Innovations for working capital management

Introduction-Working capital management

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities.

The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital.

Factors of working capital

Working capital is the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities).

As a result, the decisions relating to working capital are always current, i.e. short term, decisions. In addition to time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations.

Working capital management decisions are therefore not taken on the same basis as long term decisions, and working capital management applies different criteria in decision making: the main considerations are:

  • cash flow
  • liquidity
  • profitability
  • return on capital

Out of these cash flow is probably the more important.

New innovations for working capital

New innovations mean the new ways to control the working capital as per requirement. These new innovations help us to prepare in advance for the unexpected future. For example, when economy gets slowdown suddenly last year, every company has changed their management of working capital with new and innovative policies. So the affect of these global crises can be minimized.

Here we will study about the working capital and current ration of four companies and will try to find out their working capital innovative policies with which they get succeed.

Introduction-Castrol India Ltd.

The history of Castrol in India dates back to 1910 when certain automotive lubricants from CC wakefield & company made an entry in the Indian market. In 1919, CC wakefield & company set up its first overseas branch office in India and commenced operations as a trading unit today, Castrol India Ltd. is the largest player in the Indian lubricant industry and is the market leader in the retail automotive lubricant segment. Castrol India is part of the BP group worldwide.

Castrol India Limited is a Public Limited Company with 70.92% of the equity held by Castrol Limited UK (part of BP Group). In 2003 the company's turnover was Rs.1360.51 crores and Profit after Tax was Rs. 137.38 crores.

Castrol India manufactures and markets a range of automotive and industrial lubricants. It markets its automotive lubricants under two brands - Castrol and BP. The company has leadership positions in most of the segments in which it operates including passenger car engine oils, premium 2-stroke and 4-stroke oils and multigrade diesel engine oils. Castrol India has the largest manufacturing and marketing network amongst the lubricant companies in India. The company has 5 manufacturing Plants across the country, including a state-of-the-art plant in Silvassa. The company reaches its consumers through a distribution network of 270 distributors, servicing over 70,000.retail outlets.

Castrol India has clearly demonstrated its commitment to Indian consumers for over 80 years, by offering its international range of high performance products backed by the highest level of customer service. The company has managed to gain sustainable competitive advantage through:

  • Distinctiveness driven by continuous innovation in all areas of business
  • Winning culture and a desire to excel
  • Strong meaningful relationships with all stakeholders

Working Capital and Current ratio of last five years:

If we see, we will find out that, from 2005 to 2007 working capital increased by 3 times (approx.) of Rs. 85.11. And from 2007 to 2009 working capital only increased by 0.3 times (aprrox.) of Rs. 248.25. This means, company really have done the work on controlling the working capital according to their requirements.

Current ratio also depicts that although company is not marinating the standard ratio i.e. 2:1 but they are maintained the current ratio consistently which means they are increasing their current asset over current liability according to requirement.

Innovative steps taken for managing working capital are:

  • This performance is attributable to the consistent execution of their long term strategy and is underpinned by 'in year focus' on margins, attacking cost inefficiencies and reducing working capital.
  • The margin improvement has been achieved through a combination of premium product mix, retaining unit realization and favorable cost of materials.
  • They have also worked aggressively on cost efficiency and cost effectiveness programs to make every rupee count and further improve our profitability.

Introduction-Gulf Oil Corporation Ltd.

The liberalization policies of Government of India, introduced in 1992 were responsible in a large way for the emergence of Gulf Oil India.

Gulf Oil India Limited was promoted in 1993 by Ashok Leyland Limited with its associated companies and 50% equity participation from Gulf Oil International along with Hinduja Consultancy Ltd. to become first such company in India within the industry.

Ashok Leyland Ltd. (ALL) is India's second largest manufacturer of commercial vehicles and diesel engines. ALL has five plants in India and with its own R&D base it has established a tradition for technological leadership and a strong reputation for product liability.

ALL was the first to introduce 3-axle trucks and full air-brakes in India. Recently, as a result of almost US$200 million investment program and technology from IVECO a new generation of world class trucks - the cargo series has been added to its products range.

It also manufactures 60 other models in the light, medium and heavy duty vehicle range. ALL was the first automotive manufacturer in India to receive the ISO 9002 certificate. For the year ended March 1999, ALL registered sales turnover of Rs.20, 451 millions and PAT of Rs.203.68 millions.

GULF has agreement with GULF Oil International (Mauritius) Inc. for Trademarks license and Technical Know-How. Initially GULF introduced a whole range of GULF's international products into the country through toll blending arrangements.

In 1995 the Company set up its first State-of-the-art blending plant at Silvassa to take benefits extended by the Government policies in this Territory in the form of Sales Tax and Income Tax exemptions. The Silvassa plant has the lubricating oil production facility for 75,000 tpa and is equipped with the 'State-of-the-art' equipments including PLC for blending control.

In 1994 the Company promoted a subsidiary company viz. GULF CareX India Limited ("GCIL") with a technical collaboration with SIPAL Arexons SpA, Italy and Member of Fiat Group Companies for manufacture and marketing of wide range of vehicle maintenance products.

GCIL launched its product range of 'Do-it-yourself' that keep the vehicle fit. The name of GULF CareX India Limited was changed to GULF Carosserie India Limited in 1996. GCIL commenced successful operations in Greases in a big way from 1997.

On August 31, 1996 GULF merged with Pita Ashish Oils & Lubricants Ltd., a listed company and subsequently on September 4, 1996 the merged entity changed its name from Pita Ashish Oils & Lubricants Ltd. to GULF Oil India Limited and thereby completed exercise of so-calledreverse merger.

During 1997 the second manufacturing facility was started at Calcutta under blending & filling arrangements to cater to Eastern and North-eastern locations. The annual capacity of the Calcutta plant is 12,000 kl.

In 2002, Gulf Oil India merged with IDL Industries to form Gulf Oil Corporation Limited with headquarters in Hyderabad, India.

Working Capital and Current ratio of last five years:

From 2005 to 2007, their working capital was seemed to be following the same strategy because it is increasing according to requirements. But in 2008, company invested their fund in current assets which leads them to rapid increase in working capital of Rs. 229.92. Then in 2009 they again started to follow the same strategy to control their working capital as per requirements.

Current ratio depicts that they are strictly controlling their ratio of current asset and liabilities on same level till 2007 but in 2008 they invested in current assets to expand the business as per requirement, as a result their liability increased in next year i.e. 2009 which leads them to gain on same level of current ratio and it is a good strategy for expanding and controlling the level of current ratios and working capital.

Innovative steps taken for managing working capital are:

  • Gulf Oil Corporation Ltd reduces its working capital requirement from 68 days to 50 days. Earlier, this business was done through a system of stock transfers to up-country depots, and, then sales through its distribution network. About 40 per cent of its sales were directly supplied to the customers,
  • With the move, they can save about a crore of rupees by improving our working capital management. For the purpose, they may not need that much of investment, but only proper planning and forecasting and hence better market information, and some hedging
  • They also reduce their export processing from two weeks to about 5 to 7 working days. They reduce the cycle time of its foreign distributors who free up his cash flow.
  • The company is also planning to come out with a 3:1 (three shares for every share held) rights issue in December, this year, to raise Rs 80 crore to support its working capital requirements. The company had been funding the working capital requirements through debt financing apart from internal accruals. The rights issue was aimed at injecting liquidity into the system, reducing borrowings for working capital requirements, funding non-project capital expenditure and repayment of high cost loans. The company's debt at present stands at Rs 300 crore.

Introduction-Wipro Ltd.

Reinvention and Wipro go hand-in-hand as far as technology and process advancement is concerned. Wipro Technologies is a global IT services company that provides Consulting, Business Process Outsourcing, Business Technology Services, Enterprise Application Services, Infrastructure Management, Testing, Product Engineering, Engineering Design and Product Support. Our services are spread across a range of strategic domains.

They are the first CMMi Level 5 certified software services company and the first outside USA to receive the IEEE Software Process Award. However, when Wipro was formed as a vegetable oil refining company in 1947 the dramatic change in the company's industry dynamics could only have been predicted considering the fact that it was always reinventing itself.

Now, after three decades in the IT industry, backed with unmatched technical expertise and insights, they have maintained the highest levels of compliance and quality that go with the changing times and technologies. their knowledge investments are backed by years of R&D and have led to the creation of labs and 'Centers of Excellence' that have produced innovative solutions.

Their best has been achieved from the start - a beginning from where continuous evolution has made us the technology partner of choice for growing, established businesses.

The India and Middle East IT business unit of Wipro Limited is one of the fastest growing companies in the Middle East. This unit offers a 360 degree service portfolio spanning the entire IT life cycle. This includes Consulting, Business Solutions, System Integration, Infrastructure and Application Management and Total Outsourcing services where we service all IT needs of a customer, end-to-end.

Working Capital and Current ratio of last five years:

From 2005 to 2007, their working capital was seemed to be following the same strategy because it is increasing according to requirements. But in 2008, company invested their fund in current assets which leads them to rapid increase in working capital of Rs. 7315.80. Then in 2009 they again started to follow the same strategy to control their working capital as per requirements.

Current ratio depicts that they are strictly controlling their ratio of current asset and liabilities on same level till 2007 but in 2008 they invested in current assets to expand the business as per requirement, as a result their liability increased in next year i.e. 2009 which leads them to gain on same level of current ratio and it is a good strategy for expanding and controlling the level of current ratios and working capital.

Innovative steps taken for managing working capital are:

  • SAP SRM implemented by Wipro Technologies, to streamline processes, to free up working capital, and to deliver significant cost savings.
  • SAP Supplier Relationship Management (SAP SRM) application automates, simplifies, and accelerates procure-to-pay processes for goods and services. With SAP SRM, they can reduce procurement costs, build collaborative supplier relationships, better manage supply bases, and improve your bottom line with innovative offerings and a faster time to market.
  • Focus on better working capital management constantly and monitor return on working capital (ROWC).

Introduction- Infosys Technologies Ltd.

Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people with US$ 250. Today, they are global leader in the "next generation" of IT and consulting with revenues of over US$ 4 billion.

Infosys defines, designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. Infosys also provides a complete range of services by leveraging our domain and business expertise and strategic alliances with leading technology providers.

Their offerings span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk.

Infosys has a global footprint with over 50 offices and development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 105,453 employees as on September 30, 2009

Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers.

Working Capital and Current ratio of last five years:

Their working capital is constantly increasing every year and after every 2-3 year, they expand their business to next level, as we can see that they have the large amount of current assets that means they always grab the opportunities to have a very safe future and to become the global leader.

Current ratio also depicts the same thing that from 2005 to 2009 they are continuously in favors of making assets for company. Infect in 2009 current ratio is aprrox. 5 which is far away from the standard ration i.e. 2:1. This shows that they always think of ahead and to make a safe and expanded future.

Innovative steps taken for managing working capital are:

  • Infosys CEO Nandan Nilekani says that he prefers to sit on enough reserves to continue the company's current level of expenses even if there is zero revenue for a year.
  • Infosys have crafted a policy on their idle cash reserves. Company says it mandates an earning of a minimum of twice the cost of capital on average capital employed, and three times the cost of capital on average invested capital.
  • DSO (Day-Sales-Outstanding) down to 56 days from 72days.
  • DSO for banking clients also comes down to 30 days against company average of 56 days.
  • Receivable declined by 15% in past 6 quarters (4QFY08-2QFY10) as a testimony to quality of client relationships and operational efficiency.
  • The various asset ratios such as fixed asset turns and working capital turns continue to be maintained at very high levels

Conclusion:

From the study we have found that, innovative policies really helps in management of working capital and it is required to change the working capital policies according to the business environment as these company has done it in very effective way. List of some innovative steps taken by these four companies which really helps their business in a global crisis period are:

  • SAP SRM Implementation
  • Reducing a cycle time
  • Reducing a Day- Sale-Outstanding Period
  • Management of current assets over current liabilities by considering future prospectus of business.

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