Presentation on theme: "Working Capital Management"— Presentation transcript:
1 Working Capital Management Case Study – Textile spinningPRESENTED BY :CA – PRADIP MODIMember Advisory Board,PKM ADVISORY SERVICES PVT. LTD.AHMEDABADMOBILE : , Phone :
2 FINANCING OF AN ENTERPRISE BUSINESS ACTIVITY – Trading– Manufacturing – Green Field – Expansion – DiversificationFINANCING PATTERNTrading – Short Term – Annual basis – Working CapitalManufacturing – Long Term – 5 to 7 years – Term LoanShort Term – Annual basis – working capitalWorking Capital – Fund BasedNon fund based – letter of credit – guaranteeTerm Loan – Rupee Loan– Foreign Currency – ECB– Debentures– Private EquitySOURCES OF FINANCINGBanksFinancial InstitutionsNon Banking Financing Companies
3 HISTORY OF BANKING IN INDIA Reserve Bank of India commenced operation from April, 1, 1935.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 DevelopmentInstrumental in setting up Development InstitutionsSetup Institutions to build the financial infrastructureDeposit Insurance and credit guarantee corporation of IndiaUnit Trust of IndiaThe Industrial Development Bank of India (IDBI)The National Bank of Agricultural and Rural Development (NABARD)The Discount & Finance house of India.
4 PHASE IGeneral Bank of India – 1786Bank of Bengal – 1809Bank of Bombay – Established by The East India Company,Bank of Madras – Merged into imperial bank in 1920.1865 onwards banks were established exclusively by indians.PHASE IIBanking Sector ReformsImperial Bank was nationalised in 1955 – State Bank of India was formedSeven Banks forming subsidiaries of State Bank of India were nationalised in 1960.14 Major commercial banks were nationalised on 19th July 1969.PHASE – III1991– Indian economy opened upLiberalisation of banking practicesContinuing 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 NATIONALISATIONPre – 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 weakness3) To prescribe norms to make the disclosure practices more transparent and meaningful.Report tabled in parliament on
7 RECOMMENDATIONSPRUDENT ACCOUNTING NORMS FOR INCOME RECOGNITIONTo 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 BANKING – WORKING CAPITAL LENDING PROCEDURE Prior to Tondon / Chore Committee RecommendationsThrough credit authorisation system – centralisedBranch Office – Regional office – Zonal office – Head Office – RBI – CASQueries – RBI – Head Office – Zonal Office – Regional Office – Branch officeCOMMITTEE RECOMMENDATION – DECENTRALISEDMethodologyNorms of Current assets in major industriesEnd – use criteriaMaximum Permissible Bank FinanceEmphasis on loan systemsPeriodic Information and reporting system
9 CREDIT MONITORING ARRANGEMENT (CMA) STRUCTUREPROFITABILITY PROJECTIONS – OPERATING STATEMENTPast two years’ – Audited.Current year – estimatedNext year – projectedBALANCE SHEET ANALYSISA. I) Current liabilitiesa) Bank Borrowing – Working Capital limit.b) Current liability – payable within one yearc) Total current liabilities – (a) + (b)Long Term Liabilities – Payable after one yeara) Total outside liabilitiesNet worth Equity + Reserves & Surplus.TOTALI) Current Assets – Assets realisable within one yearii) Deferred current assets – more than one year.iii) Gross Fixed assets – Depreciation = Net fixed assetsiv) TOTAL
10 WORKING CAPITAL – DEFINITION Current Assets – Current Liabilities The funds which are used to manage day to day business operationsCurrent Assets – Current LiabilitiesCURRENT ASSETSInventory- Raw materials- Work in progress- Finished goods- Stores, spares, Packing materialReceivablesCash & Bank BalanceCURRENT LIABILITEISTrade CreditorsExpenses – Provisions – Payable within one yearsAssessed on an annual basisAssets conversion cycle through operations
12 ASSESSMENT OF WORKING CAPITAL Maximum Permissible Bank Finance (MPBF)Tondon Committee RecommendationsMethod – I Promoters 25% of net working capital(Current Assets – Current Liabilities)Method – II Promoters 25% current assetsMethod – III 100% of hard core assets + 25% of other current assetsChore Committee discarded method III and recommended Method IIMethod II Known as MPBFWorking Capital Gap MethodMethod - IMethod - II1)Current assets10002)Current Liabilities (Excluding bank)4003)Working Capital gap6004)Minimum Stipulated - Net working capital150250(25% of No.3)(25% of No.1)5)Bank finance450350(3-4)
13 CMA - DATA FORM – I Particulars of Existing and Proposed Limits FORM – II Operating StatementFORM – III Analysis of Balance SheetFORM – IV Comparative Statement of Current assets & Current LiabilitiesFORM – V Computation of Maximum Permissible Bank Finance (MPBF)FORM –IV Funds Flow Statement
14 PROJECT APPRAISAL Till the year 2000 Project Funding was done by Financial Institutions1) 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 bankingCommercial Banks provide both Term Loans and Working Capital.
15 PROJECT APPRAISALA process to assess various aspects for arriving at a financing decision.Managerial Competence – Resourcefulness, competenceand integrity of the management.Technical Feasibility – Appropriate Technology to maintainquality and cost competitiveness.Availability of skilled managementteamCommercial Feasibility – Detailed market survey – both deskand field survey.Financial Feasibility i) Cost of production & Projectedprofitability.ii) Balance Sheet and Cash flowstatement.iii) Financial ratios – Term LoanWorking capital- Short term funds are not diverted to finance long term assets.- Availability of raw material, power andlabour.
16 FINANCIAL RATIOS AND PARAMETERS SHORT TERM VIABILITYPROFITABILITYGross profit to salesNet profit to salesRaw Materials to salesInterest to salesInterest Coverage ratioBALANCE SHEETCurrent ratioTotal Outside Liability toTangible net worthTerm Liability to Tangible net worthStock turnover ratioReceivable Turnover ratioLONG TERM VIABILITYPROFITABILITYGross profit to salesOperating profit to salesNet profit to salesCash accrualsDSCR – Debt service coverage ratioBreak even AnalysisSensitivity AnalysisInternal rate of returnBALANCE SHEETCurrent ratioTOL to Tangible Net worthTerm Liability to Tangible Net worth
17 Implication of each ratios Current ratios Current assets are sufficient to service current liabilities 1.33:1.TOL to TNW Total outside liabilities against tangible net worth are not out of proportion – Maximum 3 to 4 timesDSCR Cash accruals are sufficient to service interest on Term Loan and Term Loan – Minimum 1.75 timesBreak Even Analysis Capacity utilisation & Turnover at a level where both variable and fixed expenses are absorbed – No profit – No loss.Sensitivity Analysis Profitability level, cash accruals and DSCRi) 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.Interest coverage ratio Profit before interest divided by interest How many times, profit covers interest7) Stock & receivable How many time stocks and Receivables are routedTurnover ratio against assumed sales
18 Project Viability PROMOTERS’ Point of view Proper use of technology Monitoring Cost controlTechnical Skilled ManpowerAppropriate process flow-control – Reduce wastagesFinancial discipline – Judicious use of financeInventory controlMarketing – Keep check on competition – Domestic / GlobalBANKERS – institution point of viewSHORT TERMControl on Receivables – Current assetsNo diversion of working capital for long term assetsProper implementation of process flow chartProduction planningLONG TERMCash accruals as planned to service debtProper knowledge on sensitivityBreak – even planning
19 Control of stock in process Yarn production cycle – 7 days 2nd3rd4th5th6th7thProcess Stock110225340455570685Overheads5115230345460575690Raw material100Overhead10Stock in progress800660Finished goods140
20 Selection of Product Mix The product mix depends upon various factors.Promoters’ Competency – experience – Market knowledgeProper market survey – Marketing networkThe selection of Machineries based on proposed product mixWhether carded yarn onlycarded and combed yarnFinancial ResourcefulnessTechnical ManpowerAvailability of Raw material
21 Case Study – Textiles – Spinning TEXTILE - VALUE CHAIN
22 Manufacturing Process Man made Filament Man-made Staple fibers Natural Fibers (Cotton)FiberCleaningTexturizingBlendingCardingDrawingCombingDrawingDrafting - interSpinningWinding
26 COST OF PROJECT Rs. Lacs MEANS OF FINANCE COST OF PROJECTSPINNING SPINDLESRs. Lacs1)Land & Site DevelopmentLand is taken on lease - Site development5.002)BuildingsFactory Building545.643)Plant & Machineries4)Engineering, Electrification & humidification164.665)Maintenance workshop9.556)Material handling equipments29.577)Misc. Fixed assets, Computers, office equipments25.008)Preliminary expenses10.009)Preoperative 3%68.7110)Provision for 3%11)Interest during construction153.2012)Margin money for working capital28.95TOTALMEANS OF FINANCEEquity Share Capital227.50Share Premium455.00Unsecured LoanTerm LoanTOTALPromoters' ContributionD.E.RAssets coverage Ratio
27 Production Calculation 7.22 x rpm TPI = T.M X √CountTPI X Count4.1 x =1) 20s Carded 7.22 x = gms per spindles shiftx4.1 x =2) 24s Carded 7.22 x = gms per spindles shiftx4.1 x =3) 30s Carded 7.22 x = gms per spindles shift x4.1 x =4) 40s Carded 7.22 x = gms per spindles shift x
28 NO. OF MACHINES REQUIRED AT EACH STAGE ProductionNo. ofSTAGEper day kgs.Machinesper machinerequireBlow Room12960103271Cards120798119Draw Frames- Breaker511297812- Finishedsingle delivery271697524Inter170896996
29 RAW MATERIAL REQUIRED PER DAY 10871 KGS. PRODUCTION AT EACH STAGE – RAW MATERIAL REQUIREMENTCapacity Utilisation – 97% efficiency 94%Yarn Production – Ring Frame – 9457 Kgs per dayYarn Production – Autoconor – 9362 Kgs per day – Final product for saleInputOutputKgs. / DayBlow room1087110327Carding9811Drawing - 19781Drawing - 29752Inter9699Ring Frame9457Autoconor9362Yield86.12%RAW MATERIAL REQUIRED PER DAY KGS.
30 Assumptions For the year ending 31st March 2012 2013 2014 2015 2016 For the year ending 31st March20122013201420152016201720181No of days1653302No. of Shifts3No of Machines20s Carded20524s Carded24430s Carded3040s Carded40Total Machines17Spindles per machine1008Total spindlesNos.50404032171366Capacity Utilisation92.00%95.00%97.00%
34 40s Carded2012201320142015201620172018Yield86.12%204246421813430693Invisible loss1.00%237248985001Saleable waste12.88%305406307164399100.00%237157489782500093Raw Material requirement20s CardedKgs.66585024s Carded45024892986194943730s Carded36512875406876994319RAW MATERIALCOTTON FOR(Rs./ Kgs.)77.2590.0020Power16661666 x 96% x 76% x 24 x days x Capacityunits4.80212.56438.99448.23
35 201220132014201520162017201821Stores & Spares% of sales1.00%22Other manufacturing exps.2.00%23Administrative expensive1.50%24Marketing expenses25Repairs & Maintenance- Building% of bldg.0.53%- Plant & Machineries% of P&M.1.03%26Interest on term Loan11.50%Interest on Working Capital12.50%27SpinningStock in processdays7Finished goods28Current AssetsRaw Material5060Stores & Spares StockReceivables40Other Current assets5%10%29Current LiabilitiesTrade Creditors10Other Current liabilitiesOf stores3.00%
36 CMA DATA - FORM II OPERATING STATEMENT 2012201320142015201620172018Days165330(Rs. Lacs)Sales1909483849454955Raw materials140429002961Direct expenses337719735738742746750Stock Adjustments-375-15-81366360436883699370337073711Depreciation112225Total1478382939133924392839323936Gross profit431100910321031102710231019Indirect exps.55140143144Profit before tax376869889887883879875Interest150296274234194154118Operating profit226573615653689725757Misc. Exps. W/off.1Taxes52184210233255275Net profit173418430442455469481Cash accruals286644656668681695707
37 ANALYSIS OF BALANCE SHEET CMA DATA - FORM IIIANALYSIS OF BALANCE SHEET2012201320142015201620172018CURRENT LIABILITIES(Rs. Lacs)Bank Borrowing for W.C- From Existing ban800900- From other banks-Sub-totalTrade Creditors608890Installments falling due within on year174348Other2323643944126793TOTAL CURRENT LIABILIITES1036123913411167993TERM LIABILITIESTerm LoansInstallments for more than one year15661218870522TOTAL OUTSIDE LIABILITIES26022457221118631515NET WORTHEquity with premium683General reserves17259010201462191623842865Unsecured loans from promoters2271082150019302372282632943775TOTAL LIABILITIES3684395741414235434144614768
38 ANALYSIS OF BALANCE SHEET CMA DATA - FORM IIIANALYSIS OF BALANCE SHEET2012201320142015201620172018CURRENT ASSETSCash and Bank Balance3538413731106314091942Fixed Deposits with bank - Margin Money---Receivables283567580581Sub-totalINVENTORIESRaw Material426527538Work-in-progress788283Finished goods297309316317318Others34804922941942943Advances54149152TOTAL CURRENT ASSETS1176167620862405273830843618Gross Block112337562787101212371462Less : Depreciation2499227420491824159913741149NET BLOCKOther Non-current assets98651Preliminary exps. Not W/off3684395841414234434144614768TOTAL ASSETSCurrent RatioTOL / TNWTL/TNW
39 COMPARATIVE STATEMENT OF CURRENT ASSETS & CURRENT LIABILITIES FORM - IV2012201320142015201620172018 A:CURRENT ASSETS1Raw materiala)Importedb)Indigenous4265275382)Stores34Stock in process798283Finished Goods2973093163173185Receivables2835675795806Export receivables7Advances To Suppliers of Goods8Other current assets incl. Cash & bank90187565883121515612094TOTAL CURRENT ASSETS1176167620862406273830853618
40 COMPARATIVE STATEMENT OF CURRENT ASSETS & CURRENT LIABILITIESFORM IVB.CURRENT LIABILITIES20122013201420152016201720187Creditors6088908Advances From Customers9Statutory Liabilities (hire purchase)10Other Current LiabilitiesI)Interest on term loan of GIIC – deferredii)Installments payable within one year174348iii)Dividend Payablesiv)Installments of Term Loans, DPGPublic Deposits, debentures etcv)Other liabilities2311TOTAL CURRENT LIABILITIES23543944026692
41 COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKING CAPITAL FORM V20122013201420152016201720181Total Current Assets (9 in Form IV)11761676208624062738308536182Other Current Liabilities (other than Bank Borrowings)235439440266923Working Capital Gap(WCG) (1-2)9411237164619652298281835254Minimum Stipulated Net Working capital4195216016857719045Actual Project Net Working capital1414377461065139819182625(45 in Form-III)6Item 3 Minus Items4818112413641613204726217Item 3 Minus Items58009008Maximum Permissible Bank Finance(Item 6 or 7 Whichever is Lower)9Excess Borrowings representing Short fall in net working capital (4-5)
42 FUNDS FLOW STATEMENT - FORM VI 20122013201420152016201720181SOURCESa)Net Profit After Tax172418430441454468481b)Depreciation112225c)Increase in capital683d)Increase in Term Liabilities1566increase in unsecured loans228f)Decrease in:I)Fixed Assetsg)Others (P & P Written Off)h)TOTAL27626446566686806957072USESDecrease in Term Liabilities348174Increase in:2611ii)Other non Current Assets - P & P10Normal Capital Expenditureiii)Deferred receivablesDividend paymentOthers - Decrease in Creditors for P&Me)Total26213Long Term Surplus(=)Deficit(-)1-2141296308320332521
43 4Increase/Decrease in Current Assets11764963625Increase/Decrease in Current235-203-2174Liabilities other than Bank Borrowing6Increase/Decrease in working capital gap9412964083203325217077Net Surplus(=) Deficit(-)-800-100(Difference of 3 &6)8Increase/Decrease in Bank Borrowing800100INCREASE/DECREASE IN NET SALES1909292910710
44 BREAK EVEN ANALYSIS2012201320142015201620172018ProductionKgs.Sales (Net of stock)VARIABLE EXPENSESRaw Material & Packing Mat.100%Power & fuel90%191.31395.09403.40Wages52.21104.42107.56110.78114.11117.53121.05Stores and Spares18.3146.7647.7947.89Mfg. Exps.32.9584.1686.0386.20Selling Exps.27.4670.1471.6971.83Interest on working Capital50.00100.00112.50Total Variable ExpensesCONTRIBUTION508.08% of sales22.24%23.75%23.49%23.43%23.37%23.30%23.23%FIXED EXPENSESPower10%21.2643.9044.825.8011.6011.9512.3112.6813.0613.45Mfg. Expenses3.669.359.569.58Administrative expsDepreciation112.48224.97Interest on term loan100.05195.93161.75121.7381.7141.695.84Total Fixed Expenses270.71555.89524.74485.24445.59405.95370.49BREAK EVEN POINTProduction (kg.)788519Sales (Rs. lacs)Capacity Utilisation49.02%45.81%43.75%40.54%37.33%34.11%31.23%CASH BREAK EVEN460878877347804067699504594660489256394596Sales (Rs. Lacs)711.46944.16776.81626.5228.65%27.27%24.99%21.74%18.48%15.21%12.27%
45 If sale price is reduced by 5% SENSITIVITY ANALYSISIf sale price is reduced by 5%2012201320142015201620172018SalesLess : 5%114.23242.67247.68247.74Revised salesReduced byNet profit before tax224.42572.27614.06651.26687.54723.77755.72Revised Net profit before tax110.19329.60366.38403.51439.80476.03507.97Less : 33.33%36.74109.89122.15134.53146.63158.71169.36Profit after Tax73.46219.71244.23268.98293.17317.32338.62Add back :Interest on term loan100.05195.93161.75121.7381.7141.695.84Depreciation112.48224.97Preliminary Expenses1.25Net cash accruals287.24641.86632.20616.93601.10585.23570.67Repayment obligationInterestPrincipal0.00174.00348.00Total Repayment369.93509.75469.73429.71389.69179.84D.S.C.R2.871.741.241.311.401.503.17Average D.S.C.R1.61timesTaxable profit%
46 If raw material price is increased by 5% SENSITIVITY ANALYSISIf raw material price is increased by 5%2012201320142015201620172018Raw materialAdd : Increase by 5%70.21145.00148.06Increased cost of Raw materialIncrease byNet profit before tax224.42572.27614.06651.26687.54723.77755.72Revised Net profit before tax154.21427.27466.00503.20539.49575.71607.66%51.41142.45155.37167.77179.87191.94202.59Profit after Tax102.80284.82310.64335.43359.62383.77405.07Add back :Interest on term loan100.05195.93161.75121.7381.7141.695.84Depreciation112.48224.97Preliminary exps. written off1.25316.58706.97698.61683.38667.55651.68637.12Repayment obligationInterestPrincipal0.00174.00348.00Total Repayment369.93509.75469.73429.71389.69179.84D.S.C.R3.161.911.371.451.551.673.54Average D.S.C.R1.78timesTaxable profitReduced by
47 KEY FINANCIAL PARAMETERS For the year ending 31st March2012201320142015201620172018Gross 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 Ratio1.371.882.102.422.763.113.65Debt Equity Ratio1.611.040.630.370.180.050.00TOL /TNW1.651.150.790.540.350.26DSCR (Normal)3.862.271.681.771.893.96DSCR (Normal) MaximumMinimumAverage2.06timesIRR-PROJECT (15 years)Post tax33.20%Pre tax44.72%Sensitivity analysis - D.S.C.RSales price reduced by 5%2.871.741.241.311.401.503.17Raw material cost inc by 5%3.161.911.451.551.673.541.78Break Even AnalysisProduction (Kgs.)788519Sales (Rs. Lacs)1217234022342071190717421595Capacity Utilisation49.02%45.81%43.75%40.54%37.33%34.11%31.23%Cash Break Even Analysis46087887734780406769950459466048925639459671113931276111194477762728.65%27.27%24.99%21.74%18.48%15.21%12.27%
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