Working capital management

Report on
Working Capital Management

Submitted to:
PROF. M. SHAHJAHAN MINA
Professor
Course Code: F-405
Department of Finance
Faculty of Business Studies
University of Dhaka
Date of Submission: July 20, 2014
Submitted by
BBA 17th Batch
Section-A
University of Dhaka
Course F-405; Working Capital Management
Serial
Number
Roll
Number
Name Remarks
1 17-007 Md. Enayet Hossain
2 17-013 Shougata Saha
3 17-093 Md. Aslam Sagar
4 17-111 Junayeed Rashid
5 17-151 Md. Mizanur Rahman

Letter of Transmittal
July 20, 2014
PROF. M. SHAHJAHAN MINA
Professor
Faculty of Business Studies
University of Dhaka
Subject: Letter regarding submission of Report on “Working Capital Management.”
Dear Sir,
We feel immense pleasure in presenting to your good self, the term report on “Working Capital
Management” as part of our course requirement. We found this report to be truly challenging in
many aspects, indeed very interesting in relation to the various interpretational and engrossing
exercises. In this report we have included various methodologies to study the various components
of working capital, to analyze the liquidity trend and to appraise the utilization of current assets
and current liabilities and find out short comings. In making the study, we had to take help from
the various sources of internet and class lectures. We are grateful to our honorable sir and madam
for extending generous help.
We acknowledge the contributions to our course teachers for the guidance. We have tried to use
our academic knowledge on real life case.
We are pleased to be granted this vital opportunity and grateful for your versatile assistance. We
hope that our work will please you.
Faithfully yours
…………………………………
Md. Enayet Hossain
Roll: 17-007
University of Dhaka
Acknowledgements

We have taken efforts in this report. However, it would not have been possible without the kind
support and help of many individuals. We would like to extend our sincere thanks to all of them.
At first we are highly indebted to our honorable course instructor PROF. M. SHAHJAHAN
MINA , Professor, University of Dhaka, for generous guidance and constant supervision as well
as for providing necessary information regarding the project & also for supporting in completing
the report.
We would like to express our gratitude towards Shabnaz Amin Auditi, Assistant Professor,
University of Dhaka, for their kind co-operation and encouragement which help us in completion
of this report.
We would like to express our special gratitude and thanks to all our respondents & industry persons
for giving us such attention and time.

Executive Summary
Tallu Spinning Mills Ltd. is a very well famous textile outlet in Bangladesh. It has broadened its
business towards the gulf as well. The major purpose of the study is to analyze the working capital
management of Tallu Spinning Mills Ltd by considering the annual report of five years. The
financial statement explains the trend analyzes and the ratio analyzes along with the comparative
balance statements.
Working capital is one of the most difficult financial concepts to understand for the small-business
owner. In fact, the term means a lot of different things to a lot of different people. By definition,
working capital is the amount by which current assets exceed current liabilities. It involves the
relationship between a firm’s short term assets and its short term liabilities.
Funds needed for short term needs for the purpose like payment of wages and other day to day
expenses are known as working capital. The goal of working capital management is to ensure that
the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing
short term debt and upcoming operational expenses. Working capital is primarily concerned with
inventories management, receivable management, cash management and payable management.
The study involved few personal interviews with the financial heads of the company and through
observation methods. Company annual reports were being evaluated and working capital
management was being analyzed from it. For the purpose of the study convenience sampling
technique has been used.

Table of Contents
Chapter no Description Page
Chapter-00 Letter of transmittal
Acknowledgement
Executive summary
Chapter-01 Introduction 1-3
Chapter-02 Company Profile 4-7
Chapter-03 Accounts Payable management 8-9
Chapter-04 Inventory Management 10-18
Chapter-05 Accounts Receivable management 19-24
Chapter-06 Cash Management 25-28
Chapter-07 Recommendation & Conclusion 29-30

Introduction
Management is an art of anticipating and preparing for risks, uncertainties and overcoming
obstacles. An essential precondition for sound and consistent assets management is establishing
the sound and consistent assets management policies covering fixed as well as current assets. In
modern financial management, efficient allocation of funds has a great scope, in finance and profit
planning, for the most effective utilization of enterprise resources, the fixed and current assets have
to be combined in optimum proportions.
To start any business, First of all we need finance and the success of that business entirely depends
on the proper management of day-to-day finance and the management of this short term capital or
finance of the business is called Working Capital Management.
Working Capital is the key difference between the long term financial management and short term
financial management in terms of the timing of cash. Working capital management is a short term
financial management. Working capital management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities & the inter relationship that exists
between them. The current assets refer to those assets which can be easily converted into cash in
ordinary course of business, without disrupting the operations of the firm.
Working capital management or short-term financial management is a significant facet of
financial management. It is important due to 2 reasons:
 Investment in current assets represents a substantial portion of total investment
 Investment in current assets and the level of current liabilities have to be geared quickly to
changes in sales.
Working capital involves activities such as arranging short-term finance, negotiating favorable
credit terms, controlling the movement of cash, administrating accounts receivables, and
monitoring the investment in inventories also take a great deal of time.Management of working
capital is concerned with the problem that arises in attempting to manage the current assets, current
liabilities. The basic goal of working capital management is to manage the current assets and
current liabilities of a firm in such a way that a satisfactory level of working capital is maintained,

i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be
no shortage of funds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its probability, liquidity and structural health
of the organization. So working capital management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to profitability, liquidity and
risk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current liabilities.
Objectives
 To study the various components of working capital
 To analyze the liquidity trend
 To suggest measure for effective management of Working capital
 To appraise the utilization of current assets and current liabilities and find out short
comings if any
 To identify the financial strength and weakness of the company
Methodology
 Primary data
Primary data has been collected from observation and discussion with guide, other officials as well
as personal interview.
 Secondary data
 Secondary data collected from past record
 Secondary data collected from annual report
 Secondary data collected from company website

Scope
The scope of the study is identified after and during the study is conducted. The main scope of the
study is to put into practical theoretical aspect of the study into real life work experience. The study
of working capital is based on tools lie Ratio analysis, statement of changes in working capital.
Careful inventory management can make a huge difference in the profitability of a business. It
enables the business to meet or exceed of the customer by making product readily available.
Further the study is based on last 5 years annual reports of the company.
Limitations
 Detail study about all the materials was not possible because of time limit
 Some of the information were kept confidential
 Since the financial matters are sensitive in nature the same could not acquired easily.
 Limited interaction with the concerned heads due to their busy schedule.
 The findings of the study are based on the information retrieved by the selected unit.

Tallu Spinning Mills Limited is a cotton yarn manufacturing company was envisaged by a group
of dynamic entrepreneurs who have immense contribution to development of the textile sector of
Bangladesh. The Company was incorporated as a Public Limited Company on July 20, 1985 under
the Companies Act, 1913. The project was financed with the financial assistance of Bangladesh
Shilpa Bank (presently known as Bangladesh Development Bank Limited) and it went into
commercial operation in July 1989 at Damurhuda, Chuadanga. In 2007, the company management
took a breakthrough decision to shift/relocate the project from non-gas zone of Chuadanga to a gas
zone as the productive capacity utilization went down to around 30% for non availability of
required grid power and high cost of generator fuel. With the active support of the honorable
shareholders, directors and other management staff and the financial assistances of Bangladesh
Shilpa Bank the company successfully implemented the relocation scheme at a capital outlay of
Tk. 461.05 million. The project is now relocated at Koltapara Bazar, Gouripur, Mymenshing.
The Authorized Capital of the company is Tk. 800.00 million divided into 80 million ordinary
shares of Tk. 10.00 each and its Paid-up Capital is Tk. 186.09 million as on September 30, 2011
divided into 18,608,920 ordinary shares of Tk. 10.00 each subscribed by the shareholders.
However, the shareholders of the Company also approved 15% stock dividend of Tk. 27.91 million
in its 22nd Annual General Meeting held on December 31, 2011. Thus, the total paid-up capital of
the company stood at Tk. 214.00 million as on December 31, 2011
Quality Policy
Tallu Spinning Mills Limited is committed to manufacturing delivering & servicing of high quality
cotton yarns to its customers. The objective of Tallu Spinning Mills Limited is to continuously
improve its products and service to better satisfy the needs of its customers.
All employees of Tallu Spinning Mills Limited are expected to conform to this Corporate Quality
Policy and to understand the Quality needs of the customers. The management is committed to
supply all resources and logistic to attain the Corporate Quality Policy.

Board of Directors
Mrs. Rabeya Khatun Chairman
MR. Md. Mozammel Haque Managing Director
MR. Md. Rabiul Haque Director
MR. Md. Rafiqul Haque Director
MR. Md. Mahbub-Ul Haque Director
MR. Md. Atiqul Haque Director
Mr. A K M shafiqul Islam Director (BDBL Nominated)
Mr. Salim Reza Independent Director
Mr. S.M. Shahid-ul-Arafin, MBA Executive Director & Comapney Secretary
MANAGEMENT & EXECUTIVES
Mr. S.M. Shahid-ul-Arafin Executive Director & Company Secretary & CFO
Mr. Abdus Salam Khan General Manager,Accounts
Mr. Sanat Kumar General Manager,Factory & Production
Mr. Md. Ekramul Haque Deputy General Manager, Purchase
Mr. Md. Saiful Islam Assistant General Manager, Engineering
Mr. Firoz Iftekhar Masum Assistant General Manager, Finance & Corporate
Affairs
Mr. Md. Akram Uddin
Chowdhury
Manager, Share Department
Mr. Md. Jonab Ali Manager, Sales & Marketing
Mr. Md. Wazed Ali Manager, Accounts
Mr. Md. Shohel Rana Manager, Commercial

CORPORATE INFORMATION
REGISTERED OFFICE
Doulatdiar, Uzirpur, Chuadanga
CORPORATE OFFICE
South Avenue Tower (6th Floor),
House# 50, Road # 03,
7 Gulshan Avenue, Gulshan-1, Dhaka-1212
Date of Incorporation : July 20, 1985
Date of commencement of
Business:
July 20, 1985
Listing with Dhaka Stock
Exchange :
February, 1990
Listing with Chittagong Stock
Exchange :
June, 2001
Authorized Capital : Tk. 800 million
Paid-up-Capital : Tk. 186.0892
million
Shareholders Equity (Sept
30,2011) :
Tk. 235.30
Million
Total Operating Income(Sept
30,2011) :
Tk. 14.34
Million
Total Assets(Sept 30,2011) : Tk. 1589.42
Million
Number of Employees(Sept
30,2011) :
1110
Number of Shareholders(Sept
30,2011) :
2697
MANAGING DIRECTOR

Md. Mozammel Haque
EXECUTIVE DIRECTOR & COMPANY SECRETARY & CFO
S.M. Shahid-ul-Arafin
AUDITOR
Alam Chowdhury Mostafa & Co.
Chartered Accountants
73/3, Green Road
Dhaka-1205

Management of Accounts Payable
Accounts Payable (AP) is an important factor in a company’s working capital, and a key indicator
of overall operational effectiveness. If it’s too high, the organization may soon have trouble paying
bills on time, leading to costly penalties; if it’s too low, your organization could unwisely be paying
bills early, rather than enjoying the full grace period and investing any surplus cash into the
business. AP levels also affect several important financial performance measures, including days
payable and the current ratio of assets to liabilities.
Common Practices of Managing Accounts Payable:
 Paying invoices on a predetermined schedule of the company's choosing
 Ensuring the accuracy and authenticity of invoices that the company pays, and
 Processing accounts payable paperwork with a minimum of handling and expense
Indicators of Effective Management of Accounts Payable:
 Below average “Accounts Payable Turnover”
 Above average “Average Payment Period”
Management of Accounts Payable by “Tallu Spinning Mills Ltd.”:
The suppliers of “Tallu SpinningMills Ltd.”are from foreign countries as it imports raw
materials. So, the transaction occurs through International Letter of Credit which is of two types:
 L/C at Sight
 L/C after 120 days
TOO HIGH
TOO LOW
 Difficulty in Bill Payment
 Cost ofPenalty
 Early Bill Payment
 LowCash Position

The company gets some financing if the suppliers allows “L/C after 120 days” and it gives its
effort on the availability of this financing. But it depends on the bargaining power of the suppliers
and the relationship with them. The company has to pay to the L/C opening bank in due time to
maintain its relationship with them. So, there’s no scope of delaying payment unless “L/C after
120 days’’ is allowed by the foreign suppliers.
Comparative Analysis of Accounts Payable Ratios of “Tallu SpinningMills Ltd.”:
Accounts Payable Turnover:
A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers.
Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers
and dividing it by the average accounts payable amount during the same period.
Accounts Payable Turnover = Raw Materials Consumed/Accounts Payable
 Falling turnover implies a longer period to pay off suppliers
 Rising turnover implies shorter period to pay off suppliers
Average Payment Period:
Average payment period means the average period taken by the company in making payments to
its creditors. It is computed by dividing the number of working days in a year by creditors turnover
ratio.
Average Payment Period = 360/Accounts Payable Turnover
 A shorter payment period indicates prompt payments to creditors
 A longer payment period indicates delayed payments to creditors

Inventory Management
Inventory constitutes a major component of working capital. To a large extent, the success and
failure of a business depends upon its inventory management performance. The basic objective of
inventory management is to optimize the size of inventory in a firm so that smooth performance
of production and sales function may be possible at minimum cost inventories. Inventories can be
held to improve production scheduling, to smoothen production in the face of fluctuating sales, to
minimize stock out costs, to speculate on or hedge against price movements, to reduce purchasing
costs by buying in quantity, to shorten delivery lags, and so on. It is evident that no model can
explain the rich variety of inventory behavior; an explanation that is plausible for one industry or
type of inventory may be implausible for another. Any abstract theory of inventory behavior must
simplify and generalize.

Inventory management systems are mostly applied in manufacture settings, where its viability and
potential economic value are duly attained. The average business has 30% of its working capital
tied up in inventories, while as, about 70% of its investment is in the plant and equipment. It is an
admitted fact that the carrying of inventories involves an exorbitant cost.
According to the findings of Professor Alford and Bangs, “the annual cost of carrying a production
inventory averages approximately 25 percent of the value of the inventory”. Everell
Welch has also found that, “the annual carrying cost of inventory average somewhat 20 percent of
the total inventory value, exhibiting a range of some 10 to 34 percent”.
Balancing the various tasks of inventory management mean paying attention to three key aspects
of any inventory. The first aspect has to do with time. In terms of materials acquired for inclusion
in the total inventory, this means understanding how long it takes for a supplier to process an order
and execute a delivery. Inventory management also demands that a solid understanding of how
long it will take for those materials to transfer out of the inventory be established. Knowing these
two important lead times makes it possible to know when to place an order and how many units
must be ordered to keep production running smoothly.
Calculating what is known as buffer stock is also key to effective inventory management.
Essentially, buffer stock is additional units above and beyond the minimum number required to
maintain production levels. For example, the manager may determine that it would be a good idea
to keep one or two extra units of a given machine part on hand, just in case an emergency situation
arises or one of the units proves to be defective once installed. Creating this cushion or buffer helps
to minimize the chance for production to be interrupted due to a lack of essential parts in the
operation supply inventory.
Inventory management is not limited to documenting the delivery of raw materials and the
movement of those materials into operational process. The movement of those materials as they
go through the various stages of the operation is also important. Typically known as a goods or
work in progress inventory, tracking materials as they are used to create finished goods also helps
to identify the need to adjust ordering amounts before the raw materials inventory gets dangerously
low or is inflated to an unfavorable level.

Finally, inventory management has to do with keeping accurate records of finished goods that are
ready for shipment. This often means posting the production of newly completed goods to the
inventory totals as well as subtracting the most recent shipments of finished goods to buyers. When
the company has a return policy in place, there is usually a sub-category contained in the finished
goods inventory to account for any returned goods that are reclassified as refurbished or second
grade quality. Accurately maintaining figures on the finished goods inventory makes it possible to
quickly convey information to sales personnel as to what is available and ready for shipment at
any given time.
Inventory Control:
Store is the place where every type of raw materials, spares, finished goods are kept in proper
system. Inventory control means the accurate calculation and data of every type of raw materials,
spares and finished goods in time to time store. Inventory controls in textile mill are necessary
because:
1. To know about the required amount of raw material
2. To know about the job no this would be processed
3. To be continued the production process
4. To find out the profit or loss of a company
5. Stock and stock value for consumption measuring
Framework for Inventory Models
General framework for inventory models has five components --- (1) Demand, (2) Order Quantity,
(3) Lead Time, (4) Safety Stock and (5) Cost of Possession of Inventories.
1. Demand
Demand is an indispensable component of inventory management. Inventory decisions are always
made with reference to the future demand. The decisions are taken when the manager is certain
about the requirements in his department and again when the certainty is not ensured. The later
state tells nothing about the likelihood of future levels.

2. Order Quantity
After determining the quality to procure, the buyer must decide as how much to buy. Most material
requirements are continuing requirements, cumulative or total needs. Such a system of
requirements is a far better guide than the day to day needs. In the procurement function, the term
quality has a special meaning and just as there is a need for a most suitable and economical quality
of material, there is also a requirement for a most economical ordering quantity. In this connection,
to establish an economic order quantity two extreme views are encountered. They are –
i) The production oriented solution i.e. to procure in very large lots in order to minimize the setup
and procurement costs
ii) The treasurer, comptroller or accountant oriented solution which believes in production in very
small lots to minimize the investment in stock.
In the above two extremes, none holds positively a better foothold, rather the answer is found
between the two i.e. a combination of both. The economic order quantity should be established in
such a way so as to balance all the variable costs of inventory. The variable costs of inventory are
those which vary with the size of the order quantity. The objective of economic order quantity
calculations is to determine an order quantity so that the total variable cost of inventory is kept to
the minimum.
3. Lead Time
There is always some interval between the time that the need for material is determined and order
placed and the time this material is actually manufactured and delivered. This gap period is the
lead time. The longer the lead time, the more time is required to get the results of production and
vice versa. Inventories rise when lead time increases to maintain plant operations. However, no
safety stocks would be required, if lead time is zero, as replenishment of the stock can be done
immediately without any problem. In case the lead time is longer, it is more difficult to predict the
usage or consumption, while the order is open. If the procurement is zero, it would be necessary
to make any predictions. However, variations in lead time can be quite substantial.

4. Safety Stock
In practice, the demand or usage is not generally known with certainty. Usually it fluctuates during
a given period of time. Typically, the demand for finished goods inventory is subject to the greatest
fluctuations. In contrast, the usage of raw materials inventory and in transit inventory, both of
which depend upon the production scheduling, is much more predictable. In addition to demand
or urge, the lead time required to receive delivery of inventory, once an order is placed is subject
to some variation. Owing to these fluctuations, it is not feasible to allow expected inventory to fall
to zero before a new order is anticipated, as the firm could easily do when usage and lead time
were known with certainty.
5. Cost of Possession of Inventories
Since there are numerous costs involved in holding inventories, but the main costs involved in
possession inventories are (a) Cost of Capital, (b) Insurance Cost, (c) Property Taxes, (d) Storage
costs (e) Obsolescence and Deterioration (f) Acquisition cost (g) Purchase cost and (h) Ordering
cost.
Cost of Goods Sold
2009 2010 2011 2012 2013
Raw material consumed 580,301,212 668,833,591 688,342,238 1,109,212,396 1,018,202,225
Factory overhead 100,444,361 99,241,838 111,532,539 123,423,564 134,883,646
Begin work in progress 9,177,653 8,936,803 9,426,248 20,637,450 23,576,550
End work in progress 8,936,803 9,426,248 20,637,450 23,576,550 27,522,503
Cost of goods produced 680,986,423 767,585,984 788,663,575 1,229,696,860 1,149,139,918
begin Finish Good 144,459,252 126,916,117 139,324,155 126,963,254 127,692,754
135,934,612 117,789,077 131,401,703 119,512,101 119,074,701
8,524,640 9,127,040 7,922,452 7,451,153 8,618,053
End Finish Good 126,916,117 139,324,155 126,963,254 127,692,754 126,653,248

117,789,077 131,401,703 119,512,101 119,074,701 116,922,643
9,127,040 7,922,452 7,451,153 8,618,053 9,730,605
Cost of goods sold 698,529,558 755,177,946 801,024,476 1,228,967,360 1,150,179,424
Inventory 301,845,030 313,815,439 317,376,043 401,433,154 449,480,577
End raw material 175,119,150 172,987,488 177,226,492 258,781,903 305,035,431
Turnover and Conversion Days:
Inventory turnover 2.314199303 2.406439748 2.523897105 3.061449578 2.558907955
Inventory conversion
period
155.5613639 149.5985928 142.6365597 117.5913536 140.6850134
raw material conversion
period
108.6382256 93.11059809 92.68868536 83.9888604 107.8496515
WIP conversion period 4.724395335 4.420937003 9.420343776 6.902154731 8.622188582
FG conversion period 50.70475792 52.64035295 43.71166256 24.88041567 26.59616109

Inventory conversion period:
Raw Material Conversion Period:
0
20
40
60
80
100
120
140
160
180
2009 2010 2011 2012 2013
Time
Year
Inventory conversion period
Inventory conversion period
0
20
40
60
80
100
120
2009 2010 2011 2012 2013
raw material conversionperiod
raw material conversion
period

Why High Raw material Conversion Period:
 International price fluctuations
 Continue production process
 Significant distance of supplier of raw material
 Supply shortage of quality raw material
WIP Conversion period:
WHY Work in progress:
 To hedge against breakdown of any production process
 Buffer stock
0
1
2
3
4
5
6
7
8
9
10
2009 2010 2011 2012 2013
WIP conversion period
WIP conversion period

Finish good Conversion period:
Why Finish good conversion period:
 Immediate delivery
 Uncertain demand
 Maintain customer and relation
0
10
20
30
40
50
60
2009 2010 2011 2012 2013
FG conversionperiod
FG conversion period

Inventory turnover:
Stable turnover. But very low turnover.
Comparison between COGS and inventory:
0
0.5
1
1.5
2
2.5
3
3.5
2009 2010 2011 2012 2013
Inventory turnover
Inventory turnover
0
200,000,000
400,000,000
600,000,000
800,000,000
1,000,000,000
1,200,000,000
1,400,000,000
2009 2010 2011 2012 2013
Cost of good sold
Inventory

Comparison with the industry:
Maksonspinning 2012 2011
Inventory 1,168,836,430 1,286,872,443
COGS 1,378,347,683 1,439,778,772
Inventory turnover 1.17924771 1.118820113
Inventory conversion period 305.2793718 321.7675441
Malek Spinning 2012 2011
Inventory 1,526,179,837 1,932,774,214
COGS 2,955,469,430 3,309,616,599
Inventory turnover 1.93651453 1.71236587
Inventory conversion period 185.9010064 210.2354446
Inventory turnover

Given a choice, every business would prefer selling its produce on cash basis. However, due to
factors like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell
their goods on credit. In certain circumstances, a business may deliberately extend credit as a
strategy of increasing sales. Extending credit means creating a current asset in the form of
‘Debtors’ or ‘Accounts Receivable’. Investment in this type of current assets needs proper and
effective management as it gives rise to costs such as:
i. Cost of carrying receivable (payment of interest etc.)
ii. Cost of bad debt losses
Thus the objective of any management policy pertaining to accounts receivables would be to
ensure that the benefits arising due to the receivables are more than the cost incurred for receivables
and the gap between benefit and cost increases resulting in increased profits. An effective control
of receivables helps a great deal in properly managing it. Each business should project expected
sales and expected investment in receivables based on various factors, which influence the working
capital requirement. A business should continuously try to monitor the credit days and see that the
average credit offered to clients is not crossing the budgeted period. Otherwise, the requirement of
Inventoryconversion period

investment in the working capital would increase and, as a result, activities may get squeezed. This
may lead to cash crisis.
The whole sales system is controlled by the Marketing Department.
In local Trade, there are a number of modes of payment which are being used for receiving trade
proceeds, among them letter of credit is used by Tallu Spinning.
This letter of credit arrangement usually satisfies the seller’s desire for cash and the buyer’s desire
for credit. This financial instrument serves the interest of both parties independently. The
documentary credit offers a unique and universally used method of achieving a commercially
acceptable undertaking by providing for payment to be made against complying documents that
represent the goods and making possible the transfer of title to those goods.
Under a letter of credit operation, there exists a distinct triangular contractual arrangement:
First, the sales contract between seller (Tallu Spinning) and buyer.
Second, the “Application and Security Agreement” or the “Reimbursing Agreement” between the
buyer (the Applicant) and the issuer (the issuing Bank), and
Third, the letter of credit between the issuing bank and the beneficiary. If the documentary credit
is confirmed by another bank, then such bank undertakes its own contractual agreement, in
addition to that of the issuing bank, to the beneficiary.
The three types of LCs have been used by Tallu Spinning for sales. They are:
At Sight LC: It is a kind of credit that the announcer bank after observing the carriage documents
from the seller and checking all the documents immediately pays the required money.

LC for 90 days and LC for 120 days
In case of using LC for a maturity (90 days or 120 days) the company adds a opportunity cost for
the time period
The following five major steps are involved in the operation of letter of Credit.
1. Issuing
2. Advising
3. Confirmation and Amendment ( if necessary )
4. Presentation, And
5. Settlement
Issuing a Letter of credit: Before issuing L/C, the buyer and Talu Spinning located in different
places conclude a ‘sales contract’ providing for payment by documentary credit. As per
requirement of the seller, the buyer then instructs the bank-the issuing bank-to issue a credit in
favor of the seller or beneficiary. Instruction/Application for issuing a credit should be made by
the buyer (importer) in the issuing bank’s standard form. The credit application which contains the
full details of the proposed credit, also serve as an agreement between the bank and the buyer.
After being convinced about the conditions contained in the application form the issuing then
proceeds for opening the credit to be addressed to the beneficiary.
Advising a Letter of Credit: Advising through a bank is proof of apparent authenticity of the credit
to the seller. The process of advising the credit consists of forwarding the original credit to the
beneficiary to whom it is addressed. Before forwarding, the advising bank has to verify the
signatures of the officers of the issuing bank and ensures that the terms and conditions of the credit
are not in violation of the existing exchange control regulations. In such act of advising, the
advising bank does not undertake any liability. However, the advising bank may utilize the services
of another bank (second advising bank) to advise the credit and any amendment to the beneficiary.
Confirmation and Amendment of Credit: The beneficiaries are not always willing to rely on the
credit standing of the issuing bank- particularly when the bank is unknown to the beneficiary.
Consequently, the beneficiary ma y request that the applicant instruct the issuing bank to have its
credit confirmed by a confirming bank, usually in the beneficiaries’ country. Moreover parties

involved in L/C particularly the seller and the buyer cannot always satisfy the terms and conditions
full as expected due to some genuine and obvious reasons. In such a situation, the credit should be
amended. However, a credit can neither be amended nor cancelled without the agreement of the
issuing bank, the confirming bank (if any) and the beneficiary.
Presentation of Documents: The seller being satisfied with the terms and conditions of the credit
proceeds to dispatch the required goods to the buyer and after that, has to present the documents
evidencing dispatch of goods and fulfilling other terms and conditions of L/C to the issuing or
nominated bank on or before the stipulated expire date of the credit. After receiving all the
documents, the issuing or nominated bank examines the documents against the credit. If the
documents are found complying, the bank will honor or negotiate.
Settlement: Settlement means fulfilling the commitments of the issuing bank in regard to effecting
payment subject to satisfying the credit terms fully. This settlement may be done under three
separate arrangements as stipulated in the credit.
Common Document under letter of credit: Commercial invoice
 The invoice is signed by the exporter / beneficiary
 The required numbers of copies of the invoice are placed as per L/C terms.
 Description of the goods with measurement / weight is mentioned in full.
 The value and price of the goods to be tallied with L/C terms
 The L/C number, name of the ship with shipping mark, shipments date L.C.A.F/ license
numbers of the importer, indent number etc. are to be quoted in the invoice properly.
 The quality and quantity of the goods as mentioned in the invoice must agree with that of
L/C terms.

 The name of the importer and the L/C issuing bank is mentioned in the invoice.
Key operating data have been presented below in summarized form
Year Sales Accounts Receivables Net profit Before tax
2008 1004.84 239.92 (16.10)
2009 816.91 299.88 (18.42)
2010 888.16 332.05 7.53
2011 974.98 302.29 18.10
2012 1495.34 387.88 73.82
2013 1485.14 533.36 155.38
Graphical representation of turnover and accounts receivables.
From the above graph we can say that Tallu spinning has control over the accounts receivables
sales according to maintaining the percentage of account receivables. Accounts receivables has
been increased over the years with the sales incremental and the net profit before tax has also been
increased which implied that the company has achieved the incremental sales along with net profit
before tax by extending its credit policy.
0
200
400
600
800
1000
1200
1400
1600
2013 2012 2011 2010 2009 2008
Turnover
Accounts
Receivables
TakainMillion
Year

Accounts receivable turnover measures the efficiency of a business in collecting its credit sales.
Generally a high value of accounts receivable turnover is favorable and lower figure may indicate
inefficiency in collecting outstanding sales. From the below table we can say that the accounts
receivables turnover is fluctuating over the years. Tallu Spinning had slightly improved in the
process of cash collection on credit sales. But in the very last year the company has slightly lower
receivables turnover which implied the inefficiency in collecting outstanding sales.
However, a normal level of receivables turnover is different for different industries. Also, very
high values of this ratio may not be favorable, if achieved by extremely strict credit terms since
such policies may repel potential buyers.
Calculated accounts receivables turnover and days in accounts receivables turnover in summarized
form:
Year A/R Turnover Days in A/R turnover
2008 4.188 87.143
2009 2.724 133.98
2010 2.674 136.46
2011 3.223 113.24
2012 3.855 94.68
2013 2.784 131.08
On the other hand, days in accounts receivables gives the typical number of days it takes to collect
cash from sales. It highlights that efficiency is increased by turning sales into cash quickly and is
often used as metric to evaluate collection departments.
Nevertheless, Tallu Spinning generally uses three LCs: LC at sight, LC at 90 days and 120 days,
the average days in accounts receivables, presented in the table, shows that the company is yet to
achieve the efficiency to collect the cash.

CASH MANAGEMENT AND FORECASTING
CASH MANAGEMENT
The term Cash Management refers to the management of cash from the time it starts its transit to
the firm until it leaves the firm in payments. Cash management encompasses the design of
collection and disbursement systems for cash and temporary investment for cash while it resides
with the firm. It is a key component of ensuring a company's financial stability and solvency.
Frequently corporate treasurers or a business manager is responsible for overall cash management.
IMPORTANCE
Cash Management is a critical activity for companies of all sizes. Assuring that a company has
sufficient funds when and where they are needed, is a constant challenge for financial managers.
When a company has sufficient cash to finance its business plans and cushion economic
downturns, it can confidently focus on business operations. But a business suffering from
inadequate cash levels must constantly reexamine and modify its plans, exerting enormous
energies to obtain and keep additional financing.
Creating cash management awareness is not an easy task. There have been differences in cash
management practices between larger and smaller companies. Larger companies usually have
economies of scale that justify a specialized financial function that deals specifically with a
company’s cash management practices and systems. Small businesses instinctively entrust the
CFO to control whether the company will have the cash sufficient to meet needs and
plans. However, many small to mid-sized companies cannot detect direct relationships between

and the company’s transactions in the accrual-based accounting records. In today’s challenging
economic environment the organization’s ability to manage cash is critical. The partners in our
organization have vast cash flow management experience and can show how such relationships
can be found, enabling the company to manage cash flows and forecast cash monthly or, if needed,
weekly or even daily.
Even when borrowing rates are low, small to mid-sized business owners should count on their
finance team to stretch resources as far as possible. This economizing means that a CFO should
help their companies collect cash as soon as possible, keep cash as long as practicable, use all idle
cash as profitably as feasible, organize their bank account structures efficiently, select cost-
effective bank cash management services, and develop efficient cash forecasting systems. A
company that manages its cash effectively can borrow less, invest more, and repay debt
sooner. Our expertise can assess the potential benefits from accelerating collections, retaining
cash, and using idle cash. We can also discuss cash management techniques that companies of
any size can use to stretch their cash resources. We can point out as follows-
 analyzing the Current Situation
 Understanding the Company’s Operating Cash Cycle
 Forecasting Future Cash Positions
 Investing Idle Cash
 Optimizing Float
 Administrative Considerations: Bank Fees and Controls
 Cash Reporting
CASH MANAGEMENT OF TALLO SPINNING
Tallo spinning manage their cash in a simple way. From the analysis of their financial statements
it came to our notice that they have no investment in short term money market securities. They

hold most of the cash either in hand or at bank. They have informed us that they are always in need
of cash and cash equivalents. If they invest in money market securities their cost will outperform
the revenue or return from investment. So we can say that they hold most of their cash for their
transaction demand. They keep their cash in bank in current accounts which provides minimum
amount of profit.
CASH FORECASTING
The cash forecast is an estimation of the flows in and out of the firms cash account over a particular
period of time, usually a quarter, month, week or day. A cash flow forecast pretty much tells you
how to direct your business. Just as a personal budget is important to ensure that you spend your
pay check wisely, so too is the cash flow forecast for any company/business.
It is a key management decision making tool as it is a guide to ensuring that the business's limited
resources are utilized in the most efficient manner. If prepared in adequate detail, it assists the
users (usually management) to identify any possible hemorrhage or areas requiring attention.
It is also an indicator to your bankers (as most lenders require this) that you are capable of repaying
any debt. Of course, the assumptions on which your cash flow forecast are based are extremely
important as they MUST relate to your business and the environment in which it operates.
In today's difficult economic environment, a cash flow forecast is not only useful but critical to the
success of any business. If you want to get to your goal, you need to know HOW you're going to
get there and the cash flow forecast is just one means of doing so.

WHY CASH FORECASTING
Cash forecasting is necessary and effective tool for financing of temporary deficit and investment
of temporary surpluses. It removes-
 Unanticipated cash shortages
 Unanticipated, unplanned surplus of cash
Tallo spinning follow receipts and disbursements approach for cash forecasting. They forecast the
amounts of cash expected to be received and disbursed by them over the period chosen for the
forecast.
FINANCIAL FORECASTING METHODS
Tallo spinning use different methods of financial forecasting for different items. They use spot
method when they are certain about the payments such as lease payment and lease payment.
Proportion of another account is used by them for identifying costs which are directly related to
sales and production. If they can predict the growth of expense in the future they use compounded
growth method. They use multiple dependency method for identifying the amount of inventory as
we know that there is a fixed portion called safety stock and variable portion that is related to the
demand factors.

OVERALL PERFORMANCE ANALYSIS
After discussing all their information we can analyze the performance of ‘TalloSpinning’. At first
we can comment regarding the accounts payable turnover. There is a rising trend in their accounts
payable turnover which implies that they have to pay off their customers promptly. This happens
because most of their suppliers are of foreign country. So they have to pay within a limited time
to ensure the proper supply of goods and materials. Average accounts payable period is a
consequence of accounts payable turnover. As they have to pay promptly their average payment
period is decreasing day by day. For this reason they have to hold a large amount of working cash.
Their overall turnover is increasing with increasing accounts receivable. But it is favorable that
accounts receivable are not increasing more in comparison with the increase in turnover. Their net
profit after tax is increasing gradually except 2008 and 2009 because of economic downturn all
over the world. Account receivable turnover is an important indicator of the performance of their
collection department. Though their receivable turnover was good in the early years it is decreasing
recently which implies that their investment in accounts receivable is increasing day by day. This
in turn reduces their net working capital as there is opportunity cost related to this. They are also
unable to invest their cash in short term securities. They put more of their cash in bank as current
account which does not provide handsome return. Their overall performance in terms of collecting
receivables is deteriorating gradually. Now we can discuss the conversion period related to
inventory.Work in process conversion period and raw material conversion period is increasing day
by day. But finished goods conversion period is increasing which indicates that their finished
goods are turning in sales within a short period of time. Their increasing work in progress can act
as a buffer stock.In fine it can be concluded that though there is some poor indicators but their
overall performance in relation to their peer company is not so bad.

CONCLUSION
From the above discussion it can be noted that though “Tallo Spinning” is a leading company with
good economic prospect it has some fallacy regarding working capital management. They have to
pay promptly for the purchase but receive late payments from their customers. This increases their
dependency on borrowed money. They have to forego the opportunity cost for their huge
investment in accounts receivable. They have to take some initiatives to-
 Decrease the overall payable period
 Increase accounts receivable turnover
 Decrease collection period
 Decrease inventory conversion period
 Revise their credit policy etc.

Working capital management

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