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Working Capital management
PROJECT REPORT
Development of Standard Model for Financial Management; Working Capital management Analysis in Emcure Pharmaceuticals Limited
For the Partial Fulfillment of Degree of Master of Business Administration University (Pune)
By
Sumit Jagadish BrahmankarM.B.A. – [II Year]
Under Supervision
Sinhgad Institute of Business Administration and Research 1
Working Capital managementof
Mr. Raju KaleraAnd
Hrushikesh KhandekarEmcure Pharmaceuticals Limited,
“Emcure House”, T – 184,MIDC; Bhosari,Pune - 411026.
SINHAGAD INSTITUTE BUSINESS ADMINISTRATION AND RESEARCH OF MANAGEMENT, Kondhwa Bk, Pune
Sinhgad Institute of Business Administration and Research 2
Working Capital management
SINGAD INSTITUTE OF BUSINESS ADMINISTRATION & RESEARCH
S.No. 40/4A+4B/1, Near PMC Octroi Post, Kondhwa Saswad Road,
Kondhwa (Bk), Pune - 48
CERTIFICATE
This is to certify that Mr. SUMIT BRAHMANKAR student of SINHGAD INSTITUTE
OF BUSINESS ADMINISTRATION & RESEARCH, Pune has completed his field work report
at EMCURE PHARMACEUTICALS LIMITED, Pune on the topic of WORKING CAPITAL
MANAGEMENT and has submitted the field work report in partial fulfillment of Management in
Business Administration of the UNIVERSITY OF PUNE for the academic year 2007-2009.
He has worked under our guidance and direction. The said report is based on bonafide
information.
Prof. Shagufta Prof. Sunilkumar
Project Guide Director
Date: 4th Sep’ 2008
Place: Pune
Sinhgad Institute of Business Administration and Research 3
Working Capital management
SINHGAD INSTITUTE OF BUSINESS ADMINISTRATION AND
RESEARCH, KONDHWA (BK)
DECLARATION
I herby declare that the project titled “Working Capital Management” is an original piece of
research work carried out by me under the guidance and supervision of Prof. Shagufta. The
information has been collected from genuine & authentic sources. The work has been submitted in
partial fulfillment of the requirement of MBA (Finance) to Pune University.
Place: Pune
Date: 4th Sep’2008 SUMIT BRAHMANKAR
Sinhgad Institute of Business Administration and Research 4
Working Capital management
PREFACE
It gives me immense pleasure to present this report on “Working Capital Management” for
EMCURE PHARMACEUTICALS Ltd. This research gives the idea about effective
management of working capital various methods of project evaluation, which can be used before
setting a new industry.
This report is submitted as a part of course curriculum of SINHAGAD INSTITUTE OF
BUSINESS ADMINISTRATION AND RESEARCH, PUNE.
The report is written in an easy and comprehensive manner using systematic methodology.
I have ensured my best to cover all the aspects related to this topic and make the report purposeful.
SUMIT JAGADISH BRAHMANKAR
Sinhgad Institute of Business Administration and Research 5
Working Capital management
CONTENTS
Sr no. Contents Pg no.
1 Introduction of management 6
2 Company's Overview 9
Vision, Values & Mission 9
3 Financial Highlights 12
4 Business Area 16
5 Research Area 17
6 Working Capital Management 19
7 Working Capital 20
8 Working Capital Management 21
9 Working Capital Cycle 24
10 Bank Financing of Working Capital 26
11 Methods of lending 27
12 Balance Sheet 29
13 Working Capital limits of bank 31
14 CMA for bank finance 33
15 Comparative Ratios 36
16 Operating Cycle 43
17 Effect of Inflation 45
18 Analysis and conclusion 47
19 Letter of credit 47
20 Bibliography 51
Sinhgad Institute of Business Administration and Research 6
Working Capital management
INTRODUCTION OF MANAGEMENT;
Evolution of Financial Management emerged as a distinct field of study at the turn of the century.
Its evolution is divided into three broad phases – The Traditional Phase, The Transitional Phase
and The Modern Phase.
THE TRADITIONAL PHASE lasted for about four decades. The focus of financial
management was mainly on certain episodic events like formation, issuance of capital, major
expansion, merger, reorganization and liquidation in the life cycle of the firm. The approach was
mainly descriptive and institutional. Legal aspects, instruments, institutions and procedures formed
the core of financial management.
THE TRANSITIONAL PHASE began around the early forties and continued through the
early fifties. Greater emphasis in this phase was put on day to day management problems faced by
the financial managers in the area of fund analysis, planning and control.
THE MODERN PHASE started in mid fifties and has witnessed an accelerated pace of
development with the infusion of ideas from economic theory and application of quantitative
methods of analysis. The scope of financial management was broadened. The central concern of
Financial Management is considered to be rational matching of funds to their uses in the light of
appropriate decision criteria.
Since the beginning of the modern phase many significant and seminal developments have occurred
in the fields of capital budgeting, capital structure theory, efficient market theory, option pricing
theory, valuation models, dividend policy, working capital management, financial modeling and so
on. Many more exciting developments are in the offing making a fascinating and challenging field.
Management is an activity, which is concerned with planning, organizing, staffing, directing,
reporting and budgeting, in order to achieve specific objectives. If we apply the concept to the
Financial Management (F.M.) it is related to the above financial aspects of a company / firm with a
very specific objective. Although (F.M.) is still a comparatively new discipline consequently there
is still several contraparies about various theories and concepts, and has a greater importance today
in the age of competition and IT based services.
Therefore, it is essential to know the flow of funds / financial resources, for decision making
pinpointed expeditions and exhaustively at proper time. It is basically concern with raising the funds
(resources) and utilization of the same optimally, to maximize the returns of the owned company.
Since raising of the funds / financial and the best utilization of the same, is very crucial part of the
resources i.e. (Money, Manpower, Machine and Material) 4M’s for the organization goals to be
Sinhgad Institute of Business Administration and Research 7
Working Capital managementachieved i.e. (Product, Price, Place, Promotion) 4P’s and leads to the success / failure of the
organization. In this way a successful management planning, organizing, staffing, directing,
reporting and budgeting has made Emcure achieve it objectives and goals.
Financial Accounting:
Financial accounting is that part of accounting which is mainly concerned with the historical,
custodial and stewardship aspects of external reporting to shareholders, government and other users
of accounting information outside the business entity. Financial accounting emphasizes the
stewardship aspects of accounting rather than control or decision making aspects of accounting. It is
the recording and processing of the financial data affecting the business unit, which relates to the
past and generally for one year. The end product of Financial Accounting is the Profit and Loss
Account for the period ended (which shows the Profit earned or Loss occurred) and the Balance
Sheet as on the last day of the accounting period (which shows the financial position). The
preparation of the financial accounting is based on generally accepted accounting principles
enunciated by the accounting profession and is heavily constrained by legal regulation and
accounting standards.
Management Accounting:
Management accounting is that part of accounting which is concerned, mainly with internal
reporting to the managers of a business unit. It is related to planning, control and decision making
which is useful for the management in discharge of its functions. Thus it emphasizes the control of
decision making aspects of accounting, which is tailor made to suit the needs of the management of
a specific enterprise, rather than stewardship aspects of accounting. Management accounting is a
‘forward - looking’ and generally includes cost accounting and budgeting. The preparation of
management is not based on generally accepted principals and is relatively free of constraints
imposed by legal regulations and accounting standards.
Need and Scope of Study:
Sinhgad Institute of Business Administration and Research 8
Working Capital managementEmcure as a multinational pharmaceuticals industry, in a short span of time and age of competition,
globalization growth of business, occurrence of trade cycles, it is essential to expand the scope of
financial system of long / short term financial management. This includes projection / rising of
funds, utilization of fund optimally, to maximize returns of the shareholders.
Objectives of Study:
Financial accounting provides reliable information about changes in financial position
resulting from the income producing efforts of an enterprise.
Provides information about earning of an enterprise, presented in a manner that emphasizes
sources and trends of earning.
Information about economic resources and obligations of an enterprise.
It also gives detail information about changes in net financial resources which results from
the financial and investment activities of an enterprises.
Any additional information, in the form of disclosures, which is relevant to statement user in
assessing particular enterprises prospects.
To maximize the profit with limited resources from unlimited challenges, with proper
financial analysis by a manager.
To find out the existing financial management related problems / risk factor to avoid any
unforced seen.
To develop a model for the financial system as and when required by the manager again
with various financial analysis.
To suggest and recommend the steps to be taken related to financial management to
maximize the development of industry financial position and goodwill.
COMPANY’S OVERVIEW
Sinhgad Institute of Business Administration and Research 9
Working Capital management
Emcure Pharmaceuticals Limited was established in 1981. It had a vision to create a healthcare
company that would satisfy the vast healthcare needs / demand. Company’s commitment and drive
have propelled the growth from a single manufacturing facility during the genesis, to a range of
world class manufacturing facilities spread across API, formulations and biotechnology. Company
began with a single manufacturing facility at Pune, has today rapidly grown into a set of world class
manufacturing facilities and one of the top Indian pharmaceutical corporate in the domestic
industry. It’s headquarter in Pune (INDIA) Emcure is today a vertically integrated pharmaceutical
company with infrastructure, skills and resources that are best in the world. Strengths span research
to the manufacturing of APIs, Formulations and Biotechnology. The Company has carved a
preferred outsourcing partner for some of the largest MNCs both in India and global markets.
Emcure under its own brands in the domestic market researches manufactures and formulates
markets and exports its own formulations to Asia, Africa, CIS, Europe, Latin America and the
Middle East. With this approval, the facility has accreditation from US FDA, UK MHRA, WHO
Geneva and MCC South Africa, the Emcure brand stands for quality, competitiveness. Emcure is
building its pipeline of Chiral and conventional APIs and is emerging as a strong player in the
biotechnology front. Emcure is also very active in dealing with HIV/AIDS concern through its
"Let's fight AIDS together" initiative and supplies Antiretroviral drugs to Africa, Asia Pacific and
CIS. It has taken another significant step towards corporate social responsibility by starting ‘Taal’, a
pharmacy for HIV/AIDS.
Company’s vision and value:
Vision: -
“Emerging as a technology driven global players offering high quality and cost
effective healthcare.”
Values: -
Strategic Alliances.
Brand Equity.
Global Presence.
Technology.
People Focus.
Entrepreneurship.
Sinhgad Institute of Business Administration and Research 10
Working Capital management“Emcure’s Vision is to manufacture innovative, high-tech products, which will satisfy the needs of
customers. To this we are firmly committed. Technology and R&D play a vital role in all our
endeavors. All our policies are market driven with the customer being the focal point. Emcure is
committed to create brand equity by promoting top class products.”
To achieve this Vision, they create value for the entire serve: the customers, consumers and the
community. Emcure creates value by executing a comprehensive strategy they are: -
1. Emcure will strive to develop novel products and offer sound advice to doctors and patients.
2. The company will display strong social responsibility and lead as a model corporate citizen.
VISION
“Emerging as a Technology Driven Global Players Offering High Quality and
Cost Effective Healthcare.”
Strategic
Alliances
Brand
Equity
Global
Presence
Technology People
Focus
Entre –
preneurship
Board of Directors:
Sinhgad Institute of Business Administration and Research
VALUES
11
Working Capital managementThe Emcure Board consisting of Independent and Executive Directors is drawn from highly
eminent people from areas such as Pharmaceuticals, Government, Banking & Finance, Law,
Business and Education.
Non-Executive Directors: -
Mr. Humayun Dhanrajgir – Chairman.
Mr. Shreekant Bapat.
Mr. Berjis Desai.
Dr. Mahendra Patel.
Mr. Akhil Gupta.
Mr. Marvin Samson.
Executive Directors
Mr. Satish Mehta - Managing Director.
Mr. Arun Kumar Khanna –Chief Operating Officer
Mr. Mahesh Shah, Director – Technical.
Dr. Mukund Gurjar.-Director R&D
Company’s Social Responsibility:
Emcure is looking forward towards the social responsibility and are active to the needs of health
care faced by individuals across the globe. One of our attempts is in the area of combating AIDS at
a global level. Emcure has developed a range of Antiretroviral medicines which includes two drugs
and three drug combination formulated at Emcure’s R&D. it has been well appreciated by the
Doctors and The Ministries of Health in several countries. We work in close co-ordination with
several Governments and NGOs in undertaking AIDS Awareness Programmes. As a part of its
HIV/AIDS initiatives, ure recently started the first of its kind pharmacy called ‘Taal’ in Pune.
Anaemia is the most common disorder of blood in the world. About 70-80% of women in child
bearing age are estimated to be anaemic in India due to which 20% of maternal deaths occur. A
survey conducted by FHI (Family Health International), the prevalence of anaemia in young girls
aged between 12-18 years is 82.9% in girls going to school and 92.7% among girls not going to
school. The corporate social responsibility is aimed towards increasing the awareness on anaemia,
its early detection and timely treatment of Iron deficiency in various sections of Indian population
especially young school children and the less privileged sections of society.
Sinhgad Institute of Business Administration and Research 12
Working Capital managementFinancial Highlight:
In 2006 – 2007 PROFIT GREW by 20% over previous year.
PROFIT before tax in 2006-2007 INCREASED 72% over previous year.
PROFIT after tax in 2006 – 2007 INCREASED 66% over previous year.
NET WORTH in 2006 – 2007 INCREASED 32% over previous year.
Company’s Sales
Sinhgad Institute of Business Administration and Research
Company's Sales
YEARS Rs (MILLION)
2002 – 2003 5014
2003 – 2004 5552
2004 – 2005 5558
2005 – 2006 8040
2006 – 2007 9652
13
Working Capital management
Company’s Profit
Company's Profit
YEARS Rs (MILLION)
2002 – 2003 326
2003 – 2004 560
2004 – 2005 522
2005 – 2006 812
2006 – 2007 1402
Sinhgad Institute of Business Administration and Research
Company's Sales
8040
9652
5552 55585014
0
2000
4000
6000
8000
10000
12000
2002 - 2003 2003 - 2004 2004 - 2005 2005 - 2006 2006 - 2007
YEARS
Rs
(MIL
LIO
N)
14
Working Capital management
Net Worth:
Company's Net Worth
YEARS Rs (MILLION)
2002 – 2003 964
2003 – 2004 1242
2004 – 2005 1606
2005 – 2006 2064
2006 – 2007 7216
Sinhgad Institute of Business Administration and Research
Company's Profit
326
522
1402
812
560
0
200
400
600
800
1000
1200
1400
1600
2002 - 2003 2003 - 2004 2004 - 2005 2005 - 2006 2006 - 2007
YEARS
Rs (
MIL
LIO
N)
15
Working Capital management
Company's Distribution Of Rupee Earned:
Sinhgad Institute of Business Administration and Research
2002 - 2003 2003 - 2004 2004 - 2005 2005 - 2006 2006 - 20070
1000
2000
3000
4000
5000
6000
7000
8000
9641242
1606 2064
7216
Company's Net Worth
YEARS
Rs
(MIL
LIO
N)
3%5%
3%
8%
36%16%
4%
25%
Company's DistributionDepreciation
Income Tax
Dividend
Retained Earning
Material Cost
Employee Cost
Financial Cost
Other Expenses
16
Working Capital management
BUSSINESS AREA:
Manufacturing:
Manufacturing and technical excellence have been an important area at Emcure. The first
manufacturing facility was started in 1983. Emcure has set up multiple facilities for manufacturing
brands as well as key brands for major multinationals in India. Interaction and association with
MNC principals has resulted in the cross-fertilization of technology and global systems into the
organization. This coupled with a strong work ethic has helped Emcure to create a reputation as a
high quality supplier to the Pharma industry. Technical skills and quality standards at Emcure are
benchmarked with global norms. Currently Emcure has created world class facilities to satisfy the
needs of the global markets. Emcure is today one of the largest contract manufacturers of tablets,
capsules, liquids, ointments and creams in India and manufactures the key brands for some of the
largest MNCs in India. Emcure's facilities are WHO GMP certified and ISO 9001 accredited for
systems which are regularly audited by global audit teams of principals by measured to the
standards required. A new world-class facility for liquid injectables has been set up to the regulated
markets. The Small Volume Parenterals facilities have independent lines for filling pre-filled
syringes, vials and ampoules. API R&D infrastructure comprises process development laboratories,
complete analytical equipment, microbiological facilities, kg scale facilities and pilot plant for scale
up and commercial manufacture. Emcure has set up a world class facility capable of handling
mammalian and bacteria / yeast based cell lines along with facilities for upstream and downstream
processing of bio-generics. Work is in progress to add value to the bio-generics through
technologies such as P E Gyllation.
Sinhgad Institute of Business Administration and Research 17
Working Capital managementRESEARCH AREA:
YEAR RESEARCH
2002 S – Amlodipine.
2003 S – Atenelol.
2005 S – Metoproloi.
2006 S – Pantoprazole
2007 Dexibuprfen, Eszopiclone, Dex – Rabeprazole.
Emcure is responsive to growing healthcare requirements. So, research is at the heart of Emcure’s
philosophy. Emcure believe that scientific research best and rewarding ways to go ahead. Emcure
today has independent R & D facilities, in India, for API, formulation and biotech research. All our
research facilities are approved by DSIR (Department of Scientific & Industrial Research), Ministry
of Science & Technology, Government of India.
Emcure is at the forefront of this technology. Emcure has a number of first to market to its credit in
this niche area. The focus areas of API research at Emcure are cardiovascular, haematinics and anti-
retrovirals. For ARVs, its tie up with Bristol Myers Squibb for Atazanavir demonstrates our
commitment in this direction. Emcure's research team is constantly working on synthesizing APIs
in these therapeutic category using efficient, economical and environment friendly processes.
Emcure has tied up with multinational organizations for researching and commercializing a range of
products. The API R&D infrastructure comprises process development laboratories, complete
analytical equipment, microbiological facilities, kg scale facilities and pilot plant for scale up.
Emcure has an ongoing association with two of India's pioneering research institutes, Indian
Institutes of Technology and National Chemical Laboratory, Pune. Emcure's R&D team works
closely with them on newer technologies.
Sinhgad Institute of Business Administration and Research 18
Working Capital managementSUBSIDIARIES OF EMCURE PHARMACEUTICALS LIMITED:
ZUVENTUS HEALTHCARE LIMITED.
GENNOVA BIOPHARMACEUTICALS LIMITED.
EMCURE PHARMACEUTICALS (USA), Inc.
EMCURE INFOTECH LIMITED.
LASOR PHARMACEHEM LIMITED.
NET WORTH
Definition 1:
Net Worth: - For a company, total assets minus total liabilities. Net worth is an important
determinant of the value of a company, considering it is composed primarily of all the money that
has been invested since its inspection, as well as the retained earning, for the duration of its
operation. Net worth can be used to determine creditworthiness because it gives a snapshot of the
company's investment history also called owners equity shareholders equity or net assets.
Definition 2:
Net Worth: - For an individual, the value of a person’s assets, including cash, minus all liabilities.
The amount by which the individual assets exceed their liabilities is considered the net worth of that
person.
Sinhgad Institute of Business Administration and Research 19
Working Capital management
Sinhgad Institute of Business Administration and Research 20
Working Capital managementWorking Capital
Working capital is capital which is required for day to day operation of business, or more
specifically, for financing the conversion of raw material, which is company sell for
payment. Among the most important item of working capital are levels of inventory,
accounts receivable, and account payable. Analysts look at these items for signs of a
company’s efficiency and financial strength.
Two types of Working capital-
1. Gross working capital
2. Net working capital
Gross working capital refers to the total current assets use in the firm.
Net working capital is the difference between current assets and current liabilities. It is
also called working capital of company.
It is a measure of both a company's efficiency and its short-term financial health. The
working capital ratio is calculated as:
Positive working capital means that the company is able to pay off its short-term
liabilities. Negative working capital means that a company currently is unable to meet its
short-term liabilities with its current assets (cash, accounts receivable and inventory).
Current assets involve-
Cash
Short term securities
Debtors
Bill receivable
Inventory
Current liabilities includes-
Creditors
Bill payable
Out standing expenses
Sinhgad Institute of Business Administration and Research 21
Working Capital management
Working Capital Management
Working capital (also known as net working capital) is a financial metric which
represents the amount of day-by-day operating liquidity available to a business. Along
with fixed assets such as plant and equipment, working capital is considered a part of
operating capital. It is calculated as current assets minus current liabilities. A company
can be endowed with assets and profitability, but short of liquidity, if these assets cannot
readily be converted into cash. Decisions relating to working capital and short term
financing are referred to as working capital management. These involve managing the
relationship between a firm's short term assets and its short term liabilities. The goal of
Working capital management is to ensure that the firm is able to continue its operations
and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses.
Management of working capital:
Management uses a combination of policies and techniques for the management of
working capital. These policies aim at managing the current assets (generally cash and
cash equivalents, inventories and debtors) and the short term financing, such that cash
flows and returns are acceptable.
Cash Management identifies the cash balance which allows for the business to meet
day to day expenses, but reduces cash holding costs.
Inventory management identifies the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and minimizes
reordering costs - and hence increases cash flow.
Debtor management identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle
will be offset by increased revenue and hence Return on Capital (or vice versa)
Short term financing identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
Sinhgad Institute of Business Administration and Research 22
Working Capital managementhowever, it may be necessary to utilize a bank loan (or overdraft), or to "convert
debtors to cash" through "factoring".
Calculation:
Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers have the
most direct impact:
Accounts Receivable (current asset)
Inventory (current assets)
Accounts Payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it represents a
short-term claim to current assets and is often secured by long term assets. Common
types of short-term debt are bank loans and lines of credit. An increase in working capital
indicates that the business has either increased current assets (that is received cash, or
other current assets) or has decreased current liabilities e.g. has paid off some short-term
creditors. An implication of the common commercial definition of working capital for the
purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital
adjustment mechanism in a sale and purchase agreement) is equal to: Current Assets -
Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets
and/or deposit balances. Cash balance items often attract a one-for-one purchase price
adjustment. A decision criterion of working capital management entails short term
decisions - generally, relating to the next one year period - which is "reversible". These
decisions are therefore not taken on the same basis as Capital Investment Decisions rather
they will be based on cash flows and / or profitability.
One measure of cash flow is provided by the cash conversion cycle- the net number
of days from the outlay of cash for raw material to receiving payment from the
customer. As a management tool, this metric makes explicit the inter-relatedness of
decisions relating to inventories, accounts receivable and payable, and cash. Because
this number effectively corresponds to the time that the firm's cash is tied up in
operations and unavailable for other activities, management generally aims at a low net
count.
Sinhgad Institute of Business Administration and Research 23
Working Capital management In this context, the most useful measure of profitability is Return On Capital (ROC).
The result is shown as a percentage, determined by dividing relevant income for the 12
months by capital employed; Return On Equity (ROE) shows this result for the firm's
shareholders. Firm value is enhanced when, and if, the return on capital, which results
from working capital management, exceeds the Cost Of Capital, which results from
capital investment decisions as above. ROC measures are therefore useful as a
management tool, in that they link short-term policy with long-term decision making.
A managerial accounting strategy focusing on maintaining efficient levels of both
components of working capital, current assets and current liabilities, in respect to each
other. Working capital management ensures a company has sufficient cash flow in order
to meet its short-term debt obligations and operating expenses.
Implementing an effective working capital management system is an excellent way for
many companies to improve their earnings. The two main aspects of working capital
management are ratio analysis and management of individual components of working
capital.
A few key performance ratios of a working capital management system are the working
capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead
management to identify areas of focus such as inventory management, cash
management, accounts receivable and payable management.
Factors which influence working capital of any company-
Nature of business
Market and demand condition
Technology and manufacturing policy
Credit policy
Availability of credit from suppliers
Operating efficiency
Price level changes
Sinhgad Institute of Business Administration and Research 24
Working Capital management
Working Capital Cycle
Cash flows in a cycle into, around and out of a business. It is the business's life blood
and every manager's primary task is to help keep it flowing and to use the cashflow to
generate profits.
The faster a business expands, the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right within
business. Good management of working capital will generate cash will help improve
profits and reduce risks. Bear in mind that the cost of providing credit to customers and
holding stocks can represent a substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and
work-in-progress) and Receivables (debtors owing you money). The main sources of
cash are Payables (your creditors) and Equity and Loans.
Working capital operating cycleOf
EMCURE PHARMACUTICALS
Sinhgad Institute of Business Administration and Research 25
VENDER(Creditors)
NON FUND BASED(LC,BG)
BANK
CASHCHEQUE
RAW MATERIAL
WORK INPROGRESS
FINISHEDGOODS
SALES(Debtors)
ADVANCE(From Customer)
Working Capital management
Active liquidity management optimizes monetary value chains in companies and tributes
towards a significant strengthen of internal financing sources and capital efficiency.
The specific liquidity-related activities of the following process-
1. order to cash (from acquisition to payment receipt and processing)
2. purchase to pay (from determination of the purchasing needs to trade settlment)
3. forecast to fulfill (from sale forecasting to production or services rendering )
Sinhgad Institute of Business Administration and Research 26
Working Capital management
BANK FINANCING FOR WORKING CAPITAL
The financing limits are granted based on assessment of the working capital requirement.
The assessment factors include various characteristics such as the nature of industry,
industry norms, actual level of activity for the previous year and the projected level of
activity for the subsequent year to arrive at the working capital requirement. The banking
financing limits is thereafter deciding after factoring in margins on the different types of
current assets forming part of the working capital. The bank financing limits is fixed on
the annual basis. However, since each limits is provided to meets specific requirement,
utilizing the limits is subjected to drawing power, which is decided on a
monthly/quarterly basis.
Types of working capital financing-
1. Fund Based
Cash credit
Working capital term loan
Bills financing
Export financing
2. Non Fund Based
Letter of credit
Letter of guarantee
Deferred payment
Sinhgad Institute of Business Administration and Research 27
Working Capital management
METHODS OF LENDING
Like many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon.
The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilization of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporate in the light of methodology recommended by the Group.
As per the recommendations of Tandon Committee, the corporate should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods:
First Method of Lending:Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs
Second Method of Lending:Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based
Sinhgad Institute of Business Administration and Research 28
Working Capital managementcredit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.
Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.(This method was not accepted for implementation and hence is of only academic interest).
As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the level of current assets. The classification of assets and balance sheet analysis, therefore, assumes a lot of importance. RBI has mandated a certain way of analyzing the balance sheets. The requirements of this break-up of assets and liabilities differs slightly from that mandated by the Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more detailed and accurate picture of the affairs of a corporate. The corporate are required by all banks to analyze their balance sheet in this specific format called CMA data format and submit to banks. While most qualified accountants working with the firms are aware of the method of classification in this format, professional help is also available in the form of Chartered Accountants, Financial Analysts for this analysis.
Sinhgad Institute of Business Administration and Research 29
Working Capital management
Balance Sheet of Emcure Pharmaceuticals Limited Rs.in crore
PARTICULAR EPL EPL EPL
2006 2007 2008
SOURCES OF FUNDS
Shareholders' Funds
Share Capital 24 98 98
Reserves and Surplus 182 624 660
206 722 758
Loan Funds
Secured Loans 284 358 468
Unsecured Loans 36 34 32
320 392 500
Deferred Tax (net)
Deferred Tax Liability 32 56 70
Less: Deferred Tax Asset 2 2 4
30 54 68
TOTAL 556 1168 1326
APPLICATION OF FUNDS
Fixed Assets
Gross Block 370 518 638
Less: Depreciation / Amortization 48 66 96
Net Block 322 452 540
Capital work-in-process 39 54 210
362 504 748 Investments 17 174 126
Current Assets, Loans and Advances
Inventories 94 144 212
Sundry Debtors 112 196 214
Cash and Bank Balances 2 132 6 Other current assets Loans and Advances 106 168 224
Less: Current Liabilities and Provisions
Sinhgad Institute of Business Administration and Research 30
Working Capital management Current Liabilities 120 124 176
Provisions 16 30 30
136 154 206 Net Current Assets 178 488 450
Miscellaneous Expenditure - -TOTAL 556 1168 1326
Sinhgad Institute of Business Administration and Research 31
Working Capital management
Working Capital Limits of Bank
CASH CREDIT Of EPL
BOM 2660CITY BANK 3042HDFC 4008BNP 4184HSBC 4296ICICI 3000ABN AMRO 1120SCB 1890SUB TOTAL 24200BANK LIMIT 26000
BOM
City B
ank
HDFC
HSBCIC
ICI
ABN Am
roSCB
BNP
0
2000
4000
6000
8000
10000
12000
Bank Limit Chart
Cach Credit Term Loan
Rs.
in
Lac
s
Note:
The above data shows the distribution of total bank limit of Emcure Private
limited for the purpose of raising Working Capital finance.
The company, for the purpose of raising this finance, needs to submit reports of
the company on a regular basis to these banks.
These reports need to be done in a format prescribed by the banks. These reports
give amore clear view of the financial position of the company.
For the purpose various ratios are calculated and the statements are studied
properly.
Sinhgad Institute of Business Administration and Research 32
Working Capital management On the basis of this study every bank decides up to what limits they can finance
the working capital of the company.
Thus one of these statements has been discussed below, which is one of the most
important statements to be submitted by the company.
Comparison between available limited cash credit from banks and utilization of actual cash credit by the company (Emcure)
Rs. in lacs
CMA Data for raising finance from banks
CMA stands for Credit Monitoring Analysis. It is the statement prepared for the purpose of raising bank finance for working capital. The corporate are required by all banks to analyze their balance sheet in this specific format called CMA data format and submit to banks. RBI has mandated a certain way of analyzing the balance sheets. The requirements of this break-up of assets and liabilities differs slightly from that mandated by the Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more detailed and accurate picture of the affairs of a corporate.
Sinhgad Institute of Business Administration and Research
2660
3042
4008
4184
4296
3000
1120 1890
Bankwise Distribution on Cash Credit
BOM CITY BANK HDFC BNP HSBC ICICI ABN AMRO SCB
33
Working Capital management
Estimating working capital requirement Rs in lacs Current Assets 2006 2007 2008 Details Amt. Details Amt. Details Amt.Cash & Bank balance 200 13200 600
Sundry Debtors 11200 19600 21400
Raw material inventory 4200 5200 9200
Other Inventory 5200 9200 12000
Inventories 9400 14400 21200
Investments 1700 17400 12600
Other Current Assets 10600 16800 22400
Total Current Assets (A) 33100 81400 78200
Current Liabilities & Provision 13600 15400 20600
Sundry creditors trade 8200 8400 10300
Statutory liabilities 1200 2500 2100
Provisions 4200 4500 8200
Total other Current liabilities 13600 15400 20600Add: Loan instalmentsinstallments due in 1 year
3300 3900 7300
Add: Sundry creditors capital goods 300 290 250
Add: Short term borrowings from banks 9700 13300 13900 18090 15500 23050
Total Current liabilities(B) 26900 33490 43650
Working Capital 19500 66000 57600
Net Working Capital (A-B) 6200 47910 34550
COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKING CAPITAL :
Method I PARTICULAR/YEARS 31-03-2006 31-03-2007 31-03-2008
Total Current Assets : 33,100 81,400 78,200 Other Current Liabilities : 13,600 15,400 20,600
Sinhgad Institute of Business Administration and Research 34
Working Capital managementWorking Capital : 19,500 66,000 57,600 Minimum Stipulated 4,875 16,500 14,400 Actual /Projected Net W.C. 9,800 52,100 42,100 W.C.-Minimum 14,625 49,500 43,200 W.C. - Actual net 9,700 13,900 15,500 Maximum permissible 9,700 13,900 15,500 Excess - -
Rs in lacs
Rs in lacs Method II :
Total Current Assets : 33,100 81,400 78,200 Other Current Liabilities : 13,600 15,400 20,600 Working Capital : 19,500 66,000 57,600 Minimum Stipulated (25% of C.A.) 8,275 20,350 19,550
Sinhgad Institute of Business Administration and Research 35
Working Capital managementActual /Projected Net W.C. 9,800 52,100 42,100
W.C.-Minimum 11,225 45,650 38,050
W.C. - Actual net 9,700 13,900 15,500
Maximum permissible 9,700 13,900 15,500 Excess - -
COMPARATIVE RATIOS
GROSS WORKING CAPITAL
Gross Working Capital refers to the firm’s investment in current assets. Current Assets are the assets which can be converted into cash within an accounting year.
Years GWC(in lacs)2006 331002007 814002008 78200
Sinhgad Institute of Business Administration and Research
2006 2007 20080
100002000030000400005000060000700008000090000
GWC(in lakhs)
GWC(in lakhs
36
Working Capital management
In 2007 Gross Working Capital has increased because of increase in Debtors & cash balance due to high Net Sales. The Sales have shown an increase in 2008 but not in proportion to 2007. In effect debtors are less and cash balance is utilized for Capital Projects.
NET WORKING CAPITAL
Years Net working capital2006 62002007 479102008 34550
Net Working Capital refers to 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 & outstanding expenses.
Sinhgad Institute of Business Administration and Research
2006 2007 20080
100002000030000400005000060000700008000090000
GWC(in lakhs)
GWC(in lakhs
37
Working Capital management
2006 2007 20080
10000
20000
30000
40000
50000
NWC (in Lacs)
NWC
Years
Net working capital has increased in 2007 but it has decreased in 2008 as compared to 2007.One of the reason is current assets have increased less proportionately as compared to the increase in current liabilities.
CURRENT RATIO
Sinhgad Institute of Business Administration and Research 38
Working Capital management
2006 2007 20080
0.5
1
1.5
2
2.5
1.23
2.43
1.36
Current Ratio
Current Ratio
Years
Ra
tio
The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. It is expressed as follows:
The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If a company's current assets are in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets.
Current ratio is also called the working capital ratio. A general rule of thumb for the current ratio is 2 to 1(or2:1or2/1).however an industry average may be better standard than this rule of thumb.
Ratio of the company is between 1.2 to 2. It implies that working capital is according to standards. In 2007 it is 2.47 which shows that current assets have increased
INVENTORY TURNOVER RATIO
Sinhgad Institute of Business Administration and Research 39
Working Capital management
Years 2006 2007 2008Cost of goods sold 39,262 45,340 46,930Inventory turnover 4.55 3.84 2.64Average inventory 8633 11817 17794
Turnover ratio is calculated as cost of goods sold divided by average inventory during the time period. Cost of goods sold / Average inventory
A high turnover ratio is a sign that the company is producing and selling its goods or services at a faster rate.Inventory turnover ratio is best in year 2006 out of all the 3 years and lowest in year 2008. Company holds more inventories as compared to other years.
Sinhgad Institute of Business Administration and Research
2006 2007 20080
0.51
1.52
2.53
3.54
4.55
4.55
3.84
2.64
Inventory Turnover
Inventory turnover
Years
Ra
tio
40
Working Capital managementDAYS OF INVENTORY
YEARS 2006 2007 2008
DAYS OF INVENTORY 80 95 138
COST OF GOODS SOLD 39262 45340 46930
INVENTORY 8633 11817 17794
2006 2007 20080
20
40
60
80
100
120
140
8095
138
Days of Inventory
DOI
Years
Da
ys
Average Inventory / Cost of goods sold*365=days of inventory
This ratio identifies the average length of time in days it takes the inventory to turn over.Lesser the inventory period lesser the cost spent on inventory. In 2006 it is very less(i.e. 80 days) one of the reason for this might be short lead time after procurement.In 2008 it has increased to 138 days. It shows that raw material holding has increased in a higher proportion than raw material consumption. One of the reasons can be increase in raw material prices. That is the company is keeping more stock of raw material inventory with it. Another reason could be a conscious policy decision to avoid stock out situations.
WORKING CAPITAL TURNOVER
Sinhgad Institute of Business Administration and Research 41
Working Capital management
Years 2006 2007 2008
Net sales 67800 85200 87500
Net working capital 6200 47910 34550
It is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.
A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.
Years 2006 2007 2008
Working Capital Turnover 10.93 1.78 2.53
2006 2007 20080
2
4
6
8
10
12
Working Capital Turnover
WCT
Years
Ra
tio
It can be observed here that the ratio has shown a huge decrease in 2007 as compared to 2006. This shows that the company’s estimation of working capital requirement was higher than what it was able to convert into sales. The ratio has shown a slight improvement in 2008 as compared to 2007 due to higher increase in sales as compared to increase in Working Capital.
QUICK RATIO ANALYSIS
Sinhgad Institute of Business Administration and Research 42
Working Capital managementQuick ratio focuses on immediate liquidity (i.e. cash, accounts receivable, etc.) but specifically ignores inventory. It is also called the acid test ratio. It indicates the extent to which the company could pay current liabilities without relying on the sale of inventory. The ideal ratio should be 1 to 1(or 1:1or1/1).
Years 2006 2007 2008
Liquid Assets 23700 67000 57000
Liquid Liabilities 26900 33490 43650
2006 2007 20080
0.5
1
1.5
2
0.88
2
1.31
Quick Ratio
Quick Ratio
Years
Ra
tio
AVERAGE RECEIVABLE PERIOD
Sinhgad Institute of Business Administration and Research 43
Working Capital management
YEARS 2006 2007 2008SALES 67800 85200 87500
DEBTORS 11156 19682 21402
The number indicates how quickly customers are paying your business. The greater the number of times receivables turn over during the year, the shorter the time between sales and cash collection.
2006 2007 20080
20
40
60
80
100
60
84 89
Average Receivables period
ARP
Years
Days
It can be observed that days of cash received from debtors have increased in 2007 as compared to 2006 and is highest in 2008. Either the company is not able to manage its debtors effectively, thus increasing chances of occurrence of bad debts. Or company is having policy of keeping its debtors high to increase its sales.
AVERAGE PAYMENT PERIOD
Sinhgad Institute of Business Administration and Research 44
Working Capital management
YEARS 2006 2007 2008
CREDITORS 8052 8130 9994
COST OF SALES(or purchases) 39262 45340 46930
Total creditors/total credit purchases*365
Average Payment Period is concern with payment to the suppliers. APP is increased in 2008 as demand increased and to meet this demand raw material consumption also increased.
GROSS OPERATING CYCLE
Sinhgad Institute of Business Administration and Research
2006 2007 200855
60
65
70
75
80 75
65
78
Average Payment Period
APP
Years
Days
45
Working Capital managementOperating Cycle: operating cycle is the time duration required to convert sales after the conversion of resources into inventories, into cash. Gross Operating Cycle: the length of the operating cycle of a manufacturing firm is the sum of Inventory conversion period and Debtors conversion period, which is referred to as Gross Operating Cycle.
Gross Operating Cycle of Emcure Pharmaceuticals Limited:(Inventory Conversion Period + Debtors Conversion Period) days In days
2006 2007 2008Inventory Conversion Period 46 51 74Debtors Conversion Period 60 84 89 Gross Operating Cycle 106 135 163
NET OPERATING CYCLE
Net Operating Cycle is also referred to as cash conversion cycle. Creditors deferral period is the length of time the firm is able to differ payments on various resource purchases. The difference between operating cycle and payables deferral period is Net Operating Cycle. It is net time interval between cash collections from sale of the product and cash payments or resources required by the firm. It also represents the time interval over which additional funds called working capital should be obtained in order to carry out the firm’s operations.
Net Operating Cycle of Emcure Pharmaceuticals Limited:(Gross Operating Cycle – Payment deferral period) days In days 2006 2007 2008Gross Operating Period 106 135 163Payment deferral period 75 65 78 Net Operating Cycle 31 70 85
It can be observed that there is a significant change in the company’s Net Operating Cycle (NOC). The days of NOC are increased over the period. One of the reasons could be conscious policy decisions to avoid stock out situations and carry more finished goods inventory to expand sales. But this policy has a cost. The company in the absence of a significant increase in payables deferral period will have to negotiate higher working capital funds.
CURRENT DEBT TO NET WORTH RATIO
Sinhgad Institute of Business Administration and Research 46
Working Capital management= Current liabilities / Tangible current net worth
Business should not have debt that exceeds your invested capital. This ratio measures the proportion of funds that current creditors contribute to the operations.
Note: For small businesses a ratio of 60 percent or above usually spells trouble. Larger firms should start to worry at about 75 percent.
Years 2006 2007 2008Total Current Liabilities 26900 33490 43650
Net worth 20646 72152 115796
2006 2007 20080
0.2
0.4
0.6
0.8
1
1.2
1.41.3
0.460.380000000000001
Current Debt to Net Worth Ratio
CD to NW
Years
Ratio
WORKING CAPITAL RATIO
Sinhgad Institute of Business Administration and Research 47
Working Capital managementYEARS 2006 2007 2008WORKING CAPITAL RATIO 0.17 0.24 0.25
YEARS 2006 2007 2008INVENTORY+RECEIVABLES-
PAYBLES 11250 19826 21614
SALES 67804 85244 87488
2006 2007 20080
0.05
0.1
0.15
0.2
0.25
0.17
0.24 0.25
Working Capital Ratio
WCR
Years
Ratio
EFFECT OF INFLATION
Inflation - definitiono "A persistent increase in the level of consumer prices or a persistent
decline in the purchasing power of money..."
Bank lending rates are increasing which will affect the cost of working capital.
The increasing rate of interest will reduce the working capital requirement
Though company can negotiate lending rates with banks but if inflation keeps increasing for a longer duration the company cannot avoid payment of higher interest rates.
Sinhgad Institute of Business Administration and Research 48
Working Capital managementANALYSIS & CONCLUSION
After analyzing above following conclusions can be determined
Company has invested most of its revenue into capital projects which is the reason for slight increase in revenues.
Current ratio of the company is maintained according to standards. In 2008 current ratio has decreased because Current assets have increased less proportionately as compared to current liabilities.
The higher increase in current liabilities is due to the increase in short term borrowings and interest due.
Company’s profits have decreased in 2008 as compared to 2007. The major reason for this is company is currently concentrating on capital investment and the interest is also higher but the results of this capital investment will be derived in future.
One of the above graph explains that the cash credit has increased so interest has also increased but returns from this cash credit will be generated in future because it is used for capital projects.
Debtors receivable period is increasing in current year which is the indication of increasing bad debts.
Company should manage its working capital efficiently since increasing inflation would lead to higher interest rate on cash credit.
Though company can negotiate lending rates with banks but if inflation keeps increasing for a longer duration the company cannot avoid payment of higher interest rates.
Sinhgad Institute of Business Administration and Research 49
Working Capital managementLETTER OF CREDIT
It is an official letter issued by a bank authorizing a person or company to take money from another bank. A simple example will explain it clearly. Suppose A in India wants to buy material from B in Japan. A will open a Letter of Credit in favour of B. B will ship the materials and send copy of the documents to A's Bank. When A accepts the documents from the Bank, the Bank will make payment to B's Bank thus completing the payment for the materials. The advantage here is that shipping documents sent to A's bank is proof of shipping the material and acceptance of documents by A is guarantee for payment for the materials. Thus both parties to the deal are protected.
Risks in International Trade
A Credit risk is a risk from a change in the credit of an opposing business. Exchange risk is a risk from a change in the foreign exchange rate. Other risks are mainly risks caused by a difference in law, language or culture. In
these cases, the cargo might be found late because of a dispute in import and export dealings.
Sinhgad Institute of Business Administration and Research 50
Working Capital management
The EMCURE PHARAMA LTD from time to time imports drugs,liba eq etc from a business called TRADE LINER, which banks with the ABC Bank. EMCURE PHARMA LTD holds an account at the Commonwealth Financials. EMCURE PHARMA LTD wants to buy $500,000 worth of merchandise from TRADE LINER, who agrees to sell the goods and give EMCURE PHARMA LTD 60,30,90 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount.
The steps to get the letter of credit would be as follows:
EMCURE PHARMA LTD goes to The Commonwealth Financials and requests a $500,000 letter of credit, with TRADE LINER as the beneficiary.
The Commonwealth Financials can issue an LC either on approval of a standard loan underwriting process or by EMCURE PHARMA LTD funding it directly with a deposit of $500,000 plus fees which are typically between 1% and 8% of the face value of the LC.
The Commonwealth Financials sends a copy of the LC to the ABC Bank, which notifies the TRADE LINER that payment is available and they can ship the merchandise EMCURE PHARMA LTD has ordered with the full assurance of payment to them.
On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Financials
Sinhgad Institute of Business Administration and Research 51
Working Capital managementtransfers the $500,000 to the ABC Bank, which then credits the account to the TRADE LINER for that amount.
Note that banks deal only with documents required in the letter of credit and not the underlying transaction.
Many exporters have mistakenly understood that the payment is guaranteed after receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met.
emcure provides bill of lading/air way bill lading from carrier and takes delivery of goods
To pay custom duty and clear the goods from custom
The price of LCs
The applicant pays the LC fee to the bank, and may in turn charge this on to the beneficiary. From the bank's point of view, the LC they have issued can be called upon at any time (subject to the relevant terms and conditions), and bank then looks to reclaim this from the applicant.
Sinhgad Institute of Business Administration and Research 52
Working Capital management
Legal Basis for Letters of Credit
Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any consideration given by the beneficiary to the banker prior to the tender of documents. In such transactions the undertaking by the beneficiary to deliver the goods to the applicant is not sufficient consideration for the bank’s promise because the contract of sale is made before the issuance of the credit, thus consideration in these circumstances is past. In addition, the performance of an existing duty under a contract cannot be a valid consideration for a new promise made by the bank: the delivery of the goods is consideration for enforcing the underlying contract of sale and cannot be used, as it were, a second time to establish the enforceability of the bank-beneficiary relation.
Sinhgad Institute of Business Administration and Research 53
Working Capital management
BIBLIOGRAPHY
1. Annual Report of 2006 – 2007 – 2008
2. Emcure Pharmaceuticals Limited web site
3. Google web site
Wikipedia.com
About.com
Business Dictionary
INVESTOPRDIA
Sinhgad Institute of Business Administration and Research 54
Working Capital management
Sinhgad Institute of Business Administration and Research
2006 2007 20080.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40 1.29
0.460.38
CURRENT DEBT TO NET WORTH RATIO
CURRENT DEBT TO NET WORTH RATIO
55