Block Finance4
Block Finance4
Block Finance4
ShortTerm
Finance
BLOCK 4
WORKING CAPITAL MANAGEMENT:
ISSUES AND PRACTICES
259
Financing of
Working Capital BLOCK 4 WORKING CAPITAL
MANAGEMENT: ISSUES AND
PRACTICES
This block contains four units, the first unit discusses the role and
contribution of SMEs in India, and the scope, and functions of financial
management in SMEs. Besides it also presents the issues relating to the
working capital management for small and medium enterprises. The second
unit explains the financing options of large and small businesses, besides the
differences between the small and large firms working capital management.
Further, it also highlights the important factors that affect the working capital
needs of large companies. In the end, it discusses the impact of COVID-19 on
large companies working capital management.
260
Working Capital
UNIT 12 WORKING CAPITAL Management in
SMES
MANAGEMENT IN SMES
Objectives
The objectives of this unit are to familiarise you:
• with the scope and functions of financial management
• role and contribution of SMEs in India
• working capital management for small business organizations
• managing working capital in small and medium enterprises.
Structure
12.1 Introduction
12.2 Small & Medium Enterprises Vs. Large Companies
12.3 Role of Small and Medium Enterprises in India
12.4 Working Capital Management for SMEs – Differential Features
12.5 Working Capital Cycle
12.6 Objectives of Working Capital Management in SMEs
12.7 Managing Working Capital
12.8 Determinants of Working Capital in SMEs
12.9 Components of Working Capital Management
12.10 Effective Working Capital Management for SMEs
12.12 Strategic Planning - Strengthen Working Capital Performance
12.13 Summary
12.14 Key Words
12.15 Self-Assessment Questions/Exercises
12.16 Further Readings
12.1 INTRODUCTION
To define Small and Medium Enterprises (SMEs), academics and policy
makers employed a range of criteria, including total worth, relative size
within the industry, number of employees, product value, yearly sales, or
receipts. The benchmarks, on the other hand, differ significantly from country
to country, and classification can be based on a company's assets, several
employees, or yearly sales. The nature of the unpredictability that SMEs
encounter sets them apart from their larger counterparts. Smaller businesses
are more likely to be reliant on a small number of consumers and have a
restricted product selection; they are therefore more vulnerable to market
instability.
261
Working Capital
Management: 12.2 SMALL & MEDIUM ENTERPRISES Vs.
Issues and Practices
LARGE COMPANIES
There are several analysts who argued that SMEs have many advantages over
their large-scale competitors because of their modern technologies, which
allow them to adjust more easily to market situations. They claim that SMEs
can withstand unfavorable economic situations because of their flexibility.
They are more labour-intensive than larger firms and therefore, they have a
relatively low cost of capital associated with job creation.
Small firms are similar to large well-established corporations, but they have a
lesser market presence. On the other hand, the larger firms must deal with a
plethora of rules and regulations that they have imposed on themselves. As a
small business owner, you'll have a lot more leeway when it comes to making
adjustments to business processes. Taking working capital management
seriously and paying attention to the intricacies of how cash flows are
handled can make the company more lucrative. This, when paired with social
networking, e-commerce, and data science, can be extremely beneficial to
small businesses.
A small or large business must be able to earn enough cash to meet its
immediate obligations and hence continue to trade. The failure of small and
medium businesses is caused by ineffective working capital decisions and
insufficient accounting information that has been cited regularly. Many
experts agree that “the smaller they are, the less efficient they tend to be.”
Although little study has been done on the SMEs sector, articles on working
capital management claim that the following distinctions in working capital
management techniques exist:
• For short-term finance, there is a growing reliance on trade credit and
bank overdrafts.
• willingness to extend overly generous credit terms to win business,
especially from large corporations
• Weak control procedures and a lack of a clear working capital
management policy.
The manufacturing and retailing firms generally hold more than half of their
total assets as current assets, even though the level of working capital varies
greatly by industry. As current assets are held in the form of inventory,
accounts receivables, bank and cash balances the percentage is even higher in
the case of SMEs, many of whom do not have long-term assets such as a
building or a vehicle of their own.
The small firms most typically pursue finance in the form of standard small
business loans. While these loans are excellent for beginning a firm,
producing an initial cash flow, and developing working capital, they can be
challenging to maintain over time. As a result, small firms’ investments can
take many different forms. In addition to standard small business loans,
they may be able to obtain funding through personal loans, such as home
equity loans. Small businesses can also fund their endeavors through their
262
vendors, such as financing equipment or using a pay-by-the-hour option, Working Capital
Management in
such as "buy now, pay later." Finally, small firms may be eligible for SMES
venture financing or government incentives under certain conditions.
Manufacturing Sector
Categories Investment in Plant & Machinery
Micro Enterprises Does not exceed Rs. 25 lakhs
Small Enterprises More than Rs. 25 lakhs but does not exceed Rs. 5
crores.
Medium Enterprises More than Rs. 5 crores but does not exceed Rs. 10
crores.
263
Working Capital
Management:
Service Sector
Issues and Practices Categories Investment in Equipment
Micro Enterprises Does not exceed Rs. 10 lakhs.
Small Enterprises More than Rs. 10 lakhs but does not exceed Rs. 2
crores.
Medium Enterprises More than Rs. 2 crores but does not exceed Rs. 5
crores.
Source: The Micro, Small and Medium Enterprises Development Act, 2006
In reality, small business owners cannot afford to ignore the working capital
management process. Furthermore, many small businesses do not maintain
accounting records for their operations. As a result, without proper
accounting records and information, SMEs have a difficult time
distinguishing between their working capital and earnings. As a result of this
issue, SMEs frequently fail a few years after they are founded. As a result,
the goal of working capital management is to keep net capital at a level that
maximizes the wealth of the firm's owner. Apart from that, there are several
other problems to consider when it comes to working capital management:
ii) Many SMEs struggle to manage their working capital because they lack
the resources to adequately manage their trade debtors. Small businesses
frequently operate without a credit control department. As a result, both
knowledge and the information needed to make smart decisions about
sales terms and other matters may be unavailable.
iii) SMEs lack effective debt procedures, such as timely invoicing and
regular statement distribution. Where there is a sole concern for
expansion, this tends to increase the chances of late payment and
defaulting debtors. To boost sales, SMEs may be willing to lend credit to
consumers who pose a high risk of default. While this type of issue can
occur in any size business, it is more common in smaller businesses.
264
iv) When negotiating financing terms with bigger businesses, SMEs will Working Capital
Management in
frequently find themselves in a disadvantaged position. Furthermore, SMES
when a major customer exceeds the conditions of the credit, the small
supplier may be hesitant to pursue payment from the consumer for fear
of losing future sales. SMEs appear to have a substantially higher
proportion of past-due loans than bigger corporations.
v) The SME owners and managers are not always aware of the expenses of
keeping too much stock as well as the costs of holding too little stock.
Because an effective inventory management system necessitates efficient
planning and budgeting processes, accurate sales projections or budgets
should be provided for stock ordering purposes.
vi) It was also found that cash balance was generally proportionately higher
for SMEs than for large businesses. Again, more than half of the SMEs
had regular surplus cash balances. Although finance, and specifically
working capital, has been highlighted as one of the key impediments to
small business growth, current understanding does not address the
specific difficulties or intricacies of the obstacles that small business
owners have in managing working capital.
Activity 12.1
You are required to approach a small business firm of your choice and
discuss the policies and procedures followed in the sphere of working capital
management.
…………………………………………………………………………….
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There are three phases to the operation cycle. Cash is transformed into
inventory in phase one, which comprises purchasing raw materials, 265
Working Capital converting raw materials into work-in-progress, and finished goods, and
Management:
Issues and Practices finally transferring items to stock after the production process. This phase is
shorter in trading companies that are usually modest in size since there is no
manufacturing activity and cash is directly converted into inventory.
Accounts Accounts
Receivable Payable
Production
i) Working capital and the liquidity of the company are inextricably linked.
As a result, good working capital management ensures that the company
266
has enough cash on hand to meet its short-term obligations and run its Working Capital
Management in
day-to-day operations. SMES
ii) There should be a link between profitability and working capital as well.
Because of the cost of financing the firm's current assets, the amount of
capital has an impact on its profitability and working capital.
iii) There is evidence that many SMEs are poor at managing their working
capital, which has been highlighted as a primary reason for their high
failure rate when compared to bigger enterprises.
Working Capital
Requirement
269
Working Capital
Management: Control and The importance of cash is not reflected in individual or
Issues and Practices Accountability organizational performance measurements.
Working capital is a complex topic with multiple functional
areas to which no single person can be assigned authority.
Are there any advantages? We will be unable to run the
Advantages firm on a day-to-day basis if we restrict liquidity.
Are the advantages long-term? It can control working
capital levels after the fiscal year, but they quickly climb
again.
271
Working Capital iii) Financial Leverage: Firms with more physical assets may have lower
Management:
Issues and Practices expenses when raising capital to invest in current assets, which may
increase the cash conversion cycle in small businesses. As a result, in
small businesses, physical asset investment is positively connected with
working capital size. Because of lower funding costs due to greater
physical assets, they may be able to invest more in working capital.
Behavioural Biases
• Self-Attribution Biases
• Overconfidence Biases
• Loss Aversion Biases
• Anchoring Biases
272
Working Capital
12.8.2 Owner Specific Factors Management in
SMES
i) Gender of Manager: It is a well-known truth that human attitudes and
behavior influence financial decision-making. Furthermore, due to their
attitudinal differences, males and females have dramatically different
risk-taking capacities. Females were discovered to be more risk-averse
than their male counterparts, who have higher risk tolerance. Males and
females have different risk perceptions, which influences their decision-
making. Female business managers are also more likely than male
business managers to experience financial difficulties.
ii) Education of Manager: Highly educated persons are thought to make
more informed decisions and make decisions based on analytical
reasoning. Managerial education is considered a critical component for
increasing productivity in a fast-changing environment. People with
higher education have stronger problem-solving skills and are more
adaptable to change than those with lower education. In terms of
working capital size, it has been discovered that SME owners/managers
with higher education are better equipped to manage their working
capital. In addition, skilled SME managers can effectively control
inventory levels using computerized accounting systems.
When a company runs out of inventory, it risks losing sales and losing
money that could have been generated through sales. If the company's
product is specialized, the consumer may have to wait for it, which is
less serious. If a company's products are homogeneous, buyers can
simply locate them elsewhere, which causes the company to lose clients
to its competitors. When the company is in a slump, however, it may be
difficult to acquire another customer, resulting in a higher economic
impact. If it is a manufacturing company, a shortage of raw materials
will disrupt production, resulting in idle time and overheads that aren't
incorporated into the product.
Activity 12.2
ii) Identify the type of inventory costs being incurred and assess the cost of
carrying inventory to obtain the optimal inventory.
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i) Influence
The following Table-12.2 shows how trade receivables management
strategies affect a company's commercial activities:
ii) Protection Against Bad Debt: Senior managers should evaluate the
administrative costs of debt collection, how the policy could be
implemented efficiently, and the costs and impacts of loosening credit
276 when formulating a trade receivables management policy. Longer
lending periods may boost turnover, but they also raise the chance of bad Working Capital
Management in
debts. In most cases, the cost of rising bad debts, as well as any SMES
additional working capital necessary, should be less than the increased
profits earned by increasing turnover. Many small businesses have failed
as a result of late payments from consumers. However, a solid credit
management system can help a company lower the risk of bad debts.
There is bad debt insurance available, which can be acquired through brokers
or intermediaries. The full turnover insurance will protect any debt that is less
than the agreed-upon amount from non-payment. Specific account insurance,
on the other hand, allows a corporation to protect essential accounts from
default and can be utilized for significant clients. Furthermore, cash discounts
may encourage early payment, but their cost must be lower than the total
finance savings resulting from lower trade receivables balances, any
administrative or financing savings resulting from shorter trade receivables
collection periods, and any benefits from lower bad debts.
Activity 12.3
ii) The techniques the firm has been following to minimize the bad debts on
its credit sales?
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iii) Finally, many small businesses are fast expanding and are at risk of
running out of funds. Increase in inventories and accounts receivable are
required to meet rising sales, depleting the company's cash reserves.
Influence
The internal and external influences on a company’s cash balance are now
detailed in the following Table-12.3.
278
Working Capital
Profitability: Companies with excess Inflation: Working capital Management in
cash must maximize the return on their requirements will be increased SMES
cash investments. Cash management at during periods of high inflation.
a loss-making company focuses on This is especially true when a
balancing liquidity and does not have company is profitable, as the cost
to worry about liquidity issues until of replacing a capital, expenses,
cash flows are positive. and assets may outpace the cash
Strategy: A growing company generated by the sale of older
demands capital at all times, which has things.
implications for cash flow. When the
expansion is not properly financed and
liquidity is a significant concern, the
company is said to be overtrading. The
capital structure chosen will have a
financial impact. Interest must be paid
on the debt capital, as well as capital
redemption. How capital is repaid is
determined by the type of debt.
Activity 12.4
ii) The main sources and types of income and the procedures that are
followed for their accounting, collection, and deposits of cash receipts?
…………………………………………………………………………….
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279
Working Capital
Management: 12.10 EFFECTIVE WORKING CAPITAL
Issues and Practices
MANAGEMENT FOR SMEs
Many SMEs owners/managers, in reality, run their businesses through trial
and error. They frequently focus on innovation and sales, but they are less
strict when it comes to financial management, particularly working capital
management. They believe that making money is the most important thing,
but this is not always the case. During the growth phase, they may run out of
funds needed to fund operations, activities such as payroll, rent, and payable
accounts.
12.13 SUMMARY
Small businesses frequently rely on a small number of customers and have a
restricted product selection; as a result, they are more vulnerable to market
volatility. In India, this sector contributes significantly to socio-economic
development and provides a big number of jobs at a low capital cost as
compared to the larger ones. The inability of SMEs to efficiently manage
their working capital is the primary cause of high failure rates. Using various
working capital management tactics in conjunction with technological
solutions would undoubtedly increase the profitability of these small
businesses.
Though there has always been a significant variation in working capital
performance between small, medium, and big businesses, the COVID-19 has
had an even greater impact on small businesses' working capital
management. The small businesses' cash-to-cash cycle deteriorated as a result
of the epidemic, even though they lengthened their payables cycle to protect
liquidity.
Stock-Out: It is when there aren't any things of a certain type available for
purchase. Overstocks, in which too much merchandise is kept on hand, are
the polar opposite of stockouts.
Just-in-Time: It is a management method that connects raw-material orders
from suppliers with production schedules directly. This method is used by
commercial enterprises to boost efficiency and reduce waste by obtaining
products only as needed for the production process, lowering inventory
expenses.
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Working Capital
UNIT 13 WORKING CAPITAL Management in
Large Companies
MANAGEMENT IN LARGE
COMPANIES
Objectives
The objectives of this unit are to familiarise you:
• with the financing options of large and small businesses.
• differences in small and large firms working capital management.
• factors affecting the working capital needs of large companies.
• impact of COVID-19 on large companies working capital management.
Structure
13.1 Introduction
13.2 Significance of Working Capital Management
13.3 Large and Small Firms - Financing Options
13.4 Differences in SMEs and Large Companies Working Capital
13.5 Factors Affecting Large Companies Working Capital Needs
13.6 Impact of COID-19 Pandemic
13.7 Working Capital Efficiency Improvement– During Pandemic
13.8 Strengthening Operational Agility – Strategic Partnerships
13.9 Summary
13.10 Key Words
13.11 Self-Assessment Questions/Exercises
13.12 Further Readings
13.1 INTRODUCTION
Working capital management is one of the most critical aspects of day-to-day
business management. Working capital management is a fictional area of
finance that encompasses the firm's entire current account. It is concerned
with the link between a company's short-term assets and obligations. The
purpose of working capital management is to ensure that a company can
continue to operate and that it has enough cash on hand to pay down short-
term debt and cover upcoming operating needs.
Some multinational corporations have negative working capital, meaning that
their short-term liabilities exceed their liquid assets. Behemoth firms with
great brand recognition and strong selling power are typically the only
entities capable of remaining solvent in these conditions. Such businesses can
easily raise additional funds by repurposing monies from other operational
silos or obtaining long-term debt. Even if their assets are locked up in long-
term investments, houses, or equipment rents, these companies can readily
satisfy short-term expenses.
285
Working Capital Though most firms seek to keep their working capital positive all of the time,
Management:
Issues and Practices high working capital can signal that a company isn't investing its excess cash
wisely, or that it's sacrificing development possibilities in favor of liquidity.
To put it in another way, a corporation that does not invest its cash wisely
may be doing itself a disservice. Excessively high networking capital could
indicate that the company is investing more in inventory or that it is slow to
collect its debts, both of which indicate diminishing revenues and/or
operational inefficiencies.
As working capital volume can fluctuate significantly over time and differ
from one firm to another firm, it is critical to consider this metric in a
broader, more holistic context. When evaluating financial stability based on
networking capital levels, the industry, firm size, growth stage, and
operational model of the particular business must all be considered. In some
businesses, such as retail, a large amount of working capital is required to
keep operations running smoothly throughout the year. Others, if they have
consistently steady revenues and expenditure, as well as dependable business
strategies, can run well with relatively modest working capital.
Working capital management is a collection of activities carried out by a firm
to ensure that it has adequate resources to cover day-to-day operational
expenses while also ensuring that resources are invested productively. It is
significant because the company has sufficient resources for its everyday
operations, ensuring that the company's existence is protected and that it can
continue to operate as a continuing concern. Due to lack of cash, unregulated
commercial credit rules, or limited access to short-term financing, the
company may need to be restructured, assets sold or even liquidated.
Working capital management is critical for all businesses, whether small,
medium, or big, and has a significant impact on their performance. This
working capital management consists of management of liquidity, inventory,
bills receivables, accounts payables, and short-term debt management as
shown under:
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Working Capital
13.2 SIGNIFICANCE OF WORKING CAPITAL Management in
MANAGEMENT Large Companies
Activity 13.1
You are required to approach two business organizations of your choice; one
is large and another one is small and lists out their differential sources of
working capital finance.
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Funds Arrangement
i) Larger companies indeed have greater assets. While those assets might
288 be used as collateral, which is certainly a significant benefit, they can
also be sold in a crisis. As a result, a financier understands that if a firm Working Capital
Management in
has a lot of assets, it may simply sell one of them to receive the money Large Companies
it needs.
iii) The larger corporations have a stronger reputation than the majority of
smaller corporations. In this scenario, just having a good reputation can
be enough of a guarantee. Few individuals would disagree, for
example, that Coca-Cola or Shell Oil stock is a lousy investment, at
least in the near run. The reason for this is that these companies have
reputations strong enough that it would be difficult to imagine them not
performing well. Smaller businesses, such as Ron's Home
Improvement, do not have access to this benefit.
iv) Another significant distinction between large and small business
funding choices is that larger firms can be more discriminating. Not
only will a larger company be seen as a good candidate for a variety of
funding solutions — and will receive several offers to that end. They
can, however, take several financing choices, working with one bank
for one purpose and another for another.
v) Because larger companies have less perceived risk and greater proof of
their financial status, they will be able to acquire funding at a cheaper
rate than their smaller competitors.
vi) Small business entrepreneurs frequently require some type of capital to
start their business, expand it, or even keep it afloat when times are
rough. While funding is frequently required, it can be difficult to secure
and can put them in a financial bind. Unlike major corporations, small
businesses face a variety of risks when it comes to funding.
Size of Debt
If you borrow more money to start a business, you may find it challenging
to honor the interest payments. You may not have enough finances for
marketing or supplies since the monthly installments required to repay the
loan are so high. Small investors, rather than large ones, may find a high
debt level unappealing.
Relinquishing Control
Some types of financing may require you to give up some influence over
your activities. For example, if we choose to go with equity financing,
which involves taking a loan in exchange for a share of the company's
ownership and giving the investors a role in how the company is run. This 289
Working Capital can negate the purpose of starting a firm in the first place for small business
Management:
Issues and Practices owners.
Reluctance to Retire
Those who start a small business later in life may be forced to spend cash
set aside for retirement to meet the needs of the firm. If the firm fails, it will
loose not just the business but also the chance to retire at a certain age. As a
result, individuals may be obliged to work much beyond the typical
retirement age or beyond their time of retirement.
Personal Relationships
The aspiring small firms indeed borrow money from relatives or friends to
get a low-interest rate or as a last resort. If these firms collapse or their
owners fall behind on payments, their connections may be in dispute. Even
if a bank loan is arranged, the stress of having to repay the loan may cause
affect personal relationships.
Losing Assets
When we apply for a small business loan from a bank, we are typically
required to put up some form of collateral, such as a car or even our home,
to secure the loan. If the company fails to make it, it will also risk losing
some of the personal property of the owners of the small firms. Whether a
firm is large or small, finance is critical to its growth, expansion, and
adoption of new organizational techniques. To choose which source of
financing best meets the business needs, it is necessary to have adequate
knowledge about the numerous sources of finance.
Resources of Individuals
Using personal funds to finance a business is a direct approach to doing so.
This can be done by putting savings toward business expenses, taking up a
line of credit, cashing out retirement assets, or borrowing money from
friends or relatives. In case of small businesses, the majority of new
enterprises are self-funded. This option of finance is highly beneficial
for a company since it has more control over the repayment alternatives.
For example, paying a relative back can be negotiated, whereas borrowing
money from a financial institution is subject to its payback terms.
Many people dislike the word debt, although it is a completely typical way
to fund the purchase of assets or to utilize as a backup for short-term cash
flow problems in business. In some ways, debt financing is superior to
equity financing because you do not have to give up any ownership when
you borrow money rather than take it from an investor. Small firms,
particularly young enterprises, have fewer debt funding possibilities than
larger or more established organizations.
Borrowing
A business loan is often the most obvious source of debt financing. Small
290 business owners frequently borrow money from friends and family, but if
you have collateral to put up for the loan, commercial lenders are a choice. Working Capital
Management in
If you are just starting, you may have to put your assets, such as your home, Large Companies
on the line. Once the business is established, you may be able to pledge the
assets of the company itself.
Installment Purchases
A business firm that takes a mortgage on a building buys a vehicle with a
car loan, or purchases equipment with dealer financing is doing nothing
more than acquiring debt financing. Someone - a bank, a loan firm, or the
asset's actual seller - is putting money upfront for you to buy the assets. The
capacity of new businesses to purchase assets with debt may be influenced
by the owner's credit rating. A mature company with a credit rating is more
likely to be able to obtain funding without the help of the owner.
Trade Credit
Your vendors are the ones who will provide debt financing, even if it is just
for a short period, using trade-credit — "buy now, pay later" contracts with
suppliers. You have a month's worth of debt financing for the cost of
inventory if you receive an order with a 30-day payment period. A small
business that is just getting started may not be able to get trade credit right
away. It will always have to pay in advance or on delivery until it can show
suppliers that it has the funds to satisfy its obligations.
Bonds
Small firms do not consider using bonds to raise funds for long-term
investment. Even so, it is something to keep in mind when the company is
well-established and needs funding for expansion. The municipal bonds can
be sold to fund the small business ventures, and the money created by those
initiatives can be used to repay the bonds. While some small businesses
acquire funds by selling bonds themselves, such bonds often have to pay a
high rate of interest and are labeled "junk bonds" due to the risk involved.
Managing Liquidity
Liquidity management guarantees that the organization has enough cash on
hand for both routine operations and unforeseen expenses of an acceptable
magnitude. It is also significant since it influences a company's
creditworthiness, which can decide the future of a corporation. Other factors
being equal, the lesser a company's liquidity, the more probable it is to
encounter financial difficulties. On the other hand, too much capital parked
in low or non-earning assets may indicate poor resource allocation. As a
result, adequate liquidity management manifests itself in an acceptable level
of cash and/or an organization's ability to generate cash resources swiftly
and efficiently to finance its business demands.
Inventory Control
Inventory management seeks to ensure that the company maintains an
acceptable inventory size to deal with normal operations and demand
fluctuations without overinvesting in the assets. An excessive volume of
inventory implies a large quantity of capital is invested in it. It also raises
the possibility of unsold inventory and probable obsolescence diminishing
inventory value. Inventory shortages should also be avoided, as they will
result in lost revenue for the organization.
Activity 13.2
i) List out the items of working capital in a large organization, e.g.,
inventory of raw material supplies, stores, etc.
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ii) Identify the terms of credit of sales in your selected large firm, and the
procedure that has been followed in the collection of bills, its accounting,
and deposit of bills in banks.
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iii) What is the amount of revolving fund or working capital that the selected
organization maintains to pay for the operating expenses?
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…………………………………………………………………………….
The epidemic has hurt working capital cycles in a variety of industries around
the world, and India is showing a similar pattern. On a year-over-year basis,
firms in India saw their cash-to-cash cycle deteriorate by six days in the year
ending 30 April 2021. The decline was fueled by declining receivables and
inventories. To preserve liquidity, a huge number of companies have
proactively extended their payables cycle. Numerous levers may be used to
optimize working capital, freeing up cash to manage the disruption and
assisting organizations in recovering quickly from the crisis.
Activity 13.3
You are required to meet the finance manager of a large company and
discuss the impact of the COVID-19 Pandemic on its working capital
management.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
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…………………………………………………………………………….
294
The Chemical firms benefited from a diverse product portfolio and skills, Working Capital
Management in
which allowed them to manage inventory more effectively. Further, the Large Companies
Cement and Building products firms made deliberate decisions to avoid
selling items on credit and instead focus on collection activities, which
helped them mitigate the pandemic's impact on their working capital. In
addition, the disruption caused by the pandemic led to an increased demand
for technology solutions, such as collaborative and digital tools. This led to
an increase in the revenues for the Technology sector, hence improving the
cash-to-cash cycle for the majority of the companies.
The non-listed companies, on the other hand, have a higher cost of capital for
financing their activities. It is realistic to anticipate that non-listed companies
benefit more from a stronger focus on working capital management. As a
result, it is thought that listed companies are more efficient in their working
capital management, whereas non-listed enterprises benefit more from better
working capital management.
As a result of the Covid-19 outbreak, businesses in a range of industries have
experienced a slew of working capital challenges. Economic instability
lingers in, forcing businesses to discover new ways to fund working capital to
stay afloat. Firms that focus on inventories, payables, receivables, and short-
term commitments are best positioned to manage proper cash flow.
13.9 SUMMARY
Cash, trade receivables, trade payables, short-term finance, and inventory are
all part of working capital management, which ensures that a company has
enough resources to function efficiently. Cash levels should be sufficient to
meet routine or modest, unanticipated demands, but not so high as to cause a
wasteful capital allocation. Similarly, credit should be handled wisely to
strike a balance between the requirement to continue sales and the need to
retain positive client relationships.
Managing short-term debt and accounts payable should allow the company to
attain sufficient liquidity for both routine operations and unforeseen needs
without putting the company at undue risk. Furthermore, inventory
management should ensure that there are sufficient products to sell as well as
materials for the company's manufacturing processes while preventing
excessive buildup and obsolescence. As a result, large firms have a huge
opportunity and need to enhance their working capital operations, which may
help them increase profitability and efficiency across the board.
Covid-19 has caused significant disruption in working capital management,
resulting in several issues in working capital management. As a result, amid
such exceptional circumstances, the importance of saving currency has
become crucial. In light of the COVID-19 epidemic, executives must begin
297
Working Capital planning for the future immediately. As a result, organizations must be
Management:
Issues and Practices willing to act as they face progressively more difficult financial decisions for
which technology, automation, and other methods can be used to increase
working capital efficiency.
Credit Terms: These are the conditions of payment specified on the invoice
at the time of purchase. It is an agreement between the buyer and the seller
regarding the timing and payment of products purchased on credit.
Cash Conversion Cycle: The cash conversion cycle (CCC) is a metric that
measures how long it takes a company to convert its inventory and other
resources into cash flows from sales (measured in days).
Endogenous: Endogenous factors are those factors that affect a single
product. Many businesses have trade cycles, with stronger demand at certain
times and reduced demand at others. As the market demand grows, prices
may rise as well. As a result, these factors influence business output,
efficiency, growth, profitability, and so on.
Exogeneous: Exogenous elements are external elements that have an impact
on the business. These include external business shocks, such as the
economy, federal taxes, interest rates, foreign policies, and so on.
Liquidity Management: It refers to a company's ability to meet financial
obligations via cash flow, funding operations, and capital management in
general. It can be difficult because income and cost-generating activities,
capital and dividend plans, and tax strategies all have an impact.
Trade Credit: It is a sort of business financing in which a customer can buy
products or services now and pay the supplier at a later time. Businesses can
use trade credit to free up cash flow and finance short-term expansion.
Trade Receivables: The sum due to a business by its customers following
the sale of products or services on credit is known as trade receivables.
They're also known as accounts receivable, and they're listed on the balance
sheet as current assets.
Khan M.Y., Jain P.K., 2002. Cost Accounting and Financial Management,
Tata McGraw Hill (Chapters 11-16).
Srinivasan S. (1999). Cash and Working Capital Management, Vikas
Publishing House Pvt. Ltd., Mumbai.
Van Horne, J.C. and Wachowicz, Jr., J.M. (2009) Fundamentals of Financial
Management, 13th Edition, Harlow: FT Prentice Hall.
Audio/Video Programs
Videos on: Working Capital Management, & Unique Enterprises: A Case
Study
299
Working Capital
Management: UNIT 14 WORKING CAPITAL
Issues and Practices
MANAGEMENT IN MNCS
Objectives
After going through this Unit, you will be able to:
• Understand the International Environment under which MNCs carry out
their operations.
• Develop an idea as to diverse risks associated with the management of
working capital.
• Know the issues involved in the transfer of funds from the host country
to the home country and vice-versa.
• Examine the policies and practices followed by the MNCs in managing
individual components of working capital, viz., inventory receivables,
and cash.
• Gain an understanding of the diverse sources of working capital
available to MNCs.
Structure
14.1 Introduction
14.2 Special Issues of concern: Operational Environment
14.3 Cash Management
14.4 Receivables Management
14.5 Inventory Management
14.6 Summary
14.7 Key Words
14.8 Self-Assessment Questions
14.9 Further Readings
14.1 INTRODUCTION
After the setting in of the New International Economic Order (NIEO) with
the signing of the new General Agreement on Tariffs and Trade (GAAT) by a
majority of the countries in the world and the funding of the World Trade
Organisation and the permission accorded to China to Global Trade, there
had been a sea change in the international business environment. The number
of companies carrying on their business beyond the home country has been
on the rise constantly. At the beginning of the latter half of the previous
century, companies incorporated in countries such as USA, UK, Germany,
and Japan used to set up manufacturing and trading facilities outside their
country of origin. Thus companies like Unilever, Coca-Cola, Johnson &
Johnson, L & T, etc., had business locations in many countries in Asia,
including India. The scenario got dramatically altered with the entry of
companies from South Korea, Singapore and China. China’s growth story is
300
very envious. It has become a global power in scale with varying degrees of Working Capital
Management in
integration. With just 2 percent of the share of Global GDP in 1990, China MNCS
got it expanded to about 16 percent now. It took over USA, to become the
world’s largest economy in terms of the Purchasing Power Parity (PPP) terms
(2014). China’s GDP is 66 percent of the USA in 2018. As per the study
conducted by McKinsey Global Institute on “China and the World: Inside the
Dynamics of a Changing Relationship” (July 2019), China occupied 11
percent of global trade in goods and 6 percent in services; having 110
companies on the list of Fortune 500. These companies earn about 20 percent
of their revenues from abroad. China is now one of the top 3 in terms of
capital flows across the world. It is the second in terms of its spending on
Research and Development, next only to the USA. It has 802 million Internet
users, with about 20 percent of USA-cross-border data flows. It is no surprise
to learn that more than 30 percent of smartphones used in India, Malaysia,
and Africa are made in China. Even countries like South Korea, Singapore,
and Malaysia could make rapid strides in terms of expanding their global
operations. The products manufactured by Korean companies like Samsung,
Hyundai, L G, and Kia are very popular in India. The same is true in respect
of many other companies originating from nearby Asian countries.
While it was common during the Nineteen Seventies and Eighties to acquire
Indian firms by the MNCs of Foreign Origin. Indian companies too have
started foraying into the advanced countries through collaborations and
acquisitions. Indian companies having huge cash surpluses and strong bottom
lines are now eyeing foreign companies for acquisition. During the period of
six years from 2015 to 2020. There were 910 outbound acquisitions by Indian
companies (the highest of 183 recorded in 2018) involving a deal value of
$33.5 billion. Most of these deals have happened in the sectors like
Pharmaceuticals, Chemicals, and IT Services. The most notable among these
deals are: (1) Haldia Petrochemicals and Rhone Capital LLC acquiring
Lummus Tech for $2,725 million; (2) HCL Technologies taking over DWS at
$137.5 million; (3) Tech Mahindra acquiring Zen 3 Info solutions Inc at $64
million; (4) Mastek gaining Evolutionary Systems Arabia-West Asia Biz at
$65 million and (5) Infosys taking over Kaleidoscope Innovation at $42
301
Working Capital million. These developments emphasize the fact that things are going global
Management:
Issues and Practices and even Indian companies are coming off age and are stabilizing,
necessitation the need to improve operational efficiency by focusing attention
on the working capital and fixed capital management.
Currency risks are attendant to the variations in the Exchange Rates. For
a variety of reasons, the currency values of the countries will be
changing. Such reasons may include economic slowdown, political
instability, aggression from outside, etc. Moreover, currencies of a few
countries are only accepted as ‘International Currencies’ like the Dollar
(USA), Euro (Europe), Yen (Japan), and Yuan (China). It has become
customary to express prices of goods and services for sale in other
countries in US $. This is true in the case of India also.
302
Tax policies and procedures are yet another important issue that needs to Working Capital
Management in
be taken into consideration by companies. These are akin to an MNCS
individual country. Taxation is one regulatory tool that is handy to the
Governments in regulating the inflow and outflow of funds.
303
Working Capital • Services involving private currencies, if required and subject to home
Management:
Issues and Practices country and host country regulations.
• Instant Payment Services
To realize these objectives, companies need to regulate both the cash inflows
and outflows. Increasing the cash inflows by an MNC involves setting up a
proper method of collection of sale proceeds. In the case of domestic
companies, it is said that the ‘thumb rule should be to follow the system of
decentralized collection mechanism. In the case of an MNC, it would be
through its subsidiaries and affiliates. Each unit in the host country is
independent. And the ‘terms of trade’ are governed by the industry practices
of that country. The MNC may be hard in a position to alter them
significantly. Changing values of the currency due to fluctuations in the
Exchange Rates are to be taken into consideration. A few issues that need to
be cared for are:
• The MNC may permit to hold the cash in the currency of the Host
Country and also make investments for the same from time to time.
• The firm may decide to centralize all investment decisions and thus
instruct every subsidiary unit to transfer the surplus to the home country.
However, the transfer of income/surplus will be subject to the host
country’s Foreign Exchange Management guidelines.
305
Working Capital • Minimisation of transaction costs involved in the currency conversions,
Management:
Issues and Practices calls for holding adequate cash balances in the currency of the host
country for immediate and future payments.
The only thing that Netting proves ineffective is when there are frequent and
multiple changes in the current rules of the host countries and failure of the
law and order and the ruling Government due to internal or external
disturbances.
To take an example, suppose XYZ Ltd., sells $100 million worth of goods to
its subsidiary, ABC Ltd. This subsidiary sells the same to another subsidiary
PQR Ltd. This PQR sells the same to the parent XYZ Ltd. If this is the
network of transactions, under the multi-lateral netting system, the inter-
company transfers get eliminated, as shown below:
XYZ Ltd.
$100 Million
307
Working Capital Under the netting system, a matrix of receivables and payables is prepared to
Management:
Issues and Practices arrive at the net receipts or payments. Suppose a USA parent company has
subsidiaries in France, Germany, UK, and Italy. For the netting purpose, the
transactions that happened among all these affiliates are converted into
common currency, say US Dollar, and then the netting process is followed.
Imagine the following transactions:
Paying Affiliate
France Germany UK Italy Total
France -- 20 30 50 100
Germany 30 -- 20 40 90
Receiving
UK 40 30 -- 35 105
Affiliate
Italy 50 15 30 -- 95
Total 120 65 80 125 390
In the above example, without netting, the total payments amount to $390
thousand. With netting, this amount would come down to just $50. See Table
14.3 given below:
Activity-14.2
i) Try to trace the cash flows of any MNC you are aware of.
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
The gamut of additional variables that need to be taken into account by the
MNC includes currency fluctuation, exchange rate variations, restrictions on
the flow of funds beyond the boundaries of the host countries, inflation rates,
and other economic and non-economic factors. In the case of MNC, unit
receivables mainly arise due to the transit period between countries. When
the consignment is shipped to a foreign destination, there will be sometime
elapsing between the shipment and receipt. The bills drawn on the importer
can be discounted or wait for payment. Usually, the importer is advised to
open a Letter of Credit (LC) against which payment is received by the
exporter.
310
One of the services that emerged in recent times is the factoring of Working Capital
Management in
receivables. Factoring is a financial service extended by an agency (called a MNCS
factor) that buys the receivables from the seller (means the company selling
goods or services) and pays a certain amount (generally about 80 to 90
percent) of the sale amount. The factor would collect the invoice and after
deducting his agreed commission, pay the remaining amount to the company.
Factoring encourages the exporter to quote more competitive terms or to ship
goods on an open account rather than insisting on cash payment or shipment
against the letter of credit. One advantage to the exporter is that he can save
on the cost of a credit investigation, currency risks, collection risks, and
political risks also. As the agency involved in factoring is the one having the
necessary expertise in assessing all these risks, to that extent the exporter is in
a better position. Nevertheless, it is for the exporter or the MNC to decide on
hiring the services of a Factor. It has to weigh the cost of waiting for payment
from the importer and the commission to be paid to the Factor. The following
Equation is usually employed to weigh these costs:
i × n CF
CB =
(2 X r)
The MNC will have the advantage of knowing better the local practices and
tailoring the method to suit their taste
311
Working Capital
Management: 14.5 INVENTORY MANAGEMENT
Issues and Practices
There was an age-old saying that ‘inventions are the grave end of business’.
This turns out to be true in case of domestic companies as well as
international companies. Some of the finance managers have linked
inventories to that industry’s cancer. Therefore, if the inventories are not
properly handled, they leave a deleterious effect on the bottom lines of the
companies. The inventory management techniques such as EOQ, Re-order
level, ABC, etc., are akin to both types of companies. Yet, the companies
operating in more than one country need extra caution about the purchasing
policies of the host countries, changing prices, currency fluctuations,
disruptions in the supplies, changing lead times, and finally political stability
too.
Some of the usual and most frequently resorted to mistakes by the MNCs can
be said to be the following:
• Holing too much or too little inventory in one location.
• Lack of diverse inventory items.
• An Inadequate number of warehouses.
• Difficulties in the movement of inventory items from one location to
312 another location.
• Lack of coordination among the multiple locations within the same Working Capital
Management in
country and between a parent company and the subsidiaries in host MNCS
countries.
14.6 SUMMARY
Because national boundaries are fading out and economies are merging as a
single global village, opportunities for business expansion are growing day
by day. Companies are spreading their business throughout the world and
even small start-up units are also having customers across nations.
Companies are therefore emerging as global entities in more than one
country; perhaps 10-20 countries easily. Under these circumstances,
businesses are also required to adapt themselves to international management
practices and be conversant with the changing environment.
Working Capital Management is one such important area, where companies
are required to be vigilant to improve upon their profitability. Though the 313
Working Capital practices are similar to those practiced in the domestic context, there are a
Management:
Issues and Practices few additional issues that need to be cared for by the firms operating in the
international context. These relate to the changing business and industrial
policies of the host countries. Tax matters, Exchange fluctuations, restrictions
on the movement of goods and services, and finally transfer pricing. Each
component of the working capital such as cash, accounts receivable and
inventory is to be managed properly to realize the competitive advantage in
the international context. It is advised that the firms shall always try to
maximize the inflows and minimize the outflows. In the present days of
Electronic funds transfer, the cash dealings are almost instantaneous.
Therefore, firms should be well aware of the payment mechanisms and take
advantage of the advancements in technology. Cash pooling and multilateral
netting are some of the cash management tools that can be gainfully
employed. Investing idle cash is yet another important task, about which
firms should not be complacent. Firms also shall focus on the receivables and
inventory aspects to carry out the process of production without any
interruption. Some of the techniques useful in the home country may not be
easily deployable in the host countries due to divergence in practices and also
import and export restrictions. Getting the most mileage out of every rupee
invested shall be the motto of the firm dealing in an international context.
Cash Pooling: A centralized cash management system, whereby all the cash
dealings are pooled at one place or into one account.
314
Working Capital
14.8 SELF ASSESSMENT QUESTIONS Management in
MNCS
1) How does the Working Capital Management of an MNC differ from a
domestic company?
3) How did Electronic Funds Transfer system bring about changes in the
Cash Management practices?
315
Working Capital
Management: UNIT 15 CASE STUDIES
Issues and Practices
Objectives
After going through this Unit, you should be able to:
• know how the various components of working capital are managed by
the existing companies.
• get in touch with the nuances of Working Capital Management in terms
of policy and practice.
• understand how companies would be topping and mobilizing funds for
financing working capital.
Structure
15.1 Introduction
15.2 Cash Management in Paytm
15.3 Receivables Management – Case Study of TCS
15.4 Inventory Management – Case Study of Maruti Suzuki India Ltd.
15.5 Financing of Working Capital by Commercial Banks – Case Study of
SBI.
15.1 INTRODUCTION
Working Capital is a matter of great concern to any business. It is said to be
the lifeline of a business. The shorter the operating cycle of a unit, the more
significant it turns out to be. Usually, investment in Fixed Capital is a one-
time affair. Working capital is a continuous requirement which needs the
attention of the Management. It is for this reason, that working capital is also
called ‘circulating capital’. As the blood in the arteries and veins flows in the
body of an individual, working capital circulates in the firm in the same
manner. In the case of manufacturing activities like the production of Sugar,
Cement, Paints, etc., the quantum of working capital would be heavy and
significant. It is only in the case of service industries like Software
development that the working capital assumes low significance. Irrespective
of the size and proportion, working capital will have a paramount influence
on the profitability of the company. Therefore, ignoring the aspect of prudent
management of working capital would be very dangerous.
316
Case Study on Paytm is expected to throw light on the modern state-of-the- Case Studies
art cash management practices and also highlight how the traditional
practices have been going into oblivion, yielding place to the newer ones. In
the present day context, swift practices through Payment Gateway, NEFT,
RTGS, etc., have become the order of the day. In a way, the transfer of funds
across places and accounts has turned out almost instantaneous. The
discussion in this case study would take the student closer to reality.
The case study about receivables management is done on TCS Ltd. TCS is
one of the companies having more receivables. The efficiency of
management of working capital thus depends on this component. As per the
Financial Statements of the company, the size of receivables is varying
between the lowest of Rs.24,000 crores to the highest of Rs. 29,000 crores.
Even a saving of 1 percent would add a significant amount to the profitability
of the company.
The other significant component of working capital is inventory. It is thought
that the Automobile giant M/s Maruti Suzuki would fit as the ad example.
Being a Japanese sponsored company, it could put in place state-of-the-art
Japanese inventory management techniques like JIT, Kaizen, etc., As one can
observe from the case study, the company has laid down its policies and
followed them scrupulously. It is the discipline of the Japanese companies
that takes them to the top.
On the whole, it is also considered appropriate to develop a case study on the
procedures followed by the Commercial Banks in financing working capital.
In this regard, the case study of SBI is thought the ‘best fit’. SBI, being the
biggest institution in the Indian banking industry is a model for other banks
in terms of its lending and other practices. By its sheer size also, it is in a
position to take risks and experiment with new and innovative methods. After
doing away with the implementation of Tandon Committee norms for
financing working capital, banks have a lot of freedom to design their
models. In that context, the SBI case offers interesting reading.
Shareholding Pattern
Beginning with the small investment of $2 million by the promoter, Mr. V.S.
Sharma, many other venture capital firms, equity firms, and E-Commerce
giants have started evincing interest in the company. These included Sapphire
Ventures, Alibaba Group (through Ant Financial Services), Ratan Tata,
Softbank (a Start-up funding company) and Warren Buffett (through
Berkshire Hathaway).
In turn, Paytm also expanded its business through investments and
acquisitions of related businesses. In 2013, Paytm acquired Plustxt for $2
million, invested $5 million in an auto-rickshaw aggregator, called (Jugnoo),
invested in logistics Start-ups LogiNext and XpressBees in 2016, and
invested in a healthcare start-up called Q or QL, and continued this spree as
and when it found lucrative and necessary for business development.
Over the years, there had been a significant change in the shareholding
pattern of the company, and the founder, who had about 51% at the
incorporation got shrunk to about 15.73%. There was major shuffling in the
holdings by other firms too. At the end of 2020, the following is found to be a
shareholding pattern of Paytm (i.e., One97 Communications Ltd.):
1. Alibaba 38.19
2. SoftBank 19.69
9. Others 2.11
Total 100.00
318
Case Studies
The Controversies
The runaway success of the firm is not without controversies. There was an
allegation (2018) that the firm had shared the personal details of its users with
the Indian Government, violating the ‘privacy policy. There is also an
apprehension that the promoter and his relatives had nexus with the ruling
party (BJP) and thus involved in politicking through their services. In recent
times, controversy (September 2020) pertains to the violation of Google’s
Play Store Gambling Policy, leading to the removal of its ‘Paytm’ app from
the ‘Google Play Store’. There is also an apprehension that the Chinese E-
Commerce major (Alibaba) is using Paytm as the tool to get personal data of
Indians and thus increased its shareholding to a substantial level of about
40%. Nevertheless, Paytm is not on the list of 118 Apps banned by the
Central Government, on the finding that ‘One97 Communications Ltd.’ is
still an Indian Company.
It has also developed exclusive cloud services and put in place different kinds
of Apps for dealing with its customers. Business Khata is the exclusive
service extended to its customers. Financial services delivered include
Current Accounts, Salary accounts for Employees, and Credit Card Services.
The Business Model of Paytm includes the appointment of Paytm Service
Agents (PSAs) who wish to work with Paytm as the Service Partner to sell
Paytm Products. Those that intend to tie up with Paytm for its service have to
submit required documents like company proof, Business proof, PAN Card,
Bank Account details, GST details, KYC of the Authorised signatory, and
photos/videos of the place of Business.
Consolidated Standalone
(INR in Crore) (INR in Crore)
2018-19 2017-18 2018-19 2017-18
Revenue from Operations 3,232.01 3,052.90 3,049.87 2,982.22
Other Income 347.66 256.71 341.74 247.16
TOTAL REVENUE 3,579.67 3,309.61 3,391.61 3,229.38
Less: Expenses
Employee Benefit Expense 856.22 613.98 627.78 528.66 319
Working Capital
Management:
Finance Cost 16.87 18.88 16.50 18.39
Issues and Practices Depreciation and Amortization 99.51 78.88 75.81 68.92
Expense
Other Expenses 6,757.54 4,152.79 6,534.71 4,082.11
TOTAL EXPENSES 7,730.14 4,864.53 7,254.80 4,698.08
Profit/Loss before sharing (4,150.47) (1,554.92)(3,863.19) (1,468.70)
of the result of
associates and taxation from
continuing operations
Share of result of associates / 14.61 (30.81) - -
joint venture entities
Profit/Loss before exceptional (4,135.86) (1,585.73)(3,863.19) (1,468.70)
items and tax from continuing
operations
Exceptional items (82.52) 3.40 (91.02) (2.30)
Profit/Loss before Tax from (4,218.38) (1,582.33)(3,954.21) (1,471.00)
Continuing Operations
Tax Expense (6.49) 1.53 0.12 (1.01)
Profit/Loss from Continuing (4,211.89) (1,583.86)(3,954.33) (1,469.99)
Operations
Profit/Loss for the (5.31) (20.48) (5.31) (20.48)
period from
discontinued operations
Profit/Loss for the year (4,217.20) (1,604.34)(3,959.64) (1,490.47)
Total Comprehensive (4,221.81) (1,606.05)(3,959.78) (1,491.23)
Income/Loss
Loss attributable to equity (4,167.98) (1,589.46) - -
holders of the parent
Loss attributable to non- (49.22) (14.88) - -
controlling interests
Total Comprehensive (4,172.93) (1,591.17) - -
Income/Loss attributable to
equity holders of the parent
Total Comprehensive (48.88) (14.88) - -
Income/Loss attributable to non-
controlling interests
Basic & Diluted EPS for (742.17) (311.42) (705.02) (291.77)
continuing operations
Basic & Diluted EPS for (0.95) (4.06) (0.95) (4.06)
discontinued
operations
Basic & Diluted EPS for (743.12) (315.48) (705.97) (295.83)
continuing and discontinued
operations
320
Consolidated Balance Sheet of One 97 Communications Limited as of Case Studies
March 31, 2019
(Amount in INR Crore)
Notes As of As of
March 31, March 31,
2019 2018
ASSETS
Non-current assets
Property plant and equipment 1 284.28 161.13
Capital work-in-progress 51.31 18.54
Goodwill 4 293.02 312.21
Other intangible assets 4 73.45 99.02
Intangible assets under development 4.29 1.63
Investment in Joint Venture 5(a) 46.05
Investment in associates 5(b) 200.20 175.57
Financial Assets
Investments 6(b) 105.08 211.59
Loans 6(c) 107.40 32.48
Other Financial Assets 6(d) 137.07 243.64
Current tax assets 464.76 281.26
Deferred tax assets 28 3.04 0.80
Other non-current assets 8 141.04 53.68
Total Non-current Assets 1,910.99 1,591.55
Current Assets
Financial Assets
Investments 6(a) 2,897.88 4,455.09
Trade Receivables 7 258.45 504.78
Cash and Cash Equivalents 9(a) 325.47 331.84
Bank balances other than cash 9(b) 37.26 38.21
and cash equivalents
Loans 6(c) 308.83 12.86
Other Financial Assets 6(d) 1,829.29 1,106.55
Other Current Assets 8 1,413.82 635.77
Total Current Assets 6,671.00 7,085.10
LIABILITIES
Non-current Liabilities
Financial Liabilities
Borrowings 12(a) 26.96 --
Deferred Tax Liability 28 18.47 22.67
Provisions 11 11.55 9.89
Total Non-current Liabilities 56.98 32.56
Current Liabilities
Financial Liabilities
Borrowings 12(a) 695.60 242.12
Trade Payables
(a) Total Outstanding dues of 12(b) 11.26 0.88
micro and small enterprises
(b) Total Outstanding dues other 12(b) 725.39 461.80
than (a) above
Other financial liabilities 12(c) 715.41 235.80
Contract Liabilities 352.87 ---
Other Current Liabilities 13 159.17 53.60
Provisions 11 40.46 30.67
1) How do you analyze the Business Model of Paytm? Do you have any
suggestions?
2) In the light of the stiff competition among the multiple players of
payment Gateways, what kind of Cash Management strategies you can
think of for Paytm.
3) How do you look at the Ratio between Current Assets and Non-Current
Assets of the company?
4) Keeping in view the given Financials, what kind of working capital
policies do you imagine for the company?
322
Case Studies
15.3 RECEIVABLES MANAGEMENT IN TATA
CONSULTANCY SERVICES LIMITED
Introduction
The Bombay Stock Exchange (BSE) has compiled data on the Top 100
companies listed with it, based on the figures available from their latest
Balance Sheets (see Annexure-I). As per the data compiled, the Tata
Consultancy Services Limited (TCSL) has the highest Sundry Debtors
(Receivables) at Rs.28,660 crore, which is about 86% of the total Current
Assets of the company. Close to it L & T has about Rs.27,913 crore (80.6
percent) in the second place. True, that there are a few companies that had the
highest percentage of receivables such as PTC India (97.01%), NHPC
(88.27%), ITI (86.84%), Sterling & Wilson (88.16%), and McNally Bharat
Engineering (98.37%). But the size of their receivables in absolute terms is
much lower. In this regard, the Economic Times (a Financial Daily of India)
commented that the Indian MSMEs, especially Startups are choked by the
large dues to be received from the large companies, to whom they are
supplying the goods and services.
Case of TCS
Against this background, it is felt that TCS offers itself as a good case study,
in the sphere of ‘Receivables Management. TCS is a big name in the IT
Sector of India. It is the second-largest Indian company in terms of market
capitalization. In 2018, TCS was ranked eleventh on the Fortune India 500
list.
Going into the past, TCS was founded in 1968 by Tata Sons Ltd., the parent
company. Tata Sons owns about 72% of the shareholding in TCS. The
company has 67 subsidiaries and offers a wide range of IT Services to its
customers which include application software development, business process
outsourcing, capital planning, software consultancy, and also educational
services linked to IT. The company website says that ‘TCS is an IT Services,
Consulting and Business Solutions Organisation that has been partnering
with many of the world’s large businesses in their transformation Journeys
for over years. The network of TCS includes over 4.43 lakh trained
consultants in over 46 countries. The revenues of the company stood at US
$22 billion by the end of March 31, 2020. TCS is a company carrying on
excellent work to influence climate change across the world; as evidenced by
a learning place on the ‘Sustainability Indices’ by the Dow Jones, MSCI, and
FTSE.
• Contract assets are classified as unbilled receivables (the other only act
of invoicing is pending); when there is an unconditional right to receive
cash.
• The company provides for the expected credit loss in the collection of
receivables. This is done by taking into account the tagging of
receivables.
• When the company leases any asset as a lessor, the lease rents are treated
as receivables and the rate of return is computed on the net investment
made in that asset.
Other Issues
• TCS being in the leadership position is facing several challenges from its
Indian competitors like Infosys, HCL, and Wipro.
• The acquisition strategies of the company are needed to be sharpened.
There is an apprehension in the market that its surplus is being
distributed to the shareholders to satisfy them, rather than using them for
acquisition and expansion.
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Case Studies
Annexure – I: Sundry Debtors of Top 100 Companies
Sundry % of Current
S. No. Company
Debtors Assets
1 TCS 28,660.00 85.58
2 Larsen 27,912.96 80.62
3 NTPC 15,668.11 54.77
4 Infosys 15,459.00 53.27
5 IOC 12,844.09 16.66
6 Hindustan Aeron 11,583.39 36.97
7 Wipro 9,257.00 46.58
8 SAIL 8,812.39 26.77
9 NFL 7,735.33 85.62
10 HCL Tech 7,504.00 85.19
11 Reliance 7,483.00 13.67
12 BHEL 7,107.62 31.69
13 PTC India 6,787.85 97.01
14 Bharat Elec 6,732.91 55.18
15 NLC India 6,691.83 79.76
16 Tech Mahindra 6,212.00 76.98
17 Sun Pharma 6,168.13 65.23
18 Pharma 5,789.57 56.86
19 Chambal Fert 5,563.11 81.22
20 KEC Intl 5,223.41 88.28
21 BPCL 5,164.34 20.09
22 Power Grid Corp 4,867.90 41.74
23 ONGC 4,777.39 33.38
24 Dr. Reddys Labs 4,638.70 67.54
25 Rashtriya Chem 4,551.23 82.68
26 GAIL 4,546.84 54.71
27 Reliance Infra 4,106.24 94.14
28 Coromandel Int 4,040.57 59.48
29 HPCL 3,922.72 16.93
30 Enterprises 3,846.48 62.47
31 NHPC 3,818.34 88.27
32 Bharti Airtel 3,810.00 52.84
33 Lupin 3,616.33 48.82
34 Cipla 3,560.27 50.11
35 Kalpataru Power 3,517.39 76.57
36 JSW Steel 3,166.00 13.09
325
Working Capital
Management:
37 UP 3,161.00 68.13
Issues and Practices 38 Siemens 3,123.90 31.94
39 M&M 2,998.98 28.20
40 Vodafone Idea 2,919.10 53.53
41 Grasim 2,905.32 51.78
42 Redington 2,805.58 61.78
43 Rajesh Exports 2,790.24 19.17
44 ITI 2,761.14 86.84
45 GSFC 2,722.76 67.89
46 Cadila Health 2,456.70 57.99
47 NCC 2,408.26 74.33
48 United Spirits 2,283.50 54.97
49 MRF 2,257.03 36.31
50 JISL 2,232.57 70.33
51 Jain Irrigation 2,232.57 70.33
52 NMDC 2,223.71 41.65
53 BGR Energy 2,220.57 84.57
54 L&T Infotech 2,176.70 85.42
55 Adani Ports 2,132.67 32.00
56 Maruti Suzuki 2,127.00 39.66
57 Jyoti Structure 2,105.54 96.93
58 Hindalco 2,093.00 12.61
59 ITC 2,092.00 12.33
60 Zee Entertain 2,052.00 29.55
61 Bajaj Electric 2,048.99 72.03
62 Cox & Kings 2,031.32 73.74
63 ISGEC Heavy Eng 1,990.44 75.48
64 TML-D 1,978.06 21.17
65 Tata Motors 1,978.06 21.17
66 ABB India 1,947.54 44.19
67 MMTC Ltd 1,925.36 85.07
68 GE T&D India 1,898.82 72.81
69 UltraTechCement 1,848.28 30.84
70 Glenmark 1,835.24 66.47
71 Hind Constr 1,821.97 83.48
72 Apar Ind 1,803.58 55.91
73 ABB Power Produ 1,792.85 72.47
74 PC Jeweller 1,780.55 24.50
75 Sadbhav Engg 1,743.41 86.57
326
Case Studies
76 Bajaj Auto 1,725.10 55.70
77 Bharat Forge 1,654.91 57.93
78 Hero Motocorp 1,603.14 54.58
79 Petronet LNG 1,602.57 24.60
80 Alkem Lab 1,555.07 45.56
81 SpiceJet 1,545.82 87.65
82 HFCL 1,545.71 77.34
83 Sterling & Wils 1,539.76 88.16
84 Rattan Power 1,535.22 66.94
85 Divis Labs 1,533.21 45.30
86 Jindal Saw 1,532.57 38.47
87 FEL 1,520.10 55.36
88 Future Ent 1,520.10 55.36
89 BEML 1,510.37 42.65
90 Torrent Pharma 1,508.94 44.28
91 Mangalore Chem 1,446.31 75.21
92 Polycab 1,439.40 39.73
93 Mindtree 1,438.90 71.08
94 JK Tyre & Ind 1,436.03 55.71
95 Voltas 1,429.25 47.66
96 GNFC 1,413.42 55.76
97 Sterlite Techno 1,413.16 75.61
98 Bosch 1,413.00 29.53
99 Mcnally Bh Engg 1,385.32 98.37
100 Simplex Infra 1,382.73 70.02
Source: www.moneycontrol.com
327
Working Capital Annexure-II: Key Items of Working Capital of TCS
Management:
Issues and Practices
(Rs. in Crore)
study).
Inventory Management
Being a car manufacturer, materials occupy a significant part of the cost of
production. To affect, effects and gain a competitive advantage among the
players in the market, materials/inventory management assumes paramount
importance. Going by the financials of the company, the cost of raw materials
consumed formed part of 50 percent of the total expenses of the company
during 2019-20. Inventories formed part of 38.1 percent of the total current
assets at Rs.8,427 crore in the same year (see annexure-II). The CIF value of
raw materials imported by the company stood at Rs.2,488 crore during 2019-
20; which is about 77.4 percent of the inventory and 7.2 percent of the
material cost. These figures indicate the critical value of inventories to any
automobile company like the MSIL.
329
Working Capital • Bar Codes to reduce processing times, increase the accuracy of data, and
Management:
Issues and Practices speed up the operation.
• Delivery instruction system to reduce lead time and reduce the
requirement for buffer stocks.
• Just-in-Time to align raw material orders issued to suppliers with
production schedules. It is quite surprising to note that it leaves just four
hours for the supply of local items and six days for imported items. The
inventory to sales ratios is also kept low every time.
• Kanban system is put in place to control the supply chains and realize
cost savings. This is a technique designed to reduce idle time in the
production process. The main idea under this model is to deliver the
material item when the process needs it exactly at that time.
• Kaizen is the inventory management practice that the company uses for
continuous and incremental improvement in the system.
• Vendor Management is the most efficient in MSIL. This has a focus on
the suppliers. In respect of Maruti, it is found that about 70% of the
suppliers are within 100 kms radius. Components are supplied directly to
the Assembly Line; thereby reducing the packaging costs. The company
also practices the system of engaging full component suppliers, instead
of individual parts; thus, reducing the ordering costs.
• As indicated earlier, MSIL is a strong believer in localization. Its policy
is to source the maximum components of materials, almost up to 90%
from local sources. It is working relentlessly to substitute local
components in place of imported ones.
Questions for Discussion
1) Taking the MSIL as an example, give your ideas for better inventory
management.
2) Like the Japanese Inventory Management Systems, can you identify
anything of Indian origin?
3) Analyse the Financial Statements of MSIL given in the annexures to note
down Inventory Policies and Practices of MSIL.
4) Can you compare Western and Japanese Management Practices for the
betterment of the performance of a company? Where do Indian
companies stand.
330
annexure – I: Income Statement of Maruti Suzuki India Case Studies
(Rs. in Crore)
Mar’20 Mar’19 Mar’18 Mar’17 Mar’16
INCOME
Net Sales Turnover 75610.60 86020.30 79762.70 68034.80 57538.10
Other Income 3420.80 2561.00 2045.50 2279.80 1461.00
Total Income 79031.40 88581.30 81808.20 70314.60 58999.10
EXPENSES
Stock Adjustments -238.10 210.80 40.70 -380.10 6.90
Raw Material Consumed 34636.60 45023.90 44941.30 42629.60 35483.90
Power and Fuel .00 .00 .00 .00 .00
Employee Expenses 3383.90 3254.90 2833.80 2331.00 1978.80
Administration and Selling
.00 .00 .00 .00 .00
Expenses
Research and
.00 .00 .00 .00 .00
Development Expenses
Expenses Capitalized .00 .00 .00 .00 .00
Other Expenses 30525.60 26531.40 19885.40 13101.30 11184.10
Provisions Made .00 .00 .00 .00 .00
TOTAL EXPENSES 68308.00 75021.00 67701.20 57681.80 48653.70
Operating Profit 7302.60 10999.30 12061.50 10353.00 8884.40
EBITDA 10723.40 13560.30 14107.00 12632.80 10345.40
Depreciation 3525.70 3018.90 2757.90 2602.10 2820.20
EBIT 7197.70 10541.40 11349.10 10030.70 7525.20
Interest 132.90 75.80 345.70 89.40 81.50
EBT 7064.80 10465.60 11003.40 9941.30 7443.70
Taxes 1414.20 2965.00 3281.60 2603.60 2079.40
Profit and Loss for the
5650.60 7500.60 7721.80 7337.70 5364.30
Year
Extraordinary Items .00 .00 .00 .00 .00
Prior Year Adjustment .00 .00 .00 .00 .00
Other Adjustment .00 .00 .00 .00 .00
Reported PAT 5650.60 7500.60 7721.80 7337.70 5364.30
KEY ITEMS
Reserves Written Back .00 .00 .00 .00 .00
Equity Capital 151.00 151.00 151.00 151.00 151.00
Reserves and Surplus 48286.00 45990.50 41606.30 36280.10 29733.20
Equity Dividend Rate 1200.00 1600.00 1600.00 1500.00 700.00
Agg. Non-Promoter
.00 .00 .00 .00 .00
Share(Lakhs)
Agg. Non-Promoter
.00 .00 .00 .00 .00
Holding(%)
Government Share .00 .00 .00 .00 .00
Capital Adequacy Ratio .00 .00 .00 .00 .00
EPS(Rs.) NaN NaN NaN NaN NaN
Source: https://economictimes.indiatimes.com
331
Working Capital annexure – II: Balance Sheet of Maruti Suzuki India
Management:
Issues and Practices
(Rs. in Crore)
Source: https://economictimes.indiatimes.com
Asset-Based Loan (ABL) is a new facility offered to MSME firms that are
covered under MSMED Act, 2006. The ABLs are provided to all kinds of
Manufacturing and Service Units, covering wholesale, retail, trade
professionals and self-employed. Usually, the period of repayment will be 96
months. There is also a facility called Drop line OD, which can be sanctioned
for periods ranging from 12 months to 18 months – with either equated
reduction in limit or customized reduction in limit. Keeping in view the given
trends in the business and industry, SBI is providing varied types of loans,
which included working capital. A few of them spread to purposes like
Export Packing Credit, Cotton Ginning Plus, Fleet Finance, E-dealer Finance
Scheme, E-Vendor Finance Scheme, PM Mudra Yojana, Lease Rental
334
Discounting, SME E-Biz Loan, Simplified Small Business Loan, Stand-up Case Studies
India, SME Smart Score, SME Credit Card, Warehouse Receipt Finance,
Finance to Food Processing Industry, Loans to Business Correspondents, SBI
Exporters’ Gold Card Scheme, etc. SBI’s Portfolio of working capital loans
is so diverse and innovative, reflecting the pooled experience of a large
reservoir of professionals.
The swift actions of the SBI received wide acclaim during Covid-19 times,
for taking measures to process and disburse working capital loans within 5
days. The finance minister has stated, in this regard, that about 45 lakh
industrial units had got benefitted from this measure. SBI has directed the
Branch Managers to release funds in time by taking into account the difficult
times.
SBI also has the distinction of being the only Bank, having established a
special delivery mechanism for sanction and disbursement of working capital
loans. These included the establishment of a Centralized Processing Cell for a
quick assessment, sanction, and disbursal and appointment of Relationship
Managers for different categories of MSMEs to provide customized products
and services.
Questions
1) Looking into the Case Study of SBI, what kind of Working Capital
Finance policies and practices do you suggest to other Banks?
2) Should the RBI have any control over Commercial Banks in the matter
of Financing Working Capital?
Source: www.sbi.co.in
337