Project on letter of Credit and Working Capital

8/7/2019 Project on letter of Credit and Working Capital

1/101

EXECUTIVE SUMMARY

I had the opportunity to take up the Internship Project at Vardhman textiles limited .

During the project I had the privilege of being guided by Mr. Ajay Sharma, Executive in

Finance department.

Vardhman, a household name in Northern India, has carved out a niche for itself in textile

industry. The Vardhman group was setup in 1962 by late Lala Rattan Chand Oswal, father

of present Chairman cum Managing Director, Sh. S.P. Oswal. Vardhman aims to be

world class textile organization producing diverse range of products for the global textile

market. Vardhman seeks to achieve customer delight through excellence in manufacturing

and customer service based on creative combination of state-of-the-art technology and

human resources.

My project is study of inland bill discounting under letter of credit and Analysis of

Working capital and of Yarn division Of Vardhman textiles limited.

The study was conducted at the commercial department of textiles limited under Account

Receivable Department.

The project was of 6 weeks duration. During the project interviewed the executives & staff

to collect the data, & also made use of company records & annual reports. The data

collected were then compiled, tabulated and analyzed.

The objective of my internship was the knowledge of sale under letter of credit of yarn

customers and to operate the working capital cycle of the management.

Working Capital Management is a very important facet of financial management due to:

Investments in current assets represent a substantial portion oftotal investment.

Investment in current assets & the level of current liabilities have toBe geared

quickly to change sales.

Some the points to be studied under this topic are:

In Industry Project Report 1


2/101

How much cash should a firm hold?

What should be the firms credit policy?

How to & when to pay the creditors of the firm?

How much to invest in inventories?

By studying about the company s different areas I came to know

certain things like:

Acid test ratio is more than one but it does not mean that company has excessive

liquidity.

Creditors turnover ratio also improved so it is better for company

Inventory turnover ratio is improving from 2006-7 to 2007-08, which means inventory

is used in better way so it is good for the company.

A study of letter of credit deals with studying and understanding the Letter of credit,

different fields of letter of credit and different types of L/C charges namely L/C Advising

charges, L/C Amendment charges and discrepancy charges and calculating saving

potential and making recommendations.

A letter of credit (LC) is a binding document that a buyer can request from his bank in

order to guarantee that the payment for goods will be transferred to the seller. Basically, a

letter of credit gives the seller reassurance that he will receive the payment for the goods.

By studying the LC of Yarn division I came to know

All the dealing of LC is centralized of yarn customers.

It reduces the credit risk of company

It even reduces the payment delays

It increase the liquidity position of company

Some suggestions for the company are

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



3/101

Not only for yarn customers but for other product customer dealing under

letter of credit should done

Company should put more efforts to improve its liquidity position



4/101



5/101

LETTER OF CREDIT

The English name letter of credit derives from the French word accreditif, a power to

do something, which in turn is derivative of the Latin word accreditivus, meaning

trust.

A letter of credit is basically a document issued by a bank guaranteeing a client's ability to

pay for goods or services. A bank or finance company issues a letter of credit on behalf of

a buyer, authorizing the seller to obtain payment within a specified timeframe once the

terms and conditions outlined in the letter of credit are met. The letter of credit acts like an

insurance contract for both the buyer and seller and practically eliminates the credit risk

for both parties, while at the same time reducing payment delays. A letter of credit

provides the seller with the greatest degree of safety when extending credit. It is useful

when the buyer is not well known and when exchange restrictions exist or are possible.

The LC can also be the source of payment for a transaction, meaning that a will get paid

by redeeming the letter of credit. Letters of credit are used primarily in international trade

transactions of significant value, for deals between a supplier in one country and a

customer in another. The parties to a letter of credit are usually a beneficiary who is toreceive the money, the issuing bankof whom the applicant is a client, and the advising

bankof whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e.,

cannot be amended or canceled without prior agreement of the beneficiary, the issuing

http://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/International_trade


6/101

bank and the confirming bank, if any. In executing a transaction, letters of credit

incorporate functions common Traveler's cheques.

FROM ABOVE WE CAN CONCLUDE LETTER OF CREDIT IS

A letter of credit is a document issued mostly by financial institutions which usually

provides an irrevocable payment undertaking to a beneficiary against complying

documents as stated in the credit.

Once the beneficiary or a presenting bank acting on his behalf, makes a presentation to the

issuing bank or confirming bank, if any, within the expiry date of L/C, comprising

documents complying with the terms and conditions of the L/C, the applicable UCP. And

international standard banking practices. The issuing bank or confirming bank, if any, is

obliged to honor irrespective of any instructions from the applicants to the contrary.

Seller Bank

Carrier

After a contract s concluded between buyer and seller, buyer bank supplies a letter of

credit to the seller

Seller consigns goods to a carrier in exchange for a bill of lading.

In Industry Project Report

Buyer Bank

Seller Buyer

Seller Bank Buyer Bank

6
http://en.wikipedia.org/wiki/Traveler's_chequehttp://en.wikipedia.org/wiki/Traveler's_chequehttp://en.wikipedia.org/wiki/Traveler's_cheque


7/101

Seller provide bill of lading to a bank in exchange for payment. Sellers bank exchanges

bill of lading for payment from a buyers bank. Buyers bank exchange bill of lading for

payment from buyer.

Seller Bank

Carrier

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

Seller Bank


Seller Buyer

Carrier

Buyer Bank

Seller Buyer

7


8/101

Carrier

Elements of a Letter of Credit

A payment undertaking given by a bank (issuing bank)

On behalf of a buyer (applicant)

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

On presentation of specified documents representing the supply of goods

Within specified time limits

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

Documents to be presented at a specified place

PARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT

1. Applicant

The applicant is the party who requests and instructs the issuing bank to open a letter of

credit in favor of the beneficiary. The applicant usually is the importer or the buyer of

goods and/or services. The applicant can also be another party acting on behalf of the

importer, such as a confirming house. The confirming house is equivalent to a buyingoffice, it acts as an intermediary between buyer and seller, and it can be located in a third

country or in the sellers country.


Buyer Bank

Seller Buyer

8


9/101

2.Beneficiary

The beneficiary is entitled to payment as long as he can provide the documentary evidence

required by the letter of credit. The letter of credit is a distinct and separate transactionfrom the contract on which it is based. All parties deal in documents and not in goods. The

issuing bank is not liable for performance of the underlying contract between the customer

and beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to

insure that they meet all the terms and conditions of the credit. Upon requesting demand

for payment the beneficiary warrants that all conditions of the agreement have been

complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be

paid by the bank.

3.Issuing Bank

The issuing bank's liability to pay and to be reimbursed from its customer becomes

absolute upon the completion of the terms and conditions of the letter of credit. Under the

provisions of the Uniform Customs and Practice for Documentary Credits, the bank is

given a reasonable amount of time after receipt of the documents to honor the draft.The

issuing banks' role is to provide a guarantee to the seller that if compliant documents are

presented, the bank will pay the seller the amount due and to examine the documents, andonly pay if these documents comply with the terms and conditions set out in the letter of

credit.Typically the documents requested will include a commercial invoice, a transport

document such as a bill of lading or airway bill and an insurance document; but there are

many others. Letters of credit deal in documents, not goods.

4.Advising Bank

An advising bank, usually a foreign correspondent bank of the issuing bank will advise the

beneficiary. Generally, the beneficiary would want to use a local bank to insure that the

letter of credit is valid. In addition, the advising bank would be responsible for sending the

documents to the issuing bank. The advising bank has no other obligation under the letter

of credit. If the issuing bank does not pay the beneficiary, the advising bank is not

obligated to pay.



10/101

5.Confirming Bank

The correspondent bank may confirm the letter of credit for the beneficiary. At the request

of the issuing bank, the correspondent obligates itself to insure payment under the letter ofcredit. The confirming bank would not confirm the credit until it evaluated the country

and bank where the letter of credit originates. The confirming bank is usually the advising

bank.

TYPES OF LETTER OF CREDIT

1.Commercial and stand by L/C: Commercial letters of credit are used primarily to

facilitate foreign trade. The commercial letter of credit is the primary payment mechanism

for a transaction. It is a contractual agreement between a bank, known as the issuing bank,

on behalf of one of its customers, authorizing another bank, known as the advising or

confirming bank, to make payment to the beneficiary. The issuing bank, on the request of

its customer, opens the letter of credit. The issuing bank makes a commitment to honor

drawings made under the credit. The beneficiary is normally the provider of goods and/or

services. Essentially, the issuing bank replaces the bank's customer as the payee The

standby letter of credit serves a different function. The standby letter of credit serves as a

secondary payment mechanism. The bank will issue the credit on behalf of a customer to

provide assurances of his ability to perform under the terms of a contract. A bank will

issue a standby letter of credit on behalf of a customer to provide assurances of his ability

to perform under the terms of a contract between the beneficiary. The parties involvedwith the transaction do not expect that the letter of credit will ever be drawn upon. The

standby letter of credit assures the beneficiary of the performance of the customer's

obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of

invoices, with evidence that the customer has not performed its obligation. The bank is



11/101

obligated to make payment if the documents presented comply with the terms of the letter

of credit.

They are issued by banks to stand behind monetary obligations, to insure the refund of

advance payment, to support performance and bid obligations, and to insure the

completion of a sales contract. The credit has an expiration date.The standby letter of

credit is often used to guarantee performance or to strengthen the credit worthiness of a

customer. In the above example, the letter of credit is issued by the bank and held by the

supplier. The customer is provided open account terms. If payments are made in

accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller

pursues the customer for payment directly. If the customer is unable to pay, the seller

presents a draft and copies of invoices to the bank for payment.

2.Revocable or irrevocable letter of credit: Letters of credit may be either revocable or

irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any

time by the issuing bank without notification. A revocable letter of credit cannot be

confirmed. Once the documents have been presented and meet the terms and conditions in

the letter of credit, and the draft is honored, the letter of credit cannot be revoked. The

revocable letter of credit is not a commonly used instrument. If a letter of credit is

revocable it would be referenced on its face.The irrevocable letter of credit may not be

revoked or amended without the agreement of the issuing bank, the confirming bank, and

the beneficiary. An irrevocable letter of credit from the issuing bank insures the

beneficiary that if the required documents are presented and the terms and conditions are

complied with, payment will be made. If a letter of credit is irrevocable it is referenced on

its face.

3) Sight or usance letter of credit: All letters of credit require the beneficiary to present

a draft and specified documents in order to receive payment. A draft is a written order by

which the party creating it, orders another party to pay money to a third party. A draft is

also called a bill of exchange. There are two types of drafts: sight and time. A sight draft is



12/101

payable as soon as it is presented for payment. The bank is allowed a reasonable time to

review the documents before making payment. A time draft is not payable until the lapse

of a particular time period stated on the draft. The bank is required to accept the draft assoon as the documents comply with credit terms. The issuing bank has a reasonable time

to examine those documents. The issuing bank is obligated to accept drafts and pay them

at maturity. A Letter of credit is known as a Sight letter of credit if it involves payment to

the seller against a Sight Draft. On the other hand, if the payment is made against a

Usance Draft, then it is known as Usance letter of credit.

DIFFERENT FIELDS OF LETTER OF CREDIT

FROM :( NAME & ADDRESS OF OPENING BANK )

This clause contains details of bank which has opened the Letter of Credit, and it

works on the behalf of the buyer of goods. The opening bank plays the first step in the

whole process of letter of credit.

TO :( NAME & ADDRESS OF ADVISING BANK )

This clause shows the details of bank which plays the foremost role in the process of

letter of credit. The advising bank belongs to the country of seller. It plays the role of

middleman between the seller and the opening bank

TYPE OF L/C :IRREVOCABLE

This clause shows the type of L/C in which it is being made. Various types of L/Cs

are Revocable, Irrevocable, Commercial, Negotiable etc.



13/101

L/C Number :

The clause shows a particular number for L/C and every L/C has different number sothat difference can be judged between different L/Cs.

DATE OF ISSUE :

This clause shows that date on which the opening bank has issued the L/C.

DT. & PLACE OF EXPIRY : __________________________________IN

INDIA

This shows about the date and the place in india where the lc will get expired, means

that financial institution where the L/C is send by the opening bank.

NAME & ADDRESS OF THE:

APPLICANT

It contains detail about the buyer of the goods. It gives complete address of the buyer.

NAME & ADDRESS OF THE:

BENEFICIARY

It shows details of the seller of goods, like sellers name, address, country to which he

belongs.

AMOUNT OF CREDIT IN :

US DOLLARS /EURO/ANY

OTHER FREELY

EXCHANGEABLE CURRENCY

(IN FIGURES & WORDS)



14/101

It shows the currency in which the deal is been made, the code for that currency as

well as the amount of the goods

PERCENTAGE CREDIT : AS PER CONTRACT

AMOUNT TOLERANCE

Sometimes the amount in the letter of the credit and the exact amount of the goods

does not match. There can be a difference between the both. So a specific percentage

of amounts of goods specified in L/C is given as a tolerance and the exact amount of

goods can be in between the minimum and maximum tolerated limits.

CREDIT AVAILABLE WITH:

This part shows the details of that party from where the amount can be reimburses by

the seller. This states either a specified bank in India or any bank in India.

USANCE OF THE DRAFTS :

This clause shows whether the draft is payable at sight or at any date in future.

DRAFTS TO BE DRAWN ON:

It tells about the party which acts as a drawee. Generally the opening bank acts as a

drawee

PARTIAL SHIPMENT : AS PER CONTRACT

This clause contains details whether the shipment of goods is allowed through one

shipment or the goods can be sending through various shipments.

TRANSHIPMENT : AS PER CONTRACT

Transshipment means when the goods are send,



15/101

SHIPMENT FROM :

It tells about that place from where goods are send by the seller.

SHIPMENT TO :

Its that place where the goods are sending by the seller. And generally its that country

where the buyer lives.

LATEST SHIPMENT DATE :

Its that date till which the goods should reach to the buyer. After that date, its the

choice of the buyer whether he accepts the goods or not.

DESCRIPTION OF GOODS :

Description of Materials

Size ( in mm) and Quantity (in MT)

Specification

Tolerance

Quantity

Quantity Tolerance

Price per MT (in USD/Euro/any other freely exchangeable currency)

DOCUMENTS REQUIRED :

Beneficiarys Commercial Invoice - one original plus two signed copies covering

materials shipped. Invoices will be raised on the basis of (THEORETICAL/ ACTUAL/

DRAFT SURVEY) WEIGHT.



16/101

L/C in Vardhman

In this system , first corporate centralized market Yarn department advices a branch to

make sale of yarn through letter of credit In case of those customers who are either new

for a organization whose credit worthiness is not satisfactory according to market

research report

NOTE

All L/C of Yarn division is deal by State bank of Patiala

Thereafter on the basis of instructions sent by CMY department, the branch advise the

customers to open the L/C with the bank. Some of the common points stated in th L/C are

mentioned below:

Prorate shipment

Transshipment

Shipment date



17/101

Expiry period of L/C

Usance period

Rate of interest for the usance period

Other conditions as per mutual consent between buyer and seller

After opening the L/C concerned unit makes the sale to the customers as per agreed

terms and conditions stipulated in the L/C. Then concerned unit sent the invoice and

other papers to the centralized accounting cell for lodging the documents with the

bank.. This documents consists of

Bill of exchange

Original invoice

Original G/r copy Packing list

Copy of L/C

On the Due date mentioned in the L/C, we receive the realization advice from the bank,

where we have lodged the document drawn under L/C. after getting the advice from the

bank, we credit the customers with the amount we have realized

DOCUMENTS NEED FOR L/C

Letter of credit documents are required to be arranged in the following series:

By seller (duplicate documents)

Bill of exchange

Bill

Goods lorry receipt

Party acceptance letter

Debit note

Packing list



18/101

Original letter of credit

By sellers bank (Duplicate documents)

Letter

Bill of exchange

Bill

Goods lorry receipt


Debit note

Packing list

Letter of credit (duplicate)

By buyers bank(Original documents)

Bill of exchange

Bill

Goods lorry receipt


Debit note

Packing list

Letter of credit (DUPLICATE)

BILL OF EXCHANGE

A non- interest bearing written order used primarily in international trade that binds one

party to pay a fixed sum of money to another party at a predetermined future date

Its an unconditional order issued by a party or business which directs the recipient to pay

a fixed sum of money to a third party at a future date. The future date may b either fixed or

negotiable. A bill of exchange must be in writing and signed and dated also called draft

Negotiation of letter of credit

NEGOTIABLE means the ability to be sold or transfers to another party as a form of

payment. Something which is negotiable is transferable by endorsement and delivery.



19/101

(When documents come back from bank).

JOURNAL ENTIRES

IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST

2.PARTICULARS L.F

DEBIT

(RS)

CREDIT (RS)

Particular bank a/cDr

Interest on inland bill discount a/c.Dr

To inland bill discount a/c

(BEING Negotiation of ibdno.on dated.

Inland bill discount charges a/c..Dr

To bank a/c

(BEING INALND BILL DISCOUNTING CHGS DR

BY BANK ON DATED .AGST IBD NO

XXXX

XXXX

XXXX

XXXX

XXXX

How interest is calculated?

Total bill of exchange amount * rate of interest* number of days in Bill of exchange.

Rate of interest is 11.5% (according to STATE BANK OF PATIALA)

Number of days is calculated as per the conditions laid down IN L/C AGREEMENT

Realization of bill of exchange

JOURNAL ENTIRES

IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2.



20/101

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

I inland and bill discounting a/cDr

To party account

(BEING REALISATION OF IBD NO, AGST INV

NO.ON DATED.)

XXXX

XXXX

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

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

Fully payment but late payment (overdue interest charged by bank)

JOURNAL ENTIRES

IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2.

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

Party a/c ..Dr

To bank

( BEING AMOUNT OF OVERDUE INTEREST DEBITED

TO PARTY ACCOUNT AGST IBD NO. ON DATED

XXXX

XXXX



21/101

..)



22/101

INTRODUCTION TO WORKING CAPITAL



23/101

Working Capital is life blood and nerve centre of a business. Just as circulation of blood is

essential for the survival of the human being similarly working capital is necessary for the

survival of every business organization, whether it is a small organization or a big

organization.

Every business needs funds for two purposes-for the establishment and to carry out its day

to day operations. Long terms funds are required to create production facilities through

purchase of fixed assets such as plant & machinery, land & building, furniture & fixtures

etc. Investments in these assets the present that part of the firms capital, which is blocked

on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes as for the purchase of raw material, payment of wages & other day to day

expenses etc. these funds are known as working capital.

Before discussing about the working capital management of VARDHMAN TEXTILES

LIMITED, we should know the meaning, definition and different concepts of working

capital.

MEANING OF WORKING CAPITAL

In simple words, working capital refers to that part of the firms capital which is required

for financing short term or current assets such as, cash, marketable securities, debtors, and

inventories or in other words the working capital is the excess of current assets over

current liabilities.



24/101

CLASSIFICATON OR KINDS OF WORKING CAPITAL

Working capital may be classified in two ways:

a) On the basis of concept

b) On the basis of time

On The Basis Of Concept

On the basis of concept, working capital is classified as gross working capital and net

working capital. This classification is important from the point of view of the financial

manager.

Gross working capital: - This is a wider term in a relation to the working capital. Itincludes all current assets. Thus the gross working capital is the capital invested in total

current assets of the company. Examples of current assets are:

1. Cash in hand and Bank

2. Bill Receivables

3. Sundry Debtors

4. Short Term Loan & Advances

5. Inventory of Stock

6. Prepaid expenses


Gross Working Capital = Total Current Assets


25/101

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

Permanent or fixed working capital

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL: Permanent working capital is the

minimum amount which is required and ensures effective utilization of fixed facilities and

or maintaining the circulation of current assets. There is always a minimum level of

current assets which is continuously required by the enterprise to carry out its normal

business operations. For example, work-in-progress, finished goods and cash balance.

This minimum level of current assets is called permanent working capital as this part of

the capital is permanently blocked in current assets. As the business grows, the

requirements of permanent working capital also increase due to the increase in current

assets.

TEMPORARY OR VARIABLE WORKING CAPIAL: Temporary working capital is

the amount of working capital which is required to meet the seasonal demands and some

special exigencies. Variable working capital can be further classified as seasonal working

capital and special working capital. Most of the enterprises have to provide additional

working capital to meet the seasonal and social needs. The capital required to meet the

seasonal needs of the enterprise is called seasonal working capital. Special working capital

is that part of working capital which is required to meet exigencies such as launching of

extensive marketing campaign for conducting research, etc



26/101

FACTORS DETERMINING THE WORKING CAPITAL

The working capital requirement of the concern depends upon a large numbers of factors

such as nature and the size of business, the character of their operations, the length of

production cycles, the rate of stock turnover and the state of economic situation. It is not

possible to rank them because all such factors are of different importance and influence of

individual factor changes for a firm overtime. However, the following are important

factors generally influencing the working capital requirements.

Nature and character of business.

Size of business\scale of operation.

Production policy.

Manufacturing process\length of production cycle.

Seasonal variation.

Working capital cycle.

Rate of stock turnover.

Credit policy

Business cycle.

Rate of growth of business.

Earning capacity and dividend policy.

Price level changes.

Other factors.



27/101

IMPOTANCE OF ADEQUATE WORKING CAPITAL

Working Capital is the blood and the nerve centre of business. Just as the blood circulation

is essential in the human bodies for maintaining life, working capital is very important to

maintain the running of business. No business can run successfully without an adequate

amount of working capital.

The advantages are as follows:

Solvency of the business. Adequate working capital helps in maintaining solvency

of the business by providing uninterrupted flow of production.

Goodwill. Sufficient working capital enables a business concern to make promptpayments.

Easy loan. A concern having adequate working capital high solvency and good

credit standing can arrange loans from banks and others on easy terms.

Cash discounts. Adequate working capital also enables a concern to avail cash

discounts on the purchase and hence it reduces costs.

Regular payments of salaries, wages and other day to day commitments. A

company which has adequate working capital can make regular payments of

salaries, wages and other day to day commitments with raises the morale of its

employees, increases their efficiency, reduces wastages and enhances production

and profits.

Exploitation of favorable market conditions. Only concerns with adequate

working capital can exploit favorable market conditions such as purchasing its

requirement in bulk when the prices are lower and holding its inventory for higher

prices.

Ability to face crises. Adequate working capital enables the concern face business

crises in emergencies such as depression because during such periods, generally,

there is much pressure on working capital



28/101

THE NEED OF WORKING CAPITAL

The need for working capital cannot be over emphasized. Every business needs someamount of working capital. The need for working capital arises due to the time gap

between the productions and realized of cash from sales. There is an operating cycle

involved in sales and realization of cash. There are time gaps in purchase of raw material

and production; production and sales; and realization of cash.

Thus, working capital is needed for the following purposes:

For the purchase of raw materials, components and spares.

To pay wages and salaries.

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

expenses etc.

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

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

and finish stock.

To provide credit facilities to the customers.



29/101

OPERATING CYCLE OF VARDHMAN TEXTILES LIMITED

The operating cycle refers to the length of the length of time between the firms paying thecash for the material, entering into the production process\stock and the inflow of cash

from debtors. There is a complete cycle from cash to cash where in cash gets converted

into raw material, work-in-progress, finished goods debtors and finally in cash. Short-term

funds are required to meet the requirements of the funds during this time period this time

period depends on the length of time within which the original cash gets converted into

cash again. The determination of working capital cycle helps in the forecast, control and

management of working capital. It indicates the total time lag and the relative significance

of constituent parts.


WORK-IN-PROGRESDEBTORS

CASHRAW MATERIAL

29

FINISHED GOODS


30/101

THE OPERATING CYCLE CONSISTS OF FOLLOWING EVENTS, WHICH

CONTINUES THROUGHOUT THE LIFE OF BUSINESS.

Conversion of cash to raw material.

Conversion of raw material to work in progress.

Conversion of work in progress into finished goods.

Conversion of finished goods into accounts receivable.

Conversion of accounts receivable into cash.

FINANCING BY THE WORKING CAPITAL REQUIRMENTS BY BANKS

The bank credit is the primary institutional source of working capital finance. The bank

provides finance through loan agreements, overdrafts, cash credit, purchasing of bills, and

term loans. Banks have been certain norms in granting working capital finance to

companies. These norms have been greatly influenced by the recommendation of various

committee appointed by RESERVE BANK OF INDIA from time to time.

VARDHMAN TEXTILES LIMITED finance his working capital from the different banks

like ICICI BANK, STATE BANK OF INDIA, ALLAHABAD BANK,PUNJAB

NATIONAL BANK. Company finances the amount according to its need according to its

need of working capital requirement.



31/101

WORKING CAPITAL LIMITS FROM SCHEDULED BANKS FOR YEAR 2007-

08

BANKS RS

State Bank of Patiala 5 crore

Punjab National Bank 5 crore

Allahabad Bank 50 crore

ICCI 5 crore



32/101

NET WORKING CAPITAL

Net working capital is the difference between the current assets and the current liabilities.

Therefore it is called net working capital. When current assets exceed current liabilities

then the working capital is positive otherwise negative. Examples of current liabilities.

Bill Payable

Sundry creditors

Outstanding expenses

Short term loans

Dividend payable

Bank overdraft



33/101



34/101

REVIEWS

1. Bergami Robert (2007) analysis that that international trade transactions carry

inherently more risk than domestic trade transactions, because of differences in

culture, business processes, laws and regulations. It is therefore important for traders

to ensure that payment is received for goods dispatched and that the goods received

and paid for comply with the contract of sale. One effective way of managing these

risks has been for traders to rely on the letter of credit as a payment method. However

for exporters in particular, the letter of credit has presented difficulties in meeting the

compliance requirements necessary for the payment to be triggered. The current rules

that govern letter of credit transactions(UCP 500) have been under review for the past

three years and an updated set of rules (UCP 600) is expected to be introduced on

1July 2007. This paper focuses on the changes mooted for 2007and compares these

main issues with the existing rules and other associated guidelines and regulations

governing this method of payment. This paper considers the implication to changes of

letter of credit transactions and the sharing of risk. Firstly the paper provides some

background to letters of credit, then comments on existing literature and models, and

subsequently an analysis of the most important changes to the existing rules, beforereaching a conclusion. The conclusion is that the UCP 600 have not paid enough

consideration to traders and service providers and are likely to engender an

environment of uncertainty for exporters in particular.

2. Dolan John (2007) analysis thatThe Law of Letters of Credit Commercial and

Standby Credits is the four the Edition of a traditional treatise on a rather narrow legal

subject. Letters of credit fall into two categories: (1) commercials, which find use in

international sales; and (2) standbys that are a common device in many domestic

transactions. As international trade becomes more and more rationalized, the use of

commercials has diminished; but the use of the standby has enjoyed something of a



35/101

boom, for it accomplishes much that security interests, surety ship arrangements, and

other credit enhancing devices accomplish and does it with significantly lower

transaction costs. Regrettably, the parties using letters of credit often are unaware ofthe credits legal significance. This treatise covers the legal features of the commercial

and the standby, all in a global context. While it is codified to some extent in the

Uniform Commercial Code, the law of letters of credit is largely the law merchant, the

is gentium; and the UCC defers in many respects to international rules. Thus, the

treatise deals with those international rules and cites cases from virtually all of the

common-law jurisdictions in an effort to provide complete coverage of the field.

3. Padachi Kesseven (2006 ) analysis that A well designed and implemented working

capital management is expected to contribute positively to the creation of a firms

value The purpose of this paper is to examine the trends in working capital

management and its impaction firms performance. The trend in working capital needs

and profitability of firms are examined to identify the causes for any significant

differences between the industries. The dependent variable, return on total assets is

used as a measure of profitability and the relation between working capital

management and corporate profitability is investigated for a sample of 58small

manufacturing firms, using panel data analysis for the period 1998 2003. The

regression results show that high investment in inventories and receivables is

associated with lower profitability. The key variables used in the analysis are

inventories days, accounts receivables days, accounts payable days and cash

conversion cycle. A strong significant relationship between working capital

management and profitability has been found in previous empirical work. An analysis

of the liquidity, profitability and operational efficiency of the five industries shows

significant changes and how best practices in the paper industry have contributed to

performance. The findings also reveal an increasing trend in the short-term component

of working capital financing.



36/101

4. Klien Carter (2005) studied that For a relatively small fee and assuming sufficient

collateral or creditworthiness of the tenant or a guarantor, a tenant may be able toapply for and have its bank issue to its landlord a letter of credit (L/C) to secure the

tenants obligations under a long-term lease. If the L/C is large enough, the landlord

may enter into a lease with a tenant that the landlord would otherwise refuse due to the

tenants lack of creditworthiness. From the tenants perspective, an L/C may be

preferable to a large security deposit. An L/C will not necessarily tie up large amounts

of the tenants cash or other liquid collateral, as would a security deposit. Instead, the

cash can be deployed as working capital in the tenants business. An L/C is an

independent obligation of the issuer. As long as conforming documents specified by

the terms of the

L/C is presented to the issuer before the expiration date and no fraud is involved, the

issuer must honor. The credit of the issuer stands behind the obligation of the tenant. If the

tenant is insolvent and/or bankrupt, the issuer still must honor the beneficiarys

conforming draws. Rights the landlord will lose if the L/C draw is enjoined and the credit

expires. This two-part article provides tips for drafting L/Cs. Part one includes a

discussion of using the International Standby Practices, keeping the draw condition s

simple and allowing partial draws conclusion addresses issues such as providing coverage

of the settlement period after lease termination; shortening pitfalls is eliminated.. The

conclusion of this article will provide six more drafting tips and a discussion of the issuing

banks concerns.

5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios (2004) analysis that the relationship of

corporate profitability and working capital management. We used a sample of 131

companies listed in the Athens Stock Exchange (ASE) for the period of 2001-2004.

The purpose of this paper is to establish a relationship that is statistical significant

between profitability, the cash conversion cycle and its components for listed firms in



37/101

the ASE. The results of our research showed that there is statistical significance

between profitability, measured through gross operating profit, and the cash

conversion cycle. Moreover managers can create profits for their companies byhandling correctly the cash conversion cycle and keeping each different component

(accounts receivables, accounts payables, inventory) to an optimum level.

6. Schelin Johan (2004) studied that This thesis give a historical introduction in foreign

trade and letters of credit. The reasons for using letters of credit will be shown. The

legal relationships of the concerned parties will be analysed. The doctrine of strict

compliance will be explained. Then problems will be worked out: the different

interpretation of strict compliance, the fraudulent exception and questions of liability if

the doctrine of strict compliance was not carefully used. The thesis bases on German

law, but tries, whenever useful, to compare with law of other countries and / or

International law. At the end of the thesis a critical outlook will follow. The analyse of

problems concerning the strict compliance lead to the result that still today, about 100

years after letters of credit became a common method to pay, problems exist. One of

these problems is the different interpretation of courts in different countries. Especially

the considerations of German courts that strict compliance must be interpreted in the

frontiers of good faith and that letters of credit must be interpreted as will declarations.

7. Shelton Fred (2002) studied that Working capital, an important liquidity indicator, has

historically been a major benchmark of the surety and credit-granting institutions. In

todays environment, because of the tight bond and credit markets, both institutions

are scrutinizing the amount and quality of working capital more than ever. The fewer

resources that need to be invested in working capital, after recognizing liquidity risk,

the better.



38/101

8. Weinraub Herbert, Visscher Sue (1998) studies that This study looked at ten diverse

industry groups over an extended time period to examine the relative relationship

between aggressive and conservative working capital practices. Results strongly showthat the industries had significantly different current asset management policies.

Additionally, the relative industry ranking of the aggressive/conservative asset policies

exhibited remarkable stability over time. Industry policies concerning relative

aggressive/conservative liability management were also significantly different.

Interestingly, it is evident there is a high and significant negative correlation between

industry asset and liability policies. Relatively aggressive working capital asset

management seems balanced by relatively conservative working capital financial

management.

9. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting

process. It has shown that it is reasonable to expect that the cost of capital will increase

at the same rate as the rate of inflation on an ex ante basis, and that this increase will

be a multiplicative relationship. In addition, the paper has shown that the capital

budgeting process is not neutral with respect to inflation, even if output prices rise at

the same rate as costs. Of critical importance is the degree of net working capital as a

proportion of the overall financing required, the higher the net working capital the

greater being the impact of inflation on capital spending. Finally, it would appear that

corporate financial behavior is influenced by inflation. Inflation will cause the firm to

reduce its capital budget, to attempt to reduce net working capital, and to alter the

debt/asset ratio using short term debt, thus driving up short term rates relative to long

term rates.



39/101



40/101

About Vardhman Group

Vardhman is a major integrated textile producer in India. The Group was setup in 1965

at Ludhiana, Northern India. Since then, the Group has expanded manifold and is today,

one of the largest textile conglomerates in India. The Group portfolio includes

Manufacturing and marketing of Yarns, Fabrics, Sewing Threads, Fiber and Alloy Steel.

The group started its corporate journey with an installed capacity of 6000 spindles in

1965 under the flagship company Vardhman Spinning & General Mills Limited (now

known as Vardhman Holdings Limited and is an investment arm of the Group) in

Ludhiana. Over the years the group has expanded its spinning capacities besides adding

new businesses. The group has also diversified into yarn processing, weaving, And

Sewing Thread, fabric processing, acrylic fiber manufacturing and into special/ alloy

steels. Today, close to 20,000 people are the Organization is most important asset its

human capital

The Vardhman group comprises of three listed and two unlisted companies-

Listed CompaniesListed companies

Vardhman Textiles Limited (formerly Mahavir Spinning Mills Limited)

Vardhman Acrylics Limited

Vardhman Holdings Limited1 (formerly Vardhman Spinning & General Mills

Limited)

Unlisted Companies

VMT Spinning Company Limited

Vardhman Threads Limited



41/101

LOGO OF VARDHMAN GROUP

The Flame signifies growth i.e. growth of the company along with the growth of each

and every individual associated with it whether he/she is a worker , a white collar

employee, a shareholder or a customer.

The Stick symbolizes cotton that is the basic raw material of the core product of

Vardhman. The V stands for the Vardhman Group

.



42/101

HISTORY

The industrial city of Ludhiana, located in fertile Malwa region of central Punjab is known

as the MANCHESTER OF INDIA. Within the precincts of the city is located

The corporate head quarters of Vardhman group, A household name in northern India.

The Vardhman group , born in 1965 under the entrepreneurship of late Lala Rattan Chand

Oswal has today blossoms into the one of the larger textile business houses in India .

At its inception, vardhman has installed capacity of 14000 spindles. Today: its capacity

has increase multifold to over 5.5 lacs spindles. In 1982 the group enters sewing threads

market in company, which was the forward integration of business. In 1990, it undertookyet another diversification this time into the weaving business. The grey fabric weaving

unit at Baddi, commissioned in 1990 with a capacity of 20,000 meters per day , has

already made its mark as a quality producer of grey poplin, sheeting, shirting in the

domestic as well as foreign market . This was followed by entry into fabric processing by

setting up of AURO TEXTILES at BADDI, which currently has a processing of 1,00,000

meters per day. In the year 1999, the group has added yet another feather to its cap with a

setting of VARDHMAN ACRYLICS LTD in. The company also has a strong presence in

the markets of JAPAN, HONG KONG, KOREA, and UK & EUROPE in addition to the

domestic market. Adherence to systems & true dedication to quality has resulted in

obtaining the coveted ISO 9002/ISO 14002 quality awards which is the first in

textileindustry.



43/101

PHILOSHOPHY

Faith in bright future of Indian textile industry & hence continues expansion areas

which we know best.

Total customer focus in all operational areas

Products to be of best available quality for premium market segments through TQM &

ZERO DEFECT implementation in all functional areas.

Global orientation targeting- at least 20% production for exports.

Integrated diversification/ product range expansion

World class manufacturing facilities with most modern R&D & process technology

Faith in individual potential respect for human values

Encouraging innovation for constant improvements to achieve excellence in all

functional areas

Appreciating our role as a responsible corporate citizen.

MISSIONVARDHMAN aims to be a WORLD CLASS TEXTILE organization producing diverse

range of products for the global textile market. VARDHMAN seeks to achieve customer

delight through excellence in manufacturing & customer service based on creative



44/101

combination of state- of the- art technology & human resources. VARDHMAN is

committed to be responsible corporate citizen

BOARD OF DIRECTORS

Vardhman Textiles Limited

Shri Paul Oswal - Chairman & Managing Director

Ajay Kumar Chakraborty - (Nominee of ICICI Bank Ltd.)

Vinod Kumar Saxena - (Nominee of IDBI)

Arun Kumar Purwar

(Dr.) Triloki Nath Kapoor

Prafull Anubhai

Surinder Kumar Bansal

Subash Khanchand Bijlani

Darshan Lal Sharma

Sachit Jain - Executive Director

Vardhman Holdings Limited

Shri Paul Oswal - Chairman

Surinder Singh Bagai

Jagdish Rai Singal

Chaman Lal Jain

Ram Swarup Gupta

Bal Krishan Arora

Sat Pal Kanwar

Sachit Jain

Shakun Oswal

Suchita Jain

Vardhman Acrylics Limited

Shri Paul Oswal - Chairman

Sachit Jain

Darshan Lal Sharma

Sudeshkumar Ganpatrai Gulati

Sanjit Paul Singh

Munish Chandra Gupta



45/101

(Dr.)Arvind Kumar Bakhshi

Bal Krishan Choudhary - Managing Director

Organisational hierarchy chart

CHAIRMAN CUM-MANGING DIRECTOR

CORPORATE GENERAL MANAGERS

VICE PRESIDENT

MANAGERS (M1-M4)

EXECUTIVES (E1-E2)

OFFICERS (O1-O2)

STAFF (S1-S4)



46/101

SUBSTAFF

AWARDS AND ACHIEVEMENTS

Vardhman Spinning and General Mills Ltd. was the 1st textile company to be awardedISO-9002 and ISO-14002 certificate in 1993.

It is the largest manufacturer and exporter of cotton yarn from India.

It is the second largest producer of sewing threads in Indi

It is a larger producer of acrylic fiber and finished fabrics

Textile Export Promotion Council 2003-04

Gold trophy in EOU/EPZ for export of cotton yarn


Bronze trophy in mill fabric exporter category


Gold Trophy in EOU/EPZ for export of cotton yarn


Silver Trophy


Bronze Trophy


Silver Trophy



47/101

Govt. of India Award 1994-5, 1995-96

Award of Merit


(Merchant Export Category for Fabrics)

Bronze Trophy


(Merchant Export Category for Fabrics)

Gold Trophy

GROUP OF COMPANIES



48/101

BUSINESS OF VARDHMAN GROUP

Vardhman Group consists of 5 SBUs spread across 9 manufacturinglocations



49/101

Spinning Business (Y)Vardhman Spinning & General Mills Ludhiana, PunjabAuro Spinning Baddi, HP

Arihant Spinning Malerkotla, Punjab

Arisht Spinning Baddi, HP

Gas Mercerised Yarn Business Hoshiarpur, Punjab

Auro Dyeing Baddi, HP


ST Steel

Y Yarn

C Cotton Yarn

F Fabric

49


50/101

Anant Spinning Mandideep, MP

Vardhman Spinning & General Mills (Export Oriented Unit) Baddi, HP

VMT Baddi, HPVardhman Yarns Satlapur, MP

Fabric Business (C)

Auro Weaving Baddi, HP

MSML Textiles Division Baddi, HP

Auro Textiles Baddi, HP

Vardhman Fabrics Budhni, MP

Sewing Thread Business (ST)

ST-I Hoshiarpur, Punjab

ST-II Ludhiana, Punjab

ST-III Perundurai, TN

Vardhman Threads Limited Baddi, HP

Vardhman Special Steels (S) Ludhiana, Punjab

Vardhman Acrylics Limited (F) Bharuch, Gujarat

MARKET SHARE OF VARDHMAN TEXTILES LIMITED



51/101

Spin

ning Business

Spindle Capacity

Existing About 600,000

Post Expansion 800,000

Fabric Business

Fabric Production in Lac (100 thousand) Metres/Month

Auro Textiles (Existing) 42

Post Expansion 85-90

Sewing Thread Business

Production in Metric Tonnes/DayTotal 28.30

Dyeing (Yarn & Fibre) & Mercerising

Production in Metric Tonnes/Day

Total 54.5

Steel Business

Production in Metric Tonnes/AnnumSMS 100000

Rolling Mill 84000

Acrylic Fibre Business

Production in Metric Tonnes/Annum

Total 18500



52/101

PRODUCT RANGE

Yarns

The group is one of the largest spinning group of the country with a spindlier of over

5, 50,000. The group has 12 production plants located in the states of Punjab, Himachal

Pradesh and Madhya Pradesh. In many of the yarn market segments, Vardhman holds

the position of market leader besides being a large and reliable supplier in the country.

Vardhman is also the largest exporter of yarn from India. The group yarn exports amount

to over US$ 100 million covering the most quality conscious markets in theworld. The

total export of Cotton yarn of the group is about 6% of total export of cotton yarn from

the country.

Sewing Threads

Vardhman entered the Sewing thread business in 1982 as a forward integration to its

yarn business. The group had to struggle for survival being pitted against a large

multinational organization. Today with approximately 25 metric tonne/per day of sewing

thread manufacturing capacity in its plant at Hoshiarpur, Ludhiana, Baddi & Perundurai.

Vardhman threads have emerged as second largest sewing thread brand in the country.



53/101

Processed Fabric

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

Vardhman established a modern fabric process house in 1999 with a capacity of 30

million meters per annum. This capacity has been expanded to 42 meters per annum in

FY 2005-06. A Vardhman fabric is dedicated to meet customer demand for top quality

finished fabric through product innovation, world class quality, state-of-art technology

and excellence in service.

Fibre

In 1999 the group set up an Acrylic staple fibre plant at Bharuch in Gujarat in

collaboration with Marubeni and Japan Exlan of Japan. The plant has annual capacity of

18500 metric tonnes per annum.

Steel

The steel business was setup in 1973 as diversification with a capacity of 35000 million

tones per annum. Later on group acquired a steel plant from Mohta Group of Industriesin 1988 and converted this loss making unit into a profitable business in first year of

operation with the Group. Subsequently the steel mill has been modernized and

expanded to a capacity of 100000 million tonnes per annum. Catering to high technology

Quality conscious alloy steel segment, the unit has a reputation of being a dependable



54/101

source of supply of special and alloy steel to Indian/International standards.

FINANCIAL STATUS

PARTICULARS SALES REVENUE (RS CRORE)

Yarns 102873.31

Sewing thread 29634.83

Steel 34702.19

Fabric 33239.58

% SALES REVENUE

yarns , 57%sewing

thread, 15%

steel, 15%

fabric, 13%



55/101

FINANCIAL PERFORMANCE OF THE COMPANY

1.1 TABLE SHOWING FINANCIAL REULTS IN 07-08

(IN BILLIONS)

1.1 GRAPH SHOWING TURNOVER AND PROFITS OF VARIOUSCOMPANIES OF VARDHMAN


Company Turnover Operating Profit Profit after Tax Operating Margin

VTEX 23.46 3.87 1.22 17%

VAL 2.28 0.32 0.05 14%

VMT 0.89 0.17 0.09 19%

VYTL* 0.29 0.08 0.06 27%

Vardhman Group 26.92 4.44 1.42 16%

55


56/101

INTRODUCTION TO FINANCE DEPARTMENT

Every company is required to maintain proper books of account to record all the

transactions in the course of its business operations .it is necessary that the transactions

should be properly accounted for in the books of account so that they give a true and fair

view of the state of affair of the business.

Accounting is a service activity. Its function is to provide quantitative information

primarily of financial nature about economic entities that is intended to be useful in

making economic decision, in making reasoned choices among alternative course of

action

Accounting records only monetary transactions. Events of transactions which can not be

expressed in money, do not find place in the booked of account though they may be very

useful for the business.

The life of the business is divided in to appropriate segments for studying the results

shown by the business after each segment. this is because though life of the business isconsiders to be indefinite ,the measurement of the income and studying the financial

position of the business after a very long period would not be helpful in taking proper

corrective steps at the appropriate time . It is therefore, necessary that after each segment

or time interval the businessman must stop and see back how things are going. in

accounting such a segment or time interval is called accounting period it is usually of a

year started from April and ended on March.

At the end of each accounting period an income statement and balance sheet are

prepared. The income statement discloses the profit & loss made by the business during

the accounting period while balance sheet depicts the financial position of the business

as on the last day of the accounting period. While preparing these statements a proper



57/101

distinction has to be made between capital expenditure and revenue expenditure .the

accounting statements help the management in making rational decisions.

The main object of running the business is to earn profits. in order to ascertain the profits

made by the business during a period. Is necessary that revenue of the period should be

matched with the cost/ expenditure of that period .in other words ,income made by the

business during a period can be measured only when the revenue earned during a period

is compared with the expenditure incurred for earning the revenue.

The information contained in the published financial statements is of the paramount

importance to external users viz shareholders, creditors, bankers etc. in order that the

users rely upon this information, is necessary that the information contained in the

financial statements is logical, consistent, fair. It is the responsibility of the accounting

profession to ensure that the information presented satisfies the above requirements

.there should not be too much discretion to the firms and their accountants to present the

financial information the way the y like, since this would greatly undermine the

confidence of the public in the financial statements presented by the different firms

Keeping the above fact in mind there have been efforts at the international level to brings

about uniformity in the presentation of the financial statements by formulating andadopting international accounting standards.

Thus the role of accounting is to provide an effective measurement and reporting system.

This is possible only when accounting is based on certain coherent set of logical

principals that forms the general frame of reference for evaluation and development of

sound accounting practices

Vardhman Spinning & General Mills, finance department is headed by Mr. Bhushan

Punj (Chief Manager, Commercial fianance); Mr. Munish Jain (manager) .all the

working of the finance department is done through ERP (Enterprise Resource Planning)

system, which was installed in August 2003



58/101

NEED OF FINANCE DEPARTMENT

Economic activities are those which includes buying and selling of goods and services

for purpose of profit. These activities are related to business. The main objective of the

business is to earn profits. This exchange is termed as TRANSACTION. A transaction

means a transfer from one person to another in money or moneys worth. Hence,

exchange of money, goods or services between persons or parties is known to have

resulted in a transaction. In each organization transactions are effected. The goods are

purchased from one market at a certain rate and then these goods are sold in another

market at higher price. However , in some cases organizations incur some losses instead

of profits, which may occur due to any reasons. So to achieve the purpose of recording a

will devised system plays a dominant role in an organization.

In VARDHMAN SPINNING AND GENERAL MILLS there is a finance department

headed by Mr.Bhushan Punj. ERP system is installed to deal with the finance problemsand to derive the maximum benefits of ERP system a concept of CENTRALISED

ACCOUNTING CELL. Under this concept of centralization, all types accounting of

Debtors and Creditors of all units at one single platform i.e. at accounts department

VARDHMAN Ludhiana. The basic reason behind its implementation was to improve the

accounting relating to the customers and suppliers

CENTRALISED ACCOUNTING SYSTEM

Centralized Accounting System means the accounting system, which is maintained

centrally for the units or branches located at different locations. With this system, the



59/101

company can maintain the accounts for the different units at the head office or the

desired place where ever they want to keep those.

In VARDHMAN TEXTILES LIMITED, LUDHIANA, they have the centralized

accounting cell at there corporate office. This office is situated at Vardhman Spinning &

General Mills, Ludhiana. The corporate offices as well as the accounts department,

which controls the centralized accounts, are situated in this.

This computerized centralized accounting cell has four departments and they performed

there specialized type of functions only as specified by the management which can be

altered time to time as per the need of the organization or as the organization suits better,

which are shown as under:

Accounts Department

Accounts Payable

ACP


Accounts ReceivableACR

Business Planning

Control System

BPCS

Exports Import Cell

EXIM Cell

59


60/101

ACR Overview

Accounts Receivable is the amount owed to a company from customers who have

purchased goods or services on credit.

Account Receivable is a multi-company and open item debtors system and is fully

integrated with Configurable Enterprise Accounting (General Ledger). Customer

accounts can be maintained for one or multiple companies. Every invoice or payment

transaction can be stored separately, enabling individual payments to be applied

against individual invoices for the customer. Unpaid or partially paid invoices remain

on file until paid or written off. Accounts Receivable collects and reports information

to assist in collecting receivables, assessing credit and reducing bad debt. It generates

an audit report during each transaction posting session indicating that all transactions

are posted during the session.

ACR application consists of following applications:

ACR Setup - This includes defining various types of system parameters and master

files required for implementation of BPCS ACR module.



61/101

ACR ProcessingThis includes on-line data entry/maintenance related to customer

payments, debit and credit memos. It generates an audit report during each

transaction posting session indicating that all transactions are posted correctly during

the session.

ACR Reports and Inquires This includes aging, standard receivable reports and

inquiries to assist in managing Accounts Receivable operations effectively.

Process Flow


SetupEvent

Processing

ACR

ReportsAccount

Inquiry

ACR Cash &

Memo Posting

,Bank Payment& Debit CreditMemos

Configurable

Ledger

61


62/101

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

chapters



63/101

ACR Setup

This chapter describes in detail various setup for system parameters and master files

required for implementation of BPCS ACR module. These are explained as below.


Accounts Receivable

(ACR) Setup

Describes setups involved in setting up

ACR application.

ACR Processing Describes the procedures of processing payments

Credit adjustments, debit adjustments and invoices.

Describes inquiries related to the ACR application.

Describes reports related to ACR application.

Describes accounting procedure for customer collection,

Debit / credit Memos and reconciliation.

The glossary contains a list of terms and their

Definition.

63


64/101

Company Master Company master application is used to define or maintain

the company information. The Company master contains the following

information:

Company Number It is a two digit numeric code.

Company Name

Address

Currency Code

Every customer must have a default company number. In Vardhman setup

following company codes are being used

Compa

ny

Code

Name

20VARDHMAN TEXTILES

LIMITED.

40 VMT SPINNING MILLS LTD.

50 VARDHMAN THREADS LTD.

Reason Code - Reason codes are used to link a transaction in Cash and Memo

posting with an event. It allows creating journal entries and posting them to General

Ledger. (Described in detail in Configurable Enterprise Financial Manual Part-1) .In

Vardhman setup following are some examples of reason codes being used and the

complete list is available in the system

UnitReas

onEvent Name



65/101

code

Auro Spinning Mills ,

Baddi

PBA

W

BANK RECEIPT

PBA

W

BANK PAYMENT

DCB

W

DEBIT / CREDIT MEMO

G1V

D

BY PASS JOURNAL

Customer Type- It is a four character alphanumeric code used to combine customers

into groups. The members of a customer type group have same logical similarities, such

as geographic or industry trade classification. Customer groups are assigned by currency,

therefore different customer type can be established for each currency in which the

customer bills. In Vardhman setup following customer types is being used.

Customer

Type

Description

FBD FABRIC DOMESTIC

FBE FABRIC EXPORTS

YND YARN DOMESTIC

YNE YARN EXPORTS

SCD SCRAP DOMESTIC

WSD WASTE DOMESTIC

STD SEWING THREAD DOMESTIC

STE SEWING THREAD - EXPORTS



66/101

Customer Terms - It is a two character alphanumeric code and is used to compute the

due date for an invoice. The invoice due date is calculated from the invoice date. In

Vardhman setup following are some examples of term codes being used and the

complete list is available in the system.

Bank Code It is a three character alphanumeric code used along with company and

currency to define a unique bank account code. At least one valid bank code must be setup

before issue any cash payment. In Vardhman setup following are some examples of bank

codes being used and the complete list is available in the system.

Document Sequence

Document Prefix -Itis a two character alphanumeric code assigned to different A/R

transactions like payment, debit memo and credit memo. This is used to group

customer transactions on different parameters like company name, unit name and

type of transaction.

Document Sequence - It is a sequence number automatically generated by the

system for every document prefix.

In Vardhman setup following are some examples of document prefixes beingused and the complete list is available in the system.

Co

mp

Co

de

Unit Name Docum

ent

Prefix

Type of Document

20 VARDHMANSPG &

GENERALMILL

S

EV DIRECT INVOICING

20 ARISHT SPG ZB BILLING FROM SALE



67/101

MILLS DEPOT(LUDHIANA )

Customer Master It is a six digit alphanumeric code used for unique

identification of a customer. This file contains

Company code

Address

Phone Number

Fax Number

Customer Type

Payment type

Term Code

Credit Days

Credit Limit

Document Prefix

Corporate Parent (used to build the corporate parent hierarchy

structure of a customer)

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

customers.

Customer

From

Custome

r To

Customer Type

100000 150000 FABRIC DOMESTIC



68/101

150001 199999 FABRIC EXPORTS

200000 249999 YARN DOMESTIC

250000 259999 YARN EXPORT

300000 389999 HAND KNITTING

YARN

Customer

From

Customer

To

Customer Type

390000 393999 WASTE

394000 399999 RAW MATERIAL

400000 499999 SCRAP

500000 549999 THREADS DOMESTIC550000 649999 THREADS BRANCHES

650000 659999 THREADS EXPORT

660000 779999 THREADS - BRANCHES

ACR Processing

Here we will describe in detail the steps required to process following types of transactions

available in Accounts Receivable Application.

Create On-account payments

Apply On-account payments to existing invoices

Apply Payments to existing invoices

Create Credit Memo (without any reference to existing invoice)

Apply Credit Memo to existing invoices

Create Credit Memo against existing invoices

Create Debit Memo (without any reference to existing invoice

Apply Debit Memo to existing invoices



69/101

Create Debit Memo against existing invoices

Convert initial open invoices to BPCS system.

Maintain Customer Invoice

ACR REPORTS

Report Name

Customer Outstanding Unit Wise

CMY Customer Outstanding Exception Report

Payment not received against Invoices

Customer Outstanding Invoice Wise (buckets)

Collection breakup summary

Customer outstanding (cmy)

Customer outstanding prefix wise as on date

Zone/ agent wise customer wise outstanding

Product wise outstanding

Customer wise invoice details

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

Interest calculation

Customer wise balance confirmation letter

Cash receipt journal



70/101

Account statement

Aged trial balance- company

Salesman/ customer wise outstanding

Customer/invoice wise outstanding

Category/customer/invoice wise outstanding

City/customer/invoice wise outstanding

Salesman/customer/invoice wise outstanding

Category/customer wise outstanding

Sister concern wise outstanding

YARN

The VARDHMAN range of yarn was a humble beginning. Tree decades of hard work,

commitment and constant innovation have resulted in well earn trust and goodwill of our

customers across the globe.

At VARDHMAN we move with a notion that customer serves is a way of life. We strive

to provide our customers delight with 3P service PROMPT, POLITE

&PERSONALIZED

It today have a capacity of over half a million spindles along with two dyeing plants

bearing a capacity of more than 27 tones yarn & 22 tones fibers per day. Our goal,

therefore calls for serving our customers with multiple of products meeting the most

diverse of requirement. This, infect has position VARDHMAN as a SUPER MARKET

of high quality yarn.



71/101

YARN PRODUCTION CAPACITY

VARDHMAN GROUP has installed capacity of more than half a million spindles & out

of it about 1,74,000 spindles are fully dedicated to exports only.

Having built GIANT capacity in term of more than half million spindles spanned over 15

units out of 4 units are dedicated to exports only (EOU) , state of the- art technology.

Dextrose hands capable of plain rhythm with machines sourced from best available

around the world has made VARDHMAN a gallery of variety of world CLASS yarns.

EOU - 100% dedicated to export

only

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

YARN OPERATIONS

The unique combination of man & machine, competing & supplementing each other

with continuos increase in productivity has enable VARDHMAN to dexterously ripe the

fruit of economies of scale & process variety of raw material required for variety of end

products to textiles.

Evenness results falls in 5% to 15% of user standards achieved through

Proper selection of raw materials

World class Pre spinning and Spinning Facilities

Techincal Know How



72/101

Human Skills

100% Quality Assurance System

ACCOUNTING PRECUDURE FOR CUSTOMERCOLLECTION (YARNS)There are three types of collections

Domestic collections

Collection under CMS

Collection through letter of credit L/C

DOMESTIC COLLECTION

Domestic collection means collection, which are collected by Ludhiana branch and

corporate centralized market yarns department. in this system they collect the cheque or

demand draft from the yarns customers and handed over it over to the centralized

accounting cell for the depositing the same in to the bank on daily basis. After receiving

all cheque on a particular day the e centralized accounting cell deposit the instruments in

to the bank for clearing.

After depositing the collections into the bank, the ACR section account for the same in

respective customers accounts on basis of advise sent to bank on day -to -day basis.

CASH MANAGEMENT SERVICES



73/101

Cash management means the proper use of an entitys cash resources . it serves as a

means to keep an organization functioning by making th best use of cash or liquid

resources of the organization . at the same time the organization have the responsibility

to use timely , reliable and comprehensive financial information system .

Cash management helps the organization in:

Eliminating idle cash balances

Monitoring exposure and reducing the e risk

Ensuring timely deposit of collections

Properly timely the disbursements

COLLECTION THROUGH LETTER OF CREDIT (L/C)

A letter of credit is a document issued mostly by financial institutions which usually

provides an irrevocable payment undertaking to a beneficiary against complying

documents as stated in the credit.



74/101

OBJECTIVES OF THE PROJECT

To study the working of yarn division.

Knowledge of sale under Letter of Credit in Yarn Division

Bill Discounting under letter of credit

What factors that considers their working capital requirement.

Working Capital Policies.

To operate the working capital cycle of the management.



75/101

Detail study of Account receivable department (ACR)

RESEARCH METHODOLOGY

Research comprises of defining & redefining problems, formulating hypothesis or

suggested solutions, collecting, organizing & evaluating data, making deductions &

reaching conclusions. In research design we decide about:

Type of data

From whom to get data

About sample size

How to analyze data

How to make report

DATA TYPE



76/101

Data collected was both Primary and Secondary in nature

SAMPLE SIZE

The sample size for the study of the project was yarn division of VARDHMAN GROUP

LTD.

RESEARCH DESIGN

STEP 1- To study the ACR module of yarn division

STEP 2 understanding various methods used for collection of debtors to study

procedure followed for LC in Vardhman

STEP 3 Data Analysis of working capital through Ratios

DATA COLLECTION

The information is collected through the PRIMARY SOURCES like:

Talking with the employees of the department.

Getting information by observations e.g. in manufacturing processes.

Discussion with the head of the department.

Data was collected from following SECONDARY SOURCES like

1. Corporate department

a) Marketing department

b) Finance department

2. ACR reports

3. MIS Department

The collected information was edited & tabulated for the purpose of analysis.

TOOLS USED FOR PROJECT

While making the project file various tools were used. These tools helped in doing the

work. These are:-



77/101

Microsoft Excel

Microsoft Word

Various analysis tools like Bar Graphs, Pie Graphs, tables

LIMITATIONS OF STUDY

In the due course time, the main limitation was with searching the data. The data was not

completed in the main files of Vardhman. The training period of six weeks was to short

to study the organization in detail. In some cases budgets are available but actual figures

are not available for comparison. VARDHMAN is a big unit so it was very difficult to.

study the whole budgeted data



78/101



79/101

RATIO ANALYSIS

CURRENT RATIO CURRENT ASSETS

CURRENT LIABILITIES

PARTICULARS 2006-07 2007-08

CURRENT ASSETS 1,153237,069.61 1,076,464808.72

CURRENTLIABILITIES 102,809,874.03 160,310,964.06

CURRENT RATIO 11.2 6.71

CURRENT RATIOS

11.2

6.71

0

2

4

6

8

10

12

2006-07 2007-08

CURRENT

RATIOS

Interpretation:

A relatively high current ratio is an indication that the firm is liquid and h