working capital management dcm textile summer report
1.1 Industry overview
The Textile Sector in India ranks next to Agriculture. Textile is one of India’s oldest
industries and has a formidable presence in the national economy. The textile industry
occupies a unique place in our country. It is the second largest employment generator after
Textile Industry is one of the leading textile industries in the world. Though was
predominantly unorganized industry even a few years back, but the scenario started changing
after the economic liberalization of Indian economy in 1991. The opening up of economy
gave the much-needed thrust to the Indian textile industry, which has now successfully
become one of the largest in the world.
India textile industry largely depends upon the textile manufacturing and export. It also plays
a major role in the economy of the country. India earns about 27% of its total foreign
exchange through textile exports. Further, the textile industry of India also contributes nearly
14% of the total industrial production of the country. It also contributes around 3% to the
GDP of the country. India textile industry is also the largest in the country in terms of
employment generation. It not only generates jobs in its own industry, but also opens up
scopes for the other ancillary sectors. India textile industry currently generates employment
to more than 35 million people. It is also estimated that, the industry will generate 12 million
new jobs by the year 2014.
Indian textile industry can be divided into several segments, some of which can be listed as
• Cotton Textiles
• Silk Textiles
• Woollen Textiles
• Readymade Garments
• Hand-crafted Textiles
• Jute and Coir
Textile Industry is providing one of the most basic needs of people and the holds importance;
maintaining sustained growth for improving quality of life. It has a unique position as a self-
reliant industry, from the production of raw materials to the delivery of finished products,
with substantial value-addition at each stage of processing; it is a major contribution to the
1.2 Company profile
The DCM group of companies is one of the major business pairs in the Indian business
scenario. The DCM group was founded by Late Lala Shri Ram in the year 1889 with the
establishment of Delhi Cloth Mill (DCM) which specialized in Textiles. The name of the
company was changed in 1994 to Delhi Commerce and Manufacturing Company (DCM) to
reflect the group’s diverse business activities covering the areas of:
D.C.M. GROUP AT A GLANCE
Company name Products/activities
DCM Real estate Real Estate
DCM Data systems Information Technology
DCM Textiles Cotton yarn
DCM Textiles, a unit of DCM Ltd. started its production in 1991. A part of Rs. 600 crore
DCM group Ltd. is headed by Dr. Vinay Bharat Ram, Chairman and Managing Director, a
famous Industrialist and an eminent Scholar of India. The DCM group consists of a large
number of Companies reputed for their products quality, dynamism, and business integrity
and for quick response to change in environment. DCM Ltd. is a diversified company having
interest in Textiles, Data System Tools and Dies and Real Estate & Infrastructure and other
DCM Textiles is a Spinning Mill Located in Hisar (Haryana) engaged in the manufacturing
of 100% grey cotton yarn & mélange yarn in the count range of 12s to 40s, mainly for
knitting use. The raw material used by DCM textile is cotton. Cotton can be purchased from
various states like Haryana, Punjab, Rajasthan, Gujarat, M.P., Maharashtra and A.P. The
unit has a line of new generation machines having a capability of producing good quality
yarn. The machines are from various renowned manufactures. The modernization drives it to
further enhance the competitive edge of the unit by importing Cards, Auto corner, TFO and
installing new ring frames of LMW.
To meet the stringent quality requirements, the unit has testing laboratory well equipped with
sophisticated instruments like Uster Tester (UT-3 Model) and has also implemented the
quality systemic line with the International standards.
The unit is supplying to Indian as well as to international market and is in process of further
expansion of its international markets.
DCM group corporate philosophy revolves around 3 pillars:
Business Integrity & Ethics
Global Quality Standards
Continuous Improvement and Value Additions
DCM has set bench marks in business integrity and come to top the list of 'Honoured
Business Houses which is acknowledged not only by its customers and suppliers but also by
its competitors. The group is determined to maintain highest standards of corporate ethics
which have been maintained, preserved and nurtured throughout the last over 100 years
yielding immense benefits. DCM has always striven for world class quality. Our 100% cotton
carded and combed yarns are exported across the globe in premium segment
DCM Textiles has firm commitment to the philosophy of continuous improvement. The
company led the industry by getting ISO 9001 certification for yarn operations in textiles in
the year 1995. The company is also in the process of implementing TQM practices and
successfully implemented a few quality initiatives which have given rich dividends terms of
improvement in quality and cost reduction
DCM Textiles is committed to deliver goods and services which satisfy its customers at all
times and enhance value of its business for all the stake holders through active involvement
of all the employees and continuous process improvements
2.1 Introduction of project:-
Every organization irrespective of the size is required two types of financial assistance. One
is long-term funds which are required primarily to acquire basic infrastructure for the
company to create production facilities through purchase of fixed assets such as plant &
machinery, land, building, furniture, etc. Investments in these assets represent that part of
firm’s capital which is blocked on permanent or fixed basis and is called fixed capital.
Funds are also needed for short-term purposes for the purchase of raw material, payment of
wages and other day – to- day operations. These funds are known as working capital.
In simple words, working capital refers to that part of the firm’s capital which is required for
financing short- term or current assets such as cash, marketable securities, debtors &
inventories. Funds, thus, invested in current assets keep revolving fast and are being
constantly converted in to cash and these cash flows out again in exchange for other current
assets. Hence, it is also known as revolving or circulating capital or short term capital.
In today’s competitive environment one of the primary goals of the financial management is
effective utilization of available funds.
The project assigned to me during my summer training in account & finance department is
“The working capital management.
2.2 Scope of the study:-
The scope of the study is identified after and during the study is conducted. The main scope
of the study was to put into practical the theoretical aspect of the study into real life work
experience. The study of working capital is based on tools like Ratio Analysis, Statement of
changes in working capital. Further the study is based on last 5 years Annual Reports of
DCM Textile Ltd.
2.3 OBJECTIVES OF THE STUDY:-
To study the sources and uses of the working capital.
To study the liquidity position through various working capital related ratios.
To study the working capital components such as receivables accounts,
Cash management, Inventory management.
To make suggestions based on the finding of the study.
Research methodology is a way to systematically solve the research problem. It May be
understood as a science of studying now research is done systematically. In that various steps,
those are generally adopted by a researcher in studying his problem along with the logic
“The procedures by which researcher go about their work of describing, explaining and
predicting phenomenon are called methodology”.
TYPE OF RESEARCH:-
This project “A Study on Working Capital Management of DCM Textile Ltd” is
considered as an analytical research.
Analytical Research is defined as the research in which, researcher has to use facts or
information already available, and analyze these to make a critical evaluation of the facts,
figures, data or material.
SOURCE OF RESEARCHDATA
There are mainly two through which the data required for the research is collected.
The primary data is that data which is collected fresh or first hand, and for first time which is
original in nature.
In this study the Primary data has been collected from Personal Interaction with Branch
manager i.e., Mr. Sushil Gupta. and other staff members.
The secondary data are those which have already collected and stored. Secondary data easily
get those secondary data from records, annual reports of the company etc. It will save the
time, money and efforts to collect the data.
The major source of data for this project was collected through annual reports, profit and loss
account of 5 year period from 2011-2015 & some more information collected from internet
and text sources.
Sampling unit : Financial Statements.
Sampling Size : Last five years financial statements.
Tool Used for calculations: - MS-Excel.
TOOLS USED FOR ANALYSIS OF DATA:-
The data were analyzed using the following financial tools. They are
Statement of changes in working capital.
LIMITATIONS OF THE STUDY:-
The study duration (summer in plant) is short.
The analysis is limited to just five years of data study (from year 2011 to year 2015)
for financial analysis.
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.
2.5 PRODUCTION PROCESS FLOW:-
It is the production unit of the organization and its main function is to convert cotton i.e. raw
material in to yarn. It is grey coloured yarn produced for both domestic as well as export
purpose through judicious selection of the raw material. Following is the step-wise process
followed for the production.
First of all mixing is done in the blow room. The objective of mixing is to open the
compressed bale of fibre, to regain the moisture lost during pressing and to regain
homogeneity in the end product.
MIXING PROCESS :-
The bales are got issued from the raw material stores as per the demand of the product in
dept. Bales are mixed in BINS. We have BINS & BLENDER BINS. Sometime burnoky oil
and water are used in mixing, testing parameters of cotton measured prior to mixing are
staple length, tenacity, trash & in nature fibre, maturity coefficient et after mixing, the mixed
cotton is fed in to blow room machines to remove the various impurities in the cotton.
Raw material after passing through the bale opener is passed through fast moving conveyor.
After sucking it is transformed to axiflow. After this material goes in to a feeding unit, where
cotton is further opened by grid bars, R S K beater the transforms the material coming from
feed unit to the sheet form which is further fed to the scuther for making lap the material then
flows as a
Sheet to the calendar roller where it gets proper tension & compression, thereby increasing
cohesion in the sheet and lap is formed. The end product of this purifies cotton from the Blow
room machine is the lap of about 45 mts. Length & 20 kg. Wt
Lap is sent to the carding section for forming thin filmy web wording between two relatively
moving surface clotted with wire points. God carding led to better yarn quality. The
objectives of carding are:
Opening of fibbers
Removal of neps
Removal of remaining trash
Uniform silver formation
One special feature of this carding machine is automatic doffing. In C 1/3 card the
doffing is automatic.
For better quality and export purpose the end product of carding department is sent to the
comber dept. the main objectives of this dept. are:
It helps in straightening of the fibber.
Straightening of the fibber increases inters fibber cohesion & ultimately the strength
of the fibber is increased. After passing through the rotating spool
the sliver is winding in the form of lap. Lap is 45 mts. long & 24 kgs in weights.
Ribbon lap- lap formed is fed at the feeding unit-to maintain the uniformity of the sliver of
the ribbon lap. 110 mts. long ribbon lap is sent to the comber machine.
Comber- the ribbon lap is feeded through back star roller. An accentric is placed which gives
tension to the material so that material is under constant flow. In the process short fibbers are
removed by the half lap. Through guide plate material is delivered to the can. Here neps,
waste percentage, short fibber removal are the main function performed.
DRAW FRAME DEPARTMENT:-
After carding dept. the sliver drums are sent to the D/F section. The main function of this
department is drafting, parallelization, regularity, attending and pulling out of fibbers besides
to lock in can with the help of coiler. The sliver is twisted & straightened to make it uniform.
From draw frame dept. the sliver is sent to the simplex dept. to make bobbin from sliver by
twisting & making it uniform. The approximate weight of each bobbin is about 750 GMS.
The objective of the simplex dept. is to give proper twist to the sliver and to build package for
the next process. The humidity condition should be proper for eliminating breakage’s during
RING FRAME DEPARTMENT:-
It is last & also one of the most important machines of the spinning dept. the main function is
to formation of yarn & bobbin for the winding is prepared, so main work is Drafting,
Twisting, Building motion, and Bobbin preparation.
The bobbin is fixed according jot the count. Each machine has Back Roll, Front Roll, and
Medium Roll for drafting purposes. The pressure used is of the order of 1.5 kg/cm (square).
Each yarn bobbin spindle has a weight of about 80-90 gm including 35 gm wt. of the Bobbin,
Gauge setting is the most important factor as regards quality.
WINDING AND PACKING DEPARTMENT:-
After spinning of yarn from ring frame the bobbins are sent to the post spinning dept. In this
dept. faults are detected & removed. This improves the yarn quality and checks the made
either on paper cone of cheese before delivering it to the conditioning & packing dept. We
have following machines in the dept.–Doubling machines, Cheese winder, Cone winder,
Auto corner. The main features of an auto corner machines are- Automatic splicer, Wak and
Clearer. Count is changed by computer panel which contains all information about the
machine & the processing.
CONDITION AND PACKING DEPARTMENT:-
After the completion of the winding process the package is given proper conditioning as
cotton loses its moisture content which is necessary for good
Quality of yarn. A special room is there for the conditioning. Come trolley is put in the room
for 2 hrs and water is sprinkled on it. After this process the packages are taken to the packing
unit where they are packed as per requirement.
After weighing the package is kept in a cartoon properly, then it tagged giving a proper lot
no. special company mark & trademark is properly printed. Delivery station is also printed
and then cartoons are sent to the dispatch section and from there to the proper markets.
PRODUCTION PROCESS FLOW
Working capital Management
Capital is the keynote of economic development. In this modern age, the level of economic
development is determined by the proportion of capital available.
Meaning of Capital:-
In the ordinary sense of the word Capital means initial investment invested by businessman
or owner at the time of commencing the business.
Capital (economics), a factor of production that is not wanted for itself but for its ability to
help in producing other goods.
Capital is a factor of production with a specific, changeable value attached to it that could,
potentially, provide its owner with more wealth. It is an abstract economic concept, and, as
such, has many different definitions and classifications, but the unifying feature of capital is
that it has a certain value, so it in itself is a type of wealth, and it has the potential of
generating more wealth.
Features of Capital:-
Capital has the following features.
1. Capital is a man made.
2. Capital is a perishable.
3. Capital is a human control possible.
4. Capital is a mobile.
5. Capital is a human sacrifice.
6. Capital is a scarce.
7. Capital is a passive factor.
Introduction of Working Capital:-
Working capital could be defined as the portion of assets used in current operations. The
movements of the funds from capital to income and profits and back to working capital are
one of the most important characteristics of the business. This cyclical operation is concerned
with utilization of the funds with the hope that will return with an additional amount called
income. If the operations of the company are to run smoothly, a proper relationship between
fixed capital and current capital has to maintain.
Sufficiently liquidity is important and must be achieved and maintained to provide that funds
to pay off obligation as they arise.
The adequacy of cash and other current assets together with their efficient handling, virtually
determine the survival of demise of the company. A businessman should be able to judge the
accurate requirement of working capital and should be quick enough to raise the enquired
funds to finance he working capital needs.
Working capital is also called as net current assets, “it is the excess of current assets over
current liabilities.” All organization has to carry working capital. It is important from the
point of view of both liquidity and profitability. Poor management of working capital means
that funds that unnecessarily tied up in idle assets hence educing liquidity and also reducing
ability to invest in productive assets such as plant and machinery. So affecting profitability.
The term working capital refers to current assets, which may be defined as:
i) Those which are convertible into cash or equivalents with the period of one year
ii) Those which are required to meet day to day operations
The fixed as well as current assets, both requires investment of ‘Funds’. So the management
of working capital and fixed assets apparently seem to involve it type of consideration but it
is no so. The management of working capital involve different concept and methodology than
the techniques used in fixed assets management.
3.2 Objective Of Working Capital & Research Methodology:-
Working capital management is very important in modern business. The analysis of working
capital is also very useful for short-term management of funds. The following are objective of
1) To make. Items wise analysis of the elements or component of working capital to
identify the items responsible for change in working capital.
2) To calculate working capital for last year of the company.
Scope & Limitation of the Study:-
1. The Study is limited to only the last year performance of the Company.
2. The data used in this study have been given commercial Manager. As per the
requirement and necessary some data are grouped and sub grouped.
3. For making a clear-cut opinion, Ratio technique of financial management has
IMPORTANCE OF WORKING CAPITAL :-
1. Solvency of the business: Adequate working capital helps in maintaining the
solvency of the business by providing uninterrupted of production.
2. Goodwill : Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
3. Easy loans: Adequate working capital leads to high solvency and credit standing can
arrange loans from banks and other on easy and favorable terms.
4. Cash discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
5. Regular Supply of Raw Material: Sufficient working capital ensures regular supply
of raw material and continuous production.
6. Regular payment of salaries, wages and other day to day commitments: It leads
to the satisfaction of the employees and raises the morale of its employees, increases
their efficiency, reduces wastage and costs and enhances production and profits.
7. Exploitation of favorable market conditions: If a firm is having adequate working
capital then it can exploit the favorable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for higher
8. Ability to Face Crises: A concern can face the situation during the depression.
9. Quick and regular return on investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains confidence of
the investors and can raise more funds in future.
10. High morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.
Data & Methodology of the Study:-
The data of DCM Ltd. for one year is used in this study have been taken from company.
Editing, classification and tabulation of the financial data, which are collected from the
above-mentioned sources, have been done as per the requirement of the study.
1. The initial step of the project was studying about the company and then evaluating the
financial position of the company on the basis of ratio analysis.
2. Comparing the firm’s financial position with respect to its competitors i.e. Vardhman
Textiles, Malwa cotton and spinning mill, Nahar industrial enterprises and ginni
filaments ltd. With the help of following ratios:-
3. The project will focus on the study of overall working capital management at the
organizations, for which the following study analysis will be undertaken;
Classification of working capital:-
1 On the basis of concept.
2. On the basis of time.
On the basis of concept working capital is classified into two types:-
1. Net working capital
2. Gross working capital
1) Net Working Capital:-
Term Net working capital can be define in two way
i) It is the difference between current assets and current liabilities.
ii) Amount left for operational requirement.
2) Gross Working Capital:-
Gross working capital means the total current assets.
And On the basis of time working capital may be classified as:-
Permanent working capital
Temporary working capital
1) Permanent Working Capital:-
It is the minimum amount of the current assets, which are needs to conduct the business even
during the dullest season of the year. This amount varies from year to year depending upon
the growth of a company and stage of the business cycle in which it operates. It is the amount
of funds required to produce the goods and services, which are necessary to satisfy demand at
a particular point.
It represents the current assets, which are required on a continuing basis over the year. It is
maintained as the medium to carry on operation at any time. Permanent working capital has
i) It is classified on the basis of the time factor.
ii) Its size increases with the growth of the business.
iii) It is constantly shifted from one asset to another and continues to remain in the
2) Temporary Working Capital:-
It represents the additional assets, which are required at different times during the operating
year. Seasonal working capital is the additional amount of current assets particularly cash,
receivables, and inventory which is required during the
more active business seasons of the year. It is the temporary investment in the current assets
and possesses the following features:
a) It is not always gainfully employed, though it may also shift from one asset to another as
permanent working capital does.
b) It is particularly suited to business of seasonal on cyclical nature.
The need or objective of working capital:-
Every business needs some amount of working capital. The need for working capital arises
due to the time gap between production and realization of cash from sales. Thus working
capital is needed for following purposes:
1. The purchase of raw material, components and spares
2. To pay wages and salaries
3. To incur day to day expenses and overhead costs such as fuel and power
4. To meet the selling cost as packing, advertising etc
5. To provide credit facilities to the customer
6. To maintain the inventories of the raw material, work in progress., spares and finished
ESTIMATION OF WORKING CAPITAL REQIUREMENTS:-
Managing the working capital is a matter of balance. The firms must have sufficient
funds on hand to meet its immediate needs. The DCM Textiles.Ltd is manufacturing oriented
The following aspects have to be taken into consideration while estimating the working
1. Total costs incurred on material, wages and overheads.
2. The length of time for which raw material are to remain in stores before they
are issued for production.
3. The length of the production cycle or work-in-process, i.e., the time taken for
conversion of raw material into finished goods.
4. The length of sales cycle during which finished goods to be kept waiting for sales.
5. The average period of credit allowed to customers.
6. The amount of cash required paying day-today expenses of the business.
7. The average amount of cash required to make advance payments.
8. The average credit period expected to be allowed by suppliers.
9. Time lag in the payment of wages and other expenses.
Working Capital Consideration in DCM Textiles:-
There are two concepts of working capital one is gross working capital and net working
capital. Gross working capital is the total of all current assets. The constituents of current
assets are shown in the part A in table 1 and current liabilities are shown in the part B in the
table 1 the alternate definition of net working capital is the portion of a firm’s current assets
that are financed with short-term fund.
TABLE 1: CONSTITUENTS OF CURRENT ASSETS AND CURRENT
PART- A: CURRENT ASSETS
Raw materials and components
Loan and advances
Cash and bank balance
PART-B: CURRENT LIABILITIES
- Commercial banks
As per the last year financial data (2014-15) the net working capital (NWC) of DCM
textiles is Rs. 3,64,190,699.00 and for financing the same the company makes their
short term financial arrangement from “Punjab National Bank”.
3.3Sources of Working Capital:-
Mainly there are two sources of working capital:
i. Permanent or Fixed working capital
ii. Temporary or variables working capital
In any concern, a part of the working capital investments are as investment in fixed assets.
This is so because there is always a minimum level of current assets, which are copiously
required by the enterprise to carry out its day-to-day business operation and this minimum,
cannot be expected to reduce at any time. This minimum level of current assets need long
term working capital, which is permanently blocked.
Similarly, some amount of working capital may be required to meet the seasonal demands
and some special exigencies such as rise in prices, strikes, etc. this gives rise to short term
working capital which is required for day to day transaction also.
The fixed proportion of working capital should be generally financed from the fixed capital
sources while the temporary or variable working capital equipment may be met from the
short term sources of capital.
Bank provides various types of facilities to borrower to raise its funds which are described
here in below in the form of chart:-
Term loan Working capital
guarantees & co-
Over draft Cash credit Bill finance Export finance Working capital
Hypothecationpledge Pre-shipment Post-shipment
Non Fund based
DCM Textiles basically enjoys three type of credit facilities out of above mentioned in the
Letter of credit
Letter of guarantee
Post shipment (FOBNLC)
CHARACTERSTICS OF WORKING CAPITAL IN DCM TEXTILES:-
In the management of working capital two characteristics of current assets must be borne in
mind: (i) short life span, and (ii) swift transformation into other current asset forms.
Current assets have a short life span. The life span of current assets depends upon the time
required in the activities of procurement, production, sales and collection and the degree of
synchronization among them. Each current asset is swiftly transformed into other current
Cash is used for acquiring raw materials and raw materials are transformed into finished
goods (this transformation may involve several stages of work-in-progress). Finished goods,
generally sold on credit in D.C.M. Textile are converted into accounts receivable and finally
accounts receivable, on realization, generate cash. The cycles of transformation as follows:
Conversion of cash into raw materials.
Conversion of raw materials into work in progress.
Conversion of work in progress into finished stock.
Conversion of finished stock into accounts receivables(Debtors)through sale and
Conversion of account receivables into cash.
As per financial statement of last accounting year, average holding period of different
components of working capital is as follows:
Description of current assets and current
Trade receivables 692,152,101
Cash & bank balances 53,105,704
Loans and advances 291,626,791
Other current assets 16,683,355
Current liabilities 1,307,725,193
Other Current liabilities 169,783,693
The unit is having the following assumptions for working capital:-
The DCM Textiles’ raw material holding is Rs. 522,210,782.00 as on 31.03.2015. Cotton
being a seasonal commodities is required to be stocked during the season period and higher
level of inventory gives a constant and smooth supply of raw-cotton which in turn increases
the productivity of the machines, as technical changes are not required to be made in
machines due to use of one type of cotton.
Work- in- progress:-
The DCM Textiles’ stock in progress holding is Rs. 80,236,492 as on 31.03.2015.
Stores and spares:-
The DCM Textiles’ stores and spares holding are Rs.
9,876,497 as on 31.03.2015.
The DCM Textiles’ finished goods holding is Rs.
183,483,520 as on 31.03.2015.
The DCM Textiles’ debtors holding is Rs. 524540343 .00(51 days sales) as on 31.03.2015.
Since the company is selling its production directly to the retail yarn dealers and other small
scale industries, it is necessary to keep the terms and conditions for credit sales at par with
our competitors i.e. Vardhman spinning, Nahar spinning and Abhishek industries etc. The
current credit period prevailing in the market is 45 to 60 days credit from the date of dispatch,
which is justified in view of the prevailing market scenario.
Goods in transit:-
The unit is exporting its product to various countries. The normal transit time from Mill to
the port of loading is 6 to 10 days till the goods are boarded to ship, the title of goods remain
with the unit. Accordingly, we have assumed 7 days stock in transit.
3.4.FACTORS INFLUENCING WORKING CAPITAL
The working capital needs of DCM Textiles are influenced by numerous factors. The
important ones are:
Nature of business
Seasonality of operations
Conditions of supply
NATURE OF BUSINESS:-
The working capital requirement of a firm is closely related to the nature of its business. A
service firm, like an electricity undertaking or a transport corporation, which has a short
operating cycle and which sells predominantly on cash basis, has a modest working capital
requirement. On the other hand, a manufacturing concern like a machine tools unit, which has
a long operating cycle and which sells largely on credit, has a very substantial working
As DCM Textiles is a manufacturing unit, it has large operating cycle and therefore requires a
large amount of working capital.
SEASONALITY OF OPERATION:-
Firms that have been marked seasonally in their operations usually have highly fluctuating
working capital requirements. DCM uses cotton as a raw material that is a seasonal product.
Better quality cotton is available in the season therefore to get the better quality cotton
company is bounded to purchase cotton at its season and make holding of the raw material for
the continuous production in the non-season.
So company requires a large amount of working capital for the continuous production
throughout the year because the finished goods of the DCM Textiles are demanded in the
market whole time of the year. Average raw material holding period for the seasons comes
180 days; during off seasons it comes approximately 60-90 days.
A firm marked by pronounced seasonal fluctuation in its sales may pursue a production
policy, which may reduce the sharp variations in working capital requirements. For example,
a manufacturer of ceiling fans may maintain a steady production throughout the year rather
than intensify the production activity during the peak business season. Such a production
policy may dampen the fluctuations in working capital requirements.
The DCM Textiles makes a hosiery yarn, which is used in summer as well as in winter
season. So the DCM makes its product throughout the year. Mainly production depends upon
the availability of cotton, availability of power supply and availability of workers and market
demand. During my study period unit is producing on an average of 42.303 MT production
/day, which is 95.75% of total capacity utilization. The total capacity of DCM Textiles is
Before making the production policy programme, DCM Textiles considers the constraints:
1. Market demand:
According to the market demand, production planning is made by the planning and
system deptt. Estimation of market demand is getting by the marketing deptt.
2. Availability of raw material:
The availability of raw material is also a main feature of the production planning. With
the sufficient availability of raw material, production can be made continuously as per
available capacity. Cotton is a seasonal product, hence not available throughout the year
and therefore the unit has to make maximum purchase during October to march to meet
its requirement for the whole year.
3. Suitability of Raw Material:
The availability of raw material is not enough, suitability of raw material is also
important. Mainly two types of cotton are use for production i.e. J-34 (Good Average) J-
The degree of competition prevailing in the market place has an important bearing on
working capital needs. When competition is keen, a larger inventory of finished goods is
required to promptly serve customers who may not be inclined to wait because other
manufacturers are ready to meet their needs. Further, generous credit terms may have to be
offered to attract customers in a highly competitive market. Thus, working capital needs tend
to be high because of greater investment in finished goods, inventory and accounts
The main competitors of the DCM Textile are the Vardhman Textiles, Nahar Industrial,
Malwa Cotton and Sportsking India Ltd. DCM also makes its production according to the
CONDITIONS OF SUPPLY:-
The inventory of raw materials, spares, and stores depends on the conditions of supply. If the
supply is prompt and adequate, the firm can manage with small
Inventory. However, if the supply is unpredictable then the firm, to ensure continuity of
production, would have to acquire stocks as and when they are available and carry larger
inventory on an average. A similar policy may have to be followed when the raw material is
available only seasonally and production operations are carried out round the year.
The raw material of the DCM Textilesis cotton and supply of cotton is mainly depends upon
the availability of the cotton in the market. 60% cost of the production is only of the raw
material holding cost. If the cotton is enough in the market to meet the company’s
requirement then company is not required to invest a huge amount of working capital in the
raw material. But generally all spinning mills funds are invested in the raw materials
Management of working capital:-
Working capital, in general practice, refers to him excess of current assets over current
liabilities. Management of working capital therefore, is concerned with problems that arise in
attempting to manage him current assets, current liabilities, and interrelationship that exists
between them. In other word it refers to all aspects of administration of both current assets
and current liabilities. The basic goal of working capital management is to manage the
current assets and current liabilities of a firm in such way that a satisfactory level of working
capital is maintained, i.e. neither inadequate nor excessive. This is so because both
inadequate as well as excessive working capital position is bad for the business. Inadequacy
of working capital, may lead the firm insolvency and excessive working capital implies idle
funds, which earn no profit for the business. Working capital management policies of the firm
have a great effect on its profitability, liquidity and structural health of the organization. In
this context, working capital management is three-dimensional nature:
1. Dimension I is concerned with the formulation of the policy with regard to
Profitability, risk and liquidity.
2. Dimension II is concerned with the decision about his composition and level of
3. Dimension III is concerned with the decision about his composition and level of
This dimension aspect of his working capital has been more clearly and precisely
explains by the following diagram.
Profitability, Risk & Liquidity
II Composition & level
Of current Liabilities
& Level of current assets
3.5 Evaluation of working capital:-
The working capital management needs attention of all the finance head/ working capital
management is important for avoiding unnecessary blockage of fund. Like that liquidity is
important at it refer to the short-term financial strength of company. It is very important to
have proper balance in regard to the liquidity of the firm.
31STMARCH 2005 1551.41
31STMARCH 2006 2251.10
31STMARCH 2007 4416.50
31STMARCH 2008 8095.09
31ST MARCH 2009 6179.17
31st MARCH 2010 11009.24
31st MARCH 2011 21071.99
31st MARCH 2012 93915.43
31st MARCH 2013 16601.39
31st MARCH 2014 42719.05
31st MARCH 2015 36419.06
YEAR ENDED WORKING CAPITAL
(RS. IN LAKHS)
A) Current Assets: -
iii) Cash & Bank
iv) Loans &
V) Other current
B) Current Liabilities:
Working Capital (A-B)
Add: Provision for
Net Working Capital
2010-11 2011-12 2012-13 2013-14 2014-15
2,235,516,136 1,125,034,054 1,392,389,650 1,761,429,346 1849,375,242
128,316,977 1,185,880,492 1,226,375,670 1,334,238,807 1,485,184,543
2,107,199,159 939,154,362 166,013,980 427,190,539 364,190,699
Effect on working
A) Current Assets: -
ii) Sundry Debtors
iii) Cash & Bank
iv) Loans &
v) Other current
Total Current Assets:
B) Current Liabilities:
i) Current Liabilities
Total Current Liabilities:
Working Capital (A-B)
Net Increase Or Decrease In
Table I: -
It is observed that current asset increase in 2012-13 as compare to 2011-12 but in the year
2014-15 it had been increase from 139.20 cr to 184.50 cr and the current liabilities has been
in a decreasing trend in the year 2011-12 and 2012-13. Current asset increase in 2012-13 and
again it increases 2013-14. It shows fluctuation in these years. Working capital of DCM
Textile ltd indicates a good position as it shows the increasing trend except 2012-13 that
represents the sound position of the company.
Table II: -
Statement of changes in the working capital is prepared to show the changes in the working
capital between the two balance sheet dates. This statement is prepared with the help of the
current asset and current liabilities derived from the 2 balance sheets
i) An increase in current asset increases working capital
ii) A decrease in current assets decreases in working capital
iii) An increase in current liabilities decreases working capital.
iv) A decrease in current liabilities increase working capital
It is worth noting that schedule of changes in working capital is prepared only from
current assets and current liabilities and the other information is not of any use for preparing
this statement. The company should look in to the proper current liabilities.
Financial analysis-interpretation of ratios.
Financial analysis-interpretation of ratios.
(A) LIQUIDITY RATIOS (SHORT-TERM LIQUIDITY):-
Liquidity ratios measure the short-term solvency i.e. the firm’s ability to pay its current dues
and also indicate the efficiency with which working capital is being used. Commercial banks
and short-term creditors may be basically in the ratios under this group.
(i)Current ratio or working capital ratio:-
Current ratio is a relationship of current assets to current liabilities
Current assets means the assets that are either in the form of cash or cash equivalents or can
be converted into cash or cash equivalents in short time(say within a year) like cash, bank
balances, marketable securities, sundry debtors, stocks, bills receivables, prepaid expenses.
Current liabilities mean liabilities repayable in as short time like sundry creditor, bills
payable, outstanding expenses, bank overdraft.
Computation:- The ratio is calculated as follows:-
Current ratio = Current assets
The ratio is mainly used to give an idea of the company’s ability to pay back its short-
term liabilities with its short-term assets.
The higher the current ratio, the more capable the company is of paying its
obligations. A ratio under 1 suggests that the company would be unable to pay its
obligations if they came due at that point.
While this shows the company is not in good financial health, it does not necessarily
mean that it will go bankrupt-as there are many ways to access financing-but it is
definitely not a good sign.
The current ratio can give a sense of the efficiency of a company’s operating cycle or
its ability to turn its product into cash.
An acceptable current ratio varies by industry. For most industrial comparison 1.5 is
an acceptable CR. A standard CR for a healthy business is close to 2.
However, a blind comparison of actual current ratio with the standard current ratio
may lead to unrealistic conclusions. A very high ratio indicates idleness of funds, poor
investment policies of the management and poor inventory control, while a lower
ratio indicates lack of liquidity and shortage of working capital.
2014 1.21 1.48 2.83 2.11 0.91
The ratio of DCM Textiles is acceptable but it needs to be improved.
Malwa cotton is in a better position to meet its short term obligations as can be seen by a high
current ratio. This is mainly due to high proportion of loans & advances and a significant low
proportion of debtors.
Ginni flament is also in a better position to meet its obligations.
The CR in case of Nahar industrial is less than 1 implying that it would not be able to meet its
obligations if they fall due at that time since current liabilities exceed current assets which are
not a healthy proposition.
The ratio is acceptable in case of Vardhman textile.
(B)Liquid ratio or quick ratio or acid test ratio:-
Liquid ratio is a relationship of liquid assets with current liabilities. It is fairly stringent
measure of liquidity.
Liquid assets are those which are either in the form of cash or cash equivalents or can be
converted into cash within a very short period. Liquid assets are computed by deducting stock
and prepaid expenses from the current assts. Stock is excluded from liquid assets because it
may take some time before it is converted into cash. Similarly, prepaid expenses do not
provide cash at all thus, excluded from liquid assets.
Computation: - The ratio is calculated as under:
Liquid ratio= Liquid assets
The ratio of current assets less inventories to total current liabilities. The ratio is the
most stringent measure of how well the company is covering its short-term
obligations, since the ratio only considers that part of current assets which can be
turned into cash immediately (thus the exclusion of inventories).
The ratio tells creditors how much of the company’s short term debt can be met by
selling all the company’s liquid assets at very short notice also called acid-test ratio.
The current ratio does not indicate adequately the ability of the enterprise to discharge
the current liabilities as and when they fall due. Liquid ratio is considered as a
refinement of current ratio as non-liquid position of current assets is eliminated to
calculate the liquid assets. Thus it is a better indicator of liquidity.
A quick ratio of 1:1 is considered standard and ideal, since for every rupee of current
liabilities, there is a rupee of quick assets. A decline in the liquid ratio indicates over-
trading, which if serious may land the company in difficulties.
2014 0.39 1.56 1.58 0.70 2.66
DCM Textiles is not in a good position in paying off its liabilities
Vardhman group and Malwa cotton are better off than DCM and Ginni flaments in meeting
the short-term debts by selling all the liquid assets pf the company at a very short notice.
May be that DCM and Ginni flaments are indulge in over-trading. The company should try to
keep quick ratio greater than 1.
Nahar industrial is also in an excellent position with a high quick ratio.
(C) SOLVENCY/LEVERAGE RATIO (LONG-TERM SOLVENCY):-
The term solvency implies ability of an enterprise to meet its long term indebt ness and thus,
solvency ratios convey the long term financial prospects of the company. The shareholders,
debenture holders and other lenders of the long-term finance/term loans may be basically
interested in the ratios falling under this group.
Following are the different solvency ratios:-
The debt-equity ratio is worked out to ascertain soundness of the long term financial policies
of the firm. The ratio expresses a relationship between debt (external equities) and the equity
Debt means long term loans, i.e. Debentures, public deposits, loans (long term) from
financial institutions. Equity means shareholder’s funds, i.e. preference share capital, equity
share capital, reserves less losses and fictitious assets like preliminary expenses.
Computation: the ratio is calculated as under:
Debt-equity ratio= debt(long-term loans)
Equity (shareholder’s funds)
The objective of this ratio is to arrive at an idea of the amount of capital supplied to
the concern by the proprietors and of asset ‘cushion” or cover available to its creditors
on liquidation of the organisation’s equity.
It also indicates the extent to which the firm depends upon outsiders for its existence.
In other words, it portrays the proportion of total funds acquired by a firm by way of
A high debt-equity ratio may indicate that the financial stake of the creditors is more
than that of the owners. A very high debt-ratio may take the proposition of investment
in the organization a risky one.
While a low ratio indicates safer financial position, a very low ratio may mean that the
borrowing capacity of the organization is being underutilized.
The debt/equity ratio also depends on the industry in which a company operates. For
example- capital intensive industries such as auto manufacturing tend to have a
debt/equity ratio above 2, while personal computer companies have a debt/equity of
The readers of financial management may remember that to borrow the funds from
outside is one of the best possible ways to increase the earnings available to the equity
shareholders, basically due to two reasons.
The expectations of the creditors in the form of return on their
investment are comparatively less as compared to the returns expected
by the equity shareholders.
The return on investment paid to the creditors is a tax-deductible
2014 1.08 1.80 3.91 1.42
Profit as compared to the capital employed indicated profitability of the concern. A measure
of profitability is the overall measure of efficiency. The different profitability ratio is as
Net profit ratio:-
The net profit ratio establishes the relationship between net profit and net sales expressed in
Net profit is derived by deducting administrative and marketing expenses, finance charges
and making adjustments for non-operating expenses and incomes.
Computation:-This ratio is calculated as follows:
Net profit ratio= net profit after taxes x 100
The net profit ratio determines the overall efficiency of the business. It indicates that
proportion of sales available to the owners after the consideration of all types of
expenses and costs either operating or non-operating or normal or abnormal.
A high net profit indicates profitability of the business. Hence higher the ratio the
2014 18.10 7.62 -3.99 0.95 1.88
DCM Textiles has been able to generate a high net profit ratio among the five.
Vardhman group is also in a good position.
Malwa cotton has a negative net profit ratio which indicates that the company is in the
position of loss.
Ginni flaments and Nahar industrial have a low net profit ratio so they should aim to achieve
a higher ratio.
(i)Interest coverage ratio:
The interest coverage ratio establishes the relationship between PBIT ( profit before interest
and tax) and debt interest.
Computation:- This ratio is calculated as:
Interest coverage ratio= profit before interest and taxes
The numerator considers the profit before income tax and interest on both term and working
The denominator considers the interest charges, which are in the form of interest on long term
borrowings and not the interest on working capital facilities.
Interest coverage is a financial ratio that provides a quick picture of a company’s
ability to pay the interest or its debt.
The coverage aspect of the ratio indicates how many times the interest could be paid
from the available earnings, thereby providing a sense of a safety margin a company
has for paying its interest for any period.
A company that sustains earnings well above its interest requirements is in an
excellent position to weather possible financial norms.
As a general rule of thumb, investors should not own a stock that has an interest
coverage ratio under 1.5. An interest coverage ratio below 1 indicates the business is
having difficulties generating the cash necessary to pay its interest obligations.
The ratio suffers from the following limitations:
The fixed obligations in the form of preference dividend or instalments of long
term borrowings are not considered.
The funds available for meeting the obligations of interest payments may not
be necessarily in the form of profits before interest and taxes only, as the
amount of profits so calculated may consider the amount of depreciation
debited to profit and loss account which does not involve any outflow of
2014 11.05 3.30 0.39 1.39 1.58
Maximum interest coverage is available in case of DCM indicating it is in good capacity to
pay the interest charges on debt.
Vardhman Textiles is also in a good position to pay off its debt.
In the case of malwa cotton the ratio is low which needs to be improved. That indicates that
the business is facing problem in generating cash its interest.
ACTIVITY (TURNOVER OR PERFORMANCE) RATIOS:-
Turnover indicates the speed with which capital employed is ratated in the process of doing
business. Activity ratio measures the effectiveness with which a concern uses resources as its
disposal. The following are the important activity (turnover or performance ratio):
(i)WOKING CAPITAL TURNOVER RATIO:-
The working Capital turnover indicates the number of times a unit invested in working capital
produces sale. In other words, the ratio shows the efficiency in the use of short-term funds for
Working capital is computed by deducting current liabilities from current assets. A careful
handling of short term assets and funds will mean a reduction in the amount of capital
employed there by improving turnover.
Computation: the ratio is calculated as follows:
Working capital turnover ratio= Net sales
A company uses working capital to fund operations and purchase inventory. These operations
and inventory are then converted into sales revenue for the company.
The working capital turnover ratio is used to analyse the relationship between the
money used to fund operations and the sales generated from these operations.
In a general sense, the higher the working capital turnover, the better because it mean
as that the company is generating a lot of sales compares to the money it uses to fund
A high or increasing working capital turnover is usually a positive sign, showing the
company is better able to generate sales from the working capital. Either the company
has been able to gain more net sales with the same or smaller amount of working
capital, or it has been able to reduce its working capital while being able to maintain
As such, higher this ratio the better will be the situation. However a very high ratio
may indicate overtrading-the working capital being meager for the scale of operations.
2014 1.28 1.78 2.37 3.32 1.59
Company have to increase its working capital ratio.it needs to increase its sales. In
case of ginni flaments company is in a good position to generate cash from sales
Inventory turnover ratio:-
Computation:- this ratio is calculated as follows:-
Inventory turnover ratio= cost of goods sold
A high turnover ratio indicates that maximum sales turnover is achieved with the
minimum investment in inventory. As such, as a general rule, high inventory ratio is
However, the high inventory turnover ratio should be viewed from some more angles.
Firstly, it may indicate that there is under investment in inventory whereby the
organisation may lose customer patronage if it is unable to maintain the delivery
schedule. Secondly, high inventory turnover ratio may not necessarily indicate
An organisation, in order to achieve a large volume, may sometimes sacrifice on
profits, where by a high inventory turnover ratio may not result into high amount of
On the other hand, a low inventory ratio may indicate over investment in inventory,
existence of excessive or obsolete/non-moving, improper inventory management,
accumulation of inventories at the year-end in anticipation of increased prices or sales
volume in near future and so on.
There can be no standard inventory turnover ratio which may be considered ideal. It may
depend on nature of industry and marketing strategies followed by the organization.
2014 1.74 2.64 3.76 2.34 3.66
The firm have to improve its ratio. The inventory turnover ratio is low which indicates
over investment or improper inventory management. Company should try to make proper
use of inventory.
ASSETS TURNOVER RATIOS:-
Assets turnover measures a firm’s efficiency at using its assets in generating sales
or revenue- the higher the number the better.
It also indicates pricing strategy: companies with low profit margins tend to have
high asset turnover, while those with high profit margins have low asset turnover.
A high assets turnover ratio indicates the capability of the organization to achieve
maximum sales with the minimum investments in assets. It indicates that the
assets are turned over in the form of sales more number of times, as such higher
the ratio, the better will be the situation.
(a)Total assets turnover
Computation: the ratio is computed using the following formula:
Total assets turnover ratio= net sales
2014 0.96 0.67 3.36 1.00 0.71
(b)Fixed assets turnover:-
Computation: The ratio is calculated as follows:
Fixed assets turnover ratio= net sales
Fixed assets include net fixed assets, i.e. fixed assets providing for depreciation.
2014 3.79 0.77 1.52 0.99 0.78
(c)Debtors’ turnover ratio:-
Computation: The ratio will be computes as:
Debtors turnover ratio= net credit sales
Average sundry debtors
This ratio indicates the speed at which the sundry debtors are converted in the
form of cash. However this intention is not correctly achieved by making the
calculations in this way.
2014 6.84 8.15 3.34 10.81 7.52
RETURN ON INVESTMENT:-
The ratio computes in this group indicate the relationship between the profits of a firm and
investment in the firm. There can be three ways in which the term investment may be
interpreted, i.e. assets, capital employed and shareholder’s funds. As such, there can be broad
classifications of ROI:
(a) Return on assets (ROA):-
Computation: This ratio is calculated as:
An indicator of how profitable a company is relative to its total assets. ROA gives
an idea as to how efficient management is at using its assets to generate earnings.
The assets of the company are comprised of both debt and equity. Both of these
types of financing are used to fund the operations of the company. The ROA
figure gives investors an idea of how effectively the company is converting the
money it has to invest into net income.
The higher the ROA number, the better, because the company is earning more
money on investment.
2014 0.17 0.18 0.08 0.13 0.14
All the four except malwa cotton is on same side indicating that the assets have been utilised
well to generate earnings but in case of malwa cotton it is on the lower side so the
management needs to make sure it utilises the assets well enough to generate good earnings.
(b) Return on capital employed (ROCE):
Computation: this ratio is calculated as:
ROCE= Profit before interest and taxes x 100
Average capital employed
It is used in finance as a measure of the returns that a company is realising from
its capital employed.
It is commonly used as a measure for comparing the performance between
businesses and for assessing whether a business generates enough returns to pay
for its cost of capital.
ROCE measures the profitability of the capital employed in the business, a high
ROCE indicates a better and profitable use of long term funds of owners and
creditors. As such, a high ROCE will always be preferred.
2014 13.19 9.36 2.59 8.16 5.77
A high ratio of DCM Textiles indicates a better and profitable use of long term funds of
owners and creditors.
For others company it is satisfactory however, In case of malwa cotton it is low.
The SWOT analysis summarizes the internal factors of the firm as a list of its strengths and
weaknesses and the opportunities and threats it faces from its external environment.
1. Availability of manpower.
2. High quality product.
3. Low price high quality.
4. Availability of raw materials.
1. Heavy transport charges.
2. Major consumption in paper industries but limited paper industries in Karnataka.
After studying the components of working capital management.it s found that the company
has a very sound and effective policy and its performance is very good and has managed to
make good profit. Company is competing well at the domestic as well as the international
level because of its proper management of finance, specially the short term finance known as
the working capital.
The company is a matured one and it has contributed well in the countries growth and
development and will also continue to perform and contribute to the whole nation.
In conclusion, we can say that the company’s management is an effective one and knows well
the management of finance; its working capital management system is very good.
Financial Management by RAVI M. KISHORE
Working Capital Management by V.K.BHALLA
Financial Management by I M PANDEY
Research Methodology by C.R. KOTHARI