A REPORT
ON
“
“
WORKING CAPITAL MANAGEMENT IN
WORKING CAPITAL MANAGEMENT IN
HCL INFOSYSTEMS LIMITED”
HCL INFOSYSTEMS LIMITED”
BY
(Submitted in partial fulfillment of the requirements of
MBA program at
ICFAI Business School, Chandigarh)
ACKOWLEDGEMENT
Achievement is finding out what you would be then doing, what you have to do. The higher the summit, the harder is the climb. The goal was fixed and we began with a determined resolved and put in ceaseless sustained hard work. Greater challenge, greater was our effort to overcome it.
This project work, which is my first step in the field of professionalization, has been successfully accomplished only because of my timely support of well-wishers. I would like to pay my sincere regards and thanks to those, who directed me at every step in my project work.
I would also like to thank the faculty members and the staff members of HCL Infosystems Ltd. for their kind support and help during the project.
TABLE OF CONTENTS
Acknowledgement
Abstract
1. Introduction
The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations
2. Hindustan Computers Limited
3.
HCL Infosystems – An Overview
Company’s history
HCL at a glance
Alliances and partnerships
Management team
Corporate information
4. Conceptual Framework
Introduction to Working Capital Management
Significance of working capital management
Liquidity vs Profitability: Risk – Return trade off
Classification of working capital
Types of working capital needs
Financing of working capital
Factors determining working capital requirements
Working capital cycle
Sources of working capital
HCL financials
Working capital position
Inventory management
Cash management
Receivables management
Managing payables (Creditors)
Financing current assets
Working capital & short-term financing
5. Analysis
Industry analysis
Financial graphs
Concluding analysis
Suggestions and recommendations
Bibliography
ABSTRACT
This project is based on the study of working capital management in HCL Infoystems. An insight view of the project will encompass – what it is all about, what it aims to achieve, what is its purpose and scope, the various methods used for collecting data and their sources, including literature survey done, further specifying the limitations of our study and in the last, drawing inferences from the learning so far.
HCL Infosystems Limited (HCL), is a leading domestic computer hardware and hardware services company. HCL is engaged in selling manufactured ( like PCs, servers, monitors and peripherals) and traded hardware ( like notebooks, peripherals) to institutional clients as well as in retail segment. It also offers hardware support services to existing clients through annual maintenance contracts, network consulting and facilities management.
The working capital management refers to the management of working capital, or precisely to the management of current assets. A firm’s working capital consists of its investments in current assets, which includes short-term assets— cash and bank balance, inventories, receivable and marketable securities.
This project tries to evaluate how the management of working capital is done in HCL Infosystems through inventory ratios, working capital ratios, trends, computation of cash, inventory and working capital, and short term financing.
INTRODUCTION
The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations
INTRODUCTION:
The project undertaken is on “WORKING CAPITAL MANAGEMENT IN HCL INFOSYSTEMS LIMITED”.
It describes about how the company manages its working capital and the various steps that are required in the management of working capital.
Cash is the lifeline of a company. If this lifeline deteriorates, so does the
company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM).
Working capital refers to the cash a business requires for day-to-day operations or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.
The working capital is an important yardstick to measure the company’s
operational and financial efficiency. Any company should have a right amount of cash and lines of credit for its business needs at all times.
This project describes how the management of working capital takes place at
HCL Infosystems.
THE PROBLEMS
In the management of working capital, the firm is faced with two key problems: 1. First, given the level of sales and the relevant cost considerations, what are the
optimal amounts of cash, accounts receivable and inventories that a firm should choose to maintain?
2. Second, given these optimal amounts, what is the most economical way to finance these working capital investments? To produce the best possible results, firms should keep no unproductive assets and should finance with the cheapest available sources of funds. Why? In general, it is quite advantageous for the firm to invest in short term assets and to finance short-term liabilities.
PURPOSE OF STUDY
The objectives of this project were mainly to study the inventory, cash and receivable at HCL Infosystems Ltd., but there are some more and they are
-The main purpose of our study is to render a better understanding of the concept “Working Capital Management”.
To understand the planning and management of working capital at HCL Infosystems Ltd.
To measure the financial soundness of the company by analyzing various ratios.
To suggest ways for better management and control of working capital at the concern.
RESEARCH METHODOLOGY
This project requires a detailed understanding of the concept – “Working Capital Management”. Therefore, firstly we need to have a clear idea of what is working capital, how it is managed in HCL Infosystems, what are the different ways in which the financing of working capital is done in the company.
The management of working capital involves managing inventories, accounts receivable and payable and cash. Therefore one also needs to have a sound knowledge about cash management, inventory management and receivables management.
Then comes the financing of working capital requirement, i.e. how the working capital is financed, what are the various sources through which it is done.
And, in the end, suggestions and recommendations on ways for better management and control of working capital are provided.
SCOPE OF THE STUDY
This project is vital to me in a significant way. It does have some importance for the company too. These are as follows –
This project will be a learning device for the finance student.
Through this project I would study the various methods of the working capital management.
The project will be a learning of planning and financing working capital. The project would also be an effective tool for credit policies of the companies.
This will show different methods of holding inventory and dealing with cash and receivables.
This will show the liquidity position of the company and also how do they maintain a particular liquidity position.
DATA SOURCES:
The following sources have been sought for the prep of this report:
Primary sources such as business magazines, current annual reports, book on Financial Management by various authors and internet websites the imp amongst them being : www.hcl.com,www.indiainfoline.com,
www.studyfinance.com .
Secondary sources like previous years annual reports, reports on working capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash management, receivables management, inventory management and short term financing was required.
This data was gathered through the company’s websites, its corporate intranet, HCL’s annual reports of the last five years.
A detailed study on the actual working processes of the company is also done through direct interaction with the employees and by timely studying the happenings at the company.
Also, various text books on financial management like Khan & Jain, Prasanna Chandra and I.M.Pandey were consulted to equip ourselves with the topic.
LIMITATIONS OF THE STUDY:
We cannot do comparisons with other companies unless and until we have the data of other companies on the same subject.
Only the printed data about the company will be available and not the back–end details.
Future plans of the company will not be disclosed to the trainees. Lastly, due to shortage of time it is not possible to cover all the factors and details regarding the subject of study.
The latest financial data could not be reported as the company’s websites have not been updated.
HINDUSTAN COMPUTERS LIMITED:
Type Public
(BSE: 500179,BSE: 532281) Founded 11th August 1976
Headquarters Noida, India
(Delhi metropolitan area), India
Key People Shiv Nadar, Founder, Chairman & CEO Sanjay Kumar Choudhary , Vineet Nayar
Industry Information Technology Services Revenue ▲4.7 billion
USD
Employees ~53,000 (as on 31st Dec 2007) Website www.hcl.in
Hindustan Computers Limited, also known as HCL Enterprise, is one of
India's largest electronics, computing and information technology company. Based in Noida, near Delhi, the company comprises two publicly listed Indian companies, HCL Technologies and HCL Infosystems.
HCL was founded in 1976 by Shiv Nadar, Ajai Chowdhry and four of their colleagues. HCL was focused on addressing the IT hardware market in India for the first two decades of its existence with some sporadic activity in the global
market. In 1981, HCL seeded a company focused on addressing the computer training industry, NIIT, though it has currently divested its stake in the
company. In 1991, HP took minority stake in the company (26%) and the company was known as HCL HP for the five years of the joint venture. On termination of the joint venture in 1996, HCL became an enterprise which comprises HCL Technologies (to address the global IT services market) and HCL Infosystems (to address the Indian and APAC IT hardware market). HCL has since then operated as a holding company.
HCL INFOSYSTEMS – AN OVERVIEW
Company’s history
HCL at a glance
Alliances and partnerships
Management team
HCL INFOSYSTEMS LIMITED
AN OVERVIEW ABOUT THE COMPANY
HCL Infosystems is no flash in the Information Technology pan. Founded in 1976, the firm has climbed into pantheon of India's corporate giants on the strength of its IT products and services. HCL Infosystems specializes in IT hardware (PC's and servers, as well as networking, imaging and communications products), and system integration services serving the domestic Indian market. In addition to its consumer products, the company provides commercial IT products, facilities management, network services, and IT security services for clients in such industries as government, financial services, and education. HCL Corporation owns significant stakes in HCL Infosystems (about 44%) and sister company HCL Technologies.
HCL Infosystems Ltd, a listed subsidiary of HCL, is an India-based hardware and systems integrator. It claims a presence in 170 locations and 300 service centres. Its manufacturing facilities are based in Chennai, Pondicherry and Uttarakhand .Its headquarters is in Noida.
HCL Peripherals (A Unit of HCL Infosystems Limited) Founded in the year 1983, has established itself as a leading manufacturer of computer peripherals in India, encompassing Display Products, Thin Client solutions, Information and Interactive Kiosks. HCL Peripherals has two Manufacturing facilities, one in Pondicherry (Electronics) and the other in Chennai (Mechanical) .The Company has been accredited with ISO 9001:2000, ISO 14001, TS 16949 and ISO 13485.
HISTORY
HCL Infosystems Ltd is one of the pioneers in the Indian IT market, with its origins in 1976. For over quarter of a century, we have developed and implemented solutions for multiple market segments, across a range of technologies in India. We have been in the forefront in introducing new technologies and solutions. The highlights of the HCL saga are summarized below:
Y E AR H I G H L I G H T S 1976
- Foundation of the Company laid
- Introduces microcomputer-based programmable calculators with wide acceptance in the scientific / education community
1977
- Launch of the first microcomputer-based commercial computer with a ROM -based Basic interpreter
- Unavailability of programming skills with customers results in HCL developing bespoke applications for their customers
1980 - Formation of Far East Computers Ltd., a pioneer in the Singapore IT market, forSI (System Integration) solutions
1983
- HCL launches an aggressive advertisement campaign with the theme ' even a typist can operate' to make the usage of computers popular in the SME (Small & Medium Enterprises) segment. This proposition involved menu-based
applications for the first time, to increase ease of operations. The response to the advertisement was phenomenal.
-HCL develops special program generators to speed up the development of applications
- Zonal offices of banks and general insurance companies adopt computerization - Purchase specifications demand the availability of RDBMS products on the
1991
- HCL enters into a joint venture with Hewlett Packard
- HP assists HCL to introduce new services: Systems Integration, IT consulting, packaged support services ( basic line, team line )
1994 - HCL acquires and executes the first offshore project from IBM Thailand
- HCL sets up core group to define software development methodologies
1995
- Starts execution of Information System Planning projects - Execution projects for Germany and Australia
- Begins Help desk services
1996
- Sets up the STP ( Software Technology Park ) at Chennai to execute software projects for international customers
- Becomes national integration partner for SAP
1997 - Kolkata and Noida STPs set up- HCL buys back HP stake in HCL Hewlett Packard
1998 - Chennai and Coimbatore development facilities get ISO 9001 certification
1999
- Acquires and sets up fully owned subsidiaries in USA and UK - Sets up fully owned subsidiary in Australia
- HCL ties up with Broadvision as an integration partner
2000
- Sets up fully owned subsidiary in Australia
- Chennai and Coimbatore development facilities get SEI Level 4 certification - Bags Award for Top PC Vendor In India
- Becomes the 1st IT Company to be recommended for latest version of ISO 9001 : 2000
- Bags MAIT's Award for Business Excellence - Rated as No. 1 IT Group in India
2001 -Launched Pentium IV PCs at below Rs 40,000-IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001
2002
-Declared as Top PC Vendor by Dataquest
-HCL Infosystems & Sun Microsystems enters into a Enterprise Distribution Agreement
- Realigns businesses, increasing focus on domestic IT, Communications & Imaging products, solutions & related services
2003
- Became the first vendor to register sales of 50,000 PCs in a quarter - First Indian company to be numero uno in the commercial PC market - Enters into partnership with AMD
- Launched Home PC for Rs 19,999
2004 - 1st to announce PC price cut in India, post duty reduction, offers Ezeebee at Rs. 17990
- Maintains No.1 position in the Desktop PC segment for year 2003
- Becomes the 1st company to cross 1 lac unit milestone in the Indian Desktop PC market
- Partners with Union Bank to make PCs more affordable, introduces lowest ever EMI for PC in India
- Registers a market share of 13.7% to become No.1 Desktop PC company for year 2004
- Crosses the landmark of $ 1 billion in revenue in just nine months
2005
- Launch of HCL PC for India, a fully functional PC priced at Rs.9,990/-- Rated as the No.1 Desktop PC company by IDC India Rs.9,990/--Dataquest - 'Best Employer 2005' with five star ratings by IDC India -Dataquest. - 'The Most Customer Responsive Company 2005'
-IT Hardware Category by The Economic Times -Avaya Global Connect. -Top 50 fastest growing Technology Companies in India' & 'Top 500 fastest Growing Technology Companies in Asia Pacific' by 'Deloitte & Touche'. by 'Deloitte & Touche'
-'7th IETE -Corporate Award 2005' for performance excellence in the field of Computers & Telecommunication Systems by IETE.
-India 's 'No.1 vendor' for sales of A3 size Toshiba Multi Functional Devices for the year '04 -'05 by IDC.
-Toshiba 'Super Award 2005 towards business excellence in distribution of Toshiba Multifunctional products,
-Strategic Partners in Excellence' Award by In focus Corporation for projectors. -'Most valued Business Partner' Award for projectors by In focus Corporation in 2005
2006 (till June)
- 75, 000+ machines produced in a single month
- HCL Infosystems in partnership with Toshiba expands its retail presence in India by unveiling 'shop Toshiba'
- HCL Infosystems & Nokia announce a long term distribution strategy
- HCL the leader in Desktops PCs unveils India's first segment specific range of notebooks brand - 'HCL Laptops'
- IDBI selects HCL as SI partner for 100 branches ICT infrastructure rollout - HCL Infosystems showcases Computer Solutions for the Rural Markets in India - HCL Support wins the DQ Channels-2006 GOLD Award for Best After Sales Service on a nationwide customer satisfaction survey conducted by IDC
- HCL Infosystems First in India to Launch the New Generation of High Performance Server Platforms Powered by Intel Dual - Core Xeon 5000 Processor
VISION STATEMENT:
"Together we create the Enterprises of Tomorrow"
MISSION STATEMENT:
"To provide world-class Information Technology solutions and services in order to enable our customers to serve their customers better"
CORE VALUES: Nothing transforms life like education.
We shall honor all commitments
We shall be committed to Quality, Innovation and Growth in every endeavor
We shall be responsible corporate citizens
QUALITY POLICY:
"We shall deliver defect-free products, services and solutions to meet the requirements of our external and internal customers, the first time, every time."
OBJECTIVES: MANAGEMENT OBJECTIVES –
To fuel initiative and foster activity by allowing individuals, freedom of action and innovation in attaining defined objectives.
PEOPLE OBJECTIVES –
To help people in HCL Infosystems Ltd., share company’s success, which they make possible; to provide job security based on their performance; to
recognize their individual achievements; and help them gain a sense of satisfaction and accomplishment from their work.
ALLIANCES and PARTNERSHIPS:
To provide world-class solutions and services to all our customers, HCL
Infosystems have formed Alliances and Partnerships with leading IT companies worldwide.
Associates, RedHat, Infocus, Duplo, Samsung and Novell.
These alliances on one hand give us access to best technology & products as well as enhancing our understanding of the latest in technology. On the other hand they enhance our product portfolio, and enable us to be one stop shop for our customers.
MANAGEMENT TEAM:
Ajai Chowdhry
Co-Founder HCL, Chairman and CEO - HCL Infosystems. An engineer by training, Ajai Chowdhry is one of the six co-founder members of HCL, India 's premier IT conglomerate.
J V Ramamurthy
Chief Operating Officer HCL Infosystems Ltd.
J V Ramamurthy has an engineering degree in Electronics &
Communications, from Guindy Engineering College, and a Masters' degree in Applied Electronics from the Madras Institute of
Technology, both in Chennai.
Rajendra Kumar
Executive Vice President - Frontline Division HCL Infosystems Ltd. Mr. Rajendra Kumar has been with HCL for over 30 years and has seen HCL grow from a startup company to a gigantic conglomerate that it is today.
CORPORATE INFORMATION:
BOARD OF DIRECTORS Chairman & Chief Executive Officer
Ajai Chowdhry Whole-time Director J.V. Ramamurthy Directors S. Bhattacharya D.S. Puri R.P. Khosla E.A. Kshirsagar Anita Ramachandran T.S. Purushothaman Narasimhan Jegadeesh V.N. Koura
COMPANY SECRETARY Sushil Kumar Jain
AUDITORS Price Waterhouse, New Delhi
BANKERS State Bank of India
Canara Bank HDFC Bank Ltd.
ICICI Bank Ltd. Societe Generale
Standard Chartered Bank State Bank of Patiala State Bank of Saurashtra
REGISTERED OFFICE 806, Siddharth,
96, Nehru Place, New Delhi - 110 019.
CORPORATE OFFICE E - 4, 5, 6, Sector XI, Noida - 201 301 (U.P.)
WORKS ♦ R.S. Nos: 34/4 to 34/7 and part of 34/1,
Sedarapet, Puducherry - 605 111. ♦ R.S. Nos: 107/5, 6 & 7, Main Road, Sedarapet, Puducherry - 605 111. ♦ Plot No 78, South Phase, Ambattur Industrial
Estate,Chennai - 600 058. ♦ Plot No SPL. A2, Thattanchavadi, Industrial Area, Puducherry - 605 009.
♦ Plot Nos. 1, 2, 27 & 28, Sector 5, 11E,
Rudrapur, Distt. - Udham Singh Nagar,
WORKING CAPITAL MANAGEMENT
CONCEPTUAL FRAMEWORK
27
Introduction
Significance of working capital management Liquidity Vs profitability: Risk – Return trade off Classification of working capital
Types of working capital needs Financing of working capital
Factors determining working capital requirements Working capital cycle
Sources of working capital HCL financials
Working capital position Inventory management Cash management
Receivables management Managing payables (Creditors) Financing current assets
Working capital & short-term financing Financing Current Assets
INTRODUCTION TO WORKING CAPITAL
“Working Capital is the Life-Blood and Controlling Nerve Center of a business”
The working capital management precisely refers to management of
current assets. A firm’s working capital consists of its investment in current assets, which include short-term assets such as:
Cash and bank balance, Inventories,
Receivables (including debtors and bills), Marketable securities.
Working capital is commonly defined as the difference between current assets and current liabilities.
WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES
There are two major concepts of working capital: Gross working capital
Gross working capital:
It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets.
Net working capital:
It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.
Significance Of Working Capital Management
The management of working capital is important for several reasons:
For one thing, the current assets of a typical manufacturing firm account for half of its total assets. For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has the effect on company's risk, return and share prices,
There is an inevitable relationship between sales growth and the level of current assets. The target sales level can be achieved only if supported by adequate working capital Inefficient working capital management may lead to insolvency of the firm if it is not in a position to meet its liabilities and commitments.
LIQUIDITY VS PROFITABILITY: RISK - RETURN TRADE OFF
Another important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. Like the most corporate financial decisions, the decision on how much working capital be maintained involves a trade off- having a large net working capital may reduce the liquidity risk faced by a firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They are the determination of:
The optimal level of investments in current assets.
The appropriate mix of short-term and long-term financing used to support this investment in current assets, a firm should decide whether or not it should use short-term financing. If short-term financing has to be used, the firm must determine its portion in total financing. Short-term financing may be preferred over long-term financing for two reasons:
The cost advantage Flexibility
But short-term financing is more risky than long-term financing. Following table will summarize our discussion of short-term versus long-term financing.
Maintaining a policy of short term financing for short term or temporary assets needs (Box 1) and long- term financing for long term or permanent assets needs (Box 3) would comprise a set of moderate risk – profitability strategies. But what one gains by following alternative strategies (like by box 2 or box 4) needs to weighed against what you give up.
CLASSIFICATION OF WORKING CAPITAL
Working capital can be classified as follows: On the basis of time
On the basis of concept
TYPES OF WORKING CAPITAL NEEDS
Another important aspect of working capital management is to analyze the total working capital needs of the firm in order to find out the permanent and temporary working capital. Working capital is required because of existence of operating cycle. The lengthier the operating cycle, greater would be the need for working capital. The operating cycle is a continuous process and therefore, the working capital is needed constantly and regularly. However, the magnitude and quantum of working capital required will not be same all the times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changes reflect permanent changes in the firm as is the case when the inventory and receivables increases as the firm grows and the sales become higher and higher. Other changes are seasonal, as is the case with increased inventory required for a particular festival season. Still others are random reflecting the uncertainty associated with growth in sales due to firm's specific or general economic factors.
The working capital needs can be bifurcated as:
Permanent working capital Temporary working capital
Permanent working capital:
There is always a minimum level of working capital, which is continuously required by a firm in order to maintain its activities. Every firm must have a minimum of cash, stock and other current assets, this minimum level of current assets, which must be maintained by any firm all the times, is known as permanent working capital for that firm. This amount of working capital is constantly and regularly required in the same way as fixed assets are required. So, it may also be called fixed working capital.
Temporary working capital:
Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The position of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes.
The permanent level is constant while the temporary working capital is fluctuating increasing and decreasing in accordance with seasonal demands as shown in the figure.
In the case of an expanding firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might be increasing (or decreasing) to support a rising level of activity. In that case line would be rising.
FINANCING OF WORKING CAPITAL
There are two types of working capital requirements as discussed above. They are:
Permanent or Fixed Working Capital requirements Temporary or Variable Working Capital requirements
Therefore, to finance either of these two working capital requirements, we have long-term as well as short-term sources.
FACTORS DETERMINING WORKING CAPITAL
REQUIREMENTS
There are many factors that determine working capital needs of an enterprise. Some of these factors are explained below:
Nature or Character of Business.
The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. Oh the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement.
Sintech is a manufacturing concern so this requires them to keep a very sizeable amount in working capital.
Size of Business/Scale of Operations.
Sintech has a good position in its segment and they are also spending their operations in the domestic market as well as in foreign market. The scale of operations and the size it holds in the market makes it a must for them to hold their inventory and current asset at a huge level.
Rate of Growth of Business.
The rate of growth of sales indicates a need for increase in the working capital requirements of the firm. As the firm is projected
to increase their sales by 69% from what it was in 2009, it is
required to guard them against the increasing requirements of the net current asset by way of efficient working capital management. The sales and projected sales level determine the investment in inventories and receivables.
Price Level Changes.
Changes in the price level also affect the working capital requirements. It was the reduced margins in the price of the raw materials that had prompted them to go for bulk purchases thus making on additions to their net current assets. They might have gone for this large-scale procurement for availing discounts and anticipating a rise in prices, which would have meant that more funds are required to maintain the same current assets.
WORKING CAPITAL CYCL
The upper portion of the diagram above shows in a simplified form the chain of events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank through which funds flow. These tanks, which are concerned with day-to-day activities, have funds constantly flowing into and out of them.
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firm’s work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished product.
As production progresses, labor costs and overheads need have to be met.
Of course at some stage trade creditors will need to be paid. When the finished goods are sold on credit, debtors are increased. They will eventually pay, so that cash will be injected into the firm.
Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors, cash (positive or negative) and trade creditors – can be viewed as tanks into and from which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount of cash.
The business will have to make payments to government for taxation.
Fixed assets will be purchased and sold Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of cash
Some shares may be redeemed for cash Dividends may be paid
Unlike, movements in the working capital items, most of these ‘non-working capital’ cash transactions are not every day events. Some of them are annual events (e.g. tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases and sales). Others (e.g. new equity and loan finance and redemption of old equity and loan finance) would typically be rarer events.
SOURCES OF WORKING CAPITAL
HCL Infosystems has the following sources available for the fulfillment of its working capital requirements in order to carry on its operations smoothly:
Banks:
These include the following banks –
State Bank of India Canara Bank
HDFC Bank Ltd. ICICI Bank Ltd. Societe Generale
Standard Chartered Bank State Bank of Patiala State Bank of Saurashtra
Commercial Papers:
Commercial Papers have become an important tool for financing working capital requirements of a company. Commercial Paper is an unsecured promissory note issued by the company to raise short-term funds. The buyers of the commercial paper include banks, insurance companies, unit trusts, and companies with surplus funds to invest for a short period with minimum risk.
HCL issues Commercial Papers and had 4000 commercial papers in the year 2006.
HCL FINANCIALS:
WORKING CAPITAL POSITION :
CURRENT ASSET – TOTAL ASSET
PARTICULARS 2006 2005 2004 2003 2002 CURRENT ASSETS 100970 81533 54091 45042 55985 NET BLOCK 7970 5329 4925 4954 5552 TOTAL ASSETS 122479 99139 87076 71285 75205 CA/TA 82.44 82.24 62.12 63.18 74.43
The current asset percentage on total asset is the highest over the years. This increasing percentage of current assets to the total assets at first might indicate a preference for liquidity in place of profitability, but a look into the nature of the business carried on by HCL Infosystems reveal the reason behind it. How far their preference to current assets has affected the sales is shown below.
NET CURRENT ASSET – SALES
PARTICULARS 2006 2005 2004 2003 2002 NET CURRENT ASSETS 40343 34742 14301 18752 27065 SALES 238136 199886 154295 166604 127003 WORKING CAPITAL % INCREASE 16.12 142.93 -23.736 -30.7 -0.46 SALES % INCREASE 19.14 29.54 -7.38 31.18 8.7
The sales has increased and the profits risen despite the 16.12% increase in working capital. But what is noteworthy here is that the firm has managed to maintain the trend of an increase in net current assets.
would automatically suggest towards a very efficient working capital management where the assets of the firm which are short-term in nature have been utilized optimally in connection to their fixed assets. The firm has gone towards such a dramatic shift in their working capital position might be because of the tremendous growth witnessed in the domestic IT market
CURRENT ASSET – FIXED ASSET
PARTICULARS 2006 2005 2004 2003 2002
NET CA/NET BLOCK 5.062:1 6.519:1 2.903:1 3.785:1 4.875:1
The ratio of the net current asset to the fixed ones is an indicator as to the liquidity position of the firm. This ratio has declined for the firm
compared to the previous year. There could be an argument as to whether the increased ratio of working capital to net block is a conservative policy and whether it would be detrimental to the interest of the company. Or, whether it would have been proper if the company invested more into the capital expenditure in the form of plant and machinery or invested in any other form that would have got them an internal rate of return. What has to be kept in mind before coming to a conclusion as to the policy of the company, is the fact that the firm being primarily into assembling, its investment in the fixed asset segment need not be high. A look into the capacity utilization of the plant would reaffirm this point. It would be ideal for the firm to continue in the same line and not have excessive investment in the fixed asset as they can easily add onto this part.
COMPUTER and MICRO PROCESSOR BASED SYSTEMS
YEAR INSTALLED CAPACITY ACTUAL PRODUCTION % CAPACITY UTILIZATION 2006 1150000 581805 50.59 2005 600000 448121 74.69 45
2004 525000 295192 56.23
DATA GRAPHIC/DISPLAY MONITOR/TERMINALS/HUBS YEAR INSTALLED CAPACITY ACTUAL PRODUCTION % CAPACITY UTILIZATION 2006 250000 267326 106.93 2005 250000 259617 103.85 2004 350000 297991 85.14
That the fixed assets of the firm are being put to efficient use and the firm is trying for optimum capacity utilization is something that can be easily deduced. Whether the current assets or the working capital of the firm has anything to do with it is for us to see. An increased production in normal circumstances means better raw material to finished goods conversion rate, i.e. the firm is taking less of time in the production process and this happens when the current asset employed in relation with the fixed ones are at optimum. The other notable feature here is that though the firm has added on to its installed capacity in all three years, they were still able to increase the capacity utilization. That they have been able to do it shows that the more current assets, especially inventory used in relation to the fixed assets, i.e., plant and machinery and their management has only helped in increasing their utilization to the maximum.
% CURRENT ASSETS INCREASE 23.84 50.7 20.09 -19.54 8.9 %CURRENT LIABILITES INCREASE 29.57 17.6 51.35 -9.1 19.45
The 16.12% increase in Net Current assets despite of the fact that there has been an increase in the Current Assets by 23.84% and increase in Current Liability has been by 29.57% over that of the previous year has to be attributed to the fact that in 2005, the company showed such a high increase in CA, that it is still being offset. This is an indication as to the expanding operations of the firm. HCL has increased its current assets in order to meet the increasing sales. The firm’s level of liquidity being high, we need a check on whether it affects the return on assets.
INVENTORY MANAGEMENT
Inventories
Inventories constitute the most important part of the current assets of large majority of companies. On an average the inventories are approximately 60% of the current assets in public limited companies in India. Because of the large size of inventories maintained by the firms, a considerable amount of funds is committed to them. It is therefore, imperative to manage the inventories efficiently and effectively in order to avoid unnecessary investment.
Nature of Inventories
Inventories are stock of the product of the company is manufacturing for sale and components make up of the product. The various forms of the inventories in the manufacturing companies are:
Raw Material: It is the basic input that is converted into the finished product through the manufacturing process. Raw materials are those units which have been purchased and stored for future production.
Work-in-progress: Inventories are semi-manufactured products. They represent product that need more work they become finished products for sale.
Finished Goods: Inventories are those completely manufactured products which are ready for sale. Stocks of raw materials and work-in-progress facilitate production, while stock of finished goods is required for smooth marketing operations. Thus, inventories serve as a link between the production and consumption of goods.
Inventory Management Techniques
In managing inventories, the firm’s objective should be to be in consonance with the shareholder wealth maximization principle. To achieve this, the firm should determine the optimum level of inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory control results in unbalanced inventory and inflexibility-the firm may sometimes run out of stock and sometimes pile up unnecessary stocks.
Economic Order Quantity (EOQ): The major problem to be resolved is how much the inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it has to purchase on replenishment. If the firm is planning a production run, the issue is how much production to schedule. These problems are called order quantity problems, and the task of the firm is to determine the optimum or economic lot size. Determine an optimum level involves two types of
costs:- Ordering Costs: This term is used in case of raw material
and includes all the cost of acquiring raw material. They include the costs incurred in the following activities:
Requisition Purchase Ordering Transporting Receiving Inspecting Storing
Ordering cost increase with the number of orders placed; thus the more frequently inventory is acquired, the higher the firm’s ordering costs. On the other hand, if the firm maintains large inventory’s level, there will be few orders placed and ordering costs will be relatively small. Thus, ordering costs decrease with the increasing size of inventory.
Carrying Costs: Costs are incurred for maintaining a given
level of inventory are called carrying costs. These include the following activities:
Warehousing Cost Handling
Administrative cost Insurance
Deterioration and obsolescence
Carrying costs are varying with inventory size. This behavior is contrary to that of ordering costs which decline with increase in inventory size. The economic size of inventory would thus depend on trade-off between carrying costs and ordering cost.
Composition 2006 2005 2004
Raw Material 6349 7749 6127
Stores and Spares 3713 2987 2622 Finished Goods 13374 7245 6506
Work-in-progress 595 784 871
The increasing component of raw materials in inventory is due to the fact that the company has gone for bulk purchases and has increased consumption due to a fall in prices and reduced margins for the year. Another reason might be the increasing sales, which might have induced them to purchase more in anticipation of a further increase in demand of the product. And the low composition of work-in-progress is understandable as because of the nature of the business firm is involved in.
To the question as to whether the increasing costs in inventory are justified by the returns from it the answer could be found in the HCL retail expansion. HCL caters to the need of the two separate
a) Institutions for which they manufacture against orders and, b) Retail segment of the market.
They are more into retail than earlier and at present more than 650 retail outlets branded with HCL sign ages and more are in the pipeline
The company in order to meet its raw materials requirements could have gone for frequent purchases, which would have resulted in lesser cash flows for the firm rather than the high expenditure involved when procuring in at bulk. The reason why the firm has gone for these bulk purchases because of the lower margins and the discounts it availed because of procuring in bulk quantities.
A negative growth in WIP could be because:
a) The time taken to convert raw materials to finished goods is very minimal
b) This is also due to capacity being not utilized at the optimum.
ABC System: ABC system of inventory keeping is followed in the factories. Various items are categorized into three different levels in the order of their importance. For e.g. items such as memory, high capacity processors and royalty are placed in the ‘A’ category. Large number of firms has to maintain several types of inventories. It is not desirable the same degree of control all the items. The firm should pay maximum attention to those items whose value is highest. The firm should therefore, classify inventories to identify which items should receive the most effort in controlling. The firm should be selective in approach to control investment in various types of inventories. This analytical approach is called “ABC Analysis”. The high-value items are classified as “A items” and would be under tightest control. “C items” represent relatively least value and would require simple control. “ B items” fall in between the two categories and require reasonable attention of management.
JIT: The relevance of JIT in HCL Info system can be questioned. This is because they procure materials on the basis of projections made at least two or three months before. Even at the time of procurement they ensure that they procure much more than what actually is required by the firm that is they hold significant amount of inventory as safety stock. This is done to counter the threat involved in default and accidental breakdowns. The levels of safety stock usually vary according to the usage.
Conversion Periods Analysis
Raw Material
Particulars 20079 2008 2009
Raw Material Consumption 1176.73 682.05 592.92 Raw Material Consumption/day 3.32 1.86 1.62 Raw Material Inventory 129.29 184.53 340.08 Raw Material Holding Days 40.15 99.20 209.92
The raw material conversion period or the raw material holding cost has increased from 40 to 100 days, because in e an increase in its consumption. This indicates that the firm is able to convert the raw material at its disposal to the work-in-progress at a lesser time as compared to the last year. It would be to the benefit of the firm to reduce the production process and increase the conversion rate still as the firm is required to meet the increasing demand.
Cost of Production 191911 159651.19 113500.33 Cost of Production/day 525.78 437.4 310.95 Work in progress inventory 689.5 827.52 679.455
WIP Holding days 1.31 1.89 2.19
The work-in-progress holding time is important for a firm in the sense that it determines the rate of time at which the production process will be complete or the finished goods will be ready for disposal by the firm. The firm as it is in the
process of assembling should take the least possible time in conversion to finished goods unlike a hard core manufacturing firm, as any firm would like to have its inventory in the work-in-progress at the minimum. There would also be less of stock out costs as due to better conversion rates the firm is able to meet the rise in demand situations. More the time it spends lesser its efficiency would be in the market. Here the firm has been able to bring down its WIP conversion periods.
Finished Goods
Particulars 2006 2005 20004
Cost of goods sold 228177 178438.85 124768.92 Cost of goods sold/day 625 488.87 341.832 Finished goods inventory 10310 6875.725 5026.505 Finished goods inventory Holding
days
16 14.06 14.8
The time taken for the firm to realize its finished goods as sales has increased as compared to last year. This growth in sales could be traced back to the growing domestic IT market for the commercial as consumer segment in India. HCL has around 15% of the market in desktop and it is the market leader in this segment. So it is only natural that they are able to better their conversion rate of finished goods to sales.
Operating Cycle
Particulars 2006 2005 2004
Inventory conversion period 38 42 45
Average collection period 70 63 66
Gross operating cycle 108 105 111
Average payment period 22 23 17
Operating cycle 86 82 94
The operating cycle of the firm reveals the days within which the inventory procured gets converted to sales or revenue for the firm. This time period is of importance to the firm as a lag here could significantly affect the profitability, liquidity, credit terms, and the policies of the firm. All the firms would like to reduce it to such extend that their cash inflows are timely enough to meet their obligations and support the operations. That the firm has been able to reduce the ratio is in itself an achievement as they were having huge stocks of inventory. But the reduction in the cycle could also be attributed to the boom in the market and the growth it is expected to reach. This boom automatically ensures the demand for the finished goods and thus helping in it to garner sales for the firm.
Raw Material Consumption
Particulars 2006 2005 2004
Imported 92007 70784.27 42129.63
Indigenous 29070 27187.04 15645.51
% Imports 75.99 72.25 72.92
A major chunk of the imports come from Korea and Taiwan and is purchased in US$. The value of imported and indigenous raw material
its operation to Uttaranchal it in the present state is would be affected by a change in the import duty structure.
A major chunk of their current assets are in the form of inventory and the change in technology will invariably be a threat faced by the firm. The question of technology applying here like says a certain device going say out of fashion or outdated. For e.g. TFT monitors being in demand more than CRT.
CASH MANAGEMENT
SOURCES OF CASH:Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash!) Payables (credit from suppliers)
New equity or loans from shareholders Bank overdrafts or lines of credit. Long-term loans
If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading.
Early warning signs include:
Pressure on existing cash
Exceptional cash generating activities e.g. offering high discounts for early cash payment
Bank overdraft exceeds authorized limit. Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors
Paying bills in cash to secure additional supplies
Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).
CASH MANAGEMENT IN HCL INFOSYSTEMS:
The cash management system followed by the HCL Infosystems is mainly lock box system.
Cash Management System involves the following steps:
1. The branch offices of the company at various locations hold the collection of cheques of the customers.
2. Those cheques are either handed over to the CMS agencies or bank of the particular location take charge of whole collection.
3. These CMS agencies or bank send those cheques to the clearing house to make them realized. These cheques can be local or outstation.
4. The CMS agencies or bank send information to the central hub of the company regarding realization/cheque bounced.
5. The central hub passes on the realized funds to the company as per the agreed agreements.
6. The CMS agencies or concerned bank provides the necessary MIS to the company as per requirement.
In cash management the collect float taken for the cheques to be realized into cash is irrelevant and non-interfering because banks such as Standard Chartered, HDFC and CitiBank who give credit on the basis of these cheques after charging a very small amount. These credits are given to immediately and the maximum time taken might be just a day. The amount they charge is very low and this might cover the threat of the cheque sent in by two or three customers bouncing. Even otherwise the
Cash-Current Liability
Particulars 2006 2005 2004
Absolute Liquid Ratio 0.24:1 0.31:1 0.11:1
The absolute liquid ratio is the best for three years and the cash balances as to the current liability has improved for the firm. Firm has large resources in cash and bank balances. While large resources in cash and bank balances may seem to affect the revenue the firm could have earned by investing it elsewhere as maintenance of current assets as cash and in near cash assets and marketable securities may increase the liquidity position but not the revenue or profit earning capacity of the firm.
Dividend Policy-Cash Particulars 2004 2005 2006 Dividend Policy% 210 310 400 Shift in Sales 154295 199886 238136 Cash Balance 4463.43 14582.65 14529.29 Cash in Hand 118.33 128.97 128.97 57
The other notable feature in HCL statements has been the growing dividend policy of the firm. The payment of dividend means a cash outflow. Thus cash position is an important criterion at the time of paying dividends. There is a theory that greater the cash position and ability to pay dividends. The firm has adopted a policy of disbursing the revenue earned as profits to the shareholders as dividends as could be seen from the increasing % of dividends declared.
Particulars 2006 2005 2004
PBIDT 14284 15634 14523
Equity Dividend% 400 310 210
This could mean two things for the firm the amount of cash retained in the business for capital expenditure purposes are minimal or nil. But rather than investing more in plant and machine which they can at any point in time by adding on a additional line if need they would like to optimize their utilization in fixed assets at present. This also means that the percentage of cash in hand maintained by the firm as a source of liquidity could be reduced, i.e. the amount of idle cash in the business could be made to a level which the firm feels optimum.
The firm feels that they should retain cash and it would be in the interest of the firm as well as the shareholders. This would automatically mean as decrease in Earning/share (EPS)(Basic EPS declined from 8 in 2005 to 6.74 in 2006). It would prompt more of investors being interested in the shares of the company, which would boost the purchase of the securities and increase the market price/share thus being beneficial for the firm.
Cash Flows
Cash Flows 2006 2005 2004
Net Cash from Operating activities 6924 2675.57 13706.34 Net Cash from Investing activities -3515 15661.29 -2169.16 Net Cash from Financing activities -3512 -8217.68 -11412.1
The firm has disposed of investments worth around 655 Crores to meet its growing needs. The other notable feature is decline is the firm’s inflows from operations primarily due to the reason that the cash
generated from the operations is the lowest in three years. And the firm’s growing dividend policy has contributed to the outflows in financing activities.
Cash Flow in Operating Activities
Working Capital Changes
Working Capital Changes 2006 2005 2004
Trade and other receivables -14166 -14510.69 -7106.68
Inventories -5221 -2683.92 -7221.11
payables. The outflows in inventory have become as low as 37% of what it was last year despite an increase in the inventory consumption by 16.64%. The resulting reduction in the cash outflows might be because of the inventories being procured more on credit. That the cash from operations has declined has affected the current liability index of the firm.
Cash Flow in Investing Activities
Investments in Mutual Funds 2006 2005 2004
Investments (year end) 13539 12277.44 28059.88 Purchase of Investment -65992 -53075.99 -59249.81 Disposal/Redemption of
Investment
65312 65489.84 52087.36
The investments have reduced from the last year due to the redemption of investments taken place to meet various needs such as increasing demand in stock or inventory and to ensure better credit and receivables policy. We can see that the firm has in these three years increased their cash inflow from the investing activities by way of disposal of investments when in need. That is the firm has redeemed to realize cash as to meet its expanding operations, fund the inventory procurement and meet the obligations.
The investments in mutual funds are beneficial to the firm in the context that they contain interest bearing securities which add up as a source of revenue for the firm unlike cash which remains idle and unproductive when not in use. This reduction of dividend could be attributed to disposal of investments in mutual funds and subsidiary. This disposal creates a fund, which can be used by the company as and when the need arises.
Cash vs. Marketable Securities
The investment in marketable securities rather than having large cash balances in something that has been given thought for by the firm. This is because while a firm gets revenue in the form of interests by investments, it actually has to pays certain amount money to the banks for maintaining current accounts and fixed deposits usually have a longer maturity period. That is, the problem with high investments is that the opportunity to earn is lost, thus a firm has to maintain an optimal cash balance. But the investment in mutual funds or other marketable securities might create a problem of investment, as they might not be readily realizable as say liquid cash or the amount deposited in the current account. The investments in say fixed assets say may earn a fixed rate of interest but they have a maturity period attached to them.
In HCL, Standard Chartered is the concentration bank in which all the inflows from the deposit banks are concentrated and passed on to the disbursement banks for further disbursement.
Liquid Cash Balance
The liquid cash maintained in the business is only that much as is required to satisfy the daily requirements of the firm and not more. The rest of the cash is invested into mutual funds and also held in fixed deposits and current accounts.
Instruments Used
The instrument used here are primarily cheques comprising of around 97% of what is used in. The rest 2-3% comprise of the letters of credit. Thus working capital is the lifeline for every business. The main advantages of sufficient working capital are:
Ensures regular payment of salaries and wages and day to day commitments.
RECEIVABLES MANAGEMENT
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small businesses whom can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control
due to reduced cash flow and, of course, you could experience an increased incidence of bad debt.
The following measures will help manage your debtors:
1.Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves.
2.Establish clear credit practices as a matter of company policy.
3.Make sure that these practices are clearly understood by staff, suppliers and customers.
4.Be professional when accepting new accounts, and especially largerones.
5.Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc.
6.Establish credit limits for each customer and stick to them.
7.Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector.
8.Keep very close to your larger customers. 9.Invoice promptly and clearly.
10.Consider charging penalties on overdue accounts.
11.Consider accepting credit /debit cards as a payment option.
12.Monitor your debtor balances and aging schedules, and don't let any debts get too old.
Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects.
Poor collection procedures. Lax enforcement of credit terms. Slow issue of invoices or statements. Errors in invoices or statements. Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example…..
1. Longer credit terms taken with approval, particularly for smaller orders. 2. Use of post-dated checks by debtors who normally settle within agreed
terms.
3. Evidence of customers switching to additional suppliers for the same goods.
4. New customers who are reluctant to give credit references. 5. Receiving part payments from debtors.
Profits only come from paid sales.
The act of collecting money is one, which most people dislike for many reasons and therefore put on the long finger because they convince themselves that there is something more urgent or important that demand their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer.
HERE ARE FEW WAYS IN COLLECTING MONEY FROM DEBTORS:
- Develop appropriate procedures for handling late payments. Track and pursue late payers
Don’t feel guilty asking for money .. its yours and you are entitled to it.
Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for the remainder, it lessens the problem.
When asking for your money, be hard on the issue – but soft on the person. Don’t give the debtor any excuses for not paying.
Make that your objective is to get the money, not to score points or get even.
RECEIVABLES MANAGEMENT IN HCL INFOSYSTEMS:
PARTICULARS 2006 2005 2004 2003
DEBTORS TURNOVER RATIO 5.21 5.80 5.53 6.62
AVERAGE COLLECTION PERIOD 70 63 66 55
A better turnover ratio implies for the firm, more efficiency in converting the accounts receivable to cash. A firm with very high turnover ratio can take the freedom of holding very little balances in cash, as their debtors are easily realizable. In case of HCL, the collection period for the firm is 70 days.
PARTICULARS 2006 2005 2004
PROVISION FOR DOUBTFUL DEBTS(CASH FLOW) 3 49.85 25
The debts doubtful have doubled but their percentage on the debts has almost become half. This implies a sales and collection policy that get along with the receivables management of the firm.
COLLECTION POLICIES:
It refers to the collection procedures such as letters, phone calls and other follow up mechanism to recover the amount due from the customers. It is obvious that costs are incurred towards the collection efforts, but bad debts as well as
average collection period would decrease. Further, a strict collection policy of the firm is expensive for the firm because of the high cost is required to be incurred by the firm and it may also result in loss of goodwill. But at the same time it minimizes the loss on account of bad debts. Therefore, a firm has to strike a balance between the cost and benefits associated with collection policies.
The steps usually followed in collection efforts are:
Sending repeated letters and reminders to the customers Personal visits
Using agencies involved in collection process Making telephonic reminders
Initiating legal actions
Real Time Gross Settlement (RTGS)
Real Time Gross Settlement as such is a concept new in nature and though the firm uses the system with all the members of the consortium, it is still in its primal stage and will take time before all of the clients of the firm are willing to accept it. The firm has made a proposal to the consortium of the banks during appraisal for faster implementation of internet based banking facility by all the banks and adoption of RTGS payment system through net.
The debtor’s turnover ratio is completely dependent upon the credit policy followed by the firm. The credit policy followed by the firm should be such that the threat of bad debts and the default rate involved should be terminated.
