Working Capital & Letter Of Credit Project Report

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EXECUTIVE SUMMARY I had the opportunity to take up the Internship Project at Vardhman textiles limited . During the project I had the privilege of being guided by Mr. Ajay Sharma, Executive in Finance department. Vardhman, a household name in Northern India, has carved out a niche for itself in textile industry. The Vardhman group was setup in 1962 by late Lala Rattan Chand Oswal, father of present Chairman cum Managing Director, Sh. S.P. Oswal. Vardhman aims to be world class textile organization producing diverse range of products for the global textile market. Vardhman seeks to achieve customer delight through excellence in manufacturing and customer service based on creative combination of state-of-the-art technology and human resources. My project is study of inland bill discounting under letter of credit and Analysis of Working capital and of Yarn division Of Vardhman textiles limited. The study was conducted at the commercial department of textiles limited under Account Receivable Department. The project was of 6 weeks duration. During the project interviewed the executives & staff to collect the data, & also made use of company records & annual reports. The data collected were then compiled, tabulated and analyzed. The objective of my internship was the knowledge of sale under letter of credit of yarn customers and to operate the working capital cycle of the management. Working Capital Management is a very important facet of financial management due to:  Investments in current assets represent a substantial portion oftotal investment.  Investment in current assets & the level of current liabilities have toBe geared quickly to change sales. Some the points to be studied under this topic are:  How much cash should a firm hold?  What should be the firms credit policy? In Industry Project Report

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Downloaded from azmba.blogspot.com  How to & when to pay the creditors of the firm?  How much to invest in inventories? By studying about the company s different areas I came to know certain things like:  Acid test ratio is more than one but it does not mean that company has excessive liquidity.  Creditors turnover ratio also improved so it is better for company  Inventory turnover ratio is improving from 2006-7 to 2007-08, which means inventory is used in better way so it is good for the company. A study of letter of credit deals with studying and understanding the Letter of credit, different fields of letter of credit and different types of L/C charges namely L/C Advising charges, L/C Amendment charges and discrepancy charges and calculating saving potential and making recommendations. A letter of credit (LC) is a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. By studying the LC of Yarn division I came to know  All the dealing of LC is centralized of yarn customers.  It reduces the credit risk of company  It even reduces the payment delays  It increase the liquidity position of company Some suggestions for the company are •

The prices should be less to re-establish the market for Yarn.

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Not only for yarn customers but for other product customer dealing under letter of credit should done

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Company should put more efforts to improve its liquidity position

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LETTER OF CREDIT

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Downloaded from azmba.blogspot.com The English name “letter of credit” derives from the French word “accreditif”, a power to do something, which in turn is derivative of the Latin word “accreditivus”, meaning trust. A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of a buyer, authorizing the seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. The letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A letter of credit provides the seller with the greatest degree of safety when extending credit. It is useful when the buyer is not well known and when exchange restrictions exist or are possible. The LC can also be the source of payment for a transaction, meaning that a will get paid by redeeming the letter of credit. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common Traveler's cheques. FROM ABOVE WE CAN CONCLUDE LETTER OF CREDIT IS A letter of credit is a document issued mostly by financial institutions which usually provides an irrevocable payment undertaking to a beneficiary against complying documents as stated in the credit. Once the beneficiary or a presenting bank acting on his behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of L/C, comprising documents complying with the terms and conditions of the L/C, the applicable UCP. And international standard banking practices. The issuing bank or confirming bank, if any, is obliged to honor irrespective of any instructions from the applicants to the contrary.

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Seller Bank Buyer Bank

Seller

Buyer

Carrier After a contract s concluded between buyer and seller, buyer bank supplies a letter of credit to the seller Seller consigns goods to a carrier in exchange for a bill of lading.

Seller Bank

Buyer Bank

Seller

Buyer

Carrier

Seller provide bill of lading to a bank in exchange for payment. Seller’s bank exchanges bill of lading for payment from a buyer’s bank. Buyer’s bank exchange bill of lading for payment from buyer.

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Seller

Buyer

Carrier Buyer provides bill of lading to a carrier and takes delivery of goods Seller Bank Buyer Bank

Seller

Buyer

Carrier

Elements of a Letter of Credit •

A payment undertaking given by a bank (issuing bank)

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On behalf of a buyer (applicant)

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To pay a seller (beneficiary) for a given amount of money

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On presentation of specified documents representing the supply of goods

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Within specified time limits

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Documents must conform to terms and conditions set out in the letter of credit

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Documents to be presented at a specified place

PARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT 1. Applicant The applicant is the party who requests and instructs the issuing bank to open a letter of credit in favor of the beneficiary. The applicant usually is the importer or the buyer of goods and/or services. The applicant can also be another party acting on behalf of the importer, such as a confirming house. The confirming house is equivalent to a buying office, it acts as an intermediary between buyer and seller, and it can be located in a third country or in the seller’s country. 2.Beneficiary The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all the terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank. 3.Issuing Bank The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable amount of time after receipt of the documents to honor the draft.The

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Downloaded from azmba.blogspot.com issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit.Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods. 4.Advising Bank An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of credit is valid. In addition, the advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay. 5.Confirming Bank The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent obligates itself to insure payment under the letter of credit. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the advising bank.

TYPES OF LETTER OF CREDIT 1.Commercial and stand by L/C: Commercial letters of credit are used primarily to facilitate foreign trade. The commercial letter of credit is the primary payment mechanism for a transaction. It is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or

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Downloaded from azmba.blogspot.com confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payee The standby letter of credit serves a different function. The standby letter of credit serves as a secondary payment mechanism. The bank will issue the credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon. The standby letter of credit assures the beneficiary of the performance of the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of invoices, with evidence that the customer has not performed its obligation. The bank is obligated to make payment if the documents presented comply with the terms of the letter of credit. They are issued by banks to stand behind monetary obligations, to insure the refund of advance payment, to support performance and bid obligations, and to insure the completion of a sales contract. The credit has an expiration date.The standby letter of credit is often used to guarantee performance or to strengthen the credit worthiness of a customer. In the above example, the letter of credit is issued by the bank and held by the supplier. The customer is provided open account terms. If payments are made in accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller pursues the customer for payment directly. If the customer is unable to pay, the seller presents a draft and copies of invoices to the bank for payment. 2.Revocable or irrevocable letter of credit: Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. A revocable letter of credit cannot be confirmed. Once the documents have been presented and meet the terms and conditions in the letter of credit, and the draft is honored, the letter of credit cannot be revoked. The

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Downloaded from azmba.blogspot.com revocable letter of credit is not a commonly used instrument. If a letter of credit is revocable it would be referenced on its face.The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is referenced on its face. 3) Sight or usance letter of credit: All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money to a third party. A draft is also called a bill of exchange. There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented for payment. The bank is allowed a reasonable time to review the documents before making payment. A time draft is not payable until the lapse of a particular time period stated on the draft. The bank is required to accept the draft as soon as the documents comply with credit terms. The issuing bank has a reasonable time to examine those documents. The issuing bank is obligated to accept drafts and pay them at maturity. A Letter of credit is known as a Sight letter of credit if it involves payment to the seller against a Sight Draft. On the other hand, if the payment is made against a Usance Draft, then it is known as Usance letter of credit.

DIFFERENT FIELDS OF LETTER OF CREDIT  FROM :( NAME & ADDRESS OF OPENING BANK )

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Downloaded from azmba.blogspot.com This clause contains details of bank which has opened the Letter of Credit, and it works on the behalf of the buyer of goods. The opening bank plays the first step in the whole process of letter of credit.  TO :( NAME & ADDRESS OF ADVISING BANK ) This clause shows the details of bank which plays the foremost role in the process of letter of credit. The advising bank belongs to the country of seller. It plays the role of middleman between the seller and the opening bank  TYPE OF L/C :IRREVOCABLE This clause shows the type of L/C in which it is being made. Various types of L/C’s are Revocable, Irrevocable, Commercial, Negotiable etc.  L/C Number : The clause shows a particular number for L/C and every L/C has different number so that difference can be judged between different L/C’s.  DATE OF ISSUE : This clause shows that date on which the opening bank has issued the L/C.



DT. & PLACE OF EXPIRY : __________________________________IN INDIA

This shows about the date and the place in india where the lc will get expired, means that financial institution where the L/C is send by the opening bank.

 NAME & ADDRESS OF THE: APPLICANT It contains detail about the buyer of the goods. It gives complete address of the buyer.

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Downloaded from azmba.blogspot.com  NAME & ADDRESS OF THE: BENEFICIARY It shows details of the seller of goods, like seller’s name, address, country to which he belongs.  AMOUNT OF CREDIT IN :  US DOLLARS /EURO/ANY  OTHER FREELY  EXCHANGEABLE CURRENCY  (IN FIGURES & WORDS) It shows the currency in which the deal is been made, the code for that currency as well as the amount of the goods  PERCENTAGE CREDIT : AS PER CONTRACT AMOUNT TOLERANCE Sometimes the amount in the letter of the credit and the exact amount of the goods does not match. There can be a difference between the both. So a specific percentage of amounts of goods specified in L/C is given as a tolerance and the exact amount of goods can be in between the minimum and maximum tolerated limits.  CREDIT AVAILABLE WITH: This part shows the details of that party from where the amount can be reimburses by the seller. This state’s either a specified bank in India or any bank in India.

 USANCE OF THE DRAFTS : This clause shows whether the draft is payable at sight or at any date in future.  DRAFTS TO BE DRAWN ON:

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Downloaded from azmba.blogspot.com It tells about the party which acts as a drawee. Generally the opening bank acts as a drawee  PARTIAL SHIPMENT : AS PER CONTRACT This clause contains details whether the shipment of goods is allowed through one shipment or the goods can be sending through various shipments.  TRANSHIPMENT : AS PER CONTRACT Transshipment means when the goods are send,  SHIPMENT FROM : It tells about that place from where goods are send by the seller.

 SHIPMENT TO : It’s that place where the goods are sending by the seller. And generally its that country where the buyer lives.  LATEST SHIPMENT DATE : It’s that date till which the goods should reach to the buyer. After that date, it’s the choice of the buyer whether he accepts the goods or not.  DESCRIPTION OF GOODS :  Description of Materials  Size ( in mm) and Quantity (in MT)  Specification  Tolerance  Quantity  Quantity Tolerance

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Downloaded from azmba.blogspot.com  Price per MT (in USD/Euro/any other freely exchangeable currency)  DOCUMENTS REQUIRED : Beneficiary’s Commercial Invoice - one original plus two signed copies covering materials shipped. Invoices will be raised on the basis of (THEORETICAL/ ACTUAL/ DRAFT SURVEY) WEIGHT.

L/C in Vardhman In this system , first corporate centralized market Yarn department advices a branch to make sale of yarn through letter of credit In case of those customers who are either new for a organization whose credit worthiness is not satisfactory according to

market

research report

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Downloaded from azmba.blogspot.com NOTE All L/C of Yarn division is deal by State bank of Patiala Thereafter on the basis of instructions sent by CMY department, the branch advise the customers to open the L/C with the bank. Some of the common points stated in th L/C are mentioned below:       

Prorate shipment Transshipment Shipment date Expiry period of L/C Usance period Rate of interest for the usance period Other conditions as per mutual consent between buyer and seller

After opening the L/C concerned unit makes the sale to the customers as per agreed terms and conditions stipulated in the L/C. Then concerned unit sent the invoice and other papers to the centralized accounting cell for lodging the documents with the bank.. This documents consists of  Bill of exchange  Original invoice  Original G/r copy  Packing list  Copy of L/C On the Due date mentioned in the L/C, we receive the realization advice from the bank, where we have lodged the document drawn under L/C. after getting the advice from the bank, we credit the customers with the amount we have realized

DOCUMENTS NEED FOR L/C Letter of credit documents are required to be arranged in the following series: By seller (duplicate documents)  Bill of exchange In Industry Project Report

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Downloaded from azmba.blogspot.com  Bill  Goods lorry receipt  Party acceptance letter  Debit note  Packing list  Original letter of credit By seller’s bank (Duplicate documents)  Letter  Bill of exchange  Bill  Goods lorry receipt  Party acceptance letter  Debit note  Packing list  Letter of credit (duplicate) By buyer’s bank (Original documents)  Bill of exchange  Bill  Goods lorry receipt  Party acceptance letter  Debit note  Packing list  Letter of credit (DUPLICATE)  BILL OF EXCHANGE A non- interest bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date

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Downloaded from azmba.blogspot.com It’s an unconditional order issued by a party or business which directs the recipient to pay a fixed sum of money to a third party at a future date. The future date may b either fixed or negotiable. A bill of exchange must be in writing and signed and dated also called draft Negotiation of letter of credit NEGOTIABLE means the ability to be sold or transfers to another party as a form of payment. Something which is negotiable is transferable by endorsement and delivery. (When documents come back from bank). JOURNAL ENTIRES IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2…. PARTICULARS

L.F DEBIT

Particular bank a/c……………………………Dr

(RS) XXXX

Interest on inland bill discount a/c…………….Dr

XXXX

CREDIT (RS)

To inland bill discount a/c (BEING Negotiation of ibdno……….on dated…….

XXXX

Inland bill discount charges a/c………………..Dr To bank a/c

XXXX

(BEING INALND BILL DISCOUNTING CHGS DR BY BANK ON DATED ……….AGST IBD NO……

XXXX

How interest is calculated? Total bill of exchange amount * rate of interest* number of days in Bill of exchange. Rate of interest is 11.5% (according to STATE BANK OF PATIALA)

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Downloaded from azmba.blogspot.com Number of days is calculated as per the conditions laid down IN L/C AGREEMENT Realization of bill of exchange JOURNAL ENTIRES IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2….

PARTICULARS I inland and bill discounting a/c………Dr

L.F DEBIT(RS) CREDIT (RS) XXXX

To party account

XXXX

(BEING REALISATION OF IBD NO, AGST INV NO…….ON DATED…….)

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At the time of realisation of L/C there may be over due days

Bank will charge over due interest against late payment according to number of days

 Fully payment but late payment (overdue interest charged by bank) JOURNAL ENTIRES IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2…. PARTICULARS

L.F DEBIT(RS)

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CREDIT (RS)

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XXXX XXXX

( BEING AMOUNT OF OVERDUE INTEREST DEBITED TO PARTY ACCOUNT AGST IBD NO. ON DATED ……..)

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INTRODUCTION TO WORKING CAPITAL

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Downloaded from azmba.blogspot.com Working Capital is life blood and nerve centre of a business. Just as circulation of blood is essential for the survival of the human being similarly working capital is necessary for the survival of every business organization, whether it is a small organization or a big organization. Every business needs funds for two purposes-for the establishment and to carry out its day to day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as plant & machinery, land & building, furniture & fixtures etc. Investments in these assets the present that part of the firm’s capital, which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for shortterm purposes as for the purchase of raw material, payment of wages & other day to day expenses etc. these funds are known as working capital. Before discussing about the working capital management of VARDHMAN TEXTILES LIMITED, we should know the meaning, definition and different concepts of working capital. MEANING OF WORKING CAPITAL In simple words, working capital refers to that part of the firm’s capital which is required for financing short term or current assets such as, cash, marketable securities, debtors, and inventories or in other words the working capital is the excess of current assets over current liabilities.

CLASSIFICATON OR KINDS OF WORKING CAPITAL Working capital may be classified in two ways: a)

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On the basis of time

On The Basis Of Concept On the basis of concept, working capital is classified as gross working capital and net working capital. This classification is important from the point of view of the financial manager. Gross working capital: - This is a wider term in a relation to the working capital. It includes all current assets. Thus the gross working capital is the capital invested in total current assets of the company. Examples of current assets are: 1. Cash in hand and Bank 2. Bill Receivables 3. Sundry Debtors 4. Short Term Loan & Advances 5. Inventory of Stock 6. Prepaid expenses

Gross Working Capital = Total Current Assets

ON THE BASIS OF TIME, WORKING CAPITAL MAY BE CLASSIFIED AS:

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Permanent or fixed working capital

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Temporary or variable working capital

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Downloaded from azmba.blogspot.com PERMANENT OR FIXED WORKING CAPITAL: Permanent working capital is the minimum amount which is required and ensures effective utilization of fixed facilities and or maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal business operations. For example, work-in-progress, finished goods and cash balance. This minimum level of current assets is called permanent working capital as this part of the capital is permanently blocked in current assets. As the business grows, the requirements of permanent working capital also increase due to the increase in current assets. TEMPORARY OR VARIABLE WORKING CAPIAL: Temporary working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and social needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet exigencies such as launching of extensive marketing campaign for conducting research, etc

FACTORS DETERMINING THE WORKING CAPITAL The working capital requirement of the concern depends upon a large numbers of factors such as nature and the size of business, the character of their operations, the length of production cycles, the rate of stock turnover and the state of economic situation. It is not possible to rank them because all such factors are of different importance and influence of

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Downloaded from azmba.blogspot.com individual factor changes for a firm overtime. However, the following are important factors generally influencing the working capital requirements.

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Nature and character of business.

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Size of business\scale of operation.

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Production policy.

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Manufacturing process\length of production cycle.

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Seasonal variation.

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Working capital cycle.

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Rate of stock turnover.

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Credit policy

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Business cycle.

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Rate of growth of business.

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Earning capacity and dividend policy.

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Price level changes.

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Other factors.

IMPOTANCE OF ADEQUATE WORKING CAPITAL Working Capital is the blood and the nerve centre of business. Just as the blood circulation is essential in the human bodies for maintaining life, working capital is very important to maintain the running of business. No business can run successfully without an adequate amount of working capital.

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Downloaded from azmba.blogspot.com The advantages are as follows: 

Solvency of the business. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

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Goodwill. Sufficient working capital enables a business concern to make prompt payments.

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Easy loan. A concern having adequate working capital high solvency and good credit standing can arrange loans from banks and others on easy terms.

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Cash discounts. Adequate working capital also enables a concern to avail cash discounts on the purchase and hence it reduces costs.

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Regular payments of salaries, wages and other day to day commitments. A company which has adequate working capital can make regular payments of salaries, wages and other day to day commitments with raises the morale of its employees, increases their efficiency, reduces wastages and enhances production and profits.

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Exploitation of favorable market conditions. Only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirement in bulk when the prices are lower and holding its inventory for higher prices.

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Ability to face crises. Adequate working capital enables the concern face business crises in emergencies such as depression because during such periods, generally, there is much pressure on working capital

THE NEED OF WORKING CAPITAL The need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need for working capital arises due to the time gap between the productions and realized of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production; production and sales; and realization of cash. Thus, working capital is needed for the following purposes:

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For the purchase of raw materials, components and spares.

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To pay wages and salaries.

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To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc.

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To meet the selling costs as packing, advertising, etc.

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To maintain the inventories of raw material, work-in-progress, stores and spares and finish stock.

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To provide credit facilities to the customers.

OPERATING CYCLE OF VARDHMAN TEXTILES LIMITED The operating cycle refers to the length of the length of time between the firms paying the cash for the material, entering into the production process\stock and the inflow of cash from debtors. There is a complete cycle from cash to cash where in cash gets converted into raw material, work-in-progress, finished goods debtors and finally in cash. Short-term funds are required to meet the requirements of the funds during this time period this time period depends on the length of time within which the original cash gets converted into cash again. The determination of working capital cycle helps in the forecast, control and

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Downloaded from azmba.blogspot.com management of working capital. It indicates the total time lag and the relative significance of constituent parts.

FINISHED GOODS

WORK-IN-PROGRES

DEBTORS

RAW MATERIAL

CASH

THE OPERATING CYCLE CONSISTS OF FOLLOWING EVENTS, WHICH CONTINUES THROUGHOUT THE LIFE OF BUSINESS.

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Conversion of cash to raw material.

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Conversion of raw material to work in progress.

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Conversion of work in progress into finished goods.

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Conversion of finished goods into accounts receivable.

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Conversion of accounts receivable into cash.

FINANCING BY THE WORKING CAPITAL REQUIRMENTS BY BANKS The bank credit is the primary institutional source of working capital finance. The bank provides finance through loan agreements, overdrafts, cash credit, purchasing of bills, and term loans. Banks have been certain norms in granting working capital finance to companies. These norms have been greatly influenced by the recommendation of various committee appointed by RESERVE BANK OF INDIA from time to time. VARDHMAN TEXTILES LIMITED finance his working capital from the different banks like ICICI BANK, STATE BANK OF INDIA, ALLAHABAD BANK,PUNJAB NATIONAL BANK. Company finances the amount according to its need according to its need of working capital requirement.

WORKING CAPITAL LIMITS FROM SCHEDULED BANKS FOR YEAR

2007-

08

BANKS

RS

State Bank of Patiala

5 crore

Punjab National Bank

5 crore

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Allahabad Bank

50 crore

ICCI

5 crore

NET WORKING CAPITAL Net working capital is the difference between the current assets and the current liabilities. Therefore it is called net working capital. When current assets exceed current liabilities then the working capital is positive otherwise negative. Examples of current liabilities.

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Bill Payable

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Sundry creditors

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Outstanding expenses

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Dividend payable

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Bank overdraft

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REVIEWS

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Downloaded from azmba.blogspot.com 1. Bergami Robert (2007) analysis that that international trade transactions carry inherently more risk than domestic trade transactions, because of differences in culture, business processes, laws and regulations. It is therefore important for traders to ensure that payment is received for goods dispatched and that the goods received and paid for comply with the contract of sale. One effective way of managing these risks has been for traders to rely on the letter of credit as a payment method. However for exporters in particular, the letter of credit has presented difficulties in meeting the compliance requirements necessary for the payment to be triggered. The current rules that govern letter of credit transactions(UCP 500) have been under review for the past three years and an updated set of rules (UCP 600) is expected to be introduced on 1July 2007. This paper focuses on the changes mooted for 2007and compares these main issues with the existing rules and other associated guidelines and regulations governing this method of payment. This paper considers the implication to changes of letter of credit transactions and the sharing of risk. Firstly the paper provides some background to letters of credit, then comments on existing literature and models, and subsequently an analysis of the most important changes to the existing rules, before reaching a conclusion. The conclusion is that the UCP 600 have not paid enough consideration to traders and service providers and are likely to engender an environment of uncertainty for exporters in particular.

2. Dolan John (2007) analysis that The Law of Letters of Credit – Commercial and Standby Credits is the four the Edition of a traditional treatise on a rather narrow legal subject. Letters of credit fall into two categories: (1) commercials, which find use in international sales; and (2) standbys that are a common device in many domestic transactions. As international trade becomes more and more rationalized, the use of commercials has diminished; but the use of the standby has enjoyed something of a boom, for it accomplishes much that security interests, surety ship arrangements, and other credit enhancing devices accomplish and does it with significantly lower

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Downloaded from azmba.blogspot.com transaction costs. Regrettably, the parties using letters of credit often are unaware of the credit’s legal significance. This treatise covers the legal features of the commercial and the standby, all in a global context. While it is codified to some extent in the Uniform Commercial Code, the law of letters of credit is largely the law merchant, the is gentium; and the UCC defers in many respects to international rules. Thus, the treatise deals with those international rules and cites cases from virtually all of the common-law jurisdictions in an effort to provide complete coverage of the field. 3. Padachi Kesseven (2006 ) analysis that A well designed and implemented working capital management is expected to contribute positively to the creation of a firm’s value The purpose of this paper is to examine the trends in working capital management and its impaction firms’ performance. The trend in working capital needs and profitability of firms are examined to identify the causes for any significant differences between the industries. The dependent variable, return on total assets is used as a measure of profitability and the relation between working capital management and corporate profitability is investigated for a sample of 58small manufacturing firms, using panel data analysis for the period 1998 –2003. The regression results show that high investment in inventories and receivables is associated with lower profitability. The key variables used in the analysis are inventories days, accounts receivables days, accounts payable days and cash conversion cycle. A strong significant relationship between working capital management and profitability has been found in previous empirical work. An analysis of the liquidity, profitability and operational efficiency of the five industries shows significant changes and how best practices in the paper industry have contributed to performance. The findings also reveal an increasing trend in the short-term component of working capital financing.

4. Klien Carter (2005) studied that

For a relatively small fee and assuming sufficient

collateral or creditworthiness of the tenant or a guarantor, a tenant may be able to

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Downloaded from azmba.blogspot.com apply for and have its bank issue to its landlord a letter of credit (“L/C”) to secure the tenant’s obligations under a long-term lease. If the L/C is large enough, the landlord may enter into a lease with a tenant that the landlord would otherwise refuse due to the tenant’s lack of creditworthiness. From the tenant’s perspective, an L/C may be preferable to a large security deposit. An L/C will not necessarily tie up large amounts of the tenant’s cash or other liquid collateral, as would a security deposit. Instead, the cash can be deployed as working capital in the tenant’s business. An L/C is an independent obligation of the issuer. As long as conforming documents specified by the terms of the L/C is presented to the issuer before the expiration date and no fraud is involved, the issuer must honor. The credit of the issuer stands behind the obligation of the tenant. If the tenant is insolvent and/or bankrupt, the issuer still must honor the beneficiary’s conforming draws. Rights the landlord will lose if the L/C draw is enjoined and the credit expires. This two-part article provides tips for drafting L/Cs. Part one includes a discussion of using the International Standby Practices, keeping the draw condition s simple and allowing partial draws conclusion addresses issues such as providing coverage of the settlement period after lease termination; shortening pitfalls is eliminated.. The conclusion of this article will provide six more drafting tips and a discussion of the issuing banks’ concerns.

5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios (2004) analysis that the relationship of corporate profitability and working capital management. We used a sample of 131 companies listed in the Athens Stock Exchange (ASE) for the period of 2001-2004. The purpose of this paper is to establish a relationship that is statistical significant between profitability, the cash conversion cycle and its components for listed firms in the ASE. The results of our research showed that there is statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. Moreover managers can create profits for their companies by

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Downloaded from azmba.blogspot.com handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level. 6. Schelin Johan (2004) studied that This thesis give a historical introduction in foreign trade and letters of credit. The reasons for using letters of credit will be shown. The legal relationships of the concerned parties will be analysed. The doctrine of strict compliance will be explained. Then problems will be worked out: the different interpretation of strict compliance, the fraudulent exception and questions of liability if the doctrine of strict compliance was not carefully used. The thesis bases on German law, but tries, whenever useful, to compare with law of other countries and / or International law. At the end of the thesis a critical outlook will follow. The analyse of problems concerning the strict compliance lead to the result that still today, about 100 years after letters of credit became a common method to pay, problems exist. One of these problems is the different interpretation of courts in different countries. Especially the considerations of German courts that strict compliance must be interpreted in the frontiers of good faith and that letters of credit must be interpreted as will declarations.

7. Shelton Fred (2002) studied that Working capital, an important liquidity indicator, has historically been a major benchmark of the surety and credit-granting institutions. In today’s environment, because of the tight bond and credit markets, both institutions are scrutinizing the amount and quality of working capital more than ever. The fewer resources that need to be invested in working capital, after recognizing liquidity risk, the better.

8. Weinraub Herbert, Visscher Sue (1998) studies that This study looked at ten diverse industry groups over an extended time period to examine the relative relationship between aggressive and conservative working capital practices. Results strongly show that the industries had significantly different current asset management policies.

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Downloaded from azmba.blogspot.com Additionally, the relative industry ranking of the aggressive/conservative asset policies exhibited remarkable stability over time. Industry policies concerning relative aggressive/conservative liability management were also significantly different. Interestingly, it is evident there is a high and significant negative correlation between industry asset and liability policies. Relatively aggressive working capital asset management seems balanced by relatively conservative working capital financial management.

9. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting process. It has shown that it is reasonable to expect that the cost of capital will increase at the same rate as the rate of inflation on an ex ante basis, and that this increase will be a multiplicative relationship. In addition, the paper has shown that the capital budgeting process is not neutral with respect to inflation, even if output prices rise at the same rate as costs. Of critical importance is the degree of net working capital as a proportion of the overall financing required, the higher the net working capital the greater being the impact of inflation on capital spending. Finally, it would appear that corporate financial behavior is influenced by inflation. Inflation will cause the firm to reduce its capital budget, to attempt to reduce net working capital, and to alter the debt/asset ratio using short term debt, thus driving up short term rates relative to long term rates.

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About Vardhman Group Vardhman is a major integrated textile producer in India. The Group was setup in 1965 at Ludhiana, Northern India. Since then, the Group has expanded manifold and is today, one of the largest textile conglomerates in India. The Group portfolio includes Manufacturing and marketing of Yarns, Fabrics, Sewing Threads, Fiber and Alloy Steel. The group started its corporate journey with an installed capacity of 6000 spindles in 1965 under the flagship company Vardhman Spinning & General Mills Limited (now known as Vardhman Holdings Limited and is an investment arm of the Group) in Ludhiana. Over the years the group has expanded its spinning capacities besides adding new businesses. The group has also diversified into yarn processing, weaving, And Sewing Thread, fabric processing, acrylic fiber manufacturing and into special/ alloy steels. Today, close to 20,000 people are the Organization is most important asset its human capital The Vardhman group comprises of three listed and two unlisted companiesListed Companies Listed companies  Vardhman Textiles Limited (formerly Mahavir Spinning Mills Limited)  Vardhman Acrylics Limited  Vardhman Holdings Limited1 (formerly Vardhman Spinning & General Mills Limited) Unlisted Companies VMT Spinning Company Limited Vardhman Threads Limited

LOGO OF VARDHMAN GROUP

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Downloaded from azmba.blogspot.com The “Flame” signifies growth i.e. growth of the company along with the growth of each and every individual associated with it whether he/she is a worker , a white collar employee, a shareholder or a customer. The “Stick” symbolizes cotton that is the basic raw material of the core product of Vardhman. The “V” stands for the Vardhman Group .

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Downloaded from azmba.blogspot.com The industrial city of Ludhiana, located in fertile Malwa region of central Punjab is known as the “MANCHESTER OF INDIA”. Within the precincts of the city is located The corporate head quarters of Vardhman group, A household name in northern India. The Vardhman group , born in 1965 under the entrepreneurship of late Lala Rattan Chand Oswal has today blossoms into the one of the larger textile business houses in India . At its inception, vardhman has installed capacity of 14000 spindles. Today: its capacity has increase multifold to over 5.5 lacs spindles. In 1982 the group enters sewing threads market in company, which was the forward integration of business. In 1990, it undertook yet another diversification – this time into the weaving business. The grey fabric weaving unit at Baddi, commissioned in 1990 with a capacity of 20,000 meters per day , has already made its mark as a quality producer of grey poplin, sheeting, shirting in the domestic as well as foreign market . This was followed by entry into fabric processing by setting up of AURO TEXTILES at BADDI, which currently has a processing of 1,00,000 meters per day. In the year 1999, the group has added yet another feather to its cap with a setting of VARDHMAN ACRYLICS LTD in. The company also has a strong presence in the markets of JAPAN, HONG KONG, KOREA, and UK & EUROPE in addition to the domestic market. Adherence to systems & true dedication to quality has resulted in obtaining the coveted ISO 9002/ISO 14002 quality awards which is the first in textileindustry.

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PHILOSHOPHY Faith in bright future of Indian textile industry & hence continues expansion areas “which we know best”. Total customer focus in all operational areas Products to be of best available quality for premium market segments through TQM & ZERO DEFECT implementation in all functional areas. Global orientation targeting- at least 20% production for exports. Integrated diversification/ product range expansion World class manufacturing facilities with most modern R&D & process technology Faith in individual potential respect for human values Encouraging innovation for constant improvements to achieve excellence in all functional areas Appreciating our role as a responsible corporate citizen.

MISSION VARDHMAN aims to be a WORLD CLASS TEXTILE organization producing diverse range of products for the global textile market. VARDHMAN seeks to achieve customer delight through excellence in manufacturing & customer service based on creative combination of state- of – the- art technology & human resources. VARDHMAN is committed to be responsible corporate citizen

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BOARD OF DIRECTORS Vardhman Textiles Limited Shri Paul Oswal - Chairman & Managing Director Ajay Kumar Chakraborty - (Nominee of ICICI Bank Ltd.) Vinod Kumar Saxena - (Nominee of IDBI) Arun Kumar Purwar (Dr.) Triloki Nath Kapoor Prafull Anubhai Surinder Kumar Bansal Subash Khanchand Bijlani Darshan Lal Sharma Sachit Jain - Executive Director

Vardhman Holdings Limited Shri Paul Oswal - Chairman Surinder Singh Bagai Jagdish Rai Singal Chaman Lal Jain Ram Swarup Gupta Bal Krishan Arora Sat Pal Kanwar Sachit Jain Shakun Oswal Suchita Jain

Vardhman Acrylics Limited Shri Paul Oswal - Chairman Sachit Jain Darshan Lal Sharma Sudeshkumar Ganpatrai Gulati Sanjit Paul Singh Munish Chandra Gupta (Dr.)Arvind Kumar Bakhshi Bal Krishan Choudhary - Managing Director

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CHAIRMAN –CUM-MANGING DIRECTOR

CORPORATE GENERAL MANAGERS

VICE PRESIDENT

MANAGERS (M1-M4)

EXECUTIVES (E1-E2)

OFFICERS (O1-O2)

STAFF (S1-S4)

SUBSTAFF

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AWARDS AND ACHIEVEMENTS Vardhman Spinning and General Mills Ltd. was the 1st textile company to be awarded ISO-9002 and ISO-14002 certificate in 1993.  It is the largest manufacturer and exporter of cotton yarn from India.  It is the second largest producer of sewing threads in Indi  It is a larger producer of acrylic fiber and finished fabrics Textile Export Promotion Council 2003-04 Gold trophy in EOU/EPZ for export of cotton yarn Textile Export Promotion Council 2003-04 Bronze trophy in mill fabric exporter category Textile Export Promotion Council 2002-03 Gold Trophy in EOU/EPZ for export of cotton yarn Textile Export Promotion Council 1998-99 Silver Trophy Textile Export Promotion Council 1997-98 Bronze Trophy Textile Export Promotion Council 1996-97 Silver Trophy Govt. of India Award 1994-5, 1995-96 Award of Merit Textile Export Promotion Council 1993-94 (Merchant Export Category for Fabrics) Bronze Trophy Textile Export Promotion Council 1993-94 (Merchant Export Category for Fabrics) Gold Trophy

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GROUP OF COMPANIES

BUSINESS OF VARDHMAN GROUP In Industry Project Report

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Vardhman Group consists of 5 SBUs spread across 9 manufacturing locations

In Industry Project Report

ST

Steel

Y

Yarn

C

Cotton Yarn

F

Fabric

47

Downloaded from azmba.blogspot.com Vardhman Spinning & General Mills Ludhiana, Punjab Auro Spinning Baddi, HP Arihant Spinning Malerkotla, Punjab Arisht Spinning Baddi, HP Gas Mercerised Yarn Business Hoshiarpur, Punjab Auro Dyeing Baddi, HP Anant Spinning Mandideep, MP Vardhman Spinning & General Mills (Export Oriented Unit) Baddi, HP VMT Baddi, HP Vardhman Yarns Satlapur, MP

Fabric Business (C) Auro Weaving Baddi, HP MSML Textiles Division Baddi, HP Auro Textiles Baddi, HP Vardhman Fabrics Budhni, MP

Sewing Thread Business (ST) ST-I Hoshiarpur, Punjab ST-II Ludhiana, Punjab ST-III Perundurai, TN Vardhman Threads Limited Baddi, HP Vardhman Special Steels (S) Ludhiana, Punjab Vardhman Acrylics Limited (F) Bharuch, Gujarat

MARKET SHARE OF VARDHMAN TEXTILES LIMITED

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Spin ning Business Spindle Capacity Existing About 600,000 Post Expansion 800,000 Fabric Business Fabric Production in Lac (100 thousand) Metres/Month Auro Textiles (Existing) 42 Post Expansion 85-90 Sewing Thread Business Production in Metric Tonnes/Day Total 28.30 Dyeing (Yarn & Fibre) & Mercerising Production in Metric Tonnes/Day Total 54.5 Steel Business Production in Metric Tonnes/Annum SMS 100000 Rolling Mill 84000 Acrylic Fibre Business Production in Metric Tonnes/Annum Total 18500

PRODUCT RANGE

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Yarns The group is one of the largest spinning group of the country with a spindlier of over 5, 50,000. The group has 12 production plants located in the states of Punjab, Himachal Pradesh and Madhya Pradesh. In many of the yarn market segments, Vardhman holds the position of market leader besides being a large and reliable supplier in the country. Vardhman is also the largest exporter of yarn from India. The group yarn exports amount to over US$ 100 million covering the most quality conscious markets in theworld. The total export of Cotton yarn of the group is about 6% of total export of cotton yarn from the country.

Sewing Threads Vardhman entered the Sewing thread business in 1982 as a forward integration to its yarn business. The group had to struggle for survival being pitted against a large multinational organization. Today with approximately 25 metric tonne/per day of sewing thread manufacturing capacity in its plant at Hoshiarpur, Ludhiana, Baddi & Perundurai. Vardhman threads have emerged as second largest sewing thread brand in the country.

Processed Fabric In its quest for further value addition Vardhman started fabric processing in 1999.

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Downloaded from azmba.blogspot.com Vardhman established a modern fabric process house in 1999 with a capacity of 30 million meters per annum. This capacity has been expanded to 42 meters per annum in FY 2005-06. A Vardhman fabric is dedicated to meet customer demand for top quality finished fabric through product innovation, world class quality, state-of-art technology and excellence in service.

Fibre In 1999 the group set up an Acrylic staple fibre plant at Bharuch in Gujarat in collaboration with Marubeni and Japan Exlan of Japan. The plant has annual capacity of 18500 metric tonnes per annum.

Steel The steel business was setup in 1973 as diversification with a capacity of 35000 million tones per annum. Later on group acquired a steel plant from Mohta Group of Industries in 1988 and converted this loss making unit into a profitable business in first year of operation with the Group. Subsequently the steel mill has been modernized and expanded to a capacity of 100000 million tonnes per annum. Catering to high technology Quality conscious alloy steel segment, the unit has a reputation of being a dependable source of supply of special and alloy steel to Indian/International standards.

FINANCIAL STATUS PARTICULARS Yarns Sewing thread Steel

SALES REVENUE (RS CRORE) 102873.31 29634.83 34702.19 In Industry Project Report

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33239.58

% SALES REVENUE

fabric, 13% steel, 15% sewing thread, 15%

yarns , 57%

FINANCIAL PERFORMANCE OF THE COMPANY 1.1 TABLE SHOWING FINANCIAL REULTS IN 07-08

(IN BILLIONS)

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Company

Turnover

Operating Profit

Profit after Tax

Operating Margin

VTEX

23.46

3.87

1.22

17%

VAL

2.28

0.32

0.05

14%

VMT

0.89

0.17

0.09

19%

VYTL*

0.29

0.08

0.06

27%

26.92

4.44

1.42

16%

Vardhman

1.1

Group

GRAPH

SHOWING

TURNOVER

AND

PROFITS

OF

VARIOUS

COMPANIES OF VARDHMAN

INTRODUCTION TO FINANCE DEPARTMENT

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Downloaded from azmba.blogspot.com Every company is required to maintain proper books of account to record all the transactions in the course of its business operations .it is necessary that the transactions should be properly accounted for in the books of account so that they give a true and fair view of the state of affair of the business. Accounting is a service activity. Its function is to provide quantitative information primarily of financial nature about economic entities that is intended to be useful in making economic decision, in making reasoned choices among alternative course of action Accounting records only monetary transactions. Events of transactions which can not be expressed in money, do not find place in the booked of account though they may be very useful for the business. The life of the business is divided in to appropriate segments for studying the results shown by the business after each segment. this is because though life of the business is considers to be indefinite ,the measurement of the income and studying the financial position of the business after a very long period would not be helpful in taking proper corrective steps at the appropriate time . It is therefore, necessary that after each segment or time interval the businessman must stop and see back how things are going. in accounting such a segment or time interval is called accounting period it is usually of a year started from April and ended on March. At the end of each accounting period an income statement and balance sheet are prepared. The income statement discloses the profit & loss made by the business during the accounting period while balance sheet depicts the financial position of the business as on the last day of the accounting period. While preparing these statements a proper distinction has to be made between capital expenditure and revenue expenditure .the accounting statements help the management in making rational decisions. The main object of running the business is to earn profits. in order to ascertain the profits made by the business during a period. Is necessary that revenue of the period should be matched with the cost/ expenditure of that period .in other words ,income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning the revenue.

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Downloaded from azmba.blogspot.com The information contained in the published financial statements is of the paramount importance to external users viz shareholders, creditors, banker’s etc. in order that the users rely upon this information, is necessary that the information contained in the financial statements is logical, consistent, fair. It is the responsibility of the accounting profession to ensure that the information presented satisfies the above requirements .there should not be too much discretion to the firms and their accountants to present the financial information the way the y like, since this would greatly undermine the confidence of the public in the financial statements presented by the different firms Keeping the above fact in mind there have been efforts at the international level to brings about uniformity in the presentation of the financial statements by formulating and adopting international accounting standards. Thus the role of accounting is to provide an effective measurement and reporting system. This is possible only when accounting is based on certain coherent set of logical principals that forms the general frame of reference for evaluation and development of sound accounting practices Vardhman Spinning & General Mills, finance department is headed by Mr. Bhushan Punj (Chief Manager, Commercial fianance); Mr. Munish Jain (manager) .all the working of the finance department is done through ERP (Enterprise Resource Planning) system, which was installed in August 2003

NEED OF FINANCE DEPARTMENT Economic activities are those which includes buying and selling of goods and services for purpose of profit. These activities are related to business. The main objective of the business is to earn profits. This exchange is termed as TRANSACTION. A transaction means a transfer from one person to another in money or money’s worth. Hence,

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Downloaded from azmba.blogspot.com exchange of money, goods or services between persons or parties is known to have resulted in a transaction. In each organization transactions are effected. The goods are purchased from one market at a certain rate and then these goods are sold in another market at higher price. However , in some cases organizations incur some losses instead of profits, which may occur due to any reasons. So to achieve the purpose of recording a will devised system plays a dominant role in an organization. In VARDHMAN SPINNING AND GENERAL MILLS there is a finance department headed by Mr.Bhushan Punj. ERP system is installed to deal with the finance problems and to derive the maximum benefits of ERP system a concept of ‘ CENTRALISED ACCOUNTING CELL’. Under this concept of centralization, all types accounting of Debtors and Creditors of all units at one single platform i.e. at accounts department VARDHMAN Ludhiana. The basic reason behind its implementation was to improve the accounting relating to the customers and suppliers

CENTRALISED ACCOUNTING SYSTEM Centralized Accounting System means the accounting system, which is maintained centrally for the units or branches located at different locations. With this system, the company can maintain the accounts for the different units at the head office or the desired place where ever they want to keep those. In VARDHMAN TEXTILES LIMITED, LUDHIANA, they have the centralized accounting cell at there corporate office. This office is situated at Vardhman Spinning & General Mills, Ludhiana. The corporate offices as well as the accounts department, which controls the centralized accounts, are situated in this. This computerized centralized accounting cell has four departments and they performed there specialized type of functions only as specified by the management which can be altered time to time as per the need of the organization or as the organization suits better, which are shown as under:

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Accounts Department

Accounts Payable ACP Accounts Receivable ACR

Business Planning Control System BPCS

Exports Import Cell EXIM Cell

ACR Overview Accounts Receivable is the amount owed to a company from customers who have purchased goods or services on credit.

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Downloaded from azmba.blogspot.com Account Receivable is a multi-company and open item debtors system and is fully integrated with Configurable Enterprise Accounting (General Ledger). Customer accounts can be maintained for one or multiple companies. Every invoice or payment transaction can be stored separately, enabling individual payments to be applied against individual invoices for the customer. Unpaid or partially paid invoices remain on file until paid or written off. Accounts Receivable collects and reports information to assist in collecting receivables, assessing credit and reducing bad debt. It generates an audit report during each transaction posting session indicating that all transactions are posted during the session.

ACR application consists of following applications: ACR Setup - This includes defining various types of system parameters and master files required for implementation of BPCS ACR module. ACR Processing – This includes on-line data entry/maintenance related to customer payments, debit and credit memos. It generates an audit report during each transaction posting session indicating that all transactions are posted correctly during the session. ACR Reports and Inquires – This includes aging, standard receivable reports and inquiries to assist in managing Accounts Receivable operations effectively.

Process Flow

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ACR Cash & Memo Posting

Setup

Event Processing

,Bank Payment & Debit Credit Memos

Configurable Ledger

Account Inquiry

ACR Reports

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Manual Part -2 covers the ACR application and is divided into following chapters

Accounts Receivable (ACR) Setup ACR Processing

Describes setups involved in setting up ACR application. Describes the procedures of processing payments Credit adjustments, debit adjustments and invoices. Describes inquiries related to the ACR application. Describes reports related to ACR application. Describes accounting procedure for customer collection, Debit / credit Memos and reconciliation. The glossary contains a list of terms and their Definition.

ACR Setup

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Downloaded from azmba.blogspot.com This chapter describes in detail various setup for system parameters and master files required for implementation of BPCS ACR module. These are explained as below. Company Master – Company master application is used to define or maintain the company information. The Company master contains the following information: •

Company Number – It is a two digit numeric code.

•

Company Name

•

Address

•

Currency Code

Every customer must have a default company number. In Vardhman setup following company codes are being used

Compa

Name

ny Code 20

VARDHMAN

TEXTILES

LIMITED.

40

VMT SPINNING MILLS LTD.

50

VARDHMAN THREADS LTD.

Reason Code - Reason codes are used to link a transaction in Cash and Memo posting with an event. It allows creating journal entries and posting them to General Ledger. (Described in detail in Configurable Enterprise Financial Manual Part-1). In Vardhman setup following are some examples of reason codes being used and the complete list is available in the system

Unit

Reas on

Event Name

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PBA

Baddi

W PBA

BANK RECEIPT BANK PAYMENT

W DCB

DEBIT / CREDIT MEMO

W G1V

BY PASS JOURNAL

D

Customer Type - It is a four character alphanumeric code used to combine customers into groups. The members of a customer type group have same logical similarities, such as geographic or industry trade classification. Customer groups are assigned by currency, therefore different customer type can be established for each currency in which the customer bills. In Vardhman setup following customer types is being used. Customer Description Type FBD

FABRIC – DOMESTIC

FBE

FABRIC – EXPORTS

YND

YARN – DOMESTIC

YNE

YARN – EXPORTS

SCD

SCRAP DOMESTIC

WSD

WASTE DOMESTIC

STD

SEWING THREAD – DOMESTIC

STE

SEWING THREAD - EXPORTS

Customer Terms - It is a two character alphanumeric code and is used to compute the due date for an invoice. The invoice due date is calculated from the invoice date. In Vardhman setup following are some examples of term codes being used and the complete list is available in the system. In Industry Project Report

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Downloaded from azmba.blogspot.com Bank Code – It is a three character alphanumeric code used along with company and currency to define a unique bank account code. At least one valid bank code must be setup before issue any cash payment. In Vardhman setup following are some examples of bank codes being used and the complete list is available in the system. Document Sequence Document Prefix - It is a two character alphanumeric code assigned to different A/R transactions like payment, debit memo and credit memo. This is used to group customer transactions on different parameters like company name, unit name and type of transaction. Document Sequence - It is a sequence number automatically generated by the system for every document prefix. In Vardhman setup following are some examples of document prefixes being used and the complete list is available in the system.

Co

Unit Name

Docum

mp

ent

Co

Prefix

Type of Document

de 20

VARDHMAN SPG

EV

DIRECT INVOICING

ZB

BILLING

&

GENERALMILL S 20

ARISHT

SPG

MILLS

FROM

SALE

DEPOT(LUDHIANA )

Customer Master – It is a six digit alphanumeric code used for unique identification of a customer. This file contains •

Company code In Industry Project Report

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Address

•

Phone Number

•

Fax Number

•

Customer Type

•

Payment type

•

Term Code

•

Credit Days

•

Credit Limit

•

Document Prefix

•

Corporate Parent (used to build the corporate parent hierarchy structure of a customer)

In Vardhman setup following are the ranges used for codifying different types of customers.

Customer

Custome

Customer Type

From

r To

100000

150000

FABRIC – DOMESTIC

150001

199999

FABRIC – EXPORTS

200000

249999

YARN – DOMESTIC

250000

259999

YARN – EXPORT

300000

389999

HAND

KNITTING

YARN Customer From

Customer To

Customer Type

390000

393999

WASTE

394000

399999

RAW MATERIAL

400000

499999

SCRAP

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549999

THREADS – DOMESTIC

550000

649999

THREADS – BRANCHES

650000

659999

THREADS – EXPORT

660000

779999

THREADS - BRANCHES

ACR Processing Here we will describe in detail the steps required to process following types of transactions available in Accounts Receivable Application.

 Create On-account payments  Apply On-account payments to existing invoices  Apply Payments to existing invoices  Create Credit Memo (without any reference to existing invoice)  Apply Credit Memo to existing invoices  Create Credit Memo against existing invoices  Create Debit Memo (without any reference to existing invoice  Apply Debit Memo to existing invoices  Create Debit Memo against existing invoices  Convert initial open invoices to BPCS system.  Maintain Customer Invoice

ACR REPORTS

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Customer Outstanding Unit Wise

•

CMY Customer Outstanding Exception Report

•

Payment not received against Invoices

•

Customer Outstanding Invoice Wise (buckets)

•

Collection breakup summary

•

Customer outstanding (cmy)

•

Customer outstanding prefix wise as on date

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Zone/ agent wise customer wise outstanding

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Product wise outstanding

•

Customer wise invoice details

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Sales tax return (within state & out of state), bt, consignment agents

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Interest calculation

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Customer wise balance confirmation letter

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Cash receipt journal

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Account statement

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Aged trial balance- company

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Salesman/ customer wise outstanding

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Customer/invoice wise outstanding

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Category/customer/invoice wise outstanding

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City/customer/invoice wise outstanding

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Salesman/customer/invoice wise outstanding

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Category/customer wise outstanding

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Sister concern wise outstanding

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YARN The VARDHMAN range of yarn was a humble beginning. Tree decades of hard work, commitment and constant innovation have resulted in well earn trust and goodwill of our customers across the globe. At VARDHMAN we move with a notion that customer serves is a way of life. We strive to

provide

our

customers

delight

with

3P

service

–PROMPT,

POLITE

&PERSONALIZED It today have a capacity of over half a million spindles along with two dyeing plants bearing a capacity of more than 27 tones yarn & 22 tones fibers per day. Our goal, therefore calls for serving our customers with multiple of products meeting the most diverse of requirement. This, infect has position VARDHMAN as a” SUPER MARKET of high quality yarn”. YARN PRODUCTION CAPACITY VARDHMAN GROUP has installed capacity of more than half a million spindles & out of it about 1,74,000 spindles are fully dedicated to exports only. Having built GIANT capacity in term of more than half million spindles spanned over 15 units out of 4 units are dedicated to exports only (EOU) , state – of –the- art technology. Dextrose hands capable of plain rhythm with machines sourced from best available around the world has made VARDHMAN a gallery of variety of world CLASS yarns. EOU

-

100%

dedicated

to

export

only •

NON EOU – produce for domestic as well as for export market.

YARN OPERATIONS In Industry Project Report

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Downloaded from azmba.blogspot.com The unique combination of man & machine, competing & supplementing each other with continuos increase in productivity has enable VARDHMAN to dexterously ripe the fruit of economies of scale & process variety of raw material required for variety of end products to textiles. Evenness results falls in 5% to 15% of user standards achieved through Proper selection of raw materials

World class Pre spinning and Spinning Facilities

Techincal Know How

Human Skills

100% Quality Assurance System

ACCOUNTING PRECUDURE FOR CUSTOMER COLLECTION (YARNS) There are three types of collections  Domestic collections  Collection under CMS  Collection through letter of credit L/C

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Downloaded from azmba.blogspot.com DOMESTIC COLLECTION Domestic collection means collection, which are collected by Ludhiana branch and corporate centralized market yarns department. in this system they collect the cheque or demand draft from the yarns customers and handed over it over to the centralized accounting cell for the depositing the same in to the bank on daily basis. After receiving all cheque on a particular day the e centralized accounting cell deposit the instruments in to the bank for clearing. After depositing the collections into the bank, the ACR section account for the same in respective customer’s accounts on basis of advise sent to bank on day -to -day basis. CASH MANAGEMENT SERVICES Cash management means the proper use of an entity’s cash resources . it serves as a means to keep an organization functioning by making th best use of cash or liquid resources of the organization . at the same time the organization have the responsibility to use timely , reliable and comprehensive financial information system . Cash management helps the organization in:    

Eliminating idle cash balances Monitoring exposure and reducing the e risk Ensuring timely deposit of collections Properly timely the disbursements

COLLECTION THROUGH LETTER OF CREDIT (L/C) A letter of credit is a document issued mostly by financial institutions which usually provides an irrevocable payment undertaking to a beneficiary against complying documents as stated in the credit.

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OBJECTIVES OF THE PROJECT  To study the working of yarn division.

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 Knowledge of sale under Letter of Credit in Yarn Division  Bill Discounting under letter of credit  What factors that considers their working capital requirement.  Working Capital Policies.  To operate the working capital cycle of the management.  Detail study of Account receivable department (ACR)

RESEARCH METHODOLOGY

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Downloaded from azmba.blogspot.com Research comprises of defining & redefining problems, formulating hypothesis or suggested solutions, collecting, organizing & evaluating data, making deductions & reaching conclusions. In research design we decide about: •

Type of data

•

From whom to get data

•

About sample size

•

How to analyze data

•

How to make report

DATA TYPE Data collected was both Primary and Secondary in nature SAMPLE SIZE The sample size for the study of the project was yarn division of VARDHMAN GROUP LTD. RESEARCH DESIGN STEP 1- To study the ACR module of yarn division STEP 2 – understanding various methods used for collection of debtors to study procedure followed for LC in Vardhman STEP 3 – Data Analysis of working capital through Ratios DATA COLLECTION The information is collected through the PRIMARY SOURCES like:  Talking with the employees of the department.  Getting information by observations e.g. in manufacturing processes.  Discussion with the head of the department. Data was collected from following SECONDARY SOURCES like 1. Corporate department a) Marketing department In Industry Project Report

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Downloaded from azmba.blogspot.com b) Finance department 2. ACR reports 3. MIS Department The collected information was edited & tabulated for the purpose of analysis. TOOLS USED FOR PROJECT While making the project file various tools were used. These tools helped in doing the work. These are: Microsoft Excel  Microsoft Word  Various analysis tools like Bar Graphs, Pie Graphs, tables

LIMITATIONS OF STUDY In the due course time, the main limitation was with searching the data. The data was not completed in the main files of Vardhman. The training period of six weeks was to short to study the organization in detail. In some cases budgets are available but actual figures are not available for comparison. VARDHMAN is a big unit so it was very difficult to. study the whole budgeted data

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RATIO ANALYSIS In Industry Project Report

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CURRENT RATIO –

CURRENT ASSETS CURRENT LIABILITIES

PARTICULARS

2006-07

2007-08

CURRENT ASSETS

1,153237,069.61

1,076,464808.72

CURRENT LIABILITIES

102,809,874.03

160,310,964.06

CURRENT RATIO

11.2

6.71

CURRENT RATIOS 12 10 8 6

CURRENT RATIOS

11.2

4

6.71

2 0 2006-07

2007-08

Interpretation: A relatively high current ratio is an indication that the firm is liquid and has ability to pay its current obligations in time as and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. Current ratio has moved down from 11.2 to 6.71, which indicates that there has been deterioration in the liquidity position of VARDHMAN. NOTE DURING CALUCALATION FRACTION FIGURES ARE ROUNDED OFF LIQUID RATIO –

CURRENT ASSETS - STOCK -PREPAID EXPENSES

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Downloaded from azmba.blogspot.com CURRENT LIABILITIES PARTICULARS

2006-07

2007-08

CURRENT ASSETS

1,153237,069.61

1,076,464808.72

STOCK

(431570480)

(825491821.69)

CURRENT LIABILITIES

102,809,874.03

160,310,964.06

LIQUID RATIO

4.19

1.56

LIQUID RATIO 5 4 3 2

LIQUID RATIO

4.19

1

1.56

0 2006-07

2007-08

Interpretation: Usually, a high acid test ratio is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low quick ratio represents that the firm’s liquidity position is not good. As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. Liquidity ratio is falling from 4.19 to 1.56 in the firm which means low quick ratio may have a good liquidity position if it has fast moving inventories.

ABSOLUTE LIQUID RATIO – CASH + CASH AT BANK + SHORT TERM SECURITIES CURRENT LIABILITIES In Industry Project Report

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2006-07

CASH + CASH AT BANK SHORT TERM SECURITIES CURRENT LIABILITIES

4,661,283.23 -

4,759,748.58 -

102,809,874.03

ABSOLUTE LIQUID RATIO

2007-08

.045

160,310,964.06 .029

ABSOLUTE LIQUID RATIO 0.05 0.04 0.03 0.02

0.045 0.029

0.01

ABSOLUTE LIQUID RATIO

0 2006-07

2007-08

Interpretation: Although receivables, debtors and bill receivables are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. Here the company acid test ratio decreased and its is low than the thumb rule

STOCK TURNOVER RATIO –

SALES AVERAGE STOCK

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Downloaded from azmba.blogspot.com PARTICULARS

2006-07

2007-08

SALES

3424503526

3682682347.11

AVERAGE STOCK

767334308

773579205

STOCK TURNOVER RATIO

4.46

4.76

STOCK TURNOVER RATIO 4.8 4.7 4.6

4.76

4.5 4.4

STOCK TURNOVER RATIO

4.46

4.3 2006-07

2007-08

Interpretation: Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually, a high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover implies an inefficient management of inventory. We can clearly view that stock turnover ratio has improved.

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DEBTORS TURNOVER RATIO –

SALES

AVERAGE DEBTORS

PARTICULARS

2006-07

2007-08

SALES

3424503526

3682682347.11

AVEARAGE DEBTORS

289844033

146774094

DEBTORS TURNOVER RATIO

11.81

25.09

DEBTORS TURNOVER RATIO 30 25 20 15 10 5 0

25.09

DEBTORS TURNOVER RATIO

11.81 2006-07

2007-08

Interpretation:

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Downloaded from azmba.blogspot.com Debtors velocity indicates the number of times the debtors are turned during the year. Generally, the higher the value of debtors turnover the more efficient is the management of debtors/sales or more liquid are the debtors. Similarly, low debtors turnover implies inefficient management of debtors/sales and less liquid debtors. We can see debtors turnover ratio 25.09 is very high which may imply a firm’s inability due to lack of resources to sell on credit thereby losing sales and profits

AVERAGE COLLECTION PERIOD 365 DEBTORS TURNOVER RATIO

PARTICULARS DAYS

2006-07 365

2007-08 365

DEBTORS TURNOVER RATIO

11.81

25.09

AVERAGE COLLECTION PERIOD

31 DAYS

15 DAYS

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Downloaded from azmba.blogspot.com DEBTORS COLLECTION PERIOD

15

2006-07 2007-08

31

Interpretation: The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors. VARDHMAN’S average collection period is short as compared to last financial year. This implies better quality of debtors as short collection period implies quick payment by debtors. CREDITORS TURNOVER RATIO – PURCHASES (RAW MATERIALS) AVERAGE CREDITORS

PARTICULARS

2006-07

2007-08

RAW MATERIALS

1600792135

1969197435

AVERAGE CREDITORS CREDITORS TURNOVER RATIO

125284347

132084794.5

12.77

14.9

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CREDITORS TURNOVER RATIO 16 15 14 13 12 11

14.9 12.77 2006-07

CREDITORS TURNOVER RATIO

2007-08

Interpretation: The ratio indicates the velocity with which the creditors are turned over in relation to purchases. Generally, higher the creditors velocity better it is or otherwise lower the creditors velocity, less favorable are the results

AVERAGE PAYMENT PERIOD -

365 AVERAGE CREDITOR RATIO

PARTICULARS DAYS CREDITORS TURNOVER RATIO

2006-07

2007-08

365

365

12.77

14.9

29 DAYS

24 DAYS

AVERAGE PAYMENT PERIOD

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CREDITORS PAYEMENT PERIOD

24

2006-07 29

2007-08

Interpretation: The average payment period ratio represents the average number of days taken by the firm to pay its creditors. lower the ratio the better the liquidity position of the firm, as in 2207-08 Vardhman payment period reduces to 5 days its shoe the liquidity position of company increased.

. WORKING CAPITAL RATIO -

NET SALES NET WORKING CAPTIAL

PARTICULARS

2006-07

2007-08

SALES

3424503526

3682682347.11

NET WORKING CAPITAL

1050427195

916153844.66

WORKING CAPITAL RATIO

3.2%

4.01%

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WORKING CAPITAL TURNOVER RATIO 5 4 3 2 1

3.2

4.01

WORKING CAPITAL TURNOVER RATIO

0 2006-07

2007-08

Interpretation: This ratio indicates the number of times the working capital is turned over in the course of year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization and low ratio indicates otherwise. But a very high ratio is not a good situation for any firm and hence care must be taken while interpreting the ratio

NET PROFIT RATIO –

NET PROFIT

* 100

SALES

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Downloaded from azmba.blogspot.com PARTICULARS NET PROFIT

2006-07 221,753,922.93

2007-08 250,477,915.32

SALES

3,424,503,526.55

3,682,682,347.11

NET PROFIT RATIO

6.4

6.8

NET PROFIT 10.4 10.2

10.2

10 9.8

NET PROFIT

9.78

9.6 9.4 2006-07

2007-08

Interpretation: The ratio is very helpful as if the profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. This ratio also indicates the firm capacity to face adverse economic conditions such as price competition, low demand, etc. Higher the ratio, the better is the profitability

STATEMENT SHOWING NET CURRENTS ASSETS/NET WORKING CAPITAL

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PARTICULARS

2006-07

2007-08

721,666,589.86 184,805,314.45

825,491,821.69 108,742,874.10

4661283.23 242,103,882.07

4759,748.58

A. C.ASSETS a. INVENTORIES b. SUNDRY DEBTORS c. CASH AND BANK BALANCES d. LOANS & ADVANCES

137,470,364.35

TOTAL CURRENT ASSETS

1,153237,069.61

1,076,464,808.72

103,768,089.83 (958,215.80)

160,401,500.43 (90536.37)

102,809,874.03

160,310,964.06

1,050,427,195.58

916,153.844.66

B. C.LIABILITIES a. CREDITORS b. PROVISIONS

TOTAL CURRENT LIABILITIES NET WORKING CAPITAL [A-B]

Interpretation: This table shows the Working Capital position for the last 2 YEARS

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LIMITATIONS Working capital is powerful tool of determining company’s strength and weakness. But the analysis is based on the information available in the financial statements, which are as follows:  It is only a study of interim report.

 Working capital study is only based upon monetary information and nonmonetary factors are ignored.

 It does not consider change in price level.

 As working capital is prepared on the basis of going concern, it does not give extract position. Thus accounting concept and conventions causes a serious limitation to financial analysis.

 Analysis is only a mean and not an end in itself. The analyst has to make interpretation and draw his/her conclusion. Different people may interpret the same analysis in different ways.

FINDINGS In Industry Project Report

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1. Standard current ratio is 2:1 and for industry it is 1.33:1. Vardhman ratio not satisfied 2. Liquidity ratio is improved in 2007-8 3. Absolute test ratio is slightly low to that of thumb rule 4. Debtors of the company were high; they were increasing year by year, so more funds were blocked in debtors. But now recovery is becoming faster. 5. Debtors turnover ratio is increase which is beneficial for the company because as ratio increases the number of days of collection for debtors decreases. 6. Inventory turnover ratio is improved which means inventory is used in better way so it is good for the company. 7. Working capital turnover ratio is continuously increasing that shows Increasing needs of working capital. 8. Creditors turnover ratio also increase which is good for company 9. Net profit ratio also increased which mean increase in profitability

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CONCLUSION

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Downloaded from azmba.blogspot.com The sale of Vardhman Group is more in Ludhiana market in comparison to other mills. The customers are giving faith in its quality. Oswal, Malwa & Sharman respectively stand in close competition with Vardhman. The price of Vardhman for all yarns are the highest because of its high quality standards and their expense on extensive sales promotion. The other factors that contribute for its maximum sales are its timely supply without much problems and its cordial relations with dealers. In this project we have discussed what is letter of credit and how inland bill discounting done under it and working capital and help in analysis short term financial position of company Letter of credit means when a bank or finance company issues a document on behalf of an buyer, authorizing the seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. Working Capital is the lifeline of every industry, irrespective of whether it’s a manufacturing industry, services industry. Working Capital is the prime and most important requirement for carrying out the day to day operations of the business. Working Capital gives the much-needed liquidity to the business. Working Capital Finance reduces the overall fund requirement, required to build up the Current Assets, which in turn help you improve your Turn Over Ratio. In the end I would say that it was great working in Vardhman.

SUGGESTIONS

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 The prices should be less to re-establish the market for Yarn.  Since the customer is very specific in terms of value so the company can introduce new and alternative products whenever possible by adjusting the raw-material mixing as a result achieve better profitability.

 As far as accounting is concerned, although the entire system is computerized, but there still involves lots of paperwork. So this should be minimized b acquiring more advanced accounting software  Not only for yarn customers but for other product customer dealing under letter of credit should done

 L/C period should also increased  Company should put more efforts to improve its liquidity position

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

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BIBILOGRAPHY •

REFERENCE TO A BOOK In Industry Project Report

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Downloaded from azmba.blogspot.com Gupta K Shashi , Sharma R.K (2 003), Management Accounting And business Finance , Kalyani Publishers ,New Delhi

• REFERENCE FOR ARTICLES 1. Bergami Robert, (2007), “Will the UCP 600 Provide Solutions to Letter of Credit Transactions?” International Review of Business Research Papers,Vol.3 No.2, June 2007, Pp. 41 - 53 2. Dolan John, (2007),” THE LAW OF LETTERS OF CREDIT” The Wayne State University Law School Legal Studies Research, Vol 1, April 2007, p149 3. Padachi Kesseven, (2006), “Trends in Working Capital Management and its Impact on Firms Performance: An Analysis of Mauritian Small Manufacturing Firms”, International Review of Business Research PapersVol.2 No. 2. October 2006, Pp. 45 -58 4. Klien Carter, (2005), “Using Letters of Credit to Secure Lease Obligations”, Law journal Newsletter ,Vol 18, No 4 , September 2005, p. 585 5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios, (2004), “The relationship between working capital management and profitability of listed companies in the Athens Stock Exchange”, University of Macedonia ,Greece, Vol 28, No78,October , pp1013. 6. Schelin Johan (2004), “Letter of credit and doctrine of strict compliance”, University of Uppsala, Vol. 4, No. 3,, January, pp 27 – 34 7. Shelton Fred (2002), “Working capital and constructions industry”, journal of construction accounting and taxation, December, pp. 45-56. 8. Weinraub Herbert, Visscher Sue (1998), “Industry practices relating to aggressive conservative working capital policies”, Journal of Financial and Strategic Decisions, Vol 11 No 2, November, pp. 770-774. 9. Mills Geofrey (1996), “The Impact of inflation on capital budgeting and working capital”, Journal Of Financial And Strategic Decisions, Vol 9 No 1 ,October, pp. 26-32.

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• WEB PAGES  www.google.com  http://en.widipedia.org/wiki/Letters_of_credit  www.vardhman.com

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