History

The pioneer years

Our history begins in 1866, when the Anglo-Swiss Condensed Milk Company opens the first
European condensed milk factory in Switzerland. Henri Nestl develops a breakthrough infant
food in 1867, and in 1905 the company he founded merges with Anglo-Swiss, to form what is now
known as the Nestl Group. During this period cities grow and railways and steamships bring
down commodity costs, spurring international trade in consumer goods.

Highlights
1866

US brothers Charles and George Page help establish Anglo-Swiss Condensed Milk Company.
Using abundant supplies of fresh milk in Switzerland, they apply knowledge gained in their
homeland to establish Europes first production facility for condensed milk in Cham. They start
supplying Europes industrial towns with the product under the Milkmaid brand, marketing it as a
safe, long-life alternative to fresh milk.

1867

Nestls founder, German-born pharmacist Henri Nestl, launches his farine lacte (flour with
milk) in Vevey, Switzerland. It combines cows milk, wheat flour and sugar, and Nestl develops it
for consumption by infants who cannot be breastfed, to tackle high mortality rates. Around this
time he starts using the now iconic Nest logo.

1875

Henri Nestl sells his company and factory in Vevey to three local businessmen. They employ
chemists and skilled workers to help expand production and sales.

1878

Fierce competition develops between Nestl and Anglo-Swiss, when both companies start selling
rival versions of the others original products: condensed milk and infant cereal. Both firms
expand sales and production abroad.

1882-1902

In 1882 Anglo-Swiss expands into the US, but the death of George Page frustrates its plans. In
1902 it sells its US-based operations, which paves the way for an eventual merger with Nestl.

1904

Nestl begins selling chocolate for the first time when it takes over export sales for Peter &
Kohler. Henri Nestl himself plays a key role in the development of milk chocolate from 1875,
when he supplies his Vevey neighbour Daniel Peter with condensed milk, which Peter uses to
develop the first such commercial product in the 1880s.

Strategy
Our ambition is to be the world's recognised leading Nutrition Health and Wellness company, and
the industry reference for financial performance, trusted by all stakeholders.
For almost 150 years we have enhanced people's lives by offering tastier and healthier food and
beverages choices at all stages of life and at any time of day, helping them care for themselves
and their families. We have built our success by anticipating the future and continuously adapting
ourselves to seize the opportunities it presents.

Management

WHY INDIA
Large domestic market
India is one of the largest emerging markets, with a population of over one billion. India
is one of the largest economies in the world in term of purchasing power and has has a
strong middle class base of 300 million.
Rural and urban potential
Rural- urban profile
Urban
Population 2012-13 (mn 53
household )
Population 2013-14 (mn 69
household)
% Distribution (12-13)
28

Rural
135

Market (town/villages)

3,768

6,27,000

Universe of outlets (mn)

3.3

153
72

Source: statistical outline of India, NCAER

Around 70 % of the total household in India (188 million) reside in the rural areas. The
total number of rural households is expected to rise from 135 million in 2012-13 to 153
million in 2013-14. This present the largest potential market in the world. The annual size
of the rural FMCG market was estimated at around us$ 10.5 billion in 2001-02. With
growing incomes at both the rural and the urban level, the market potential is expected to
expand further.

Demand supply gap

Currently, only a small percentage of the raw materials in India are processed into value
added products even as the demand for processed and convenience food is on the rise.
This demand supply gap indicates an untapped opportunity in areas such as packaged
form, convenience food and drinks, milk product etc.
In the personal care segment, the low penetration rate is both the rural and urban areas
indicate a market potential.

India a large consumer goods spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on
personal care product. The large share of fast moving consumer goods (FMCG) in total
individual spending along with the large population base is another factor that makes
India one of the largest FMCG markets.

ACTIVITIES OF THE COMPANY

A
C
T

SALES

FINANCE & IT

V
I
T

MARKETING

I
E

RESEARCH &
DEVELOPMENT

EXPORT

OF

TRCHINICAL &
OPERATION

T
H

PRODCUTION

HUMAN RESOURCE &

LEGAL

C
O
M
P
A
N
Y

QUALITY
ASSURANCE

WORKING CAPITAL MANAGEMENT

INTRODUCTION TO THE WORKING CAPITAL:-

It involves the relationship between a firm's short-term assets and its short-term
liabilities. The goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both maturing short-term
debt and upcoming operational expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and cash.
Working capital is represented by current assets .It constitutes a dominant segment of
investment ,particularly in manufacturing enterprises management of working capital
assumes added significance in the context of small scale and medium sized industries in
our country .most of them have weak financial base and limited access to the institutional
finance .their risk capacity is also low. An effort is to reduce or optimize its size releases
funds and improves profitability working capital management deals with management of
each of the firms current assets in such a way that maximizes the value of the firm.
Shortage of funds for working capital as well as the uncontrolled over expansion has
caused many business to fail and in less severe cases has stunted their growth .specially
in small firms, working capital management may be the factor that decides success or
failure: in large firms, efficient working capital management can significantly affect the
firms risk, returns and share price.Commercial banks are the major source of finance to
the industry and commerce banks in India provides mainly short term credit for financing
working capital needs .the various types of advances provided by them are: loans cash
credit and overdrafts are running accounts .borrower can draw funds up to the sanctioned
credit limit interest is charged on the daily outstanding amount.
DEFINITION

According to SHUBIN, working capital is the amount of funds necessary to cover the
cost of operating the enterprise. Working Capital Management is the process of planning

and controlling the level and mix of the current assets of the firm as well as financing
these assets. Working capital is the amount that is required to meet the day to day
operations of the business.

TYPES OF WORKING CAPITAL

Working capital can be classified on the following two bases:
1.
On the basis of concepts
2. On the basis of time
1. On the basis of concepts: On the basis of concepts working capital can be of
two types.

Gross working capital

Net working capital

Gross working capital

It refers to the firms investment in current assets. Current assets are the assets which
can be
securities,

converted in to cash with in an accounting year & include cash, short-term

and debtors, bills receivable & stock

Net working capital :

It refers to the difference between current assets and current liabilities. Current
liabilities are those claims of outsiders which are expected to mature for payment
with in an accounting year & include creditors, bills payable & outstanding
expenses.

2. On the basis of time: Working capital can be divided into two categories:

Permanent (fixed or core) working capital

Temporary (seasonal or variable) working capita

Permanent (fixed or core) working capital:

Permanent or fixed, working capital is the minimum amount of investment in all
current assets is required at all times to carry out minimum level of business
activities. In other words, it represents the current assets required on a continue basis
over the entire year. For example every firm has to maintain level of raw material,
finished goods and cash balance. This minimum level of current assets is called
permanent or fixed working capital as this part of capital is permanently belongs in
current assets. This amount varies from year to year, depending upon the growth of
the company and the stage of the business cycle in which it operates. Permanent
working capital is needed permanently for the business and, therefore, it should be
financed out of long- term funds.

Temporary (seasonal or variable) working capital:

The amount of such working capital keeps on fluctuating from time to time on the
basis of

business activities. For example extra inventory has to be maintain to

support sales during peek sales period. Similarly, this is a receivable also increase
and must be financed during the period of high sales. On the other hand, investment
in inventories receivables etc, will decrease in period of depression.
Hence, it is that part of total working capital which varies with the variation in the
volume of business operations. It rises during brisk seasons and goes down during
slack season. It can be therefore, be called seasonal working capital also suppliers of
temporary working capital can expect it return during of season when it is not
required by the firm. Hence, temporary working capital is generally financed such as
bank credit.

COMPONENTS OF WORKING CAPITAL

There are two components of working capital, viz., current assets and current liabilities.
1. CURRENT ASSETS :
Current assets are those which are converted into cash in the normal course of business
within a short period- say a maximum of one year. List of current assets comprises of:

Cash in hand & cash at bank

Bills receivables
Sundry debtors (less provision for bad debts)
Short term loans and advances.
Inventories of stocks, as: raw material, work-in-progress, stores and spares,

finished goods
Temporary investments of surplus funds.
Prepaid expanses
Accrued incomes.

2. CURRENT LIABILITIES :
Current liabilities are those liabilities which are intended to be paid in the ordinary course
of business within a short period of normally one accounting year out of the current
assets are the income of the business. Examples of current liabilities are:

Bills payable
Sundry creditors are account payable.
Accrued or outstanding expenses.
Short terms loans, advance and deposits.
Dividend payable.
Bank overdraft.
Provision for taxation if it does not amount to appropriation of profits.

In order to ascertain the real position of working capital, certain adjustment, which are
abnormal in nature, are to be adjusted against each component of current assets and
current liabilities.

NEED FOR WORKING CAPITAL

The need for working capital to run day to day business activities cannot be
overemphasis. We will hardly find a business firm which does not require any amount of
working capital.
We know that the firm aims at maximizing the wealth of the shareholder. In its endeavor
to maximize shareholder wealth the firm should earn sufficient return from its operation
earning a steady amount of profit requires successful sales activity. The firm has invested
enough funds in current assets for the success of sales activity. Current assets are needed
because sales do not convert into cash instaneously. There is always operating cycle
involved in the conversion of cash. Thus working capital is needed for the following
purpose:
1. For the purchase of raw material, components and spares.
2. To pay wages and salaries.
3. To incur day to day expenses and overhead cost such as fuel, power and office
expenses etc.
4. To meet selling costs as packaging, advertising etc.
5. To provide credit facilities to the customers
6. To maintain the inventories of raw materials, work in progress, stores and spares and
finished stock.

WORKING CAPITAL CYCLE

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

The faster a business expands the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right within
business. Good management of working capital will generate cash will help improve
profits and reduce risks. Bear in mind that the cost of providing credit to customers and
holding stocks can represent a substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and
work-in-progress) and Receivables (debtors owing you money). The main sources of
cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two
dimensions ........TIME ......... and MONEY. When it comes to managing working capital
- TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect
monies due from debtors more quickly) or reduce the amount of money tied up (e.g.
reduce inventory levels relative to sales), the business will generate more cash or it will

need to borrow less money to fund working capital. As a consequence, you could reduce
the cost of bank interest or you'll have additional free money available to support
additional sales growth or investment. Similarly, if you can negotiate improved terms
with suppliers e.g. get longer credit or an increased credit limit, you effectively
create free finance to help fund future sales.

If you .......

Then ......

Collect receivables (debtors) faster

You release cash from

the cycle

Collect receivables (debtors) slower

Your receivables soak

up cash

Get better credit (in terms of duration or

amount) from suppliers

You increase your cash

resources

Shift inventory (stocks) faster

You free up cash

Move inventory (stocks) slower

You consume more

cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles
etc. If you do pay cash, remember that this is now longer available for working capital.
Therefore, if cash is tight, consider other ways of financing capital investment - loans,
equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash
outflows and, like water flowing down a plug hole, they remove liquidity from the
business.

Importance or advantages of adequate working capital

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:

Solvency of the business

To maintain goodwill
Easy loans
Cash discounts
Regular supply of raw materials
Regular payment of salary, wages and other day to day commitments
Exploitation of favorable market conditions
Ability to face crisis
Quick and regular return on investments
High morale

1. Solvency of the business

Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production.
2. To maintain goodwill
Sufficient working capital enables a business concern to make prompt payments 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 financial institutions on easy and favorable
terms.
4. Cash discounts
Adequate working capital also enables a concern to avail cash discounts on the
purchase and hence it reduces costs.
5. Regular supply of raw materials
Sufficient working capital ensures regular supply of raw material and continuous
production.
6. Regular payment of salary, wages and other day to day commitments

A company which has ample working capital can make regular payment of wages,
salary and other day to day commitments which rise the morale of its employees,
increases their efficiency, reduces wastages and costs and enhances production and
profit.
7. Exploitation of favorable market conditions
Only concerns with adequate working capital can exploit favorable market
conditions such as purchasing its requirement 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 investments

Every investors wants to quick and regular return on his investments. Sufficiently of
working capital enables a concern to pay quick and regular dividends to its investor
as there may not be much pressure to plough back profits. This gains the confidence
of its investor and creates a favorable market to raises 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 business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every firms must have adequate working capital. It should have

neither the

excessive working capital nor inadequate working capital nor inadequate working
capital. Both situations are risky and may have dangerous outcome. However, out of
the two. It is the inadequacy of working capital which is more dangerous form the
point of view of the firm.
Disadvantages of redundant or excessive working capital:

Excessive working capital means idle funds which earn no profit for the
business and hence the business can not earn a proper rate of return on its
investment.

When there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft,
waste and losses

Excessive working capital implies excessive debtors and defective credit

policy which may cause higher incidence of bad debts.

It may result into overall inefficiency in the organizations.

When there is excessive working capital, relation with banks and other
financial institutions may not be maintained.

Due to low rate of return on investment, the value of shares may also fall.

The redundant working capital gives rise to speculative transactions.

Disadvantages or Dangers or inadequate working capital

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.

It cannot buy its requirements in bulk and can not avail of discounts, etc.

It becomes difficult for the firm to exploit favorable market conditions and
undertake profitable projects due to lack of working capital.

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

It becomes impossible to utilize efficiently the fixed assets due to non

availability of liquid funds.

The rate return on investments also falls with the shortage of working capital.

Factors affecting working Capital

A firm should have neither low nor high working capital. Low working capital involves
more risk and more returns, high working capital involves less risk and less returns. Risk
here refers to technical insolvency while returns refer to increased profits/earnings. The
amount of working capital is determined by a wide variety of factors.
1. Nature of Business:
The working capital requirement of a firm depends on the nature of the business. For
example, a firm involved in sale of services rather than manufacturing or a firm is
allowing only cash sales. In the first instance, no investment is required in either raw
materials or WIP or finished goods, while in the second instance there exists no
receivables as there is immediate realization of cash. Hence the requirement of working
capital will be lower.
2. Production Cycle:

The term production cycle refers to the time involved in the manufacture of goods. It
covers the time span between the procurement of the raw materials and the completion of
the manufacturing process leading to the production of goods. As funds are necessarily
tied up during the production cycle, the production cycle has a bearing on the quantum of
working capital. The longer the time span of production cycle, the larger will be the funds
tied up and therefore the larger the working capital needed and vice versa.
3. Seasonality of Operations:
If the product of the firm has a seasonal demand like refrigerators, the firms need high
working capital in the periods of summer, as the demand for the refrigerators is more and
the firm needs low working capital in the periods of winter, as the demand for the product
is low.

4. Business cycle fluctuation:

Different phases of business cycle, i.e., boom, recession, recovery etc also affect the
working capital requirement. In case of boom condition, inflationary pressure appears
and business activities expand. As a result the overall need for cash, inventories etc.
increases resulting in more and more funds blocked in these current assets. In case of
recession period however, there is usually dullness in business activities and there will
be an opposite effect on the level of working capital requirement. There will be a fall in
inventories and cash requirement etc.
5. Market Conditions:
The working capital requirements are also determined by the market conditions. In case
of the high degree of competition prevailing in the market the firm has to maintain larger
inventories as customers are not inclined to wait for the product. This needs higher
working capital requirements. If there is good demand for the product and the
competition is weak, a firm can manage with smaller inventory of finished goods, as

customers can wait for the product if it is not available in the market. Thus, a firm can
manage with low inventory and will need low working capital requirements.
6. Credit Policy:
The credit policy means the totality of terms and conditions on which goods are sold and
purchased. A firm has to interact with two types of credit policies at a time. One, the
credit policy of the supplier of raw materials, foods etc., and the credit policy relating to
credit which it extends to its customers. The level of the working capital is also
determined by the credit policy, as the firms credit policy determines the amount of
receivables. If the firm has a liberal credit policy, then the firm needs high working
capital and the firm needs low working capital if the companys credit policy does not
allow it to extend credit to the buyers

7. Production Policy:
The quantum of working capital is also determined by production policy. In case of the
firms having seasonal demand of the products like refrigerators, air coolers etc., The
production policy of the firm determines the amount of working capital requirement. If
the firm has production policy to carry production at a steady level to meet the peak
demand, this will result in a large accumulation of finished goods (inventories) during the
off-seasons and the abrupt sale during the peak season. The progressive accumulation of
finished goods will naturally require an increasing amount of working capital. If the firm
has production policy to produce only when there is a demand then the firm needs low
working capital during the slack season and high working capital during season.
8. Price level changes:
Changes the price level due to inflation or other reason also affect the requirement of
working capital. Rising prices necessitate the use of more funds for maintaining an

existing level of activity. Rising prices will require higher level of working capital and
vice-versa.
9. Conditions of Supply:
The availability of raw materials and spares also determine the level of working capital.
If there is ready availability of raw materials and spares, a firm can maintain minimum
inventory and need less working capital. If the supply of raw materials is unpredictable,
then the firm has to acquire stocks as and when they are available for ensuring continuous
production. Thus, the firm needs to maintain larger inventory average and needs larger
requirement of working capital.
10. Profit Margin and Profit Appropriation:
A high net profit margin contributes towards the WC pool. Also, tax liability is
unavoidable and hence provision for its payment must be made in the WC plan, otherwise
it may impose a strain on the WC. Also if the firms policy is to retain the profits it will
increase their WC, and if they decide to pay their dividends it will weaken their WC
position, as the cash will flow out. However this can be avoided by declaring bonus
shares out of past profits. This will help the firm to maintain a good image and also not
part with the money immediately, thus not affecting the WC position.

OPERATING CYCLE AND CIRCULAR FLOW CONCEPT

The circular flow concept of working capital is based upon this operating or working
cycle of a firm. The cycle starts with the purchase of raw material and other resources and
ends with the realization of cash from the sale of finished goods. It involves purchase of
raw material and stores, its conversion into stock of finished goods through work-inprogress with progressive increment of labour and service costs, conversion of again
from cash to purchase of raw material and so on. The time duration required to complete
one cycle determines the requirements of working capital-longer the cycle, large is the
requirement of working capital.
Thus gross operating cycle of a firm is equal to the length of the inventories and
receivables conversion period. Thus
Gross Operating Cycle =
Where: -

RMCP + WIPCP + FGCP + RCP

RMCP = Raw Material Conversion Period

WIPCP = Work-in-process Conversion Period
FGCP = Finished Goods Conversion Period

RCP = Receivables Conversion period

Net operating cycle period = Gross operating cycle Period -Payable Deferral
Period.

OPERATING CYCLE
The operating cycle implies the continuing flow from cash to suppliers, to inventory to
accounts

receivable and back into cash.

RECEIVABLE

CASH
INVENTORY

Operating cycle can be said to be at the heart of the need for working capital.

Determination of operating cycle:

Raw material holding period= (360*stock of raw material)
Cost of raw material consumed

Creditors payment period = (360*creditors)

Purchases

Work in progress holding period= (360*stock of WIP)

Cost of goods manufacture

Finished goods holding period = (360*stock of finished goods)

Cost of goods sold

Debtors collection period = (360*debtors)

Credit sales

Operating cycle = raw material holding period-creditors payment period + WIP holding
period +
Finished Goods holding period

The length of the operating cycle is the most widely use method to determine working
capital need. As longer the operating cycle the more working capital is required. The
shorter the operating cycle more predictable are the cash inflows. The operating cycle of
Britannia industries limited, rudrapur is 22 days. As in FMCG sector, the 31 days is
considered maximum length of the operating cycle. The operating cycle is managed
efficiently.

Cost of raw material consumed is assumed to be equivalent to purchases of raw

material.
Cost of goods sold is assumed to be equivalent to the goods transfer from factory

throughout the year.

Cost of good manufacture is assumed to be equivalent to cost of goods sold

MEASURES TO IMPROVE WORKING

CAPITAL MANAGEMENT

:-

The essence of effective Working capital management is proper cash flow forecasting.
This should take into account the impact of unforeseen events, market cycles, loss of a
prime customer and actions by competitors. The effect of unforeseen demands of
Working

capital

should

be

factored

in.

It pays to have contingency plans to tide over unexpected events. While marketleaders can manage uncertainty better, even other companies must have riskmanagement procedures. These must be based on objective and realistic view of the
role of Working capital. Addressing the issue of Working capital on a corporate-wide
basis has certain advantages. Cash generated at one location can well be utilized at
another. For this to happen, information access, efficient banking channels, good
linkages between production and billing, internal systems to move cash and good
treasury practices should be in place.

An innovative approach, combining operational and financial skills and an allencompassing view of the companys operations will help in identifying and
implementing strategies that generate short-term cash. This can be achieved by
having the right set of executives who are responsible for setting targets and
performance levels.

Effective dispute management procedures in relation to customers will go along way

in freeing up cash otherwise locked in due to disputes. It will also improve customer
service and free up time for legitimate activities like sales, order entry and cash
collection.

Overall,

efficiency

will

increase

due

to

reduced

operating

costs.

Collaborating with your customers instead of being focused only on own operations
will also yield good results. If feasible, helping them to plan their inventory

requirements efficiently to match your production with their consumption will help
reduce inventory levels. This can be done with suppliers also.

WORKING CAPITAL FINANCING POLICY

HEDGING FINANCING POLICY
CONSERVATIVE FINANCING POLICY
AGGRESSIVE FINANCING POLICY
HEDGING FINANCING POLICY:
This requires that financing of each asset would be offset with a financing of each asset
would be offset with a financing instrument of approximately the same maturity. Short
term or seasonal variations in current assets would be financed with short term debt. The
fixed assets and the permanent component of current assets would be financed with long
term debt or equity. And the firm can adopt a financial plan which matches the expected
life of source of fund s raised to finance assets.
CONSERVATIVE FINANCING POLICY
A firm can adopt a conservative approach in financing its current and fixed assets. a
financial policy of the firm is said to be conservative when its depends more on long term
funds for financing needs .under a conservative plan, the firm finances its permanent
assets and also a part of temporary current assets, with long term financing .
AGGRESSIVE FINANCING POLICY
A firm may be aggressive in financing its assets. An aggressive policy is said to be
followed by the firm when it uses more short term financing than warranted by matching
plan .under a aggressive policy, the firm finance a part of permanent current assets with
short

term

financing

MANAGEMENT OF WORKING CAPITAL

Working Capital management involves the problem of decision making regarding
investment in various current assets with an objective of maintaining the liquidity of
funds of the firm to meet its obligation promptly and efficiently. The basic goal of
working capital management is to manage the current assets and current liabilities of a
firm in such a way that a satisfactory level of working capital is maintained, it is neither
inadequate nor excessive.
The management of working capital has-been studies under the following three heads1. Management of Cash Balance.
2. Management of receivable.
3. Management of Inventory.

MANAGEMENT OF CASH BALANCE

Cash is one of the current assets of a business. It is needed at all times to keep business
concern should always keep sufficient cash for meeting its obligations. Any shortage of
cash will hamper the operations of a concern and any excess of it will be unproductive.
Cash not only include hard cash but also include which can be easily converted into cash
with in no time.
TOOLS FOR CASH CONTROL:
a. Cash Budget.
b. Inflow or Outflow of cash.

c. Ratio Analysis.
MANAGEMENT OF RECEIVABLES :
Receivable result from credit sales. A concern is required to allow credit sales in
order to expand its sales volume. It is not always possible to sell goods on cash basis
only. Sometimes, other concerns in that line might have established a practice of
selling goods on credit basis. Under these circumstances, it is not possible to avoid
credit sale without adversely affecting sale.
TOOL FOR RECEIVABLE CONTROL:
a. Deciding acceptable level of risk.
b. Terms of credit sale.

c. Credit collection policy.

MANAGEMENT OF INVENTORY:

Inventories mean the stock of the product and the components of the product that is
Raw Material, W-I-P, Finish good, Spares. Inventories hold the prime position
among the current assets in India. In India, about 60% of the current assets are
representing by inventories.
Thus large part of working capital is invested in inventories. The management of
inventories is therefore necessary to avoid heavy losses due to leakage, theft and
wastage because neglecting the management of inventories may jeopardize the long
run profitability of the concern and the concern may fall ultimately. Inventory
management will minimize these costs.
TOOLS FOR INVENTORY CONTROL:

a. Classification and identification of inventories.

b. Adequate storage facilities.
c. Record of inventories.
d. Standardization and simplification of inventories.
e. Use the appropriate method of inventory control for ex. - JIT, HML, EOQ,
FSN etc.

f. Intelligent and experience person.

FORECAST/ ESIMATE OF WORKING CAPITAL REQUIREMENT

Working capital is the life blood and controlling never centre of a business. No
business can be successfully run without an adequate amount of working capital. To
avoid the shortage of working capital at once, an estimate of working capital
requirements should be made in advance.
For a manufacturing organization, the following factors have to be taken into
consideration while an estimate of working capital.

Factor Requiring Consideration While Estimating Working Capital

1

Total costs incurred on material, wages and overheads.

The length of time for which raw material are to remain In stores before they are issued for
production.

The length of sales cycle during which finished goods are to be kept waiting for sales.

The length of the production cycle or work in process, i.e., the time taken for conversion of raw
material into finished goods.

The average period of credit allowed to customers.

The amount of cash required to pay day-to-day expenses of the business.

The average amount of cash required to make advance payments, if any.

The average credit period expected to be allowed by suppliers.

Time-lag in the payment of wages and other expenses.

ANALYSIS OF WORKING CAPITAL:There are three Techniques to analysis the working capital

Schedule of change in working capital

Ratio Analysis

Fund statement

SCHEDULE OF CHANGE IN WORKING CAPITAL:

The working capital of a business concern is subject to change due to several business
transactions. Working Capital represents excess of current assets over current liabilities.
The Schedule of Change in Working Capital presents a detailed and analytical picture of
changes in current assets and current liabilities during two balance sheet dates.
RATIO ANALYSIS:

Ratio is one of the methods of analyzing financial statement. Ratio analysis measures the
Profitability, Efficiency and Financial soundness of the business.
According to Myers, ratio analysis is a study of relationship among the various
financial factors in a business.
FUND STATEMENT:
Fund flow statement is the technique of analyzing and interpreting the financial statement
of business concern. It is a technical device designed to analyze the changes in the
financial or working capital position of a business enterprise between two dates.
The Fund Flow Statement is a statement, depicting change in working capital. It is also
termed as
Financial

a statement of source and Application of Funds, Statement of Change in

Position,

Statement

of

Change

in

Working

TECHNIQUES OF FORECASTING WORKINGCAPITAL

1. Operating cycle method
2. Forecasting of current assets and current liabilities
3. Cash forecasting method
4. Projected balance sheet method
5. Profit & loss adjustment method

OPERATING CYCLE METHOD:

Capital.

Operating cycle is the time duration within one cycle of business operation is completed.
Business operations involve a number of stages from purchase of raw material till
conversion of receivable into cash.
FORCASTING OF CURRENT ASSETS AND CURRENT LIABILITIES:
This is the Traditional method of forecasting the Working Capital requirements. Working
Capital is the excess of Current Assets over Current Liabilities; its requirement can easily
be forecasted by making the estimate of the amount of each component of current assets
and current liabilities. The procedure for estimating the component is as under:

Stock of Raw-materials:- The average amount of such stock of raw-materials

would depend upon the quantity of raw-materials required for production during a
particular period as well as upon the average time taken in obtaining fresh
delivery.

Stock of Work-in-Progress:- Raw-materials, wages, overheads are included in

the cost of work-in-progress. In order to determine the stock of work-in-progress,
the time-period for which the inputs will be in the process of production will be
determined.

Finished Goods Stock:- Finished goods are not immediately sold these are to be
kept in go downs or warehouses for certain period. This is an important factor in
determining the amount to be locked up in finished goods stock. On the basis of
years production, the amount of finished goods for the storage period may be
calculated.

Sundry Debtors:- The amount of capital locked up in sundry debtors can be

computed on the basis of credit sales, period of credit allowed/time lag in
collecting the payments.

Cash and Bank Balances:- These are estimated on the basis of past experience

Sundry Creditors:- This is estimated on the basis of credit purchases and the
time lag in payments to creditors/credit period allowed by suppliers of rawmaterials.

Outstanding Expenses:-These are ascertained having considered the time lag in

payment of various types of expenses.

CASH FORCASTING METHOD:

This method is very much related to cash budgeting and it attempts to estimate the cash
surplus and deficiency.
Every operating cycle starts with a cash outflow and after passing through various
channels it ultimately ends with an inflow of cash. A statement of month, cash forecast is
prepared which includes cash inflow and outflow for the various methods. The difference
between the total cash flow will indicate surplus or deficiency for which necessary
adjustment can be planned in advance.
Cash turnover

No. of days in operating period

Duration of cash cycle in days

PROJECTED BALANCE SHEET METHOD:

Under this method, various items of assets and liabilities (both long-term as well as shortterm) are estimated for the future period. On the basis of these assets and liabilities, a
projected Balance Sheet is prepared and then Working Capital estimate is made by
deducting current liabilities from the current assets.

PROFIT AND LOSS ADJUSTMENT METHOD:

According to this method, estimated profit is calculated first on the basis of transactions
likely to take place in future. Working Capital magnitude is ascertained by making
necessary adjustments for cash inflow and outflow in the estimated profit.