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WORKING CAPITAL MANAGEMENT

A PROJECT REPORT

Working Capital Management


SUBMITTED BY:

(MMS-Corporate Finance)
Submitted to : PROF. P.L.ARYA THE Director N.L.DIMSR

Anand Bagri

UNIVERSITY OF MUMBAI
(2008-2010)

NIRANJAN LAL DALMIA INSTITUTE OF MANAGEMENT STUDIES AND REASERCH

MUMBAI- 401104

N.L. DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

WORKING CAPITAL MANAGEMENT

SHRISHTI, SECTOR-1, MIRA ROAD (E)

ACKNOWLEDGEMENT
I take immense pleasure in submitting the project on Working Capital Management . As this project comes to an end, I would like to take the opportunity to thank all those persons who supported me directly or indirectly in this project. I would like to thank project guide Prof. P.L. ARYA for the support and guidance throughout the project.

Last but not the least I would like to thank all the students and staff members of N.L. Dalmia Institute of Management Studies and Research who helped me in my endeavor.

Anand Bagri MMS (Corporate Finance) N.L.Dalmia Institute of Management Studies and Research
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INDEX Sr.No. Topic Executive Summary Objectives and Scope of the project Working Capital Management of Working Capital Need for adequate Working Capital Factors determining Working Capital Assessment of Working Capital Working Capital Finance Modes of Working Capital Finance i. Cash Credit ii. Working Capital Demand Loan iii. Bill Discounting iv. Export Packing Credit v. Commercial Paper vi. Inter-Corporate Deposit vii. FCNR(B) Loans 10. 11. 12. 13. 14. 15. Statement Of Working Capital Inventory Management Cash Management Receivables Management Conclusion Bibliography Page No. 3 5 6 8 10 12 16 20 24 25 29 31 34 40 47 50 53 55 64 73 79 80

1. 2. 3.

4. 5.
6. 7. 8. 9.

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Executive summary

Working capital management refers to the administration of all aspects of current assets, namely cash, marketable securities, debtors and stock (inventories) and current liabilities. The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time.

There are many aspects of working capital management, which make it an important function of the financial manager:

Time: working capital management requires much of the financial managers time. Investment: working capital represents a large portion of the total investments in assets. Significance: working capital management has great significance for all firms but it is very critical for small firms. Growth: the need for working capital is directly related to the firms growth.

Investment in current assets represents a very significant portion of the total investment in assets. Working capital management is critical for all firms. A small firm may not have much investment in fixed assets, but it has to invest to in current assets. Small firms in India face a severe problem of collecting their debtors.

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It may, thus, be concluded that all precautions should be taken for the effective and efficient management of working capital. The finance manager should pay regular attention to the levels of current assets and the financing of current assets.

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OBJECTIVES AND SCOPE OF THE PROJECT Objectives of the Project: To study working capital management process. To study receivable management of the company. To study the process of cash and inventory management. Scope of the project: The scope of the project includes elaborate discussion on: Statement of working capital. Inventory management Cash management. Debtors management. The above-mentioned topics form the core part of working capital management. Limitations: Not considered other current assets and their ratios, which form a part of working capital like Stock of raw material, work in progress, outstanding expenses, labor, etc as too many calculations may lead to confusion. Methodology: Acquisition of primary and secondary data.

Primary data: The first hand data obtained from the company sources (E.g.; information about the company. Secondary data: Annual reports, balance sheets, trial balance, etc.

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Working Capital

The objective of running any Company is to earn profits. A Company will require funds to acquire Fixed Assets like Land, Building, Plant & Machinery, Equipment, Tools, etc and also to run business viz, for its day to day operations (working). Capital or Funds required for a Company can therefore be bifurcated as Fixed Capital & Working Capital. Funds required for day to day working would be to finance production and sales. For production, funds are needed for purchase of Raw Materials / Stores / Fuel, for payment of Labour, Power Charges, etc, for storing Finished Goods, and for financing the sales, by way of sundry debtors / receivables. Concept: Working Capital is often defined as the excess of Current Assets over Current Liabilities. Current Assets are those, that in the ordinary course of business can be or will be converted into cash within one year (during operating cycle of the industry). Current Liabilities are those liabilities intended, at their inception, to be paid in the ordinary course of business within a reasonably short time (normally one year) out of current assets or the income of the business. The above definition of Working Capital, however, takes into account only the funds available to the Company from long term sources like capital and long-term borrowings. It does not represent the total funds required by the Company towards Working Capital, to sustain its level of operations. The excess of CA over CL is therefore, known in working
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parlance, as Net Working Capital (NWC) or Liquid Surplus (LS) and represents that portion of the Working Capital, which has been provided from the long-term sources.
LIABILITY C &R ASSETS FA M & NCA DL ITA L.S. (or) NWC CL CA

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Management of working capital Management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. It simply refers to management of the working capital, or in more precise terms, the management of current assets. A firms working capital consist of its investment in current asset which include short term asset such as cash and bank balance, inventories, receivables, and marketable securities. Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and minimizes reordering costs - and hence increases cash flow, supply chain management ; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ). Debtors management: Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); Discounts and allowances. Short term financing: Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit

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granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring". The term working capital may be used in two different ways: Gross working capital: The gross working capital refers to the firms investment in all current assets taken together. Net working capital: The term net working capital may be defined as the excess of total current assets over total current liabilities. A firm should maintain an optimum level of gross working capital. This will help avoiding the unnecessarily stoppage of work or liquidation due to insufficient working capital. Effect on profitability because over flowing working capital implies cost. Therefore, a firm should have just adequate level of total current assets. The gross working capital also gives an idea of total funds required for maintaining current assets. On other hand, net working capital refers to amount of funds that must be invested by the firm, more or less regularly in current assets. The net working capital also denotes the net liquidity being maintained by the firm. This also gives an idea of buffer available to the current liability.

1.

2.

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Need for adequate working capital Every firm must maintain a sound working capital position otherwise; its business activities may be adversely affected. The excess working capital, i.e. when the investment in working capital is more than the required level, it may result in unnecessary accumulation of inventories resulting in waste, theft, damage etc. Delay in collection of receivables resulting in more liberal credit terms to customers than warranted by the market conditions. Adverse influence on the performance of the management. On the other hand, inadequate working capital is not good for the firm. It may result in the following: The fixed asset may not be optimally used. Firm growth may stagnate. Interruptions in production schedule may occur ultimately resulting in lowering of the profit of the firm. The firm may not be able to take benefit of an opportunity. Firm goodwill in the market is affected if it is not in a position to meet its liabilities on time. Working Capital Needs: A business need for working capital can come as a result of several reasons that include the following: Increasing sales growth or seasonal growth. Customers paying slower.
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Need to increase inventory to support sales growth and/or adding product lines. Desire to take discounts on purchases from vendors. Recent operating losses have reduced your cash reserves. Increased expenses due to additional marketing efforts, new employees, office relocation, etc.

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Factors determining working capital requirement Though there is no set of universally applicable rules to ascertain working capital needs, the following factors may be considered: Nature of business: The Working capital requirement depends upon the nature of business carried on by the organization. In a manufacturing firm the requirement is generally high, but it also depends on the type and nature of the product. The proportion of current asset to total assets measures the relative requirements of working capital of various industries. Manufacturing cycle: Time span required for the conversion of raw materials into finished goods is a block period. The period in reality extends a little before and after the work-in-progress. The manufacturing cycle and the fund requirements vary in direct proportion. The funds blocked in manufacturing cycle vary from industry to industry. Further, even within the same group of industries, the operating cycle may be different due to technological considerations. Business cycle: Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a shift in working capital position particularly for working capital requirement. The variations in business conditions may be in two directions: Upward phase when boom conditions prevail, and Downswing phase when economic activity is marked by a decline. During the upswing of business activity, the need for working capital is
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likely to grow and during the downswing phase the working capital requirement is likely to be less. The decline in economy is associated with a fall in the volume of sales, which, in turn, leads to a fall in the level of inventories and book debts. Seasonal variation: Variation apart, seasonally factor creates production or even shortage problem. This is the reason as to why manufacturing concerns producing seasonal products purchase their raw material throughout the year and carry on the manufacturing activity. For example woolen garments have a demand during winter. But the manufacturing operation for the same has to be conducted during the whole year resulting in working capital blockage during off-season. Production policy: While working capital requirements vary because of seasonal factors, the impact can be minimized by suitably gearing the production schedule. There are two choices- either the production is periodically adjusted to meet the seasonal requirements or a steady level of production is maintained throughout, consequently allowing the inventories to build up in the off-season. Scale of operations: Operational level determines the working capital demand during a particular period. Higher the scale, higher will be the need for working capital. However, pace of sales turnover is another factor. Quick turnover calls for lesser investment for inventory while low turnover rate necessitates larger investments.

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Credit policy: The credit policy influences the requirement of working capital in two ways: Through credit terms granted by the firm to its customers/buyers of goods. Credit terms available to the firm from its creditors. Growth and expansion: It is, of course difficult to determine precisely the relationship between the growth and volume of business and the increase in working capital. The composition of working capital also shifts with economic circumstances and corporate practices. However, it is to be noted that the need for increased working capital funds does not follow the growth in business activity but precedes it. Dividend policy: The payment of dividend consumes cash resources and, thereby, effects working capital to that extent. However, if the firm does not pay dividend but retains the profit, working capital increases. There are wide variations in industry practices as regards the inter relationship between working capital requirement and dividend payment. In some cases, shortage of working capital is sometimes a powerful reason for reducing or even skipping dividends in cash (resolved by payment of bonus shares). Depreciation policy: There is an indirect effect of depreciation policy on working capital. Enhanced rates of depreciation lower the profits and tax liability and, thus, more cash profits. Higher depreciation means lower disposable profits and a smaller dividend payment. Thus cash is preserved. If the
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current capital expenditure falls short of the depreciation provision, the working capital position is strengthened and there may be no need for short-term borrowing. If the current capital expenditure exceeds the depreciation provision, either outside borrowing will have to be resorted to or a restriction on dividend payment coupled with retention of profits will have to be adopted to prevent working capital position from being adversely affected. Price level changes: Rising prices necessitate the use of more funds for maintaining an existing level of activity. However, the implications of rising price levels on working capital position may vary from company to company depending on the nature of its operation, its standing in the market and other relevant considerations. Operating efficiency: The efficient utilization of resources by eliminating waste, improved coordination and full utilization of existing resources would increase the operating efficiency. Efficiency of operations accelerates the pace of cash cycle and improves the working capital turnover. It releases the pressure on working capital by improving profitability and improving the internal generation of funds.

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Assessment of Working Capital

Funds required to carry the required levels of current assets, to enable the Company to carry on its operations at the expected levels uninterruptedly, are the Working Capital Requirements. Therefore Working Capital Requirement (WCR) is proportional to: a. The volume of activity (i.e. level of operation ) b. The type of business carried on viz. manufacturing process, production programme. Though there are various methods for assessing the quantum of WCR for an industry, the following three are commonly known and used. 1) 2) 3) Operating Cycle Method (for W/C limits upto Usual or Traditional Method (for W/C limit upto Rs.25000) Rs.10 lacs) Using Tandon & Chore Committee Norms (for W/C limit above Rs.10 lacs) 1. Operating Cycle Method: Any manufacturing activity is characterized by a cycle of operations consisting of purchase of raw materials for cash, converting these into FGs and realising cash by sale of these finished goods. The cycle consists of: 1) Time taken to acquire RMs &
CASH RM

Ave. period for which they are in stores. 2) Conversion process time.

O.C. S.Dr. SIM/WIP F.G.

3) Ave. period for which finished goods are in stores.

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Ave.

collection

period

of

receivable (Sundry Debtors) operating cycle is also called cash to cash cycle & indicates how cash is converted into RM, WIP, FG & Bill receivables and finally cash. If length of operating cycle is, say 120 days. Then it means 365 / 120 = 3 cycles of operations in a year. This means each rupee of WCR employed in the unit is turned over 3 times in a year. This is also known as Working Capital Turnover Ratio. WCR = Operating Expenses No. of Cycles per annum

Factors, which influence WCR, are: 1) 2) Level of operating Expense & Length of operating Cycle.

2. Usual (Traditional) Method of Assessment of WCR: The operating cycle concept serves to identify the areas requiring improvement for the purpose of control and performance review. But bankers require a more detailed analysis to assess the various components of WCR viz. finance for stocks, bills, etc. Hence usual method is different. Bankers provide working capital finance for holding an acceptable level of Current Assets, viz. RM, SIP, FG, and SDrs for achieving a predetermined level of production and sales. Quantification of these funds, required to be blocked, in each of these items of CA at any time is as follows:
1)

R.M. requirement is generally W.I.P. a rough & ready formula

expressed as so many months requirement (consumption).


2)

for computing the requirement of funds is to find the Cost of


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Production for the period of processing. viz.( RM consumed / month + Expenses / month) * period of processing in months.
3)

F.G. the requirement of funds Sundry Debtors: WCR against

against FG is expressed as so many months cost of production.


4)

Sundry Debtors will be computed on the basis of Cost of Production (where as the Permissible Bank Finance will be on the basis of the sale value) WCR is normally expressed as so many months of Cost of Production (CoP). Working Capital of any industry can thus be summerised as: RM WIP FG SDrs Expenses Months Requirement Weeks (CoP) Months (CoP) to be stocked Months (CoP) outstanding Credit One Month Rs. A Rs. B Rs. C Rs. D Rs. E Rs. F Rs. G

Less: Credit received on purchases Less: Advance payment on received WCR (Rs. H) = (A+B+C+D+E)-(F+G)

The purpose of assessing the Working Capital Requirement of the company is to determine how the total requirement of funds will be met. The two resources are: 1) Long term Borrowing and Capital 2) Short term Bank Borrowing. 3. Method using Tandon / Chore Committee Norms: The Reserve Bank of India constituted study groups in 1974 and 1979 viz. Tandon Committee and Chore Committee to frame suitable guidelines for Working Capital Finance. The recommendations of Tandon / Chore Committee relate to:
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Norms for Inventory and Receivables a. b. Approach to Lending Follow-up, Supervision & Control of Advances

The Tandon Committee prescribed definitive norms as to the reasonable level of inventory and the receivables the unit should carry and the extent to which the total Current Assets are supported by long-term funds. The lending norms comprise of three methods as under:

1st method: The quantum of the banks short-term advances

will be restricted to 75% of the Working Capital gap; remaining 25% is to be met from NWC.

2nd method: NWC should be atleast be equal to 25% of the

total value of acceptable current assets. The remaining 75% should first be financed by other CL and then the banker may finance the balance of the requirement.

3rd method: Borrower should provide for entire core CA and

25% of the CA over the core CA. RBI has not implemented this method. All the units with Fund Based Working Capital limits of Rs.50 lacs and over should be straightaway placed under 2nd method of lending.

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Working Capital Finance Banks normally provide Working Capital Finance by way of advances against stocks and sundry debtors. Banks do not finance the full amount of the funds required for carrying inventories and receivables. Bank finance is normally restricted to the amount of funds locked up less a certain percentage of margins. Margins are imposed with a view to have adequate stake of the promoter in the business both to ensure his adequate interest in the business and to act as a bulwark against any shocks that the business may sustain. The margins stipulated will depend on various factors like saleability, whether imported or indigenous, quality durability, price fluctuations in the market for commodity. Taking into account the total WCR as assessed earlier, the permissible limit upto, which the bank finance can be granted, is arrived at as shown below: Permissible Limit Raw Materials Less: % margin Rs. Rs. _____________ ___________________ P Stocks-in-Process Less: % margin Rs. Rs. _____________ ___________________ Q Finished Goods Less: % margin Rs. Rs. _____________ ___________________ R Sundry Debtors Rs.
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Less: % margin

Rs. _____________

___________________ S Total Permissible Limit (P+Q+R+S) ___________________ T (P+Q+R) indicates the total limit against stocks and S indicates the limit against sundry debtors. The difference between the working capital requirement (H) and the total permissible bank borrowing (T) is the Long-Term Working Capital and should be met from the Net Working Capital. When the NWC is not sufficient to meet the Long Term WCRs, there will be a deficit in the WCR. It will be necessary for the Company to either arrange to meet the funds from borrowings or arrange for more Short-Term funds from bank, by reduction in margins temporarily or granting separate advances to be repaid out of the units future profits. The Computation of Bank finance is facilitated by the new set of forms introduced by RBI commonly known as CMA format. The format provides, a fund of information/data to the Banker in respect of the past, present and future financial position of borrower. Complete and prompt submission of data by the borrower is a sine-qua non for speedy credit decisions by Banks. CMA Format: For appraising the Working Capital requirement the borrower has to submit the financial data to the Bank in the prescribed format. This is known as the CMA format (Credit Monitoring Arrangement). There are total six forms to be filled up according to the CMA format. These forms give the following details: FORM I:
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Separate information in respect of each of the working capital credit facilities, viz. Cash Credit, EPC, WCDL, Bill purchased and discounted, etc. Details of quasi credit facilities viz. L/C, Guarantees, etc. Details of credit facilities availed and deposit a/cs maintained with other non-consortium banks are given. Maximum and minimum utilisation of the limits during the past 12 months. FORM II: Details of Operating Statement for 3 years. Audited figs. for the last year, estimated figs. for the current year and projected figs. for the next year. Assumptions on which the projections have been based. FORM III: Analysis of the Balance Sheet for 3 years. Audited figs. for the last year, estimated figs. for the current year & projected figs. for the next year. Assumptions on which the projections have been based. In case of a multi-division company the analysis is for the company as a whole. FORM IV: Comparative statement of Current Assets and Current Liability for 3 years. Audited figs. for the last year, estimated figs. for the current year & projected figs. for the next year. Assumptions on which the projections have been based. FORM V:

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Computation of Maximum Permissible Bank Finance for Working Capital Requirement for 3 years. Audited figs. for the last year, estimated figs. for the current year & projected figs. for the next year. Other than sick/weak units, the computation is done as per IInd method of lending. In case of Ist method of lending specific reasons thereof are furnished. FORM VI: Details of funds flow statement for 3 years. Audited figs. for the last year and projected figs. for the current and the next year. In case increase in inventory, decrease in CL or WC gap is disproportionate with % change in sales, the same is given in details separately. Along with the above forms a statement of Analytical and Comparative Ratios is also submitted. These data are also for 3 years as mentioned above. The various ratios include current ratio, Debt/Equity ratio, Bank borrowing/Total outside liabilities, net sales/Total tangible assets,etc. Also stock of raw material in terms of No. of months consumption, WIP in terms of No. of months cost of production, FG in terms of No. of months cost of sales, Sundry debtors in terms of No. of months sales are also given.

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Modes of Working Capital Finance

The bank can provide the Working Capital Finances in different ways. Basically these are of two types: a) Fund Based Working Capital Finance and b) Non Fund based Working Capital Finance. The scope of this project is restricted to the Fund Based Finance only. The Fund Based Finances can be availed in many ways. Different facilities and instruments are made available to the borrower to avail the finances. In the following pages an attempt has been made to explain some of them in brief. These are as follows: Cash Credit 1. 2. 3. 4. 5. 6. Working Capital demand Loan Bill Discounting Export Packing Credit Commercial Paper Inter-Corporate Deposit FCNR(B) Loans

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Cash Credit Cash Credit is the part of fund based facility given by the Bank to the company. With this the company, which is the customer to the bank, can draw amounts upto pre-defined limits specified by the bank. The company can use this money to fulfill its every day working capital needs. As and when the company receives the sales proceeds, it can deposit the same to its cash credit account with the Bank. These payments can be in parts or in full depending upon the sales receipts. The company can issue cheques to its suppliers as well as deposit the cheques given by its customers. This form of advance is highly attractive from the borrowers point of view because while the borrower has the freedom of drawing the amount in installments as and when required, interest is payable only on the amount actually outstanding. Availment of Cash Credit Facility: For availing the cash credit facility, the company or the borrower has to make an application to the consortium of banks or a particular bank as the case may be. The application should be accompanied with the financial statement for the current year (estimated figs) and projected figs for the next year. Along with this one copy of audited financial statement of the last year is also to be submitted. These will also give the working capital needs of the company. These statements should be given in the proper CMA format only. Where there is consortium, the lead bank shall do the assessment of credit requirement. It is based on the following parameters: 1. Past performance as evidenced by audited Financial Statement.

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2. Present performance indicated by current statement of stocks, sales, proforma, Balance sheet, etc. 3. Future performance indicated by projected Balance Sheet, Cash flow, etc. Where there is no consortium the concerned bank does the assessment and sanctions the credit limits. Once the facility is made available to the company or the borrower, then the borrower can draw as much as needed and as and when needed, to the extent that the amounts outstanding in the account does not cross the Drawing Power limits specified / sanctioned to it. There is no restriction on the amount of transactions, involving deposits and withdrawals, which can be done during a day. Drawing Power limits: The Drawing Power for the company is calculated on the monthly basis. It is changes every month. The companys utilization of working capital limits can not cross the Drawing Power limits. These limits can be equal to or less than the total sanctioned limits for a particular year. But it can not be more than that. The Drawing Power is calculated on the basis of the stocks and debtors of the company, for the previous month. The borrower has to submit a statement, giving the stock and debtor position, at the end of every month. These are hypothecated with the bank against which the bank provides the credit. The stock includes Raw Materials, intermediate stocks and Finished Goods. To compute the Drawing Power, 75% of total stocks (reduced by amount payable for Letter of Credit creditors) and 60% of debtors outstanding for a period of less than six months are considered. Then Drawing Power is divided, on prorata basis, among all
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the banks in the consortium. It may happen that the amount, so calculated above, will exceed the total sanctioned limits for the company. In such cases, the sanctioned limits will be the ceiling for the Drawing Power. Hence in any case the Drawing Power can not exceed the sanctioned limits. Further more, if the borrower is enjoying, Bill Discounting, EPC or WCDL facilities, then the Drawing Power will be blocked by that amount for the period till such facilities are enjoyed. Generally all banks divide the Drawing Power limit into two parts. 50% each for Cash Credit and WCDL. Interest rate: The borrower has to pay the interest on the limit utilisation at the day end and not on the entire amount of sanctioned limit. This is where the cash credit account comes in very handy for the borrower, as he has to pay the interest only for the amount he has utilised. The interest rate is negotiable. It depends upon the borrower and the bank, which is giving the facility. The interest is calculated on daily basis, but charged to the account on a monthly basis. The closing balance, for the day, is liable for the interest charges. The borrower will not be paid any interest if he has any surplus amount in his account. A minimum charge may be payable, irrespective of the level of borrowing, for availing this facility. This is to make sure that the bank is not at a loss. Duration of the facility: Normally such facilities are given for a period of one year. After one year the bank does the review. This is to find out, upto what extent the borrower is using the facility given to him. Is he making the maximum
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possible use of the facility provided? Depending on the review, the bank may lower the sanctioned limits. If every thing is in place then the agreement is automatically renewed for the next year. Changes in the sanctioned limits for the subsequent Year: For every subsequent Year, the company or the borrower has to submit to the bank the CMA data, as mentioned earlier, in the proper CMA format giving the details. The details contain the estimated financial statements for the subsequent Year and projected financial statements for the next year henceforth. These details will also give the working capital requirement for the subsequent Year. Then the bank will renew the terms, for giving the Cash Credit / Overdraft facility. If there is any increase/decrease in the working capital requirement, then accordingly, the changes are made to the sanctioned limits. If, in the review of the current year, the bank finds that the borrower is not using the facility then the bank may even refuse to renew the facility, in the subsequent Year. Depending on the financial position of the borrower the bank can even increase / decrease the interest rate. In case of consortium of banks, as said earlier, the lead bank decides on the cash credit limit for the borrower or the company. Then this limit is divided among number banks, in the consortium, depending upon their capacity to give the facility. Hence, the borrower can have cash credit account with different banks. But while doing this, it is made sure that the total limit, taken together, is within the sanctioned limits.

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Working Capital Demand Loan Working Capital Demand Loan (WCDL) is also a fund-based facility given by the bank to the company. These loans are linked with the cash credit account of the company with the bank. They are given at the same interest rate as that of the cash credit account. The loans are supported by a demand promissory note executed by the borrower. There is often a possibility of renewing the loan. Availment of Working Capital Demand Loan: This facility comes with the cash credit facility. These loans are available on demand and hence are called Working Capital Demand Loans. For getting the loan the company or the borrower has to apply for it. This application has to be made 2 to 3 days in advance. This application doesnt, normally, involve a lengthy procedure. A mere request, for the same, is enough for getting the loan, provided sanction is available. As explained earlier, the Drawing Power of the borrower is divided between Cash Credit and WCDL equally, if the borrower enjoys no other facility. But if the borrower is enjoying other facilities, like Bill Discounting and EPC, then he can request to the bank to block the WCDL facility for the said facilities. The borrower then can not get the WCDL, if the Drawing Power, against WCDL, is exhausted due to the availment of the said facilities. When the amounts, raised against these facilities, are fully repaid, then the blocked part is released and the borrower can get the WCDL to its full extent. For example, If the Drawing Power limit of a company for a month is, say Rs.100 Crores. Then Company can avail WCDL of Rs.50 Crores. Now, if the
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company avails an EPC of say Rs. 40 Crores and requests the bank to block its WCDL facility for that much amount, then the company can get WCDL upto Rs. 10 Crores only. And can only enjoy the entire WCDL limit only when it repays the EPC. Duration of the loan: The WCDLs are given for some minimum period. This period varies from bank to bank and for customer to customer. It can be negotiated. Generally this period varies between 15 days to one month. One can not repay the loan before this period, even if he is capable of paying. Interest rate and method of payment: As mentioned earlier, the interest rate is same as it is for the Cash Credit. Only difference is in calculating and charging the interest. Here the interest is to be paid on the month end or on repayment of WCDL whichever is earlier. The interest is calculated on the entire loan amount, for the period for which the loan was used. Interest, from the date on which the loan was given to the end of that month, is charged at the end of that month. The balance interest is charged on the end of the next month. The payment of the principal amount can be made on any date after the minimum period is over. As mentioned above the principal can not be repaid before this period. If one pays before this period then he will be penalised for that. In this case he has pay additional 2% interest over and above the agreed interest rate for the period the loan is used. In most cases, these loans are renewed.

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Bill Discounting Bill discounting is one of the facilities for supporting the working capital requirements. In bill discounting facility generally three parties are involved, which are the drawer (seller), drawee (buyer), and the bank. The seller sells the products to the customer and raises an invoice against it. Then on the basis of this invoice, the seller will make a Bill of Exchange. The B/E contains the details like the invoice date, name of the bank to whom the payment has to be made, the due date of payment and the amount to be paid. The B/E and the invoice are send to the buyer for his acceptance. After the acceptance by the buyer, the same are returned to the drawer. The drawer then submits the invoice and the B/E, along with the covering letter, to the bank. The bank, after receiving these documents, credits the B/E amount, less the discount charges (i.e. interest), immediately to the drawers account. The entire procedure takes 3 to 4 days. The drawee shall make the payment of the B/E amount to the bank on the due date. If the drawee fails to make the payment on the due date then the bank takes the necessary action, according to the terms and conditions mentioned in the Bill Discounting Agreement/Sanction Letter. The bank, in this case may, register a protest, for the dishonor of the bill, with a notary public. On the dishonor of the bill, the bank intimates the drawer of the bill, about the fact of dishonor, and requests the drawer to make the payment on the bill with the additional interest on the delayed payment and other expenses that the bank has incurred for the recovery of the bill amount.
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Discounting Rate: The discounting rates differ from bank to bank and from customer to customer. It mainly depends upon the credit rating of the borrower, drawee of the bill (B/E drawn on reputed drawees attract lower rate of interests), tenure of the bill and also whether the bill is with recourse or without recourse. Hence the discount rates are negotiated. The discount rate varies between 9.25 to 10.5%. The bank generally gives the discount rate 1 to 2%below their PLR. Bill discounting is cheaper as compared to cash credit and working capital demand loan.

Bill Discounting Agreement: At the request of the company the bank has granted the company bill discounting facility by way of discounting of sales bills raised by the company on customers, with certain overall limit (termed as the facility) on terms and conditions mutually agreed. On presentation of the documents the bank shall discount the documents for an amount equivalent to 100% of the value of the bill and pay to the company/credit to the companys account with the bank the discounted value of the bill. Provided that the bank may at its entire discretion refuse to entertain the companys request to discount any bill, without being obliged to assign any reason therefore. Each bill presented to the bank for discounting shall be made payable not later than 90days from the date of the bill and shall have been duly accepted by the customer and endorsed in favour of the bank In respect of each bill discounted by the bank the company shall be liable to pay to the bank the interest at the rate specified by the bank in its sole discretion from time to time from the date on which the bill
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has been discounted upon the date on which the payment is received from the customer. On maturity of the discounted bill the bank shall cause the said bill to be presented to the customer for payment. In the event of any of the bill drawn on any customer remaining over due for more than 15 days the bank may at its entire discretion discontinue discounting of any bills drawn on such customer until the overdue payment is fully regularised. Even after such regularisation the bank may delete the name of such customer from the schedule and refuse to discount bills drawn on such customers. In the event of any of the discounted bill remaining unpaid for a period of the 30 days from the due date the bank shall be entitled to initiate proceedings against the defaulting customer and all cost, charges and expenses incurred by the bank for recovery of such outstanding bill amount shall be to the account of the company.

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Export Packing Credit Exports: Exports have come to be regarded as an engine of economic growth in the wake of liberalization and structural reforms in the economy. A sustained growth in exports is, however, not possible in the absence of proper and adequate infrastructure, as adequate and reliable infrastructure is essential to facilitate unhindered production, cut down the cost of production and make our exports internationally competitive. Various export-financing facilities are available with the exporters. Export Packing Credit is one of them. The banks give Export Packing Credit (EPC) to the exporter for encouraging the exports and allow more foreign currency to come into the country. These are of two types: 1. Pre-shipment Export Packing Credit Post-shipment Export Packing Credit The Export Packing Credit can be availed in both Indian Currency as well as in Foreign Currency. Pre-Shipment EPC: Pre-shipment EPC is extended prior to shipment for the purchase of raw materials, processing, packing, transportation, warehousing, etc of goods meant for exports. Pre-shipment EPC is extended in both Indian Currency as well as Foreign Currency. Pre-shipment Rupee Credit is extended to finance temporary funding requirement of export contracts. This facility enables provision of rupee mobilisation expenses for construction/ turnkey projects. Exporters could also avail of pre-shipment credit in foreign currency (PCFC) to finance cost of imported inputs for manufacture of export products to be supplied under the projects.
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Exporters with a good track record are allowed a running account facility with the bank for PCFC. The specified eligibility factor is that the export's overdues should not exceed 5% of the average annual export realizations during the preceding three calendar years. Commercial banks also extend this facility for definite periods. Post-shipment EPC: Post-shipment is extended after shipment, to bridge the time lag between the shipment of goods and the realization of proceeds. Exporter can avail this facility in both Rupee as well as Foreign Currency. In case of Foreign Currency, no Foreign Currency loan is granted. Loan is given in rupees but the liability is in dollars. The loan is to be liquidated from the export proceeds. This scheme is optional for Banks. RBI declares the rate of interest on such loans. In this case, the interest amount in US $ is deducted from the amount of the bill. Only the net amount will be converted into rupees and credited to exporters account. Availment of Facility: For availing such credits, the exporter has to make an application to the bank for granting the export credit facility. The documents attached with the application are the Letter of Credit (LC)/ Contracts/ confirmed orders along with a covering letter, furnishing therein an undertaking that the relative export bills will be negotiated with the bank. Further that, the finance granted against such LC/s Contracts/ orders will be liquidated within a period of 180 days from the date of availment of the advances or within the prescribed time limit as per the directives issued by RBI from time to time.

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Exporters with firm export orders or confirmed letters of credit are eligible for the EPC, provided they satisfy the other credit norms. The credit will be available for maximum period of 180 days from the date of first disbursement. In some cases, the credit can also be extended for a period of 270 days with a higher rate of interest. Moreover a corporate can also book forward contract in respect of future export credit drawls. In case LC/ Contract/ confirmed order is expected in the near future, the relevant evidence which may be in the form of a cable / telex is also applicable, subject to the condition that such communication contains at least the following information: 1. 2. 3. goods to be exported 4. 5. Terms of payment Final LC/ contract should be produced at a later stage, as and when available. For getting the credit, the exporter has to submit the following documents to the concerned bank in case of pre-shipment EPC. 1. Exporters tender document 2. Offer confirmed order document. In case of postshipment EPC one extra document, that is required to be attached along with the above two, is the Bill of Lading. In case of Rupee denominated EPC, the tender amount is converted into Indian Currency. This application contains the tender amount in Indian Currency and the unit Rate of the material in $/unit. Where as in foreign Currency denominated EPC no such conversion is done. Date of shipment Name of the buyer Value of the order Quantity and particulars of the

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After approving such application, the bank immediately credits the entire amount to the exporters account / makes the payment. This may be in Indian Currency or Foreign Currency as the case may be. For example, at SBI, Pre-shipment EPC in Foreign Currency can be availed in US Dollar, Pound, Sterling, Euro and the Japanese Yen. At the same time, the bank blocks the CC / WCDL account for an amount equivalent to the tender or credited amount. This is done to make sure that exporters withdrawal does not cross the sanctioned limits. Generally, the pre-shipment advance granted to the exporter does not exceed FOB value of the goods or domestic market value of the goods, whichever is less. Repayment: On realization of the proceeds from the export, the exporter has to repay to the bank on or before the due date. Such credits are to be repaid only with the proceeds of the export bill tendered, under the export bill rediscounting scheme, and not with foreign exchange acquired from any other source. Interest rate: The rate of interest on the EPC differs from bank to bank and for exporter to exporter, depending on the credit rating of the exporter. Hence these are negotiable. But it is always lower than the banks PLR. The interest rate for the EPC in Indian Currency and EPC in Foreign Currency is different. Interest rate is generally between 8 to 10% for the Indian Currency EPC, where as it is LIBOR+ some spread for Foreign Currency EPC, which works out to around 3%. The interest rate on EPC is lower than CC / WCDL rate. This is to encourage the exports.

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The amount recovered through such export trade should be equal to or greater than the EPC availed, to make sure that more foreign currency comes in. If the exporter fails to achieve this, then he is penalized. In such cases, he has to pay the interest at a rate applicable for CC / WCDL, for the under recovered amount. If the exporter fails to pay on the due date, then an extra interest of 2% is charged over and above the CC / WCDL rate as applicable. Regulatory Aspects of Export Credits: While extending such facilities banks are mainly governed by the guidelines issued by the Reserve Bank of India under the Export Credit (Interest Subsidy) Scheme 1968. It is necessary that the exporter applies for and obtains sanction of limits suitable and according to his needs. At the pre-safe stage bifurcation of working capital limits for domestic and export purposes is essential so that the quantum of packing credit advance could be determined. At the post stage, quantum of post-shipment credit facilities would be based on export sales and export receivables. Export Credit (Interest Subsidy) scheme 1968: In order to maintain the cost of export credit at a reasonably low level, the RBI prescribed in August 1967, a ceiling on the rates of interest that could be charged by banks on export credit. The ceiling rates, which were subsequently replaced, by fixed rates were lower than the rates of interest charged for other commercial advances. Operational Features: The factors taken into consideration by banks before disbursal of export credit facilities are

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1. Banks adopt a flexible attitude with regard to debt / equity ratio, margin and security but there could be no compromise in respect of viability of the proposal and the integrity of the borrower. 2. Exporters should be able to satisfy their bankers about their capacity to execute the orders within the stipulated time and to manage the export business. 3. The quantum of finance sought for should be commensurate with the expected export turnover and the needs of the exporter. 4. Banks would need to be satisfied about the standing of the credit opening banks. 5. Banks would also look into, the political and financial conditions of the importers country. 6. In working out the need-based requirements of the exporter, the banks keep in view the past performance, orders on hand etc. 7. The terms and conditions of the credit facilities are advised by banks to the exporter by an arrangement letter.

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Commercial Paper Introduction: Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Terms and conditions for issuing CP like eligibility, modes of issue, maturity periods, denominations and issuance procedure, etc., are stipulated by the Reserve Bank of India. There are no interest rate restrictions on CP. Eligibility for issue of CP: Corporates, Primary Dealers (PDs) and Satellite Dealers (SDs), and the all-India Financial Institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP. A Corporate would be eligible to issue CP provided it satisfies the following requirements: 1. Tangible net worth of the company, as per the latest audited Balance Sheet, is not less than Rs. 4 Crores. 2. Working Capital (fund based) limits of the company, sanctioned by bank/s or all-India Financial Institution/s, is not less than Rs. 4 Crores.

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3. The company should obtain the specified credit rating from an agency approved by RBI, for the purpose, from time to time.
4.

The borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

Rating Requirement: All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review. Denomination and minimum size of CP: CP can be issued in denominations of Rs.5 lacs or multiples thereof. Amount invested by single investor should not be less than Rs.5 lacs (face value). Minimum and Maximum Period of CP: CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. The maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid. There shall be no grace period of payment of CP. If the maturity date happens to be a holiday, the company shall be liable to make payment on the immediate preceding working day.
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Limits and the Amount of Issue of CP: The aggregate amount to be raised by issuance of CP by a corporate should not exceed the working capital (fund-based) limit sanctioned to it by bank/banks. Corporates can automatically raise CP to the extent of 50% of working capital limits without prior clearance from the bank/s. (The 50% limit would also be inclusive of any outstanding CP). However, companies intending to issue CP in excess of 50% of working capital limits can do so after getting prior clearance from bank/s. The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription. CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date. Every CP issue should be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying Agent (IPA) within three days from the date of completion of the issue. Investment in CP: CP may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI). A CP shall be issued to a non-resident Indian (NRI) only on conditions that (1) the proceeds will be non-repatriable and (2) the CP shall not be transferable.

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Mode of issue: CP can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI. As regards the existing stock of CP, the same can continue to be held either in physical form or can be dematerialised, if both the issuer and the investor agree for the same. CP will be issued at a discount to face value as may be determined by the issuer. CP can be issued as Front Ended or Rear Ended, depending upon the terms agreed upon between the borrower and investor. No issuer shall have the issue of Commercial Paper underwritten or coaccepted. Payment of CP: The initial investor in CP shall pay the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP, when the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA. However, when the CP is held in Demat form, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA. Standby facility with banking companies: A company issuing CP may request the sole bank / the consortium leader to provide standby facility for an amount not exceeding, the amount of issue, for meeting the liability of CP on maturity. In view of CP being a stand alone product, it would not be obligatory in any manner on the part of bank to provide stand-by facility to the issuers of CP. Where standby facility has been arranged for, such company may fall back on

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the working capital (fund based) limit with the sole bank / consortium banks, if there is no Roll Over of commercial paper. Procedure for Issuance: 1. A resolution, for the proposed CP program, shall be passed in the Board Meeting. 2. Any company proposing to issue CP should submit a proposal incorporating details in the form, as modified from time to time by the Reserve Bank of India, to the financing banking company together with the certificate issued by the credit rating agency. The financing banking company, on receipt of the proposal for issuance of CP, shall scrutinise the same and on being satisfied shall take the proposal on record. 3. A Company proposing to issue CP upto 50 per cent of working capital limits may, after submitting the proposal as stated above, open the issue for subscription. 4. However, a company proposing to issue CP in excess of 50 per cent of working capital limits can open the issue for subscription only after the proposal has been taken on record by the financing banking company. 5. Companies must ensure that the proposed issue of CP is complete within the period of two weeks from the date of opening of the issue for subscription. 6. After the exchange of deal confirmation between the investor and the issuer, issuing company shall issue physical certificates to the investor or arrange for crediting the CP to the investor's account with depository. Investors shall be given a copy of IPA agreement, copy of IPA certificate to the effect that documents are in order and a statement of account from depository (in case of Demat form).
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7. The initial investor in CP shall pay the discounted value of the CP by means of a crossed account payee cheque to the account of the issuing company with the financing banking company only. 8. The working capital (fund-based) limit of every company issuing the CP shall be correspondingly reduced by the financing banking company, once the CP is issued and the financing banking company shall make necessary adjustments in the account of such company respectively, with the banking company/the other member banking companies. 9. Every company issuing CP shall within three days from the date of completion of issue, advise the Reserve Bank of India {Industrial and Export Credit Department, Central Office, Mumbai (IECD)}, through the financing banking company, the amount of CP actually issued. Documents for issue of CP: The following are the documents relating to issue of CP: 1. Incumbency certificate to be issued by the company issuing CP 2. Certificate issued by the Credit Rating Agency. 3. Issuing and Paying Agency Agreement to be signed by A Scheduled Bank and the CP issuing company and 4. Standby Agreement to be signed by Standby Bank and the CP issuing company. Issue Expenses: A Company issuing CP shall bear the expenses of the issue including dealers fees, rating agency fee. The charges by the banking company for providing standby facilities and of IPA commission. Also stamping duty at the rate of 0.05% is to be paid for the Stamp Office Agreement.

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Issuing and Paying Agency: At the request of the issuer, the Issuing and Paying Agent (IPA), agrees to act as the IPA in respect of all the CPs to be issued by the issuer during the validity of the IPA agreement, as per the terms and conditions mentioned. Only a scheduled bank can act as an IPA for issuance of CP. As and when the Issuer proposes to issue the CPs, the IPA allows the issuer to withdraw such number of blank forms of CPs from its safe custody sufficient to meet the requirement of the issuer for issuing the CPs. Then, on the receipt of the duly filled CPs from the issuer, the IPA intimates the Dealer that the CPs along with the Certificate of IPA are ready for delivery and delivers them to the dealer for distributing to the investors. After receiving the discounted face value of the CPs, the IPA credits the account of the investor. On maturity of the CP, the holder presents the document to the IPA at the place and office as indicated in the CP for payment. The IPA may pay the amount thereafter depending upon the availability of the funds in the issuers account. IPA will get a commission, at a rate as may be mutually agreed between the Issuer and the IPA, from time to time, within the overall limit prescribed by the RBI, for the services of handling the receipt and payment of the CPs and for monitoring the Account of the issuer with the IPA in connection therewith and for maintenance of Registers and Records therefore. Conclusion: The average discount rate of the CP in India, is around 7 to 9%, which is less than the usual CC / WCDL interest rate, which is close to 14 to 15%.

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Inter-Corporate Deposits

Apart from CPs, corporates also have access to another market called the Inter Corporate Deposits (ICD) market. An ICD is an unsecured loan extended by one corporate to another. This market allows funds surplus corporates to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than a bank, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent in high. The ICD market is not well organised with very little information available publicly about transaction details. The instrument is non negotiable and hence is not transferable or tradable. ICDs are given outside the working Capital limits, unlike CPs. But there is limit on the outstanding amount. Interest rate: The instrument carries a coupon rate, which is market determined. It depends on: Prevailing market rate, call money rate, Bank rate, etc. Financial strength and credit rating of borrower. The coupon rate mostly remains fixed upto the maturity. Issuance: These are issued at the face value. The issue can be single or in parts, which depends upon the size of the issue. If the issue size is big and there is no single investor interested in investing for the entire amount, then the issue can be divided into small parts and issued to number of investors.
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Such issues can be made at different coupon rates depending upon the negotiations with different investors. Transaction size is mostly in the region of Rs.1 Crore to Rs. 5 Crores. the transactions are mostly routed through financial intermediary. i.e. Brokerage House. Duration: These are generally for a period of 90 days. However one may also have money invested for even short term of 3 to 5 days on call. Rate of interest is generally low compared to interest on higher tenure. Types of Deposits: Such deposits are usually of Fixed Period ICDs, Pure Call ICDs and a combination of both. These are as follows: 1. Call Deposits: These deposits carry a call option. The lender on notice can terminate these. The maturity period can be as short as one day, to as long as one year. For example, 5 days and call, which means, the lender can call back the deposit on any day after the 5th day. In theory, a call deposit is withdrawable by the lender on a days notice. However, in practice, the lender has to give 1 to 2 days notice. 2. Three Months Deposits: These are more popular in practice. These deposits are taken by borrowers to fulfill the short-term cash inadequacy. There will not be any call option. The maturity period is fixed at 3 months. 3. Six Months deposits: Normally lending companies do not extend deposits beyond this time frame. Such deposits are usually made with first class borrowers. The maturity period is fixed at 6 months.
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Payment: The payment of such deposits is to be done on maturity. The interest is also payable on maturity. In case of the Call Deposits the payment is to made when the notice from the lender is received. In case of default in payment, there will be some penalty payable, as per the terms agreed upon in the agreement. Characteristics of ICD Market: Following are some of the characteristics of the ICD market. 1. Lack of regulation: The lack of legal hassles and bureaucratic red tape makes an ICD transaction very convenient. In a business environment otherwise characterised by a plethora of rules and regulations, the evolution of the ICD market is an example of the ability of the corporate sector to organise itself in a reasonably orderly manner. 2. Secrecy: ICD market is shrouded in secrecy. Brokers regard their lists of borrowers and lenders as guarded secrets. Tightlipped and circumspect, they are somewhat reluctant to talk about their business. Such disclosures they apprehend would result in unwelcome competition and undercutting of rates. 3. Importance of Personal Contacts: Brokers and lenders argue that they are guided by a reasonably objective analysis of the financial situation of the borrowers. However the truth is that lending decisions in the ICD markets are based on personal contacts and market information which may lack reliability.

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FCNR(B) Loans FCNR(B) stands for Foreign Currency Non-Residence (Borrowings). FCNR(B) loans are given by the banks to the borrowers from the FCNR(B) deposits. FCNR(B) deposits are the deposits kept by NRI in foreign currencies. Bank provides loan in foreign currency out of dollar deposit of NRI available with them. These loans are generally provided out of the Working Capital limit sanctioned to the company. Availment of FCNR(B) loans: The corporate needing funds make an application to the bank having the FCNR(B) deposit account. The bank after scrutinising such application to their satisfaction extends the loan to the company. The bank provides dollars to the borrower or the company, the company utilises the dollar either to meet its immediate requirement of dollar payment either towards imports or other foreign currency payments. However, generally the dollars provided by the bank are sold back to the bank at the prevailing exchange rate and rupee amount is credited to the companys account. It may be noted that the liability of the company is always in foreign currency. Duration: Depending upon the type of loan the tenure is determined. These loans are given for a short duration. Since banks lend foreign currency loans out of their FCNR(B) deposits, which typically span over 6-12 months period, they cannot lend FCNR(B) loans for periods of more than one year. Normally such loans are given for a period of 90-180 days. Interest Rate:

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Interest is charged by applying a spread over LIBOR (London Inter-Bank Offer Rate). The spread can be in range of 50-300 basis points (0.50% 3.00%) over the LIBOR. Currently the 6 month LIBOR is around 2.00% p.a. The spread is levied by the bank depending upon the credit rating of company, prevailing market condition, etc. The currency risk is borne by company. However company by booking a forward contract, upto maturity of loan, can limit any adverse movement in currency rates. Also the effective rate of interest can be determined. Assuming premium rate to be 5.50% and that the rate of interest quoted by bank is LIBOR + 1% p.a., the effective cost will be 8.50% p.a. The mechanism provides for cheaper financing. Even after taking forward cover the effective cost is much less than the rate levied by the bank on Working Capital funds in Rupees. Further in case company does not take a forward cover and the rate of depreciation is less than the premium payable on booking of forward contract, the effective cost can still be cheaper. Assuming that the company had not covered the exposure and in case the rupee depreciates only, by say 2% p.a. vis--vis the premium of 5.50% p.a. the effective cost will come to 5% p.a. only. Repayment: As mentioned earlier, the liability of the company remains in foreign currency only. The interest is calculated on the foreign currency. The repayment of the principal amount, along with the interest thereon, is to be made on maturity.

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Characteristics of FCNR(B) loans: 1. With the interest rate on these loans linked to the dollar exchange rate and rates prevailing in the international market, these loans work out to be cheaper than rupee credit. 2. The RBI has allowed banks lend at sub-PLR rates in its recent credit policy, which has made this avenue very attractive in recent months. 3. For banks, too, FCNR(B) loans is a profitable avenue of business as the cost of funds here are cheaper than rupee funds. This helps banks manage their spreads better as cost of funds and loans linked to FCNR(B) move with international benchmarks and Libor. 4. The abolishing of incremental CRR on FCNR(B) loans has further helped in reducing cost of funds for banks. Conclusion: Corporates and banks are suddenly discovering the benefits of foreign currency loans that are available from the FCNR(B) deposits banks. However, the availability of FCNR(B) funds for lending purposes is very limited. The funds requirement of corporates, however, is many times higher. Besides, this special source of funds is concentrated mostly in three public sector banks SBI, BoB and Bank of India. Also, corporates still feel there are problems on the FCNR(B) loan front. For one, these funds are unable to meet their entire credit needs. Second, they are typically of six months to one-year duration.

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STATEMENT OF WORKING CAPITAL


Changes In W-cap For the year ended 2005

Increase
2006 2004-05 2005-06 2004-05

Decrease
2004-05

PARTICUL ARS
Current Assets
Inventories Sundry Debtors Cash and Bank Other Current Assets Loans and Advances

2004

29490.66 24614.52 2675.92 1887.79 12122.14 70791.03

28756.59 22627.67 1324.83 2277.72 12206.35 67193.16

31904.16 24846.74 2503.17 3315.06 14442.06 77011.19 389.93 84.21

3147.57 2219.07 1178.34 1037.34 2235.71 9818.03

734.07 1986.85 1351.09

Total Current Assets Current Liabilities

3597.87

Acceptances
Sundry Creditors Advances against sales Due to Subsidiary Cos Deposits from Dealers and Agents Overdrawn Bank Balances Other liabilities Interest accrued but not due Provisions

89.75 10491.99 449.05 137.82

42.17 11009.37 459.52 207.25

45.09 16427.41 560.35 177.84 517.38 10.47 69.43

2.92 5418.04 100.83

47.58

29.41

4874.25

5134.95

5318.21

260.7

183.26

186.60 1491.91

484.16 1689.99

1125.67 2044.72

297.56 198.08 161.33

641.61 354.73 50.85

528.05 315.87 8373.15 26410.39 477.20 5605.17 25109.78 6770.84 26227.34

1165.67 1117.56

2767.98 1300.61

Total Current Liabilities

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Net Working Capital


(CA CL)
44380.64 42083.38 50783.85 8700.47 2297.26

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INVENTORY MANAGEMENT

Inventory refers to the stock of products a firm is offering for sale and the components that make up the product. It includes raw materials; work in process (semi-finished goods). Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly the overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. Inventory Financing: As with accounts receivable loans, inventory financing is a secured loan, in this case with inventory as collateral. However, inventory financing is more difficult to secure since inventory is riskier collateral than accounts receivable. Some inventory becomes obsolete and looses value quickly, and other types of inventory, like partially manufactured goods, have little or no resale value. Firms with an inventory of standardized goods with predictable prices, such as automobiles or appliances, will be more successful at securing inventory financing than businesses with a large amount of work in process or highly seasonal or perishable goods. Loan amounts also vary with the quality of the inventory pledged as collateral, usually ranging from 50% to 80%. For most businesses, inventory loans yield loan proceeds at a lower share of pledged assets than accounts receivable financing. When inventory is a large share of a firms current assets,
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however, inventory financing is a critical option to finance working capital. Lenders need to control the inventory pledged as collateral to ensure that it is not sold before their loan is repaid. Two primary methods are used to obtain this control: (1) warehouse storage; and (2) direct assignment by product serial or identification numbers. Under one warehouse arrangement pledged inventory is stored in a public warehouse and controlled by an independent party (the warehouse operator). A warehouse receipt is issued when the inventory is stored, and the goods are released only upon the instructions of the receipt-holder. When the inventory is pledged, the lender has control of the receipt and can prevent release of the goods until the loan is repaid. Since public warehouse storage is inconvenient for firms that need on-site access to their inventory, an alternative arrangement, known as a field warehouse, can be established. Here, an independent public warehouse company assumes control over the pledged inventory at the firms site. In effect, the firm leases space to the warehouse operator rather than transferring goods to an off-site location. As with a public warehouse, the lender controls the warehouse receipt and will not release the inventory until the loan is repaid. Direct assignment by serial number is a simpler method to control inventory used for manufactured goods that are tagged with a unique serial number. The lender receives an assignment or trust receipt for the pledged inventory that lists all serial numbers for the collateral. The company houses and controls its inventory and can arrange for product
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sales. However, a release of the assignment or return of the trust receipt is required before the collateral is delivered and ownership transferred to the buyer. This release occurs with partial or full loan repayment. While inventory financing involves higher transaction and administrative costs than other loan instruments, it is an important financing tool for companies with large inventory assets. When a company has limited accounts receivable and lacks the financial position to obtain a line of credit, inventory financing may be the only available type of working capital debt. Moreover, this form of financing can be cost effective when inventory quality is high and yields a good loan-to-value ratio and interest rate. Factors to be considered when determining optimum stock levels include: What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can the company remove slow movers from their product range without compromising best sellers? It should be noted that stock sitting on shelves for long periods of time ties up money, which is not working. For better stock control, the following may be considered: Review the effectiveness of existing purchasing and inventory systems.

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Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer the company keeps it. Consider having part of the companys product outsourced to another manufacturer rather than make it yourself. Review your security procedures to ensure that no stock is going out the back door! Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges. The inventory of a manufacturing concern usually includes: Raw material Work-in-Progress Finished goods

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Ratios: Ratio used for evaluatio n

Formula used

Ratio for the financial year ended 2006 2005 2004

Inventory COGS Turnove r ratio Average Inventory (Times) Inventory Period (Days) Current Ratio 365 Inventory Turnover Ratio

1.34

3.43

2.84

272

106

129

Current assets, loans and advances Current liabilities and provisions

2.33

2.68

2.68

Interpretation:

Inventory Turnover ratio: This ratio measures the number of times a companys inventory is turned over in a year. A high turnover ratio is considered good. From working capital point of view, a company with a high turnover requires a smaller investment in inventory than one producing the same sales with a low turnover.
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This ratio indicates managements efficiency in turning over the companys inventory, which can be compared with other companies in the same field. It also suggests how adequate a companys inventory is for its business volume. There is no standard yardstick for this ratio since inventory turnover rates, vary from industry to industry. If a company has an inventory turnover rate thats above average for its industry, it will generally mean that a better balance is being maintained between inventory and sales volume. So there will be less risk of Being caught with a top-heavy inventory position in the event of a decline in the price of raw materials, or in the market demand for end products, and Wastage through materials and products standing unused for longer periods than anticipated with consequent possible deterioration in quality and/or marketability. On the other hand, if inventory turnover is too high compared to industry norms, problems could arise from shortages in inventory, resulting in lost sales. Since much of a companys working capital is usually tied up in inventory, how the inventory position is managed has an important and direct effect on earnings. For Khandesh Roller Flour mill the inventory turnover ratio has increased from 2.84 times (2004) to 3.43 times (2005), but showed a major decline in the year 2005-06 indicating that inventory management has to be taken due attention. But the decline in the inventory turnover
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ratio could be attributed to many reasons and not just poor inventory management. Inventory Period had shown a downward trend from 129 days (2004) and 106 days (2005) corresponding to then increase in the inventory turnover period in the same period. But there is major variation to the earlier years. In the year 2006 the inventory period has increased tremendously from 106 days in 2005 to 272 days in 2006. This is also supported by the decline in the inventory turnover ratio to a meager of 1.34 times in 2006. Current ratio: The current ratio is a reflection of financial strength. The current ratio measures the ability of the firm to meets its current liabilities- current assets get converted into cash and provide the funds needed to pay current liabilities. A current ratio can be improved by increasing current assets or by decreasing current liabilities. Steps to accomplish an improvement include: Paying down debt. Acquiring a long-term loan (payable in more than 1 year's time). Selling a fixed asset. Ploughing back profits into the business. A high current ratio may mean that cash is not being utilized in an optimal way. For example, the excess cash might be better invested in equipment. The higher the current ratio, the greater the margin of safety, the larger the amount of current assets in relation to current liabilities, the more the firms ability to meet its current obligations.
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The current ratio for Khandesh Roller Flour mill Ltd. was 2.68:1 in 2004. The current ratio stood at 2.68:1 for the year ended 2005.If we compare current ratio of 2005 with 2004,we can see that the percentage of the ratio remains same for both years but here cash bank balance has decreased by 51%. Other current assets have increased by 20.6% compared with 2004. And provisions has decreased by 33.05%, current liabilities so the current ratio for both the years has remained constant i.e. 2.68:1. When one sees the changes in assets, cash and bank balance has increased tremendously by 79.07 %. This is because company has received prompt payments from debtors. Other current assets have decreased by 25%. This is because company received less interest and dividend in the year 2004 than in the year 2003. The overall decrease in earning of interest and dividend was 70%. The Current Liabilities, provisions have increased by 22.42 %. This is because the provision made by the company such as proposed dividend, tax on dividends, retirement benefits and excise duties has increased by 22%. But the current ratio has decreased from 2.68:1 (2005) to 2.33:1 in the year 2006. This is the result of the changes in current assets and current liabilities or changes in the working capital. Current assets comprises of Inventory, Debtors, Cash & Bank balances, Other Current Assets and Loans & Advances.

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The percentage of inventory held by Khandesh Roller Flour mill ltd. Increased by 10%, which is evident form the decline in the inventory turnover ratio and the increase in the inventory period. Debtors have increased by 7% compared to the previous year. That means sales and marketing efforts needs a push because inventory is pilling up. Inventory has increased and so has the debtors. Cash and bank balances have increased drastically by 88% in 2006 as in the year 2005. Attention has to be paid to the increase in the amount of cash balances. Other current assets have also increased by 45.54%. Loans and advances have also increased by 37.35%. Thus the overall current assets have increased by 17.57%. Dividend and interest subsidy receivable has increased as compared to the last year. Current liabilities have increased by 34.67% from the last year 2005. Provisions have increased by 20.78%, thus the total current liabilities have increased by 31.42%. Hence as the increase in the current liabilities is much more than the increase in the current assets, the current ratio has declined slightly. The current liabilities, which include sundry creditors, have increased from 10851.45 lakhs to 16427.41 lakhs. The overdrawn bank balances and the interest accrued but not due component of the current liabilities section has also increased. A new provision has been made in the form of fringe benefit tax has also been introduced in the year 2006. The provision for excise duty has also increased.

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CASH MANAGEMENT There are four primary motives for maintaining cash balances. Transactions Motive - to meet payments arising in the ordinary course of business. Speculative Motive - to take advantage of temporary opportunities Unexpected cash needs Compensating motive - Hold cash balances to compensate banks for providing certain services and loans. The basic objectives of cash management are: To meet the cash disbursement needs. To minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management is to reconcile them. Cash Management Techniques: The strategic aspects of efficient cash management are: Efficient inventory management Speedy collection of accounts receivables Delaying payments on accounts payable. There are some specific techniques and processes for speedy collection of receivables from customers and slowing disbursements.
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Precautionary Motive - to maintain a cushion or buffer to meet

WORKING CAPITAL MANAGEMENT

Speedy Cash Collections: Expedite preparing and mailing the invoice Accelerate the mailing of payments from customers Reduce the time during which payments received by the firm remain uncollected Prompt payment by customers Early conversion of payments into cash. Concentration Banking Lock Box System Slowing disbursements: Avoidance of early payments Centralized disbursements Float Paying from a distant bank Cheque encashment analysis Accruals (goods and services accrued but not paid for) Cash management models Several types of cash management models have been recently designed to help in determining optimum cash balance. These models are interesting and are beginning to be used in practice. Two of such models are given below: 1.Baumol model: This model was suggested by William J Baumol. It is similar to one used for determination of economic order quantity.
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According to this model, optimum cash level is that level of cash where the carrying costs and transactions costs are the minimum. Carrying costs This refers to the cost of holding cash, namely, the interest foregone on marketable securities. They may also be termed as opportunity cost of keeping cash balance. Transaction costs This refers to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and to sell the securities resulting in clerical, brokerage, registration and other costs. There is an inverse relationship between the two costs. When one increases, the other decreases. Hence, optimum cash level will be at that point where these two costs are equal.

The formula for determining optimum cash balance can be put as follows: C= 2U x P S

Where, C = Optimum cash balance U = Annual (or monthly) cash disbursements P = Fixed costs per transaction S = Opportunity cost of one rupee p.a. (p.m)
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2. Miller-Orr Model Baumol model is not suitable in those circumstances when the demand for cash is not steady and cannot be known in advance. Miller-Orr model helps in determining the optimum level of cash in such circumstances. It deals with cash management problem under the assumption of stochastic or random cash flows by laying down control limits for cash balances. These limits consist of an upper limit (h), lower limit (o) and return point (z). When cash balance reaches the upper limit, a transfer of cash equal to h-z is effected to marketable securities. When it touches the lower limit, a transfer equal to z-o from marketable securities to cash is made. No transaction between cash to marketable securities and marketable securities to cash is made during the period when the cash balance stays between the high and low limits. The model is illustrated in the form of the following chart:

upper control limit h Cash balance z Return point

O Time (D#4 source: Dr.S.N.Maheshwari, Financial management)

lower control limit

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The above chart shows that when cash balances reaches the upper limit, an account equal to h-z is invested in the marketable securities and cash balance comes down to z level. When cash balance touches the lower limit marketable securities of the value of z-o are sold and the cash balance again goes up to z level. The upper limit and lower limit are set on the basis of opportunity cost of holding cash; degree of likely fluctuation in cash balances and the fixed costs associated with securities transactions. Ratios: Ratio used for evaluatio n 2006 Cash Ratio Cash & Book Balances + Current Investments Current Liabilities 1.73 2005 2.46 2004 2.35

Formula used

Ratio for the financial year ended

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Sales to Cash Ratio Sales_ Cash

51.34

84.19

37.15

Cash Profit Ratio

Cash Profit Sales

* 100

17.72

18.68

22.75

Notes: In all the calculations involving Net Sales, the amount is taken net of excise duties paid. Net sales = Net sales Excise duty (Rs. In lakhs) Particulars Net sales (Net of excise) 2006 132275.5 1 2005 111534.4 4 2004

99431.64

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Cash Profit: Cash Profit = Profit available for appropriation + Depreciation + Miscellaneous Expenditure written off Interpretation: Cash Ratio: The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. It is also called liquidity ratio or cash asset ratio. This ratio is the most stringent measure of liquidity. However, it can be argued that lack of immediate cash may not matter if the firm can stretch payments or borrow money at short notice. Cash ratio for Khandesh Ltd. increased from 2.35:1(2004) to 2.46:1 (2005). The major reason for this burst in the increase in the current investments and sales amount by 12% in the year 2005 as compared to 2005, though there was a decline in the cash and bank balances. The other reason being the decrease in the current liabilities. For the year ended 2005, the cash ratio is 2.46 and in 2004 it was 2.35 so net result is slight increased by 17.45%. This sudden jump in the ratio occurred because of the slight increase in the current investments (increased by 1.58%). Another reason for this may be attributed to a certain extent to the decrease in the current liabilities (15.44 % decline). For the year ended 2005-2006, the cash ratio has fallen from 2.46:1(2005) to 1.73:1 in 2006. Current investments have not fluctuated as compared to the earlier year.
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Increase in the current liabilities by 1117.56 lakhs can also be attributed to the fall in the cash ratio. Sales have registered an increase of 15%. The increase in the current liabilities is much more than the increase in the current assets, hence there is a decline in the cash ratio. Sales to cash ratio: This ratio indicates efficient utilization of cash input in achieving the sales generated. Sales to cash ratio increased during the period 2004-05 due to decrease in cash and bank balance by 51%, thereby increasing the overall ratio from 37.15% (2004) to 84.19% (2005). But it has shown a downward decline in 2006 to 51.34%. The cash and bank balances have increased by 88% as compared to the year 2005. Sales have increased by 15%. Hence as the increase in the sales is not at par with the increase in the cash and bank balances the ratio has been negatively affected. Hence better cash management is needed at Khandesh ltd. The extra money could be utilized to push sales and to pay the increase in the current liabilities. Cash Profit ratio: Cash profit ratio measures the cash generation in the business as a result of the operations expressed in terms of sale. The cash profit ratio is a more reliable indicator of performance, where there are sharp fluctuations in the profit before tax and net profit from year to year owing to difference in depreciation charged. This ratio evaluates the efficiency of operations in terms of cash generation and is not affected by the method of depreciation charged. It also facilitates inter-firm comparison of performance since different companies may adopt different methods of depreciation.
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This ratio for Khandesh limited, has been 22.75 % for the year ended 2004 and decreased to 18.68 % for the year ended 2005 due to decrease in profit. However, it should be noted that for the purpose of evaluation of this ratio, exceptional items might also be considered. It is still decelerating to 17.72% in the year 2006 also. Special attention has to be given to the decline in this ratio. Measures have to tightened to earn larger profits.

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RECEIVABLES MANAGEMENT (DEBTORS) Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed. Late payments can erode profits and lead to bad debts Slow payment has a crippling effect on business. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. Establish clear credit practices as a matter of company policy. Make sure that these practices are clearly understood by staff, suppliers and customers. Be professional when accepting new accounts, and especially larger ones. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. Establish credit limits for each customer... and stick to them. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. Keep very close to your larger customers.
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Invoice promptly and clearly. Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example......... Longer credit terms taken with approval, particularly for smaller orders. Use of post-dated cheques by debtors who normally settle within agreed terms. Evidence of customers switching to additional suppliers for the same goods. New customers who are reluctant to give credit references. Receiving part payments from debtors. Profits only come from paid sales. The act of collecting money is one, which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer.

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Here are a few ideas that may help you in collecting money from debtors: Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem. When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying. Make it your objective is to get the money - not to score points or get even. Accounts Receivable Financing: Some businesses lack the credit quality to borrow on an unsecured basis and must pledge collateral to obtain a loan. Loans secured by accounts receivable are a common form of debt used to finance working capital. Under accounts receivable debt, the maximum loan amount is tied to a percentage of the borrowers accounts receivable. When accounts receivable increase, the allowable loan principal also rises. However, the firm must use customer payments on these receivables to reduce the loan balance. The borrowing ratio depends on the credit quality of the firms customers and the age of the accounts receivable.

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A firm with financially strong customers should be able to obtain a loan equal to 80% of its accounts receivable. With weaker credit customers, the loan may be limited to 50% to 60% of accounts receivable. Additionally, a lender may exclude receivables beyond a certain age (e.g., 60 or 90 days) in the base used to calculate the loan limit. Older receivables are considered indicative of a customer with financial problems and less likely to pay. Since accounts receivable are pledged as collateral, when a firm does not repay the loan, the lender will collect the receivables directly from the customer and apply it to loan payments. The bank receives a copy of all invoices along with an assignment that gives it the legal right to collect payment and apply it to the loan. In some accounts receivable loans, customers make payments directly to a bankcontrolled account (a lock box). Firms gain several benefits with accounts receivable financing. With the loan limit tied to total accounts receivable, borrowing capacity grows automatically as sales grow. This automatic matching of credit increases to sales growth provides a ready means to finance expanded sales, which is especially valuable to fast-growing firms. It also provides a good borrowing alternative for businesses without the financial strength to obtain an unsecured line of credit. Accounts receivable financing allows small businesses with creditworthy customers to use the stronger credit of their customers to help borrow funds. One disadvantage of accounts receivable financing is the higher costs associated with managing the collateral, for which lenders may charge a higher interest rate or fees. Since accounts receivable financing requires pledging collateral, it limits a firms ability to use this collateral for any
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other borrowing. This may be a concern if accounts receivable are the firms primary asset. Ratios:

Ratio used for evaluation Formula used Ratio for the financial year ended 2006 Debtors Turnover Ratio (times) 365 Credit Period Debtors Turnover Ratio 66 77 99 Net Sales Avg. Debtors 5.50 4.72 3.70 2005 2004

Interpretation: Debtors Turnover Ratio: The debtors turnover ratio has been gradually increasing over the years from 2004 to 2005, from 3.70 to 4.72 respectively. This indicates that the credit period has declined from 99 days (2004) to 77 days (2005). This implies that for the year ended 2005 debtors on an average are collected in a period of 77 days. A turnover ratio of 4.72 (2005) signifies that debtors get converted into cash (4.72) approximately 5 times in a year.
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Khandesh Ltd. is a cash rich company. The liberal policy is adopted to augment its sales thereby not losing its key customers. It is suggested that the company should adopt stringent credit practices for its debtors thereby, having more funds at its disposal for investments as well as for daily operating requirements and thus saving on the interest costs. In order to keep up with the industry credit standards Khandesh Ltd. has been gradually reducing its credit period. For the previous year the debtors turnover ratio has increased by almost 28 % from 3.70 to 4.72 thereby reducing the collection period to a meager 77 days. The debtors turnover ratio has improved further in 2006 as it has increased to 5.50 times. Hence as an effect of the increase in the debtors turnover ratio, there is a significant improvement in the credit period as it has reduced to 66 days from 77 days.

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Conclusion Working Capital is the lifeline of every industry, irrespective of whether its a manufacturing industry, services industry. Working Capital is the prime and most important requirement for carrying out the day to day operations of the business. Working Capital gives the much-needed liquidity to the business. Working Capital Finance reduces the overall fund requirement, required to build up the Current Assets, which in turn help you improve your Turn Over Ratio. We have discussed in this project, various ways in which Working Capital requirements can be financed. There are different instruments and facilities available, which can be used cost effectively in a given situation, by different businesses. For this, one should have sound knowledge of these instruments and facilities.

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Bibliography 1. Booksa. Financial Management By Dr. Prasanna Chandra b. Principals of Corpo. Finance 2. Web Sitesa. www.rbi.org.in b. www.statebankofindia.com c. www.indiamart.com d. www.boi.com.sg e. www.eximbankindia.com 3. Khandesh Roller Flour Mill Pvt. Ltd. Journals By Brailly and Mayers

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