A REPORT

ON

“WORKING CAPITAL MANAGEMENT IN

HCL INFOSYSTEMS LIMITED”

BY

(Submitted in partial fulfillment of the requirements of

MBA program at
Jagan Institute Of Management Studies , Rohini)

SUBMITTED TO :

Mr. J.C Joshi Ms .Deepti Kakkar

Accounts Manager (PF), Faculty Guide,
HCL Infosystems Ltd. JIMS

BHAVANSHU JOSHI

FC09130

1
 CERTIFICATE

This is to certify that the project work done on “Working Capital Management at
HCL Infosystems” is an original work carried out by Ms. Bhavanshu Joshi under my
supervision and guidance. The project report is submitted towards the partial
fulfillment of two – year, full time Post Graduate Diploma in Management.

This work has not been submitted anywhere else for any other degree/diploma. The
work was carried out from 03-06-2010 to 28-06-2010 in HCL Infosystems.

Mr.J.C.Joshi Ms Deepti Kakkar

(Industrial Guide) Faculty Guide

Date:

Bhavanshu Joshi

Roll No. FC09130

2
 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.

3
 DECLARATION

I hereby declare that this project report titled “working capital management at HCL
INFOSYSTEMS is true to my knowledge and is result of my own efforts. This
project has not been submitted anywhere and I am solely responsible for the accuracy
of this project.

Bhavanshu Joshi

FC09130

JIMS

4
 PREFACE

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.

5
 TABLE OF CONTENTS

Acknowledgement

Declaration

Preface

Executive summary

1. INTRODUCTION

Introduction about the organisation

 Company’s history
 HCL at a glance
 Alliances and partnerships
 Management team
 Corporate information

Objectives

Hypothesis

2. LIETRATURE REVIEW
3. RESEARCH METHODOLOGY
Scope of study
Data source
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

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  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
 Comparing the working capital efficiency with other competitor firms
4. FINDING AND ANALYSIS
 Industry analysis
 Financial graphs
 Concluding analysis
5. SUGGESTIONS AND RECOMMENDATIONS
6. LIMITATION
BIBLOGRAPHY
APPENDIX

7
 LIST OF TABLES AND FIGURES

Table No. Name Page.

No

1.1 Highlight of HCL 11

3.2 Current assets-total asset 35

3.3 Sales-current asset 35

3.4 Current assets-fixed assets 36

3.5 Current assets-current liability 36

3.6 Inventory composition 40

3.7 Raw material composition 42

3.8 Work in progress composition 42

3.9 Finished goods composition 43

3.10 Inventory turnover ratio 44

3.11 Quick ratio 49

3.12 Cash flow 51

3.13 Working capital ratio 51

3.14 Cash flow from investing activity 52

3.15 Debtor turnover ratio & average collection period ratio 56

3.16 Secured loan 61

3.17 Unsecured loan 62

3.18 Year end commercial papers 62

4.1 Comparison between ratios of competitor companies 69

4.2 Analysis of the ratio in comparison with competitor 70

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Figure No. Name Page
No.

1.1 HCL’s area of work

2.1 Operating cycle 17

3.1 Short term-long term financing 24

3.2 Kinds of working capital 25

3.3 Permanent and temporary financing 27

3.4 Graph showing temporary and permanent financing 27

3.5 Working capital cycle 33

3.6 Inventory turnover ratio 44

3.7 Average inventory holding period 44

3.8 Quick ratio 49

3.9 Dividend 49

3.10 Cash balance 49

3.11 Average collection period 56

3.12 Debtor turnover ratio 56

3.13 Level of current assets Vs output 59

4.1 Revenue graph 65

4.2 PBT graph 66

4.3 PAT graph 66

4.4 EPS graph 67

4.5 Dividend 67

4.6 Book value 68

4.7 PE ratio graph 68

9
 EXECUTIVE SUMMARY:

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.

10
 Chapter 1:INTRODUCTION

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 and Chief
Strategy Officer, HCLTechnologies
Roshni Nadar, CEO HCL Corp
Ajai Chowdhry - Founder-Chairman and CEO,
HCL Infosystems , Vineet Nayar - CEO, HCL
Technologies. Jagadeshwar Gattu- Vise
President of HCL.
Industry Information Technology Services

Revenue US$5.0 billion (2009)

Employees 62,000+ (2010

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

11
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

An Overview About The Company

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

12
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:

Table 1.1

Y E AR HIGHLIGHTS

1976 - Foundation of the Company laid

- Launch of the first microcomputer-based commercial computer with a

1977 ROM -based Basic interpreter
- Formation of Far East Computers Ltd., a pioneer in the Singapore IT
1980 market, for SI (System Integration) solutions
- Purchase specifications demand the availability of RDBMS products on
1986 the supplied solution (Unify, Oracle).

1991 - HCL enters into a joint venture with Hewlett Packard

- HCL acquires and executes the first offshore project from IBM
1994
Thailand

1996 - Becomes national integration partner for SAP

- Chennai and Coimbatore development facilities get ISO 9001

1998
certification
- Acquires and sets up fully owned subsidiaries in USA and UK
1999
- Sets up fully owned subsidiary in Australia
- Bags Award for Top PC Vendor In India
- Becomes the 1st IT Company to be recommended for latest version of
2000
ISO 9001 : 2000
- Rated as No. 1 IT Group in India

2001 -IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001

13
 -HCL Infosystems & Sun Microsystems enters into a Enterprise
2002
Distribution Agreement

2003 - Enters into partnership with AMD

- Maintains No.1 position in the Desktop PC segment for year 2003

- Partners with Union Bank to make PCs more affordable, introduces
2004
lowest ever EMI for PC in India
- Crosses the landmark of $ 1 billion in revenue in just nine months
- HCL Infosystems & Nokia announce a long term distribution strategy
2006 - HCL Infosystems showcases Computer Solutions for the Rural Markets
in India
- HCL Forms a Strategic Partnership with APPLE to provide Sales &
Service Support for iPods in India
-HCL Infosystems wins CNBC Awaaz consumer award for personal
2007 computers
-HCL announces ‘HCL ecoSafe’ program
-HCL unveils the future of personal computing – unveils next generation,
ultra portable, sub Rs.14000/- laptops for the first time in India
2008
-for security & surveillance Launch of HCLTouch - a pioneering
initiative in the Indian ICT sector for customer care services.
-Largest selling enterprise desktop brand for the seventh consecutive year
2009 -HCL ranks No.1 Company in IT services as per DQ CSA 2009

AREA OF WORK
Figure 1.1

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The fast-pace of growth in the Indian economy has transformed the way systems and
technologies are deployed. It is seen across verticals and sectors, that organisations
are looking for efficiencies of operations through the use of technology. The more
complex systems and technologies become, the more urgent is the need to ensure their
flawless integration to deliver exceptional value to the users. To address this growing
demand HCL has reoriented its operations to focus increasingly on system integration
solutions to our customers. Our System Integration capabilities span across a diverse
range of services ranging from Consultancy, Solution Design, Selection of technology
components, Project roll outs and Operation & Maintenance services. HCL have also
developed a range of Hardware & Software products, Processes & Project
management methodologies for various customer verticals including Banking,
Financial Services and Insurance (BFSI) to e-Governance, Power ,Telecom
,Railways, Defence, Security, Education, Infrastructure, Healthcare, Retail, and Media
& Entertainment . HCL have built a model that leverages our strengths with that of
leading technology partners including -Microsoft, Oracle ,SAP ,IBM, HP
,Symantec ,Cisco ,Sun, CA and Hitachi - to roll out solutions that incorporate the best
of breed technology to meet the requirement of the consumer

i
HCL ANNUAL REPORT 2008-09

OBJECTIVE OF STUDY

15
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 objective of this project is to understand the concept of “ Working

Capital Management”.
 To understand the planning and management of working capital at HCL
Infosystems Ltd.
 To determine and analyze various ratios and hence measure the financial
soundness of the company
 To compare the working capital management of HCL Infosystems with other
competitor companies.

CHAPTER 2:LITERATURE REVIEW

16
In general, it is possible to discuss finance theory under three main threads as capital
budgeting, capital structure and working capital management. The first two of them
are mostly related with financing and managing long-term investments. However,
financial decisions about working capital are mostly related with financing and
managing short-term investments and undertake both current assets and current
liabilities simultaneously (Mueller, 1953; Scherr, 1989; Moyer et al., 1992; Pinches,
1992; Brealey and Myers, 1996; Brigham and Gapenski, 1996; Damodaran, 2002;
Aksoy, 2005). So, most of the time, it is reasonable to term short-term financial
management as working capital management (Ross et al., 2003).

Efficiency in working capital management is so vital for especially production- firms

whose assets are mostly composed of current assets (Horne and Wachowitz, 1998) as
it directly affects liquidity and profitability of any firm (Raheman and Nasr, 2007).
According to Kargar and Bluementhal (1994) bankruptcy may also be likely for firms
that put inaccurate working capital management procedures into practice, even though
their profitability is constantly positive. Hence, it must be avoided to recede from
optimal working capital level by bringing the aim of profit maximization in the
foreground, or just in direct contradiction, to focus only on liquidity and consequently
pass over profitability. While excessive levels of working capital can easily result in a
substandard return on assets; inconsiderable amount of it may incur shortages and
difficulties in maintaining day-to-day operations.

Working capital is also a major external source of capital for especially small and
medium sized and high-growth firms. These firms have relatively limited access to
capital markets and tend to overcome this complication by short-term borrowing.
Working capital position of such firms is not only an internal firm-specific matter, but
also an important indicator of risk for creditors (Moyer et al., 1992). Higher amount
of working capital enables a firm to meet its short-term obligations easier. This results
increase in borrowing capability and decrease in default risk (and consequential
decrease in cost of capital and increase in firm value). So, it is possible to state that
efficiency in working capital management affects not only short-term financial
performance (profitability), but also long-term financial performance (firm value
maximization).

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Liquidity, as a function of current assets and current liabilities, is an important factor
in determining working capital policies and indicates firm ’s capability of generating
cash in case of need. Current, acid-test and cash ratios as traditional measures of
liquidity are incompetent and static balance sheet based measures that can not provide
detailed and accurate information about working capital management effectiveness
(Finnerty, 1993; Jose et al., 1996). Formulas used for calculating them consider both
liquid and operating assets in common. However, considering operating assets like
receivables and inventories with cash and cash-equivalent assets is illogical for basic
principles of cash management. Besides, mentioned traditional ratios are also not
meaningful in terms of cash flows (Richards and Laughlin, 1980).

Drawing attention to limitations of traditional liquidity ratios, Hager (1976), Richards

and Laughlin (1980), Emery (1984a), Kamath (1989), Gentry et al. (1990), Schilling
(1996) and Boer (1999) have insisted on using ongoing liquidity measures in working
capital management. Ongoing liquidity refers to the inflows and outflows of cash
through the firm as the product acquisition, production, sales, payment and collection
process takes place over time. As the firm ’s ongoing liquidity is a function of its cash
(conversion) cycle (Pinches, 1992), it will be more appropriate and accurate to
evaluate effectiveness of working capital management by cash conversion cycle,
rather than traditional liquidity measures.

Cash conversion cycle as a part of operating cycle (Fig. 1) is an ongoing liquidity

measure developed by Gitman (1974). Closely related with operating cycle, cash
conversion cycle is, in brief, the part of operating cycle financed by the firm itself
(McLaney, 1997) and is simply calculated by adding inventory period to accounts
receivables period and then subtracting accounts payables period from it. It focuses on
the length of time between the acquisition of raw materials and other inputs and the
inflow of cash from the sale of goods (Arnold, 1998). The shorter this cycle, the fewer
resources the firm needs to tie up.

Traditional approach to interaction between cash conversion cycle and profitability

posits that relatively long cash conversion periods tend to decrease profitability. Trade
activities of a firm can be considered as a process in circulation where cash is
converted into assets and assets into cash. Cash available for trade activities of the

18
firm has an important multiplier effect due to its turnover ratio. Higher cash turnover
ratios enable managers to minimize short-term investments whose rates of return are
relatively lower compared to long-term investments and consequently increase
profitability.

Studies regarding working capital are mostly related with improving models to
determine optimal liquidity and cash balance, rather than analyzing underlying
reasons of relationships between liquidity, working capital management practices and
profitability.

Operating and cash conversion

Fig.
cycles. Fundamentals of corporate
2.1:
finance (Ross et al., 2003)

Pioneer studies of Baumol (1952) about an inventory management model and of

Miller (1966) about a cash management model may be considered as the best-known
studies in this field. Though foundations and assumptions of these models are not
well-established in terms of applicability, they inform managers about problems
related with working capital management practices. Later on, Johnson and Aggarwal
(1998), similarly, have developed a cash management model focusing on cash flows
and argued that cash collection and cash payment processes should have to be handled
independently.

As mentioned before, traditional measures of liquidity are in lack of expressing the

effects of cash flows; hence, the effectiveness (and quality) of working capital
management practices in terms of firm profitability should be revised by components

19
of cash conversion cycle. Literature review consisting some of previous studies
-though limited in scope and outnumbered-regarding with the relationship between
profitability and working capital management practices is given below.

In a study by Kamath (1989) about working capital management practices in retailing

firms, it has been concluded that there is a reverse relationship between cash
conversion cycle and profitability. The results of a more detailed study by Soenen
(1993) have shown that, in case of overlooking industrial differences, there does not
exist any statistically constant relationship between cash conversion cycle and
profitability. However, in case of considering industrial differences, the relationship
between the mentioned variables has shown dissimilarities across industries as
positive in some industries and negative in others. In another study of Shin and
Soenen (1998), a sample consisting of American manufacturing firms for the period
of 1974-1995 has been analysed and a statistically negative relationship between cash
conversion cycle and profitability has been confirmed. In a similar study to our study,
Deloof (2003) has discussed possible relationships between cash conversion cycle and
profitability by dividing cash conversion cycle into its components (inventory,
accounts receivables and accounts payables periods). Results of the study have
concluded that increases in all of these periods affect profitability negatively.
Empirical findings of Lazaridis and Tryfonidis (2006) ’s study have been similar to
Deloof (2003) ’s. According to the results of their study based on a sample of 131
Athens Stock Exchange listed companies for the period of 2001-2004, cash
conversion cycle affects profitability negatively. According to the findings of another
study from a different perspective, it has been concluded that the effect of cash
conversion cycle on profitability is stronger than the effect of current ratio on it
(Eljelly, 2004).

This study aims to analyze the effect of working capital management on firm
profitability, an indicator of short-term financial performance.

ii
http://scialert.net/fulltext/?doi=ijaef.2008.44.50&org=11

CHAPTER 3: RESEARCH METHODOLOGY

20
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

21
 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 prepration of this report:

22
  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 ,www.moneycontrol.com.

 Secondary sources like previous years annual reports, reports on working

capital for research, analysis and comparison of the data gathered.

 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, financial management

by RP Rustagi Khan & Jain, Prasanna Chandra and I.M.Pandey were
consulted to equip ourselves with the topic.

INTRODUCTION TO WORKING CAPITAL

“Working Capital is the Life-Blood and Controlling Nerve Center of a business”

23
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

Net 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

24
 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 commitment

25
 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:
Fig.3.1

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.

26
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

Fig.3.2

KINDS OF WORKING
CAPITAL

ON THE ON THE
BASIS OF BASIS OF
CONCEPT TIME

PERMANENT
GROSS NET /FIXED TEMPORARY/
TEMPORARY/
WORKING VARIABLE
VARIABLE
WORKING WORKING WORKING
CAPITAL WORKING
CAPITAL CAPITAL CAPITAL
CAPITAL

REGULAR
REGULAR RESERVE
RESERVE SEASONAL
SEASONAL SPECIAL
SPECIAL
WORKING
WORKING WORKING
WORKING WORKING
WORKING WORKING
WORKING
CAPITAL
CAPITAL CAPITAL
CAPITAL CAPITAL
CAPITAL CAPITAL
CAPITAL

27
 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.

Permanent working capital

Temporary working capital

28
 There is always a minimum level of working capital, which is
continuously required by a firm in order to maintain its
PERMANENT activities. Every firm must have a minimum of cash, stock
WORKING and other current assets, this minimum level of current assets,
which must be maintained by any firm all the times, is known
CAPITAL 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 Any amount over and above the permanent level of working
WORKING capital is temporary, fluctuating or variable working capital.
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

Fig 3.3

The permanent level is constant while the temporary working capital is fluctuating
increasing and decreasing in accordance with seasonal demands as shown in the
fig.3.4

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.

29
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL

   Solvency Of The Business: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of
production.
 Goodwill: Sufficient amount of working capital enables a firm to make
prompt payments and makes and maintain the goodwill.
 Easy loans: Adequate working capital leads to high solvency and credit
standing can arrange loans from banks and other on easy and favorable
terms.
 Cash Discounts: Adequate working capital also enables a concern to avail
cash discounts on the purchases and hence reduces cost.
 Regular Supply of Raw Material: Sufficient working capital ensures
regular supply of raw material and continuous production.
 Regular Payment Of Salaries, Wages And Other Day TO Day
Commitments: It leads to the satisfaction of the employees and raises the
morale of its employees, increases their efficiency, reduces wastage and
costs and enhances production and profits.
 Exploitation Of Favorable Market  Conditions: If a firm is having adequate
working capital then it can exploit the favorable market conditions such as
purchasing its requirements in bulk when the prices are lower and holdings
its inventories for higher prices.
 Ability To Face Crises: A concern can face the situation during the
depression.
 Quick And Regular Return On Investments: Sufficient working capital
enables a concern to pay quick and regular of dividends to its investors and
gains confidence of the investors and can raise more funds in future.
 High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in a
business.

30
EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its
business operations. It should have neither redundant or excess working capital
nor inadequate nor shortages of working capital. Both excess as well as short
working capital positions are bad for any business. However, it is the inadequate
working capital which is more dangerous from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE

WORKING CAPITAL

1.     Excessive working capital means ideal funds which earn no profit for the
firm and business cannot earn the required rate of return on its
investments.

2.     Redundant working capital leads to unnecessary purchasing and

accumulation of inventories.

3.     Excessive working capital implies excessive debtors and defective credit
policy which causes higher incidence of bad debts.

4.     It may reduce the overall efficiency of the business.

5.     If a firm is having excessive working capital then the relations with banks
and other financial institution may not be maintained.

6.     Due to lower rate of return n investments, the values of shares may also
fall.

7.     The redundant working capital gives rise to speculative transactions

31
DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital
arises due to the time gap between production and realization of cash from sales.
There is an operating cycle involved in sales and realization of cash. There are time
gaps in purchase of raw material and production; production and sales; and realization
of cash.

Thus working capital is needed for the following purposes:

·       For the purpose of raw material, components and spares.

·       To pay wages and salaries

·       To incur day-to-day expenses and overload costs such as office expenses.

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

·       To provide credit facilities to the customer.

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

For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc. These
expenses are called preliminary expenses and are capitalized. The amount needed
for working capital depends upon the size of the company and ambitions of its
promoters. Greater the size of the business unit, generally larger will be the
requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.

There are others factors also influence the need of working capital in a business

32
FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS

There are many factors that determine working capital needs of an enterprise. Some
of these factors are explained below:

1.  Nature Of Business: The requirements of working is very limited in

public utility undertakings such as electricity, water supply and railways
because they offer cash sale only and supply services not products, and no
funds are tied up in inventories and receivables. On the other hand the
trading and financial firms requires less investment in fixed assets but have
to invest large amt. of working capital along with fixed investments.

2.  Size Of The Business: Greater the size of the business, greater is the
requirement of working capital.

3.  Production Policy: If the policy is to keep production steady by

accumulating inventories it will require higher working capital.

4.  Length of Production Cycle: The longer the manufacturing time the raw
material and other supplies have to be carried for a longer in the process
with progressive increment of labor and service costs before the final
product is obtained. So working capital is directly proportional to the
length of the manufacturing process.

5.  Seasonals Variations: Generally, during the busy season, a firm requires
larger working capital than in slack season.

6.  Working Capital Cycle: The speed with which the working cycle
completes one cycle determines the requirements of working capital.
Longer the cycle larger is the requirement of working capital.

7.     Rate of Stock Turnover: There is an inverse co-relationship between

the question of working capital and the velocity or speed with which the

33
 sales are affected. A firm having a high rate of stock turnover wuill needs
lower amt. of working capital as compared to a firm having a low rate of
turnover.

8.   Business Cycle: In period of boom, when the business is prosperous, there

is need for larger amt. of working capital due to rise in sales, rise in prices,
optimistic expansion of business, etc. On the contrary in time of
depression, the business contracts, sales decline, difficulties are faced in
collection from debtor and the firm may have a large amt. of working
capital.

9. Rate of Growth of Business: In faster growing concern, we shall require

large amt. of working capital.

10. 1Earning Capacity And Dividend Policy: Some firms have more earning
capacity than other due to quality of their products, monopoly conditions,
etc. Such firms may generate cash profits from operations and contribute
to their working capital. The dividend policy also affects the requirement
of working capital. A firm maintaining a steady high rate of cash dividend
irrespective of its profits needs working capital than the firm that retains
larger part of its profits and does not pay so high rate of cash dividend.

11. Price Level Changes: Changes in the price level also affect the working
capital requirements. Generally rise in prices leads to increase in working
capitaliii

1
http://www.allprojectreports.com/working_capital_analysis/working_capital_analysis.htm

34
 WORKING CAPITAL CYCLE
Fig.3.5 working capital cycle

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.

35
 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
Long-term loan creditors (existing or new) may provide loan finance, loans
will need to be repaid from time-to-time, and
Interest obligations will have to be met by the business

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

36
 WORKING CAPITAL POSITION :

CURRENT ASSET – TOTAL ASSET

Table 3.2

PARTICULARS 2005 2006 2007 2008 2009

CURRENT ASSETS 631.16 839.21 1973.5 2456.74 2585.19

8

NET BLOCK 52.58 63.32 98.48 138.57 150.63

TOTAL ASSETS 704.34 896.86 1988.1 2457.19 2589.51

8

CA/TA 89.60% 93.57% 97.45% 99.98% 99.83%

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, 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.

SALES-CURRENT ASSET

Table.3.3

PARTICULARS 2005 2006 2007 2008 2009

CURRENT 631.16 839.21 1973.58 2456.74 2585.19

ASSETS

SALES 1970.94 2294.70 11818.25 12208.77 12336.81

SALE/CURRENT 2.17 2.07 20.0 23.9 21.87

ASSET(%)

37
SALES % 29 16.4 415 5.2 1.1
INCREASE

The Sales to Current Assets ratio measures how well a company is making use of it
assets in generating sales.  This ratio is most valid in industries where companies
hold the majority of their own inventories in-house, which is very much relevant to
HCL’s business. Here the ratio is in increasing trend this shows that the company
using more and more current asset ,and maintaining large inventory ,it is prevalent
that the ratio has increased sharply after 2007 it is because of high level of sale.

CURRENT ASSET – FIXED ASSET

Table 3.4

PARTICULARS 2005 2006 2007 2008 2009

NET CA/NET BLOCK 6.5:1 6.2:1 6.9:1 7.1:1 6.1:1

The ratio of the net current asset to the fixed ones is an indicator as to the liquidity
position of the firm. 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.

38
 CURRENT ASSET – CURRENT LIABILITY
Table 3.5

PARTICULARS 2005 2006 2007 2008 2009

CURRENT ASSETS 631.16 839.21 1973.58 2456.74 2585.19

CURRENT LIABILITES 417.22 556.66 1376.78 1620.25 1882.97

% CURRENT ASSETS 9.7 33 135.17 99.90 5.2

INCREASE

%CURRENT LIABILITES 16.2 33.42 147.34 17.6 16.21

INCREASE

CURRENT RATIO 1.5 1.50 1.43 1.5 1.37

/WORKING CAPITAL RATIO

The current asset, current liability level is fluctuating over the period of 5 year there is
a sharp increase in level of CA and CL this is because of increase in sale. The current
ratio is useful in telling us whether the business can support itself with its current
assets despite its current liabilities. The current ratio can give a sense of the efficiency
of a company's operating cycle or its ability to turn its product into cash. Companies
that have trouble getting paid on their receivables or have long inventory turnover can
run into liquidity problems because they are unable to alleviate their obligations.
Because business operations differ in each industry, it is always more
useful to compare companies within the same industry .The ideal current ratio is
between 1.2 and 2.0. In the HCL’s case, the working capital ratio shows a healthy
liquidity position. The working capital ratio above 2.0 indicates underutilized assets
or bad asset investment. In the case that the working capital ratio is less than 1, the
business is in jeopardy and cannot meet its current liabilities. In this case, the

39
company will have to work on their negative working capital ratio with working
capital management.

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.

40
 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

41
  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.

Table 3.6

Composition 2005 2006 2007 2008 2009

Raw Material 77.94 63.49 110.89 89.25 119.67
Stores and Spares 43.16 52.55 56.18 64.23 66.64
Finished Goods 220.46 347.62 623.58 712.79 731.21
Work-in-progress 7.84 5.92 1.23 1.68 1.16

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.

42
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 segments:

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”

43
 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
Raw Material

Table 3.7

Particulars 2005 2006 2007 2008 2009

Raw Material Consumption 979.71 1210.77 1097.52 1753.81 1860.34
Raw Material Inventory 77.93 63.49 110.89 119.65 89.25
Raw Material Holding Days 29.0 19.20 40.0 25.0 17.26

The raw material conversion period or the raw material holding cost has reduced from
29 to 17. This is despite 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.

Work-in-progress

Table3.8

Particulars 2005 2006 2007 2008 2009

Cost of Production 1596.52 1919.1 10781.8 11166.95 11128.5
1
Work in progress 7.84 5.94 1.23 1.68 1.16

44
inventory
WIP Holding days 1.8 1.3 0.04 0.05 0.04

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 period. Here we can see the inventory
holding have decreased to the level of less than 1 day which is sign of effective
inventory management.

Finished Goods (Average Finished Goods Held)

Table 3.9

Particulars 2005 2006 2007 2008 2009

Cost of Production 1596.52 1919.11 10781.8 11166.95 11128.5
finished good held 196.39 284.035 485.6 766.38 722
Average finished good 14.65 22.57 20.09 21.60 22.43
inventory held

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.

45
 INVENTORY TURNOVER RATIO

Table 3.10

Particulars 2005 2006 2007 2008 2009

Sales turnover 1970.94 2381.36 11818.25 12569.44 12336.82
Inventory 188.10 240.31 791.73 893.37 888.26
Inventory turnover ratio 10.48 9.91 14.93 14.06 13.89
Average inventory holding 34.83 36.83 24.45 30 26.27
period
INVENTORY TURNOVER RATIO AVERAGE INVENTORY HOLDING PERIOD
40
16 35
14
12 30
10 25
8 20
6 15
4
10
2
0 5
2005 2006 2007 2008 2009 0
2005 2006 2007 2008 2009

Fig.3.6 Fig.3.7

A high inventory turnover ratio indicates efficient management of inventory because

the stocks are sold more frequently and lesser amount of money is required to finance
the inventory. A low inventory turnover ratio indicates an inefficient management of
inventory. But a high turnover of Inventory may not necessarily always imply a
favorable situation. A high inventory turnover may be the result of very low level of
inventory which results in shortage of goods in relation to demand and a position of
stock out or the turnover may be high due to a conservative method of valuing
inventories at lower values or the policy of the firm to buy frequently in small lots.
Here in case of HCL the inventor turnover ratio is satisfactory as the main working
model of the company is assembly not manufacturing so maintain low inventory is
advisable. Also the level of average inventory is in decreasing trend that is shows
good inventory holding policy of management.

CASH MANAGEMENT

46
Cash is money that is easily accessible either in the bank or in the business. It is not
inventory, it is not accounts receivable, and it is not property. These might be
converted to cash at some point in time, but it takes cash on hand or in the bank to pay
suppliers, to pay the rent, and to meet the payroll. Profit growth does not always mean
more cash.

Profit is the amount of money you expect to make if all customers paid on time and if
your expenses were spread out evenly over the time period being measured. However,
it is not your day-to-day reality. Cash is what you must have to keep the doors of your
business open. Over time, a company's profits are of little value if they are not
accompanied by positive net cash flow. You can't spend profit; you can only spend
cash.

Cash Flow refers to the flow of cash into and out of a business over a period of time.
The outflow of cash is measured by the money you pay every month to salaries,
suppliers, and creditors. The inflows are the cash you receive from customers, lenders,
and investors.

Positive Cash Flow

If the cash coming into the business is more than the cash going out of the
business, the company has a positive cash flow. A positive cash flow is very
good and the only concern here is managing the excess cash prudently.

Negative Cash Flow

If the cash going out of the business is more than the cash coming into the
business, the company has a negative cash flow. A negative cash flow can be
caused by a number of problems that result in a shortage of cash, such as too
much or obsolete inventory, or poor collections on accounts receivable. If the
company doesn't have money in the bank or can't borrow additional cash at
this point, it may be in serious trouble.

A Cash Flow Statement is typically divided into three components so that you can see
and understand both the internal and external sources and uses of cash.

47
 1. Operating Cash Flow (Internal)
Operating cash flow, often referred to as working capital, is the cash flow
generated from internal operations. It is the cash generated from sales of the
product or service of your business. Because it is generated internally, it is
under your control.

2. Investing Cash Flow (Internal)

Investing cash flow is generated internally from non-operating activities. This
component would include investments in plant and equipment or other fixed
assets, nonrecurring gains or losses, or other sources and uses of cash outside
of normal operations.

3. Financing Cash Flow (External)

Financing cash flow is the cash to and from external sources, such as lenders,
investors and shareholders. A new loan, the repayment of a loan, the issuance
of stock and the payment of dividend are some of the activities that would be
included in this section of the cash flow statement.

Good cash management means:

 Knowing when, where, and how your cash needs will occur,
 Knowing what the best sources are for meeting additional cash needs; and,
 Being prepared to meet these needs when they occur, by keeping good
relationships with bankers and other creditors.

The starting point for avoiding a cash crisis is to develop a cash flow projection.
Smart business owners know how to develop both short-term (weekly, monthly) cash
flow projections to help them manage daily cash, and long-term (annual, 3-5 year)
cash flow projections to help them develop the necessary capital strategy to meet their
business needs. They also prepare and use historical cash flow statements to gain an
understanding about where all the money went.

SOURCES OF CASH :

48
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
2
Frequent short-term emergency requests to the bank (to help pay wages,
pending receipt of a cheque).

CASH MANAGEMENT IN HCL INFOSYSTEMS:

2
http://www.smallbusinessnotes.com/operating/finmgmt/cashmanagement.html

49
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 time taken
for the cheques to be processed is instantaneous. Their Cash Management System is
quite efficient.

CASH-CURRENT LIABILITY

50
Table 3.11

Particulars 2005 2006 2007 2008 2009

Absolute Liquid Ratio(quick ratio) 1.04:1 1.08:1 1.04:1 1.28:1 1.3:1

Quick Ratio
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2005 2006 2007 2008 2009

Fig .3.8

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

Table 3.13

Particulars 2005 2006 2007 2008 2009

Dividend policy% 310 400 400 400 325
EPS 7.94 6.91 18.79 17.81 16.21
Cash Balance 0.26 0.26 0.42 0.42 0.29
Cash in Hand 32.63 24.02 35.13 99.84 57.75

51
 DIVIDEND CASH BALANCE

120
450
400 100
350
80
300 Cash Balnce
250 60 Cash in hand
200
40
150
100 20
50
0
0 2005 2006 2007 2008 2009
2005 2006 2007 2008 2009

Fig 3.9 Fig.3.10

The other notable feature in HCL statements has been the growing dividend policy of
the firm except the last year. 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.

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. But after 2007 there is a
sharp increase in demand due to which the liquid cash requirement increased and
which we can very well find out from the graph. as liquid cash increases this leads to
increase in EPS. Also the dividend distributed among the shareholder is constant
throughout the year except of the last year, this is because the comparative revenue in
year 2009

52
 CASH FLOWS

Table 3.12

Cash Flows 2005 2006 2007 2008 2009

Net Cash from Operating 26.76 69.24 18.68 160.26 267.55
activities
Net Cash from Investing 156.61 -35.15 -17,26 36.40 -73.62
activities
Net Cash from Financing -81.68 -35.12 -20.55 -73.34 -309.08
activities

CASH FLOW IN OPERATING ACTIVITIES

Working Capital Changes

Table.3.13

Working Capital Changes 2005 2006 2007 2008 2009

Trade and other receivables -145.12 -141.66 -318.08 -313.08 -355.13
Inventories -2683.92 -5221 -322.03 -106.65 10.11
Trade Payables and other 64.19 130.26 301.21 235.49 251.52
Liabilities

The cash flows from operating activities section comes first and tells how much cash
the company generated from its core business, as opposed to peripheral activities such
as investing or borrowing. Here we can see the sharp increase in the cash flow from
operating activity which is a positive sign.

Cash Flow in Investing Activities

53
Table 3.14

Investments in Mutual 2005 2006 2007 2008 2009

Funds
Investments (year end) 122.77 135.39 279.79 215.20 276.10
Purchase of Investment -530.75 -659.92 -1813.98 -3553.34 -2034.38
Disposal/Redemption of 654.90 653.12 1813.98 3611.32 1980.11
Investment

Net cash from investing activities shows the amount of cash firms spend on
investments. Here we can see that some year its positive and some year its negative it
does not signifies wrong investment policy of firm but it shows that heavy investment
during that particular year.

The investments have increased from the last year due to the continuous increase in
sales revenue. 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.

RECEIVABLES MANAGEMENT

54
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 larger ones.
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.

55
 Poor collection procedures.
 Lax enforcement of credit terms.
 Slow issue of invoices or statements.
 Errors in invoices or statements.
 Customer dissatisfaction.
 Weak credit judgement.

56
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
 Get external help if you own efforts fail.
 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.

57
 RECEIVABLES MANAGEMENT IN HCL INFOSYSTEMS:

Table 3.15

PARTICULARS 2005 2006 2007 2008 2009

DEBTORS TURNOVER RATIO 5.80 5.21 13.39 11.06 8.91

AVERAGE COLLECTION 63 84 31 36 46
PERIOD

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 decreasing trend which is good for the firm.

AVERAGE COLLECTION PERIOD DEBTOR TURNOVER RATIO

16
90
80 14

70 12
60 10
50
8
40
6
30
4
20
10 2

0 0
2005 2006 2007 2008 2009 225 2006 2007 2008 2009

Fig 3.11 Fig .3.12

58
 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.

59
 MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing function can create
liquidity problems.

Consider the following: -

 Who authorizes purchasing in your company - is it tightly managed or spread

among a number of (junior) people?
 Are purchase quantities geared to demand forecasts?
 Do you use order quantities, which take account of stock holding and purchasing
costs?
 Do you know the cost to the company of carrying stock?
 Do you have alternative sources of supply? If not, get quotes from major suppliers
and shop around for the best discounts, credit terms as it reduces dependence on a
single supplier.
 How many of your suppliers have a return policy?
 Are you in a position to pass on cost increases quickly through price increases to
your customers?
 If a supplier of goods or services lets you down can you charge back the cost of the
delay?
 Can you arrange (with confidence!) to have delivery of supplies staggered or on a
just-in-time basis?

There is an old adage in business that "if you can buy well then you can sell well".
Management of your creditors and suppliers is just as important as the management of
your debtors. It is important to look after your creditors- slow payment by you may
create ill feeling and can signal that your company is inefficient (or in trouble!).

60
Remember that a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.

Financing Current Assets

The firm has to decide about the sources of funds, which can be availed to make
investment in current assets.

Long term financing:

It includes ordinary share capital, preference share capital, debentures, long term
borrowings from financial institutions and reserves and surplus.

Short term financing:

It is for a period less than one year and includes working capital funds from banks,
public deposits, commercial paper etc.

Spontaneous financing:

It refers to automatic sources of short-term funds arising in normal course of business.

There is no explicit cost associated with it. For example, Trade Credit and Outstanding
Expenses etc.

Depending on the mix of short and long term financing, the company can follow
any of the following approaches.

Matching Approach

In this, the firm follows a financial plan, which matches the expected life of assets with
the expected life of source of funds raised to finance assets. When the firm follows this

61
approach, long term financing will be used to finance fixed assets and permanent
current assets and short term financing to finance temporary or variable current assets.

Conservative Approach

In this, the firm finances its permanent assets and also a part of temporary current assets
with long term financing. In the periods when the firm has no need for temporary current
assets, the long-term funds can be invested in tradable securities to conserve liquidity. In
this the firm has less risk of facing the problem of shortage of funds.

Aggressive Approach

In this, the firm uses more short term financing than warranted by the matching plan.
Under an aggressive plan, the firm finances a part of its current assets with short term
financing.

Relatively more use of short term financing makes the firm more risky.

Current asset to fixed asset ratio:

The financial manager should determine the optimum level of current assets so that the
wealth of shareholders is maximized. A firm needs fixed and current assets to support a
particular level of output.

The level of current assets can be measured by relating current assets. Dividing current
assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets, a
higher CA/FA ratio indicates a conservative current assets policy and a lower CA/FA

62
ratio means an aggressive current assets policy assuming other factors to be constant. A
fig 3.11

conservative policy i.e. higher CA/FA ratio implies greater liquidity and lower risk;
while an aggressive policy i.e. lower CA/FA ratio indicates higher risk and poor
liquidity. The current assets policy of the most firms may fall between these two
extreme policies. The alternative current assets policies may be shown with the help of
the following figure.

In this figure the most conservative policy is indicated by alternative A, where as CA/FA
ratio is greatest at every level of output. Alternative C is the most aggressive policy, as
CA/FA ratio is lowest at all levels of output. Alternative B lies between the conservative
and aggressive policies and is an average policy.

SHORT TERM FINANCING

Other than the investment in current assets, the firm also has to be concerned with short-
term to long-term debt as this plays a very important role in determining the amount of
risk undertaken by the firm. That is , the firm not only has to be concerned about current
assets but also the sources through which they are financed. A firm before financing in
either of the two, has to take into consideration various aspects. While short term might
seem the ideal way to finance your assets than the long term due to shorter maturity
period and also less of costs are involved, there is an inherent risk in short term financing
due to fluctuating interest rates and due to the reason that the firm might be unable to
reay the amount in a shorter span of time.

Table 3.16

SECURED LOANS 2005 2006 2007 2008 2009

SHORT TERM 50.21 31.0 6.02 0 0

LONG TERM 5.54 13.49 6.0 0 101.85

TOTAL 55.75 44.49 12.02 0 101.85

%SHORT TERM 90.0 70 50 0 100

63
Under secured loan cash credit, along with non fund based facilities, foreign currency
term loan from banks are secured by way of hypothecation of stock-in-trade, book debts
as first charge and by way of second chanrge on all the immovable and movable assets of
the parent company. Term loan in Indian rupees from a bank is subject to a prior charge
in favour of company’s bankers on book debts and stock in trade for working capital
facilities.

Table 3.17

UNSECURED LOANS 2005 2006 2007 2008 2009

SHORT TERM 26.10 151.0 223.87 352.66 226.85

LONG TERM --- 0.11 -- -- --

TOTAL 26.10 151.15 223.87 352.66 226.85

Here HCL has a major portion of their financing done through short term financing than
long term financing. The preference of short term financing to long term as such is not
the part of any policy employed by the firm but it was due to the reason that the interest
rates in short term were more investor friendly and the cost involved in them were also
low. At present, we can see that the firm is moving more towards long term financing as
the interest terms in the long term has reduced compared to the short term.

YEAR- END COMMERCIAL PAPERS

Table 3.19

PARTICULARS 2005 2006 2007 2008 2009

COMMERCIAL 25.00 40.00 70.0 145.0 105.0

PAPERS

The credit rating by ICRA continued at ‘A1+’indicating highest safety to company’s

commercial paper program of Rs. 75 Crores. It acts as an effective tool in reducing the
interst cost and is used for financing inventories and other receivables. As and when the
firm issues commercial papers, it sends a letter to the leader of the consortium, i.e., SBI
to reduce from the fund based limits the amount it has issued in the form of the

64
commercial papers. Suppose the firm issues 30 Crores as commercial papers and the fund
based limits are say 115 Crores. Then firm sends a letter to SBI to reduce the existing
fund based limits from 115 to 85 Crores.

In terms of desirability, the commercial papers are cheaper and advantageous to the firm
compared to the consortium financing. The main advantage being the interest rate which
is lower than the bank rates existing under consortium financing. But the firm depends on
both and for working capital financing, it is dependent on the banks for funds sich as
working capital demand loans and cash credits. There is no point in the firm not making
use of the fund based limits in the consortium banking as their commercial papers are
restricted to 75 Crores.

MERITS OF COMMERCIAL PAPERS:

 It is an alternative source of raising short-term finance, and proves to be handy

during periods of tight bank credit.
 It is a cheaper source of finance in comparison to the bank credit.

DEMERITS OF COMMERCIAL PAPERS:

 It is an impersonal method of financing.

 It is always available to the financially sound and highest rated companies.
 The amount of lonable funds available in the commercial paper market is limited
to the amount of excess liquidity of the various purchasers of commercial paper.

65
 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.

66
 CHAPTER 4: FINDING AND CONCLUSION
INDUSTRY ANALYSIS

Over the past decade, the Information Technology (IT) industry has become one of the
fastest growing industries in India, propelled by exports (the industry accounted for more
than a quarter of India’s services exports in 2004-05). The key segments that have
contributed significantly (96 percent of total) to the industry’s exports include – Software
and services (IT services) and IT enabled services (ITES) i.e. business services. Over a
period of time, India has established itself
as a preferred global sourcing base in these segments and they are expected to continue to
fuel growth in the future.

FINANCIAL GRAPHS(CONSOLIDATED OPERATION)

Gross Business Income:

Consolidated Revenue for the year is Rs. 12378 crores a against Rs. 12403 crores
in the previous year Services revenue grew by 43% from Rs. 458 crores to Rs.
654 crores in the current year

Fig .4.1

67
 Profit before Tax:

Profit before tax for Parent Standalone in FY 2009 is Rs. 374 crores as against Rs.
434 crores in the previous year. Excluding exchange fluctuations, PBT for Parent
Standalone is Rs. 400 crores as against Rs. 432 crores in the previous year.

Fig.4.2

Profit after Tax:

Profit after Tax for FY 2009 is Rs. 240 crores as against . 300 crores in FY
2008.Basic EPS for FY 2009 is Rs. 14.0.

Fig 4.3Earnings Per Share:

68
 Basic EPS grew from Rs. 16.7 in the previous year to Rs. 18.7 in the current year.
Diluted EPS grew from Rs. 16.5 in the previous year to Rs. 18.6 in the current
year.

EPS
20

15

10

0
2005 2006 2007 2008 2009

Fig 4.4

Dividend:
The Board recommends a final dividend of Rs. 1.50 per share (75% per fully paid
up equity share) to shareholders. This will be paid, subject to shareholder
approval on October 23, 2009. The total dividend proposed and paid for FY 2009
(including interim dividend of Rs. 5.00 per share) is Rs. 6.50 per share (325% per
fully paid up equity share), amounting to Rs. 130 crores including dividend
distribution tax.

Fig 4.5

Net worth/ Shareholders Fund:

Net Worth grew to Rs. 1122 crores as at June 30, 2009 from Rs. 1016 crores as at
the close of the previous year. Paid up capital as at June 30, 2009 is Rs. 34.2
crores, comprising 17.1 crores equity shares of Rs. 2/- each Reserves & Surplus

69
 are Rs. 1088 crores at year-end after appropriating Rs. 130 crores for dividend
and dividend distribution tax.

Fig 4.6

Borrowings

During the year, the Company raised Rs. 80 crores by issue of 800 Redeemable,
Non-Convertible Debentures (NCDs) of Rs. 10 lacs each to LIC of India on private
placement basis. Fitch has assigned ‘stable’ outlook rating for the NCD
programme. These NCDs are listed on the National Stock Exchange of India
Limited. The company also repaid borrowings to the extent of Rs. 208 crores
during the year. Loan Funds, therefore, decreased to Rs. 227 crores as at June 30,
2009 from Rs. 355 crores as on June 30, 2008. The Debt/ (Debt + equity) ratio
reduced to 17%.

Fig 4.7

70
 COMPARING THE EFFCIENCY OF WORKING CAPITAL MANAGEMENT
OF HCL INFOSYSTEM WITH ITS COMPITITOR

Table 4.1

2005 2006 2007 2008 2009

HCL Current ratio 1.5 1.5 1.43 1.5 1.37

INFOSYSTEM Inventory turnover ratio 10.48 9.90 14.93 14.06 13.89

Quick ratio 1.04 1.08 1.04 1.28 1.30

Debtor turnover ratio 5.80 5.21 13.39 11.06 8.91

TVS Current ratio 1.37 1.71 1.422 2.11 1.62

ELECTRONICS
Inventory turnover ratio 7.46 9.22 9.61 15.27 11.70

Quick ratio 0.87 1.83 1.93 2.28 1.94

Debtor turnover ratio 6.22 3.95 3.38 3.31 4.20

MOSER BAER Current ratio 1.18 1.14 0.98 1.25 0.85

Inventory turnover ratio 3.86 3.84 3.73 3.84 4.36

Quick ratio 2.18 3.14 1.62 2.69 1.77

Debtor turnover ratio 4.02 4.68 5.59 5.90 6.55

ZENITH Current ratio 0.79 0.93 3.85 3.52 3.69

COMPUTERS
Inventory turnover ratio 9.63 14.27 12.61 8.25 5.08

Quick ratio 2.74 4.83 2.82 2.27 2.19

Debtor turnover ratio 5.43 4.44 5.09 5.18 4.55

MRO-TEK Current ratio 2.24 2.63 2.02 2.06 3.84

Inventory turnover ratio 1.46 2.01 2.02 2.06 2.90

Quick ratio 4.17 5.12 - 4.15 4.17

Debtor turnover ratio 5.50 4.53 4.52 4.74 3.88

71
 ANALYSIS OF THE IMPORTANT RATIO WITH RESPECT TO ITS
COMPETITORS

Table 4.2

72
 CONCLUDING ANAYSIS

The working capital position of the company is managed very aptly also the
various sources through which it is financed are optimal.
The company has used its dividend policy, purchasing, financing and investment
decisions to good effect can be seen from the inferences made earlier in the
project.
Sales and collection policy that get along with the receivables management of the
firm.
The various ratios calculated are an indicator as to the fact that the profitability of
the firm and sales are on a rise and also the deletion of the inefficiencies in the
working capital management.
The firm has not compromised on profitability despite the high liquidity is
commendable.
HCL Infosystems has reached a position where the default costs are as low as
negligible and where they can readily factor their accounts receivables for
availing finance is noteworthy.
Compare to its competition the working capital management is very sound.

73
 CHAPTER 5: SUGGESTIONS AND
RECOMMENDATIONS

The management of working capital plays a vital role in running of a successful

business. So, things should go with a proper understanding for managing cash,
receivables and inventory.

HCL Infosystems is managing its working capital in a good manner, but still there is
some scope for improvement in its management. This can help the company in raising
its profit level by making less investment in accounts receivables and stocks etc. This
will ultimately improve the efficiency of its operations. Following are few
recommendations given to the company in achieving its desired objectives:

The business runs successfully with adequate amount of the working capital but
the company should see to it that the cash should not be tied up in excessive
amount of working capital.
Though the present collection system is near perfect, the company as due to the
increasing sales should adopt more effective measures so as to counter the threat
of bad debts.
The over purchasing function should be avoided as it could lead to liquidity
problems.
The investment of cash in marketable securities should be increased, as it is very
profitable for the company.
Holding of excessive and insufficient stock must be avoided as it creates a
burden on the cash resources of a business and results in lost sales, delays for
customers, etc respectively.

74
CHAPTER 6: LIMITATIONS OF THE STUDY

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.

75
 BIBLIOGRAPHY

Following sources have been sought for the preparation of this report:

Corporate Intranet
Financial Statements (Annual Reports)
Direct interaction with the employees of the company
Internet ----www.hclinfosystems.in

http://en.wikipedia.org/wiki/HCL_Enterprise
http://www.allprojectreports.com/working_capital_analysis/working_capital_a
nalysis.htm
http://www.google.co.in/imgres?
imgurl=http://tutor2u.net/business/images/working_capital_cycle.gif&imgrefur
l=http://tutor2u.net/business/finance/workingcapital_cycle.htm&usg=__Msnio
pozJAEt6dmNXSR7qWPAJas=&h=376&w=501&sz=10&hl=en&start=5&sig
2=Y12LfxuDRxoYlwxOuXIZDw&um=1&itbs=1&tbnid=dsbmtNs8A-
lJpM:&tbnh=98&tbnw=130&prev=/images%3Fq%3Dworking%2Bcapital
%2Bmanagement%26um%3D1%26hl%3Den%26tbs
%3Disch:1&ei=4a0wTMc307asB6X_0PMF
http://scialert.net/fulltext/?doi=ijaef.2008.44.50&org=11
Textbooks on financial management -
 I.M.Pandey
 Khan and Jain
 Prasanna Chandra

76
 APPENDICES

Balance Sheet of ------------------- in Rs. Cr. -------------------

HCL Infosystems
Jun Jun '06 Jun '07 Jun '08 Jun '09
'05

12 12 mths 12 mths 12 mths 12 mths

mths

Sources Of Funds

Total Share Capital 33.44 33.75 33.83 34.23 34.24

Equity Share Capital 33.44 33.75 33.83 34.23 34.24

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 398.9 374.63 808.46 968.83 1,098.12

0

Revaluation Reserves 3.01 2.96 2.92 3.20 0.00

Networth 435.3 411.34 845.21 1,006.26 1,132.36

5

Secured Loans 55.75 44.49 12.02 0.00 101.85

Unsecured Loans 26.10 151.15 223.87 352.66 125.00

Total Debt 81.85 195.64 235.89 352.66 226.85

Total Liabilities 517.2 606.98 1,081.10 1,358.92 1,359.21

0

Jun Jun '06 Jun '07 Jun '08 Jun '09

'05

12 12 mths 12 mths 12 mths 12 mths

mths

Application Of Funds

77
Gross Block 95.27 111.09 162.31 216.68 234.10

Less: Accum. Depreciation 42.89 47.77 63.83 78.11 83.47

Net Block 52.38 63.32 98.48 138.57 150.63

Capital Work in Progress 0.91 16.38 21.36 13.89 9.50

Investments 122.7 135.39 279.78 215.02 276.10

7

Inventories 188.1 240.31 791.73 898.37 888.26

0

Sundry Debtors 369.9 511.26 1,002.51 1,241.46 1,498.26

2

Cash and Bank Balance 73.14 87.64 179.34 316.91 198.67

Total Current Assets 631.1 839.21 1,973.58 2,456.74 2,585.19

6

Loans and Advances 115.2 117.28 170.28 244.48 315.17

2

Fixed Deposits 73.18 57.65 14.60 0.45 4.32

Total CA, Loans & Advances 819.5 1,014.14 2,158.46 2,701.67 2,904.68
6

Deffered Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities 427.7 572.64 1,395.88 1,639.38 1,899.81

5

Provisions 50.67 49.61 81.10 70.85 81.89

Total CL & Provisions 478.4 622.25 1,476.98 1,710.23 1,981.70

2

Net Current Assets 341.1 391.89 681.48 991.44 922.98

4

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00

Total Assets 517.2 606.98 1,081.10 1,358.92 1,359.21

0

Contingent Liabilities 284.6 334.55 349.75 49.73 57.18

0

Book Value (Rs) 25.86 24.20 49.79 58.61 66.14

78
 Profit & Loss account of HCL ------------------- in Rs. Cr. -------------------
Infosystems
Jun '05 Jun '06 Jun '07 Jun '08 Jun '09

12 mths 12 mths 12 mths 12 mths 12 mths

Income

Sales Turnover 1,970.94 2,381.36 11,818.25 12,569.44 12,336.81

Excise Duty 39.28 86.66 170.13 158.00 126.08

Net Sales 1,931.66 2,294.70 11,648.12 12,411.44 12,210.73

Other Income 31.93 9.80 52.81 32.37 -8.84

Stock 6.52 59.40 270.99 89.81 17.90

Adjustments

Total Income 1,970.11 2,363.90 11,971.92 12,533.62 12,219.79

Raw Materials 1,511.87 1,868.94 10,929.68 11,347.82 11,040.53

Power & Fuel 1.22 1.41 1.64 1.60 1.72

Cost

Employee Cost 106.99 130.22 217.73 292.96 325.98

79
Other 91.84 108.40 121.76 110.47 104.75
Manufacturing
Expenses

Selling and 79.82 89.11 197.09 255.37 270.40

Admin Expenses

Miscellaneous 20.06 18.10 36.29 31.46 44.51

Expenses

Preoperative Exp -5.61 -5.70 0.00 -0.55 -0.49

Capitalised

Total Expenses 1,806.19 2,210.48 11,504.19 12,039.13 11,787.40

Jun '05 Jun '06 Jun '07 Jun '08 Jun '09

12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 131.99 143.62 414.92 462.12 441.23

PBDIT 163.92 153.42 467.73 494.49 432.39

Interest 14.32 21.46 31.59 58.84 56.73

PBDT 149.60 131.96 436.14 435.65 375.66

Depreciation 6.50 6.75 12.55 16.35 17.27

Other Written Off 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 143.10 125.21 423.59 419.30 358.39

Extra-ordinary items 5.82 6.31 6.40 15.17 15.59

PBT (Post Extra-ord 148.92 131.52 429.99 434.47 373.98

Items)

Tax 16.10 18.30 112.14 129.72 113.42

Reported Net Profit 132.77 113.22 317.85 304.75 260.44

Total Value Addition 294.32 341.54 574.51 691.31 746.87

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 103.22 134.68 135.30 136.84 111.27

Corporate Dividend 14.08 18.89 20.98 23.26 18.91

Tax

80
Shares in issue (lakhs) 1,671.82 1,687.29 1,691.53 1,711.50 1,712.12

Earning Per Share (Rs) 7.94 6.71 18.79 17.81 15.21

Equity Dividend (%) 310.00 400.00 400.00 400.00 325.00

Book Value (Rs) 25.86 24.20 49.79 58.61 66.14

------------------- in Rs. Cr. -------------------

Cash Flow of HCL
Infosystems

Jun Jun '06 Jun '07 Jun '08 Jun '09

'05

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 148.87 131.52 429.99 434.47 373.86

Net Cash From Operating 26.76 69.24 18.68 160.26 267.55

Activities

Net Cash (used in)/from 156.61 -35.15 -17.26 36.46 -73.62

Investing Activities

Net Cash (used in)/from -81.68 -35.12 -20.55 -73.34 -309.08

Financing Activities

81
Net (decrease)/increase In 101.69 -1.03 -19.13 123.38 -115.15
Cash and Cash Equivalents

Opening Cash & Cash 44.63 146.32 213.07 193.98 318.14

Equivalents

Closing Cash & Cash 146.32 145.29 193.94 317.36 202.99

Equivalents

82
i

ii

iii

RATIO USED:
1) Current asset
Total asset

2) Sales
Current asset

3) Current asset
Fixed asset

4) Current ratio= Current Asset

Current Liabilities

5) Raw material conversion ratio= Raw Material Inventory*365

Raw material consumption

6) Work in progress = WIP Inventory*365

Cost of production

7) Finished goods held = Finished Goods Inventory*365

Cost of production

8) Inventory turnover ratio= Sales

Inventory

9) Quick ratio = Current Assets – Inventory

Current Liabilities

10) Debtors turnover ratio = Total Sales

Debtors

11) Average collection period= Trade Debtor*No Of Working Days 

Net Credit Sales