Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
1.0 Introduction The financial management of business firms involves three functions: the management of longterm assets, the management of long-term capital, and the management of short-term assets and liabilities. The first of these is capital budgeting, the second is management of capital structure, and the last is working capital management. Management of working capital is concerned with the management of the assets and liabilities in the top half of the balance sheet. Assets include cash, marketable securities, accounts receivable, inventory, prepaid expenses, and other current assets; also, liabilities such as accounts payable, wages payable, and accruals. In working capital management we analyze decision such as: 1. How should the firm manage its cash? 2. To whom should the firm grant credit? 3. How much inventory should the firm keep 4. What should be the composition of the firm’s current debt? In addition as the means to handle the day to day operational uncertainties the working capital plays crucial role in maintaining the financial health of a firm. Firms strive to maintain a balance between current assets and current liabilities and between sales and each category of current assets in an effort to provide sufficient liquidity to survive to live to maximize value in the future. As long as a good balance is maintained, current liabilities can be paid on time, suppliers will continue to provide needed inventories, and companies will be able to sales demands. However, if the financial situation gets out of balance, liquidity problems surface and often multiply into more serious problems, perhaps even bankruptcy. There are two types of capital need: for “fixed capital" to invest in things such as buildings, plant and equipment; and 'working capital' principally to pay for stock and to cover the amount of credit extended to customers. Fixed capital, as the name implies, tends not to vary in the short term but to move up (Or down) in jumps when major investment decisions are made (or assets sold). Working capital, on the 1
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
other hand, is much more fluid and fluctuates with the level of Business. The working capital cycle links directly with the cash operating cycle-Working capital comprises short-term net assets: stock, debtors, and cash, less creditors. Working capital management then is to do with management of all aspects of both current assets and current liabilities, so as to minimize/c the risk of insolvency while maximizing return on assets. Generally we divide financial management decisions into the management of assets (investment) and liabilities (Sources of financing) in the, 1) the long term and 2) the short term. Short-term financial management often refers lo Working Capital Management, which involves management of the current assets and the current liabilities of a firm. Working capital management is so important in financial management because firm's value cannot be maximized in the long run unless it survives the short run. In fact the principal reason firms fail because they are unable to meet their working capital needs. Thus, sound working capital management is a requisite for firm Survival.
1.1 Objectives Primary objective of the preparing this report is to fulfill a short part of our course requirement of “Working Capital Management” Secondary objectives are: •
To evaluate the liquidity position of Monno Ceramic Industry Ltd.
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To study about credit policy of Monno Ceramic.
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Working Capital Practice in our country.
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About short term investment in Bangladesh.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
1.2 Methodology Data has been collected from the primary source as well as from the secondary source. The annual report of Monno Ceramic Industry Ltd. has been collected. Some information has been used from the class lecture, course material and from internet.
1.3 Background We are tremendously grateful to our course teacher Mohammad Iftekharul Alam who gave us this terrific opportunity to participate in such a Ratio analysis and find out the scenario of working capital practice in Bangladesh. We think that this is unique and dynamic idea. In our real and professional life, this practice will help us a lot when the critical issues will have to be evaluated and screened.
1.4 Limitations Every task has some limitations. We faced some usual constraints during the research period. Though we have given utmost effort to prepare this report but there are some limitations of the study. These are as follows Collecting Information Communication Busy working Environment Secrecy of Information Different Format Data Technological Problem Financial Data Complexity
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
2.0 Overview of Monno Ceramic Industries Ltd Monno Ceramic Industries began producing porcelain tableware for the Bangladesh home market in 1985, and secured its first export order the following year. Monno soon earned an enviable reputation for both quality and value. The subsequent introduction of bone china to its range of quality dinnerware has only served to strengthen that reputation. As the original exporter of porcelain dinnerware ‘Made in Bangladesh’ Monno is proud to contribute to the growth of the Bangladesh economy. In a developing country the kudos accorded to exports and the valuable foreign exchange derived is significant. Today in Bangladesh Monno is a household name and regarded as one of the country’s premier companies. Bangladesh is still a relatively young country. When after independence British India was partitioned in 1947, West Pakistan and East Pakistan were created. Subsequently East Pakistan proclaimed independence in 1971 and Bangladesh (meaning Bengali homeland) came into being. As a developing country Bangladesh is accorded preferential tariffs by the European Union which means zero import duty on Monno tableware. Monno offers products in Porcelain, New Bone China, Ivory China, and real Bone China. In fact they source the materials in their bone china body and glaze from Stoke on Trent, to which is added pure water filtered from their own wells. So Monno likes to think of it as ‘English’ Bone China. Customers include many well known prestigious department stores, specialty and chain stores around the world for whom they manufacture own label products. Some customers have been with Monno for as long as 20 consecutive years and Monno is proud to enjoy a close relationship with them. They work with customers to develop their own shapes or decorations, or can offer designs from their extensive stable. Their talented teams of artists and designers work closely with the experienced technicians of an own in-house decal print unit. That combination of man and machine helps achieve striking results. Monno’s Porcelain & Bone China factories are perhaps unique in being able to offer under one roof the flexibility and versatility of many manufacturing methods as best suit the size or nature 4
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
of the product. Monno has invested in modern machinery and can boast high pressure casting, ISO Static Pressing, auto cup lines, auto dip glazing, spray drying, and an open firing system. That technology helps them in their never ending pursuit of excellence. Manufacturing capacity is in the order of 2 Million pieces per month. Monno Products are safe! Tests carried out by CERAM show their products fall well below the thresholds for lead and cadmium release in tableware or cookware coming into contact with foodstuffs as specified under current European regulations. They also meet Australasian and US Federal requirements as well as those specified by California’s very tough ‘Proposition 65’. The Monno Group of companies includes, significantly, Monno Fabrics Ltd. and Monno Attire Ltd, as well as printing and packaging companies mutually supporting the activities of the Group. Monno is not therefore dependent on outside suppliers for labels or packaging, which helps to ensure orders are available on time. Monno provides employment to some 5,000 skilled and unskilled local artisans, crafts men and women, who are encouraged to develop their full creative potential. Training is highly regarded, especially when working with some of the very best advanced machinery selected from manufacturers worldwide. Monno is a strong supporter of the environment, using for example only natural non toxic materials in its porcelain, and only recycled pulp in its packaging; disposing of waste factory product in accordance with Federal and European standards. Monno does not employ children or discriminate between gender, and has an equal opportunity policy. Monno also cares for the community, providing welfare, vocational training, basic education for those less well off, together with a home for underprivileged children. Those graduating from these programmes are helped to find jobs according to their individual abilities. Monno’s own ethical and social environmental policy is in accord with that of their customers and has satisfied the requirements of all factory and ethical audits independently carried out on their behalf.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
At the time of writing the Monno Group is currently building a hospital as will further benefit its employees and residents in local communities.
2.1 Mission, Vision & Objectives of Monno Ceramic Industries Ltd The Monno Ceramic Industries Limited (the company) was incorporated in Bangladesh 21 st April, 1981 as a Public Limited Company under the Companies Act 1913. The Company want for public issues of shares in 1985 and its shares are listed with the Dhaka Stock Exchange Limited & Chittagong Stock Exchange Limited since 1983 and 1995 respectively. The Company owns and operates modern Ceramic wares Factory and produces high quality Porcelain and Bone China Tableware’s products and sells them in the local as well as in foreign market. The mission of Monno Ceramic is to provide world class quality products to the valued customers strictly maintain ethical standard in business operation. The vision of Monno Ceramic is the well being of the shareholders and all other stakeholders, society as well as the national interest as a whole. The objectives of Monno Ceramic are to conduct transparent business operation within the legal & social frame work with aims to attain the mission with a quantitative / qualitative target in business operation. The mission, vision and the objective are to emphasize on the continuous development in making value addition to the products for producing the higher and products, to keep well prepared for competitive world market
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
3.0 Working Capital Terminology It is useful to begin the discussion of working capital policy by reviewing some basic definitions and concepts: •
The term working capital, sometimes called gross working capital, generally refers to current assets.
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Net Working Capital is defined s current assets minus current liabilities.
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The Current Ratio, which is calculated by dividing current assets by current liabilities and it is intended to measure a firm's liquidity. However, a high current ratio does not insure that a firm will have the cash required to meets its needs. If inventories cannot be sold, if receivables cannot be collected in a timely manner, then the apparent safety reflected in a high current ratio could be illusory.
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The best and most comprehensive picture of a firm's liquidity position is obtained by examining cash budget. The cash budget, which forecast cash inflows and outflows, focuses on what really counts, the firm's ability to generate sufficient cash inflows to meet its required cash outflows.
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Working Capital Policy is generally refers to the firm's basic policies regarding - (a) target levels for each category of current assets and (b) how current assets will be financed.
In the standard financial literature, working capital is defined in two ways. According to one definition it is "the arithmetic difference between current assets and current liabilities". The other definition is "the sum of current assets" which is also called "Current Capital". In the cooperative literature the working capital has a third definition namely "the sum total have owned capital and borrowing less investment made in building and other fixed assets". The first two definitions emphasis on assets, that is, utilization of resources, while the third one emphasizes on resources itself. In our discussions the term "Working Capital" is used to denote the sum total of current assets and the net working capital to arithmetic differences between current assets and current liabilities.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
3.1 Value Added Conversion Work in Progress Even profitable companies fail if they have inadequate cash How. Liabilities are settled with cash not profits. The primary objective of working capital management is to ensure that sufficient cash is available to: •
Meet day-to-day cash flow needs
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Pay wages and salaries when they fall due
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Pay creditors to ensure continued supplies of goods and services
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Pay government taxation and providers of capital — dividends; and
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Ensure the long-term survival of the business entity.
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Poor working capital management can lead to
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Over-capitalization (and therefore waste through under utilization of resources and hence
poor returns); and •
Overtrading (trying to maintain a level of sales which is higher than working capital can
sustain — for businesses which extend credit terms, more sales means more debtors and higher working capital demands). Characteristics of over-capitalization are excessive stocks, debtors, and cash, low return on investment with long term funds tied up in non-earning short term assets. Overtrading leads to escalating debtors and creditors, and if unchecked, ultimately to cash starvation.
3.2 Taking Control of Working Capital means Focusing on its Main Elements Control of the debtors' element (the amount owed the business in the short term) involves a fundamental trade-off between the cost of providing credit to customers (which includes financing bad debts and administration), and the additional net revenue that can be earned by doing so. The former can be kept to a minimum with effective credit control policies, which will require: •
Setting and enforcing credit terms; 8
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
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Vetting customers prior to allowing them credit;
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Setting and reviewing individual credit limits;
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Efficient invoicing and statement generation;
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Prompt query resolution.
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Effective chasing and collection procedures; and
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Limits beyond which legal action will be pursued.
Before allowing credit to a new customer trade and bank references should be sought. Accounts can be asked for and analyzed and a report including any county court judgments against the business and a credit score asked for from a credit rating business (such as Dun and Bradstreet). Salesmen's views can also be canvassed and the premises of the potential customer visited. The extent to which all means are called upon will depend on the amount of the credit sought, the period, past experiences with this customer or trade sector, and the importance of the business that is involved. But this is not a one-off requirement. One classic fraud is to start off with small amounts of credit, with invoices being settled promptly, eventually building up to a huge order and a disappearing customer. Credit checking, even for established customers, should therefore feature in regular procedures. When the credit worthiness of a new customer is established, positive credit control calls for the setting of a credit limit, any settlement discounts, the credit period, and credit charges (if any). The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge large interest on late payment of business debts by companies and public sector organizations. From last November they were also able to take similar action against other small businesses. Nevertheless, it is wise to inform customers this right will be exercised. Collection is a vital element of credit control and must include standard, polite and wellconstructed reminder letters, and effective telephone or e-mail follows up. Use of collection agencies should be considered, as could factor — in its most comprehensive form a loan facility based on outstanding invoices plus a sales ledger and debtors control service.
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Efficient control of debtors will assist cash flow. And help keep overdraft or other loan requirements down, and hence reduce interest costs. Debtors represent future cash or they should do if proper credit control policies are pursued. Likewise stock will eventually become cash, but in the meantime represents working capital tied up in the business. Keeping levels to the minimum required for efficient operations will keep costs down. This means controlling buying, handling, and storing, issuing, and recording stock. Inherent in any system of inventory control is the concept of appropriate stock levels normally expressed in physical units sometimes in monetary terms. The objective of establishing control levels is to ensure that excessive stocks are never carried (and working capital thereby sacrificed) but that they never fall below the level at which they can be replenished before they run out.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
4.0 Working Capital Practice of Monno Ceramic Industry Ltd Working capital policy involves two basic questions: (1) what is the appropriate level for current assets, both in total and specific accounts, and (2) how should current assets be financed. From the balance sheet, we found stocks, account receivables, cash and cash advances in the current assets portion. What would be the working policy whether relaxed, restricted or moderate of holding different types of current assets; I did not found any clear statement from the company. The company does practice the scenario analysis of working capital that will maximize the profit of the company. We found trade and other payable, current portion of term loan, short-term loan and bank overdraft, and provision for taxation in current liability portion. What policy they use in managing current liabilities and how and when they paid obligations, we need identify their policy against current liabilities. Working capital management is one of the important tasks in financial management of an enterprise. Because working capital management is so important in financial management because firm's value cannot be maximized in the long run unless it survives the short run. In fact the principal reason firms fail because they are unable to meet their working capital needs. Monno Ceramic Industry Ltd is one of the important units of Monno group, We will analyze five years balance of the company and try to identify working capital position of the company and its capacity to payment current liabilities with the current assets of the company, how they manage different current assets and policy to get maximum benefit from those current assets that will develop the liquidity position of the company. We think managing business with working capital requires high capability to managers to tackle any unexpected situation. Because we observe the result of weak working capital position of a company does not work positively with its business performance. The flow of current assets is necessary to the working expenses. We will discuss the cash management policy, credit management policy, inventory management policy and management of short-term liabilities one by another in the rest portion of the report.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
4.1 Cash Management of Monno Ceramic Industries Ltd In this section, our mission is to focuses on the formulation of financial policies and decisions for the management of cash and marketable securities. Two major areas are explored: (1) techniques available for favorably influencing cash receipt and disbursements patterns, and (2) responsible investment outlets that enable the company to employ excess cash balances in a productive fashion. It will be helpful to distinguish among some terms. Cash is the currency and coin the firm has on hand in petty cash drawers, in cash registers, or in checking accounts at the various commercial banks where its demand deposits are maintained. Marketable securities arc those security investments the firm can quickly convert into cash balances. Those held by most firms tend to have very short maturity periods-less than one year. Marketable securities arc also referred to as near cash or near cash assets because they can be quickly turned into cash. Taken together, cash and near cash are known as liquid assets. The financial manager is directly responsible and accountable for management of cash. Business activities can be organized without machinery, building, stocks or inventories, and even without men but not without cash. Cash is the least common denominator of all business activities. In this discussion the term 'cash' is used to denote not only the cash on hand but also the general cash balances with bank. 4.1.1Objectives of Cash Management: The objectives of cash management are: •
Meeting payment obligations: The main objective of maintaining cash is to meet payment obligations as and when they arise. This is called liquidity management.
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Increase fife profitability: Funds have a price, interest to be paid or the opportunity lost in earning interest or profit by investing in business instead of keeping idle is the main cost of maintaining cash. The other costs are maintaining costs, embezzlement costs, etc.
These two objectives are not mutually exclusive and the financial manager has to strive to achieve those objectives simultaneously.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
4.1.2 Scope of Subject: The subject of cash management would cover the following aspects: •
Maintaining Cash Levels: How much cash is to be maintained to meet the payment obligations depends on the predictable and unpredictable gaps and availability of other sources of funds.
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Controlling Flow of Cash: Some important aspects connected with flow of cash are efficient collection mechanism
from depots, branches and customers, deposits the
cheque the same are received in the office, synchronizing the time of receipts and payments that is, coinciding outflow of major payments with inflow of funds. •
Investment of Surplus Funds: The criteria for selecting an investment portfolio are security, liquidity, yield and maturity.
4.1.3 Reasons For Holding Cash: The term cash refers to the funds a firm holds that can be used for immediate disbursement-this includes the amount a firm holds in its checking account as well as the amount of actual coin and currency it holds. Cash is a “non-earning, idle, asset" that is required to pay bills. When possible, cash should be "put to work" by investing in assets that have positive expected returns. Thus, the goal of the cash manager is to minimize the amount of cash the firm must hold for use in conducting its normal business activities, yet, at the same time, to have sufficient cash to (1) pay suppliers (2) maintain the firm's credit rating, and (3) meet unexpected cash needs. Firms hold cash for the following reasons: •
Cash balances are necessary in business operations because payments must be made in cash, and receipts arc deposited in a cash account. Cash balances associated with routine payments and collections arc known as transactions balance.
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A bank often requires a firm to maintain a compensating balance on deposit to help offset the costs of providing services such as check clearing and cash management advice.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
•
Because cash inflows and cash outflows are somewhat unpredictable, firms generally hold some cash in reserve for random, unforeseen fluctuations in cash flows, These safety stocks are called precautionary balances-the predictable the firm's cash flows, the larger such balances should be. However, if the firm has easy access to borrowed fund-that is, if it can borrow on short notice (e.g. via a line of credit at the bank)-its need for precautionary balances is reduced.
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Sometimes cash balances are held to enable the firm to take advantage of bargain purchases that might arise. These funds are known as speculative balances. As with precautionary balances, though, firms that have easy access to borrowed funds are likely to rely on their ability to borrow quickly rather than to rely on cash balances for speculative purposes.
4.1.4 The Cash Budget: Perhaps the most critical ingredient to proper cash management is the ability to estimate the cash flows of the firm so that firm can make plans to borrow when cash is deficient or to invest when cash is excess of what is needed. Without a doubt, financial manager will agree that the most important tool for managing cash is the cash budget (forecast). The cash budget help management plan investment and borrowing strategies and it also is used to provide feedback and control to improve the efficiency of cash management in the future. The firm estimate it's general needs for cash as a part of its overall budgeting or forecasting, process. First, the firm forecasts its operating activities such as expenses and revenues for the period in question. Then the financing activities necessary to attain the level of operations must be forecasted. Such forecast entails the construction of pro forma financial statements. The information provided from the pro forma balance sheet and income statement isc combined with projections about the delay in collecting accounts receivable, the delay in paying suppliers and employees, tax payment dates, dividend and interest payment dates, and so on. 4.1.5 Fluctuations in Cash Holding: The firm is subject Ho irregular upswings in its cash holding from several external sources. Funds can be obtained in the financial market from the sale of securities, or non-marketable debt contracts can be entered into with lenders, such as commercial banks. External financing 14
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
contracts usually involve significant sums of money stemming from a major firm need, such as plant expansion, and do not occur on a regular basis. Monno ceramic ltd does not prepare any cash budget to maintain receipts of the company. As we know from our prior analysis, working capital position the company is negative, we can realize that its cash position obviously bad. Now we all try to analyze the cash management technique of the company and how the managers to manage the cash position of the firm and overall receipts and payments of the company. Then an obligation arises to payment any cash, first, the management tries to find the credit limits to their different bank accounts and how much money available to their result. Monno ceramic ltd has a credit accessibility to go for a credit application. The main sources of cash of the company are short-term loans & cash collections from sales. The accounting people of the company try to find where the credit limit yet not exceeded and they have access to collect cash from that bank account. The company deals with different bank with overdraft, current account and short term-loan. When an obligation arises to payment any cash, first, the management tries to find the credit limits to their different bank accounts and how much money available to their vault. Monno ceramic ltd has a credit accessibility to go for a credit application if it finds any requirement. The main sources of cash of the company are short-term loans and cash collections from sales. The cash management is not sufficient to handle a big enterprise like Monno ceramic industries ltd. They do not prepare cash budget at the beginning of the year. The take decisions very small duration, therefore, they can see the future of the cash position of the company. They hold cash if they need to pay any emergency payment to operate its business. Finally, we can draw a conclusion that cash management position of the company is not good at all. They should develop cash budget before beginning a period. They should also develop some policy to hold cash in their account to maintain payment procedures and take advantage to win the risk of facing and uncertainty of cash shortage.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
4.2 Credit Management of Monno Ceramic Industries Limited 4.2.1 Credit Policy of the Monno Ceramic Industries Limited: It is experienced that all sales and collection lie with the marketing/Sales managers that is the persons who make the sales; they are responsible for the collections. The collection effort of territory sales officer shall be targeted and judged by sales managers while overall monitoring and reporting on debtors will be done the accounts manager. 4.2.2 Credit Procedures of Monno Ceramic Industries Limited: The credit amount is determined by the sales department, they basically determines the credit, will be offered to the dealer, and traders. It is experienced that a maximum of 50% of the total sales may be given on credit with all collection responsibilities of sales or marketing department. There is a dealer and traders network of the company. Credit sales to dealer or traders shall also take place against pre-fixed credit limits and auto check will be there to keep invoicing within limits. 4.2.3 New Dealer Establishment Policy of Monno Ceramic Industries Limited: Transactions with newly established dealers or traders shall be on cash basis for a period of six months or twelve months, which shall be treated as provisionary period of a dealer. On financial appointment of a dealer may be allowed on the basis of performance for definite period. 4.2.4 Credit Limits: Credit Limits for the dealers are fixed on the basis of the followings criteria: •
Average one month's sales on the basis of his last 12 months performance plus target sales if any to be allotted to the dealers/traders.
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Collaterals i.e. Bank guarantee, sales certificate, Bonds etc, to be submitted by the dealers to the company as security against credit allotted to him supported by confidential bank reference.
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Signing of dealership agreement is specified from specifications supplied by the company. 16
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
4.2.5 Credit Terms of Monno Ceramic Industries Ltd: There may be separate cash and credit prices. Normally selling prices will be fixed on the basis of cash sales and credit prices will be certain percentage above than the cash price. 4.2.6 Credit Period of Monno Ceramic Industries Ltd: Monno ceramic industries Ltd practices variable credit period different dealers and traders. The credit period varies dealer to dealer on the basis of distance with sales office of the company to dealers. It varies from 5 day, 10 days, 15 days, 20 days etc. 4.2.7 Credit Release Policy: There should be an auto system, which will be activated in the computer, and which will be send invoice to credit hold if payment is overdue in terms of time or exceeds credit limits in terms of amounts. Customers order from to be raised by the bank office staff of all products for credit sales are to be approved by the credit manager or credit controller before invoicing. Any order going to credit hold shall be reviewed by the credit controller and released after scrutiny on case to case on the basis of his satisfaction.
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4.3 Inventory Management Practices of Monno Ceramic Industries Limited Monno ceramic industries Limited usually sells the goods in Bangladesh. Our main focus is to discuss how they determine the annual requirement for each type of products, what are their basis to determine the annual demand for each type of’ products, frequency of order, quantity for each product and their policies to minimize inventory related costs. 4.3.1 Determining the annual demand: Annual demands for each product are determined by using different ways for determining the market demand. The annual requirement of each product are mainly defined based on the - (I) Sales force requirement, (2) Previous History (Effective demand in the past), (3) Market trend, and (4) Effective demand in the present. (1) Sales force requirement: The sales requirement is primarily defined be the statements provided by the sales forces of the company that is how they could sell in the coming year. The sales force of the company presents an initial sales volume that they are able to sell in the next year. Management carefully observes the projection of the sales team and the ability to sell of the sale person and determine a reliable quantity to be sold in the next year. (2) Previous History (Effective demand in the past): Before defining the annual demand for the next year, management analyses the consumption series that obtained from several years. From that data, management tries to draw a demand level that would be equal to the demand for the coming year with respect to data from the previous years. (3) Market trend: The sales demand is also composed by the current market trend and tendency of the customers. Management carefully assesses that which product will be able to attract customers with its product features (which are customer's current desires). They try to order more those product, has the potential ability to attract customers.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
(4) Effective demand in the present: Management also assesses the current demand of each product by the customer preference and order from dealer and traders. The information of the effective demand in the present also helps to determine the effective demand in the next year. 4.3.2 Assessment of Market Potentiality: Monno ceramic industries Limited tries to assess the market potentiality by assessing the demand of each region of Bangladesh. Covering several macro and micro factors influencing each segment draws this assessment. •
Size of the population: The team identifies the size of the population of a target people.
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Consumption Level: Management analyzes the consumption level and purchasing power of the people of each segment.
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Income Level: Management measures the relative income level of the people and their savings propensity for each segment.
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Level of competition: They examine the competitive position of each segment and analyze the strengths and their activities to generate sales in those regions.
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Size of Potential buyer: They determine the size of the potential buyers with respect to income level and other cultural factors. Capacity to capture customers: After all consideration, management tries to assess their brand pull, product pull, and promotion pull. Management determines their effective annual demand according to their brand pull, product pull, and promotion pull.
4.3.3 Quantity of Order: Quantity for an order is defined with consideration of different factors. Monno ceramic industries Limited consider variation, occasions, design and other factors that determine the demand for electronics goods. It orders more at the time of EiduI-Azha and Eidul-Fetor. When they order they consider past experience of demand for deferent season. Inventory management practice of Monno Ceramic Industries Limited is not very much effective. They do not calculate EOQ to determine the optimum quantity that will minimize the Inventory cost. Their policy is very much inefficient from the financial management point of view. Number of orders that should be in a year is not calculated in the light of modem inventory 19
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
management, it is essential to establish effective inventory monitoring and order policy to minimize total inventory costs.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
5.0 Basic Analysis of Cash Liquidity, Trade Credit & Inventory Management of Monno Ceramic Industries The liquidity of Monno Ceramic Industries refers to the convertibility of its assets without losing significant value. Cash of a firm is the tangible current asset which is the most liquid asset of a firm. Trade credit is one' of the oldest forms of credit arrangements. From ancient time traders allowed its trusted customers to buy goods on credit. In modern age the trade credit is considered as the integral 'part of all business activities. The trade credit is extended not surely for historical reasons. In general reasons are shown to argue in favor of trade credit. These are: (a) Opportunity for financial arbitrage (b) Informational gap regarding product/service quality and (c) to facilitate payments through systematic and reliable means Inventory represents item with a physical existence a bushel of corn an automobiles headlamp or another good. Inventory represents a costly investment to the firm. In order for this investment to be worthwhile, there must be some advantage in making it. In this section, we discuss some reasons why the firm may want to carry inventory. These reasons vary with the type of inventory carried. For accountant's convention inventory is divided into three types: Raw Materials Inventory: There are several reasons why firms might want to carry inventories of raw materials. First, having an available stock of raw materials inventory makes production scheduling easier. Since the raw materials for the production process are on hand, scheduling of the firm's production equipment can proceed without concern over when these goods will arrive. Without a stock of raw 'materials on hand, this scheduling would be tentative, and subject to the arrival of such materials.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
A second reason to keep raw materials inventory is to avoid price changes for these goods. If the firm keeps a stock of raw materials, the firm can purchase these materials when it believes prices are low and can decline to purchase when it believes prices are high"!) This reduces the firm's costs and also the variability of these costs. By keeping a stock of raw materials for this purpose, the firm is pursuing a hedging strategy against price fluctuations of these materials. Third, the firm may keep extra raw materials inventory to hedge against supply shortages.\When prices of raw materials are controlled when goods are unavailable sat the controlled price. During these times, the firm may draw down its existing inventory to continue production. Finally the firm may order and keep additional inventories or raw materials to make advantage of quantity discount. Work-in-Process Inventory: In manufacturing firms, a certain amount of work-in-process inventory occurs as products move from one production process to another. A major reason that firms keep work-in-process inventory beyond this minimum level is to buffer production. Buffering is part of the planning process and allows flexibility and economies that would not otherwise occur. Finished Goods Inventory: One reason to keep finished goods inventory is to provide immediate service. When customers want to purchase goods and services, ready availability of these is a substantial advantage in making a sale. A second reason for keeping finished goods inventory is to stabilize production. When firms produce several types of products using the same equipment, there are costs and delays in changing from the production of one product to another. The longer are the firm's production runs, the lower are these transition costs. However, longer production runs result in higher finished goods and work-in-process inventories.
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
Generally a Firm’s Liquidity is measured with the help of following ratio analysis 1. Current Ratio (CR) = 2. Quick Ratio or Acid Test Ratio (QR) 3. Accounts Receivable Turnover Ratio (ART) = 4. Average Collection Period = 5. Inventory Turnover Ratio (ITR) = 6. Inventory Conversion Period (ICP) = 7. Cash Conversion Cycle = Operation Cycle Time- Payment Deferred Time. 8. Operating cycle time = Inventory conversion Period + Average Collection Period 9. Payment Deferred Period = (Some of A/Cs Payable + Other Sales Related Payable) x 360 days / Cost of goods sold. 10. Mat Liquid Balance = (Cash + Marketable Securities – Notes Payable- Current Maturity) / Total Asset.
5.1 THE WORKING CAPITAL ACCOUNTS OF MONNO CERAMIC AT A GLANCE 23
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
Amount in Taka Particulars Total Assets Current
2007-08 977,425,853 491,611,098
2006-07 906,893,007 434,240,126
2005-06 854,861,453 350,968,948
2004-05 484,970,162 367,181,684
2003-04 438,183,992 322,512,300
Assets Current Liability Inventory Accounts
526,296,546 336,569,586 65,857,815
407,755,356 247,286,088 95,358,803
312,367,258 197,009,432 83,457,116
373,049,499 217,410,601 73,552,473
302,016,236 169,714,140 72,238,955
Receivable Credit Sale Cost of Goods
773,203,789 609,014,853
664,548,289 522,226,124
726,551,705 592,574,535
715,289,994 587,042,139
676,784,086 535,182,643
Sold Cash Accounts Payable Wages M/S Current Maturity Notes Payable
9,862,797 116,210,219 7,307,411 37,991,973 127,230,286
27,319,683 40,968,814 6,909,508 47,294,000 150,164,425
17,824,481 15,727,508 6,460,145 47,294,000 181,703,003
11,330,357 47,569,181 8,717,141 151,936,330
25,466,180 87,137,545, 7,362,482 190,921,460
5.2 RATIOS OF MONNO CERAMIC FOR CONSECUTIVE 5 YEARS
Particulars CR QR
2007-08 0.93 0.29
2006-07 1.06 0.46
2005-06 1.12 0.49
2004-05 0.98 0.40
2003-04 1.07 0.51 24
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
ART ACP (Days) ITR ICP (Days) Operating Cycle
11.74 30.66 1.81 198.90 Time 229.56
6.97 51.65 2.11 170.62 222.27
8.71 41.33 3 120 161.33
9.72 37 2.7 133.33 170.33
9.37 38.42 3.15 114.29 152.71
(Days) Payment differed period 73.01
33
13.48
34.52
63.57
(Days) Cash Conversion Cycle 156.55
189.27
147.85
135.81
89.14
(Days) Net Liquid Balance
--0.19
-0.25
-0.29
-3.78
-0.16
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Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
5.3 PROFIT, PROFITABILITY, FREE CASH FLOW AND SHARE PRICE OF MONNO CERAMIC FOR CONSECUTIVE 5 YEARS
Particulars
2007-08 Gross Profit 164,188,936 Operating 109,027,589,
2006-07 142,322,165 79,782,461
2005-06 133,977,170 78,083,877
2004-05 128,247,855 3,997,093
2003-04 141,601,443 17,045,542
Profit Net Profit -1,154,979
8,156,697
8,938,741
8,144,000
20,468,553
Before Tax Gross Profit 21.23%
21,42%
18.44%
17,93%
20.92%
Margin Free Cash 9862,797
27,319, 683
17,824,481
11,330,357
25,466,180
Flow Share Price
Tk. 58.50
Tk. 58.50
Tk. 83.75
6.0 Findings Current ratio is in volatile situation. In most of the cases current ratio is more than one that indicates that current assets of Monno Ceramic are greater than current liabilities which give us a positive signal. The quick ratio is almost stable. Average collection period has been increases over the years and inventory conversion period has also been increased. Cash conversion cycle is 26
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
increasing during the period. Cash conversation is necessary but the firm need to restrict to grants the credit limit. Net liquid balance is negative which shows that its current assets are capable of meeting the liabilities of the firm. To profit margin is increasing which give us satisfactory situation of the firm. But the net profit margin is decreasing and in the financial year 2007-08 it has incurred loss and free cash flow is in volatile position. The share price has also been decreased. So the management of Monno Ceramic should take effective measures immediately in handling its assets and liabilities.
7.0 Conclusion Monno Ceramics Limited is a leading ceramic company in ceramic industries since couple of year. Ratios of Monno Ceramic ltd shows that their current asset is greater than current liabilities. It is a good sign for any company as well as industry. The quick has ratio almost in a steady position. Overall ratios represents working capital practice of Monno Ceramic is good. 27
Working Capital Practice in our Country Based on Monno Ceramic Industries Ltd.
The cash conversation cycle is increasing over the period. Whereas we know that cash conversation cycle is necessary for a firm who grants credit because it is not possible to meet up the general obligation by other current asset except cash. That is why it is necessary to increase cash conversation cycle but if the firm grants credit more than an effective rate, it should be harm for the company.
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