive telecom development program, which has resulted in the area under telecom and proper distribution of various varieties of sets so as to enable the company to run its operations during the entire seasons in a viable manner. Other telecom company which run at low capacity and do not pose much challenge to the company. 2. The company has set up a 10.2 M.W. bagasse based co-generation power plant to add value to its by-product and to integrate its operation fully.

WEAKNESSES:
1. Surya is highly regulated commodity. The government controls most aspect of telecom trade, from telecom product pricing to telecom distribution and sale. Currently, telecom product prices are depressed and communication product prices declared by the state governments are high thus affecting the profitability of the company.

OPPORTUNITIES:
1. The compny has got license for setting up to forgien trade and also take over large area of Indian market. Company sell its product in others state. This will further integrate the companys operations and add to their overall profitability.

THREATS:
1. Excess stock of product and falling prices pose a major threat to the company.

CRITICAL RISK FACTORS;

1. Telecom product operations are not sustainable at the prevailing low product prices and high state declared telecom product prices. In addition the unit has to bear heaving carrying cost on high level stocks.

MITIGATING FACTORS:
1. Company has partially integrated its operations by setting up a bagasse based co-generation power plant where profit margins are substantially higher. 2. Company is setting up a distillery unit to utilize its other product viz. molasses

Molasses with a view to further its profitability.

INTRODUCTION TO THE PROJECT

CONTENTS
INTRODUCTION TO PROJECT OBJECTIVES THE STUDY METHODOLOGY THEORATICAL CONCEPT OF WORKING CAPITAL WORKING CAPITAL MANAGEMENT SCOPE OF WORKING CAPITAL MANAGEMENT CASH MANAGEMENT ACCOUNTS RECEIVABLES MANAGEMENT INVENTORY MANAGEMENT

WORKING CAPITAL FINANCE SUMMARY FINDING & SUGGESTION BIBLIOGRAPHY

INTRODUCTION TO THE PROJECT

As a part of my academic curriculum. I had undergone my training in SURYA TELECOM (P) LIMITED. It was really a golden opportunity for me to carry out my training in one of the Esteemed organization having a well- organized and well- managed structure under the able guidance of Sh. Roshan Lal ( Account Manager). The project given to me was working capital management of SURYA TELECOM (P) LIMITED. Management & Control of working capital is primarily important for any kind of organization. Because working capital makes the long terms assets operative. Working capital analysis is one of the main strategic areas in which finance managers have to look Deeply. Working capital is blood life of each and every organization. It works as a lubricant in the Working of any organization.

OBJECTIVES OF THE STUDY

The main objective of this study is to look deeply into working capital management and its analysis of SURYA TELECOM (P) LIMITED. The following aspects have been looked after explicitly: Assessment of working capital management Structural analysis of working capital management (a) Cash and Bank balances (b) Accounts receivables (c) Inventories Study of working capital position. The procedure and regulation for obtaining working capital bank finance Ratio analysis

METHODOLOGY
For studying the Working capital of a concern a great amount of data is required. The requisite data has been collected from annual statement of finance and the internal sources of the company including the staff members and the management. To prepare my project report I personally went through the finance department and collected the data. This project report will give valuable information to the readers of this report. In the preparation of this report, the various published sources from the company and the various reports, procedures had been followed.

THEORATICAL CONCEPT OF WORKING CAPITAL The need of working capital to run the day-to-day business activities cannot be overemphasized. There is hardly any firm, which does not require any amount of working capital. Firms may differ in their requirement of working capital but they do need working capital for their business. Broadly speaking the capital of a company can be divided into.

. .

Fixed capital

Working (fluctuating) capital Fixed capital is that part of the total capital, which is invested in, fixed assets, Likewise, working capital is that part of the total capital which are invested in current assets. MEANING OF WORKING CAPITAL_____________________________________ Fund needed for short-term purpose for the purchase of raw materials, payment of wages and others day-to-day expenses etc. are known as the working capital. Working capital is that part of firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors & inventories Working capital is the amount of funds necessary to cover the cost of operating the enterprises. CONCEPTS OF WORKING CAPITAL____________________________________ There are two concepts of working capital (1) Gross working capital (2) Net working capital GROSS WORKING CAPITAL___________________________________________ The gross working capital invested in total current assets of the enterprises.

NET WORKING CAPITAL______________________________________________ Net working capital is the excess of current assets over current liabilities. As per the general practice, net working capital is referred to simply as working capital. Now, one question arises that why does a firm need to hold current assets like inventory, receivables etc.? The answer to this question lies in the concept of operating cycle. OPERATING CYCLE___________________________________________________ Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases.

. Acquisition of resources such as raw material, labour, power and fuel etc. . Manufacture of the product that includes conversion of raw material into WIP into
Finished goods.

. Sale of the product either for cash or on credit. Credit sales create amount receivables
for collection. Operating Cycle (OC) is the sum of ICP and ARCP, thus ICP= RMPCP + WIPCP + FGCP OC = ICP + ARCP When firm buy materials from their suppliers, they do not pay cash immediately, thus the firm is able to defer payment and reduce its funds requirement for financing current assets. The time taken in paying to the suppliers is called accounts payables deferral period (APDP). If APDP is subtracted from operating cycle, it gives, what is called net operating cycle (NOC) if depreciation is excluded form computation of operating cycle. NOC is also called as cash conversion period (CCC).

Funds-------- -------------Raw materials----

-------Work-in-process

(Realisation of cash ) Receivables------------

----------------Finished goods

OPERATIVE CYCLE A manufacturing firms operating cycle (OC) can be calculated, by calculating inventory conversion period, account receivable conversion period, and account payable period. Raw materials conversion period (RMCP): RMPC = RMI RMC/360 (2) Work-in-process conversion period (WIPCP): WIPCP = WIPI COP/360 (3) Finished goods conversion period (FGCP): FGCP = FGI CGS/360 (4) Inventory conversion period (ICP): ICP = RMCP + WIPCP + FGCP (5) Accounts receivable conversion period (ARCP): ARCP = AR

CR Sales/360 (6) Operating cycle (OC): OC = ICP + ARCP (7) Accounts payables deferral period (APDP): APDP = AP CR Purchase/360 (8) Net operating cycle (NOC): NOC = OC - APDP WORKING CAPITAL MANAGEMENT Working capital management refers to the administration of all aspect of current assets, namely cash, marketable securities, and debtors and stock ( inventories) and current liabilities. There are many aspect of working capital management, which make it an important function of the financial manager. While estimation of working capital requirements following factors have to be taken into consideration. (1) Total costs incurred on material, wages and overheads. (2) The length of time for which raw materials are to remain in stores before they are issued for production. (3) The length of the production cycle or work-in-progress, i.e. the time taken for conversion of raw material into finished goods. (4) The length of sales cycles during which finished goods are to be kept waiting for sales. (5) The average period of credit allowed to customers. (6) The amount for cash required to pay day-to-day expenses of the business.

(7) The average credit period expected to be allowed by suppliers. (8) Time lag in the payment of wages and other expenses.

WORKING CAPITAL MANAGEMENT IN SURYA TELECOM (P) LIMITED Working capital management in SURYA TELECOM (P) LIMITED is fully centralized. Mainly finance and accounts section is responsible for the management of various components of working capital but managing director always takes the final decision. The working capital utilized by the company has decreased in the year 2005 in comparison to year 2004, but the working capital utilized but the company has increased in 2004 in comparison to year 2003 & 2005. this is because of utilization of more current assets mainly higher inventory and higher accounts of sundry debtors. WORKING CAPITAL TRUNOVER RATIO OF SURYA TELECOM LTD. Working capital turnover ratio indicates the number of times the working capital is turned over in the course of a year. This measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization of working capital. Working capital Turnover Ratio for the = Cost of Sales / Net working Capital Working Capital Turnover Ratio for the year 2003 ; 63.72/4.61 =13.82 times Working Capital Turnover Ratio for the year 2004; 62.06/2.81 = 22.09 times Working Capital Turnover Ratio for the year 2005; 81.70/5.26 = 15.53 times The Working Capital Turnover ratio is decreased in 2005 as compared to 2004. This is mainly because of utilization of more working capital. But as compared to 2003 ratio has increased. This is mainly because of utilization of less working capital.

WORKING CAPITAL OF SURYA TELECOM (P) LIMITED Year Current Assets Cash & bank balances Investment Receivables Installments of deferred Receivables Inventory (1) Raw Material (a) Imported (b) Indigenous (2) Stock in- process (3) Finished goods (4) Other ConsumableSpares (a) imported (b) indigenous (a + b) = Advances to supplier of Raw materials and stores & spares Advance payment of taxes Other current assets Duty drawback receivable Total Current Assets(A) 2003 0.99 0.67 2.46 2004 0.73 0.73 3.28 (Amount in crores) 2005 (Provisional) 0.42 0.75 2.75

59.06

68.29

74.35

2.15 2.15 7.87 0.05 1.10 74.35

2.72 2.72 11.91 0.03 2.45 90.14

2.75 2.75 12.00 0.15 0.75 93.92

CURRENT LIABLITES Year 1. Short term borrowings from banks(including bills purchased. Discounted and excess borrowing placed on repayment) (i) From applicant bank (ii)From other banks (iii) (of which bills Purchased/discounted) Sub total(A) 2.Short term borrowings From other 3. Sundry Creditors(Trade) 4. Advance payments from Customers/deposit from dealers 5. Provision for taxation 6. Dividend payable 7. Other statutory liabilities(due within one year) 8. Deposits/installments of Term loans/Debentures. 9. Other current liabilities And provisions(duek within one year (specify

2003

2004

2005

22.05 27.47

25.65 32.06

27.00 33.00

49.52 7.80 2.26

57.71 11.86 5.49

60.00 12.00 5.00

0.65 0.26

2.45 0.21

2.50 0.26

0.02 4.95 3.74 4.90

4.30

5.85

4.00

Major items int. Accrued ______________________________________________________________________ Sub total (B) TOTAL CURRENT LIABILITES (A)-(B) Net Working Capital 20.22 29.62 28.66

69.74

87.33

88.66

4.61

2.81

5.26

Net working capital of the Company as on 31.03.2003 decreased from Rs.4.61 crores as on 31.03.2004 to Rs. 2.81 crores mainly due to impact of deferred tax liability of Rs. 1.34 crores for past years written of against general reserves and other factors. But in comparison of years 2003& 2005. So it means there is more utilization of working capital. FACTORS DETERMING THE WORKING CAPITAL REQUIREMENTS The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operations, the length of production cycles, the rate of stock turnover and the state of economic situation. It is not possible to rank them because all such factors are of different importance and the influence of individual factors change for the firm over time. However, the following are the important factors generally influencing the working capital requirements.
1. NATURE

OR CHARACTER OF BUSINESS. The working capital requirements of a firm basically depend upon the nature of its business. Public utility undertaking like electricity, water supply and railways need very limited working capital because they offer cash sales only and supply services not products, and as such no founds are tied up in inventories and receivables. On the other hand trading and financial firms require less investment in fixed assets but have to invest large amounts in current asset like inventories, receivables and cash; as such they need large amount of working capital. The manufacturing undertaking also require sizable working capital along with fixed investment generally speaking it may be said that public utility undertaking require small amount of working capital, trading and financial firms require relatively very large amount, whereas manufacturing undertakings require sizable working capital between these two extremes.

2. SIZE OF BUSINESS/SCALE OF OPERATIONS : The working capital

requirements of a concern are directly influenced by the size of its business which may be measure in terms of scale of operations. Greater the size of a business until , generally larger will be the requirements of working capital. However , in some cases even a smaller concern may need more working capital due to high overhead, inefficient use of available resources and other economic disadvantages of small size.
3. PRODUCTION POLICY : In certain industries the demand is subject to wide

fluctuations due to seasonal variations. The requirements of working capital, in such cases, depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be curtailed during the slack season and increased during the peak seasons and increased during the peaks season if the policy is to keep production steady by accumulating inventories it will require higher working capital. 4. MANUFACTURING PROCESS/ LENGTH OF PRODUCTIONS CYCLE: In manufacturing business, the requirements of working capital in direct proportion to length of manufacturing process. Longer the process period of manufacture. Larger is the amount of working capital required. The longer the manufacturing time, the raw materials and other supplies have to be carried for a longer period in the process with progressive increment of labour and service costs before the finished product is finally obtained. There for, if there are alternative processes of production the processes of production, the process with the shortest production period should be chosen. 5. SEASONAL VARIATION. In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and the process them during the entire year. A huge amount is, thus, blocked I the from of material inventories during such seasons, which gives rise to more working capital requirements. Generally, during the busy season, a firm requires larger working capital then in the slack season. 6. WORKING CAPITAL CYCLE. In a manufacturing concern, the working capital cycle starts with the purchase of raw materials and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labour and service cost, conversion of finished stock into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw material and so on. The speed with which the working capital completes on cycle determines the requirements of working capital- longer the period of the cycle larger is the requirement of working capital. PRINICPLES OF WORING CAPITAL MANAGEMENT/ POLICY 1. PRINCIPALE OF RISK VARIATION: Risk here refers to the inability of a firm to meet its obligation as and when they become due for payment. Larger

2.

3.

4.

5.

investment in current assets with less dependence on short term borrowings increase liquidity , reduces dependence on short term borrowing liquidity , reduces risk and there by decreases the opportunity for gain or loss. On the other hand less investment in current assets with greater dependence on short term borrowings increases risk , reduces liquidity and increases profitability. A conservative management prefers to minimize risk by maintaining a higher lever of current assets or working capital while a liberal management assumes greater risk by reducing working capital. However, the goal of the management should be to establish a suitable trade off between profitability and risk. PRINCIPLE OF COST OF CAPITAL. The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost. PRINCIPLE OF EQUITY POSITION: This principle is concerned with planning the total investment in current assets. According to this principle, the amount of working capital invested in each component should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios (i) current assets as percentage of total assets and (ii) current assets as a percentage of total sales. While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages. PRINCIPLE OF MATURITY OF PAYMENT: This principle is concerned with planning the source of finance for working capital. According to this principle, a for should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessment. Generally, shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the greater the inability to meet its obligations in times

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL Working capital is the life blood and never center of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: 1. Solvency of the business: adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill: Sufficient working capital enables a business concern to make prompt payment and hence helps in creating and maintaining goodwill.

3. Easy Loans: A concern having adequate working capital. High solvency and good credit standing can arrange loans from banks and other on easy and favorable terms 4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts of the purchase and hence it reduces costs. 5. Regular supply of raw materials: sufficient working capital ensures regular supply of raw materials and continuous production. 6. Regular payment of salaries, wages and other day-to day commitments: A company which has adequate working capital can make regular payment of salaries, wages and other day to day commitments which raises the morale of its employees, increases their efficiency , reduce wastage and cost and enhances production and profits. 7. Exploitation of favorable market conditions: Only concern with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices. 8. Ability to face crisis: Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods generally there is much pressure on working capital 9. Quick and regular return on investment: Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors and creates a favorable market to raise additional funds in the future. 10.High morale: Adequacy of working capital creates an environment of security, confidence high morale and creates overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortage of working capital. Both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm. DISADVANTAGES OF EXCESS WORKING CAPITAL 1. Excessive Working capital means idle funds which earns no profits for the business and hence the business cannot earn a proper rate on its investments. 2. When there is redundant working capital. It may lead to unnecessary purchasing and accumulation of inventories causing more changes of left, waste and losses. 3. Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts. 4. It may result into overall inefficiency in the organization. 5. When there is excessive working capital, relations with banks and other financial institutions may not be maintained. 6. Due to low rate of return on investment, the value of shares may also full. 7. The redundant working capital gives rise to speculative transactions. DISADVANTAGES OR DANGER OF INADEQUATE WORKING CAPITAL 1. A concern which has inadequate working capital cannot pay its short term liabilities in time. Thus it will lose its reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discounts etc. 3. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lake of working capital.

4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business.

5. It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds. 6. The rate of return on investments also falls with the shortage of working capital.

SCOPE OF WORKING CAPITAL MANAGEMENT The scope of working capital management is to determine what should be the adequate level of each component in the working capital of the concern. Generally three aspects are covered under it. CASH MANAGEMENT : Cash management is concerned with the managing of cash and outflows, cash flows within the firm, & cash balance held by the firm at a point of time. ACCOUNT RECEIVABLE MANAGEMENT: Receivable management is the process of making decisions relation to investment in trade debtors. It is concerned with managing receivable efficiently to receive the payment in time and to avoid the change of misappropriation. INVENTORY MANAGEMENT: Inventory management is a proper planning of purchasing, handling storing and accounting of inventory. It is concerned with managing inventories effectively and efficiently in order to avoids unnecessary investment or inadequate level. Further each component of working capital Management are discussed in detail: CASH MANAGEMENT Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running on continous basis: it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should deep sufficient cash , neither more nor less. It keeps additional funds to meet any emergency situation. Cash is required to meet a firms

transactions and precautionary needs. Some firms may also maintain cash for taking advantages of speculative changes in prices of input and output. Cash management is concerned with the managing of: Cash flows into and out of the firm. Cash flows within the firm. Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. It can be represented by a cash management cycle as shown below: Business Operations

Business Operations

Informatiot on

Cash management cycle

Sales generate cash, which has to be disturbed out. The surplus cash has to be invested while deficit has to be borrowed . Cash management seeks to accomplish this cycle at a minimum cost. At the same time. It also seeks to achieve liquidity and control . Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a firm holds. It is significant because it is used to pay the firms obligations: The aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way. The firm should evolve strategies regarding the following four facts of cash management;

CASH PLANNING: Cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash budget should be prepared for this purpose. MANAGING THE CASH FLOWS: The flow of cash should be properly managed. The cash inflows should be accelerated while , as far as possible , the cash outflows should be decelerated. OPTIMUM CASH LEVEL: The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. INVESTING SURPLUS CASH : The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short-term investment opportunities such as bank deposits, marketable securities or inter corporate lending.

CASH BUDGETS: Cash budget is the most significant device to plan for and control cash receipts and payments . A cash budget is a summary of the firms expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period . This information helps the financial manager to determine the future cash needs of the firm , plan for the financing of these needs and exercise control over the cash and liquidity of the firm. Cash budget is generally prepared for shout periods such periods such as weekly , monthly, quarterely ,half yearly or yearly . Cash budget will serve its purpose only if the firm can accelerate its collections and postpone its payments within allowed limits. The financial manager should be aware of the instruments of payments, and choose the most convenient and least costly mode of receiving payment . Therefore , a firm should follow the norms of the business. CASH MANAGEMENT IN SURYA TELECOM PRIVATE LIMITED In Surya Telecom Pvt. Ltd. The level of cash budget of the period are prepared to estimate future needs in Surya Telecom Pvt. Ltd. . The Company prepares the budgeted cash flow statement summarizes the course of changes in cash position of a business enterprise between two dates of balance sheet. If there is any shortage of cash,it can be met by utilizing the bank credit by discounting the bills, by raising loans or deposits from institutions or person other than bank. If the company has surplus cash, the company made investment in government securities and UTI or paid the short-term loans. LEVEL OF CASH AND BANK BALANCES IN REALATION TO CURRENT ASSETS

YEARS Cash & Bank Balances Current Assets (excluding non Current assets) Cash & Bank Balances as a % Of current assets

2001 0.99 74.35

2002 0.73 90.14

(Rs. In Crores) 2003 0.42 93.92

1.33%

0.81%

0.45%

From this table we came to know that cash & bank balance has been declined in comparison of total current assets.

ACCOUNTS RECEIVABLE MANAGEMENT

Trade credit arises when a firm sells its product or services on credit and does not receive cash immediately. Trade credit creates receivable or book debts, which the firm is expected to collect in the near future. Accounts Receivable constitutes a substantial portion of current assets of several firms. The purpose of investing in receivables is to meet competition , and to increase the sale and profits. But for the investment in receivable, a firm has to incur certain certain cost and risk of bad debts. Thus,there should be proper control and management of receivables. A firms investment in Accounts Receivables depends on: The volume of credit sales. The collection period.

Thus the companys average account receivables (AAR) will be : AAR= Credit sales*Collection period A firm can save costs and improve profitability if it can reduce its investment in account receivables. Introducing appropriate credit policies , streamlining collection procedure may do this and close monitoring of account receivables. CREDIT POLICY The financial manager or the credit manager may administer the credit policy of a firm. In establishing an optimum credit policy , the financial manager must consider the importanant decision variables , which influence the level of receivables. The major decision variables include the following: Credit Standards. Credit Terms Collection Policy

Credit Standards:
Credit Standards are the criteria , which a firm follows in selecting customers for the purpose of credit extension . The firm may tight credit standards; it may sell mostly on cash basis, and may extend credit only to the most reliable and financially strong customers. This will result in no bad debt losses

but its sales may be low. On the other hand , if credit standards are loose the firm may have larger sales.But the firm will have to carry larger receivable. The costs of administering credit and bad debts losses will also increase.

Credit Terms:
The stilpulations under which the firm sells on credit to customers are called credit terms.These stipulations include credit period and cash discount. Credit period The length of time for which credit is extended to customers is called the credit period . A firms credit period may be governed by the industry norms. But depending on its objective . the firm can lengthen the credit period if customers are defaulting too frequently and bad debts losses are building up. Sometimes more credit time is allowed to increase sales to existing customers and also to attract new ones.

Cash discount A cash discount is reduction in payment offered to customers to induce them to repay credit obligations within a specified period of time , which will be less than the normal credit period. It is usually expressed as a percentage of sales. Cash discount terms indicate the rate of discount and the period for which it is available. A firm uses cash discount as a tool to increase sales and accelerate collections from customers.

Collection Policy A collection policy is needed because all customers do not pay the firm;s bill in time . A collection policy of the concern follows following steps in collection overdue amounts:

(1) Sending reminder for payments . (2) Personal request through telephone , telegram . (3) Personal visit to customers. (4) Taking help of collecting agencies. (5) Lastly , taking legal action (this step should be taken only after exhausting all other means) A collection effort should , therefore , aim at accelerating collections from slow payers and reducing bad debts losses. A collection policy should ensure prompt And regular collection. MONITORING RECEIVABLES (6) A firm needs to continuously monitor and control its receivable to ensure the success of collection efforts. There are three methods of evaluating the management of receivables are: Average Collection Period Aging schedule Collection experience matrix Average collection period (ACP) Average collection period is calculated as: ACP = Debtors *360 / credit sales The average collection period so calculated is compared with the firms stated credit period to judge the collection eeficiency . The average collection period measures the quality of receivable since it indicates the speed of their collectability. Aging schedule: Aging schedule breaks down receivables according to the length of time for which they have been outstanding. Aging schedule provides more information about the collection experience. Collection Experience matrix: This method relates receivables to sales of the same period. When sales over a period of time are shown horizontally and associated receivables vertically in a tabular forms, a

matrix is constructed. Therefore, this method of evaluating receivables is called collection experience matrix. ACCOUNT RECEIVABLES MANAGEMENT IN RANA SUGARS LIMITED At Surya telecome (P) Ltd., the finance controller administers credit policy of company. He established the credit policy according to the market conditions. They also gives the cash discount to the customers whenever its necessary to induce them to repay credit obligations within a specified period of time or to increase sales and accelerate collection from customers. At Surya Telecome (P) Ltd methods for efficient monitoring of receivables are used. LEVEL OF SUNDRY DEBTORS IN RELATION TO CURRENT ASSETS YEAR Sundry Debtors at the End of year Current Assets (excluding Non C.A) Debtors as % Of Current Assets 2001 2.46 2002 3.28 2003 2.75

74.35

90.14

93.92

3.31%

3.64%

2.93%

In comparison to year 2001&2002 in the year 2003 the percentage of sundry debtors in relation to current assets of Surya Telecome (P) Ltd., have been decreasing. This means the credit sales has been decreasing in the year 2003.

DEBTORS TURNOVER RATIO OF RANA SUGARS LIMITED Debtors turnover ratio indicates the number of tiem the detor turned over during the year. Higher the debtor turnover ratio, the more efficient management of the debtors. Debtor turnover Ratio. = Total Credit Sales /Average debtors Debtor turnover ratio for 2000-2001 78.44/2.46 = 31.89 times

Debtor turnover ratio for 2001-2002 76.63/3.28 =23.36 Debtor turnover ratio for 2002-2003 96.59/2.75-35.12 times 2001-2002 Debtor turnover ratio has been increasing in 2002-2003 in comparison to year. This is mainly because of decrease in the companys debtors during this year.-*/ Inventory Management Introduction: Inventories constitute the most significant part of the current assets of a large majority of companies in India. On an average, inventories are approximately 60 per cent of current assets in public limited companies in India. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is therefore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a company to reduce its level of inventories to considerable degree, e.g., 10 to 20 per cent, without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in excessive inventories carries a favorable impact on a companys profitability. NATURE OF INVENTORIES Inventories are stock of the product a company is manufacturing for sale and components the make up the product. The various forms in which inventories exist in a manufacturing company are: raw materials, work-in-process and finished goods.

Raw materials: Raw material are those basic inputs that are converted into finished product through the manufacturing process. Raw materials inventories are those units, which have been purchased and stored for future. Work-in process: Work-in-process inventories are semi-manufactured products. They represent product that need more work before they become finished products for sale. Finished Goods: Inventories are those completely manufactured products. Which are ready for Sale.

Firms also maintain a forth kind of inventory, supplies (or stores and spares).Supplies donot directly enter production, but are necessary for production process. Need to hold Inventories There are three general motives for holding inventories: Transaction motives: emphasiss the need to maintain inventories to facilitate smooth production and sales operations. Precautionary motive: necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. Speculative motive: influence the decision to increase or reduce inventory levels to take advantage of price fluctuations.

Objectives of inventory management To maintain a large size of inventory for efficient and smooth production and sales operations. To maintain a minimum investment in inventories to maximize profitability. The aim of inventory management should be avoid excessive and inadequate level Of inventories and to maintain sufficient inventory for the smooth production and sales operations. An effective inventory management should:

Ensure a continuous supply of raw materials to facilitate uninterrupted production.

Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service. Minimize the carrying cost and time. Control investment in inventories and keep it at an optimum level. LEVEL INVENTORY HOLDING Surya Telecom Pvt. Ltd. has to hold the inventory at a level at which it is neither excess nor less than the requirement. Surya Telecom Pvt. Ltd. officials in such a way fix this level that neither company suffers from plant shutdown due to shortage of materials nor it is overburdened due to heavy investment in stocks. Inventory holding level is fixed after taking into consideration the following factors: 1. Availibility of material in the market. 2. Whether availability is seasonal or not. 3. Consumption during lead-time. 4. Delivery schedule of supplier. 5. Replenishment time. The ministry of commerce , reserve bank of India (RBI) approves the inventory holding level and various banks are concerned about holding level because they have to give loans against inventory. LEVEL OF INVENTORY IN RELATION TO CURRENT ASSETS ---------------------------------------------------------------------------------------------YEAR Total inventory at The end 2001 61.21 2002 71.01 2003 77.10

Total current assets (excluding non CA)

74.35

90.14

93.92

Inventory as a % of 82.33% 78.78% 82.09% Current assets The above table shows that inventory constitutes a large part of current assets.when we compare level of inventory in relation to current assets between year 2001 & 2003 this gives an indication of good step towards the efficient inventory management.

INVENTORY TURNOVER RATIO OF SURYA TELECOM PVT. LTD.

Inventory turnover ration indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory . Higher the ration is an indicator of better management of stocks. Inventory Turnover Ratio = Cost of sales/ Average inventory Inventory Turnover Ration for 2001 63.72/61.21= 1.04 times Inventory Turnover Ratio for 2002 62.06/71.01= 0.87 times Inventory Turnover Ratio for 2003 81.70/74.35= 1.10times

CURRENT RATIO OF SURYA TELECOM PVT. LTD.

Current Ratio = Current Assets/Current Liabilities Current Ratio for the year 2001 = 74.35/69.74 = 1.07 times Current Ratio for the year 2002 = 90.14/87.33 = 1.03 times Current Ratio for thr year 2003 = 93.92/88.66 = 1.06 times The Current Ratio of the company has been declining if it is compared to the year 2001.it is because of increase in current liabilities mainly on account of pending raw materials to

WORKING CAPITAL BANK FINANCE Bank Finance for Working Capital : Banks are the main institutional sources of working capital finance. Based on the firms production and sales plan, banks fix a maximum amount of working capital, called credit limit for the firm. They also determine separate credit limits for peak and non peak requirements in the case of the firms, which have seasonal sales. In practice , banks donot lend 100% of the credit limit; they deduct margin money. If the margin requirement is 30%, bank will lend only up to 70% of the value of asset. Forms of Bank Finance A firm can draw funds from its bank within the maximum credit limit sanctioned. It can draw funds in the following forms:

Overdrafts : Overdrafts facility is allowed to borrower to withdraw funds in excess of the balance in his current account up to a certain specified limit during a stipulated period. Although the overdrawn amount is repayable on demand, banks generally continue renewing the limits of their borrowers. This system is also quite flexible from the borrower point of view. Interest is charged on daily balances on the amount actually withdrawn subject to some minimum charges.

Cash Credit: Cash credit is the most popular method of working capital finance. Under this method , a borrower is allowed to withdraw funds from the bank up to sanctioned credit limit . He is not required to withdraw the entire sanctioned credit at once. He can withdraw funds periodically as he requires , and also , can repay the outstanding amount whenever he has surplus cash in his credit account. He is required to pay interest only on the actual amount utilized by him. Cash Credit limits are sanctioned against the security of current assets. This system provides maximum flexibility to the borrower.

Purchasing or discounting of bills : Under this, Banks purchases or discounts the borrowers bills within the sanctioned credit limit. When a bill is purchased, the borrower receives the amount of the bill minus bank commission (discount). The bank collects the full amount on maturity. Letter of Credit: Under letter of credit , a bank opens a L/C in favour of a customer to facilitate his purchase of goods. It helps its customers to obtain credit from suppliers , particularly the foreign suppliers because it ensures that there is no risk of non-payment. Under the L/C arrangement , if the customer does not pay to the supplier within the credit period , the bank makes the payment . Bank charges the customer for opening the L/C . L/C limits can be of two types: (a) L/C at site (b) L/C on D/A basis (document against acceptance). Unlike cash credit or overdraft facility, the L/C arrangement is an indirect financing. Working capital loan : A borrower may sometimes require ad hoc or temporary accommodation in excess of sanctioned credit limits to meet unforeseen contingencies. Bank provide such accommodations through a demand loan account or a separate non-operable cash credit account. The borrower is required to pay higher rate of interest above the normal rate of interest on such additional credit. Banks generally donot provide working capital finance without adequate security . The following are the modes of security ,which a bank may require:

 Hypothecation: Under hypothecation , the borrower is provided with working capital finance by the bank against the security of movable property, generally inventories. The borrower does not transfer the property to the bank; he remains in the possession of property made available as a security for the debt. Thus hypothecation is a charge against property for an amount of debt where neither ownership nor possession is passed to the creditor. Banks generally grant credit hypothecation facility to new borrowers.

Pledge: Under this arrangement , the borrower is required to transfer the physical possession of the property offered as a security to the bank to obtain credit. The bank has a right of lien and can retain possession of the goods pledged unless payment of the principal, interest and any other expenses is made. In case of default, the bank may either (a) sue the borrower for the amount bue, or (b) sue for sale of goods pledged, or (c) after giving due notice, sell the goods.

Mortage : Mortage is the transfer of a legal or equitable interest in a specific immovable property for the payment of debt. In case of mortage , the possession of the property may remain with the borrower, with the lender getting the full legal title. The transferor of interest (borrower) is called the mortgagor, the transferee (bank) is called the mortgage and the instrument of transfer is called the mortgage deed. Usually, for working capital finance, the mode of security is either hypothecation or pledge. Mortgage may be taken as additional security. Lien: Lien means right of the lender to retain property belonging to the borrower until he repays credit. It can be either a particular lien or general lien. Particular lien is a right to retain property until the claim associated with the property is fully paid. General lien, on the other hand , is applicable till all dues of the lender are paid.

REGULATION OF BANK FINANCE Banks have been following certain norms in granting working capital finance to companies. These norms have greatly influenced by the recommendations of various committees appointed by the Reserve Bank of India from time to time. The norms of working capital finance followed by bank since mid-70 were mainly based on the recommendations of the TANDON COMMITTEE. The CHORE COMMITTEE made further recommendations to strengthen the procedures and norms for working capital finance by banks. TANDON COMMITTE Tandon committee was appointed by RBI in july 1974, under the chairmanship of shri P.L. Tandon to suggest guidelines for the rational allocation and optimum use of bank credit. For regulation bank credit. The Tandon Committee made comprehensive recommendations, which have been large, accepted by the RBI. These recommendations are as follows:

Inventory and receivable norms: the committee has suggested norms 15 major industries (presently 42 industries) which represent the maximum level for holding inventories and receivable pertaining to : (a) raw material (b) stock in process (c) finished goods (d) receivables and bill discounted and purchased. The norms have been worked out according to the time element. The norms suggested may not be viewed as rigid of inflexible under certain circumstances like bunched receipt of raw materials, power cuts, strikes , transport delays etc.

Quantum of Permissible Bank Finance : Three methods have been suggested for determining the maximum permissible amount of bank finance. Under these methods, current assets will be taken at estimated values or values as per the Tandon ommittee norms whichever is lower.

These methods are: Method 1: The borrower will contribute 25% of the working capital gap (current assets-current liabilities excluding bank borrowings), the remaining 75% can be financed from bank borrowings. This method will give a minimum current ration of 1:1.

Method 2: The borrower will contribute 25 % of the total assets. The remainingof the working capital gap (i.e. the working capital gap less than the borrowers contribution) can be bridged from the bank borrowings. This method will give ration of 1.33:1. Method 3: The borrower will contribute 100% of core assets (i.e. the current assets which are permanently required by the unit for its functioning and 25% of the balance of current assets. The remaining of the working

capital gap can be met from the borrowings. This method will further strengthen the current ratio.

Style of Lending : The committee suggested that the overall credit limit might be bifurcated into a loan component, which would represent the minimum level of borrowing throughout the year and demand cash credit component. Which would you take care of the fluctuating requirements, both to the reviewed annually 0:3 The demand cash credit component. Apart from loan and cash credit , a part of the total credit requirement within the overall eligibility could also be provided by way of bill limits to finance sellers receivables.

Inforamation & Reporting system: The committee suggested a comprehensive information system as under to enable the banker to have a deeper insight into the operations and funds requirement of the borrower. (1) Quarterly profit and loss statement (2) Quarterly statement of current assets and current liabilities (3) Half yearly Performa balance sheet and profit and loss account within 60days (4) Annual audited accounts within 3 months (5) Monthly stock statements.

CHORE COMMITTEE RECOMMENDATIONS The Reserve Bank of India in April 1979, appointed another committee under the chairmanship of shri K.B.Chore to review the system of cash credit. The major recommendations having a bearing on bank credit to firms, of the committee are as follows:

Reduced dependence on bank credit: Borrower should contrinute more funds to finance their working capital requirements and reduce dependence on the bank credit. Therfore the group recommended firms to be placed in the second method of lending a explained by the Tandon Committee. In case the borrower was unable to comply with this requirement immediately, he would be granted excess borrowing in the form of working capital term loan (WCTL). (WCTL) should be repaid in semiannual installments for a period not exceeding five years and a higher rate of interest than under the cash credit system.

Credit limit to be separated into peak level and normal non-peak level limits: Banks should appraise and fix separate limits for the peak level and normal non-peak level credit requirements for all borrowers in excess of Rs. 10lakhs , indicating the relevant periods. Within the sanctioned limits for these two periods the borrower should indicate in advance his need for funds during a quarter. Any deviation in utilization beyond 10% tolerance limit should be treated as an irregularly and appropriate action should be taken. Banks should discouraged adhoc or temporary credit limit. If sanctioned under exceptional circumstances, additional interest of 1% per annum should be charged for such limits.

Existing lending system to continue : The existing system of three types of lending: cash credit, loans and bills should continue. Loan and bills should however, replace cash credit system wherever possible. Cash credit accounts in case of large borrowers should discontinue. Information system : The discipline relating to the submission of quarterly statements to be obtained from the borrowers under the existing system should be strictly adhered to in respect of all borrowers having working capital limits of Rs. 50 lakh and over from the banking system. After the Tandon Committee and Chore Committee, Reserve Bank of India has appointed the various committee such as Marathe Committee, Nayak Committee, jilani Committee etc. But all these committee are based upon the Tandon Committee. RBI with minor Modifications has accepted recommendations of these committees. CREDIT MONITORING ARRANGEMENT The Reserve Bank of India (RBI) regulations the overall credit granted by commercial banks to firms. It has replaced its Credit Authorization Scheme (CAS) by its Credit Monitoring Arrangement (CMA). CAS was withdrawn of 10th October 1988. Under CAS, prior authorizations was needed from the RBI for the sanction of working capital limits/ term loan, above the prescribed cut-off points. Now under CMA, the RBI will oversee the sanction of term loans and working capital limits beyond the level as post-sanction scrutiny.

The banks in sanctioning of working capital limits, have to submit to RBI sanction/renewal of Credit limits to borrowers enjoying Working Capital facailities beyond Rs. 5 crore and sanction of additional limits to the existing borrowers, which would you take their total limits from the banking system beyond Rs. 5 crore for post sanction scrutiny. So far the post-sanction scrutiny had been prescribed for the RBI for credit limits of Rs. 2 crore. Banks should submit relevant papers to the RBI within 15 days of sanction/renewal by the bank for scrutiny. The bank may, sanction ad-hoc limits on merits to borrowers, but such limits, may be for a period not exceeding three months. The banks may also sanction additional limits for payments of bonus, while sanction of such limits to borrowers be reported to the RBI along with a copy of the sanction buys the bank. Also a certificate that the previous loan, if any granted for the purpose has been fully repaid and if it has not been liquidated, the reasons for it should accompany it.

FINANCING OF WORKING CAPITAL IN SURYA TELECOM (P) LTD. The working capital is financed by raising loans from banks and finance corporation. In Surya Telecom Pvt. Ltd. use Peak Deficit Method is used to calculated working capital of the company. WORKING CAPITAL LOANS (Rs. In Crores)

Working Capital Loans:

As at

As at

As at

31.03.2000 State Bank of India (SBI) State Bank of Patiala(SBOP) Bank of Baroda (BOB) 23.44 16.01 13.39

31.03.2001 22.05 14.85 12.62

31.03.2002 25.65 17.50 14.56

Working Capital loans are secured by pledge of crystal sugar and gunny bags, and hypothecation of all other current assets of the company in favour of State Bank of India (SBI), State Bank of Patiala (SBOP) and Bank Of Baroda (BOB) on pari-passu basis. The loan has been further secured by personal guarantee to promoter Directors and third charge on the entire fixed assets of the Company.

SUMMARY

SUMMARY Most manufacturing companies make substantial investment in current assets or gross working capital. Proper management of working capital in a large manufacturing concern assumes importance as it reflects on the sound financial health of an organization. Achieving budgeted growth rate and excelling past performance in sales turnover do not necessarily indicate proper management of working capital as even a highly profitable company may be having a precarious cash position. A through analysis of working capital position, drawing of appropriate action plans for improvement through revamping of existing system, and a multidisciplinary term approach are essential to achieve the objective of efficient management of working capital. This study shows that there has been a very efficient management of working capital in SURYA TELECOM (P) LIMITED. Realization of working capital management requires. The end use of current assets is very important. In order, words funds should not be blocked in non-working capital assets(non-productive current assets such doubtful loans and advance, bad debts. Obsolete inventory, and other inactive current assets). In fact, effective management of working capital is reflected in the higher return on investment (ROI) which also leads to an improvement in the earning per share (EPS). Maintenance of working capital at the optimum level requires effective co-operation from and prefect co-ordination among all the function in an organization-production, material management, marketing management, finance and other managerial functions. Each function in an organization should strive for:

. .

Achieving the budgeted level of working capital. Reducing the cost of financing working capital

. .

Becoming cost conscious in using working capital. Strengthening the data base on working capital management.

Other managerial functions, which can contribute to efficient working capital management, may be summarized as follows:

. . . .

Intensifying productivity efforts in the organization. Making management information system effective Making extensive use of computer to ascertain aberrant behaviors in current assets and to diagnose symptoms. Taking other measures such as pooling common implementing suitable incentive schemes, and providing for training and hiring of temporary staff for standard type of administrative and accounting work.

To conclude, any reduction in operation cost as a result of effective management of working capital would improve the profitability, liquidity and solvency of an organization.

FINDINGS AND SUGGESTIONS

FINDINGS

. .

Telecom industry is a demandable industry. And it is under the direct control of govt. being a demandable industry its main working is from when demand. There is a huge inventory SURYA TELECOM (P) LIMITED, so the working capital requirements are very high in this company.

Profitability of SURYA TELECOM (P) LIMITED is less because of the following reasons: i) ii) iii) Lower product recovery. Lower capacity utilization. Lower sales of power against the estimates because of delay in commissioning of power project.

. . . . .

Net profits of the company are unstable. This year recovery from raw material is 10%, which is usually comes out to be 9% Gross block of Assets is more than the total amount of net sales. Cost of sales is less in comparison to sales which is good sign Debtors turnover ratio is fluctuating. The ratio has decreased in the year 2005. it shows that currently the debts of the company are not collected well in time.

SUGGESTIONS

. . .

Telecom industry being a demandable industry is forced down its production during the period of demand. The distillery will work for the whole year, which will help in reducing the fixed cost. The management must take steps to reduce its cost of goods sold by bringing down its expenditure on labour charges. The management is advised to keep its borrowing under control so that long term solvency position of the company is not affected.

. . .

The management must manage to liquidate their current assets efficiently and try to minimize the quantity of obsolete stock and debtors in current assets. The current liabilities must also be kept under control. The company should try to increase its sales because right now their sales are less than the gross block of fixed assets, they are having.

BIBLIOGRAPHY

BIBLIOGRAPHY

. . . .

Chandra prasana ; Financial Management Tata Mc-Graw-Hill, Publishing Co. Ltd; New Delhi, 2004. Pandey I.M.; Financial Management Vikas Publishing House Pvt. Ltd ; New Delhi, 2004. Sharma R.K. and Gupta Sashi . K ; Management Accounting and Business Finance Kalyani Publishers, New Delhi, 2004. Jain T.R.; Indian Economy V.K. Publication, New Delhi, 2004.

Annual Report of SURYA T

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