Working capital management 3
- 1. Working Capital Management Roshankumar S Pimpalkar roshankumar.2007@rediffmail.com
- 2. WORKING CAPITAL MANAGEMENT PART 3 Materials constitute a very significant proportion of total cost of finished product in most of the manufacturing industries. A proper control system is necessary to ensure that exact quality of input as required for finished product, the price paid for input should be minimum possible, material should be available in adequate quantity whenever required, there should be no over-stocking, wastage and losses while material is in store and in process should be avoided. Requirements of material control 1. Proper co-ordination of all departments involved viz. finance, purchasing, receiving, inspection, storage accounting and payment. 2. Purchases are made only after suitable inquiries so that firm gets most favourable deal. 3. Use of standard forms for placing the order, noting receipt of goods, authorizing issue of material etc. 4. Preparation of budget concerning material consumption 5. Storage of all material and supplies at well designated place. 6. Continuous stock taking to determine value and quantity of each item of material at any time. 7. Regular reports of materials purchased, issue from stock, inventory balances, obsolete stock, goods returned and spoiled or defective unit. Material Procurement Procedure If a concern can afford, it should have a separate purchase department for all purchases to be made on behalf of all other departments. Purchasing should be centralized i.e. all purchases should be done by purchasing department except for small purchases which may be done by the user's department. The concerned officer in the department keeps themselves in constant touch with the markets to have the latest information. The purchase department follows the following steps. Receiving purchase requisitions. It is a form used for making request to the purchasing department to purchase material. Exploring the sources of materials supply and selecting suitable material suppliers. Selection of suppliers is based on various factors such as price, quantity, quality, time of delivery, mode of transportation, terms of payment, reputation of supplier, past records etc. Preparation and execution of purchase order. After identifying the suitable supplier with best quotation the purchase manager issues formal purchase order. Its copies are sent to The supplier, Store department, Receiving department, Accounting department and one copy is held in file. Receipt and inspection of materials to ensure that goods received are of desired quality and quantity. If they are not according to specification then goods are not accepted. After receipt of goods the receiving department prepares Material inward note in quadruplicate. One copy is sent to Purchase department for verifying supplier's bill for payment, other copy is sent to the roshankumar.2007@rediffmail.com
- 3. store, third copy is sent to stores ledger clerk in Cost Department and the last copy is retained for use by receiving department. Checking and passing bills for payment. The invoice received from the supplier is sent to the stores accounting section to check authenticity and mathematical accuracy. The quantity and price are also checked with reference to goods received note and the purchase order respectively. The stores accounting section after checking its accuracy finally certifies and passes the invoice for payment. Material Issue Procedure Issue of material must be on the first in first out basis to ensure that the materials which were entered first don't get deteriorated for having been kept for a long period Bill of material also known as Material specification list or simply Material list. Its a schedule of standard quantities of material required for any job or other unit of production. It is prepared by the Engineering or Planning department in a standard form. It is prepared in quadruplicate and sent to Stores department, Cost accounts department, Production control department and Engineering or Planning department. Material requisition note is for issue of materials for use in the factory or in any its department. It is prepared in triplicate and distributed as one copy to Store keeper, one to Cost department and one is for department requiring it. Sometimes any of the department has surplus material which returned to storeroom accompanied by Shop credit note which is prepared in triplicate and distributed as one copy for Store Room, one for Cost department and one for department returning surplus material. Material Storage Purchasing material of desired quality is not enough their proper storage is also important. Loss due to poor storage is even more than what might arise from purchase of bad quality materials. Store location should be carefully planned. It should be near to the material department so that transportation charges are minimum. At the same time it should be easily accessible to all other department of the factory. Inventory Control Although there are many inventory control methods the two are quite popular- Economic Order Quantity and Just in Time (JIT). Economic Order Quantity (EOQ) This method tries to keep ordering cost and carrying cost of inventory at minimum. The formula is EOQ = √ (2*A*S)/C roshankumar.2007@rediffmail.com
- 4. Where A = Annual usage units S = Ordering cost per order C = Carrying cost per unit per annum Just in Time (JIT) According to this technique materials are ordered as and when required. So there is no carrying cost as material is delivered directly to production floor. For implementing this system the supplier should be very prompt in delivery and also company's personnel should inspect the quality and quantity of material at the supplier's premises itself. Review of slow and non-moving items The expensive slow and non-moving items in the inventory block huge sum of money. For such items no new requisition should be made till the existing stock is exhausted. roshankumar.2007@rediffmail.com