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WORKING CAPITAL OF HCL Page 1
PROJECT REPORT
ON
FOR
BY
JEENAL N.RATHOD
WORKING CAPITAL OF HCL Page 2
“WORKING CAPITAL OF HCL”
SUBMITTED BY
NAME: Ms. JEENAL N. RATHOD
CLASS: M.COM PART – II ACCO...
WORKING CAPITAL OF HCL Page 3
RAJASTHANI SAMMELAN‟S
Ghanshyamdas Saraf College
Affiliated to University of Mumbai
REACCRED...
WORKING CAPITAL OF HCL Page 4
ACKNOWLEDGEMENT
I take this opportunity to thank the UNIVERSITY OF MUMBAI
for giving me a ch...
WORKING CAPITAL OF HCL Page 5
DECLARATION
I Miss JEENAL NAVARATNA RATHOD a student of
Ghanshyamdas Saraf College of Arts a...
WORKING CAPITAL OF HCL Page 6
INDEX
Sr. No TITLE Page.
No.
CHAPTER 1
1.1 Executive Summary (Preface) 7
1.2 Objectives of t...
WORKING CAPITAL OF HCL Page 7
1.1EXECUTIVE SUMMARY:
Working capital management refers to the administration of all aspects...
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1.2 OBJECTIVES OF THE STUDY:
Since working capital management is one of the most important a...
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2.1 COMPANY OVERVIEW:
Hindustan Computers Limited
Hindustan Computers Limited, also known as...
WORKING CAPITAL OF HCL Page 10
Services, Retail & Consumer, Life Sciences & Healthcare, Aerospace &
Defense, Automotive, T...
WORKING CAPITAL OF HCL Page 11
2.2 HCL Career Development Centre:
HCL Career Development Centre or LEARNING DIVISION is an...
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3.1 Working Capital
Introduction:
In a working capital we focus on short term finance of a ...
WORKING CAPITAL OF HCL Page 13
We start with the types of working capital followed by concept and
application of operating...
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peak cash needs occur? When and how much bank borrowing will
be needed to meet any cash sho...
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3.2 Types of working capital:
Basis of concept:-
There are two type of working capital on t...
WORKING CAPITAL OF HCL Page 16
the same into finished products for sale and realizing cash along with
profit from the acco...
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Temporary Working capital
The temporary or varying working capital varies with the volume o...
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Both permanent and temporary working capitals are necessary to
facilitate the sales and pro...
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Operating cycle:
The entire cycle, from the time the firm acquires inventory to the time
it...
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Determining Operating And Cash Cycle:-
Raw material conversion period:-
Raw material conver...
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D. Finished goods storage period (C / B) = n3
Average Collection Periods:
It is the average...
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Particulars
Raw material, component etc.
Work in progress
Finished goods
A/c receivable
A/c...
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D. Average conversion period = 64.32/ 31.70
n2 = 2
Finished goods storage period:
A. Annual...
WORKING CAPITAL OF HCL Page 24
Number of toys per year = 70000
Labor cost per unit / toy = Rs.19.5
Average wages payable =...
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3.3 Importance of Working Capital Ratios:
Ratio analysis can be used by financial executive...
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Payables
Ratio
(in days)
Creditors * 365/
Cost of Sales (or
Purchases)
= x days On average,...
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Other working capital measures include the following:
Bad debts expressed as a percentage o...
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good security to the unsecured loans, Banks favor in granting seasonal
loans, if business h...
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3.4 Factors Determining Working Capital:
1. Nature of the Business
2. Size of business
3. P...
WORKING CAPITAL OF HCL Page 30
working capital.
6. Rapidity of turnover: A company having high rate of turnover will
need ...
WORKING CAPITAL OF HCL Page 31
3.5 The need or objects of working capital:
The need for working capital cannot be over emp...
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Debtor‟s management. Identify the appropriate credit policy, i.e. credit
terms which will a...
WORKING CAPITAL OF HCL Page 33
becoming technically insolvent. The relationship between liquidity,
net working capital and...
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3.6Principles of Working Capital Management/Policy:
1. Principle of risk variation:-
Risk h...
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2.6 Forecasting / Estimation of Working Capital
Requirements:
“Working capital is the life ...
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Liabilities ₨ Assets ₨
Equity share
capital
8% debenture
Reserve and
surplus
Long term loan...
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1. Regression analysis method (average relationship between sales
and working capital):-
Th...
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You are required to forecast the working capital requirements of the
company for the year 2...
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91 = 5a + 550 * 0.1125
91 = 5a + 61.875
5a = 29.125
a = 5.825
Now, putting the value of „a‟...
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Draw up a statement showing requirements of working capital from
month to month, ignoring t...
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Working note:
As payment for material is made in the month following the purchase,
there is...
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4.1 Performa - Working Capital Estimates:
Trading Concern-
2. Manufacturing concern –
WORKING CAPITAL OF HCL Page 43
3. Columnar form:
An alternative preformed for estimating of working capital requirements
i...
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4.2WORKING CAPITAL FINANCING POLICIES:-
A growing firm can be thought of as having a total ...
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2. Aggressive Approach:-
a relatively aggressive company finances all of its long term asse...
WORKING CAPITAL OF HCL Page 46
4.3Conclusion:
Hindustan Computers Limited, also known as HCL Enterprise, is
one of India's...
WORKING CAPITAL OF HCL Page 47
4.4 Findings:
1. During my survey well asking that which IT institute do you prefer
then ou...
WORKING CAPITAL OF HCL Page 48
6. Well I curiously asked for most of the students that why they are
choosing the HCL learn...
WORKING CAPITAL OF HCL Page 49
4.5 WORKING CAPITAL QUESTIONNAIRE:
This questionnaire is to be used entirely for the purpos...
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4. To financial analysts, "net working capital" means the same thing as
__________.
o Total...
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7. Which of the following would be consistent with a hedging
(maturity matching) approach t...
WORKING CAPITAL OF HCL Page 52
4.6 BIBLOGRAHY:
BOOK NAME AUTHOR NAME
FINANCIAL MANAGEMENT Shahs K. Gupta & R.K. Sharma
FIN...
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Transcript of "Working capital of hcl"

  1. 1. WORKING CAPITAL OF HCL Page 1 PROJECT REPORT ON FOR BY JEENAL N.RATHOD
  2. 2. WORKING CAPITAL OF HCL Page 2 “WORKING CAPITAL OF HCL” SUBMITTED BY NAME: Ms. JEENAL N. RATHOD CLASS: M.COM PART – II ACCOUNTS (SEM IV) SUBMITTED TO UNIVERSITY OF MUMBAI PROJECTED GUIDE: Mrs. Dr. LIPI BHATTACHARYA RAJATHANI SAMMELAN‟S GHANSHYAMDAS SARAF GIRL‟S COLLEGE, AFFILLIATED TO UNIVERSITY OF MUMBAI REACCREDITED BY NAAC WITH “A” GRADE & DURGADEVI SARAF JUNIOR COLLEGE ( ARTS & COMMERCE) S.V.ROAD MALAD (W) MUMBAI – 400064 YEAR: 2013-14
  3. 3. WORKING CAPITAL OF HCL Page 3 RAJASTHANI SAMMELAN‟S Ghanshyamdas Saraf College Affiliated to University of Mumbai REACCREDITED BY NAAC WITH „A‟ GRADE R. S. Campus, S. V. Road, Malad (W), Mumbai: 400 064 Year: 2013-2014 CERTIFICATE I Prof. REKHA BHATIA here by certify that Ms. Jeenal Navratana Rathod a student of Ghanshyamdas Saraf College of M.COM PART II ACCOUNT (Semester IV) has completed Project on “WORKING CAPITAL OF HCL” in the Academic year 2013-2014. Thus information submitted is true and Original to the best of my Knowledge. External Examiner: Principal: Date: Project Co-ordinator: College Seal: Date:
  4. 4. WORKING CAPITAL OF HCL Page 4 ACKNOWLEDGEMENT I take this opportunity to thank the UNIVERSITY OF MUMBAI for giving me a chance to do this Project. I express my sincere gratitude to the Principal Mrs. Sujata Karmarkar, course co-ordinator and Guide Prof. Mrs. Dr. Lipi Bhattacharya, our librarian and other teachers for their constant support and helping me for completing the project. I am also grateful to my friends for giving support in my project. Lastly, I would like to thank each and every person who helped me in completing the project especially MY PARENTS. Date: Signature of the Student :
  5. 5. WORKING CAPITAL OF HCL Page 5 DECLARATION I Miss JEENAL NAVARATNA RATHOD a student of Ghanshyamdas Saraf College of Arts and Commerce, Malad (W) M.COM PART II ACCOUNT (Semester IV) hereby declare that I have completed project on “WORKING CAPITAL OF HCL” in the academic Year 2013-2014. This information submitted is true and original to best of my Knowledge. Date : Signature of the Student:
  6. 6. WORKING CAPITAL OF HCL Page 6 INDEX Sr. No TITLE Page. No. CHAPTER 1 1.1 Executive Summary (Preface) 7 1.2 Objectives of the Study 8 CHAPTER 2 2.1 HCL Company Overview 9-10 2.2 Introduction to HCL Career Development Centre 11 CHAPTER 3 3.1 Introduction to Working Capital 12-14 3.2 Types Of Working Capital 15-24 3.3 Importance of Working Capital 25-28 3.4 Factors Determining Working Capital 29-30 3.5 Need and Objectives of Working Capital 31-33 3.6 Principle of Working Capital Management/Policy 34 3.7 Forecasting/Estimation of Working Capital Requirement 35-41 CHAPTER 4 4.1 Performa of Working Capital Estimating 42-43 4.2 Working capital financing policies 44-45 4.3 Conclusion 46 4.4 Findings 47-48 4.5 Questionnaire of working capital 49-51 4.6 Bibliography 52
  7. 7. WORKING CAPITAL OF HCL Page 7 1.1EXECUTIVE 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. 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 manager‟s 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 firm‟s 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. Banks have their own policies to assess the working capital of the firm to finance them with the shortage. Bank of Maharashtra adopts certain method for financing their customer‟s working capital requirements. 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.
  8. 8. WORKING CAPITAL OF HCL Page 8 1.2 OBJECTIVES OF THE STUDY: Since working capital management is one of the most important aspects of finance, it enables to study in-depth the methods involved in it; so that as a student of finance it gives me a chance to study the financial perspectives of the industry. It offers scope to understand various aspects of finance and all these aspects are reflected in this report. The estimation of required working capital differs from organization to organization. So doing this project in an industry will help in knowing more about the working capital, its preparation and execution. The study has the following objectives:- 1. To see whether the working capital in “HCL” is an effective one. 2. To find out the extent of the need and adequacy of the working capital of the firm. 3. To evaluate or analyze the organizational financial discipline and fiscal soundness. 4. To find out the variance attained in related to projected and actual figure. 5. To see the liquidity position of the company. 6. To see the changes in the working capital. 7. To see the components of working capital is properly maintained. 8. To determine the requirements of working capital.
  9. 9. WORKING CAPITAL OF HCL Page 9 2.1 COMPANY OVERVIEW: Hindustan Computers Limited Hindustan Computers Limited, also known as HCL Enterprise, is one of India's largest electronics, computing and information Technology Company. Based in Noida, near Delhi, the company comprises two publicly listed Indian companies, HCL Technologies and HCL Info systems. HCL was founded in 1976 by Shiv Nadar, Ajay Chowdhry and four of their colleagues. HCL was focused on addressing the IT hardware market in India for the first two decades of its existence with some sporadic activity in the global market. In 1981, HCL seeded a company focused on addressing the computer training industry, NIIT, though it has currently divested its stake in the company. In 1991, HP took minority stake in the company (26%) and the company was known as HCL HP for the five years of the joint venture. On termination of the joint venture in 1996, HCL became an enterprise which comprises HCL Technologies (to address the global IT services market) and HCL Infosystems (to address the Indian and APAC IT hardware market). HCL has since then operated as a holding company. HCL Technologies is a global IT Services company headquartered in Noida, a suburb of Delhi, India led by Mr Vineet Nayar, HCL Technologies, along with its subsidiaries, had consolidated revenues of US$ 5 billion, as of 2010, and employed more than 60,000 workers. HCL offers services including software-led IT solutions, remote infrastructure management, Engineering and R&D Services and BPO. The company provides services across industries including Financia
  10. 10. WORKING CAPITAL OF HCL Page 10 Services, Retail & Consumer, Life Sciences & Healthcare, Aerospace & Defense, Automotive, Telecom and Media, Publishing and Entertainment, amongst others. HCL‟s key services include: Custom Application Services Enterprise Application Services Enterprise Transformation Services Infrastructure Management Engineering and R&D Services Business Processing outsourcing Type Public BSE: 500179 BSE: 532281 Industry IT Services Founded August 11, 1976 Headquarters Delhi metropolitan area Noida, India Key people Shiv Nadar, Founder-Chairman and Chief Strategy Officer, HCL Technologies Roshni Nadar, CEO HCL Corp.[1] Ajai Chowdhry - Founder-Chairman and CEO, HCL Infosystems , Vineet Nayar - CEO, HCL Technologies. Jagadeshwar Gattu- Vise President of HCL. Revenue ▲ US$5.0 billion (2009) Employees 62,000+ (2010) Website HCL.in
  11. 11. WORKING CAPITAL OF HCL Page 11 2.2 HCL Career Development Centre: HCL Career Development Centre or LEARNING DIVISION is an initiative that enables individuals to benefit from HCL expertise in the space and become Industry ready IT professionals. HCL dominates the IT space as a leader. 45,000 gifted professionals, a colossal US $4 Billion turnover, an international presence in 17 countries, and most importantly a deep-rooted commitment to innovate, makes it a true Technology Giant. HCL CAREER DEVELOPMENT CENTRE career program equips a student to meet emerging industry challenges with finesse and ease. Opportunities to grow with HCL CAREER DEVELOPMENT CENTRE are limitless, catapulting a student to high level controlling positions in Mega Corporate. With top HCL professionals as the trainers, customized career programs, hands on experience, state of art infrastructure and world class training program the student's career graph is bound to follow a steep rise. HCL CAREER DEVELOPMENT CENTRE provides specially designed courses in high-end software, hardware and networking integration to groom students into industry-ready professionals. HCL CAREER DEVELOPMENT CENTRE also offers placement support to all their students who excel in their academics and display a remarkable performance during the course. Among the fastest growing IT education brands in India, HCL CAREER DEVELOPMENT CENTRE offers a complete spectrum of quality training programs on software, hardware, networking as well as global certifications in association with leading IT organizations worldwide. Certification of quality standards: "In its pursuit of excellence", the company has developed a quality management system in line with ISO 9001:2000 standards. Business Excellence Initiatives: The organization follows a framework developed by EFQM (European Foundation for Quality Management). Organization policies and strategies are aligned with EFQM Model. The "Quest of Excellence" is taken as a mission who drives the quality of Training Delivery and associated services.
  12. 12. WORKING CAPITAL OF HCL Page 12 3.1 Working Capital Introduction: In a working capital we focus on short term finance of a company. In a business we include two terms of finance i.e. short term and long term finance it lies in the timing of cash flows. Short term financial decisions typically involve cash inflows and outflows that take place within a year or less. For examples, short term financial decisions are involved when a firm orders raw material, pays in cash, and anticipate selling finished goods within one year for cash. On the other hand, long term financial decisions are involved when a firm buys a machine that is expected to reduce operating costs over, says, the next seven year. The types of decisions that fall under the general heading of short term finance are many; to mention a few: The level of cash the firm should maintain. The level of short term borrowing to have. Credit to be extended to customers. Inventories to be maintained and so on. Frequently, the term working capital management is used in place of short term financial decisions and we shall also stick only to this only.
  13. 13. WORKING CAPITAL OF HCL Page 13 We start with the types of working capital followed by concept and application of operating cycle in estimating working capital needs. We also discuss the factors affecting working capital requirements and the policy of financing working capital. Definition of working capital: Working capital can be defined as the amount of capital required for the smooth and interrupted functioning of normal business operations of a company. Working Capital refers to that part of the firm‟s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital. In the words of Shubin, “Working capital is the amount of funds necessary to cover the cost of operating the enterprise”. According to Genestenberg, “Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables into cash”. According to J.S. Mill, “The sum of the current assets is the working capital of a business”. It is helpful for us, as a business owner, to think of working capital in terms of five components: 1. Cash and equivalents. This most liquid form of working capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will
  14. 14. WORKING CAPITAL OF HCL Page 14 peak cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it? 2. Accounts receivable. Many businesses extend credit to their customers. If you do, is the amount of accounts receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them? 3. Inventory. Inventory is often as much as 50 percent of a firm's current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What's the rate of inventory turnover compared with other companies in your type of business 4. Accounts payable. Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? 5. Accrued expenses and taxes payable. These are obligations of your company at any given time and represent a future outflow of cash.
  15. 15. WORKING CAPITAL OF HCL Page 15 3.2 Types of working capital: Basis of concept:- There are two type of working capital on the basis of concept, namely gross and net working capital. Gross working capital is firm‟s total investment in current assets. Current assets are the assets which can be converted into cash within a year. For examples cash, short term securities, account receivable, bills receivable and inventory. Net working capital, on the other hand, refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year: examples include accounts payable, bills payable and outstanding expenses.It must be noted that net working capital could be both positive as well as negative. A positive net working capital will be arise when current assets exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The term working capital is commonly used interchangeably with net working capital. Working capital is the amount of capital required for the smooth and interrupted functioning of normal business operations of a company ranging from the procurement of raw material, converting
  16. 16. WORKING CAPITAL OF HCL Page 16 the same into finished products for sale and realizing cash along with profit from the accounts receivables that arise from sale of finished goods on credit. Concept of time:- Permanent Working capital and Temporary Working capital. Permanent Working capital Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital being a permanent investment needs to be financed through long-term funds. The permanent working capital can be further divided into two parts: Regular working capital Reserve working capital It required ensuring circulation of current assets from cash to inventories, from inventories to receivables and from receivables to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital which may be provided for contingencies that way arise at unstated period such as strikes, rise in prices, depression, etc.
  17. 17. WORKING CAPITAL OF HCL Page 17 Temporary Working capital The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans. Variable working capital can be further classified as: Seasonal working capital Special working capital Most of enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc.
  18. 18. WORKING CAPITAL OF HCL Page 18 Both permanent and temporary working capitals are necessary to facilitate the sales and production process through operating cycle. Operating cycle and cash cycle: The primary concerns in working capital management include firms short run operating and financing activities. For a typical manufacturing firm, the major short run activities will consist of the following activities and related decisions: These activities entail cash inflows and cash outflows; but the cash flows are both unsynchronized and uncertain. They are unsynchronized because the payment of cash for raw materials does not take place at the same time as the receipt of cash from sales of the finished product. They are uncertain because future sales and costs cannot be precisely predicted. These give rise to what is called as operating cycles and cash cycle. Activity • Buy raw material • Pay for purchases • Manufacture products • Sell the product • Collection for sales Decision • How much to order • Whether to borrow or pay cash • Choice of technology • Whether to extend credit or to sell on cash • How to collect
  19. 19. WORKING CAPITAL OF HCL Page 19 Operating cycle: The entire cycle, from the time the firm acquires inventory to the time it collects the cash, takes 100 days. This is called the operating cycle. The operating cycle is the length of time it takes to acquire inventory, sell it, and collect for it. This cycle has two distinct parts- the time it takes to acquire and sell the inventory; a 60 day span in our case, is called the inventory conversion period; and the time it takes to collect cash for the sales, 40 days in our case; called as accounts receivable (debtors) conversion period. Thus, operating cycle is just the sum of the inventory conversion period and accounts receivable conversion periods: For a typical manufacturing company, the inventory conversion period is the total time needed for producing and selling the product and includes:  Raw material conversion period.  Work in process conversion period.  Finished goods conversion period. Cash cycle – There are number of days that pass before the firm collects cash for sales, measured from it actually pays for the inventory. Thus, cash cycle is the difference between the operating cycle and the accounts payment period. For example, the firm does not pay cash for inventory until 30 days after acquiring it. The intervening 30 days period is called the accounts payable (creditors) period. Next, though the firm spends cash on 30th day, it does not collect cash till 100th day. Somehow, the firm must arrange to finance the Rs 1000 for 100-30 = 70 days. This period is called the cash cycle or net operating cycle.
  20. 20. WORKING CAPITAL OF HCL Page 20 Determining Operating And Cash Cycle:- Raw material conversion period:- Raw material conversion period is the average time period taken to convert material into work in process. Annual consumption of raw material component etc. A. Average daily consumption (A /360) B. Average stock of raw material = (Opening stock + closingstock) 2 Raw material storage period (C / B) = n1 days Conversion / work in progress period: Work in progress conversion period is the average time taken to complete the semi finished goods convert work in progress into finished goods. A. Annual cost of production = opening stock of WIP + consumption of raw material + other manufacturing Cost Such as wages, salary +Depreciation – Closing Stock WIP B. average daily cost of production (A / 360) C. average stock of WIP = (Opening stock + closing stock) 2 D. average conversion period (C / B) = n2 Finished goods storage period: Finished goods conversion period is the average time taken to sell the finished goods. A. Annual cost = opening stock of finished goods + cost of production + Of sales Excise Duty + selling & distribution cost + general Administration cost+ financial cost – closing stock Of finished goods B. Average daily cost of sales (A / 360) C. Average stock of finished goods = (Opening stock + closing stock) 2
  21. 21. WORKING CAPITAL OF HCL Page 21 D. Finished goods storage period (C / B) = n3 Average Collection Periods: It is the average time taken to convert accounts receivables into cash. A. Annual credit sales of company B. Average daily credit sales ( A / 360) C. Average balance of sundry debtors = (opening stock + closing stock) 2 D. Average collection period C / B = n4 Average Payment Periods: It is average time taken to convert accounts payable into cash payment. A. Annual credit purchase company B. Average daily credit purchase ( A / 360 ) C. Average balance sundry creditors = (opening balance +closing balance ) 2 D. Average payment period n5 = C / B Operating cycle = raw material conversion period + work in progress conversion period + finished goods conversion period +account receivable conversion period Operating Cycle = n1 + n2 + n3 + n4 Cash cycle = raw material conversion period + work in progress conversion period + finished goods conversion period +account receivable conversion period – accounts payable conversion period Cash Cycle = n1 + n2 + n3 + n4 – n5  Example-
  22. 22. WORKING CAPITAL OF HCL Page 22 Particulars Raw material, component etc. Work in progress Finished goods A/c receivable A/c payable Purchases of raw materials Manufacturing expenses Depreciation Custom & excise duties Selling, administration, financial expenses Sales Opening Balance 3454.84 56.15 637.92 756.45 2504.18 Closing Balance 4095.41 72.50 1032.74 1166.32 3084.47 10676.10 1146.76 247.72 35025.56 4557.48 54210.65 Calculate operating cycle ? Answer- Raw Material Storage Period: A. Annual consumption = opening stock + purchase – closing stock = 3454.84 +10676.10 – 4095.41 = 10035.53 B. Average daily consumption = 10035.53/36 = 27.88 C. Average stock of raw material = (3454.84+ 4095.41)/ 2 = 3775.125 D. Raw material storage period=3775.125/27.8n1 135.40 = 135 Conversion Period: A. Annual cost of production = 56.15 + 10035.53 + 1146.76 + 247.72 -72.50 = 11413.66 B. Average daily cost of production = 11413.66/360 =31.70 C. Average stock of Work in progress = (56.15 + 72.50) / 2 = 64.32
  23. 23. WORKING CAPITAL OF HCL Page 23 D. Average conversion period = 64.32/ 31.70 n2 = 2 Finished goods storage period: A. Annual cost of sales = 637.92 + 11413.66 + 35025.56 + 4557.48 – 1032.7 = 50601.88 B. Average daily Cost of sales = 50601.88 / 360 = 140.56 C. Average stock of Finished goods =(637.92 +1032.74) / 2 =835.33 D. Finished goods Storage period = 835.33/140.56 E. n3 = 5.9 ≈ 6days Average collection period: A. Annual credit sales = 54210.65 B. Average daily credit sales = 54210.65 / 360 = 150.59 C. Average balance of Sundry debtors = (756.45 + 1166.32) / 2 =961.38 Average collection period = 961.38/ 150.59 = 6.38 = 6 days Average payment period Annual credit purchase‟s company = 10676.10 Average daily credit purchases = 10676.10/360 = 29.66 Average balance sundry creditors = (2504.18+3084.47)/2 = 2794.32 Average payment period = 2794.32/29.66 = 94.21 = 94 days Operating cycle = 135 + 2 + 6 + = 149 days Net operating/ cash cycle = 135 + 2 + 6 + 6 – 94 = 55 days Deferred wages: The firm pays to labor ager a gap of 10 days. The amount could be calculated in the same way as accounts payable for purchases: Wages Payment Period= Average Wages Payable * 360/ total wages 10 = Average Wages Payable * 360/ total wages Average Wages Payable =10* total wages / 360  Example-
  24. 24. WORKING CAPITAL OF HCL Page 24 Number of toys per year = 70000 Labor cost per unit / toy = Rs.19.5 Average wages payable = ? So,Wages PaymentPeriod = Average Wages Payable * 360/ Total Wages 10 = Average Wages Payable * 360 / (70000*19.5) Average Wages Payable = 10 * 70000 * 19.5 / 10 = Rs.37916 Deferred overheads: One month (30 days), means that overheads are paid after one month. The amount will be as follows: Overheads Payment Period = Average Overheads Payable * 360 / Total Overhead 30 = Average Overheads Payable * 360 / Total Overhead Average Overheads Payable = 30* Total Overheads / 360  Example – Number of toys per year = 70000 Overheads per unit = Rs. 39 Average over heads payable = ? So, Overheads Payment Period = Average Overheads Payable * 360 / Total Overheads 30 = Average Overheads Payable * 360 / (70000*39) Average Overheads Payable = 30*70000*39/360 = Rs. 2, 27,50
  25. 25. WORKING CAPITAL OF HCL Page 25 3.3 Importance of Working Capital Ratios: Ratio analysis can be used by financial executives to check upon the efficiency with which working capital is being used in the enterprise. The following are the important ratios to measure the efficiency of working capital. The following, easily calculated, ratios are important measures of working capital utilization. Ratio Formulas Result Interpretation Stock Turnover (in days) Average Stock * 365/ Cost of Goods Sold = x days On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. Receivables Ratio (in days) Debtors * 365/ Sales = x days It take you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days... why? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.
  26. 26. WORKING CAPITAL OF HCL Page 26 Payables Ratio (in days) Creditors * 365/ Cost of Sales (or Purchases) = x days On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Ratio Total Current Assets/ Total Current Liabilities = x times Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. Quick Ratio (Total Current Assets - Inventory)/ Total Current Liabilities = x times Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash. Working Capital Ratio (Inventory + Receivables - Payables)/ Sales As % Sales A high percentage means that working capital needs are high relative to your sales.
  27. 27. WORKING CAPITAL OF HCL Page 27 Other working capital measures include the following: Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc. Debtor concentration - degree of dependency on a limited number of customers.  Significance Of Working Capital: 1. Cash Discount: If a proper cash balance is maintained, the business can avail the advantage of cash discount by paying cash for the purchase of raw materials and merchandise. It will result in reducing the cost of production. 2. It creates a Feeling of Security and Confidence: The proprietor or officials or management of a concern are quite carefree, if they have proper working capital arrangements because they need not worry for the payment of business expenditure or creditors. Adequate working capital creates a sense of security, confidence and loyalty, not only throughout the business itself, but also among its customers, creditors and business associates. 3. „Must‟ for Maintaining Solvency and Continuing Production: In order to maintain the solvency of the business, it is but essential that the sufficient amount t of fund is available to make all the payments in time as and when they are due. Without ample working capital, production will suffer, particularly in the era of cut throat competition, and a business can never flourish in the absence of adequate working capital. 4. Sound Goodwill and Debt Capacity: It is common experience of all prudent businessmen that promptness of payment in business creates goodwill and increases the debt of the capacity of the business. A firm can raise funds from the market, purchase goods on credit and borrow short-term funds from bank, etc. If the investor and borrowers are confident that they will get their due interest and payment of principal in time. 5. Easy Loans from the Banks: An adequate working capital i.e excess of current assets over current liabilities helps the company to borrow unsecured loans from the bank because the excess provides a
  28. 28. WORKING CAPITAL OF HCL Page 28 good security to the unsecured loans, Banks favor in granting seasonal loans, if business has a good credit standing and trade reputation. 6. Distribution of Dividend: If company is short of working capital, it cannot distribute the good dividend to its shareholders inspite of sufficient profits. Profits are to be retained in the business to make up the deficiency of working capital. On the other contrary, if working capital is sufficient, ample dividend can be declared and distributed. It increases the market value of shares. 7. Meeting Unseen Contingency: Depression shoots the demand of working capital because sock piling of finished goods become necessary. Certain other unseen contingencies e.g., financial crisis due to heavy losses, business oscillations, etc. can easily be overcome, if company maintains adequate working capital. 8. Increased Production Efficiency: A continuous supply of raw material, research programme, innovations and technical development and expansion programmes can successfully be carried out if adequate working capital is maintained in the business. It will increase the production efficiency, which will, in turn increases the efficiency and morale of the employees and lower costs and create image among the community.  Strategies to overcome the problem: • Manage working capital investment or financing such as • Holding additional cash balances beyond expected needs • Holding a reserve of short term marketable securities • Arrange for availability of additional short-term borrowing capacity • One of the ways to address the problem of fixed set-up cost may be to hold inventory. • One or combination of the above strategies will target the problem
  29. 29. WORKING CAPITAL OF HCL Page 29 3.4 Factors Determining Working Capital: 1. Nature of the Business 2. Size of business 3. Production policies 4. Production cycle 5. Credit policy 6. Rapidity of turnover 7. Seasonal fluctuation 8. Price level changes 9. Others factors 1. Nature of the business: Working capital also depends upon the nature of the business. Public utility concerns like railway, electricity etc. have a very little need of working capital since most of their transaction are on cash basis. On the other hand ordinary manufacturing and trading concerns require sufficient working capital, since they have to invest substantially in inventories and debtors. 2. Size of Business: Size of business is another influencing factor. As size increases, the working capital requirement is also more and vice versa. 3. Production policies: The production policies pursued by the management have a significant effect on the requirement of working capital of the business. The decision about the management regarding a u t o m a t i o n , etc. will also have its effect on working capital 4. Production cycle: The time lapse between feeding of raw material into the machine and obtaining the finished goods out from the machine is what is described as the length of manufacturing process. It is otherwise known as conversion time. Longer this time period, higher is the volume and value of work-in-progress and hence higher the requirement of working capital and vice versa. 5. Credit policy: A company which allows liberal credit to its customers may have higher sales but will need more working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires less amount of
  30. 30. WORKING CAPITAL OF HCL Page 30 working capital. 6. Rapidity of turnover: A company having high rate of turnover will need lower amount of working capital as compared to a company which has a lower turnover. 7. Seasonal fluctuations: In case of seasonal industries like sugar and woollen textiles, their working capital required during the particular season will be higher than other periods. 8. Price level changes: Changes in the price level also affect the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of working capital as more funds will be required to maintain the same current assets. The effect of rising prices may be different for different firms. Some firms may be affected much while some others may not be affected at all by the rise in prices. 9. Other factors: Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, etc. Also influences the requirements of working capital. Disadvantages or Dangers of Inadequate or Short Working Capital - Can‟t pay off its short-term liabilities in time. Economies of scale are not possible. Difficult for the firm to exploit favourable market situations Day-to-day liquidity worsens Improper utilization the fixed assets and ROA/ROI falls sharply
  31. 31. WORKING CAPITAL OF HCL Page 31 3.5 The need or objects of working capital: The need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need for working capital arises due to the gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. To pay wages and salaries. 1. To incur day to day expenses and overheads costs such as fuel, power and office expenses, etc. 2. To meet the selling costs as packing, advertising, etc. 3. To provide credit facilities to the customers. 4. To maintain the inventories of raw material, work in progress, stores and spares and finished stock.  Management Of Working Capital (WCM): Management of working capital is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter-relationship that exists between them. In other words, it refers to all aspects of administration of CA and CL. management will use a combination of policies and techniques for the management of working capital. The 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. 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. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity.
  32. 32. WORKING CAPITAL OF HCL Page 32 Debtor‟s 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); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring" Aims of Working Capital Management: The goal of working capital management is to manage the firm‟s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained, to meet the short-term obligations as and when they arise. 1. A significant objective of working capital management is to ensure short-term liquidity and to see that profitability is not affected by the way current assets and current liabilities are managed. 2. The main theme of working capital management is the interaction between the current assets and the current liabilities and arrives at the optimum level of both. The optimum level thus arrived must have provision for contingencies. 3. Trade-off between Profitability and Risk: The level of a firm‟s Net working capital has a bearing on its profitability as well as risk. The term profitability used in this context is measured by profits after expenses. The term risk is defined as the probability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. The risk of becoming technically insolvent is measured using Net Working Capital. The greater the net working capital, the more liquid the firm is and therefore the less likelihood of it
  33. 33. WORKING CAPITAL OF HCL Page 33 becoming technically insolvent. The relationship between liquidity, net working capital and risk is such that if either net working capital or liquidity increases, the firm's risk decreases. 4. Trade-off: If a firm wants to increase its profits, it must also increase its risk. Inversely, if it decreases risk, its profitability too tends to decrease. The trade-off between these variables is that regardless of how the firm increases its profitability through the manipulation of working capital, the consequence is a corresponding increase in risk as measured by the level of Net working capital. 5. Apart from the profitability – risk – trade-off, another important ingredient of the theory of working capital management is determining the financing mix. Financing mix refers to the proportion of current assets that would be financed by current liabilities and by long-term resources.
  34. 34. WORKING CAPITAL OF HCL Page 34 3.6Principles of Working Capital Management/Policy: 1. Principle of risk variation:- Risk here refers to the inability of a firm to meet its obligation as and when they become due payment. Larger investment in current assets with less dependence on short term borrowings increase liquidity, reduces dependence on short term borrowings increases liquidity, reduces risk and thereby decrease the opportunity for gain or loss. On the other hand less investment in current assets with dependence on short term borrowings, reduce liquidity and increase profitability. 2. Principle of cost of capital:- The various sources of raising working capital finance have different cost of capital and degree of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two. 3. Principle of Equity position:- This principle is concerned with planning the total investment in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firm‟s equity position. Every rupee invested in current 4assets should contribute to net worth of the firm. The level of current assets may be measured with the help of two ratios:  Current assets as a percentage of total assets.  Current assets as a percentage of total sales. 4. Principle of maturity of payment:- This principle is concerned with planning the sources of finance for working capital. According to this principle, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater inability to meet its obligations in time.
  35. 35. WORKING CAPITAL OF HCL Page 35 2.6 Forecasting / Estimation of Working Capital Requirements: “Working capital is the life blood and controlling nerve centre of a business.” No business can be successfully run without an adequate amount of working capital. To avoid the shortage of working capital at once, an estimate of working capital requirements should be made in advance so that arrangement can be made to procure adequate working capital. Methods of forecasting working capital requirements-The following methods are usually followed in forecasting working capital requirements of a firm: 1. Percentage of sales method:- This method of estimating working capital requirements is based on the assumption that the level of working capital for any firm is directly related to its sales value. If past experience indicates a stable relationship between the amount of sales and working capital, then this basis may be used to determine the requirements of working capital for future period. If sales for the year 2007 amounted to ₨ 30, 00,000 and working capital required as ₨ 6, 00,000; the requirement of working capital for the year 2008 on an estimated sales of ₨ 40, 00,000 shall be ₨ 8,00,000; i.e. 20% of ₨40, 00,000. The individual items of current assets and current liabilities can also be estimated on the basis of the past experience as a percentage of sales. This method is simple to understand and easy to operate but it cannot be applied in all cases because the direct relationship between sales and working capital may not be estimated. Example- the following information has been provided by a company for the year ended 30.6.2008.
  36. 36. WORKING CAPITAL OF HCL Page 36 Liabilities ₨ Assets ₨ Equity share capital 8% debenture Reserve and surplus Long term loan Sundry creditors 2,00,000 1,00,000 50,000 50,000 80,000 4,80,000 Fixed assets less depreciation Inventories Sundry debtors Cash and bank 3,00,000 1,00,000 70,000 10,000 4,80,000 Sales for the ended 30.6.2008 amounted to ₨ 10,00,000 and it is estimated that the same will amount to ₨ 12,00,000 for the year 2008- 09. You are required to estimate the working capital requirements for the year 2008-09 assuming a linear relationship between sales and working capital. Solution- Estimating of working capital requirements Actual 2007-08 (₨) %age to sales 2007-08 Estimat e 2008-09 (₨) Sales 10,00,000 100 12,00,0 00 Current assets: Inventories Sundry debtors Cash and bank Total current assets (CA) 1,00,000 70,000 10,000 1,80,000 10 7 1 18 1,20,00 0 84,000 12,000 2,16,00 0 Current liabilities: Sundry creditors Total current liabilities (CL) 80,000 80,000 8 8 96,000 96,000 Working capital (CA-CL) 1,00,000 10 1,20,00 0
  37. 37. WORKING CAPITAL OF HCL Page 37 1. Regression analysis method (average relationship between sales and working capital):- This method of forecasting working capital requirements is based upon the statistical technique of estimating or predicting the unknown value of a dependent variable from the known value of an independent variable. It is the measure of the average relationship between two or more variables, i.e.; sales and working capital, in terms of the original units of data. The relationship between sales and working capital is represented by equation: Where, y = working capital (dependent variable) a = intercept of the least square b = slope of the regression line x = sales (independent variables) For determining the value „a‟ and „b‟ two normal equations are used which can be solved simultaneously: Example- The sales and working capital figures of Suvidha ltd. for a period of 5 years are given as follows: Year Sales (in lakhs) Working capital (in lakhs) 2003-04 2004-05 2005-06 2006-07 2007-08 60 80 120 130 160 12 15 20 21 23 ∑y = na + b∑x ∑xy = a∑x + b∑x2 y = a + bx
  38. 38. WORKING CAPITAL OF HCL Page 38 You are required to forecast the working capital requirements of the company for the year 2008-09 taking the estimated sales of ₨ 200 lakhs. Solution- The relationship between sales and working capital can be represented by: y = a + bx Year Sales (x) Working capital (y) Xy x2 2003-04 2004-05 2005-06 2006-07 2007-08 60 80 120 130 160 12 15 20 21 23 720 1200 2400 2730 3680 3600 6400 14400 16900 25600 n = 5 ∑x =550 ∑y = 91 ∑xy = 10730 ∑x2 = 66900 ∑y = na + b∑x ∑xy = a∑x + b∑x2 Putting the values in the above equations: 91 = 5a + 550b (1) 10730 = 550a + 66900b (2) Multiplying equation (1) with 110, we get: 10010 = 550a + 60500b (3) Subtracting equation (3) equation (2) 720 = 0 + 6400b b = 0.1125 Putting the value of b in equation (1)
  39. 39. WORKING CAPITAL OF HCL Page 39 91 = 5a + 550 * 0.1125 91 = 5a + 61.875 5a = 29.125 a = 5.825 Now, putting the value of „a‟ and „b‟ in the equation y = a + bx (where y and x are estimated working capital and estimated sales respectively) y = a + bx y = 5.825 + 0.1125 * 200 y = 27.825 Thus, when estimated sales for 2008-09 are ₨ 200 lakhs, the amount of estimated working capital shall be ₨ 27.825 lakhs. 2. Cash forecasting method:- This method of estimating working capital requirements involves forecasting of cash receipts and disbursements during a future period of time. Cash forecast will include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined. This method is similar to the preparation of a cash budget. The excess of receipts over payments represents surplus of cash and the excess of payments over receipts causes deficit of cash or the amount of working capital required. The following example explains the cash forecasting method of estimating working capital requirements. Examples- Texas manufacturing company Ltd. is to start production on 1 January 2009. The prime cost of a unit is expected to be ₨ 40 out of which ₨ 16 is for materials and ₨ 24 for labor. In addition, variable expense per unit are expected to be ₨ 8 and fixed expense per month ₨ 30000. Payment for material is to be made in the month following the purchases. One third of sales will be for cash and the rest on credit for settlement in the following month. Expense are payable in the month in which they are incurred. The selling price is fixed at ₨ 80 per unit.The numbers of units manufacturing and sold are expected to be as under:
  40. 40. WORKING CAPITAL OF HCL Page 40 Draw up a statement showing requirements of working capital from month to month, ignoring the question of stocks. January 900 February 1200 March 1800 April 2100 May 2100 June 2400 Statement Showing Requirement Of Working Capital Jan. ₨ Feb. ₨ March ₨ April ₨ May ₨ June ₨ Payments: Materials Wages Fixed expenses Variable expenses Receipts: Cash sales Debtors Working capital required (payments-receipts) Surplus Cumulative Requirements of working capital: Surplus working capital - 21600 30000 7200 58800 24000 - 24000 34800 - 34800 14400 28800 30000 9600 82800 32000 48000 80000 2800 - 37600 19200 43200 30000 14400 106800 48000 64000 112000 - 5200 32400 28800 50400 30000 16800 126000 56000 96000 152000 - 26000 6400 33600 50400 30000 16800 130800 56000 112000 168000 - 37200 - 30800 33600 57600 30000 19200 140400 64000 112000 176000 - 35600 - 66400
  41. 41. WORKING CAPITAL OF HCL Page 41 Working note: As payment for material is made in the month following the purchase, there is no payment for material in January. In February, material payment is calculated as 900 * 16 = ₨14400 and in the same manner for other months. Cash sales are calculated as: For January 900 „80‟1/3 = ₨24000 and in the same manner for other months. Receipts from debtors are calculated as: For Jan. – Nil because cash from debtors is collected in the month following the sales. For Feb. – 900‟80‟2/3 = ₨ 48000 For March – 1200‟80‟2/3 = ₨ 64000, and so on.  Factors requiring consideration while estimating working capital: The estimating of working capital requirement is not an easy task and large numbers of factors have to be considered before starting this exercise. For a manufacturing organization, the following factors have to be taken into consideration while making an estimate of working capital requirements: Factors to be considered- • Total costs incurred on materials, wages and overheads • The length of time for which raw materials remain in stores before they are issued to production. • The length of the production cycle or WIP, i.e., the time taken for conversion of RM into FG. • The length of the Sales Cycle during which FG are to be kept waiting for sales. • The average period of credit allowed to customers. • The amount of cash required to pay day-to-day expenses of the business. • The amount of cash required for advance payments if any. • The average period of credit to be allowed by suppliers. • Time – lag in the payment of wages and other overheads • The average amount of advance received, if any
  42. 42. WORKING CAPITAL OF HCL Page 42 4.1 Performa - Working Capital Estimates: Trading Concern- 2. Manufacturing concern –
  43. 43. WORKING CAPITAL OF HCL Page 43 3. Columnar form: An alternative preformed for estimating of working capital requirements in columnar form given below:
  44. 44. WORKING CAPITAL OF HCL Page 44 4.2WORKING CAPITAL FINANCING POLICIES:- A growing firm can be thought of as having a total assets requirement consisting of the current assets and long term assets and long term assets for its efficient operations. It seldom happens that net working capital goes to zero. As discussed earlier, companies have some permanent working capital, which is the net working capital on hand at the low point of the business cycle. Then, as sales increase, net working capital must be increased, and this addition is the temporary part of net working capital. The manner in which the permanent and temporary portions of net working capital are financed is called as working capital financing policies. 1. Maturity Matching/ Self-Liquidating Approach:- Maturity matching means to match asset and liability maturities. This strategy minimizes the risk that the firm will be unable to pay off its maturing obligations. To illustrate, suppose a company arises a one year loan to and uses the funds obtained to build and equip a plant. Obviously, cash flow from the plant (that is profits and depreciation) would not be enough to pay off the loan at the end of only one year, therefore the firm would be force to renew the loan. As a limiting case, the company could try to match exactly the maturity of all of its assets and liabilities. For example, inventory expected to be sold in 30 days could be financed with a 30 days bank loan; and a 20 year building could be financed with a 20 year mortgage and so on. In simple words, the source of finance use has same maturity as the life of the assets for which the financing has been done. The policy looks quite useful as it minimizes the wastage of funds. However, the risk that this policy entails is that if the cash from the assets do not take place on time, the firm would not be able to pay back and forced into renewal situation. The cost of funds for the renewal case could be unattractive, and might it the profit of the company.
  45. 45. WORKING CAPITAL OF HCL Page 45 2. Aggressive Approach:- a relatively aggressive company finances all of its long term assets and a part of permanent net working capital with long term assets and rest permanent working capital with short term debt. The term „relatively‟ has been used because there can be different degrees of aggressiveness. For example, the dashed line in panel „b‟ could have been drawn below the line showing long term assets, indicating that all of the permanent net working capital even some part of long term assets have been financed with short term debt; this would be a highly aggressive position, and the firm would be very much exposed to dangers from rising interest rates as well as to loan renewal problems. However, because short term debt is generally cheaper than long term debt, some companies are ready to sacrifice safety for the chance of better profit. 3. Conservative Approach:- permanent net working capital, meaning that long term sources have been employed to finance all permanent assets and also to meet some of the temporary requirements. The peak requirements could be met out of small amount of short term debt; but it also finances a part of the seasonal needs by putting the money in marketable securities. This approach, as the name suggests, is a very safe, conservative working capital financing policy as there is no risk of going out of liquidity. However, since long term debt is normally costlier, investments in cash and marketable securities are zero net present value investments at best, the safety comes at the cost of lower profits.
  46. 46. WORKING CAPITAL OF HCL Page 46 4.3Conclusion: Hindustan Computers Limited, also known as HCL Enterprise, is one of India's largest electronics, computing and information Technology Company. HCL Career Development Centre or LEARNING DIVISION is an initiative that enables individuals to benefit from HCL expertise in the space and become Industry ready IT professionals. HCL dominates the IT space as a leader. Any change in the working capital will have an effect on a business's cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital will have a negative effect on the business's cash holding. However, a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad repercussions to the future ofthecompany.
  47. 47. WORKING CAPITAL OF HCL Page 47 4.4 Findings: 1. During my survey well asking that which IT institute do you prefer then out of 100 Customer 30% said that they will prefer HCL learning division. The reason which is given by them is HCL learning division is one of the good brand in IT firm & by joining HCL there placement got secure. 2. As HCL learning division is providing major type of courses which I have surveyed the area of interest which I find out of student more towards CCNA. Which is one of the hardware courses the reasons behind that is most of the student are mainly concern with hardware or they may be having a degree or diploma in software which is provided by many other institute. of quantity in HCL which is later on followed by brand name because the student know that HCL company is known to everyone & is very much obvious that the courses which provided by HCL will be quality oriented. When I asked from the student why they like HCL learning division then most of them had answered that they will get a quality instead 3. During my survey related to its awareness amongst student most of the student replied they get the information related to HCL learning division is mainly through newspapers and broachers. As one of the new courses so most of the students are not aware of these courses so because of very few students can able to know about the courses to their friends. 4. As HCL is providing various facilities like discount coupons, Bank loans so where asking which offer is beneficial to students most of them i.e. almost 64% is said that they will prefer opt for Bank loan instead for discount and coupon the reason which is got is most of them were having the perception that they will go for loan it will be the responsibility of HCL to provide the job. 5. The promotion activities of HCL were graded as fair by 80% of the students because for its facility of loan brand name and courses that is offered.
  48. 48. WORKING CAPITAL OF HCL Page 48 6. Well I curiously asked for most of the students that why they are choosing the HCL learning division the answer which I got very much similar which I expected most of them choosing HCL learning division because HCL having brand and good reputation in the market. The marker apart from its quality and price. 7. Company was doing various promotional activities like Hand Billing, Road shows, Seminar and area campaign but where asking which was the most prefer by the students 41% said that area campaign is one of the best way to contact with them 35% were agreed for seminar and 23% for Hand billing this is so because area campaign the way by which most of the students weather he is from college or school going or road side one can able to know what exactly HCL learning division offering them which is not fulfil by seminar or hand billing in a satisfactory position. 8. After asking which courses mostly preferred by the students the answer which I got is majority for short term courses which is having duration of six month or one year minority were asking long term courses which is having duration of two year. This is so because the majority of students which I surveyed were doing job so they mostly preferred short term courses over within six month and one year. Lastly I asked that which timing is mostly suits them 47% said that evening is most suitable for them as I have said earlier that most of them doing job so they don‟t want to hamper their job for this course but as this course was really suited to them they really want to do it as a part time courses.
  49. 49. WORKING CAPITAL OF HCL Page 49 4.5 WORKING CAPITAL QUESTIONNAIRE: This questionnaire is to be used entirely for the purpose of conducting a study. The information provided by you shall be kept confident. I therefore shall appreciate your cooperation for being frank an expressive in your answers. Name: - Age: - Education: Income level: - Occupation: Contact No: 1. To financial analysts, "working capital" means the same thing as __________. o Total Assets o Fixed assets o Current assets o Current assets minus current liabilities 2. The amount of current assets required to meet a firm's long-term minimum needs is referred to as __________ working capital. o Permanent o Temporary o Net o Gross 3. The amount of current assets that varies with seasonal requirements is referred to as __________ working capital. o Permanent o Temporary o Net o Gross
  50. 50. WORKING CAPITAL OF HCL Page 50 4. To financial analysts, "net working capital" means the same thing as __________. o Total assets o Fixed assets o Current assets o Current assets minus current liabilities 5. Companies may adopt an aggressive or a conservative working capital policy. An aggressive policy means that a company o Holds high levels of cash and inventories o Has a low level of flexibility o Faces a low level of risk o Expects a lower level of profitability 6. Given the following information, what is the cash conversion cycle in days of PP plc? £000 Total sales 276 Costs of goods sold 200 Purchases 120 Stocks 37 Debtors 43 Creditors 15 o 78.8 days o 125.6 days o 60.2 days o 170.0 days
  51. 51. WORKING CAPITAL OF HCL Page 51 7. Which of the following would be consistent with a hedging (maturity matching) approach to financing working capital? o Financing short term needs with short term funds o Financing short term needs with long term debt o Financing seasonal needs with long term funds o Financing some long term needs with short term funds 8. Having defined working capital as current assets, it can be further classified according to __________. o Financing method and time o Rate of return and financing method o Time and rate of return o Components and time 9. Varies inversely with profitability. o Liquidity o Risk o Blue o False 10. Ideally, which of the following types of assets should be financed with long-term financing? o Fixed assets only o Fixed assets and temporary current assets o Fixed assets and permanent current assets o Temporary and permanent current assets.
  52. 52. WORKING CAPITAL OF HCL Page 52 4.6 BIBLOGRAHY: BOOK NAME AUTHOR NAME FINANCIAL MANAGEMENT Shahs K. Gupta & R.K. Sharma FINANCIAL MANAGEMENT I.M. Pandey ACCOUNTING FOR MANAGEMENT T. Ramachandran MANAGEMENT ACCOUNTING R.S.N. Pillai & Bagavathi FINANCIAL MANAGEMENT Navdeep Aggerwal Websites Search- • www.wiki.com • www.google.com • www.hcl.com • www.hclcdc.in

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