PROJECT ON

WORKING CAPITAL MANAGEMENTOF OSWAL DENIMS-LALRU

INOSWAL WOOLLEN MILLS LIMITED

OSWAL DENIMSA UNIT OF  

OSWAL WOOLLEN MILLS

LIMITED    

(CAPACITY - 34 MILLION MTRS./ ANNUM.)

AT VILLAGE LALRU,

P.O. DAPPAR,

CHANDIGARH-AMBALA ROAD,

DISTRICT MOHALI,

PUNJAB

Oswal put up a denim textile unit with a turnover of 200 crores. The new unit is located at Lalru in Mohali in an area of 50 acres and commenced production by February 2008.

The company produces denim fibre, largely meant for export. With this unit, Oswal Woollen Mills started production of denim textile that would be sold in domestic (40 per cent of the production) and international (60 per cent of the total output) markets. "This is going to be a big project with large investments and so it may take some time," said Oswal.

Unit Name Spindles Rotors Location

Oswal Denim Unit (Lalru)

114048 2160Lalru near Chandigarh

OBJECTIVES

• To analyze the working capital management of the company.

• To determine the operating cycle of the unit.

NET WORKING CAPITAL=Current Assets-Current Liabilities

Particulars 2008-09 2009-10 2010-11 2011-12 2012-13

CURRENT ASSETS 2853.29 8970.69 14160.08 18992.82 23788.04

CURRENT LIABILITIES 164.75 2365.13 2982.41 2998.97 3012.65

NET WORKING CAPITAL 2688.54 6605.56 11177.67 16010.85 20805.69

CURRENT RATIO= Current Assets

Current LiabilitiesParticulars 2008-09 2009-10 2010-11 2011-12 2012-13

CURRENT ASSETS 2853.29 8970.69 14160.08 18992.82 23788.04

CURRENT LIABILITIES 164.75 2365.13 2982.41 2998.97 3012.65

CURRENT RATIO 17.32 3.79 4.75 6.37 7.98

ACID TEST RATIO= Quick Assets

Current LiabilitiesParticulars 2008-09 2009-10 2010-11 2011-12 2012-13

QUICK ASSETS 945.23 5,758.51 10,284.87 15,117.61 19,912.83 CURRENT LIABILITIES 164.75 2365.13 2982.41 2998.97 3012.65

ACID TEST RATIO 5.74 2.43 3.45 5.07 6.68

Creditors Turnover Ratio=Net Credit Purchases

Average Creditors

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13NET CREDIT PURCHASES 4076.12 5258.08 6471.51 7107.73 6993.37AVERAGE CREDITORS

778.42

833.45

1,054.92

820.23 502.50

CREDITOR TURNOVER RATIO

3.86

4.98

6.13

6.74

6.63

Net Credit Purchases = Opening Creditors + Purchases – Closing Creditors

CREDITORS PAYMENT PERIOD(in days)

= 365 CREDITORS TURNOVER RATIO PARTICULAR

S 2008-09 2009-10 2010-11 2011-12 2012-13 CREDITORS TURNOVER RATIO

3.86

4.98

6.13

6.74

6.63

CREDITORS PAYMENT PERIOD

94

73

59

54

55

RAW MATERIALS TURNOVER= Cost of Raw Materials Used

Average Raw Materials Inventory

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

COST OF RAW MATERIALS USED 9743.63 13902.88 19019.17 21078.03

21134.76.03

AVERAGE RAW MATERIALS INVENTORY 568.91 666.96 1880.47 2305.86 2435.65

RAW MATERIALS TURNOVER

17.13

20.85

10.11 9.14

9.10

RAW MATERIAL HOLDING PERIOD (in days)

= 365 RAW MATERIALS TURNOVER

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13 RAW MATERIALS TURNOVER 17.13 20.85 10.11 9.14 9.10

RAW MATERIAL HOLDING PERIOD 21 18 36 40 40

WORK IN PROCESSTURNOVER= Cost of goods manufactured

Average Inventory

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

COGM 12331.42 16511.51 23297.83 25884.38 25996.94

Average WIP inventory

617.94 1,273.71 2,093.16 2,305.86

2,316.79

WIP Turnover Ratio

19.96

12.96 11.13 11.23

11.27

COGM = Opening stock(R.M.+WIP) + purchases + direct exp. - closing stock(R.M.+WIP)

WIP HOLDING PERIOD(in days)= 365

AVERAGE WIP TURNOVER RATIO

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13WIP Turnover Ratio

20.79

13.45 11.45 11.52

11.57

WIP HoldingPeriod 18 28 33 33 32

DEBT EQUITY RATIO= Long Term Debt

Shareholder’s Equity

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13LONG TERM DEBT 5700.00 9019.75 8509.75 6889.75 5269.75

TOTAL EQUITY 6505.43 10535.62 15250.26 20582.50 25877.25DEBT EQUITY RATIO 0.88 0.86 0.56 0.33 0.20

PROPRIETORY RATIO= Proprietor’s Fund

Total Assets

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

Proprietory Fund 6505.43 10535.62 15250.26 20582.50 25877.25

Total Assets 11,980.49 22,571.94 29,248.57 34,291.32 39,086.53 PROPRIETORY RATIO 0.54 0.47 0.52 0.60 0.66

INTEREST COVERAGE RATIO= EBIT

INTEREST

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

EBIT2713.51 4410.83 5212.26 5811.17 5696.86

INTEREST282.94 380.63 497.62 478.93 402.11

INTEREST COVERAGE 9.59 11.59 10.47 12.13 14.17

GROSS PROFIT MARGIN = Gross Profit X 100

Sales

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

GROSS PROFIT 3613.40 5661.85 6834.42 7470.65 7356.29

Sales 16091.46 22394.45 30448.30 33672.82 33789.93

GROSS PROFIT MARGIN 22.46 25.28 22.45 22.19 21.85

Gross Profit = Net Sales - COGS

OPERATING PROFIT RATIO= EBIT – Other incomes

Net Sales

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

EBIT-Other Incomes 2,657.37 4,350.83

5,142.26

5,741.17

5,626.86

Net Sales 15,634.33 21,834.59

29,839.33

33,063.86

33,083.97

Operating Profit Ratio 0.17 0.20 0.17 0.17 0.17

NET PROFIT RATIO= EAT

Net Sales

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

EAT 2430.57 4030.20 4714.64 5332.24 5294.75

Net Sales 15,634.33 21,834.59 29,839.33 33,063.86

33,083.97

Net Profit Ratio 0.16 0.18 0.16 0.16 0.16

RETURN ON ASSETS(ROA)= Net profit after Taxes + Interest

Average total assets

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

AVERAGE TOTAL ASSETS

4256.72 10664.10 16624.99 21667.74 26462.95

NET PROFIT AFTER TAX+INTEREST 2,713.51 4,410.83 5,212.26 5,811.17 5,696.86

ROA 0.64 1.04 1.22 1.37 1.34

Meaning Of Working Capital Management

In simple words working capital means that which is issued to carry out the day to day operations of a business.

Working Capital =Current Asset – Current Liability

Concept of Working Capital

• Gross Working Capital = Total of Current Asset

• Net Working Capital = Excess of Current Asset over Current Liability

NET WORKING CAPITALPARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

INVENTORIES 1369.76 2658.88 3296.91 3341.52 3410.63SUNDRY DEBTORS 2338.10 1840.64 2502.60 2603.23 2723.53CASH & BANK BAL. 1000.56 5611.28 10247.18 15289.93 20085.14

LOAN & ADV. 538.30 553.30 578.30 581.30 593.30

SUB-TOTAL 4256.72 10664.10 16624.99 21667.74 26462.95

LESS: 1403.43 1693.41 2464.91 2671.32 2687.11CURRENT ASSETS (A) 2853.29 8970.69 14160.08 18992.82 23788.04CURRENT LIABILITIES (B) 164.75 2365.13 2982.41 2991.25 3001.34NET WORKING CAPITAL(A-B) 2688.54 6605.56 11177.67 16010.41 20805.63

COMPOSITION OF CURRENT ASSETS

WORKING CAPITAL TREND ANALYSIS

Changes in working capital PARTICULARS 2009-10 2010-11

Changes in W.C.Increase Decrease

INVENTORIES 2658.88 3296.91 638.03 SUNDRY

DEBTORS 1840.64 2502.60 661.96 CASH & BANK

BAL. 5611.28 10247.18 4,635.90

LOAN & ADV. 553.30 578.30 25.00

SUB-TOTAL 10664.10 16624.99 5,960.89

LESS: 1693.41 2464.91 771.50 CURRENT

ASSETS 8970.69 14160.08 5,189.39 CURRENT

LIABILITIES 2365.13 2982.41 617.28NET WORKING

CAPITAL 6605.56 11177.67 4,572.11

OPERATING CYCLEThe duration of time required for completing the following

sequences of events in case of manufacturing firm is called the operating cycle.

Conversion of cash into raw material.Conversion of raw material into work in progress.Conversion of work in progress into finished goods.Conversion of finished goods into debtors & bills receivable through sale.Conversion of debtors & bills receivable into cash.

RawMaterial

Debtors& Bills

Receivables

Cash

Work In

Process

FinishedGoodsSales

OperatingCycle

Operating Cycle PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13ADD  1. Inventory Conversion Period  Raw mat. Holding period 21 18 36 40 40 WIP period

21 28 33 33 32 Finished goods holding period 18 17 23 25 25 2.Debtors collection period 55 43 31 21 19 3.Gross operating cycle

115 106 123 119 116

LESS.  4.Creditors payment period 94 73 59 54 55 Net operating cycle

21 33 64 65 61

OPERATING CYCLE COMPONENTS

WORKING CAPITAL TURNOVER RATIO= COGS

Net Working Capital

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

COGS 12429.47 17725.01 23723.22 25884.38 25996.94

Net W.C. 2688.54 6605.56 11177.67 16010.41 20805.63

W.C. TURNOVER RATIO

4.62

2.68

2.12

1.62

1.25

COGS = Opening stock + purchases + direct expenses - closing stock

INVENTORY TURNOVER RATIO= Cost of goods sold Average Inventory

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

COGS 12429.47 17725.01 23723.22 25884.38 25996.94Average inventory

1,988.91

2,747.67 5,450.63 6,388.72

6,221.72

Inventory Turnover Ratio

6.25

6.45 4.35 4.05

4.18

INVENTORY HOLDING PERIOD(in days)= 365

AVERAGE TURNOVER RATIO PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13Inventory Turnover Ratio

17.37

13.92 11.33 11.23

11.27

Inventory HoldingPeriod 58 57 82 87 86

Debtors Turnover Ratio=Net Credit Sales Average Debtors

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13

Net Credit Sales 15,634.33 21,834.59 29,839.33 33,063.86 33,083.97 AVERAGE DEBTORS 2340.64 2,560.64 2,502.60 1,930.25 1,750.36 DEBTOR TURNOVER RATIO 6.68 8.53 11.92 17.13 18.89

DEBTOR COLLECTION PERIOD(in days)= 365 days

Debtor Turnover RatioPARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13 DEBTOR TURNOVER RATIO 6.68 8.53 11.92 17.13 18.89 DEBTOR COLLECTION PERIOD 55

43 31 21 19

WORKING CAPITAL MANGEMENT COMPONENTS

Receivables Management Inventory Management Cash Management

RECEIVABLES MANAGEMENTPARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13SUNDRY DEBTORS 2338.10 1840.64 2502.60 2603.23 2723.53 SUNDRY DEBTORS INDICES 100.00 78.72 107.04 111.34 116.48

AVERAGE COLLECTION PERIOD (in days)

= 365 days Debtor Turnover Ratio

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13 DEBTOR TURNOVER RATIO 6.68 8.53 11.92 17.13 18.89 DEBTOR COLLECTION PERIOD 55 43 31 21 19

INVENTORY MANAGEMENT

PARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13RAW MATERIAL (YARN)

705.44

743.61 913.39 834.81

736.22

WORK IN PROCESS

722.41

672.41 892.19 840.64

864.34

FINISHED GOODS

1,158.06

1,150.36

1,413.67 1,560.00

1,642.62

STORES & SPARES

34.81

34.81 77.65 60.31

52.86

TOTAL

2,620.72

2,601.19

3,296.90 3,295.76

3,296.04

INDICES

100.00

99.25 125.80 125.76

125.77

COMPONENTS OF INVENTORY

MANAGEMENT OF CASHPARTICULARS 2008-09 2009-10 2010-11 2011-12 2012-13CASH & BANK BAL. 1000.56 5611.28 10247.18 15289.93 20085.14

INDICES 100.00 560.81 1,024.14 1,528.14 2,007.39

LIMITATION OF THE STUDY

1. Limited Data2. Limited Period

FINDINGS

The Net Working Capital of the company is increasing so the company is able to pay-off its short-term liabilities.

The creditor turnover ratio increases , it shows company is increasing its efficiency in collecting its sales on credit.

The raw material holding period is increasing as the company is new and expanding its production.

The net operating cycle is increasing but it may start decline from next year as the company is improving its debtor and creditor collection period.

The working capital turnover ratio is declining because of relative high increase in net working capital.

The inventory turnover ratio is decreasing.

SUGGESTIONS• Company has surplus owner funds , it must

increase its debt to enjoy the benefits of trading on equity.

• The company should adopt proper inventory control. Proper inventory management technique will help the unit to decide upon the quantity of inventory to be kept.

• The company should increase its current liabilities in order to make full use of its current borrowing capacity.

• Company should stretch the credit period given by the suppliers.

• Company has to take control on cash & bank balance because cash is non earning assets

THANK YOU