Company Profile

Shakti Engineering Limited was established in 1986. The primary objective of the Organization
is to provide engineering, engineering-management and manufacturing services in various fields.
The corporate operational spirit since inception - recognizing the sever resource constrains in the
country has been “Progress through innovation and Efficiency.”

The Manufacturing Division

The Organization is manufacturing electrical equipment - mainly Distribution Transformers,

Switchgear and PFI Plant. SEL has successfully designed and manufactured transformer in
11\0.415 KV 3 phase and 6.325\0.24 KV 1-phase ranges, besides other special transformers. The
organization is recognized as manufacturer of transformer by all Power Supply Utilities in the
country dealing with electric power systems.

Telecommunication Division

Shakti Engineering Ltd is providing point-to-point Satellite Telecommunication Links through

VSAT as representative of PAK DATACOM LIMITED, Pakistan. Till date such satellite
telecommunication Links have been provided to USA, Singapore, Thailand and Hong Kong.

Mission Statement...

 To be a Profitable Enterprise of International Standards,

 Organized and run Professionally,
 With High Efficiency.
 Financial Growth of the Company must ensure a proportional improvement in
long term financial prospects of the people working in the company.

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 Introduction:

Working capital management implicates the administration of current assets as well as current
liabilities. It is the main part of a firm’s short-term financial planning since it encompasses the
management of cash, inventory and accounts receivable. Working capital management is most
important for several reasons. The current assets of a typical manufacturing firm account for over
half of its total assets. Excessive levels of current assets can easily result in a firm realizing a
substandard return on investment. However, firms with too few currents assets may incur
shortages and difficulties in maintaining smooth operations.

For small companies, current liabilities are the principal source of external financing. The fast
growing but larger company also makes use of current liability financing. For these reasons the
financial manager and stuff devote a considerable portion of their time to working capital
matters. The management of cash, accounts receivable, accounts payable, accruals and other
means of short term financing is the direct responsibility of the financial manager.

Through our survey we tried to find out how “Shakti Engineering Limited” practices their
working capital management.

Cash Management:

Cash management involves managing the monies of the firm in order to maximize cash
availability and interest income on any idle funds. The organization holds liquid money to run
their production process smoothly and to meet any emergency situation. In order to achieve this,
cash management encompasses the following functions, Managing Collections, Control of
Disbursements, Electronic Funds transfers, Balancing Cash and Marketable Securities and
Investment in Marketable Securities.

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Motives for holding cash:

Transaction motive: To meet payments, such as purchases, wages, taxes arising in the ordinary
courses of businesses.

Speculative motive: To take advantages of temporary opportunities.

Precautionary motive: To maintain a safety cushion buffer to meet unexpected cash needs.

In our survey we found out that “Shakti Engineering Limited” (SEL) holds cash for transaction
and precautionary motive. (SEL) does not hold any cash for speculative motive.

Managing cash collections: Through our survey we found out that, the major customers of
“Shakti Engineering Ltd” are Government, Semi-government Authorities and Private companies.
“Shakti Engineering Limited” collects checks from the customers directly through their agents.

 Collection float: Collection float means the total time between the mailing of the
check by the customer and the availability of cash to the receiving firm. The
collection float is five-six days.

 Mail float: The time for which the check is in the mail. “Shakti Engineering
Limited” collects checks from the customers directly through their agents. So the
mail float is zero for the firm.

 Deposit float: The time during which the check receiver by the firm remains
uncollected funds. Deposit float has two aspects these are processing float and
availability floats.

• Processing float: The time it takes a company to process the check

internally. Shakti Engineering Limited” takes three days to process the
check internally. So the processing float is three days.

• Availability float: The time consumed in clearing the check through

the banking system. The bank takes two days to clear the check. So
the availability float is two days.

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Cash concentration: The movement of cash from lockbox or field banks in to the firm’s central
cash pool residing in a concentration bank. This process of cash concentration has several
effects. This process of cash concentration has several effects.

 Improves control over inflows and outflows of corporate cash.

 Reduces idle cash balances to a minimum

 Allows for more effective investments by pooling excess cash balances

There are three principal methods employed to move funds between banks.

 Depository transfer checks (DTC): A non negotiable check payable to a single

company account at a concentration bank. Funds are not immediately available upon
receipt of the DTC.

 Automated clearing house electronic transfer: This item is an electronic check image
version of the DTC, which can be used between banks that are members of the
automated clearing house system. Transferred funds become available one business
day later.

 Wire transfer: A generic term for electronic funds transfer using a two way
communication system. Funds are available upon receipt of the wire transfer. Its
much more expensive.

In our survey we found that “Shakti Engineering Ltd” uses the depository transfer check to
collect cash from creditors.

Recommendation: “Shakti Engineering Ltd” can use the automated clearing house electronic
transfer system to speeding up the cash collections. Because, in this system transferred funds are
available one business day later. Wire transfer system is much more expensive. So we don’t
recommend using the wire transfer system.

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Cash Disbursement: Where as one of the underlying objectives of cash management is to
accelerate collections. Another objective is to slow down cash disbursement as much as possible.
The combination of fast collection and slow disbursement will result in increased availability of
cash.

Control of disbursement:

 Payable through draft (PTD): A check- like instrument that is drawn against the
payor and not against the bank as is a check. After a PTD is presented to a bank,
the payor gets to decide whether to honor or refuse the payment. It delays the time
to have funds on deposit to cover the draft.

 Payroll and dividend disbursement: The firm attempts to determine when payroll
and dividend checks will be presented for collection. In this system funds are
deposited based on expected needs. It minimizes excessive cash balances.

 Zero balance account: A corporate checking account in which a zero balance is

maintained. The account requires a master account from which funds are drawn to
cover negative balances or to which excess balances are sent.

 Remote and controlled disbursement: A system in which the firm directs checks
to be drawn on a bank that is geographically remote from its customer.

In our survey we found that “Shakti Engineering Ltd” doesn’t follow any specific disbursement
control method.

Recommendation: To control the disbursement “Shakti Engineering Ltd” can use the PTD
method.

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 Receivable management

Analyzing the credit applicant: The credit evaluation process involves three related steps.

 Obtaining information on the applicant

 Analyzing this information to determine the applicant’s credit worthiness.

 Making the credit decision.

To make the credit decision firm can obtain information about the creditors from some sources.

 Financial statement

 Credit ratings and reports

 Bank checking

 Trade checking

 The company’s own experience

Credit analysis: Given the financial statement of a credit applicant, the credit analyst should
undertake a ratio analysis. The analyst will be particularly interested in the applicant’s liquidity
and ability to pay bills on time.

Sequential investigation process: The cost of investigation is balanced against the expected profit
from an order.

Credit scoring system: A system used to decide whether to grant credit by assigning numerical
scores to various characteristics related to credit worthiness.

Credit decision and line of credit: A limit to the amount of credit extended to an account.

Outsourcing credit and collections: The entire credit and collection function are outsourced to
a third party company.

Our survey result says that, incase of selecting new credit customers and to extend the credit to
existing customers it follows the three C’s (credit analysis, character and capacity). It also selects
credit customers through the reference of existing customers.

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Credit and collection policies

Credit standards: The minimum quality of credit worthiness of a credit applicant that is
applicable to the firm. Lowering credit standards may stimulate demand, which in turn should
lead to higher sales and profits.

Credit terms: Specify the length of time over which credit is extended to a customer and the
discount if any given for early payment.

Credit period: The total length of time over which credit is extended to a customer to pay a bill.

Cash discount period: the period of time during which a cash discount can be taken for early
payment.

Cash discount: A cash reduction in sales or purchase price allowed for early payment of invoices.

In our survey we found that, existing customers of “Shakti Engineering Ltd” usually pay in three
months. It doesn’t offer any cash discount to the customers. It only states the credit period to the
customers.

Recommendation

Selling price of a 100kVA transformer is 200000 taka

Variable cost 170000 taka

Contribution margin 30000 taka

Yearly sales 50 units

Existing customers pay in 3 months.

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If “Shakti Engineering Ltd” relaxes the credit standard it can sell 70 units a year. Additional
receivable will be (20 units×200000) = 4000000 taka. The average collection period will be 4
months. Opportunity cost of carrying the additional receivable will be 20%.

Profitability of additional sales= Contribution margin per unit × Additional unit sold

= (30000×20) taka

= 600000 taka

Additional receivables= Additional sales revenue/ Receivable turnover for new customers

= 4000000 ÷ (12/4)

= 1333333 taka

Investment in additional receivable=Variable cost per unit ÷ (sales price per unit × additional
receivable)

= (170000÷200000) × 1333333)

= .85×1333333

= 1133333 taka

Required before tax return on additional investment,

= Opportunity cost × Investment in additional receivable

= .20×11333333

= 226666 taka

The profitability of additional sales 600000 taka exceeds the required return on the additional
investment on receivables of 226666 taka.

From the above calculation we can say that, “Shakti Engineering Ltd” will be benefited by
relaxing the credit standard.

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 Inventory Management

Inventories form a link between production and sale of product.

Types of inventory

 Raw materials inventory

 Work in process inventory

 In transit inventory

 Finished goods inventory

The survey result says that, 70% of the total inventories are raw materials, 20% are work in
process and the remaining 10% are finished goods. That means they invest a huge amount of
money in purchasing and maintaining the inventory of raw materials.

ABC Method of inventory control: ABC method is a inventory control method which controls
expensive inventory items more closely than less expensive item.

ABC system of segregation of inventory at “Shakti Engineering Ltd”.

Group-A materials Group-B materials Group-C materials

Copper Barring components Rubber materials

Barrings Still keys Nuts and bolts

Motors Washers

Electronic rings

Inventory order decision:

How much to order: The optimal quantity to order depends on the following factors.

 Forecast usage

 Ordering cost

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  Carrying cost
When to order: The appropriate time to order an inventory item depends on the following factors.
 Lead time: The length of time between the placement of an order for an inventory
item and when the item is received in inventory.

 Order point: The quantity to which inventory must fall in order to signal that an order
must be placed to replenish an item.

Just-in-time(JIT): An approach to inventory management and control in which inventories are

acquired and inserted in production at the exact times they are needed.

Findings

 To reduce the inventory “Shakti Engineering Ltd” has follow Just-in-time inventory
control system for procurement of raw materials.

 Based on delivery of final products inventory will order.

 First-in-first-out (FIFO) inventory method has been followed for distribution of

inventory in units.

 It is following “ABC” technique for maintaining inventory.

• Group-A: Consists the inventory items that account approximately 70% of the
company taka is invested.

• Group-B: Consists the inventory items that account approximately 20% of the
company taka is invested.

• Group-C: Consists the inventory items that account approximately 10% of the
company taka is invested.

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 Spontaneous financing

Accounts payable: Trade liabilities are a form of short term financing common to almost all
businesses. They are collectively the largest source of short term financing for business firms.
Accounts payable arises from the trade credits from the suppliers.

 Open account: The seller ships goods to the buyer with an invoice specifying
goods, total amount due, and terms of the sale.

 Notes payable: The buyer signs a note that evidences a debt to seller.

 Trade acceptances: The seller draws a draft on the buyer that orders the buyer
to pay the draft at some future time period.

Terms of the sale

 No Trade credit: The buyer pays cash on delivery or cash before delivery.

 Net period – no cash discount: When credit is extended, the seller specifies the
period of time allowed for payment.

 Net period – cash discount: When credit is extended, the seller specifies the
period of time allowed for payment and offers a cash discount if paid in the
early part of the period.

Percentages of discount available for the company for early payment. The credit period is 90
days.

Days Percentage

60 days 2%

30 days 4%

Immediate Payment 5%

In our survey we fond that, the company doesn’t take the advantages of cash discount. It always
pays it’s payables at the last date of the credit period.