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Working Capital Management Case Study – Textile spinning PRESENTED BY : CA – PRADIP MODI Member Advisory Board, PKM ADVISORY SERVICES PVT. LTD. AHMEDABAD.

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Presentation on theme: "Working Capital Management Case Study – Textile spinning PRESENTED BY : CA – PRADIP MODI Member Advisory Board, PKM ADVISORY SERVICES PVT. LTD. AHMEDABAD."— Presentation transcript:

1 Working Capital Management Case Study – Textile spinning PRESENTED BY : CA – PRADIP MODI Member Advisory Board, PKM ADVISORY SERVICES PVT. LTD. AHMEDABAD MOBILE : , Phone :

2 FINANCING OF AN ENTERPRISE BUSINESS ACTIVITY – Trading – Manufacturing – Green Field – Expansion – Diversification FINANCING PATTERN Trading– Short Term – Annual basis – Working Capital Manufacturing– Long Term – 5 to 7 years – Term Loan Short Term– Annual basis – working capital Working Capital – Fund Based Non fund based – letter of credit – guarantee Term Loan – Rupee Loan – Foreign Currency – ECB – Debentures – Private Equity SOURCES OF FINANCING Banks Financial Institutions Non Banking Financing Companies

3 HISTORY OF BANKING IN INDIA Reserve Bank of India commenced operation from April, 1, Through Reserve Bank of India Act, 1934 (II of 1934) 1949 – Enactment of Banking Regulation Act. RESERVE BANK OF INDIA played a special role in the context of Development Instrumental in setting up Development Institutions Setup Institutions to build the financial infrastructure Deposit Insurance and credit guarantee corporation of India Unit Trust of India The Industrial Development Bank of India (IDBI) The National Bank of Agricultural and Rural Development (NABARD) The Discount & Finance house of India.

4 PHASE I General Bank of India – 1786 Bank of Bengal – 1809 Bank of Bombay – 1840Established by The East India Company, Bank of Madras – 1843Merged into imperial bank in onwards banks were established exclusively by indians. PHASE II Banking Sector Reforms Imperial Bank was nationalised in 1955 – State Bank of India was formed Seven Banks forming subsidiaries of State Bank of India were nationalised in Major commercial banks were nationalised on 19 th July PHASE – III 1991– Indian economy opened up Liberalisation of banking practices Continuing Government control with public participation.

5 BANKING INDUSTRY in retrospect. 1) PRE-NATIONALISATION (private ownership) Prior to 1969, focus more on individual credibility of borrower rather than huge paper work. Setbacks were largely absorbed by corporate houses who owned them. 2) POST NATIONALISATION Pre – supposed social objectives with specific mandate to banks; i) To expand branch network – mostly in rural India. ii) Flow of credit to rural and SSI sector – Approach at times that banking industry should sacrifice, if required in achieving social goal (not scientifically defined) – known as Loan Mela. 3) POST – LIBERALISATION (Precisely 1990 onwards) Economy to global competition. Focus shifted to better risk management and improving quality of assets. More transparent system to reflect true financial position of banks.

6 Systematic efforts initiated first time in 1991 for performance evaluation of the borrower and lenders. Committee under the Chairmanship of Mr. M. Narsimham – 1)To study prevailing financial system, 2)To identify shortcomings and weakness 3)To prescribe norms to make the disclosure practices more transparent and meaningful. Report tabled in parliament on

7 RECOMMENDATIONS PRUDENT ACCOUNTING NORMS FOR INCOME RECOGNITION To make if more objective based on record and recovery rather than subjective considerations like availability of security, net worth of borrower and guarantors (even though, importance given on security and net worth as banking system requires).

8 Prior to Tondon / Chore Committee Recommendations Through credit authorisation system – centralised Branch Office – Regional office – Zonal office – Head Office – RBI – CAS Queries – RBI – Head Office – Zonal Office – Regional Office – Branch office COMMITTEE RECOMMENDATION – DECENTRALISED Methodology Norms of Current assets in major industries End – use criteria Maximum Permissible Bank Finance Emphasis on loan systems Periodic Information and reporting system BANKING – WORKING CAPITAL LENDING PROCEDURE

9 CREDIT MONITORING ARRANGEMENT (CMA) STRUCTURE PROFITABILITY PROJECTIONS – OPERATING STATEMENT I)Past two years – Audited. II)Current year – estimated III)Next year – projected BALANCE SHEET ANALYSIS A.I)Current liabilities a)Bank Borrowing – Working Capital limit. b)Current liability – payable within one year c)Total current liabilities – (a) + (b) ii)Long Term Liabilities – Payable after one year a)Total outside liabilities iii)Net worth Equity + Reserves & Surplus. iv)TOTAL B.I)Current Assets – Assets realisable within one year ii)Deferred current assets – more than one year. iii)Gross Fixed assets – Depreciation = Net fixed assets iv)TOTAL

10 The funds which are used to manage day to day business operations Current Assets – Current Liabilities CURRENT ASSETS Inventory - Raw materials - Work in progress - Finished goods - Stores, spares, Packing material Receivables Cash & Bank Balance CURRENT LIABILITEIS Trade Creditors Expenses – Provisions – Payable within one years Assessed on an annual basis Assets conversion cycle through operations WORKING CAPITAL – DEFINITION


12 Maximum Permissible Bank Finance (MPBF) Tondon Committee Recommendations Method – I Promoters 25% of net working capital (Current Assets – Current Liabilities) Method – IIPromoters 25% current assets Method – III100% of hard core assets + 25% of other current assets Chore Committee discarded method III and recommended Method II Method II Known as MPBF Working Capital Gap Method ASSESSMENT OF WORKING CAPITAL Method - IMethod - II 1)Current assets1000 2)Current Liabilities (Excluding bank)400 3)Working Capital gap600 4)Minimum Stipulated - Net working capital (25% of No.3)(25% of No.1) 5)Bank finance (3-4)

13 FORM – IParticulars of Existing and Proposed Limits FORM – IIOperating Statement FORM – IIIAnalysis of Balance Sheet FORM – IVComparative Statement of Current assets & Current Liabilities FORM – VComputation of Maximum Permissible Bank Finance (MPBF) FORM –IVFunds Flow Statement CMA - DATA

14 PROJECT APPRAISAL Till the year 2000 Project Funding was done by Financial Institutions 1)State Financial Corporations. 2)Industrial Development Bank of India (IDBI). 3)Industrial Finance Corporation of India (IFCI) 4)Industrial Credit and Investment Corporation of India (ICICI). 5)Small Industrial Development Bank of India (SIDBI). Working capital provided by commercial banks. Funding pattern is changed. IDBI & ICICI transformed into full fledged banking Commercial Banks provide both Term Loans and Working Capital.

15 PROJECT APPRAISAL A process to assess various aspects for arriving at a financing decision. 1)Managerial Competence – Resourcefulness, competence and integrity of the management. 2)Technical Feasibility – Appropriate Technology to maintain quality and cost competitiveness. Availability of skilled management team 3)Commercial Feasibility– Detailed market survey – both desk and field survey. 4)Financial Feasibility i) Cost of production & Projected profitability. ii) Balance Sheet and Cash flow statement. iii) Financial ratios – Term Loan Working capital - Short term funds are not diverted to finance long term assets. - Availability of raw material, power and labour.

16 FINANCIAL RATIOS AND PARAMETERS SHORT TERM VIABILITY PROFITABILITY Gross profit to sales Net profit to sales Raw Materials to sales Interest to sales Interest Coverage ratio BALANCE SHEET Current ratio Total Outside Liability to Tangible net worth Term Liability to Tangible net worth Stock turnover ratio Receivable Turnover ratio LONG TERM VIABILITY PROFITABILITY Gross profit to sales Operating profit to sales Net profit to sales Cash accruals DSCR – Debt service coverage ratio Break even Analysis Sensitivity Analysis Internal rate of return BALANCE SHEET Current ratio TOL to Tangible Net worth Term Liability to Tangible Net worth

17 Implication of each ratios 1)Current ratiosCurrent assets are sufficient to service current liabilities 1.33:1. 2)TOL to TNWTotal outside liabilities against tangible net worth are not out of proportion – Maximum 3 to 4 times 3)DSCRCash accruals are sufficient to service interest on Term Loan and Term Loan – Minimum 1.75 times 4)Break Even AnalysisCapacity utilisation & Turnover at a level where both variable and fixed expenses are absorbed – No profit – No loss. 5)Sensitivity AnalysisProfitability level, cash accruals and DSCR i) At a level when sales price is lower in actual than assumed. ii) At a level when raw material price is higher in actual than assumed. iii) At a level when production is lower in actual than assumed. 6)Interest coverage ratioProfit before interest divided by interest. How many times, profit covers interest 7)Stock & receivable How many time stocks and Receivables are routed Turnover ratio against assumed sales

18 Project Viability PROMOTERS Point of view 1)Proper use of technology 2)Monitoring Cost control Technical Skilled Manpower Appropriate process flow-control – Reduce wastages Financial discipline – Judicious use of finance Inventory control 3)Marketing – Keep check on competition – Domestic / Global BANKERS – institution point of view SHORT TERM Control on Receivables – Current assets No diversion of working capital for long term assets Proper implementation of process flow chart Production planning LONG TERM Cash accruals as planned to service debt Proper knowledge on sensitivity Break – even planning

19 Day1st2nd3rd4th5th6th7th Process Stock Overheads Raw material100 Overhead Stock in progress Stock in progress660 Finished goods140 Control of stock in process Yarn production cycle – 7 days

20 Selection of Product Mix The product mix depends upon various factors. Promoters Competency – experience – Market knowledge Proper market survey – Marketing network The selection of Machineries based on proposed product mix Whether carded yarn only carded and combed yarn Financial Resourcefulness Technical Manpower Availability of Raw material

21 Case Study – Textiles – Spinning TEXTILE - VALUE CHAIN

22 Manufacturing Process Texturizing Blending Cleaning Carding Drawing Combing Drawing Drafting - inter Spinning Winding Man made Filament Man-made Staple fibersNatural Fibers (Cotton) Fiber

23 Technical Parameters LENGTH Staple Classification Length MMLength InchesProduct Mix Count 1)ShortLess than 2415/16-1Coarse below 20s 2)Medium / /32Medium Count 20s – 40s 3)Long /32-1.3/8Fine count 40s – 60 s count 4)Extra long /8-1.9/16Superfine count 80s – 140s

24 Co-relation between fiber and yarn. 1.Staple length spinning potential 2.Fiber strength Yarn strength, less breakages 3.Fineness Finer spinning potential 4.Maturity Yarn strength and evenness, better dyeing absorbity 5.Trash (non-lint content) Reduce waste 6.Uniformity Ratio Better productivity and evenness 7.Elongations less end breakages 8.Friction cohesiveness 9.Yellowness Yarn appearance 10.Nepiness Yarn nepiness 11.Moisture Content 8.5% moisture content optimum for 65%.


26 COST OF PROJECT SPINNING SPINDLESRs. Lacs 1) Land & Site Development Land is taken on lease - Site development5.00 2) Buildings Factory Building ) Plant & Machineries ) Engineering, Electrification & humidification ) Maintenance workshop9.55 6) Material handling equipments ) Misc. Fixed assets, Computers, office equipments ) Preliminary expenses ) Preoperative 3% ) Provision for 3% ) Interest during construction ) Margin money for working capital28.95 TOTAL MEANS OF FINANCE Equity Share Capital Share Premium Unsecured Loan Term Loan TOTAL Promoters' Contribution D.E.R Assets coverage Ratio

27 Production Calculation 7.22 x rpmTPI= T.M X Count TPI X Count 4.1 x = )20s Carded7.22 x = gms per spindles shift x x = ) 24s Carded7.22 x = gms per spindles shift x x = ) 30s Carded7.22 x = gms per spindles shift x x = ) 40s Carded7.22 x = gms per spindles shift x

28 Production No. of STAGEper day kgs. Machines per machine require Blow Room Cards Draw Frames - Breaker Finished single delivery Inter NO. OF MACHINES REQUIRED AT EACH STAGE

29 PRODUCTION AT EACH STAGE – RAW MATERIAL REQUIREMENT Capacity Utilisation – 97% efficiency 94% Yarn Production – Ring Frame – 9457 Kgs per day Yarn Production– Autoconor – 9362 Kgs per day – Final product for sale InputOutput Kgs. / Day Blow room Carding Drawing Drawing Inter Ring Frame Autoconor Yield86.12% RAW MATERIAL REQUIRED PER DAY KGS.

30 Assumptions For the year ending 31st March No of days No. of Shifts No of Machines 20s Carded s Carded s Carded s Carded Total Machines17 4 Spindles per machine 20s Carded s Carded s Carded s Carded1008 5Total spindles 20s CardedNos s CardedNos s CardedNos s CardedNos.4032 Total spindlesNos Capacity Utilisation 92.00%95.00%97.00%

31 7 capacity utilisations s CardedNos s CardedNos s CardedNos s CardedNos Nos RPM 20s Carded s Carded s Carded s Carded TM 20s Carded s Carded s Carded s Carded TPI 20s Carded s Carded s Carded s Carded PRODUCTION Gms. / spindle / shift 20s CardedGms266 24s CardedGms225 30s CardedGms182 40s CardedGms118

32 12Efficiency s Carded94% 24s Carded94% 30s Carded94% 40s Carded94% 13PRODUCTION Gms. / spindle / shift 20s CardedGms250 24s CardedGms211 30s CardedGms171 40s CardedGms111 14PRODUCTION Kgs. Per day 20s CardedKgs s CardedKgs s CardedKgs s CardedKgs Kgs PRODUCTION 20s CardedKgs s CardedKgs s CardedKgs s CardedKgs Kgs

33 16SELLING PRICE s CardedRs. / Kg s CardedRs. / Kg s CardedRs. / Kg s CardedRs. / Kg SELLING PRICE (WASTAGE) 20s CardedRs. / Kg s CardedRs. / Kg s CardedRs. / Kg s CardedRs. / Kg WASTAGE 20s Carded Yield86.12% Invisible loss1.00% Saleable waste12.88% % s Carded Yield86.12% Invisible loss1.00% Saleable waste12.88% % s Carded Yield86.12% Invisible loss1.00% Saleable waste12.88% %

34 40s Carded Yield86.12% Invisible loss1.00% Saleable waste12.88% % Raw Material requirement 20s CardedKgs s CardedKgs s CardedKgs s CardedKgs Kgs RAW MATERIAL COTTON FOR 20s Carded(Rs./ Kgs.) s Carded(Rs./ Kgs.) s Carded(Rs./ Kgs.) s Carded(Rs./ Kgs.) Power x 96% x 76% x 24 x days x Capacityunits

35 Stores & Spares% of sales1.00% 22Other manufacturing exps.% of sales2.00% 23Administrative expensive% of sales1.50% 24Marketing expenses% of sales1.50% 25Repairs & Maintenance - Building% of bldg.0.53% - Plant & Machineries% of P&M.1.03% 26Interest on term Loan11.50% Interest on Working Capital12.50% 27Spinning Stock in processdays Finished goodsdays25 28Current Assets Raw Materialdays5060 Stores & Spares Stockdays25 Receivables2640 Other Current assets5%10% 29Current Liabilities Trade Creditorsdays710 Other Current liabilitiesOf stores3.00%

36 CMA DATA - FORM II OPERATING STATEMENT Days (Rs. Lacs) Sales Raw materials Direct expenses Stock Adjustments Depreciation Total Gross profit Indirect exps Profit before tax Interest Operating profit Misc. Exps. W/off Taxes Net profit Cash accruals

37 CMA DATA - FORM III ANALYSIS OF BALANCE SHEET CURRENT LIABILITIES(Rs. Lacs) Bank Borrowing for W.C - From Existing ban From other banks Sub-total Trade Creditors Installments falling due within on year Other Sub-total TOTAL CURRENT LIABILIITES TERM LIABILITIES Term Loans Installments for more than one year TOTAL OUTSIDE LIABILITIES NET WORTH Equity with premium683 General reserves Unsecured loans from promoters227 Sub-total TOTAL LIABILITIES

38 CMA DATA - FORM III ANALYSIS OF BALANCE SHEET CURRENT ASSETS Cash and Bank Balance Fixed Deposits with bank - Margin Money Receivables Sub-total INVENTORIES Raw Material Work-in-progress Finished goods Others Sub-total Advances TOTAL CURRENT ASSETS Gross Block Less : Depreciation NET BLOCK Other Non-current assets Preliminary exps. Not W/off TOTAL ASSETS Current Ratio TOL / TNW TL/TNW

39 COMPARATIVE STATEMENT OF CURRENT ASSETS & CURRENT LIABILITIES FORM - IV A :CURRENT ASSETS 1Raw material a)Imported b)Indigenous )Stores a)Imported b)Indigenous Stock in process Finished Goods Receivables Export receivables Advances To Suppliers of Goods Other current assets incl. Cash & bank TOTAL CURRENT ASSETS

40 COMPARATIVE STATEMENT OF CURRENT ASSETS & CURRENT LIABILITIES FORM IV B.CURRENT LIABILITIES Creditors Advances From Customers Statutory Liabilities (hire purchase) Other Current Liabilities I) Interest on term loan of GIIC – deferred ii) Installments payable within one year iii)Dividend Payables iv)Installments of Term Loans, DPG Public Deposits, debentures etc v)Other liabilities TOTAL CURRENT LIABILITIES

41 COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKING CAPITAL FORM V Total Current Assets (9 in Form IV) Other Current Liabilities (other than Bank Borrowings) Working Capital Gap(WCG) (1-2) Minimum Stipulated Net Working capital Actual Project Net Working capital (45 in Form-III) 6Item 3 Minus Items Item 3 Minus Items Maximum Permissible Bank Finance (Item 6 or 7 Whichever is Lower) Excess Borrowings representing Short fall in net working capital (4-5)

42 FUNDS FLOW STATEMENT - FORM VI SOURCES a)Net Profit After Tax b)Depreciation c)Increase in capital d)Increase in Term Liabilities increase in unsecured loans f)Decrease in: I) Fixed Assets g)Others (P & P Written Off) h)TOTAL USES a)Decrease in Term Liabilities b)Increase in: I) Fixed Assets ii) Other non Current Assets - P & P Normal Capital Expenditure iii)Deferred receivables c)Dividend payment d)Others - Decrease in Creditors for P&M e)Total Long Term Surplus(=)Deficit(-)

43 4 Increase/Decrease in Current Assets Increase/Decrease in Current Liabilities other than Bank Borrowing 6 Increase/Decrease in working capital gap Net Surplus(=) Deficit(-) (Difference of 3 &6) 8 Increase/Decrease in Bank Borrowing INCREASE/DECREASE IN NET SALES

44 BREAK EVEN ANALYSIS ProductionKgs Sales (Net of stock) VARIABLE EXPENSES Raw Material & Packing Mat.100% Power & fuel90% Wages90% Stores and Spares100% Mfg. Exps.90% Selling Exps.100% Interest on working Capital100% Total Variable Expenses CONTRIBUTION % of sales22.24%23.75%23.49%23.43%23.37%23.30%23.23% FIXED EXPENSES Power10% Wages10% Mfg. Expenses10% Administrative exps100% Depreciation100% Interest on term loan100% Total Fixed Expenses BREAK EVEN POINT Production (kg.) Sales (Rs. lacs) Capacity Utilisation49.02%45.81%43.75%40.54%37.33%34.11%31.23% CASH BREAK EVEN Production (kg.) Sales (Rs. Lacs) Capacity Utilisation 28.65%27.27%24.99%21.74%18.48%15.21%12.27%

45 SENSITIVITY ANALYSIS If sale price is reduced by 5% Sales Less : 5% Revised sales Reduced by Net profit before tax Revised Net profit before tax Less : 33.33% Profit after Tax Add back : Interest on term loan Depreciation Preliminary Expenses1.25 Net cash accruals Repayment obligation Interest Principal Total Repayment D.S.C.R Average D.S.C.R1.61times Taxable profit Reduced by %

46 SENSITIVITY ANALYSIS If raw material price is increased by 5% Raw material Add : Increase by 5% Increased cost of Raw material Increase by Net profit before tax Revised Net profit before tax % Profit after Tax Add back : Interest on term loan Depreciation Preliminary exps. written off Repayment obligation Interest Principal Total Repayment D.S.C.R Average D.S.C.R1.78times Taxable profit Reduced by %

47 KEY FINANCIAL PARAMETERS For the year ending 31st March Gross profit to sales21.37%22.55%22.50%22.44%22.36%22.28%22.21% Operating profit to sales9.82%11.79%12.40%13.14%13.88%14.61%15.25% Net profit to sales7.54%8.61%8.68%8.91%9.16%9.45%9.71% Interest to sales6.57%6.10%5.54%4.73%3.92%3.11%2.39% Raw material to sales61.47%59.75%59.78%59.76% Current Ratio Debt Equity Ratio TOL /TNW DSCR (Normal) DSCR (Normal) Maximum3.96 Minimum1.61 Average2.06times IRR-PROJECT (15 years) Post tax33.20% Pre tax44.72% Sensitivity analysis - D.S.C.R Sales price reduced by 5% Average1.61times Raw material cost inc by 5% Average1.78times Break Even Analysis Production (Kgs.) Sales (Rs. Lacs) Capacity Utilisation49.02%45.81%43.75%40.54%37.33%34.11%31.23% Cash Break Even Analysis Production (Kgs.) Sales (Rs. Lacs) Capacity Utilisation28.65%27.27%24.99%21.74%18.48%15.21%12.27%

48 PKM Advisory Services Pvt. Ltd. A , Safal Pegasus, Nr. Prahalad Nagar Garden, 100 Ft Road, Anand Nagar Road, Prahaladnagar, Ahmedabad Phone no : Fax: Web: Thank You..

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