Working capital management

CONTENTS

1. Company profile

2. Design of the study.

3. Analysis of working capital at MYPOL.

4. Importance and objective of the study.

5. SWOT Analysis.

7. Findings and suggestions

8. Conclusion

9. Bibliography

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Working capital management

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Working capital management

INTRODUCTION:

Mysore Polymers and Rubbers Products (P) Ltd., was started in the year 1981.
The company commenced its commercial production in the year 1982. It is a private
limited company. It has obtained ISO TS 16949 – 2002 certificate. The company
maintains good relationship with its customers by supplying quality products. The
company has also entered into the foreign market in 1994-1995 by exporting its
products to far East, Middle East Africa, North and South America. MYPOL ensures
maximum utilization of available resources. The company believes in mainly
promoting from within and encourages its people to strive for higher management
stability. The setup also allows them to take the advantage of common pool of technical
and marketing talent of the highest quality.

LOCATION OF THE COMPANY:

MYPOL is located just 6 kms from historical city of Mysore in the state of
Karnataka. It is about 10 kms from K.R. Sagar dam. The manufacturing facility of
laboratory and head office is housed over an area of 12,153 square feet.

ADDRESS OF ORGANISATION:

Mysore Polymers and Rubber Products (P) Ltd.,

#20 P, K.R.S.Road,
Metagalli Post,
Mysore – 570016.

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Working capital management

BACKGROUND AND INCEPTION OF THE COMPANY:

In the year 1981, a group of people from various disciplines of rubber and
polymers science and technology, engineering, finance, marketing and management got
together and analyzed the Indian Automotive and Rubber Industry Scenario.
Butyl inner tubes, because of their superiority over natural rubber tubes seemed
to have a phenomenal market in the future though they were not in widespread use at
that time. This was the beginning of the MYPOL Pvt Ltd., which was incorporated
under the Company’s Act 1956 with an authorized share capital of Rs.1 million.

The company started production in the year 1982. The initial strategy of
concentrating on two wheeler markets paid off as the company, Became known
established reliable supplier of quality tubes. At present, MYPOL Pvt Ltd.,
manufactures inner tubes for almost any type of vehicle on the Indian road.
In addition to it is also innovating in relate for industrial and automotive use.
MYPOL bagged the president “Indian special recognition award” in the year 1985.

NATURE OF BUSINESS CARRIED:

The MYPOL is producing industrial goods, viz, tubes, washers, “O”rings, jaws
etc. All are used in another industry.

VISION, MISSION AND QUALITY POLICY:

Vision of MYPOL:
Being a market leader in automotive in butyl rubber tubes for domestic and
export marketing.

Mission of MYPOL:
Every employee at MYPOL strives to live by this motto. This focused vision
has resulted in a rock solid reputation for consistency, reliability and products that
conform to national and international standard alike.

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Working capital management

Quality policy of MYPOL:

“MYPOL faith is “prosper by quality”

“To create confidence as a reliable vendor through total employee

commitment to quality by maintaining high standards of integrity in all aspects of
business”

According to the customer satisfaction, continuous improvements of products

and process, team work and satisfaction of interested parties govern its operation.

Quality objectives:

• Enhancement of customer satisfaction.

• Reduction of operating cost by continuous improvement of processes for

reduction of variation and waste in supply chain.

• Self – reliance with enhance volume of business in domestic and export

markets.

• Increasing in productivity.

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Working capital management

PRODUCT PROFILE:

Introduction
The product profile of any company includes a combination of various products
or various sizes of the same product. As far as MYPOL is concerned it is not an
exception to this.

The product profile of MYPOL includes the following:

The MYPOL the core product is automotive tubes. They also manufacture other
subsidiary products. They are washers, “O”rings, jaws and other engineering rubber
products/components (metal bonded).
In case of tubes, it manufactures butyl tubes for vehicle ranging from moped to
trucks.

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Working capital management

The product range is as follows

Category Sizes Values

1. Moped 2.75/3.00 14
2.25/2.50 16
2.25/2.50 17
2. Scooter 3.50 8
2.75 10
3.50 10
3. Motor cycle 2.50 18
2.75/3.00 18
3.00/3.25 16
3.00/3.25/3.50 19
4. Three wheeler 4.00 8
4.50/5.00 10
5. Jeep 6.00/6.50 16

6. Passenger 4.50/5.00/5.65 12
145/155R 13
175/185R 13
7. Light truck 6.70/7.00 15
9.00 16
8. Truck 9.00 20
10.00 20
12.00 20
9. Tractor 12.4 28
13.6 28

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Working capital management

AREA OF OPERATION:

MYPOL operates globally; the company has registered a healthy growth since
its inception, which translates to a sales turnover of Rs. 450 million. The company has
just began to tap the huge export market from just Rs. 0.6 million in 1994-1995 export
sales have reached Rs. 15 million in the year 1999-2000. They are planning to increase
this figure substantially in the future aiming to export 25%of total production.
The company exports its products to Far East, Middle East, Africa, North and
South America. It imports raw materials from Russia, Belgium and France etc.

OWNERSHIP PATTERN:

MYPOL management consists of:

• C.D. Nagarajan. Chairman & Managing Director.

• S.R. Parthasarathy. Joint Managing Director.
• C. Raghunathan. Director.
• G. Santhanam. Director.
• M. Sampath Kumar. Technical Advisor.
• Prof. Narayanan. Consultant Systems & Quality.
• Prof. Shridharan. Consultant.

COMPETITION INFORMATION:

Each and every industry faces severe competition both in the national and
international market.

MYPOL faces stiff competition from other tube manufacturing companies.

Many of these companies manufacture tube from natural rubber, which is costly
compared to the tubes manufactured from butyl rubber. This is an imported rubber and
very costly. Following are the main competitors:

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Working capital management

1. J.K. Industries 2. Apollo

3. MRF 4. Bal Krishna

5. CEAT 6. Good year

7. Birla 8. TVS-Srichakra

9. Bridgestone 10. Cycle-Companies

11. Falcon tyres

ACHIEVEMENT / AWARDS:

 MYPOL got ISO-2000 from RWTUV of German Company.

 MYPOL got another standard regarding technical specification i.e.,
ISO/TS 16949. This certification is essential because it is to be included
in tender.
 National award by president of India in the year 1985.
 Diversification into moulded / Other rubber products for export / Supply
to ISRO / Atomic energy commission.
 Major converter for reputed tyre company for their tubes like
J.K.Industries Ltd., Good year (I) Ltd., CEAT Ltd., Falcon Tyres Ltd.

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Working capital management
WORK FLOW MODEL:
Master batch
Master batch final mixing
Final mixing

Straining
Straining

Final mixing

Extrusion

Value Hole punching

Pre- cut

Splicing, Fusing & Painting

Value Application

Chilling

Shaping

Curing
NOT OK
Repair
Final Inspection
OK
Value bending & accessories fixing OK Inspection

Packing NOT OK
Scrap

Dispatch

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Working capital management

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Working capital management
TITLE OF THE STUDY:

The title of the study is “WORKING CAPITAL MANAGEMENT” at Mysore

polymers & rubber products Ltd, Mysore.

Introduction:
Working capital may be regarded as the life - blood of a business firm. Technically,
working capital management is an integral part of the financial management. The
financial manager must determine the optimum level of working capital funds and also
the optimum composition of current assets and current liabilities. He must ensure that
the appropriate sources of funds arc used to finance working capital and should also see
that short-term liabilities of the business are met well in time.

DEFINITION:

• According to James C. Van Home, "Working capital management usually is

considered to involve the administration of current assets - namely cash, marketable
securities, receivable and inventories and the administration of current liabilities".

MEANING:

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Working capital management

Working capital management is concerned with the problems that arise in

attempting to manage the current assets, current liabilities and the inter-relationship that
exists between them. The term current assets refer to those assets which in the ordinary
course of business can be, or will be, converted into cash within one year without
undergoing a diminution in value and without disrupting the operations of the firm

Concepts of working capital management

There are two concepts of working capital

a. Gross Concept
b. Net Concept

Gross working capital

Simply called as working capital refers to the firm's investment in current

assets. It is a quantitative concept. It focuses attention on two aspects of current assets
management.

Net working capital:

According to L.J.Gitman, “The portion of firm’s current assets which are

financed from long term funds”. It refers to the difference between current assets and
current liabilities.

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Working capital management
Need and importance of working capital management:

Management of working capital is very important for the success of a business. We

know that firms aim at maximizing the wealth of shareholders. In its endeavor to
maximize shareholder's wealth, a firm should earn sufficient return from its operations.
Earning a steady amount of profit requires successful sales activity. The firm has to
invest enough funds in current assets for the success of sales activity. Current assets are'
needed because sales do not convert into cask instantaneously. There is always an
operating cycle involved in the conversion of sales into cash.

Components of Working Capital:

The term Working Capital refers to Gross Working Capital which represents the
amount of funds invested in Current Assets. The components representing Current
Assets are;
 Cash and Bank balances.
 Short term loans and advances.
 Bills receivables.
 Inventories.
 Sundry debtors.

In a narrow sense the term Working Capital refers to Net Working Capital. Net
Working Capital is the excess of current assets over current liabilities. The components
of current liabilities are;

 Bills payable.

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Working capital management
 Sundry creditors.
 Short term borrowings.
 Provisions.

Objectives of Working Capital:

1. Liquidity v/s Profitability
2. Choosing the pattern of Financing.

Determinants of Working Capital:

The need for Working Capital requirement for running day to day business activities
cannot be over emphasized. Some of the important determinants of Working Capital
are;

 General nature of Business.

 Terms of sales and purchases
 Manufacturing cycles
 Rapidity of turnover
 Business cycle
 Changes in Technology
 Seasonal variation
 Market conditions
 Seasonality of Operation
 Working capital cycle
 Dividend policy
 Depreciation policy.

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Working capital management
Operating Cycle:

It 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.

a. Acquisitions of resources such as raw material, labor, power and fuel,

b. Manufacture of the product, which includes conversion of raw material

into work in progress into finished goods.
c. Sales of the product either for cash or on credit. A credit sale creates
books debts for collection.

Operating Cycle approach:

The title Working Capital is more expressive in a sense that the normal business
operations of manufacturing and trading company start with cash, go through the
successive segments of the operating cycles namely raw material storage period,
conversion period, finished goods storage period and average collection period before
getting back the cash along with the profit. The total duration of all the segments is
known as Gross operating cycle period.
When the average payment period of the company to its suppliers is deducted
from the gross operating cycle period, the resultant period is called Net Operating
Cycle
period.

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Working capital management
List of Formulae:

1. Raw material storage period = Avg raw material inventory X 353

Raw material consumption

2. Work-in progress conversion period = Avg WIP inventory X 353

Cost of production

3. Finished goods conversion period = Avg FG inventory X 353

Cost of goods sold

4. Average collection period = Avg debtors X 353

Credit sales

5. Average payment period = Avg creditors X 353

Credit purchases

6. Gross operating cycle = Raw material storage period + WIP conversion period+
Finished goods conversion period + Average collection
period

7. Net operating cycle = Gross operating cycle - Average payment period

Permanent and variable working capital

The operating cycle is a continuous process and, therefore, the need for current assets is
felt constantly. But the magnitude of current assets needed is not always same; it
increases and decreases over time. However, there is always a minimum level of
current assets, which is continuously required by the firm to carry on its businesses
operations, which is referred to as permanent or fixed working capital.

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Working capital management
The extra working capital, needed to support the changing production and sales
activities, is called fluctuating or variable or temporary working capital.

Adequacy of working capital

The firm should maintain a sound working capital positions. It should have adequate
working capital to run its business operations.

Structure of working capital:

Structure of working capital means the study of elements of current assets and current
liabilities. The main elements of current assets are cash and bank balances, inventory,
receivables and other quick resources like short term or temporary investments. Current
liabilities include payables, bank overdrafts, outstanding expenses and proposed
dividends.

1. Inventory:
the profitability of the business depends upon the turnover of working
capital and that in turn depends to a large measure upon the turnover of inventory.
Inventory may be divided into:

a. Raw materials:

Raw materials mean the items, which are held in their original form, for
processing and production. It is very essential that production should not suffer because
of stock position.

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Working capital management

b. Work-in progress

Work in progress is case of manufacturing concerns is generally unavoidable since it is

rare that a manufacturing process will be completed within a short period.

c. Finished goods

There are two important advantages of carrying on the high level of finished stock
inventory, namely, minimization of the loss of sales and minimization of high
additional costs due to many number of production operations.

2. Receivables

This is borne out by the fact that credit allowed to customers always enables the
concern 10 increase sales. The practice of carrying receivable has a few advantages
such as
a. The reduction of collection costs over cash collection,
b. Reduction in the variability of sales, and
c. Increase in the level of near-term sales.

3. Cash
Cash is one of the most significant means of day-to-day operations of a business, as it is
a form of liquid funds, which are available for payment for any item.

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Working capital management

4. Marketable securities
'In modern age, it has become a practice with business organizations to avoid too much
redundant cash investing a part of their earnings in assets, which are easily convertible
into cash.

Criteria for evaluation of Working Capital Management:

 Liquidity
 Availability of cash
 Inventory turn over
 Credit extended to customers
 Credit obtained from suppliers.

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Working capital management

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Working capital management
Analysis of Working Capital:

Working Capital may be analyzed using various tools. The following are the prominent
tools of analysis of working capital:
 Statement of changes in Working Capital

Gross Working Capital and Net Working Capital at MYPOL

Particulars 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

Inventories 11088.44 1297.67 1273.92 1844.16 2103.11
Sundry
Debtors 1071.80 1511.06 1305.74 1420.58 1884.41
Cash and
Bank 374.22 512.94 572.59 454.56 645.80
balance
Loans and
Advances 322.37 386.00 474.76 893.58 392.93
Gross
Working 2848.83 3707.67 3627.01 4612.88 5026.25
Capital
Table 4.1 Representing the Gross Working Capital
(Source: MYPOL Annual Reports.)
1180

200
161.92176.43
150 130.15127.32
Trend in 100
100
Gross WC
50
0
2002- 2003- 2004- 2005- 2006-
2003 2004 2005 2006 2007
Year

Chart 4.1 Showing the trend of Gross WC

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Working capital management
Gross working capital during the year 2002-2003 has been Rs. 2848.83 crores and has
been increasing during the consecutive years to 3707.67, 3627.01, 4612.88, and
5026.25. Therefore it can be said that Gross Working Capital has been showing an
increasing trend for the past 5 years.
Particulars 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007
Gross 2848.83 3707.67 3627.01 4612.88 5026.25
working
capital
Current 2296.78 2568.41 2499.55 2913.98 3324.14
liabilities
Provisions 369.14 526.56 652.23 1027.93 743.43
Net 182.91 612.7 475.23 670.97 958.68
working
capital
Table 4.1.1 depicting Net Working Capital trend
(Source: MYPOL Annual Reports.)

600 524.13
500
377.76
Trend in 400 334.97
300 259.82
Net WC 200
100 100
0
2002- 2003-2004-2005- 2006-
2003 2004 2005 2006 2007
Year

Chart 4.1.1 depicting Net Working Capital trend

Net Working capital shows a fluctuating trend during the years 2002-2007.

Statement of changes in working capital:

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Working capital management
It is a comparative statement showing the changes in individual current assets and
current liabilities in comparison with the previous year’s performance.

Year Increase in Working Decrease in Working

Capital Capital
2002-2003 ------ 265.73
2003-2004 429.79 -----
2004-2005 ------ 137.47
2005-2006 195.64 ------
2006-2007 287.81 ------
Table 4.1.2 Depicting the trend in Working Capital
(Source: MYPOL Annual Reports.)

600
429.79
400 287.81
Increase/ 195.64
200
Decrease
0
in WC -137.47
-200 -265.73
-400
2002-2003-2004-2005-2006-
2003 20042005 2006 2007
Year

Chart 4.1.2 Depicting the trend in Working Capital

The working capital during the year 2002-2003 has decreased by Rs 265.73 crores duly
because of disproportionate increase in current liabilities. How ever the working capital
has increased by 429.79 in the 2003-2004.During the year 2004-2005 WC has
decreased by 137.47 due to decrease in cash and bank balances & loans and advances.

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Working capital management
In the year 2005-2006 there was an increase in WC by 195.64 and in the year 2006-
2007 increase by 287.81. In general WC has been showing an fluctuating trend.

Operating Cycle for the year 2003-2004:

Raw material conversion period:
Average raw material inventory 685.35
Raw material consumption 8775.91
Raw material conversion period 28 days

Work in progress conversion period:

Average WIP inventory 238.22
Cost of production 13190.38
WIP conversion period 6 days

Finished goods conversion period:

Average finished goods 946.6
inventory
Cost of goods sold 20151.22
Finished goods conversion period 17 days

Average collection period:

Average Debtors 1652.795
Credit sales 18042.45
Debtors conversion period 32.33 days

Average payment period:

Average creditors 1354.49
Credit purchases 8972.61
Average payment period 53 days

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Working capital management

Gross Operating cycle: 80 days

Net Operating cycle: 27 days

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IMPORTANCE AND OBJECTIVE OF THE STUDY

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Working capital management
The present study "working capital management of MYPOI. and rubber
products Ltd." IS intended to analyze the MYPOL practice in working capital
management and to examine management performance in this segment of financial
management.

The efficiency of the working capital management in MYPOL is determined by the

efficient administration of its various components -inventory accounts receivables and
cash. The study attempts to determine the efficiency and effectiveness of management
in each segment of working capital.

Since the net concept of working capital (excess of current assets over current
liabilities) has been taken in the present study, the management of both current assets as
well as current liabilities will be critically evaluated. The importance of the study is
emphasized by the fact that the manner of administration of current assets and current
liabilities determines to a very large extent the success or failure of a business. Many
times, in the event of the failure of a business the shortage of working capital funds is
given out as its root cause. The efficient and effective management of working capital
is, therefore, of crucial importance for the success of a business firm, which involves
the management of current assets and current liabilities.

Credit Policy

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Working capital management
Credit Policy is an important part of the overall strategy of a firm to market its
products. An important aspect of the credit policy should identify before establishing an
optimum credit policy.

Credit Terms

MYPOL's credits include the credit period i.e. length of time for which
credit is extended to the customers which is expressed in terms of net date. The
company tightens its credit period if customers are defaulting too frequently and bad-
debts losses are building up. It takes necessary steps to collect the amount due if the
period goes beyond the net date. This has enabled the company to increase its operating
profit through expanded sales.

In the open market and replacement market, the net date is 30 days, within
which the customers are required to pay their obligation. The cash discount varies from
5% - 10%. For the bulk buyers the goods are sold at low prices and no discount is
allowed to them. To the distributors of tubes 17.5% discount is allowed to two ana tnree
wheelers. 12.5% on passenger car and light commercial vehicles and 10% discount on
truck tubes.

Credit Limit

Once the firm has taken a decision to extend credit to the applicant, the amount and
duration of the credit have to be decided. The decisions on the magnitude of credit will
depend upon the amount of contemplated sale and the customer's financial strength.

Credit Procedure

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Working capital management

The collection procedure of the firm should be clear-cut and well administered. The
purpose of collection policy should be to speed up the collection of dues.

The average collection period of MYPOL varies from 30 days to 120 days depending
on the customers.

Details of customers who enjoy higher credit days:

1. Apollo Tyres
2. Ceat Tyres
3. Vikrant Tyres
4. Goodyear Tyres

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Working capital management

SWOT ANALYSIS

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Working capital management
A SWOT Analysis is a strategic planning tool used to evaluate the strengths,
weaknesses, Opportunities, and Threats involved in a project or in a business
venture or in any other situation requiring a decision. The technique is credited to
Albert Humphrey, who led a research project at Stanford University in the 1960s
and 70s using data from the Fortune 500 companies.

Strengths

• Diversification to other Rubbe4r products

• Promoted by Rubber technocrats.
• Good two wheeler inner tube production capacity
• Discipline in workers.
• Quality reputation in the market.
• Cordial relationship between union and management.

Weakness:

• Educational qualification of the foreman lacking.

• Increasing price of Rubber.
• Limitation in Advertising.
• Lack of Marketing Expertise.

Opportunities

• Tremendous potential for Expansion plan.

• Up gradation of technology.

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Working capital management
• Demand for tube and other rubber products.
• Expected growth in four wheeler segments.

Threats

• Tube less tyres

• Taxation
• Dependency on Imported raw materials, the price of which is very
uncertain.
• Huge competition.

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Working capital management

FINDINGS:

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Working capital management
 Gross Working Capital has been showing an increasing trend for the past 5 years.
 Net Working capital shows a fluctuating trend during the years 2002-2007.
 We can say that the company’s current ratio is below standard ratio. The company
is not able to pay off its short term obligations but if the company has arrangements
with its banks for its requirements then the ratio is adequate.
 We can say that the company enjoys a satisfactory liquidity position which is not
very strong and has to be improved.
 The operating cycle of the company is effective.

SUGGESTIONS:

 The company has to hold adequate cash reserves to meet its liabilities since
inventory takes lot of time to get converted into cash.
 The company has to increase its liquidity position.
 It is advisable for the company to adopt debt collection techniques like aging
schedule.

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Working capital management

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Working capital management

CONCLUSIONS

It can be concluded that the company is well managed, technically,

commercially, and financially, the people behind the company are of high repute
with the gre4atestintegrity and financial discipline, the management can be rated
as one of the best.

The company has introduced sophisticated machinery’s to suit the modern

needs and is doing well. The company has all the infrastructural facilities and no
glaring lacunas are found. As such we can say that as far as technical aspects of
the company are concerned, it is highly satisfactory.

As there is a constant demand from the tyre manufacturers, the company

has not been exposed to much threats, So we can say that the company’s survival
mainly depends upon the demands of the tyre manufacturers.

The financial aspects of the company from the given business parameters
is looking good. It can be observed that the financial statements reveal that the
company is managing the financial aspects very judiciously. The adaptability of
the company to the needs, to the situation has given a greater financial viability
under any circumstances.

The present requirement of the company as per the estimates or

projections suggests a higher working capital limits, however the company is
managing the affairs very efficiently from the present available information.

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Working capital management

BIBLIOGRAPHY:

 Financial Management : I.MPandey

 Management Accounting : R.S.N. Pillai & V.Bagavathi

 Financial Management for

Managers : ICFAI University.

 Annual Reports of MYSORE POLYMERS AND RUBBER LTD.

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Working capital management

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