Project on letter of credit and working capital


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Project on letter of credit and working capital

  1. 1. EXECUTIVE SUMMARYI had the opportunity to take up the Internship Project at Vardhman textiles limited .During the project I had the privilege of being guided by Mr. Ajay Sharma, Executive inFinance department.Vardhman, a household name in Northern India, has carved out a niche for itself in textileindustry. The Vardhman group was setup in 1962 by late Lala Rattan Chand Oswal, fatherof present Chairman cum Managing Director, Sh. S.P. Oswal. Vardhman aims to beworld class textile organization producing diverse range of products for the global textilemarket. Vardhman seeks to achieve customer delight through excellence in manufacturingand customer service based on creative combination of state-of-the-art technology andhuman resources.My project is study of inland bill discounting under letter of credit and Analysis ofWorking capital and of Yarn division Of Vardhman textiles limited.The study was conducted at the commercial department of textiles limited under AccountReceivable Department.The project was of 6 weeks duration. During the project interviewed the executives & staffto collect the data, & also made use of company records & annual reports. The datacollected were then compiled, tabulated and analyzed.The objective of my internship was the knowledge of sale under letter of credit of yarncustomers and to operate the working capital cycle of the management.Working Capital Management is a very important facet of financial management due to:  Investments in current assets represent a substantial portion oftotal investment.  Investment in current assets & the level of current liabilities have toBe geared quickly to change sales. Some the points to be studied under this topic are:  How much cash should a firm hold? In Industry Project Report 1
  2. 2.  What should be the firms credit policy?  How to & when to pay the creditors of the firm?  How much to invest in inventories?By studying about the company s different areas I came to knowcertain things like: Acid test ratio is more than one but it does not mean that company has excessive liquidity. Creditors turnover ratio also improved so it is better for company Inventory turnover ratio is improving from 2006-7 to 2007-08, which means inventory is used in better way so it is good for the company.A study of letter of credit deals with studying and understanding the Letter of credit,different fields of letter of credit and different types of L/C charges namely L/C Advisingcharges, L/C Amendment charges and discrepancy charges and calculating savingpotential and making recommendations.A letter of credit (LC) is a binding document that a buyer can request from his bank inorder to guarantee that the payment for goods will be transferred to the seller. Basically, aletter of credit gives the seller reassurance that he will receive the payment for the goods.By studying the LC of Yarn division I came to know  All the dealing of LC is centralized of yarn customers.  It reduces the credit risk of company  It even reduces the payment delays  It increase the liquidity position of companySome suggestions for the company are • The prices should be less to re-establish the market for Yarn. • Not only for yarn customers but for other product customer dealing under letter of credit should done • Company should put more efforts to improve its liquidity position In Industry Project Report 2
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  5. 5. LETTER OF CREDITThe English name “letter of credit” derives from the French word “accreditif”, a power todo something, which in turn is derivative of the Latin word “accreditivus”, meaningtrust.A letter of credit is basically a document issued by a bank guaranteeing a clients ability topay for goods or services. A bank or finance company issues a letter of credit on behalf ofa buyer, authorizing the seller to obtain payment within a specified timeframe once theterms and conditions outlined in the letter of credit are met. The letter of credit acts like aninsurance contract for both the buyer and seller and practically eliminates the credit riskfor both parties, while at the same time reducing payment delays. A letter of creditprovides the seller with the greatest degree of safety when extending credit. It is usefulwhen the buyer is not well known and when exchange restrictions exist or are possible.The LC can also be the source of payment for a transaction, meaning that a will get paidby redeeming the letter of credit. Letters of credit are used primarily in international tradetransactions of significant value, for deals between a supplier in one country and acustomer in another. The parties to a letter of credit are usually a beneficiary who is toreceive the money, the issuing bank of whom the applicant is a client, and the advisingbank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e.,cannot be amended or canceled without prior agreement of the beneficiary, the issuingbank and the confirming bank, if any. In executing a transaction, letters of creditincorporate functions common Travelers cheques.FROM ABOVE WE CAN CONCLUDE LETTER OF CREDIT ISA letter of credit is a document issued mostly by financial institutions which usuallyprovides an irrevocable payment undertaking to a beneficiary against complyingdocuments as stated in the credit. In Industry Project Report 5
  6. 6. Once the beneficiary or a presenting bank acting on his behalf, makes a presentation to theissuing bank or confirming bank, if any, within the expiry date of L/C, comprisingdocuments complying with the terms and conditions of the L/C, the applicable UCP. Andinternational standard banking practices. The issuing bank or confirming bank, if any, isobliged to honor irrespective of any instructions from the applicants to the contrary. Seller Bank Buyer BankSeller Buyer CarrierAfter a contract s concluded between buyer and seller, buyer bank supplies a letter ofcredit to the sellerSeller consigns goods to a carrier in exchange for a bill of lading.Seller Bank Buyer Bank Seller Buyer Carrier In Industry Project Report 6
  7. 7. Seller provide bill of lading to a bank in exchange for payment. Seller’s bank exchangesbill of lading for payment from a buyer’s bank. Buyer’s bank exchange bill of lading forpayment from buyer.Seller Bank Buyer BankSeller Buyer CarrierBuyer provides bill of lading to a carrier and takes delivery of goods Seller Bank Buyer BankSeller Buyer In Industry Project Report 7
  8. 8. CarrierElements of a Letter of Credit • A payment undertaking given by a bank (issuing bank) • On behalf of a buyer (applicant) • To pay a seller (beneficiary) for a given amount of money • On presentation of specified documents representing the supply of goods • Within specified time limits • Documents must conform to terms and conditions set out in the letter of credit • Documents to be presented at a specified placePARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT1. ApplicantThe applicant is the party who requests and instructs the issuing bank to open a letter ofcredit in favor of the beneficiary. The applicant usually is the importer or the buyer ofgoods and/or services. The applicant can also be another party acting on behalf of theimporter, such as a confirming house. The confirming house is equivalent to a buyingoffice, it acts as an intermediary between buyer and seller, and it can be located in a thirdcountry or in the seller’s country.2.BeneficiaryThe beneficiary is entitled to payment as long as he can provide the documentary evidencerequired by the letter of credit. The letter of credit is a distinct and separate transactionfrom the contract on which it is based. All parties deal in documents and not in goods. Theissuing bank is not liable for performance of the underlying contract between the customerand beneficiary. The issuing banks obligation to the buyer, is to examine all documents toinsure that they meet all the terms and conditions of the credit. Upon requesting demandfor payment the beneficiary warrants that all conditions of the agreement have been In Industry Project Report 8
  9. 9. complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must bepaid by the bank.3.Issuing BankThe issuing banks liability to pay and to be reimbursed from its customer becomesabsolute upon the completion of the terms and conditions of the letter of credit. Under theprovisions of the Uniform Customs and Practice for Documentary Credits, the bank isgiven a reasonable amount of time after receipt of the documents to honor the draft.Theissuing banks role is to provide a guarantee to the seller that if compliant documents arepresented, the bank will pay the seller the amount due and to examine the documents, andonly pay if these documents comply with the terms and conditions set out in the letter ofcredit.Typically the documents requested will include a commercial invoice, a transportdocument such as a bill of lading or airway bill and an insurance document; but there aremany others. Letters of credit deal in documents, not goods.4.Advising BankAn advising bank, usually a foreign correspondent bank of the issuing bank will advise thebeneficiary. Generally, the beneficiary would want to use a local bank to insure that theletter of credit is valid. In addition, the advising bank would be responsible for sending thedocuments to the issuing bank. The advising bank has no other obligation under the letterof credit. If the issuing bank does not pay the beneficiary, the advising bank is notobligated to pay.5.Confirming BankThe correspondent bank may confirm the letter of credit for the beneficiary. At the requestof the issuing bank, the correspondent obligates itself to insure payment under the letter ofcredit. The confirming bank would not confirm the credit until it evaluated the countryand bank where the letter of credit originates. The confirming bank is usually the advisingbank. In Industry Project Report 9
  10. 10. TYPES OF LETTER OF CREDIT1.Commercial and stand by L/C: Commercial letters of credit are used primarily tofacilitate foreign trade. The commercial letter of credit is the primary payment mechanismfor a transaction. It is a contractual agreement between a bank, known as the issuing bank,on behalf of one of its customers, authorizing another bank, known as the advising orconfirming bank, to make payment to the beneficiary. The issuing bank, on the request ofits customer, opens the letter of credit. The issuing bank makes a commitment to honordrawings made under the credit. The beneficiary is normally the provider of goods and/orservices. Essentially, the issuing bank replaces the banks customer as the payee Thestandby letter of credit serves a different function. The standby letter of credit serves as asecondary payment mechanism. The bank will issue the credit on behalf of a customer toprovide assurances of his ability to perform under the terms of a contract. A bank willissue a standby letter of credit on behalf of a customer to provide assurances of his abilityto perform under the terms of a contract between the beneficiary. The parties involvedwith the transaction do not expect that the letter of credit will ever be drawn upon. Thestandby letter of credit assures the beneficiary of the performance of the customersobligation. The beneficiary is able to draw under the credit by presenting a draft, copies ofinvoices, with evidence that the customer has not performed its obligation. The bank isobligated to make payment if the documents presented comply with the terms of the letterof credit.They are issued by banks to stand behind monetary obligations, to insure the refund ofadvance payment, to support performance and bid obligations, and to insure thecompletion of a sales contract. The credit has an expiration date.The standby letter ofcredit is often used to guarantee performance or to strengthen the credit worthiness of a In Industry Project Report 10
  11. 11. customer. In the above example, the letter of credit is issued by the bank and held by thesupplier. The customer is provided open account terms. If payments are made inaccordance with the suppliers terms, the letter of credit would not be drawn on. The sellerpursues the customer for payment directly. If the customer is unable to pay, the sellerpresents a draft and copies of invoices to the bank for payment.2.Revocable or irrevocable letter of credit: Letters of credit may be either revocable orirrevocable. A revocable letter of credit may be revoked or modified for any reason, at anytime by the issuing bank without notification. A revocable letter of credit cannot beconfirmed. Once the documents have been presented and meet the terms and conditions inthe letter of credit, and the draft is honored, the letter of credit cannot be revoked. Therevocable letter of credit is not a commonly used instrument. If a letter of credit isrevocable it would be referenced on its face.The irrevocable letter of credit may not berevoked or amended without the agreement of the issuing bank, the confirming bank, andthe beneficiary. An irrevocable letter of credit from the issuing bank insures thebeneficiary that if the required documents are presented and the terms and conditions arecomplied with, payment will be made. If a letter of credit is irrevocable it is referenced onits face.3) Sight or usance letter of credit: All letters of credit require the beneficiary to presenta draft and specified documents in order to receive payment. A draft is a written order bywhich the party creating it, orders another party to pay money to a third party. A draft isalso called a bill of exchange. There are two types of drafts: sight and time. A sight draft ispayable as soon as it is presented for payment. The bank is allowed a reasonable time toreview the documents before making payment. A time draft is not payable until the lapseof a particular time period stated on the draft. The bank is required to accept the draft assoon as the documents comply with credit terms. The issuing bank has a reasonable timeto examine those documents. The issuing bank is obligated to accept drafts and pay themat maturity. A Letter of credit is known as a Sight letter of credit if it involves payment to In Industry Project Report 11
  12. 12. the seller against a Sight Draft. On the other hand, if the payment is made against aUsance Draft, then it is known as Usance letter of credit.DIFFERENT FIELDS OF LETTER OF CREDIT  FROM :( NAME & ADDRESS OF OPENING BANK ) This clause contains details of bank which has opened the Letter of Credit, and it works on the behalf of the buyer of goods. The opening bank plays the first step in the whole process of letter of credit.  TO :( NAME & ADDRESS OF ADVISING BANK ) This clause shows the details of bank which plays the foremost role in the process of letter of credit. The advising bank belongs to the country of seller. It plays the role of middleman between the seller and the opening bank  TYPE OF L/C :IRREVOCABLE This clause shows the type of L/C in which it is being made. Various types of L/C’s are Revocable, Irrevocable, Commercial, Negotiable etc.  L/C Number : The clause shows a particular number for L/C and every L/C has different number so that difference can be judged between different L/C’s.  DATE OF ISSUE : In Industry Project Report 12
  13. 13. This clause shows that date on which the opening bank has issued the L/C. DT. & PLACE OF EXPIRY : __________________________________IN INDIAThis shows about the date and the place in india where the lc will get expired, meansthat financial institution where the L/C is send by the opening bank. NAME & ADDRESS OF THE:APPLICANTIt contains detail about the buyer of the goods. It gives complete address of the buyer. NAME & ADDRESS OF THE:BENEFICIARYIt shows details of the seller of goods, like seller’s name, address, country to which hebelongs. AMOUNT OF CREDIT IN : US DOLLARS /EURO/ANY OTHER FREELY EXCHANGEABLE CURRENCY (IN FIGURES & WORDS)It shows the currency in which the deal is been made, the code for that currency aswell as the amount of the goods PERCENTAGE CREDIT : AS PER CONTRACTAMOUNT TOLERANCESometimes the amount in the letter of the credit and the exact amount of the goodsdoes not match. There can be a difference between the both. So a specific percentage In Industry Project Report 13
  14. 14. of amounts of goods specified in L/C is given as a tolerance and the exact amount ofgoods can be in between the minimum and maximum tolerated limits. CREDIT AVAILABLE WITH:This part shows the details of that party from where the amount can be reimburses bythe seller. This state’s either a specified bank in India or any bank in India. USANCE OF THE DRAFTS :This clause shows whether the draft is payable at sight or at any date in future. DRAFTS TO BE DRAWN ON:It tells about the party which acts as a drawee. Generally the opening bank acts as adrawee PARTIAL SHIPMENT : AS PER CONTRACTThis clause contains details whether the shipment of goods is allowed through oneshipment or the goods can be sending through various shipments. TRANSHIPMENT : AS PER CONTRACTTransshipment means when the goods are send, SHIPMENT FROM :It tells about that place from where goods are send by the seller. SHIPMENT TO :It’s that place where the goods are sending by the seller. And generally its that countrywhere the buyer lives. In Industry Project Report 14
  15. 15.  LATEST SHIPMENT DATE : It’s that date till which the goods should reach to the buyer. After that date, it’s the choice of the buyer whether he accepts the goods or not.  DESCRIPTION OF GOODS :  Description of Materials  Size ( in mm) and Quantity (in MT)  Specification  Tolerance  Quantity  Quantity Tolerance  Price per MT (in USD/Euro/any other freely exchangeable currency)  DOCUMENTS REQUIRED :Beneficiary’s Commercial Invoice - one original plus two signed copies coveringmaterials shipped. Invoices will be raised on the basis of (THEORETICAL/ ACTUAL/DRAFT SURVEY) WEIGHT. In Industry Project Report 15
  16. 16. L/C in VardhmanIn this system , first corporate centralized market Yarn department advices a branch tomake sale of yarn through letter of credit In case of those customers who are either newfor a organization whose credit worthiness is not satisfactory according to marketresearch reportNOTEAll L/C of Yarn division is deal by State bank of PatialaThereafter on the basis of instructions sent by CMY department, the branch advise thecustomers to open the L/C with the bank. Some of the common points stated in th L/C arementioned below:  Prorate shipment  Transshipment  Shipment date  Expiry period of L/C  Usance period  Rate of interest for the usance period  Other conditions as per mutual consent between buyer and seller After opening the L/C concerned unit makes the sale to the customers as per agreed terms and conditions stipulated in the L/C. Then concerned unit sent the invoice and other papers to the centralized accounting cell for lodging the documents with the bank.. This documents consists of  Bill of exchange In Industry Project Report 16
  17. 17.  Original invoice  Original G/r copy  Packing list  Copy of L/COn the Due date mentioned in the L/C, we receive the realization advice from the bank,where we have lodged the document drawn under L/C. after getting the advice from thebank, we credit the customers with the amount we have realizedDOCUMENTS NEED FOR L/CLetter of credit documents are required to be arranged in the following series:By seller (duplicate documents) Bill of exchange Bill Goods lorry receipt Party acceptance letter Debit note Packing list Original letter of creditBy seller’s bank (Duplicate documents) Letter Bill of exchange Bill Goods lorry receipt Party acceptance letter Debit note Packing list In Industry Project Report 17
  18. 18.  Letter of credit (duplicate)By buyer’s bank (Original documents)  Bill of exchange  Bill  Goods lorry receipt  Party acceptance letter  Debit note  Packing list  Letter of credit (DUPLICATE)  BILL OF EXCHANGEA non- interest bearing written order used primarily in international trade that binds oneparty to pay a fixed sum of money to another party at a predetermined future dateIt’s an unconditional order issued by a party or business which directs the recipient to paya fixed sum of money to a third party at a future date. The future date may b either fixed ornegotiable. A bill of exchange must be in writing and signed and dated also called draftNegotiation of letter of creditNEGOTIABLE means the ability to be sold or transfers to another party as a form ofpayment. Something which is negotiable is transferable by endorsement and delivery.(When documents come back from bank).JOURNAL ENTIRESIN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2…. PARTICULARS L.F DEBIT CREDIT (RS) (RS) In Industry Project Report 18
  19. 19. Particular bank a/c……………………………Dr XXXXInterest on inland bill discount a/c…………….Dr XXXX To inland bill discount a/c (BEING Negotiation of ibdno……….on dated……. XXXXInland bill discount charges a/c………………..Dr To bank a/c XXXX (BEING INALND BILL DISCOUNTING CHGS DR BY BANK ON DATED ……….AGST IBD NO…… XXXX How interest is calculated? Total bill of exchange amount * rate of interest* number of days in Bill of exchange. Rate of interest is 11.5% (according to STATE BANK OF PATIALA) Number of days is calculated as per the conditions laid down IN L/C AGREEMENT Realization of bill of exchange JOURNAL ENTIRES IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2…. PARTICULARS L.F DEBIT(RS) CREDIT (RS) In Industry Project Report 19
  20. 20. I inland and bill discounting a/c………Dr XXXX To party account XXXX (BEING REALISATION OF IBD NO, AGST INV NO…….ON DATED…….) • At the time of realisation of L/C there may be over due days Bank will charge over due interest against late payment according to number of days  Fully payment but late payment (overdue interest charged by bank) JOURNAL ENTIRES IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2….PARTICULARS L.F DEBIT(RS) CREDIT (RS) Party a/c …………………………..Dr XXXX To bank XXXX ( BEING AMOUNT OF OVERDUE INTEREST DEBITED TO PARTY ACCOUNT AGST IBD NO. ON DATED ……..) In Industry Project Report 20
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  22. 22. INTRODUCTION TO WORKING CAPITAL In Industry Project Report 22
  23. 23. Working Capital is life blood and nerve centre of a business. Just as circulation of blood isessential for the survival of the human being similarly working capital is necessary for thesurvival of every business organization, whether it is a small organization or a bigorganization.Every business needs funds for two purposes-for the establishment and to carry out its dayto day operations. Long terms funds are required to create production facilities throughpurchase of fixed assets such as plant & machinery, land & building, furniture & fixturesetc. Investments in these assets the present that part of the firm’s capital, which is blockedon a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes as for the purchase of raw material, payment of wages & other day to dayexpenses etc. these funds are known as working capital.Before discussing about the working capital management of VARDHMAN TEXTILESLIMITED, we should know the meaning, definition and different concepts of workingcapital.MEANING OF WORKING CAPITALIn simple words, working capital refers to that part of the firm’s capital which is requiredfor financing short term or current assets such as, cash, marketable securities, debtors, andinventories or in other words the working capital is the excess of current assets overcurrent liabilities. In Industry Project Report 23
  24. 24. CLASSIFICATON OR KINDS OF WORKING CAPITALWorking capital may be classified in two ways: a) On the basis of concept b) On the basis of timeOn The Basis Of ConceptOn the basis of concept, working capital is classified as gross working capital and networking capital. This classification is important from the point of view of the financialmanager.Gross working capital: - This is a wider term in a relation to the working capital. Itincludes all current assets. Thus the gross working capital is the capital invested in totalcurrent assets of the company. Examples of current assets are: 1. Cash in hand and Bank 2. Bill Receivables 3. Sundry Debtors 4. Short Term Loan & Advances 5. Inventory of Stock 6. Prepaid expenses Gross Working Capital = Total Current Assets In Industry Project Report 24
  25. 25. ON THE BASIS OF TIME, WORKING CAPITAL MAY BE CLASSIFIED AS:  Permanent or fixed working capital  Temporary or variable working capitalPERMANENT OR FIXED WORKING CAPITAL: Permanent working capital is theminimum amount which is required and ensures effective utilization of fixed facilities andor maintaining the circulation of current assets. There is always a minimum level ofcurrent assets which is continuously required by the enterprise to carry out its normalbusiness operations. For example, work-in-progress, finished goods and cash balance.This minimum level of current assets is called permanent working capital as this part ofthe capital is permanently blocked in current assets. As the business grows, therequirements of permanent working capital also increase due to the increase in currentassets.TEMPORARY OR VARIABLE WORKING CAPIAL: Temporary working capital isthe amount of working capital which is required to meet the seasonal demands and somespecial exigencies. Variable working capital can be further classified as seasonal workingcapital and special working capital. Most of the enterprises have to provide additionalworking capital to meet the seasonal and social needs. The capital required to meet theseasonal needs of the enterprise is called seasonal working capital. Special working capitalis that part of working capital which is required to meet exigencies such as launching ofextensive marketing campaign for conducting research, etc In Industry Project Report 25
  26. 26. FACTORS DETERMINING THE WORKING CAPITALThe working capital requirement of the concern depends upon a large numbers of factorssuch as nature and the size of business, the character of their operations, the length ofproduction cycles, the rate of stock turnover and the state of economic situation. It is notpossible to rank them because all such factors are of different importance and influence ofindividual factor changes for a firm overtime. However, the following are importantfactors generally influencing the working capital requirements.  Nature and character of business.  Size of businessscale of operation.  Production policy.  Manufacturing processlength of production cycle.  Seasonal variation.  Working capital cycle.  Rate of stock turnover.  Credit policy  Business cycle.  Rate of growth of business.  Earning capacity and dividend policy.  Price level changes.  Other factors. In Industry Project Report 26
  27. 27. IMPOTANCE OF ADEQUATE WORKING CAPITALWorking Capital is the blood and the nerve centre of business. Just as the blood circulationis essential in the human bodies for maintaining life, working capital is very important tomaintain the running of business. No business can run successfully without an adequateamount of working capital.The advantages are as follows:  Solvency of the business. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.  Goodwill. Sufficient working capital enables a business concern to make prompt payments.  Easy loan. A concern having adequate working capital high solvency and good credit standing can arrange loans from banks and others on easy terms.  Cash discounts. Adequate working capital also enables a concern to avail cash discounts on the purchase and hence it reduces costs.  Regular payments of salaries, wages and other day to day commitments. A company which has adequate working capital can make regular payments of salaries, wages and other day to day commitments with raises the morale of its employees, increases their efficiency, reduces wastages and enhances production and profits.  Exploitation of favorable market conditions. Only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirement in bulk when the prices are lower and holding its inventory for higher prices.  Ability to face crises. Adequate working capital enables the concern face business crises in emergencies such as depression because during such periods, generally, there is much pressure on working capital In Industry Project Report 27
  28. 28. THE NEED OF WORKING CAPITALThe need for working capital cannot be over emphasized. Every business needs someamount of working capital. The need for working capital arises due to the time gapbetween the productions and realized of cash from sales. There is an operating cycleinvolved in sales and realization of cash. There are time gaps in purchase of raw materialand production; production and sales; and realization of cash.Thus, working capital is needed for the following purposes:  For the purchase of raw materials, components and spares.  To pay wages and salaries.  To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc.  To meet the selling costs as packing, advertising, etc.  To maintain the inventories of raw material, work-in-progress, stores and spares and finish stock.  To provide credit facilities to the customers.OPERATING CYCLE OF VARDHMAN TEXTILES LIMITED In Industry Project Report 28
  29. 29. The operating cycle refers to the length of the length of time between the firms paying thecash for the material, entering into the production processstock and the inflow of cashfrom debtors. There is a complete cycle from cash to cash where in cash gets convertedinto raw material, work-in-progress, finished goods debtors and finally in cash. Short-termfunds are required to meet the requirements of the funds during this time period this timeperiod depends on the length of time within which the original cash gets converted intocash again. The determination of working capital cycle helps in the forecast, control andmanagement of working capital. It indicates the total time lag and the relative significanceof constituent parts. FINISHED GOODS WORK-IN-PROGRES DEBTORS RAW MATERIAL CASH In Industry Project Report 29
  30. 30. THE OPERATING CYCLE CONSISTS OF FOLLOWING EVENTS, WHICHCONTINUES THROUGHOUT THE LIFE OF BUSINESS.  Conversion of cash to raw material.  Conversion of raw material to work in progress.  Conversion of work in progress into finished goods.  Conversion of finished goods into accounts receivable.  Conversion of accounts receivable into cash.FINANCING BY THE WORKING CAPITAL REQUIRMENTS BY BANKSThe bank credit is the primary institutional source of working capital finance. The bankprovides finance through loan agreements, overdrafts, cash credit, purchasing of bills, andterm loans. Banks have been certain norms in granting working capital finance tocompanies. These norms have been greatly influenced by the recommendation of variouscommittee appointed by RESERVE BANK OF INDIA from time to time.VARDHMAN TEXTILES LIMITED finance his working capital from the different bankslike ICICI BANK, STATE BANK OF INDIA, ALLAHABAD BANK,PUNJABNATIONAL BANK. Company finances the amount according to its need according to itsneed of working capital requirement. In Industry Project Report 30
  31. 31. WORKING CAPITAL LIMITS FROM SCHEDULED BANKS FOR YEAR2007-08 BANKS RS State Bank of Patiala 5 crore Punjab National Bank 5 crore Allahabad Bank 50 crore ICCI 5 crore In Industry Project Report 31
  32. 32. NET WORKING CAPITALNet working capital is the difference between the current assets and the current liabilities.Therefore it is called net working capital. When current assets exceed current liabilitiesthen the working capital is positive otherwise negative. Examples of current liabilities.  Bill Payable  Sundry creditors  Outstanding expenses  Short term loans  Dividend payable  Bank overdraft In Industry Project Report 32
  33. 33. In Industry Project Report 33
  34. 34. REVIEWS1. Bergami Robert (2007) analysis that that international trade transactions carry inherently more risk than domestic trade transactions, because of differences in culture, business processes, laws and regulations. It is therefore important for traders to ensure that payment is received for goods dispatched and that the goods received and paid for comply with the contract of sale. One effective way of managing these risks has been for traders to rely on the letter of credit as a payment method. However for exporters in particular, the letter of credit has presented difficulties in meeting the compliance requirements necessary for the payment to be triggered. The current rules that govern letter of credit transactions(UCP 500) have been under review for the past three years and an updated set of rules (UCP 600) is expected to be introduced on 1July 2007. This paper focuses on the changes mooted for 2007and compares these main issues with the existing rules and other associated guidelines and regulations governing this method of payment. This paper considers the implication to changes of letter of credit transactions and the sharing of risk. Firstly the paper provides some background to letters of credit, then comments on existing literature and models, and subsequently an analysis of the most important changes to the existing rules, before reaching a conclusion. The conclusion is that the UCP 600 have not paid enough consideration to traders and service providers and are likely to engender an environment of uncertainty for exporters in particular.2. Dolan John (2007) analysis that The Law of Letters of Credit – Commercial and Standby Credits is the four the Edition of a traditional treatise on a rather narrow legal subject. Letters of credit fall into two categories: (1) commercials, which find use in international sales; and (2) standbys that are a common device in many domestic transactions. As international trade becomes more and more rationalized, the use of commercials has diminished; but the use of the standby has enjoyed something of a In Industry Project Report 34
  35. 35. boom, for it accomplishes much that security interests, surety ship arrangements, and other credit enhancing devices accomplish and does it with significantly lower transaction costs. Regrettably, the parties using letters of credit often are unaware of the credit’s legal significance. This treatise covers the legal features of the commercial and the standby, all in a global context. While it is codified to some extent in the Uniform Commercial Code, the law of letters of credit is largely the law merchant, the is gentium; and the UCC defers in many respects to international rules. Thus, the treatise deals with those international rules and cites cases from virtually all of the common-law jurisdictions in an effort to provide complete coverage of the field.3. Padachi Kesseven (2006 ) analysis that A well designed and implemented working capital management is expected to contribute positively to the creation of a firm’s value The purpose of this paper is to examine the trends in working capital management and its impaction firms’ performance. The trend in working capital needs and profitability of firms are examined to identify the causes for any significant differences between the industries. The dependent variable, return on total assets is used as a measure of profitability and the relation between working capital management and corporate profitability is investigated for a sample of 58small manufacturing firms, using panel data analysis for the period 1998 –2003. The regression results show that high investment in inventories and receivables is associated with lower profitability. The key variables used in the analysis are inventories days, accounts receivables days, accounts payable days and cash conversion cycle. A strong significant relationship between working capital management and profitability has been found in previous empirical work. An analysis of the liquidity, profitability and operational efficiency of the five industries shows significant changes and how best practices in the paper industry have contributed to performance. The findings also reveal an increasing trend in the short-term component of working capital financing. In Industry Project Report 35
  36. 36. 4. Klien Carter (2005) studied that For a relatively small fee and assuming sufficient collateral or creditworthiness of the tenant or a guarantor, a tenant may be able to apply for and have its bank issue to its landlord a letter of credit (“L/C”) to secure the tenant’s obligations under a long-term lease. If the L/C is large enough, the landlord may enter into a lease with a tenant that the landlord would otherwise refuse due to the tenant’s lack of creditworthiness. From the tenant’s perspective, an L/C may be preferable to a large security deposit. An L/C will not necessarily tie up large amounts of the tenant’s cash or other liquid collateral, as would a security deposit. Instead, the cash can be deployed as working capital in the tenant’s business. An L/C is an independent obligation of the issuer. As long as conforming documents specified by the terms of theL/C is presented to the issuer before the expiration date and no fraud is involved, theissuer must honor. The credit of the issuer stands behind the obligation of the tenant. If thetenant is insolvent and/or bankrupt, the issuer still must honor the beneficiary’sconforming draws. Rights the landlord will lose if the L/C draw is enjoined and the creditexpires. This two-part article provides tips for drafting L/Cs. Part one includes adiscussion of using the International Standby Practices, keeping the draw condition ssimple and allowing partial draws conclusion addresses issues such as providing coverageof the settlement period after lease termination; shortening pitfalls is eliminated.. Theconclusion of this article will provide six more drafting tips and a discussion of the issuingbanks’ concerns.5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios (2004) analysis that the relationship of corporate profitability and working capital management. We used a sample of 131 companies listed in the Athens Stock Exchange (ASE) for the period of 2001-2004. The purpose of this paper is to establish a relationship that is statistical significant between profitability, the cash conversion cycle and its components for listed firms in In Industry Project Report 36
  37. 37. the ASE. The results of our research showed that there is statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. Moreover managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level.6. Schelin Johan (2004) studied that This thesis give a historical introduction in foreign trade and letters of credit. The reasons for using letters of credit will be shown. The legal relationships of the concerned parties will be analysed. The doctrine of strict compliance will be explained. Then problems will be worked out: the different interpretation of strict compliance, the fraudulent exception and questions of liability if the doctrine of strict compliance was not carefully used. The thesis bases on German law, but tries, whenever useful, to compare with law of other countries and / or International law. At the end of the thesis a critical outlook will follow. The analyse of problems concerning the strict compliance lead to the result that still today, about 100 years after letters of credit became a common method to pay, problems exist. One of these problems is the different interpretation of courts in different countries. Especially the considerations of German courts that strict compliance must be interpreted in the frontiers of good faith and that letters of credit must be interpreted as will declarations.7. Shelton Fred (2002) studied that Working capital, an important liquidity indicator, has historically been a major benchmark of the surety and credit-granting institutions. In today’s environment, because of the tight bond and credit markets, both institutions are scrutinizing the amount and quality of working capital more than ever. The fewer resources that need to be invested in working capital, after recognizing liquidity risk, the better. In Industry Project Report 37
  38. 38. 8. Weinraub Herbert, Visscher Sue (1998) studies that This study looked at ten diverse industry groups over an extended time period to examine the relative relationship between aggressive and conservative working capital practices. Results strongly show that the industries had significantly different current asset management policies. Additionally, the relative industry ranking of the aggressive/conservative asset policies exhibited remarkable stability over time. Industry policies concerning relative aggressive/conservative liability management were also significantly different. Interestingly, it is evident there is a high and significant negative correlation between industry asset and liability policies. Relatively aggressive working capital asset management seems balanced by relatively conservative working capital financial management.9. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting process. It has shown that it is reasonable to expect that the cost of capital will increase at the same rate as the rate of inflation on an ex ante basis, and that this increase will be a multiplicative relationship. In addition, the paper has shown that the capital budgeting process is not neutral with respect to inflation, even if output prices rise at the same rate as costs. Of critical importance is the degree of net working capital as a proportion of the overall financing required, the higher the net working capital the greater being the impact of inflation on capital spending. Finally, it would appear that corporate financial behavior is influenced by inflation. Inflation will cause the firm to reduce its capital budget, to attempt to reduce net working capital, and to alter the debt/asset ratio using short term debt, thus driving up short term rates relative to long term rates. In Industry Project Report 38
  39. 39. In Industry Project Report 39
  40. 40. About Vardhman GroupVardhman is a major integrated textile producer in India. The Group was setup in 1965at Ludhiana, Northern India. Since then, the Group has expanded manifold and is today,one of the largest textile conglomerates in India. The Group portfolio includesManufacturing and marketing of Yarns, Fabrics, Sewing Threads, Fiber and Alloy Steel.The group started its corporate journey with an installed capacity of 6000 spindles in1965 under the flagship company Vardhman Spinning & General Mills Limited (nowknown as Vardhman Holdings Limited and is an investment arm of the Group) inLudhiana. Over the years the group has expanded its spinning capacities besides addingnew businesses. The group has also diversified into yarn processing, weaving, AndSewing Thread, fabric processing, acrylic fiber manufacturing and into special/ alloysteels. Today, close to 20,000 people are the Organization is most important asset itshuman capitalThe Vardhman group comprises of three listed and two unlisted companies-Listed CompaniesListed companies  Vardhman Textiles Limited (formerly Mahavir Spinning Mills Limited)  Vardhman Acrylics Limited  Vardhman Holdings Limited1 (formerly Vardhman Spinning & General Mills Limited)Unlisted CompaniesVMT Spinning Company LimitedVardhman Threads Limited In Industry Project Report 40
  41. 41. LOGO OF VARDHMAN GROUPThe “Flame” signifies growth i.e. growth of the company along with the growth of eachand every individual associated with it whether he/she is a worker , a white collaremployee, a shareholder or a customer.The “Stick” symbolizes cotton that is the basic raw material of the core product ofVardhman. The “V” stands for the Vardhman Group. In Industry Project Report 41
  42. 42. HISTORYThe industrial city of Ludhiana, located in fertile Malwa region of central Punjab is knownas the “MANCHESTER OF INDIA”. Within the precincts of the city is locatedThe corporate head quarters of Vardhman group, A household name in northern India.The Vardhman group , born in 1965 under the entrepreneurship of late Lala Rattan ChandOswal has today blossoms into the one of the larger textile business houses in India .At its inception, vardhman has installed capacity of 14000 spindles. Today: its capacityhas increase multifold to over 5.5 lacs spindles. In 1982 the group enters sewing threadsmarket in company, which was the forward integration of business. In 1990, it undertookyet another diversification – this time into the weaving business. The grey fabric weavingunit at Baddi, commissioned in 1990 with a capacity of 20,000 meters per day , hasalready made its mark as a quality producer of grey poplin, sheeting, shirting in thedomestic as well as foreign market . This was followed by entry into fabric processing bysetting up of AURO TEXTILES at BADDI, which currently has a processing of 1,00,000meters per day. In the year 1999, the group has added yet another feather to its cap with asetting of VARDHMAN ACRYLICS LTD in. The company also has a strong presence inthe markets of JAPAN, HONG KONG, KOREA, and UK & EUROPE in addition to thedomestic market. Adherence to systems & true dedication to quality has resulted inobtaining the coveted ISO 9002/ISO 14002 quality awards which is the first intextileindustry. In Industry Project Report 42
  43. 43. PHILOSHOPHY Faith in bright future of Indian textile industry & hence continues expansion areas “which we know best”. Total customer focus in all operational areas Products to be of best available quality for premium market segments through TQM & ZERO DEFECT implementation in all functional areas. Global orientation targeting- at least 20% production for exports. Integrated diversification/ product range expansion World class manufacturing facilities with most modern R&D & process technology Faith in individual potential respect for human values Encouraging innovation for constant improvements to achieve excellence in all functional areas Appreciating our role as a responsible corporate citizen. MISSIONVARDHMAN aims to be a WORLD CLASS TEXTILE organization producing diverserange of products for the global textile market. VARDHMAN seeks to achieve customerdelight through excellence in manufacturing & customer service based on creative In Industry Project Report 43
  44. 44. combination of state- of – the- art technology & human resources. VARDHMAN iscommitted to be responsible corporate citizen BOARD OF DIRECTORS Vardhman Textiles Limited Shri Paul Oswal - Chairman & Managing Director Ajay Kumar Chakraborty - (Nominee of ICICI Bank Ltd.) Vinod Kumar Saxena - (Nominee of IDBI) Arun Kumar Purwar (Dr.) Triloki Nath Kapoor Prafull Anubhai Surinder Kumar Bansal Subash Khanchand Bijlani Darshan Lal Sharma Sachit Jain - Executive Director Vardhman Holdings Limited Shri Paul Oswal - Chairman Surinder Singh Bagai Jagdish Rai Singal Chaman Lal Jain Ram Swarup Gupta Bal Krishan Arora Sat Pal Kanwar Sachit Jain Shakun Oswal Suchita Jain Vardhman Acrylics Limited Shri Paul Oswal - Chairman Sachit Jain Darshan Lal Sharma Sudeshkumar Ganpatrai Gulati Sanjit Paul Singh Munish Chandra Gupta In Industry Project Report 44
  45. 45. (Dr.)Arvind Kumar BakhshiBal Krishan Choudhary - Managing Director Organisational hierarchy chart CHAIRMAN –CUM-MANGING DIRECTOR CORPORATE GENERAL MANAGERS VICE PRESIDENT MANAGERS (M1-M4) EXECUTIVES (E1-E2) OFFICERS (O1-O2) STAFF (S1-S4) In Industry Project Report 45
  46. 46. SUBSTAFF AWARDS AND ACHIEVEMENTSVardhman Spinning and General Mills Ltd. was the 1st textile company to be awardedISO-9002 and ISO-14002 certificate in 1993.  It is the largest manufacturer and exporter of cotton yarn from India.  It is the second largest producer of sewing threads in Indi  It is a larger producer of acrylic fiber and finished fabricsTextile Export Promotion Council 2003-04Gold trophy in EOU/EPZ for export of cotton yarnTextile Export Promotion Council 2003-04Bronze trophy in mill fabric exporter categoryTextile Export Promotion Council 2002-03Gold Trophy in EOU/EPZ for export of cotton yarnTextile Export Promotion Council 1998-99Silver TrophyTextile Export Promotion Council 1997-98Bronze TrophyTextile Export Promotion Council 1996-97Silver TrophyGovt. of India Award 1994-5, 1995-96Award of Merit In Industry Project Report 46
  47. 47. Textile Export Promotion Council 1993-94(Merchant Export Category for Fabrics)Bronze TrophyTextile Export Promotion Council 1993-94(Merchant Export Category for Fabrics)Gold Trophy GROUP OF COMPANIES In Industry Project Report 47
  48. 48. BUSINESS OF VARDHMAN GROUPVardhman Group consists of 5 SBUs spread across 9 manufacturinglocations In Industry Project Report 48
  49. 49. ST Steel Y Yarn C Cotton Yarn F FabricSpinning Business (Y)Vardhman Spinning & General Mills Ludhiana, PunjabAuro Spinning Baddi, HPArihant Spinning Malerkotla, PunjabArisht Spinning Baddi, HPGas Mercerised Yarn Business Hoshiarpur, PunjabAuro Dyeing Baddi, HP In Industry Project Report 49
  50. 50. Anant Spinning Mandideep, MPVardhman Spinning & General Mills (Export Oriented Unit) Baddi, HPVMT Baddi, HPVardhman Yarns Satlapur, MP Fabric Business (C)Auro Weaving Baddi, HPMSML Textiles Division Baddi, HPAuro Textiles Baddi, HPVardhman Fabrics Budhni, MPSewing Thread Business (ST)ST-I Hoshiarpur, PunjabST-II Ludhiana, PunjabST-III Perundurai, TNVardhman Threads Limited Baddi, HPVardhman Special Steels (S) Ludhiana, PunjabVardhman Acrylics Limited (F) Bharuch, GujaratMARKET SHARE OF VARDHMAN TEXTILES LIMITED In Industry Project Report 50
  51. 51. Spinning BusinessSpindle CapacityExisting About 600,000Post Expansion 800,000Fabric BusinessFabric Production in Lac (100 thousand) Metres/MonthAuro Textiles (Existing) 42Post Expansion 85-90Sewing Thread BusinessProduction in Metric Tonnes/DayTotal 28.30Dyeing (Yarn & Fibre) & MercerisingProduction in Metric Tonnes/DayTotal 54.5Steel BusinessProduction in Metric Tonnes/AnnumSMS 100000Rolling Mill 84000Acrylic Fibre BusinessProduction in Metric Tonnes/AnnumTotal 18500 In Industry Project Report 51
  52. 52. PRODUCT RANGE YarnsThe group is one of the largest spinning group of the country with a spindlier of over5, 50,000. The group has 12 production plants located in the states of Punjab, HimachalPradesh and Madhya Pradesh. In many of the yarn market segments, Vardhman holdsthe position of market leader besides being a large and reliable supplier in the country.Vardhman is also the largest exporter of yarn from India. The group yarn exports amountto over US$ 100 million covering the most quality conscious markets in theworld. Thetotal export of Cotton yarn of the group is about 6% of total export of cotton yarn fromthe country. Sewing ThreadsVardhman entered the Sewing thread business in 1982 as a forward integration to itsyarn business. The group had to struggle for survival being pitted against a largemultinational organization. Today with approximately 25 metric tonne/per day of sewingthread manufacturing capacity in its plant at Hoshiarpur, Ludhiana, Baddi & Perundurai.Vardhman threads have emerged as second largest sewing thread brand in the country. In Industry Project Report 52
  53. 53. Processed FabricIn its quest for further value addition Vardhman started fabric processing in 1999.Vardhman established a modern fabric process house in 1999 with a capacity of 30million meters per annum. This capacity has been expanded to 42 meters per annum inFY 2005-06. A Vardhman fabric is dedicated to meet customer demand for top qualityfinished fabric through product innovation, world class quality, state-of-art technologyand excellence in service. FibreIn 1999 the group set up an Acrylic staple fibre plant at Bharuch in Gujarat incollaboration with Marubeni and Japan Exlan of Japan. The plant has annual capacity of18500 metric tonnes per annum. SteelThe steel business was setup in 1973 as diversification with a capacity of 35000 milliontones per annum. Later on group acquired a steel plant from Mohta Group of Industriesin 1988 and converted this loss making unit into a profitable business in first year ofoperation with the Group. Subsequently the steel mill has been modernized andexpanded to a capacity of 100000 million tonnes per annum. Catering to high technologyQuality conscious alloy steel segment, the unit has a reputation of being a dependable In Industry Project Report 53
  54. 54. source of supply of special and alloy steel to Indian/International standards.FINANCIAL STATUSPARTICULARS SALES REVENUE (RS CRORE)Yarns 102873.31Sewing thread 29634.83Steel 34702.19Fabric 33239.58% SALES REVENUE fabric, 13% steel, 15% yarns , 57% sewing thread, 15% In Industry Project Report 54
  55. 55. FINANCIAL PERFORMANCE OF THE COMPANY1.1 TABLE SHOWING FINANCIAL REULTS IN 07-08 (IN BILLIONS)Company Turnover Operating Profit Profit after Tax Operating MarginVTEX 23.46 3.87 1.22 17%VAL 2.28 0.32 0.05 14%VMT 0.89 0.17 0.09 19%VYTL* 0.29 0.08 0.06 27%Vardhman Group 26.92 4.44 1.42 16%1.1 GRAPH SHOWING TURNOVER AND PROFITS OF VARIOUSCOMPANIES OF VARDHMAN In Industry Project Report 55
  56. 56. INTRODUCTION TO FINANCE DEPARTMENTEvery company is required to maintain proper books of account to record all thetransactions in the course of its business operations .it is necessary that the transactionsshould be properly accounted for in the books of account so that they give a true and fairview of the state of affair of the business.Accounting is a service activity. Its function is to provide quantitative informationprimarily of financial nature about economic entities that is intended to be useful inmaking economic decision, in making reasoned choices among alternative course ofactionAccounting records only monetary transactions. Events of transactions which can not beexpressed in money, do not find place in the booked of account though they may be veryuseful for the business.The life of the business is divided in to appropriate segments for studying the resultsshown by the business after each segment. this is because though life of the business isconsiders to be indefinite ,the measurement of the income and studying the financialposition of the business after a very long period would not be helpful in taking propercorrective steps at the appropriate time . It is therefore, necessary that after each segmentor time interval the businessman must stop and see back how things are going. inaccounting such a segment or time interval is called accounting period it is usually of ayear started from April and ended on March.At the end of each accounting period an income statement and balance sheet areprepared. The income statement discloses the profit & loss made by the business duringthe accounting period while balance sheet depicts the financial position of the businessas on the last day of the accounting period. While preparing these statements a proper In Industry Project Report 56
  57. 57. distinction has to be made between capital expenditure and revenue expenditure .theaccounting statements help the management in making rational decisions.The main object of running the business is to earn profits. in order to ascertain the profitsmade by the business during a period. Is necessary that revenue of the period should bematched with the cost/ expenditure of that period .in other words ,income made by thebusiness during a period can be measured only when the revenue earned during a periodis compared with the expenditure incurred for earning the revenue.The information contained in the published financial statements is of the paramountimportance to external users viz shareholders, creditors, banker’s etc. in order that theusers rely upon this information, is necessary that the information contained in thefinancial statements is logical, consistent, fair. It is the responsibility of the accountingprofession to ensure that the information presented satisfies the above requirements.there should not be too much discretion to the firms and their accountants to present thefinancial information the way the y like, since this would greatly undermine theconfidence of the public in the financial statements presented by the different firmsKeeping the above fact in mind there have been efforts at the international level to bringsabout uniformity in the presentation of the financial statements by formulating andadopting international accounting standards.Thus the role of accounting is to provide an effective measurement and reporting system.This is possible only when accounting is based on certain coherent set of logicalprincipals that forms the general frame of reference for evaluation and development ofsound accounting practicesVardhman Spinning & General Mills, finance department is headed by Mr. BhushanPunj (Chief Manager, Commercial fianance); Mr. Munish Jain (manager) .all theworking of the finance department is done through ERP (Enterprise Resource Planning)system, which was installed in August 2003 In Industry Project Report 57
  58. 58. NEED OF FINANCE DEPARTMENTEconomic activities are those which includes buying and selling of goods and servicesfor purpose of profit. These activities are related to business. The main objective of thebusiness is to earn profits. This exchange is termed as TRANSACTION. A transactionmeans a transfer from one person to another in money or money’s worth. Hence,exchange of money, goods or services between persons or parties is known to haveresulted in a transaction. In each organization transactions are effected. The goods arepurchased from one market at a certain rate and then these goods are sold in anothermarket at higher price. However , in some cases organizations incur some losses insteadof profits, which may occur due to any reasons. So to achieve the purpose of recording awill devised system plays a dominant role in an organization.In VARDHMAN SPINNING AND GENERAL MILLS there is a finance departmentheaded by Mr.Bhushan Punj. ERP system is installed to deal with the finance problemsand to derive the maximum benefits of ERP system a concept of ‘ CENTRALISEDACCOUNTING CELL’. Under this concept of centralization, all types accounting ofDebtors and Creditors of all units at one single platform i.e. at accounts departmentVARDHMAN Ludhiana. The basic reason behind its implementation was to improve theaccounting relating to the customers and suppliersCENTRALISED ACCOUNTING SYSTEMCentralized Accounting System means the accounting system, which is maintainedcentrally for the units or branches located at different locations. With this system, the In Industry Project Report 58
  59. 59. company can maintain the accounts for the different units at the head office or the desired place where ever they want to keep those. In VARDHMAN TEXTILES LIMITED, LUDHIANA, they have the centralized accounting cell at there corporate office. This office is situated at Vardhman Spinning & General Mills, Ludhiana. The corporate offices as well as the accounts department, which controls the centralized accounts, are situated in this. This computerized centralized accounting cell has four departments and they performed there specialized type of functions only as specified by the management which can be altered time to time as per the need of the organization or as the organization suits better, which are shown as under: Accounts Department Accounts Payable ACP Accounts Receivable ACRBusiness Planning Exports Import CellControl System EXIM Cell BPCS In Industry Project Report 59
  60. 60. ACR OverviewAccounts Receivable is the amount owed to a company from customers who havepurchased goods or services on credit.Account Receivable is a multi-company and open item debtors system and is fullyintegrated with Configurable Enterprise Accounting (General Ledger). Customeraccounts can be maintained for one or multiple companies. Every invoice or paymenttransaction can be stored separately, enabling individual payments to be appliedagainst individual invoices for the customer. Unpaid or partially paid invoices remainon file until paid or written off. Accounts Receivable collects and reports informationto assist in collecting receivables, assessing credit and reducing bad debt. It generatesan audit report during each transaction posting session indicating that all transactionsare posted during the session.ACR application consists of following applications:ACR Setup - This includes defining various types of system parameters and masterfiles required for implementation of BPCS ACR module. In Industry Project Report 60
  61. 61. ACR Processing – This includes on-line data entry/maintenance related to customerpayments, debit and credit memos. It generates an audit report during eachtransaction posting session indicating that all transactions are posted correctly duringthe session.ACR Reports and Inquires – This includes aging, standard receivable reports andinquiries to assist in managing Accounts Receivable operations effectively. Process Flow ACR Cash & Memo Posting EventSetup Processing ,Bank Payment & Debit Credit Memos Configurable Ledger ACR Reports Account Inquiry In Industry Project Report 61
  62. 62. Manual Part -2 covers the ACR application and is divided into followingchapters In Industry Project Report 62
  63. 63. In Industry Project Report 63
  64. 64. Accounts Receivable Describes setups involved in setting up (ACR) Setup ACR application. ACR Processing Describes the procedures of processing payments Credit adjustments, debit adjustments and invoices. Describes inquiries related to the ACR application. Describes reports related to ACR application. Describes accounting procedure for customer collection, Debit / credit Memos and reconciliation. The glossary contains a list of terms and their Definition. ACR SetupThis chapter describes in detail various setup for system parameters and master filesrequired for implementation of BPCS ACR module. These are explained as below. In Industry Project Report 64
  65. 65. Company Master – Company master application is used to define or maintain the company information. The Company master contains the following information:• Company Number – It is a two digit numeric code.• Company Name• Address• Currency Code Every customer must have a default company number. In Vardhman setup following company codes are being used Compa Name ny Code VARDHMAN TEXTILES 20 LIMITED. 40 VMT SPINNING MILLS LTD. 50 VARDHMAN THREADS LTD. Reason Code - Reason codes are used to link a transaction in Cash and Memo posting with an event. It allows creating journal entries and posting them to General Ledger. (Described in detail in Configurable Enterprise Financial Manual Part-1). In Vardhman setup following are some examples of reason codes being used and the complete list is available in the system Unit Reas Event Name on In Industry Project Report 65
  66. 66. code Auro Spinning Mills , PBA BANK RECEIPT Baddi W PBA BANK PAYMENT W DCB DEBIT / CREDIT MEMO W G1V BY PASS JOURNAL DCustomer Type - It is a four character alphanumeric code used to combine customersinto groups. The members of a customer type group have same logical similarities, suchas geographic or industry trade classification. Customer groups are assigned by currency,therefore different customer type can be established for each currency in which thecustomer bills. In Vardhman setup following customer types is being used.Customer DescriptionTypeFBD FABRIC – DOMESTICFBE FABRIC – EXPORTSYND YARN – DOMESTICYNE YARN – EXPORTSSCD SCRAP DOMESTICWSD WASTE DOMESTICSTD SEWING THREAD – DOMESTICSTE SEWING THREAD - EXPORTS In Industry Project Report 66
  67. 67. Customer Terms - It is a two character alphanumeric code and is used to compute the due date for an invoice. The invoice due date is calculated from the invoice date. In Vardhman setup following are some examples of term codes being used and the complete list is available in the system.Bank Code – It is a three character alphanumeric code used along with company andcurrency to define a unique bank account code. At least one valid bank code must be setupbefore issue any cash payment. In Vardhman setup following are some examples of bankcodes being used and the complete list is available in the system. Document Sequence Document Prefix - It is a two character alphanumeric code assigned to different A/R transactions like payment, debit memo and credit memo. This is used to group customer transactions on different parameters like company name, unit name and type of transaction. Document Sequence - It is a sequence number automatically generated by the system for every document prefix. In Vardhman setup following are some examples of document prefixes being used and the complete list is available in the system. Co Unit Name Docum Type of Document mp ent Co Prefix de 20 VARDHMAN EV DIRECT INVOICING SPG & GENERALMILL S 20 ARISHT SPG ZB BILLING FROM SALE In Industry Project Report 67
  68. 68. MILLS DEPOT(LUDHIANA ) Customer Master – It is a six digit alphanumeric code used for unique identification of a customer. This file contains • Company code • Address • Phone Number • Fax Number • Customer Type • Payment type • Term Code • Credit Days • Credit Limit • Document Prefix • Corporate Parent (used to build the corporate parent hierarchy structure of a customer) In Vardhman setup following are the ranges used for codifying different typesof customers.Customer Custome Customer TypeFrom r To100000 150000 FABRIC – DOMESTIC150001 199999 FABRIC – EXPORTS In Industry Project Report 68
  69. 69. 200000 249999 YARN – DOMESTIC 250000 259999 YARN – EXPORT 300000 389999 HAND KNITTING YARN Customer Customer Customer Type From To 390000 393999 WASTE 394000 399999 RAW MATERIAL 400000 499999 SCRAP 500000 549999 THREADS – DOMESTIC 550000 649999 THREADS – BRANCHES 650000 659999 THREADS – EXPORT 660000 779999 THREADS - BRANCHES ACR ProcessingHere we will describe in detail the steps required to process following types oftransactions available in Accounts Receivable Application.  Create On-account payments  Apply On-account payments to existing invoices  Apply Payments to existing invoices  Create Credit Memo (without any reference to existing invoice)  Apply Credit Memo to existing invoices  Create Credit Memo against existing invoices  Create Debit Memo (without any reference to existing invoice  Apply Debit Memo to existing invoices  Create Debit Memo against existing invoices In Industry Project Report 69
  70. 70.  Convert initial open invoices to BPCS system.  Maintain Customer Invoice ACR REPORTSReport Name • Customer Outstanding Unit Wise • CMY Customer Outstanding Exception Report • Payment not received against Invoices • Customer Outstanding Invoice Wise (buckets) • Collection breakup summary • Customer outstanding (cmy) • Customer outstanding prefix wise as on date • Zone/ agent wise customer wise outstanding • Product wise outstanding • Customer wise invoice details • Sales tax return (within state & out of state), bt, consignment agents • Interest calculation • Customer wise balance confirmation letter • Cash receipt journal • Account statement • Aged trial balance- company In Industry Project Report 70
  71. 71. • Salesman/ customer wise outstanding • Customer/invoice wise outstanding • Category/customer/invoice wise outstanding • City/customer/invoice wise outstanding • Salesman/customer/invoice wise outstanding • Category/customer wise outstanding • Sister concern wise outstanding YARNThe VARDHMAN range of yarn was a humble beginning. Tree decades of hard work,commitment and constant innovation have resulted in well earn trust and goodwill of ourcustomers across the globe.At VARDHMAN we move with a notion that customer serves is a way of life. We striveto provide our customers delight with 3P service –PROMPT, POLITE&PERSONALIZEDIt today have a capacity of over half a million spindles along with two dyeing plantsbearing a capacity of more than 27 tones yarn & 22 tones fibers per day. Our goal,therefore calls for serving our customers with multiple of products meeting the mostdiverse of requirement. This, infect has position VARDHMAN as a” SUPER MARKETof high quality yarn”.YARN PRODUCTION CAPACITY In Industry Project Report 71
  72. 72. VARDHMAN GROUP has installed capacity of more than half a million spindles & outof it about 1,74,000 spindles are fully dedicated to exports only.Having built GIANT capacity in term of more than half million spindles spanned over 15units out of 4 units are dedicated to exports only (EOU) , state – of –the- art technology.Dextrose hands capable of plain rhythm with machines sourced from best availablearound the world has made VARDHMAN a gallery of variety of world CLASS yarns.EOU - 100% dedicated to exportonly • NON EOU – produce for domestic as well as for export market. YARN OPERATIONSThe unique combination of man & machine, competing & supplementing each otherwith continuos increase in productivity has enable VARDHMAN to dexterously ripe thefruit of economies of scale & process variety of raw material required for variety of endproducts to textiles.Evenness results falls in 5% to 15% of user standards achieved through Proper selection of raw materials World class Pre spinning and Spinning Facilities Techincal Know How In Industry Project Report 72
  73. 73. Human Skills 100% Quality Assurance SystemACCOUNTING PRECUDURE FOR CUSTOMERCOLLECTION (YARNS)There are three types of collections  Domestic collections  Collection under CMS  Collection through letter of credit L/CDOMESTIC COLLECTIONDomestic collection means collection, which are collected by Ludhiana branch andcorporate centralized market yarns department. in this system they collect the cheque ordemand draft from the yarns customers and handed over it over to the centralizedaccounting cell for the depositing the same in to the bank on daily basis. After receivingall cheque on a particular day the e centralized accounting cell deposit the instruments into the bank for clearing.After depositing the collections into the bank, the ACR section account for the same inrespective customer’s accounts on basis of advise sent to bank on day -to -day basis.CASH MANAGEMENT SERVICESCash management means the proper use of an entity’s cash resources . it serves as ameans to keep an organization functioning by making th best use of cash or liquid In Industry Project Report 73
  74. 74. resources of the organization . at the same time the organization have the responsibilityto use timely , reliable and comprehensive financial information system .Cash management helps the organization in:  Eliminating idle cash balances  Monitoring exposure and reducing the e risk  Ensuring timely deposit of collections  Properly timely the disbursementsCOLLECTION THROUGH LETTER OF CREDIT (L/C)A letter of credit is a document issued mostly by financial institutions which usuallyprovides an irrevocable payment undertaking to a beneficiary against complyingdocuments as stated in the credit. In Industry Project Report 74
  75. 75. OBJECTIVES OF THE PROJECT To study the working of yarn division. Knowledge of sale under Letter of Credit in Yarn Division Bill Discounting under letter of credit What factors that considers their working capital requirement. Working Capital Policies. To operate the working capital cycle of the management. Detail study of Account receivable department (ACR) In Industry Project Report 75
  76. 76. RESEARCH METHODOLOGYResearch comprises of defining & redefining problems, formulating hypothesis orsuggested solutions, collecting, organizing & evaluating data, making deductions &reaching conclusions. In research design we decide about: • Type of data • From whom to get data • About sample size • How to analyze data • How to make reportDATA TYPEData collected was both Primary and Secondary in natureSAMPLE SIZE In Industry Project Report 76
  77. 77. The sample size for the study of the project was yarn division of VARDHMAN GROUPLTD.RESEARCH DESIGNSTEP 1- To study the ACR module of yarn divisionSTEP 2 – understanding various methods used for collection of debtors to studyprocedure followed for LC in VardhmanSTEP 3 – Data Analysis of working capital through RatiosDATA COLLECTIONThe information is collected through the PRIMARY SOURCES like:  Talking with the employees of the department.  Getting information by observations e.g. in manufacturing processes.  Discussion with the head of the department.Data was collected from following SECONDARY SOURCES like 1. Corporate departmenta) Marketing departmentb) Finance department 2. ACR reports 3. MIS DepartmentThe collected information was edited & tabulated for the purpose of analysis.TOOLS USED FOR PROJECTWhile making the project file various tools were used. These tools helped in doing thework. These are:-  Microsoft Excel  Microsoft Word  Various analysis tools like Bar Graphs, Pie Graphs, tables In Industry Project Report 77
  78. 78. LIMITATIONS OF STUDYIn the due course time, the main limitation was with searching the data. The data was notcompleted in the main files of Vardhman. The training period of six weeks was to shortto study the organization in detail. In some cases budgets are available but actual figuresare not available for comparison. VARDHMAN is a big unit so it was very difficult the whole budgeted data In Industry Project Report 78
  79. 79. RATIO ANALYSIS CURRENT RATIO – CURRENT ASSETS CURRENT LIABILITIESPARTICULARS 2006-07 2007-08CURRENT ASSETS 1,153237,069.61 1,076,464808.72CURRENTLIABILITIES 102,809,874.03 160,310,964.06CURRENT RATIO 11.2 6.71 In Industry Project Report 79
  80. 80. CURRENT RATIOS 12 10 8 CURRENT 6 11.2 RATIOS 4 6.71 2 0 2006-07 2007-08 Interpretation: A relatively high current ratio is an indication that the firm is liquid and has ability to pay its current obligations in time as and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. Current ratio has moved down from 11.2 to 6.71, which indicates that there has been deterioration in the liquidity position of VARDHMAN. NOTE DURING CALUCALATION FRACTION FIGURES ARE ROUNDED OFF LIQUID RATIO – CURRENT ASSETS - STOCK -PREPAID EXPENSES CURRENT LIABILITIESPARTICULARS 2006-07 2007-08CURRENT ASSETS 1,153237,069.61 1,076,464808.72STOCK (431570480) (825491821.69)CURRENTLIABILITIES 102,809,874.03 160,310,964.06LIQUID RATIO 4.19 1.56 In Industry Project Report 80
  81. 81. LIQUID RATIO 5 4 3 LIQUID RATIO 2 4.19 1 1.56 0 2006-07 2007-08 Interpretation: Usually, a high acid test ratio is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low quick ratio represents that the firm’s liquidity position is not good. As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. Liquidity ratio is falling from 4.19 to 1.56 in the firm which means low quick ratio may have a good liquidity position if it has fast moving inventories.ABSOLUTE LIQUID RATIO – CASH + CASH AT BANK + SHORT TERM SECURITIES CURRENT LIABILITIES PARTICULARS 2006-07 2007-08 CASH + CASH AT 4,661,283.23 4,759,748.58 BANK SHORT TERM - - SECURITIES CURRENT LIABILITIES 102,809,874.03 160,310,964.06 In Industry Project Report 81
  82. 82. ABSOLUTE LIQUID .045 .029RATIO ABSOLUTE LIQUID RATIO 0.05 0.04 0.03 ABSOLUTE 0.02 0.045 LIQUID RATIO 0.029 0.01 0 2006-07 2007-08 Interpretation: Although receivables, debtors and bill receivables are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. Here the company acid test ratio decreased and its is low than the thumb rule STOCK TURNOVER RATIO – SALES AVERAGE STOCK In Industry Project Report 82
  83. 83. PARTICULARS 2006-07 2007-08SALES 3424503526 3682682347.11AVERAGE STOCK 767334308 773579205STOCK TURNOVER 4.46 4.76RATIO STOCK TURNOVER RATIO 4.8 4.7 4.6 STOCK 4.76 TURNOVER 4.5 RATIO 4.4 4.46 4.3 2006-07 2007-08Interpretation:Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually,a high inventory turnover indicates efficient management of inventory because morefrequently the stocks are sold; the lesser amount of money is required to finance the In Industry Project Report 83
  84. 84. inventory. A low inventory turnover implies an inefficient management of inventory. Wecan clearly view that stock turnover ratio has improved.DEBTORS TURNOVER RATIO – SALES AVERAGE DEBTORSPARTICULARS 2006-07 2007-08SALES 3424503526 3682682347.11AVEARAGE 289844033 146774094DEBTORSDEBTORS 11.81 25.09TURNOVER RATIO In Industry Project Report 84
  85. 85. DEBTORS TURNOVER RATIO 30 25 20 DEBTORS 15 TURNOVER 25.09 10 RATIO 5 11.81 0 2006-07 2007-08Interpretation:Debtors velocity indicates the number of times the debtors are turned during the year.Generally, the higher the value of debtors turnover the more efficient is the managementof debtors/sales or more liquid are the debtors. Similarly, low debtors turnover impliesinefficient management of debtors/sales and less liquid debtors.We can see debtors turnover ratio 25.09 is very high which may imply a firm’s inabilitydue to lack of resources to sell on credit thereby losing sales and profitsAVERAGE COLLECTION PERIOD - 365 DEBTORS TURNOVER RATIOPARTICULARS 2006-07 2007-08DAYS 365 365DEBTORS 11.81 25.09TURNOVER RATIOAVERAGE 31 DAYS 15 DAYSCOLLECTIONPERIOD In Industry Project Report 85
  86. 86. DEBTORS COLLECTION PERIOD 15 2006-07 2007-08 31Interpretation:The average collection period ratio represents the average number of days for which afirm has to wait before its receivables are converted into cash. It measures the quality ofdebtors.VARDHMAN’S average collection period is short as compared to last financial year.This implies better quality of debtors as short collection period implies quick payment bydebtors.CREDITORS TURNOVER RATIO – PURCHASES (RAW MATERIALS) AVERAGE CREDITORS In Industry Project Report 86
  87. 87. PARTICULARS 2006-07 2007-08RAW MATERIALS 1600792135 1969197435AVERAGE 125284347 132084794.5CREDITORSCREDITORS 12.77 14.9TURNOVER RATIO CREDITORS TURNOVER RATIO 16 15 14 CREDITORS TURNOVER 13 14.9 RATIO 12 12.77 11 2006-07 2007-08Interpretation:The ratio indicates the velocity with which the creditors are turned over in relation topurchases. Generally, higher the creditors velocity better it is or otherwise lower thecreditors velocity, less favorable are the results In Industry Project Report 87