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Department of Finance and Banking University of Chittagong 1.1 ORIGIN OF THE REPORT
This paper is originated from the curriculum requirement of MBA program of University of Chittagong .The topic of my report is !orking capital Management practiced in Usmania "lass #heet Factory $td.%. The report has &een 'repared under direct supervision of Md. Fa(lul )aque Deputy Manager* Accounts and Finance* U"#F$.
1.2 AIM & OBJECTIVES OF THE STUDY
The aim of the report is to evaluate the +orking capital management of Usmania "lass #heet Factory $td. comparing +ith the standards of +orking capital management. The o&,ectives of the study are
To have an idea a&out the +orking capital management of Usmania "lass #heet Factory $td. To &e familiar +ith internal control of +orking capital procedure. To understand the application of every component of +orking capital in U"#F$. To relate the theoretical learning +ith the real life situation. To identify identify pro&lems and provide recommendations on the &asis of my findings.
1.3 SCOPE OF THE STUDY
The scope of my study is only a&out +orking capital management. The Term 'aper descri&es a&out the eisting procedure of +orking capital management in Usmania "lass #heet Factory $td. the rules and regulations regulations follo+ed follo+ed &y it and the eisting Account Accountss 'aya&le and Account Account /eceiva&le system relating to this account. The report is prepared on the &asis of conversations +ith personnel of accounts and finance department of U"#F$. As 0 have prepared this term paper on the &asis secondary sources* my scope of +ork +as limited to provide information. information. 1.4 METHODOLOGY OF THE STUDY
1
Department of Finance and Banking University of Chittagong The follo+ing methodology +as follo+ed throughout the study .The study is &ased &asically on &oth primary and secondary data. Data regarding the organi(ation profile collected in the follo+ing +ays1.4.1 Primary Sources
Face2 to2face conversation +ith the respective offices. 0nformal conversation +ith the clients and friends. Appointment +ith the top officials of U"#F$
1.4.2 Secondary Source
3rgani(ational Brochures4 Annual /eports. 3nline information. Different U"#F$ pu&lications. 3ther relevant +ritten materials. Tet Books. 1.5 ORGANIZATION OF THE REPORT
The Term 'aper is divided into five parts. The first part is the introductory chapter. The second part is the organi(ational part 5a &rief overvie+ of U"#F$6. The Third part deals +ith report part of U"#F$. The fourth part includes overall findings and analy(ing performance concluding remarks. The last part provides Bi&liography and anneure 1.6 LIMITATIONS OF THE STUDY
Time is an important issue in Term 'aper /eport +riting. As 0 have &een given a specific deadline for su&mission* o&servation and learning all the +orking capital management +ithin fe+ days really tough. Besides* all the comments made* conclusions reached and suggestions for possi&le improvement provided are purely &ased on my level of understanding* kno+ledge and my +ay of interpreting a particular statement. Because of the lack of information* 0 have to make some assumptions that may cause fe+ errors or personal mistakes in the Term 'aper. 0n spite of all these limitations* 0 have tried to put the &est effort e ffort as far as +as possi&le.
7
Department of Finance and Banking University of Chittagong The follo+ing methodology +as follo+ed throughout the study .The study is &ased &asically on &oth primary and secondary data. Data regarding the organi(ation profile collected in the follo+ing +ays1.4.1 Primary Sources
Face2 to2face conversation +ith the respective offices. 0nformal conversation +ith the clients and friends. Appointment +ith the top officials of U"#F$
1.4.2 Secondary Source
3rgani(ational Brochures4 Annual /eports. 3nline information. Different U"#F$ pu&lications. 3ther relevant +ritten materials. Tet Books. 1.5 ORGANIZATION OF THE REPORT
The Term 'aper is divided into five parts. The first part is the introductory chapter. The second part is the organi(ational part 5a &rief overvie+ of U"#F$6. The Third part deals +ith report part of U"#F$. The fourth part includes overall findings and analy(ing performance concluding remarks. The last part provides Bi&liography and anneure 1.6 LIMITATIONS OF THE STUDY
Time is an important issue in Term 'aper /eport +riting. As 0 have &een given a specific deadline for su&mission* o&servation and learning all the +orking capital management +ithin fe+ days really tough. Besides* all the comments made* conclusions reached and suggestions for possi&le improvement provided are purely &ased on my level of understanding* kno+ledge and my +ay of interpreting a particular statement. Because of the lack of information* 0 have to make some assumptions that may cause fe+ errors or personal mistakes in the Term 'aper. 0n spite of all these limitations* 0 have tried to put the &est effort e ffort as far as +as possi&le.
7
Department of Finance and Banking University of Chittagong
2.1 BACGROUND OF GLASS SHEET INDUSTRIES IN BANGLADESH
There +as no glass sheet manufacturing company &efore 1898. :o+ some glass sheet factories have &een esta&lished in Bangladesh to meet our current demand. The oldest sheet glass plant in Bangladesh is situated in the southern side of the country at the district of Chittagong. 0t is fully* integrated plant and esta&lished on ;
1. After li&er li&erat atio ion n of Bang Bangla lade desh sh** it +as +as taken taken over over &y the the "ove "overn rnme ment nt of Bangl Banglad ades esh h and +as +as su&sequently placed under Bangladesh Chemical 0ndustries Corporation 5BC0C6. This +as the first glass sheet2producing unit in this industry. But glass sheet companies are not developed in our country as for need. Usmania +as monopoly in this line up to 188>. And in 188? another glas glasss shee sheett fact factor ory y M@B M@B%% +as +as esta esta&l &lis ished hed in the the capit capital al city city.. 0t is a part part of 0#$A 0#$AM0 M0C C B/3T)@/#. But these are the only t+o running glass sheet factories in Bangladesh till no+. But +ithin last t+o years the follo+ing organi(ation came into the market +ith more advanced technology and capacity. • •
')' Float "lass 0ndustries $td. 5having 19< m.ton production capacity each day6 :asir "old "lass 0ndustries 0ndustries $td.
These factories have created a ne+ arena in glass industries of Bangladesh. ')' is the first organi(ation that has eported flat glass. 3n the other hand the imported sheet glasses are availa&le in our country and this glass captured most of the market at present. "enerally glass sheet are imported from2 • • • • • •
China Thailand Tai+an 0ndonesia ietnam 0ndia
$arge amount of glass are imported from China and Thailand and a small portion from 0ndia and mostly high quality glass are imported from ietnam. ietnam. 5Annual report of U"#F$* 7<176 ;
Department of Finance and Banking University of Chittagong 2.2 HISTORICAL BACGROUND OF USMANIA GLASS SHEET FACTORY
There +ere a fe+ glass2+are manufacturing industries in the then east 'akistan* no+ forming the territory of Bangladesh* &ut not a single factory to manufacture sheet glass to serve the country. The country +as fully dependent on import from outsides. 0n the circumstances* a thought prevailed in the minds of some private entrepreneurs as to +hether a sheet glass manufacturing unit could &e set2up in the country in order to achieve economic advantages for the country. )is thought gradually took a definite shape and in 1898 a group of entrepreneurs of the then !est 'akistan* no+ 'akistan* proposed to set up a sheet glass factory at the sea to+n of Chittagong. The factory +as started at alurghat 0ndustrial Area initially +ith one furnace +ith an annual installed capacity of ?72ac sft. 'er year* in terms of 7mm. 0t +ent on production from April* 18>1 The company +as su&sequently converted into a 'u&lic $imited Company in 18>7 +ith an authori(ed capital of Taka one crore divided into 1< lacs ordinary shares of Tk. 1<.<< each. The issued and paid up capital of the company +as Taka fifty lacs +hich +as later on increased to Tk.99 lacs and the management of the company +as vested in the Managing Agents of M #. U#*1A: #3:# $TD. Thus in short The Company +as incorporated on ;
7. 2.3 COMPANY OVERVIE!
Usmania "lass #heet Factory ltd. 5U"#F$6 is situated in alurghat )eavy 0ndustrial area* 'ost office Chandgaon* Chittagong2717. This company is production oriented. The initiative to esta&lish this industry +as taken firstly late usman shat%. )e +as a citi(en of the then 'akistan. This organi(ation esta&lished on ;
1 and production started from 7?th 3cto&er 18>7.Mean+hile in 18>7 it converted in pu&lic limited company and it &ecomes
Department of Finance and Banking University of Chittagong nationali(ed under president order27? in 18?7. This factory is no+ under the sector corporation named Bangladesh Chemical 0ndustries Corporation 5BC0C6. Usmania "lass #heet Factory is a state o+ned enterprise 5#3@6* i.e.8 share in private and 91 share in pu&lic4"ovt. o+nership.
1. Address
Usmania glass sheet factory ltd is situated in alurghat )eavy 0ndustrial area* 'ost office Chandgaon* Chittagong2717.
7. Eear of commissioning
18>1
;. :ature of production
Forecourt Dra+ing
. :um&er of Furnaces
7 5t+o6
9. Dra+ing capacity
79<<< sift per machine per day 3r 11.79 MT4Day4m4c
>. Molten glass capacity
19 M4Tons per day per Furnace
?. Main 'roducts
#heet glass of 7MM* ;MM* 9MM >MM Mussalin Design "lass of 7MM to >MM
G. Main /a+2materials
a. #ilica #and &. #oda2Ash c. Dolomite2Ash d. $ime #tone e. Culets
8. Man2po+er
3fficers > #taff 8? !orkers1? Total 78<
1<. Utility consumption
Furnace oil
;9<< "allons per day
!ater
?9<<< "allons per day
@lectricity
79<< !) per day
9
Department of Finance and Banking University of Chittagong
2.4 ORGANIZATIONAL STRUCTURE
0n U"#F $td has a composition of supreme &oard. Total 8 persons in this &oard. 3ut of +hich 9 persons are selected4assigned &y the BC0C and remaining persons are selected or assigned &y private o+ners of 8 shareholders.
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Department of Finance and Banking University of Chittagong
Managing Director
1
Ad,ustment Branch27H1I;
Administratio
'urchase4Com
'roduction
Accounts
@ngineering
n
mercial
Juality
Division
Division
Division
Control
1>H1I1?
7GH9I;;
1;H;I1>
1;9H11I78
Division ;?H11IG
"eneral
"eneral
Manager "eneral "eneral Manager Administratio 5Admins.6 n #taff Administratio
'urchase Marketing M'0C
treatment Batch plant Furnace
n
Cutting
Medical
'acking
Center
"eneral #ecretariat of Manager Board* #hare* 5Account and Cost* Budget* Finance6 M0#*
53peration6 #and
5@ngineering6 Mechanical* @lectrical @ngineering
Accounts* Finance* Audit*
Bill*
#tore accounts.
Juality
#ecurity
Control
Branch
/esearch
Development Department
Manager
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Department of Finance and Banking University of Chittagong
3.1 !ORING CAPITAL MANAGEMENT
!orking capital* also kno+n as net +orking capital or :!C* is a financial metric +hich represents operating liquidity availa&le to a &usiness. Along +ith fied assets such as plant and equipment* +orking capital is considered a part of operating capital. 0t is calculated as current assets minus current lia&ilities. 0f current assets are less than current lia&ilities* an entity has a +orking capital deficiency* also called a +orking capital deficit. . 0n Accounting- :et liquid assets computed &y deducting current lia&ilities from current assets. #ources of +orking capital are 516 net income* 576 long2term loans 5non2current lia&ilities6* 5;6 sale of capital 5non2current6 assets* and 56 in,ection of funds &y the o+ners 5stockholders6. Amount of availa&le +orking capital is a measure of a firmKs a&ility to meet its short2term o&ligations. Ample +orking capital allo+s management to avail of unepected opportunities* and to qualify for &ank loans and favora&le trade credit terms. 0n the normal trade cycle of a firm* +orking capital equals +orking assets. A high +orking capital &alance is needed if the &usiness is una&le to &orro+ on short notice. Banks look at +orking capital over time to determine a companyKs a&ility to support financial crises. :et !orking Capital 5+hich is also kno+n as !orking Capital% or the initials :!C%6 is a measurement of the operating liquidity availa&le for a company to use in developing and gro+ing its &usiness. The +orking capital can &e calculated very simply &y su&tracting a companyLs total current lia&ilities from its total current assets. Through this formula* a +orking capital amount can &e determined to &e either positive or negative. :aturally* this +ill rely largely on the amount of de&t o+ed &y the company. 0t should not come as a surprise that having plenty of +orking capital tends to help companies achieve more success. This follo+s &ecause +orking capital allo+s companies to gro+ smoothly and make necessary improvements to their corporate operations.
G
Department of Finance and Banking University of Chittagong 3n the other hand* companies that are operating +ith negative +orking capital may not have the financial support or flei&ility to gro+ and4or improve* even +hen such developments +ould &e indicated. )ence* +orking capital can &e an indicator of the overall strength of a company. There are three main indicators used in calculating +orking capital. @lements of the current assets% side of the equation +ill include accounts receiva&le* as +ell as any inventory of goods on2hand. Current lia&ilities% +ill include accounts paya&le. A positive change in a companyLs +orking capital +ill generally indicate one of t+o developments. @ither the company has increased its current assets &y receiving cash 5or some other form of assets6* or it has minimi(ed its lia&ilities often &y paying off a short2term creditor.
!orking Capital I Current Assets N Current $ia&ilities A company can &e endo+ed +ith assets and profita&ility &ut short of liquidity if its assets cannot readily &e converted into cash. 'ositive +orking capital is required to ensure that a firm is a&le to continue its operations and that it has sufficient funds to satisfy &oth maturing short2term de&t and upcoming operational epenses. The management of +orking capital involves managing inventories* accounts receiva&le and paya&le and cash. 3.2 COMPONENT OF !ORING CAPITAL
3.2.1 Cash
Cash is pro&a&ly the least productive asset you can have. :ot only does it not earn anything* it actually loses purchasing po+er as a consequence of inflation. !hile cash is necessary to cover the transactions motive* the precautionary and speculative motives can &e covered +ith the near money 5or near cash6 of marketa&le securities. 0n order to maimi(e your cash &alances* you can do one of t+o thingsO either accelerate the inflo+ of funds 5ask for an advance on your salary6 or delay the outflo+ of funds 5postpone paying the phone &ill until net month6.
3.2.2 Marketable Securities
8
Department of Finance and Banking University of Chittagong Marketa&le securities are a +ay of holding cash &ut +ith the attri&ute of earning interest. Market securities have three characteristics1. #hort2term maturity 5less than one year* or money market instruments% 7. )igh marketa&ility ;. irtually no risk of default #everal types of marketa&le securities eist* the ma,or ones &eing Treasury &ills- Treasury &ills are auctioned every predetermined day &y the government. Most have maturities of 81 or 1G1 days* although some 82month 57?< days6 and 172month 5;>< days6 &ills are sold. The t2&ills* generally +ith a face value of P1<*<<< each* are sold at a discount to the highest &idders. The difference &et+een the amount paid and the face value at maturity represents the interest that is earned. Anticipation notes- Anticipation notes are issued &y municipalities and school districts. #ince their revenues come from ta sources* the notes are in anticipation% of future ta receipts. 3.2.3 Commercial paper
Commercial paper is the promissory notes of ma,or national firms. Most of the firms that issue commercial paper sell it directly to investors 5insurance companies* money market funds* pension funds6 although sometimes it +ill &e sold through investment &ankers. Commercial paper is a su&stitute for &ank de&t* &ut at a rate of interest that is one2fourth to on2half of a percent higher than t2&ills 5currently a&out .;6 &ut significantly less than +hat &anks +ould charge 5prime is currently a&out G.96. 3.2.4 Bankers Acceptances
A &ankerLs acceptance is a time draft that evolves from international eport4import financing. An eporter is paid &y a time draft issued &y a foreign &ank. #ince the draft is not paya&le until some future date 512; months* typically6 the company that receives it +ill often sell it to its local &ank at a discount. The local &ank &undles the discounted drafts 5&ankerLs acceptances6 and then resells them in the money markets. 3.2.5 Accounts ecei!able
1<
Department of Finance and Banking University of Chittagong Accounts receiva&le are generated +hen a firm offers credit to its customers. The first thing that needs to &e addressed +hen esta&lishing a credit policy is to set the standards &y +hich a firm is ,udged in determining +hether or not credit +ill &e etended. There is +hatLs kno+n as the 9 Cs of credit1. Character* 7.Capacity* ;.Capital* .Collateral* 9. Conditions 3nce the credit standards have &een set* the terms of credit need to &e esta&lished. !hen must the customer payQ 0f they pay early* +ill they receive a discountQ 0f they pay late* do they get charged a penaltyQ !hile the +hole purpose of etending credit is to increase sales and* thus* gross profits* the epected increase in gross profits must &e compared +ith the costs associated +ith etending credit to customers. Competitors +ill respond very quickly to a change in price. )o+ many times have +e seen the claims that !e +ill meet or &eat any advertised price%Q A change in credit policy* on the other hand* is a more su&tle means of competing for customers and one that the competition +ill not necessarily respond to. 0n fact* many firms &ase their &usiness on easy credit. )o+ many times have +e seen the advertisements +here they tell us "ood creditQ Bad creditQ :o creditQ !e donLt careR% 3f course* these firms +ill have larger &ad de&t epenses and larger financing costs* etc. 3&viously* they +ill also need to have higher prices 5higher gross profit margins6 in order to cover these costs. 3.2." #n!entories
0nventories 5ra+ materials* +ork2in2process* finished goods6 make up a large portion of most firmLs current assets* and for many* total assets. As such* the etent to +hich a firm efficiently manages its inventories can have a large influence on its profita&ility. Thus* keeping a&reast of inventory policy is critical to the profita&ility 5and value6 of the firm. #everal factors influence the amount of inventory that a firm maintains. The most important of these include • •
$evel of sales typically* the more sales a firm has* the more inventory it ho lds $ength of time and technical nature of the production process The longer it takes to produce finished goods inventories from ra+ materials* the larger the amount of finished goods that a firm +ill typically hold 5a safety stock6. Also* if the production process is highly 11
Department of Finance and Banking University of Chittagong technical* requiring that retooling &e performed prior to each production run in order to assure that production is meeting specifications* larger amounts of inventory +ill &e produced +ith each production run in order to minimi(e the set2up costs associated +ith •
retooling. Dura&ility vs. 'erish a&ility 0f an inventory item is highly perisha&le* such as fresh vegeta&les* a small amount +ill &e held. #imilarly* fashions of clothes and car styles are perisha&le% and +ill result in smaller inventories than dura&le goods such as tools and
•
hard+are. Costs Cost of holding inventories as +ell as costs of o&taining inventories +ill influence inventory si(es. 3.3 !ORING CAPITAL CYCLE
Cash flo+s in a cycle into* around and out of a &usiness. 0t is the &usinessKs life &lood and every managerKs primary task is to help keep it flo+ing and to use the cash flo+ to generate profits. 0f a &usiness is operating profita&ly* then it should* in theory* generate cash surpluses. 0f it doesnKt generate surpluses* the &usiness +ill eventually run out of cash and epire The faster a &usiness epands the more cash it +ill need for +orking capital and investment. The cheapest and &est sources of cash eist as +orking capital right +ithin &usiness. "ood management of +orking capital +ill generate cash +ill help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a su&stantial proportion of a firmKs total profits. There are t+o elements in the &usiness cycle that a&sor& cash 2 #n!entory 5stocks and +ork2in2 progress6 and ecei!ables 5de&tors o+ing you money6. The main sources of cash are Payables 5your creditors6 and $%uity and &oans .
17
Department of Finance and Banking University of Chittagong
@ach component of +orking capital 5namely inventory* receiva&les and paya&les6 has t+o dimensions time and money. !hen it comes to managing +orking capital 2 '#M$ #S M()$*. 0f you can get money to move faster around the cycle 5e.g. collect monies due from de&tors more quickly6 or reduce the amount of money tied up 5e.g. reduce inventory levels relative to sales6* the &usiness +ill generate more cash or it +ill need to &orro+ less money to fund +orking capital. As a consequence* you could reduce the cost of &ank interest or youKll have additional free money availa&le to support additional sales gro+th or investment. #imilarly* if you can negotiate improved terms +ith suppliers e.g. get longer credit or an increased credit limitO you effectively create free finance to help fund future sales.
1;
Department of Finance and Banking University of Chittagong
4.1 LEVEL OF !ORING CAPITAL OF UGSFL
The consideration of the level investment in current assets should avoid t+o danger poi of ecessive and inadequate investment in current assets. 0nvestment in current assets should &e ,ust adequate* not more or less* to the need of the &usiness firms. @cessive investment in current assets should &e avoided &ecause it impairs the companyLs profita&ility* as idle investment earns nothing. 3n the other hand inadequate amount of +orking capital can &e threatened solvency of the firms &ecause of its ina&ility to meet its current o&ligation. 0t should &e reali(ed that the +orking capital need of the firms may &e fluctuating +ith changing &usiness activity. This may cause ecess or shortage of +orking capital frequently. The management should &e prompt to initiate an action and correct im&alance. Ta&le 2 #i(e of +orking capital in U"#F$ 'articulars A6Current assets
Department of Finance and Banking University of Chittagong
#ource- #elf Arrangement in financial area from annual report &ook. 4.1.1 Current Assets o+ ,-S&
Current asset is very much important component of +orking capital of the company. )ere in U"#F$ the status of the current assets are sho+n &elo+Ta&le21- Current assets of U"#F$ Particulars #n!entories BC#C Current Accounts Current Accounts ith
Department of Finance and Banking University of Chittagong
Figure- Current Assets of U"#F$. )ere as the company is getting &igger day &y day the si(e of the current assets is also increasing at proportionately. But in 7<11 7<17 the amount of current assets are quite less than the previous years. 0n 7<17 the amount of inventories* account receiva&les loans advances are quite less than the previous year. But 0 have o&served that the volume of production* sales volume profit margin these all the indicators are sound enough than the previous yearLs performance. 0t indicates me that the management of current assets in 7<17 is very nice. As larger amount of current assets require a larger amount of costs* 0 think in that year management did +ell. #ame case occurred in 7<11 also. 0n 7<<8 the management achieved larger 'rofit after ta &y using very less current assets. 0 think it is an indicator of +ell performance of management.
4.1.2 Current &iabilities o+ ,-S&
0n order to run the company* the company should maintain a sound amount of current lia&ilities. 3ther+ise the company +ill face a crisis of cash flo+. @ven the company may face the pro&lem of running the day to day operations. The recent conditions of the current lia&ilities are &eing sho+n &elo+1>
Department of Finance and Banking University of Chittagong
Department of Finance and Banking University of Chittagong )ere though it is a lia&ility* if a company can use maimum amount of current lia&ilities* it can run its &usiness +ith little operating costs. By taking this v ie+ under consideration* 0 think that in 7<
/eceiva&les or de&tors are the one of the most important parts of the current Assets +hich is created if the 0ndustry sells the finished goods to the customer &ut not receive the cash for the same immediately. Trade credit arises +hen firm sells its products and services on credit and does not receive cash immediately. 0t is essential marketing tool* acting as &ridge for the movement of goods through production and distri&ution stages to customers. Trade credit creates receiva&les or &ook de&ts +hich the firm is epected to collect in the near future. Ta&le- #i(e of receiva&les of U"#F$ 'articulars Trade De&tors 3ther De&tors Total De&tors 0ndices
Department of Finance and Banking University of Chittagong Chart2 #i(e of receiva&les
4.2.1 A!era9e collection period
The average collection period measures the quality of de&tors since it indicate the speed of their collection. The shorter the average collection period* the &etter the quality of the de&tors since a short collection period implies the prompt payment &y de&tors. The average collection period should &e compared against the firmLs credit terms and policy ,udges its credit and collection efficiency. The collection period ratio thus helps an analyst in t+o respects.
0n determining the collecta&ility of de&tors and thus* the efficiency of collection efforts. 0n ascertaining the firmLs comparative strength and advantages related to its credit policy and performance.
The de&torLs turnover ratio can &e transformed in to the num&er of days of holding of de&tors.
(bser!ations
The si(e of receiva&les is very insignificant. 0t indicates that the 0ndustry +as allo+ing no credit year to year. Actually the company is strictly avoiding credit sales. All the a&ove factors directly or indirectly affects in the de&tors turnover ratio* current ratio and +orking capital ratio. For effective management of credit* the Firms should lay do+n clear cut guidelines and procedure for granting credit to individual customers and collecting individual accounts should involve follo+ing steps 516 Credit information 576 Credit investigation 5;6 Credit limits 56 Collection procedure. 18
Department of Finance and Banking University of Chittagong 4.3 INVENTORY MANAGEMENT
The term SinventoryL is used to designate the aggregate of those items of tangi&le assets +hich are2
Finished goods 5Ssalea&leL6 !ork2in2progress 5Sconverti&leL6 Material and supplies 5Sconsuma&leL6
0n financial vie+* inventory defined as the sum of the value of ra+ material and supplies* including spares* semi2processed material or +ork in progress and finished goods. The nature of inventory is largely depending upon the type of operation carried on. For instance* in the case of a manufacturing concern* the inventory +ill generally comprise all three groups mentioned a&ove +hile in the case of a trading concern* it +ill simply &e &y stock2 in2 trade or finished goods. Ta&le 2#i(e of inventory 'articulars
7<
7<<8
7<11
7<17
inventory
?G?79>??
??>8G<79
11911G;<
?8>1
1<<
8G.>8>18
1>.77?1G;; 1<1.177<79
0ndices
7<
Department of Finance and Banking University of Chittagong Chart #i(e of 0nventory
4.3.1 Composition o+ in!entory
0n most of the case* a firm maintains ra+ material* !orking2in2process and Finished goods as inventory. Depending on the nature of Business* the proportion of inventory held &y the firm various. Ta&le2 ;- Total inventories of U"#F$ #tems inished -oods
2//0 '; 788*1<<
2// '; 1*?1*78>
2/11 '; G*?7>*;G8
2/12 '; 1565"26/30
a< materials
7*8G;*9?>
;>*89G*<>
?*7>19G?
246=03631/
ork in Process Store spares 7
*9>*?? G*>G<*81
*1;8*;?8 ;9*1<1*8?7
*89G*>>> G8*?8>*?78
56120=1 3360/6222
accessories Store in 'ransit
18G*<;;
7?*;1
*;?8>8
15"61=2
'otal #n!entory
=06=256"==
==6"06/25
1156110634/
=6"1/6=13
71
Department of Finance and Banking University of Chittagong Figure2 ;- Total 0nventories of U"#F$
)ere* try to sho+ the total inventories of U"#F$ in 7< the percentages of inventories is higher than other four years. And the inventories position is gradually increase of U"#F$ in 7<<; to 7<<>. )ere though the amount of inventory is increasing year after year* &ut the proportionate amount of inventories is not increasing at same rate. 0f +e o&serve the follo+ing calculation it +ill &e clear to us-
#n!entory turno!er 7.98 Times 7.>8 Times 7 Times 1.8; Times
)ere +e have seen that the in 7<17 the company hold smaller amount of inventory than that of 7<11. 0t is good. The company is no+ conscious a&out its inventory management. 4.4 MANAGEMENT OF CASH
Cash is common purchasing po+er or medium of echange. As such* it forms the most important component of +orking capital. The term cash +ith reference to cash management is used in t+o senses* in narro+ sense it is used &roadly to cover cash and generally accepted equivalent of cash such as cheques* draft and demand deposits in &anks. The &roader vie+ of cash also induce hear2 cash assets* such as marketa&le sense as marketa&le securities and time deposits in &anks. The main characteristics of this deposits that they can &e really sold and convert in to cash in short term. They also provide short term investment outlet for ecess and are also useful for meeting planned outflo+ of funds. !e employ the term cash management in the &roader sense. 77
Department of Finance and Banking University of Chittagong 0rrespective of the form in +hich it is held* a distinguishing feature of cash as assets is that it +as no earning po+er. 0ndustry have to al+ays maintain the cash &alance to fulfill the dally requirement of epenses. There are four primary motive for maintain the cash as follo+ Ta&le2#i(e and indices of cash of U"#F$ 'articulars Cash &ank &alance 0ndices
From the a&ove information +e can say that the position of the cash flo+ is in the up+ard situation. #o +e can say that the U"#F$ is conscious enough a&out the cash in hand. 0tLs a positive sign* as it helps to continue the production and all other it also indicates that the companyLs a&ility to pay the current o&ligations is in a handsome position. 3n the other hand it should not &e ecess proportionate to the production volume. 3ther+ise it +ill cost much and the per unit product cost +ill also increase.
4.5 RATIO ANALYSIS
.9.1 Current ratio
This ratio &et+een the current assets and the current lia&ilities is kno+n as the current ratio. 0f the current assets are larger than the current lia&ilities* the &orro+er a&ility to meet his current 7
Department of Finance and Banking University of Chittagong lia&ilities +ithout default may easily &e esta&lished. The current ratio sho+s the short2term financial strength of a &usiness concern. This ratio of 7-1 is generally considered quit satisfactory as the current lia&ilities are sufficiently covered &y the current assets and the surplus is a short of &uffer for the creditors. This is true from the vie+point of a creditor &ut not from that of product management* &ecause ecess of cash &alance or stock2in2trade over +hat is needed* may not &e considered desira&le &y the management. The current ratio may also fluctuate &ecause seasonal characteristic of &usiness. This ratio is to &e calculated Total Current Assets
The current ratio I Total Current $ia&ilities
:o+ 0 analysis of t+o years current ratio of the U"#F$ $td* follo+ their financial statements. These analyses are &elo+-
Current Assets
Current /atio 7<17 I Current $ia&ility ;G9
I 9;1G89<7 I ?.7-1
#imilarly calculated for other yearsEear
7<
7<<8
7<11
7<17
Current Asset
7?89<11;
G79GG1;
;9898;19
;G9
>81>1<7
81;7711
9;1G89<7
>.9?9>7
G.G?;1G?;GG
?.7;8G17>G
Total
current ??G99887
lia&ilities Current /atios
9.8>>GG7<>
79
Department of Finance and Banking University of Chittagong
)ere +e have seen that the current ratio of the company is less in 7<17 than 7<11* it represents that though in &oth year the ratio is a&ove the standard its current assets4+orking capital is controlled in 7<17. !e have mention earlier that the company epanded its &usiness in 7<11 7<17 &ut they reduced their +orking capital. 0tLs an important issue that it is not necessary to go a&ove the standard level* as it costs a &ig amount to maintain a larger amount of +orking capital. The &asic reason is that itLs a short term financing. (bser!ations
0ndustry has an increasing trend of current ratio. The current ratio indicates the availa&ility of funds to payment of current lia&ilities in the form of current assets. A higher ratio indicates that there +ere sufficient assets availa&le +ith the organi(ation +hich can &e converted in cash* +ithout any reduction in the value. As ideal current ratio is 7-1* +here current ratio of the firm is 7>
Department of Finance and Banking University of Chittagong more than 7-1* it indicates the unnecessarily investment in the current assets in the form of de&tor and cash &alance. /atio is lo+er in the year 7<17 +here cash &alance is more than requirement.
4.5.2 ?uick atio
This ratio is the similar to the current ratio ecept that the inventories are ecluded from the current assets &ecause they may not &e so easily marketa&le assets as the other liquidity assets are. This ratio measures the short2term liquidity of a &usiness concern. The quick ratio esta&lishes a relationship &et+een readily marketa&le assets and the current lia&ilities. 0t provides a &etter indication of the liquidity position and repaying capacity of &orro+ing concern than the current ratio. This ratio of 1-1 is generally considered ecellent* as the liquid assets +ill &e considered sufficient to meet the current lia&ilities. This ratio is to &e calculatedTotal Current Assets 2 0nventories
The quick ratio I
Total Current $ia&ilitie s
:o+ 0 analysis of t+o years quick ratio of the U"#F$ $td* follo+ their financial statements. These analyses are &elo+-
Current Assets 2 0nventory
Juick /atio 7<17 I
Current $ia&ility
I 5;G91<*?1;64 9;1G89<7 I 9.-1
#imilarly calculated for other years-
7?
Department of Finance and Banking University of Chittagong
Eear
7<
7<<8
7<11
7<17
Current Asset
7?89<11;
G79GG1;
;9898;19
;G9
>81>1<7
81;7711
9;1G89<7
Total
current ??G99887
lia&ilities
Total 0nventory
?G*?79*>??
?*?>8G*<79
119*11G*;<
?8*>1<*?1;
Juick /atios
.97
9.<7
>.1>
9.
(bser!ations
:ote- The quick ratio is the important of the analysis of the financial statements. This ratio is indicating ho+ much quick asset to repay their current lia&ilities. This ratio of 1-1 is standard of 7G
Department of Finance and Banking University of Chittagong the analysis of the financial statements. 0t is not standard for the quick ratio. This ratio is the less for their standard to repay their current lia&ilities. Unlike the current ratio the status of quick ratio is also very nice* more than dou&le to the standard level. 0t represents that the inventory of the firm is not too much comparing to the other ingredients. Though it costs a very large amount &ut the stakeholder of the company +ill feel comport to &e involved +ith the company. The company can easily manage &ank loan and no disruption +ill occur in the production process. )ere the company is trying to control its quick ratio to the standard level.
Juick ratio indicates that the 0ndustry has sufficient liquid &alance for the payment of current lia&ilities. The liquid ratio of 1-1 is suppose to &e standard or ideal &ut here ratio is more than 1-1 over the period of time* it indicates that the firm maintains the over liquid assets than actual requirement of such assets. 4.5.3 ecei!able 'urno!er atio
This ratio is +orked out &y dividing the total credit sales during the year &y the amount of the de&tors outstanding at the end of the year. The ratio sho+s the etent to +hich credit is granted &y the &usiness concern to its &uyers and also indicates the promptness +ith +hich the de&ts are reali(ed. A lo+ turnover of receiva&les means higher collection period and large amount of overdue.
/eceiva&le Turnover ratio I #ales4Account /eceiva&le
:o+ 0 analy(e of t+o years receiva&le turnover ratio of the U"#F$* follo+ their financial statements. These analyses are &elo+-
78
Department of Finance and Banking University of Chittagong /eceiva&le Turnover 7<17 I #ales4Account /eceiva&le
I 77G*;99*G1G4 >*17<
I ;9>1.;G71times #imilarly calculated for other years-
Eear
7<
7<<8
7<11
7<17
#ales
;77*><>*9G
;7?*87*<;G
7><*;?<*7<9
77G*;99*G1G
Accounts /eceiva&les
7?1*8?
7?<*87
>*17<
>*17<
/eceiva&le Turnover
11G>.1>>G>8
?>.>?8;?1
<><.>?<>8>
;9>1.;G71
;<
Department of Finance and Banking University of Chittagong :ote- Actually there is no mentiona&le amount of account receiva&le. Because U"#F$ does not allo+ any credit sell. #o here this ratio is not important.
4.5.4 #n!entory 'urno!er atio
This is usually computed as cost of sales divided &y the inventory. $ike the account receiva&le turnover ratio* the more liquidity the asset. The &asic difficult +ith the accounts receiva&le turnover ratio and inventory turnover ratio as liquidity measure is that only focus on only one assets nearness to cash* and thus &y themselves do not tell a&out the firmLs overall liquidity position. That really +hat +e +ant to measure. Cost of "oods sold
0nventory Turnover /atio I
0nventory
:o+ 0 analysis of t+o years inventory turnover ratio of the U"#F$* follo+ their financial statements. These analyses are &elo+-
Cost of "oods sold
0nventory Turnover 7<17 I
0nventory
I 1GG*1<*?1;
I 7.;>7>7?times
#imilarly calculated for other years-
;1
Department of Finance and Banking University of Chittagong Eear
7<
7<<8
7<11
7<17
Cost of goods sold
71<*8;1*G>;
7
71>*;;G*;8;
1GG*
0nventory
?G*?79*>??
?*?>8G*<79
119*11G*;<
?8*>1<*?1;
0nventory turnover
7.>?8;7?;8
7.>GG>?8>G
1.G?87>89>?
7.;>7>7?
:ote- 0 am analysis this ratio and find out their return* &ut 0 see that this turnover is increasing last year. #o in this case* the companyLs position is good. The ratio represents that the company is keeping optimal level of inventory for its production purpose. As a result its cost &ehind inventory management +ill &e controlled at large amount. 4.5.5 orkin9 capital 'urno!er atio
!orking capital turnover ratio represents the efficiency of the management in using the +orking capital. #o that the costs related to financing if +orking capital can &e controlled. 0t signifies that for an amount of sales* a relative amount of +orking capital is needed. 0f any increase in sales contemplated +orking capital should &e adequate and thus this ratio helps management to
;7
Department of Finance and Banking University of Chittagong maintain the adequate level of +orking capital. The ratio measures the efficiency +ith +hich the +orking capital is &eing used &y a firm. 0t may thus compute net +orking capital turnover &y dividing sales &y +orking capital. !orking capital turnover ratio
!orking capital turnover ratio I :et sales4:et +orking capital
!orking capital turnover 7<17 I 77G*;99*G1G4;;1G87978
I<.>GG<19;
#imilarly calculated for other years-
Eear
7<
7<<8
7<11
7<17
:et sales
;77*><>*9G
;7?*87*<;G
7><*;?<*7<9
77G*;99*G1G
:et +orking capital
;9<<8171
;?GG7?11
;G>G7?1<
;;1G87978
<.871G9181
<.G>9;G9
<.>?;<818;G
<.>GG<19;
+orking turnover
capital
;;
Department of Finance and Banking University of Chittagong
:ote- As here the rate of turnover is increasing* compare to the previous year* it can &e said that the management is &eing efficient in utili(ing its +orking capital. The more the +orking capital +ill turn* represents that it costs less in financing +orking capital. (bser!ations
0t +as o&served that current assets turnover ratio does not indicate any trend over the period of time. Turnover ratio +as &elo+ 1 in the follo+ing year and remains same to all respectively* &ut it decreased in the year 7<11* &ecause of high cash &alance. Cash did not help to increase in sales volume* as cash is non2earning asset. 0n the year 7<17 0ndustry Current Assets Turnover /atio also decrease from previous year as increase its sales +ith decrease investment in current assets* thus current assets turnover ratio increased to <.>?; from <.>GG in the year 7<17.
;
Department of Finance and Banking University of Chittagong
5.1 CONCLUSION
!e kno+ that ratio analysis is one of the common used tolls to evaluate the financial performance. By eamining the Usmania "lass #heet Factory $imited through ratio analysis +e have found that the financial performance of the company is quite satisfactory. But it can &e said that the company could use its opportunities more effectively. As the company is the largest government o+ned "lass manufacturing firm* the company should use its opportunity more efficiently though it has some pro&lems such as idle money* production inefficiency* o&solete technology highly dependence on foreign ra+ materials lack proper planning and promotional activities . But 0 think that these pro&lems can &e overcome. The management as +ell as the government can do this. 0 sa+ that all the personnel +orking in the eecutive level are skillful* efficient and qualified. Therefore the company +ill &e a&le to overcome these pro&lems in future. Despite a profita&le concern of BC0C* o+ing to lack of supervision* financial inefficiency *lengthy process of procurement ra+ materials and accounts receiva&les gross profit * net profit margin /3A*/3@* are constantly decreasing over the passage of time.
0n time it can &e said that Usmania "lass #heet Factory $imited has created a good position in glass sheet field through its high quality product* services* and research and development programs. )o+ever* it should maintain its eisting good+ill as +ell as improve its market share to survive. Finally 0 +ish all success of Usmania "lass #heet Factory $imited. 5.2 RECOMMENDATIONS
#o far +e have analy(ed various financial statements such as income statement Balance sheet and cash flo+ statement of U"#F$ that guides us to recommend the follo+ing
Consumer census and data &ase. Detection of pilferage and unauthori(ed connections. 0ntroduction of universal metering and time &ased metering for &ulk consumers of po+er and replacement of faculty meters. ;9
Department of Finance and Banking University of Chittagong
The company should consider its field level managerKs decisions in creative decision
making process. The company should contri&ute in the governments ne+ decisions regarding
environment more effectively. The company should follo+ product differentiation policy to face the competitors. The company should purchase through tenders under the decision of "eneral
Manager 5'urchase6 The company should replace their officials and it should search young and energetic
+orkers. To increase sales company should offer attractive gifts to its customers. To survive the market company should take immediate steps in order to face
competitors. Usmania "lass #heet Factory $imited has to implement an action program to deal
+ith the system loss in po+er gas distri&ution * ur&an +ater supply and telephone
services through appropriate measures* includingUsmania "lass #heet Factory $td. should have effective advertisement through mass media like television ne+spapers etc.
