Free Essay

Working Capital Management in Textile Industries

In: Business and Management

Submitted By 2gopalv
Words 13940
Pages 56
1. INTRODUCTION

* The project focuses on the importance of financial analysis for the company as financial Statements are useful as they provide information that allows investors and creditors to make better decisions. However, because of selective reporting of economic events as well as non-comparable accounting methods and estimates, financial statements are only an approximation of reality. In addition, because of the tendency to delay accounting recognition, financial statements also tend to lag reality.

* A primary objective of financial analysis is to determine comparable risk and return of companies and their securities. Financial statements include the * Balance Sheet * Income Statement * Cash Flow Statement * The financial statements are interrelated and are used and analysed together. Methods of financial statement analysis are divided into two general categories, internal analysis and comparative or external analysis. * Internal analysis uses figures from the financial statements of any one date or period to gain an understanding of the customer. Comparative analysis is used to determine trends when two or more successive sets of figures are reviewed, or is used to evaluate the company's financial statement against industry standards. * These methods are used separately or in combination. They are part of the tools that enable experienced credit professionals to reach a credit decision. Financial statements are spread and analyzed, with appropriate ratios and flows calculated as an aid in the customer evaluation. As an important first step in internal analysis, the financial statements are examined for validity and general correctness. After the statement has been accepted as valid and reasonably accurate, ratios are calculated and the figures analyzed. Internal analysis calls for an examination of items within a single financial statement for the purpose of judging their significance in relation to the capital of the company, its method of operation and conditions prevailing within the industry. The major tools for internal analysis are balance sheet ratios and a working knowledge of the line of business including the method of operation and seasonal influences. * Ratios are mathematical aids for appraisal and comparison of financial statements. They are used to supplement currency amount inspection, to examine inter-item relationships and to compare a specific company's performance against its industry standard. * The use of ratios reduces the influence of currency size on analysis since these comparisons are expressed as a percentage, fraction, decimal, or rates of turnover. Only the combinations that could be made of the items appearing in both schedules limit the number of ratios that can be developed from the balance sheet and income statement. The type of operation represented by the account and the nature of the risk has an important bearing on what ratios are to be computed and studied.

2. SCOPE & OBJECTIVES OF THE PROJECT

SCOPE: * The scope of the study was confirmed to internal environment only. The study is based on secondary data collected through past annual statements. After duly recognizing the importance of financial statements, analysis of this topic has been chosen as the focus of the project.

OBJECTIVES: * To study the working capital management of the firm * To study the different components of working capital of the company * To calculate the working capital * To study the liquidity position of the company with the help of ratios * To highlight the current position of the textile industries, the problems faced in the current scenario & giving recommendations for the same

3. METHODOLOGY
RESEARCH PROBLEM * To Study the nature, status & scope of Textile industries * To Study the Balance sheet and guide the firm regarding their financial position and their standing among industry competitors. * To analyse the problems & issues of Power loom industry. * To enlighten the pathways to action and give broad indication for different policy options.

RESEARCH DESIGN * A Research design specifies the methods and procedures for conducting a particular study. It is a map (or) blue print to which the research is to be conducted. The major purposes of Descriptive & Exploratory studies are the identification of problems, the more precise Formulation of problems and the formulations of new alternative courses of action. The design of exploratory studies is characterized by a great amount of flexibility and ad-hoc veracity. * Descriptive & Exploratory research design has been considered as a suitable methodology for present study and for data analysis.

DATA COLLECTION * The research data is secondary in nature as for this particular research. The data is collected for the last five years i.e. from 2008 to 2013, in the form of annual reports from the office, containing: * Balance sheet * Income statement * Profit & Loss account

FINDINGS * Performance of the firm in terms of finance * Overall progress of the firm * Loopholes on the organization if any or any area in which the firm is lacking behind or facing problem.

ANALYSIS * Comparison of previous balance sheet * Statistical tools like graphical presentation

4. INDUSTRY PROFILE
ABOUT TEXTILE INDUSTRY

Textile is one of India’s oldest industries and has a formidable presence in the national economy. The Textile Sector in India ranks next to Agriculture .The Textile sector has the second largest share of employment after agriculture. The textiles and clothing sector contributes about 14% to the industrial production and 4% to the gross domestic product (GDP) of the country. Around8% of the total excise revenue collection is contributed by the textile industry. So much so, the textile industry accounts for as large as 21% of the total employment generated in the economy. Around 35 million people are directly employed in the textile manufacturing activities. Indirect employment including the manpower engaged in agricultural based raw-material production like cotton and related trade and handling could be stated to be around another 60 million. Indian textile industry has now achieved a respectable place in the world market. CITI (The Confederation of Indian Textile Industry) has projected the growth of total textile and clothing market at USD 100 billion in 2015 against USD 55 Billion at present. These estimates will see phenomenal growth in the manufacturing, processing and garmenting sectors of the textiles industry, which in turn will throw up the need for an estimated 25 million new jobs. In order to cope with the enhanced requirement of trained man-power on such a massive scale within a short span, the sector will have to be strengthened and augmented for providing this workforce. There is emerging shortage of high quality skills that are needed for the manufacturing, which could erode our competitive advantage. Unless this problem is addressed on an urgent basis we will fail to attain global standards.

Technological modernization being the key to high industrial growth, labour intensive industries like textile, will not only require skilled workforce, but also massive vocational training for skill up gradation of existing workforce, engaged in the organized as well as unorganized sectors, (including handlooms, power looms, wool, khadi, etc.) Education and training are the most critical and crucial elements in empowering people with skills and knowledge and give them access to productive employment. This paper deals with the skills required in textile sector today & status of the existing Educational and Training infrastructure The Textile Industry is a self-reliant industry from the production of raw materials to the delivery of final products with considerable value addition at each stage of processing. The industry was delicensed in 1991 and under the current policy no prior government approval is necessary to set up textile mills. The per capita cloth availability in the country has increased from 24.1 square meters in 1991 to 30.7 square meters in 2000-01.The textile sector including the garment sector has a continual increase in the FDI inflow from Rs.80.99 million to Rs.234.73million. From growing its own raw material (cotton, jute, silk and wool) to providing value added products to consumers (fabrics and garments), the textile industry covers a wide range of economic activities, including employment generation in both organized and unorganized sectors. Manmade fibres account for around 40 per cent share in a cotton dominated Indian textile industry. India accounts for 15% of world's total cotton crop production. And it is the second largest employer after the agriculture sector in both rural and urban areas. India has a large pool of skilled low-cost textile workers, experienced in technical skills. Almost all sectors of the textile industry have shown significant achievement. India's cotton textile industry has a high export potential. Cost competitiveness is driving the penetration of Indian basic yarns and grey fabrics in international commodity markets. Besides natural fibres such as cotton, jute and silk, synthetic raw material products such as polyester staple fibre, polyester filament yarn, acrylic fibre and viscose fibre are produced in India.
India also produces large varieties of synthetic and manmade fibres such as filament and spun yarns from polyester, viscose, nylon and acrylic which are used to manufacture fabric and garments. India’s ministry of Garments is planning to help build integrated Garment parks within two years to support domestic manufacturers’ bid to take full advantage of post quota trading. This and other institutional support could give a big fillip to this sector. Indian companies were planning to invest INR300bn ($6.8bn) over the next two years to upgrade their facilities, to close the gap with China. A new Kurt Salmon Associates Technopak study estimates that the Indian Garments sector needs at least $15bn of investment throughout the Garment chain. Garments and garments continue to maintain its position as the India’s largest single item of exports since 1986. From 1st January 2005, all textile and clothing products are traded internationally without quota-restrictions. And this reality brings the issue of competitiveness to the fore for all firms in the textile and clothing sectors, including those in India. With the dismantling of quotas in 2004 under mandate from the Agreement in Textile and Clothing of the WTO, the focus has clearly shifted to the future of the Indian textile and clothing exports. It is imperative to understand the true competitiveness of Indian textile and clothing firms in order to make an assessment of what lies over a period of time.
The textile industry can be broadly classified into two categories, the organized mill sector and the unorganized decentralized sector. The organized sector of the textile industry represents the mills. It could be a spinning mill or a composite mill. Composite mill is one where the spinning, weaving and processing facilities are carried out less than one roof.
The decentralized sector is engaged mainly in the weaving activity, which makes it heavily dependent on the organized sector for their yarn requirements. This decentralized sector is comprised of the three major segments viz., power loom, handloom and hosiery. In addition to the above, there are readymade garments, khadi as well as carpet manufacturing units in the decentralized sector.
The Indian Textile Industry has an overwhelming presence in the economic life of the country. It is the second largest textile industry in the world after China. Apart from providing one of the basic necessities of life i.e. cloth, the textile industry contributes about 14% to the country's industrial output and about 17% to export earnings. After agriculture this industry provides employment to maximum number of people in India employing 35 million people. Besides, another 50 million people are engaged in allied activities. India is the largest producer of Jute, the 2nd largest producer of Silk, the 3rd largest producer of Cotton and Cellulosic Fibre / Yarn and 5th largest producer of Synthetic Fibres’/Yarn.
Textile Industry contributes around 4% of GDP, 9% of excise collections, 18% of employment in industrial sector, and has 16 % share in the country’s export. The Industry contributes around 25% share in the world trade of cotton yarn. India is the largest exporter of yarn in the international market and has a share of 25% in world cotton yarn export market. India contributes for 12% of the world’s production of textile fibres and yarn. Indian textile industry is second largest after China, in terms of spindleage, and has share of 23% of the world’s spindle capacity.
India has around 6% of global rotor capacity. The country has the highest loom capacity, including handlooms, and has a share of 61% in world loomage. The Apparel Industry is one of largest foreign revenue contributor and holds 12% of the country’s total export.

TEXTILE SECTORS IN INDIA

THE MAN-MADE FIBER / YARN AND POWER LOOM SECTOR
This part of industry includes fibre and filament yarn manufacturing units. The Power looms sector is decentralized and plays a vital role in Indian Textiles Industry. It produces large variety of cloths to fulfil different needs of the market. It is the largest manufacturer of fabric and produces a wide variety of cloth. The sector contributes around 62% of the total cloth production in the country and provides ample employment opportunities to 4.86 million people.
THE COTTON SECTOR
Cotton is one of the major sources of employment and contributes in export in promising manner. This sector provides huge employment opportunities to around 50 million people related activities like Cultivation, Trade, and Processing. India’s Cotton sector is second largest producer of cotton products in the world.
THE HANDLOOM SECTOR
The handloom sector plays a very important role in the country’s economy. It is the second largest sector in terms of employment, next only to agriculture. This sector accounts for about 13% of the total cloth produced in the country (excluding wool, silk and Khadi).
THE WOOLLEN SECTOR
The Woollen Textile sector is an Organized and Decentralized Sector. The major part of the industry is rural based. India is the 7th largest producer of wool, and has 1.8% share in total world production. The share of apparel grade is 5%, carpet grade is 85%, and coarse grade is 10% of the total production of raw wool. The Industry is highly dependent on import of raw wool material, due to inadequate production.
THE JUTE SECTOR
Jute Sector plays very important role in Indian Textile Industry. Jute is called Golden fibre and after cotton it is the cheapest fibre available. Indian Jute Industry is the largest producer of raw jute and jute products in the world. India is the second largest exporter of jute goods in world.
THE SERICULTURE AND SILK SECTOR
The Silk industry has a unique position in India, and plays important role in Textile Industry and Export. India is the 2nd largest producer of silk in world and contributes 18% of the total world raw silk production. In India Silk is available with varieties such as, Mulberry, Eri, Tasar, and Muga. Sericulture plays vital role in cottage industry in the country. It is the most labour-intensive sector that combines both Agriculture and Industry.

EVOLUTION OF TEXTILE INDUSTRIES IN INDIA

1854 – 1900: * The first cotton textile mill of Mumbai was established in the year 1854. * The first cotton mill of Ahmedabad was found in 1861; it emerged as a rival centre to Mumbai.
1901 – 1950: * Number of mills increased from 178 in 1901 to 417 in 1945. * Out of 423 textile mills of the undivided India, India received 409 after partition and the remaining 14 went to Pakistan.
1951 – 2000: * In 1999, TUFS was set up to provide easy access to capital for technological up gradation. * TMC was launched to address issues related to low productivity and infrastructure. * In 2000, NTP was announced for the overall development of the textile and apparel industry.
2000 – ONWARDS: * NTC started selling few mills to private businesses in 2005 * SITP was implemented to facilitate setting up of textile units with appropriate support infrastructure * After MFA cotton prices are aligned with global prices * Technical textile industry will be a new growth avenue * Free trade agreement with ASEAN countries and proposed agreement with EU under discussion

GLOBAL TRADE IN TEXTILE AND CLOTHING -INDIA’S PERFORMANCE During the MFN period, the textile exporters from industrial countries and those from developing countries merely changed shares between themselves during 24 years .The share of industrial countries declined by almost as much (19.2%) as was the gain in the share of developing countries (18.8%). Clothing exporters, however, exhibit significant changes, with the share of top exporters having declined by 13.8%. New entrants have come in as well as some old ones have been knocked out. Of these new entrants, most- if not all- are from developing countries, since the share of industrial countries has declined during the period, and that of developing countries has increased. The countries that are gaining share in clothing exports are the ones whose industries are integrated to one or the other advanced country through some policy-induced preferential arrangements. Mexico, Caribbean region, East European countries and Mediterranean countries are capturing much of the space vacated. There has been a much deeper globalization in clothing than in textiles. Indeed, that has been one of the principal reasons for the developed countries agreeing to an eventual phase-out in the UR of negotiations. While in textiles, there was an inexorable shift away from developed countries in 1973 to1997 and to developing countries at large, in clothing the shift away from developed countries is increasingly being grabbed by ‘preferred’ developing countries. Thus, in clothing, the non-preferred group of developing countries is fighting amongst themselves for a pie that is increasingly declining. One should expect a much higher level of intra-industry and intra-firm trade in clothing than in textiles. This is entirely compatible with the fact that it is the trade in Clothing that is growing faster than that in textile. And this trend is likely to deepen, as Clothing retailers consolidate, and Outward Processing Trade (OPT) traffic increases. The Opportunity clearly lies much more in clothing, though the caveat is the exporting. Country would have to achieve the ‘preferred’ status, and integrate its manufacturing with that of an importing country in order to continue exporting to the restricted markets. The pressure to export would intensify in the years to come since 80% of additional output during 1995-2005 is expected to be located in developing countries. On the other hand, only 50% of the additional fibre consumption would originate in developing countries.

INDIAN TEXTILE INDUSTRY SCENARIO
India is the one of the world's largest producers of textiles and garments. Abundant availability of raw materials such as cotton, wool, silk and jute as well as skilled workforce have made the country a sourcing hub. It is the world's second largest producer of textiles and garments. The Indian textiles industry accounts for about 24 per cent of the world’s spindle capacity and 8 per cent of global rotor capacity. The potential size of the Indian textiles and apparel industry is expected to reach US$ 223 billion by 2021, according to a report by Technopak Advisors.
The textiles industry has made a major contribution to the national economy in terms of direct and indirect employment generation and net foreign exchange earnings. The sector contributes about 14 per cent to industrial production, 4 per cent to the gross domestic product (GDP), and 27 per cent to the country's foreign exchange inflows. It provides direct employment to over 45 million people. The textiles sector is the second largest provider of employment after agriculture. Thus, the growth and all round development of this industry has a direct bearing on the improvement of the India’s economy.

MARKET SIZE
The Indian textiles industry is set for strong growth, buoyed by strong domestic consumption as well as export demand.
The most significant change in the Indian textiles industry has been the advent of man-made fibres (MMF). India has successfully placed its innovative range of MMF textiles in almost all the countries across the globe. MMF production recorded an increase of 10 per cent and filament yarn production grew by 6 per cent in the month of February 2014. MMF production increased by about 4 per cent during the period April 2013–February 2014.
Cotton yarn production increased by about 10 per cent during February 2014 and by about 10 per cent during April 2013–February 2014. Blended and 100 per cent non-cotton yarn production increased by 6 per cent during February 2014 and by 8 per cent during the period April 2013–February 2014.
Cloth production by mill sector registered a growth of 9 per cent in the month of February 2014 and of 6 per cent during April 2013–February 2014.
Cloth production by power loom and hosiery increased by 2 per cent and 9 per cent, respectively, during February 2014. The total cloth production grew by 4 per cent during February 2014 and by 3 per cent during the period April 2013–February 2014.
Textiles exports stood at US$ 28.53 billion during April 2013–January 2014 as compared to US$ 24.90 billion during the corresponding period of the previous year, registering a growth of 14.58 per cent. Garment exports from India is expected to touch US$ 60 billion over the next three years, with the help of government support, said Dr A Sakthivel, Chairman, Apparel Export Promotion Council (AEPC).

INVESTMENTS
The textiles sector has witnessed a spurt in investment during the last five years. The industry (including dyed and printed) attracted foreign direct investment (FDI) worth Rs 6,710.94crore (US$ 1.11 billion) during April 2000 to February 2014.
Some of the major investments in the Indian textiles industry are as follows: * Private Equity (PE) firm Everstone plans to invest Rs 100 crore (US$ 16.62 million) for an undisclosed minority stake in the fashion label of designer Ritu Kumar. * Raymond’s ‘Complete Man’ plans to enter the developed markets in the US, Europe and East Asia as the textile company seeks to expand the network of its Made to Measure (MTM) stores. With plans to invest around Rs 200 crore (US$ 33.24 million), the company is looking for partners to help it grow its overseas business. * Arvind Ltd has picked up the 49 per cent stake held by the Murjani Group in Calvin Klein in India. With this, Arvind and PVH Corp are expected to drive Calvin Klein's business in the country. * Suraaj Linens, India’s leading manufacturer of Home Textiles articles, has launched a new line of modern home textiles that reflect trendsetting patterns, fabrics and styles. * American apparel-maker, Tommy Hilfiger plans to add 500 stores in India over the next five years as part of their expansion spree. Currently, Tommy Hilfiger operates 58 franchised outlets and over 60 shop-in-shops in other department stores.

GOVERNMENT INITIATIVES
The Government of India has promoted a number of export promotion policies for the textiles sector. It has also allowed 100 per cent FDI in the Indian textiles sector under automatic route.
Some of initiatives taken by the government to further promote the industry are as under: * The government has taken a lot of initiatives for the welfare and development of the weavers and the handloom sector. Under revival, reform and restructuring (RRR) package, financial assistance to the tune of Rs 1,019 crore (US$ 169.66 million) has been approved and the Indian government has released Rs 741 crore (US$ 123.42 million). * Encouraged by turnaround in textiles exports, the Government of India plans to set up a US$ 60 billion target for the current financial year, a jump of over 30 per cent from the previous financial year. * The Cabinet Committee on Economic Affairs (CCEA) has approved an Integrated Processing Development Scheme (IPDS) with a corpus of Rs 500 crore (US$ 83.28 million) to make textiles processing units more environment-friendly and globally competitive. * The Government of India plans to set up an Rs 100 crore (US$ 16.62 million) venture capital fund to provide equity support to start-ups in the textiles sector, in order to encourage innovative ideas in this export intensive sector. * The Government of India has allotted Rs 700 crore (US$ 116.60 million) in the 12th Five Year Plan for the development of technical textiles. In 2012–13, the technical textiles industry reached Rs 7.48 trillion (US$ 124.60 billion) at an annual growth rate of 3.5 per cent.

ROAD AHEAD
The Indian textiles industry is set for strong growth, buoyed by both strong domestic consumption as well as export demand. The industry is expected to reach US$ 220 billion by 2020, according to estimates by Alok Industries Ltd.
The Central Silk Board sets targets for raw silk production and encourages farmers and private players to grow silk. To achieve these targets, alliances with the private sector, especially major agro-based industries in pre-cocoon and post-cocoon segments have been encouraged.
For the textiles industry, the proposed hike in FDI limit in multi-brand retail will bring in more players, thereby providing more options to consumers. It will also bring in greater investments along the entire value chain – from agricultural production to final manufactured goods.
With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with several international players such as Marks & Spencer, Guess and next having entered the Indian market. The organised apparel segment is expected to grow at a compound annual growth rate (CAGR) of more than 13 per cent over a 10-year period.

5. TEXTILE MANUFACTURING PROCESS -FLOWCHART & SEQUENCE

Textile Manufacturing is a science and followed by a strict process. Each process of textile manufacturing is maintained with pre-defined sequences and the textile engineers usually follow the flow chart step by step to produce the better textile products that have been ordered by buyer.
Usually, the whole textile manufacturing process is divided by four segments. These are: * Yarn Manufacturing or Spinning * Fabric Manufacturing or Weaving. * Dyeing, Printing & Finishing * Garments Manufacturing or Clothing.
Here, each manufacturing process is discussed step by step so that the idea of each sequence is made clear.

YARN SPINNING MANUFACTURING PROCESS SEQUENCE
Blow room: Where different types of quality cotton are mixed up by a blower.
Carding: All the dust and darts are being removed from the Cotton in this stage.
Drawing: Cotton is polished and formed to a sliver.
Combing: More dirt and dusts are removed by combing process.
Roving: Cotton Lap is formed slightly to the yarn.
Simplex/Yarn Manufacturing: Eventually the roved yarn is turned into a complete yarn on this stage.

FABRIC OR WEAVING MANUFACTURING PROCESS
Yarn Selection: Select the right yarn from the Yarn Manufacturing section.
Doubling and Twisting: Mixing up the yarn with one of low quality to high quality so that it reduces the cost.
Winding: Building up to a form so that it can be taken to next step of processing easily.
Creeling: Setting up the Winded form yarn to stake by stake so that each yarns can be drawn individually.
Warping: Winding the yarn into a beam.
Sizing: A process to apply sizes on the yarn so that it seems strong to protect the breakage while looming.
Beaming: Winding the sized yarn over the Warp beam which will be taken to the loom.

DYEING, PRINTING AND FINISHING PROCESSING IN TEXTILES
Gray Cloth Inspection: Inspecting the right cloth for dyeing and further processing.
Stitching: Stitching one cloth with another cloth for a continuous dying process.
Cropping: Cropping the fabric for suiting with machineries.
Brushing: To remove the protruding fibre from over the cloth this process is started.
Singeing: Applying another precise method to cut over the small and protruding fibres.
Desizing: Removing sizes from the clothes, so that it can be dyed or printed easily.
Scouring: Removing gums and natural oils from the textile fabrics.
Bleaching: In the process, each of the fabrics is bleached to gain the natural white colour.
Washing: Washing the process fabrics by detergents and cold waters then.
Drying: After washing; it is mandatory to dry these fabric for better dyeing operations.
Mercerizing: Applying hot iron over the cloth so it stays in form always.
Printing: Printing the fabrics according to the pre-defined designs of printers with selective colours.
Dyeing: Applying Dyes and desired colour schemes over the cloth.
After-Treatment: Applying some chemicals to protect the fabric from worm, bacteria.

PROCESS FLOWCHART OF GARMENTS MANUFACTURING OR CLOTHING SEQUENCE: * Designing & Sketching the fabrics * Designing the Patterns of the fabrics * Making samples once before bulk production * Grading the fabrics for further pick up advantages * Marker Making: Making dummies for the precise production of textiles. * Spreading: Processing the fabrics over a table to cut it according to the designs. * Cutting the fabrics * Sorting and Bundling: After sorting these fabrics; it will be bundled to specific sizes. * Sewing and Assembling: Sewing is required to add all the separate cut clothes into wear-able products. * Inspection: In this section all the faulty textile fabrics or cloths are found out and then sort it. * Packing and Despatch: After the final inspection; all the clothing is being packed in a particular size of bags and then sent to dispatch section for market it.
This is the whole Textile Manufacturing process and each textile industry of this world follow this exact same flowchart and process sequence to make every cloth we wear.

6. PROBLEMS FACED BY TEXTILES INDUSTRIES IN CURRENT SCENARIO
RAW MATERIAL
COTTON YARN:
The textile industry plays very important role in Indian economy. It ranks second after the agriculture. Besides the industrial production, it provides employment to millions of the people of the country and gives a handsome earning of foreign exchange through export. It is also source of livelihood in villages and remote areas. Millions of people in our country depend upon it. The rapid growth and development of this industry is remarkable. The Indian textile industry is consisted of the following three groups
i) Mill Sector ii) Handloom Sector iii) Power loom Sector Or in terms of fabrics used namely cotton textiles, woollen textiles, manmade Textiles and Silk textiles As far as power loom industry of Malegaon is concerned, it is categorized in cotton textiles. This power loom industry is fully dependent on cotton yarn either in the form of cone or hank. So also the power looms depend on the textile mills for the supply of yarn.
EXPLOITATION BY YARN MERCHANTS:
The power loom industry faces the exploitation from the yarn merchants. The composite mills produce and supply the yarn to the power loom weavers. For the distribution of yarn, a circle has been formed by them.
They have installed their own sale depots at the different power loom centres. These depots are actually run by the relatives of the spinning mill management. These relatives of the mill management arrange these sell depots. With their help the sell and purchase business of yarn is carried out. In this manner, the yarn reaches the actual users or the weavers through 5 to 6 mediators. In each hand the profit is added. There are number of traders buying the yarn, so the prices go higher and higher as demand increases. Ultimately artificial shortage of yarn is created in the market. Apart from this, the traders do not pay the sales tax to the government in this way the Union Government loses crore of rupees. This malpractice is going on since the yarn is produced. Though many times this has been brought to the notice of the Government it has failed to take effective steps in the matter. No doubt the small power loom owners who are financially poor, are very much in the grip of mill owners and middlemen and are being exploited and put to hardship.
MILL OWNERS AND POLITICAL LEADERS:
The mill owners and political leaders have stakes in badly affecting power loom owners and hence they provide funds to political parties to get their interests protected.
FLUCTUATION IN YARN PRICES:
One more problem of fluctuating prices of yarn was very troublesome. The prices of yarn were fixed by the capitalists, Mill owners and the middlemen by creating artificial shortage of yarn. Instead of this the following factors caused to make the yarn available on a high cost.
1) The Government exports the raw cotton as well as finer yarn to earn foreign exchange.
2) As a result, the shortage of raw cotton and yarn is created and ultimately the prices of yarn go up.
The Government has provided loan to the spinning mills. These spinning mills are in great loss. The capital of Government is blocked in these spinning mills. So that the government forced them for the production of finer yarn in order to get back the blocked capital in spinning mills.
COLOUR, CHEMICAL AND ACCESSORIES:
Colour and chemicals are required for dying and bleaching the yarn. These materials were supplied by the dealers, wholesalers and agents in the market. There were no shortages of these materials. It never created any problem for the industry.
The artificial shortage was created to get the huge profit. Most of the Muslims started business of colour and chemicals. But due to lack of sufficient knowledge and capital, they could not succeed. At a point in the year 1980s India was one of the biggest exporter of the dow chemical and the colour and chemicals which is used to dying the cloth but due to many government and political interference the company started closing as the colour company could not face the demands by the government and by 1998 all the colour company in Maharashtra were closed and only few were left in Gujarat and in few year even that closed and after that India has to import that colour from china who was no way near to India in the 90s to compete in this segment and due to this the prices of this colour has increased like anything a colour which use to come earlier at around 400 to 500Rs is now been sold at around 2500 which ha shoot up the costing of all the people who are making cloth resulting in costly manufacturing.
RENTAL BASIS:
Majority of the property in the Bhiwandi area is owned by the politician or the people who earlier use to live over there who had land for farming and they gave it for working purpose so due to this the property holder are not willing to sell their property and instead they rent that property which many mill , power loom, and packing people face as they year by year increase the rent the even if a person is looking to buyout any place the prices are too high so people opt out of this and due to this rental scenario many of the people have shifted their base from Bhiwandi to surat as that place is more favourable and easy to work and also the chances of malpractices is very less so people are favouring that place instead of Bhiwandi.
LABOUR ATTRITION RATE:
Labour attrition is the major problem for textile industries. In Amar textiles as well, they have a lot of problems while employing workers. There is scarcity of labour and people are not willing to work especially because of the distance. And even if workers agree to work, there are high chances of them not being skilled – fitter, machinist etcetera. Despite of being skilled, they have problems of attitude and lack motivation and the right mindset. Middle level management is also a problem. A single person keeps running here and there. He is the one who looks after the operations single handily. So, he is not able to keep an eye on everything that is going on. If the operations are not monitored regularly, it creates problems. The manager, due to these reasons, may leave the job. TRANSPORTATION: For flourishing of any industry transportation is one of the important factors. For easy and quick transportation, there must be good roads connected to the market centres, for the transportation of prepared goods as well as to carry the raw materials at the industrial place.
ROLE OF FINANCIAL INSTITUTION:
From last year and a half with so many problem being faced by the textiles people as finance is one big problem as new entrant in this field are not able to cope up with the existing players as in both the terms financially and non-financially as they face an uphill task ahead. Also many financial institution has negative marked this area as they are not willing to lend money so easily also people are facing huge problem in generating money from the market also the number of people defaulting in payment has gone up, as this being one reason. Also the parties defaulting in payment or getting bankrupt is increasing at a great pace.

7. COMPANY PROFILE

Amar Textiles was established in the year 1992 by Om Prakash Verma along with his partner Bhagwati Prashad Mundhra but is now handled by Mr.Om Prakash Verma as a Sole Proprietor. The manufacturing unit is located at Bhiwandi, Navi Mumbai. The main products that are manufactured and dealt in are Jacket material and ladies dress material. Their main customers are located in North India at places like Punjab, Delhi, and Indore and also in Eastern regions like Kolkata. The company started the business with the simple plain cloth manufacturing and gradually they started manufacturing different varieties in the same. After 2 years, they started a new product of ladies dress material also in between the company tried their hands in different things like running mills though that did not work out for them and in some time they stopped that work and in the year 1997, developed a new cloth of peach finish (which is of velvet type) which was used inside the jacket that they manufactured. That was the product that made their name in the market as Amar textiles was the first one to introduce such a cloth in that material. Thereafter, it became their main product. They also manufactured other varieties of cloth material like gents shirtings and they also experimented with some safari suit cloth for men but that didn’t work out. But their priority remained their ever changing designs and new materials of good quality and at good prices. Also the new development in the area of jacket material was very important since, in the last 4 years that material was also changed and new good quality materials were manufactured.

The company’s policy is that it does not trade directly with customers; but through brokers. At present, most of their sales are of pure cotton and pure polyester. At present, their main market for trade is in the North of India and for ladies dress material it is Kolkata and Indore.

PRODUCTS OF AMAR TEXTILES * Jacket cloth * Ladies dress material * Gents shirting * Safari suit cloth * Linen cotton

QUALITIES PRODUCED UNDER THESE PRODUCTS ARE: * N.S: IN 44’ & 58’ * ICON: IN 44’ & 58’ * DHOOM: ONLY IN 58’ * PC(Pure Cotton): IN 44’ * RAYMOND COTTON: IN 44’ & 58’

8. BCG MATRIX FOR AMAR TEXTILES
BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and it’s potential. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand, which brands the firm should invest in and which ones should be divested.

STARLadies Dress Material | Question marksLinen CottonGents Shirting | Cash cowJacket Material | DogsSafari suit |

9. WORKING CAPITAL AND ITS CONCEPTS

MEANING AND DEFINITION OF WORKING CAPITAL
Working capital is the amount of funds which a company has to finance its day to day operations it can be regards as the part of capitals which the capitals is basically classified into fixed and working. Fixed capital is normally invested in fixed assets and working capital in current assets. It is used in day to day operations. These are the funds that are invested in current assets. The form of these current assets keeps on changing. Ex: Raw material to work in progress to finished product. , so it is also called circulating capital. A study of working capital is of major part of the external and internal analysis because of its close relationship with the current day to day operation of the business. Working capital consists of broadly for that the assets of a business that are used at related current operation and is represented by raw material, stores, work in progress, and finished goods merchandise, bills receivable.

DEFINITION OF WORKING CAPITAL “Working capital is the amount of funds necessary to the cost of operating the enterprise. Operating expenses involve investment in current assets, payment towards overhead and expenses. Investment made in these heads is classified as working capital”.

GROSS WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITY

CONCEPT OF WORKING CAPITAL
There are two concepts of working capital that are: 1) Balance sheet concept 2) Operating cycle concept.

1) BALANCE SHEET CONCEPT

Working capital as per this defined in terms of current assets and current liabilities. Balance sheet concept further classifies working capital into a) gross and b) net working capital. a) Gross working capital: it refers to total investment made in current assets. It is also called circulating rotating from one head to another. Ex. Cash to raw material, raw material to finished products, finished products to debtors, and debtors to cash. This concept stresses on quantity aspect; i.e. to refer to total investment made in different current assets. Bonneville and beway have defined gross working capital as ’’ any fund received which increases the current assets”.
b) Net Working capital: as per this concept working capital is the difference between current assets and current liabilities. This concept stresses on quality aspect of working capital. The difference between current assets highlights on liquidity aspect and quality of current assets. A firm that has excess of current assets over liabilities is said to possess adequate liquidity. On the contrary firm that has excess of current liability over current assets means it does not have adequate liquidity. It means that part of current assets of such firm are financed through fixed assets. 2) OPERATING CYCLE CONCEPT:
Operating Cycle or Working Capital Cycle indicates the length of time between affirms paying for raw materials entering into finished stock and receiving cash on the sales of such Finished Stock.

This operating cycle differs from firm to firm. Longer the operating cycle greater will be the amount of Working Capital required and vice versa. Thus it plays an important role in determining the Working Capital needs of a firm.

OPERATING CYCLE CHART

Cash
Raw Materials
Work In Process
Finished good
Sales
Debtors
Cash
Raw Materials
Work In Process
Finished good
Sales
Debtors

Operating Cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash.

CLASSIFICATION OF WORKING CAPITAL Working capital can be classified on the basis of concept and on the basis of time. Various types of working capital are as follows

1) ON THE BASIS OF CONCEPT: Working capital on this basis of concept is classified into A) Gross working capital: It refers to total investment made in current asset. Current assets are the asset which can be converted into cash within a short period of an accounting year. Current assets include cash, debtors, bills receivables and short term securities etc. B) Net working capital: It is the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. Positive net working capital will arise when current asset exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets.

1) ON THE BASIS OF TIME :

Classification of working capital in this case is made on the basis Of time for which investment is required. Kinds of working capital in
This category is:
1) Permanent: Some portion of working capital always remains permanent or fixed. This refers to minimum investment a firm has to make and keep in certain current assets. Firm has to always maintain minimum cash balance, inventory, debtors etc. as their current assets are required permanently. They are normally financed through long term capital.
Such permanent working capital is further classified into a) regular and b) reserve

a) Regular: regular permanent working capital is used in routine business operations.
b) Reserve: reserve working capital refers to some portion of working capital that is kept as reserve to meet any contingency.

2) TEMPORARY WORKING CAPITAL:

Required of such capital varies or fluctuates depending on season. Its requirement is not continuous it is normally finance through short term sources, like overdraft, cash credit and other short term liabilities.
Temporary working capital is further classified into: A) Seasonal working capital: requirement of working capital is based on particular seasons
Ex; winter, summer or festival seasons etc during these seasons there will be additional demand for the products. To meet out such demand firm has to make additional arrangement of working capital.
B) Special working capital: requirement of such working capital is necessitated to meet demands of special occasion’s ex. Occasion of world cup cricket, Olympics, kumba mela, elections. During these special occasions demand for goods and service will increase. To meet such special demand firm has to make temporary arrangement of working capital

DETERMINANTS OF WORKING CAPITAL

Requirement of working capital differs from one firm to other. This is because of business conditions and policies of conducting business differ. Working capital required by each from is determined by following factors. * Nature of business: important factor that determines requirement of working capital is nature of business a firm is undertaking. Firm that is engaged in production and marketing need more working capital compared to the firm that are in trading or service oriented business. This is because manufacturing units need more current assets compared to service oriented units. * Size of business: Size of the business obviously determines the requirement of the working capital bigger the size more is the requirement of the working capital. Larger the scale of operations, larger the investment required in current assets.

* Operating cycle: Operating cycle means period from which investment is locked up in different operations. Longer the period of inventory holding, work in progress, finished goods etc more is the investment needed in the operations. This necessities more investment in current assets. * Stock turn over: stock turnover refers to number of times stock is turned over that is it refers to sales. Quicker the stock turn over (quick sales) less is the working capital. Slow pace of stock turnover demands more investment is locked up in operation.

* Credit policy: Credit policy of the firm will influence requirements of working capital. Firms that offer liberal credit to the debtor have made more investment in production operations. Such firms need more working capital to keep their production operation continuous. Requirement of working capital will be much more if the firm buys on cash and sells on credit. On the contrary firms that buy on credit and sell on cash basis need less working capital.

* Production policy: Firms that undertakes all production operations within the organization need more working capital. Such firms have to make investment to manufacture every component or part. On the contrary, firms which undertake outsourcing that is buying some of the components or parts from outside agencies need less working capital.

* Growth of business: Firms that are experiencing growth need more working capital. Such firms have to constantly increase their production levels. To meet rising needs of sales targets. They need to continuously increase investment in current assets.

* Earning capacity and its appropriation: Firms that earn sufficient profits and invest a portion of profit in business needs less working capital. Ploughing back of profits and accumulated reserves will minimize dependency on external capital for working capital needs. On the contrary firms that follow liberal divided policy are firms that do not have adequate surplus need to borrow more to meet regular working capital needs.

IMPORTANCE OF WORKING CAPITAL

The firm’s aim is that maximizing the wealth of shareholders. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for generating of sales activity. Current assets are needed because sales do not convert into cash instantaneously. There is always an operating cycle involved in the conversion of sales into cash. Therefore Working Capital required for:

1) To meet the cost of inventories including total of raw materials purchased parts, operating Supplies, work in progress, finished goods. 2) To pay wages, salaries, for indirect labour, clerical staff, managerial and supervision staff. 3) To meet overhead costs, including those of maintenance services activities, fuel, power charges, taxes and general expense administration. * To bear the expansion (with regard to promotion of sales) e.g. expenses on packing, advertisement, salesmanship, Sales Servicing, After requires, Credit Facilities, Delivery Services, etc. Even though the skills for maintaining the working capital are somewhat unique, the goals are the same-viz. to make an efficient use of funds for minimizing the risk of loss to attain profit objectives.

Firstly, the adequate of working capital contributes a lot in raising the credit-standing of a corporation in terms of favourable rates of interest on bank loan, better terms on goods purchased, reduced cost of production on account of the receipt of cash discounts, etc.

Secondly, a company with sufficient working capital is always in a position to take the advantage of any favourable opportunity either to purchase raw materials or to execute a special order or to wait for better market position.
In the third place, the ability to meet all reasonable demands for cash without inordinate delay is a great psychological factor to improve the all rounds efficiency of the business.
Lastly, during slump the demand for working capital, instead of coming down, shoots up. A good amount of working capital is locked up in the inventories and book debts. Concerns having ample resources can tide over that period of depression.
Thus, working capital is regarded as one of the conditioning factors in the long run operations of the firm, which is often inclined to treat it as an issue of short run analysis and decision making.

COMPONENTS OF WORKING CAPITAL: There are two components of Working Capital A. Current Assets B. Current Liabilities

A) Current Assets: Components of Current Assets are as follows:
1. Cash & Bank Balance
2. Stock of Raw Material at cost- work in process and Finished Goods.
3. Advanced Recoverable in Cash or kind or kind or for value to be received.
4. Deposits under the company scheme.
5. Advanced payment of income takes credit certificates...
6. Outstanding debts for a period exceeding six months.
7. Balance with central excise authorities.

B) Current Liabilities: Components of Current Liabilities are as follows:
1. Sundry Creditors for the goods and expenses.
2. Income tax deducted at sources from contractors.
3. Expenses Payable.
4. Unclaimed Dividend.
5. Security Deposits.
6. Liabilities for bills discounted.
7. Bank Overdraft Acceptance.

Working Capital Management concerned with the following aspects:
1. Cash Management: Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash is the liquid form of an asset. It is the ready money available in the firm or with the business, essential for its operations. A firm needs the cash for the following three purposes:
(a) The Transaction Motive
(b) The Precautionary Motive
(c) The Speculative Motive
2. Receivables Management:
Receivable represents amounts owed to the firm as a result of sale of goods or services on the ordinary course of business. These are claims of the firm against its customers and form part of its current assets. These receivables are carried for the customers. The period of credit and extent of receivables depends upon the credit policy followed by the firm. The main purpose of maintaining or investing in receivables is to meet competitors, to increase sales, and to maintain a cordial relationship with the clients.
3. Inventory management: Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution process. There is, generally a time lag between the recognition of a need and its fulfilment. The greater the time lag, the higher the requirements for inventory. The unforeseen fluctuations in demand and supply of goods necessitate the need for inventory. Moreover, it provides a cushion for future price fluctuations.

10. FINANCIALS OF AMAR TEXTILES
Balance Sheet of Amar textiles as on 2008 to 2011 PARTICULARS | 2008-2009 | 2009-2010 | 2010-2011 | 1.NON-CURRENT LIABILITIES | | | | | | | | (a)Long Term Borrowings | 92089101 | 108979856.5 | 99195482.45 | | | | | | | | | TOTAL | 92089101 | 108979856.5 | 99195482.45 | | | | | 2.APPLICATIONS OF FUNDS | | | | a)Fixed Assets | | | | i)Gross Block | 63334153.19 | 65655519.7 | 67224145.61 | ii)Less: Depreciation Reserve | 31563461.15 | 35069978.15 | 39784514 | iii)Net Block | 31770692.04 | 30585541.54 | 27439631.6 | iv)capital WIP | 2044786.268 | | 832976.468 | | | | | TOTAL | 33815478.31 | 30585541.54 | 28272608.08 | b)Investment | 100 | 100 | 40 | c)Current Assets, Loans &Advances | | | | i)Inventories | 7597248.724 | 10796280.98 | 22360536.38 | ii)sundry debtors | 1734281.052 | 4080027.9 | 2299344.042 | iii)cash and bank balance | 14762.916 | 30471.906 | 21498.992 | iv)other current assets | 2532698.42 | 1883094.512 | 1783854.632 | v)Loans Advances | 258219.39 | 3125369.892 | 5034786.804 | vi)Inter-sub unit office current a/c | | | | vii) Inter- unit office current a/c | | 2351168.964 | 15359302.4 | | | | | TOTAL (A) | 12077210.5 | 50393814.16 | 46859323.26 | LESS | | | | Current liabilities Provision | | | | i)Current liabilities | 7562977.32 | 11632408.57 | 18027732.88 | ii)Provision | 9330374.1 | 10669590 | 10438458.3 | iii)Inter sub office current a/c | | 31519.8 | | TOTAL (B) | 16893351.42 | 22333518.37 | 28466191.18 | Net current assets/liabilities (A-B) | -4816140.918 | 28060295.79 | 18393132.07 | Miscellaneous expenses | | | | Inter unit current a/c | 10609904.01 | | | d)Profit & loss a/c (Balance as per annexed a/c) | 73699637.64 | 50333989.2 | 52529712.3 | | | | | TOTAL | 92089101 | 108979856.5 | 99195482.45 |

Balance Sheet of Amar Textiles as on 31st March 2011-2012 & 2012-2013 PARTICULARS | 2011-2012 | 2012-2013 | 2.Non-current liabilities | | | a)Long term Borrowings | 272031542 | 200123492.2 | b)Deferred tax Liabilities | | | c)Other Long term liabilities | | | d)long term provisions | 10337599.5 | 10289265 | SUB TOTAL(1) | 282369141.5 | 210412757.2 | 3.Current liabilities | | | a)Short term borrowings | | | b)Trade payable | 4534757.172 | 9653289.396 | c)Other current liabilities | 12044497.54 | 10681463.48 | d)Short term provisions | 1455593.7 | 345096.3 | e) Inter-sub unit office current a/c | | | f) Inter- unit office current a/c | | | | | | SUB TOTAL(2) | 18034848.42 | 20679849.18 | TOTAL(1+2) | 300403989.9 | 231092606.4 | II.ASSETS | | | 1.Non-current asset | | | a)Fixed assets | | | i)Tangible assets | 42724798.32 | 41602602.56 | ii)Intangible assets | | | iii)Capital WIP | 119135126 | 62934799.08 | iv)Intangible assets under development | | | SUB TOTAL(a) | 161859924.3 | 104537401.6 | b)Non-current investment | 100 | 100 | c)Deferred Tax asset(net) | | | d)Long term loans & advances | 4060050.448 | 16044174.96 | e)other noncurrent assets | 3600 | 76549.8 | SUB TOTAL(1) | 165923604.7 | 120658156.4 | 2.current assets | | | a)Current investment | | | b)Inventories | 34679940.22 | 38420695.68 | c)sundry debtors | 4854652.048 | 7571879.248 | d)cash and bank balance | 604326.258 | 4999225.472 | e)Short term Loans Advances | 1721896.794 | 948934.6832 | f)other current assets | 2497889.568 | 2096571.768 | g)Inter-sub unit office current a/c | | | h) Inter- unit office current a/c | 24335702.76 | 13270780.18 | SUB TOTAL(2) | 68694407.64 | 67308087.04 | TOTAL(1+2) | 234618012.4 | 187966243.4 |

LIQUIDITY POSITION OF THE FIRM
CURRENT RATIO
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better.

Formula: |

CASH RATIO

Cash ratio is the ratio of cash and cash equivalents of a company to its current liabilities. It is an extreme liquidity ratio since only cash and cash equivalents are compared with the current liabilities. It measures the ability of a business to repay its current liabilities by only using its cash and cash equivalents and nothing else.
Formula:

Cash ratio is calculated using the following formula:

Cash Ratio = Cash + Cash Equivalents Current Liabilities

Cash equivalents are assets which can be converted into cash quickly whereas current liabilities are those liabilities which are to be settled within 12 months or the business cycle.

QUICK RATIO

The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

Formula: |

INVENTORY TURNOVER RATIO

Inventory turnover is the ratio of cost of goods sold by a business to its average inventory during a given accounting period. It is an activity ratio measuring the number of times per period; a business sells and replaces its entire batch of inventory again.

Formula:
Inventory turnover ratio is calculated using the following formula:
Inventory Turnover = Cost of Goods Sold Average Inventory

Cost of goods sold figure is obtained from the income statement of a business whereas average inventory is calculated as the sum of the inventory at the beginning and at the end of the period divided by 2. The values of beginning and ending inventory are obtained from the balance sheets at the start and at the end of the accounting period.

ACCOUNTS RECEIVABLE TURNOVER RATIO

Accounts receivable turnover is the ratio of net credit sales of a business to its average accounts receivable during a given period, usually a year. It is an activity ratio which estimates the number of times a business collects its average accounts receivable balance during a period.
Formula:

Accounts receivable turnover is calculated using the following formula:
Receivables = Net Credit Sales
Turnover Average Accounts Receivable

We can obtain the net credit sales figure from the income statement of a company. Average accounts receivable figure may be calculated simply by dividing the sum of beginning and ending accounts receivable by 2. The beginning and ending accounts receivable can be found on the balance sheets of the first and the last day of the accounting period.

Accounts receivable turnover is usually calculated on annual basis; however for the purpose of creating trends, it is more meaningful to calculate it on monthly or quarterly basis.

WORKING CAPITAL

One of the main reasons serious investors look at a balance sheet is to find out a company's working capital (or "current") position. Working capital reveals more about the financial condition of a business than almost any other calculation because it tells you what would be left if a company took all of its short-term resources, and used them to pay off its short-term liabilities. The more working capital a firm has on hand, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt. Calculating Working Capital

Working Capital is the easiest of all the balance sheet calculations.

Formula:
Current Assets - Current Liabilities = Working Capital

One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor

Components:

RATIO ANALYSIS - CURRENT RATIO | Year | Current assets (Rs in Crore) | Current liabilities (Rs in crore) | Ratio (%) | 2008-2009 | 12077210.5 | 7562977.32 | 1.596885723 | 2009-2010 | 50393814.16 | 11632408.57 | 4.332190867 | 2010-2011 | 46859323.24 | 18027732.88 | 2.599290967 | 2011-2012 | 68694407.64 | 18034848.42 | 3.808981703 | 2012-2013 | 67308087.04 | 20679849.18 | 3.254766825 | | | | | | | | ABSOLUTE LIQUID/CASH RATIO | | | Year | Absolute liquid asset (Rs in Crore) | Current liabilities (Rs in crore) | Ratio (%) | 2008-2009 | 14762.916 | 7562977.32 | 0.001951998 | 2009-2010 | 30471.906 | 11632408.57 | 0.00261957 | 2010-2011 | 21498.993 | 18027732.88 | 0.001192551 | 2011-2012 | 604326.258 | 18034848.42 | 0.033508807 | 2012-2013 | 4999225.472 | 20679849.18 | 0.241743807 | | | | | ACID TEST RATIO | | Year | Liquid Assets (Rs in Crore) | Current liabilities (Rs in crore) | Ratio (%) | 2008-2009 | 4514233.184 | 7562977.32 | 0.596885723 | 2009-2010 | 38761405.59 | 11632408.57 | 3.332190866 | 2010-2011 | 28831590.37 | 18027732.88 | 1.599290968 | 2011-2012 | 32659559.23 | 18034848.42 | 1.810913986 | 2012-2013 | 46628237.84 | 20679849.18 | 2.254766825 | | | | | INVENTORY STOCK TURNOVER RATIO | Year | Sales (Rs in Crore) | Inventories (Rs in Crore) | Times | 2008-2009 | 54270427.72 | 7597248.724 | 7.14343175 | 2009-2010 | 77206359.12 | 10796280.98 | 7.151199502 | 2010-2011 | 88958142.28 | 22360536.38 | 3.978354578 | 2011-2012 | 77535456.68 | 4854652.048 | 15.9713726 | 2012-2013 | 135997865.4 | 7571879.248 | 17.96091313 | | | | | DEBTORS TURNOVER RATIO | Year | Total Sales (Rs in Crore) | Debtors (Rs in crore) | Times | 2008-2009 | 54270427.72 | 1734281.052 | 31.29275251 | 2009-2010 | 77206359.12 | 4080027.9 | 18.92299784 | 2010-2011 | 88958142.28 | 2299344.042 | 38.68848708 | 2011-2012 | 77535456.68 | 4854652.048 | 15.9713726 | 2012-2013 | 135997865.4 | 13461118.66 | 10.10301364 |

WORKING CAPITAL OF THE FIRM

WORKING CAPITAL | Year | Current assets (Rs in Crore) | Current liabilities (Rs in crore) | Working Capital (Rs in Crore) | 2008-2009 | 12077210.5 | 7562977.32 | 4514233.18 | 2009-2010 | 50393814.16 | 11632408.57 | 38761405.59 | 2010-2011 | 46859323.24 | 18027732.88 | 28831590.36 | 2011-2012 | 68694407.64 | 18034848.42 | 50659559.22 | 2012-2013 | 67308087.04 | 20679849.18 | 46628237.86 |

11. FINDINGS & ANALYSIS

CURRENT RATIO

The current ratio is used extensively in financial reporting. However, while easy to understand, it can be misleading in both a positive and negative sense - i.e., a high current ratio is not necessarily good, and a low current ratio is not necessarily bad (see chart below).

Contrary to popular perception, the ubiquitous current ratio, as an indicator of liquidity, is flawed because it's conceptually based on the liquidation of all of a company's current assets to meet all of its current liabilities. In reality, this is not likely to occur. Investors have to look at a company as a going concern. It's the time it takes to convert a company's working capital assets into cash to pay its current obligations that is the key to its liquidity. In a word, the current ratio can be "misleading."
When looking at the current ratio, it is important that a company's current assets can cover its current liabilities; however, investors should be aware that this is not the whole story on company liquidity. Try to understand the types of current assets the company has and how quickly these can be converted into cash to meet current liabilities.

The company’s current ratio was very low in 2008-09 while it almost doubled in the next financial year. The ratio has been showing quite a fluctuating trend but it has been stable for the year 2011-12 & 2012-13. It is to be noted that this fluctuation is being caused by an increase in current liabilities.

CASH RATIO A cash ratio of 1.00 and above means that the business will be able to pay all its current liabilities in immediate short term. Therefore, creditors usually prefer high cash ratio. But businesses usually do not plan to keep their cash and cash equivalent at level with their current liabilities because they can use a portion of idle cash to generate profits. This means that a normal value of cash ratio is somewhere below 1.00.

The absolute liquid ratio or cash ratio has been stable below 1.00 from year 2008-11. It increased in 2011-12 due to rise in absolute liquid assets, while in 2012-13 the ratio almost shot up to a high level due to drastic increase in liquid assets of the firm.

QUICK RATIO

As previously mentioned, the quick ratio is a more conservative measure of liquidity than the current ratio as it removes inventory from the current assets used in the ratio's formula. By excluding inventory, the quick ratio focuses on the more-liquid assets of a company.

The basics and use of this ratio are similar to the current ratio in that it gives users an idea of the ability of a company to meet its short-term liabilities with its short-term assets. Another beneficial use is to compare the quick ratio with the current ratio. If the current ratio is significantly higher, it is a clear indication that the company's current assets are dependent on inventory.

While considered more stringent than the current ratio, the quick ratio, because of its accounts receivable component, suffers from the same deficiencies as the current ratio - albeit somewhat less.
In brief, both the quick and the current ratios assume a liquidation of accounts receivable and inventory as the basis for measuring liquidity.

While theoretically feasible, as a going concern a company must focus on the time it takes to convert its working capital assets to cash - that is the true measure of liquidity. Thus, if accounts receivable, as a component of the quick ratio, have, let's say, a conversion time of several months rather than several days, the "quickness" attribute of this ratio is questionable.
For the firm the quick ratio has been the highest in 21012-13 when compared to the last five years. And when the quick ratio is compared with the current ratio it is clear that the company’s current asset are dependent on inventory as the current ratio is higher than that of the quick ratio.

Investors need to be aware that the conventional wisdom regarding both the current and quick ratios as indicators of a company's liquidity can be misleading.
INVENTORY STOCK TURNOVER RATIO
Inventory turnover ratio is used to measure the inventory management efficiency of a business. In general, a higher value of inventory turnover indicates better performance and lower value means inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. However, a very high value of this ratio may be accompanied by loss of sales due to inventory shortage.
Inventory turnover is different for different industries. Businesses which trade perishable goods have very higher turnover compared to those dealing in durables. Hence a comparison would only be fair if made between businesses of same industry. The inventory stock turnover ratio is highest for the year 2012-13 indicating that the firm is losing on sales due to inventory shortage. Years of 2008-10 have been good with respect to inventory turnover but the firm is suffering from inventory shortage since 2011-12
DEBTORS TURNOVER/ACCOUNTS RECEIVABLES TURNOVER RATIO
Accounts receivable turnover measures the efficiency of a business in collecting its credit sales. Generally a high value of accounts receivable turnover is favorable and lower figure may indicate inefficiency in collecting outstanding sales. Increase in accounts receivable turnover overtime generally indicates improvement in the process of cash collection on credit sales.
However, a normal level of receivables turnover is different for different industries. Also, very high values of this ratio may not be favourable, if achieved by extremely strict credit terms since such policies may repel potential buyers.
Debtor’s turnover ratio for the year 21012-13 has been the lowest. So it is evident that the firm is not able to collect from its debtors efficiently this year but there has also been an increase in sales which are almost doubled since the last year showing that the firms liberal credit terms have helped it to earn sales. The ratio has been good for the years 2009-10 and 2011-12.

WORKING CAPITAL
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Even though the company’s working capital has doubled since the year 2010-11, there has been a decrease since the last year. The working capital for the firm has been showing a fluctuating trend. It is evident that the sales volumes have increased but along with the debtors. So the company is not risky in long term and it has paying back capacity.
Also even though the collection has been slow in the year 21012-13, it has not impacted the working capital of the firm indicating its operational efficiency

12. CONCLUSIONS
With the above findings & analysis of the ratios and financial components of Amar Textiles; we can conclude that there has been constant increase in the sales, current assets as well as the current liabilities of the firm.
For the year 2012-12, the debtors, liquid assets and the inventories have been the highest when compared to the last five years.
The working capital is fluctuating and has declined for the year 2012-13 affecting the operational efficiency of the firm especially its inventory management.
The risk factor for the company is not that high from a long term perspective since its current assets are increasing at a higher rate than that of its liabilities and a lower working capital for year 2012-13 should not have a major affect.
It is also concluded that the year 2009-10 has been exceptional in both ways as there was sharp rise in the current assets and current liabilities of the firm with the debtors at their lowest, while the sales and inventories showed an increase for that year.
It is recommended that the firm should get money to move faster by collecting monies due from debtors more quickly or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales) so the firm will generate more cash or it will need to borrow less money to fund working capital. As a consequence, it could reduce the cost of bank interest or the firm will have additional free money available to support additional sales growth or investment. Similarly, if the firm can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; it will effectively create free finance to help fund future sales.
As far as the industry is concerned, the textile and garment makers of India are eyeing 15-20 percent growth in exports this year as the Textiles Ministry has assured full support to the industry and the Indian Government is planning to implement some new measures to boost exports.
All the segments of the textiles value chain are doing well at present both in the domestic and global markets. This year, the country textile and garment industry may witness an increase of 15-20 percent in exports which could go up further if some of the measures already being contemplated by Union Government get implemented without any delay.
13. RECOMMENDATIONS
To solve the problems of the Power loom Industry the suggestions and recommendations are given below: 1) Upgradation & Modernization: In Bhiwandi, the loom technology level used in the power loom industry is awfully low. There are only 5000 Semi-Automatic and 6800 Shuttles looms out of 2.5 laky power looms. The central government is running Technology Up gradation Fund Scheme for the modernisation of the power loom industry. As most of the weavers are unaware about the scheme, there is a need of the hour to aware the weavers about the modernisation and up gradation of the industry.

2) Upgradation of Plain power looms to Semi-Automatic level: The majority of the power loom owners are small weavers having 4 to 24 power looms. Because of small in size they are unable to get the benefits of modernization scheme i.e. TUFFS. The government should initiate conversion of plain power looms to semi-automatic level. The plain looms can be converted by installing attachments of electrical / mechanical warp stop motion, weft stop motion and positive let off motion. The Upgradation needs additional amount of Rs.45000 to Rs.80000 per power loom.

3) Industrial Estate & Textile Park: In order to pull the pace of the growth of the power loom industry, the government should elevate it to the moderate industrial level. The government should develop and create the industrial estates or textile parks in the major clusters of the state.

4) Technical Training: The workers employed in power loom industry are mostly technically untrained. They acquire the skills through experience. Because of non-technical training their productivity is affected. Labour productivity can be further enhanced by providing systematic training to the power loom workers. The Power loom Service Centre, technical institutes and textile department should conduct special technical training programs for the workers.

5) Entrepreneurial Training: In order to improve the level of managerial and administrative skills of the weavers. There is a need to expand the services of power loom service centres. They should also provide training to proprietors/ weavers regarding entrepreneurship. Steps should be taken to provide basic entrepreneurial training to weavers.

6) To Overcome Labour attrition: They can go to tier 3 cities where ITI programs are run and recruit people from there. The people there don’t have very high aspirations. This leads to less attrition rate. Also, for the managers that they recruit, they can sign a bond or contract that they cannot leave the jobs for 1 year or any stipulated time specified in the contract.

14. ACTION PLAN FOR IMPLEMENTATION
Working capital is the backbone of any business, so learning how to maintain or generate more cash in THE Company is vital to success. It's basically the cash needed to operate, or the current assets minus current liabilities. Without enough working capital, firm could lose its flexibility and credibility with financial institutions, suppliers and customers.
To manage the working capital at Amar Textiles more effectively, the following plan can be followed: 1. Sources of Additional Working Capital
The firm could look at additional working capital sources. Sources of additional working capital include the following: * Existing cash reserves * Profits (when secured as cash!) * Payables (credit from suppliers) * New equity or loans from shareholders * Bank overdrafts or lines of credit * Long-term loans
2. Handling Receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business, if the firm doesn’t manage debtors, they will begin to manage the business and gradually the business would lose control due to reduced cash flow and an increased incidence of bad debt. The following measures will help the firm manage debtors: a) Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. b) Establish clear credit practices as a matter of company policy. c) Make sure that these practices are clearly understood by staff, suppliers and customers. d) Be professional when accepting new accounts, and especially larger ones. e) Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. f) Establish credit limits for each customer... and stick to them. g) Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. h) Keep very close to your larger customers. i) Invoice promptly and clearly. j) Consider charging penalties on overdue accounts. k) Consider accepting credit /debit cards as a payment option. l) Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.
Recognize the following possible defects:
• Weak credit judgement
• Poor collection procedures
• Lax enforcement of credit terms
• Slow issue of invoices or statements
• Errors in invoices or statements
• Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should demand immediate attention.

4. Managing Payables (Creditors)
Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Management of creditors and suppliers is just as important as the management of debtors. It is important to look after creditors - slow payment by you may create ill-feeling and can signal that company is inefficient (or in trouble!).
5. Inventory Management
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc.
The key is to know how quickly overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold.
The key issue for the business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels include: * What are the projected sales of each product? * How widely available are raw materials, components etc.? * How long does it take for delivery by suppliers? * Can the removal of slow movers from product range without compromising best sellers possible?
For better stock control, the following can be done: * Review the effectiveness of existing purchasing and inventory systems. * Know the stock turn for all major items of inventory. * Apply tight controls to the significant few items and simplify controls for the trivial many. * Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer it is kept. * Consider having part of product outsourced to another manufacturer rather than make it.
Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges.
The most important of all once ratios have been established for, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.

APPENDICES. A
Balance Sheet of Amar Textiles as on 2008 to 2011 PARTICULARS | 2008-2009 | 2009-2010 | 2010-2011 | 1.NON-CURRENT LIABILITIES | | | | (a)Long Term Borrowings | 92089101 | 108979856.5 | 99195482.45 | | | | | | | | | TOTAL | 92089101 | 108979856.5 | 99195482.45 | | | | | 2.APPLICATIONS OF FUNDS | | | | a)Fixed Assets | | | | i)Gross Block | 63334153.19 | 65655519.7 | 67224145.61 | ii)Less: Depreciation Reserve | 31563461.15 | 35069978.15 | 39784514 | iii)Net Block | 31770692.04 | 30585541.54 | 27439631.6 | iv)capital WIP | 2044786.268 | | 832976.468 | TOTAL | 33815478.31 | 30585541.54 | 28272608.08 | b)Investment | 100 | 100 | 40 | c)Current Assets, Loans &Advances | | | | i)Inventories | 7597248.724 | 10796280.98 | 22360536.38 | ii)sundry debtors | 1734281.052 | 4080027.9 | 2299344.042 | iii)cash and bank balance | 14762.916 | 30471.906 | 21498.992 | iv)other current assets | 2532698.42 | 1883094.512 | 1783854.632 | v)Loans Advances | 258219.39 | 3125369.892 | 5034786.804 | vi)Inter-sub unit office current a/c | | | | vii) Inter- unit office current a/c | | 2351168.964 | 15359302.4 | | | | | TOTAL (A) | 12077210.5 | 50393814.16 | 46859323.26 | LESS | | | | Current liabilities Provision | | | | i)Current liabilities | 7562977.32 | 11632408.57 | 18027732.88 | ii)Provision | 9330374.1 | 10669590 | 10438458.3 | iii)Inter sub office current a/c | | 31519.8 | | TOTAL (B) | 16893351.42 | 22333518.37 | 28466191.18 | Net current assets/liabilities (A-B) | -4816140.918 | 28060295.79 | 18393132.07 | Miscellaneous expenses | | | | Inter unit current a/c | 10609904.01 | | | d)Profit & loss a/c (Balance as per annexed a/c) | 73699637.64 | 50333989.2 | 52529712.3 | TOTAL | 92089101 | 108979856.5 | 99195482.45 |

APPENDICES. B
Balance Sheet of Amar textiles as on 31st March 2011-2012 & 2012-2013 PARTICULARS | 2011-2012 | 2012-2013 | 2.Non-current liabilities | | | a)Long term Borrowings | 272031542 | 200123492.2 | b)Deferred tax Liabilities | | | c)Other Long term liabilities | | | d)long term provisions | 10337599.5 | 10289265 | SUB TOTAL(1) | 282369141.5 | 210412757.2 | 3.Current liabilities | | | a)Short term borrowings | | | b)Trade payable | 4534757.172 | 9653289.396 | c)Other current liabilities | 12044497.54 | 10681463.48 | d)Short term provisions | 1455593.7 | 345096.3 | e) Inter-sub unit office current a/c | | | f) Inter- unit office current a/c | | | | | | SUB TOTAL(2) | 18034848.42 | 20679849.18 | TOTAL(1+2) | 300403989.9 | 231092606.4 | II.ASSETS | | | 1.Non-current asset | | | a)Fixed assets | | | i)Tangible assets | 42724798.32 | 41602602.56 | ii)Intangible assets | | | iii)Capital WIP | 119135126 | 62934799.08 | iv)Intangible assets under development | | | SUB TOTAL(a) | 161859924.3 | 104537401.6 | b)Non-current investment | 100 | 100 | c)Deferred Tax asset(net) | | | d)Long term loans & advances | 4060050.448 | 16044174.96 | e)other noncurrent assets | 3600 | 76549.8 | SUB TOTAL(1) | 165923604.7 | 120658156.4 | 2.current assets | | | a)Current investment | | | b)Inventories | 34679940.22 | 38420695.68 | c)sundry debtors | 4854652.048 | 7571879.248 | d)cash and bank balance | 604326.258 | 4999225.472 | e)Short term Loans Advances | 1721896.794 | 948934.6832 | f)other current assets | 2497889.568 | 2096571.768 | g)Inter-sub unit office current a/c | | | h) Inter- unit office current a/c | 24335702.76 | 13270780.18 | SUB TOTAL(2) | 68694407.64 | 67308087.04 | TOTAL(1+2) | 234618012.4 | 187966243.4 |

15. BIBILOGRAPHY

* http://textilescommittee.nic.in/npclothing * http://www.payscale.com/research/IN/Industry=Textiles/Salary * www.nsdcindia.org

REFERENCES * Financial Management by Khan & Jain * Financial Management by I. M. Pandey * Basic Financial Management by R.P.Rustagi…...

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...CHAPTER – 1 INTRODUCTION 1. INDUSTRY PROFILE Technology generation in the Indian tyre industry has witnessed a fair amount of expertise and versatility to absorb, adapt and modify international technology to suit Indian conditions. This is reflected in the swift technology progression from cotton (reinforcement) carcass to high-performance radial tyres in a span of four decades. Globalization has led to the linking of the economies of all the nations and therefore major Indian players in the tyre industry are pursuing global strategies to enhance their competitiveness in world markets.  The present section broadly undertakes an overview of the Indian tyre industry through an examination of its growth trends with respect to production, exports and acquisition of technological capabilities. Key Features At present there are 40 listed companies in the tyre sector in India. Major players are MRF, JK Tyres, and Apollo Tyres & CEAT, which account for 63 per cent of the organized tyre market. The other key players include Modi Rubber, Kesoram Industries and Goodyear India, with 11 per cent, 7 per cent and 6 per cent share respectively. Dunlop, Falcon, Tyre Corporation of India Limited (TCIL), TVS-Srichakra, Metro Tyres and Balkrishna Tyres are some of the other significant players in the industry. While the tyre industry is largely dominated by the organized sector, the unorganized sector is predominant with respect to bicycle tyres. The industry is a major consumer of......

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Premium Essay

Working Capital Management

...Two Readings on Working Capital Management Keys To Successful Working Capital Management From the perspective of the Chief Financial Officer (CFO), the concept of working capital management is relatively straightforward: to ensure that the organization is able to fund the difference between short-term assets and short-term liabilities. In practice, though, working capital management has become the Achilles' heel of scores of finance organizations, with many CFOs struggling to identify core working capital drivers and the appropriate level of working capital. As a result, companies can be limited in their ability to weather unforeseen or adverse events and ensure that cash is readily available where it is needed, regardless of the circumstances. By understanding the role and drivers of working capital management and taking steps to reach the "right" levels of working capital, companies can minimize risk, effectively prepare for uncertainty and improve overall performance. Factors Influencing Working Capital Performance For most CFOs, the greatest challenge with respect to working capital management is the need to understand and influence factors that are out of their direct control, in order to obtain a complete picture of the company's needs. The CFO's span of control can be limited in terms of functional silos, though corporate finance may well have some powers of influence over operating units. While organizations generally concentrate on the right......

Words: 2865 - Pages: 12

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