1 finance project report imt
TRANSCRIPT
Summer Project at
Indo Rama Synthetic (I) Ltd. Butibori Complex
Submitted to:
ACKNOWLEDGEMENT
It is my great opportunity as well as pleasure to carry out my summer project at Indorama.
My training had been a great experience for me. I take this opportunity to express my
gratitude to everyone has helped me during the course of my project and made my project a
success.
I am grateful to Mr. D.K. Vishnoi who has guided me in my project “Operational Working
Capital Cycle at IRSL and Recommendation for its Improvement” and devoted much of his
precious time to provide substantial insight in the field of financial statements.
I have been privileged to interact with personalities of Indorama like Mr. Sanjeev Saxena,
Mr. Chintamani Kabdal, Mr. Kailash C. Bhomia, Mr. Shrikant Kolwadkar, Mr. Rajesh
Saxena and many more. I express my deep sense of gratitude for their help and kind co-
operation, who took out time from their busy schedule and personally guide me in the course
of my project.
Table of Contents
1. Introduction
2. Company Profile
3. Structure of the Company
4. Product Range
5. Sales Section
6. Raw Material Purchase Accounting
7. Banking Section
8. Stores and Spares
9. Balance Sheet
10. Conclusion
11. Recommendations
12. Bibliography
Introduction
One of the most important areas in the day to day management of the organisation deals with
the management of working capital, which is defined as “all the short term assets used in
daily operations”. The balances in these accounts can be highly volatile as they respond
quickly to changes in organisation’s operating environment. The effective management of
working capital requires both medium term planning and immediate reactions to changing
forecasts and conditions. Working capital management is functional area of finance that
covers all the currents accounts of the firm. It is concerned with the adequacy of current
assets as well as level of risk posed by current liabilities. It is a disciple that seeks proper
policies for managing current assets and liabilities and practical techniques for maximizing
the benefits from managing working capital.
Working capital management is concerned with the problems that arise in attempting to
manage the current assets, current liabilities and the inter-relationship that exist between
them. The current assets refers to those assets which in ordinary course of business can be or
will be, turned into cash within one year without undergoing a diminution in value and
without disrupting the operations of the firm. The major current assets are cash, marketable
securities, account receivables and inventory. Current liabilities are those liabilities which are
intended at their inception to be paid in ordinary course of business, with in a year, out of
current assets or earnings of the concern. The basic current liabilities are accounts payable,
bills payable, bank over-draft and outstanding expenses. The goal of working capital
management is to manage the firm’s current assets and current liabilities in such a way that a
satisfactory level of working capital is maintained. This is so because if the firm cannot
maintain a satisfactory level of working capital, it is likely to become insolvent and may even
be forced into bankruptcy. The current assets should be large enough to cover its current
liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be
managed efficiently in order to maintain the liquidity of firm while not keeping too high a
level of any one of them. Each of the short term resources of financing must be continuously
managed to ensure that they are obtained and used in the best possible way. The interaction
between current assets and current liabilities is, therefore, the main theme of the theory of
working capital management.
COMPANY PROFILE
Indo Rama is India’s largest manufacturer of synthetics fibre and largest exporter of
synthetics blended yarn. Having started in 1989 at Pithampur and in 1993 at Butibori and
today is an over Rs. 20000 million corporation with sharp focus on quality, cost and delivery.
The company has emerged as a lean, agile and supremely fit corporation in the façade of
economic liberalization and globalization. Indo Rama today, is a part of the world’s tenth
largest manufacturer of synthetic fiber with a strong presence in Indonesia, Lithuania, Egypt,
Thailand, USA, Nepal, Sri Lanka, and India. Most importantly, Indo Rama’s quality has
found an overwhelming response in discerning markets worldwide. Indo Rama is now
transforming itself into a customer-led enterprise; and positioning itself strongly to move up
the ‘value chain’- where the challenge is to manage increasing customer expectations and
market dynamic based on superior value and service.
In India, its corporate office is in New Delhi and marketing offices in Mumbai, Surat,
Coimbatore and New Delhi. The whole unit of Butibori, an integrated polyester plant, has
divided into 3 strategic units, for the purpose of identifying different profit & loss making.
They are-
SBU 1: Spinning
SBU 2: Polyester
SBU 3: DTY
But now Indo Rama Butibori plant has been alienated into 2 companies, namely,
Indo Rama Synthetic (I) limited
Indo Rama Textile limited
Indo Rama Synthetics (I) Ltd. is an ISO 9001:2000 and ISO 14000 company certified by SGS
Yarsley,UK, and employing 3500 persons and engaged in expanding production capacities by
300000 tpa. Indo Rama’s world-class integrated polyester plant has an installed capacity to
produce 300000 tpa of PSF/POY/FDY/DTY and fibre grade chips and set up in technical
collaboration with DuPont of USA for Partially Oriented Yarn (POY), and Toyobo of Japan
for Polyester Staple Fiber (PSF).
The company benchmarks itself against the best in the world and sets global standards for
itself. Indo Rama is distinguished by its ability to work smart and as a place that empowers
people and encourages them to take initiative. The future will see Indo Rama concentrate
even more strongly on its core strengths- innovation, quality and just in time service. So that
it continues to dominate its market segments and creates value for its stakeholders.
We believe that:
An abiding faith in self
An extraordinary ability to focus on one goal
An uncommon capacity to take risk
A resolve to hold one’s own against all odds
A dogged determination to excel
A position to seek greater, newer challenges consistently
A vision to be first; and the ‘best among the best’
Indo Rama has achieved the following Milestones:
The SRTEPC Award from last 12 years
1st prize at IIMM- Ariba Sourcing Excellence
Highest Exports to Latin American Countries
The NIRYAT SHREE Award from the Federation of Indian
Excellance in IT Application in Textiles
Export Organizations in Textiles
CII- National Water Management Award-2004
CII- Leadership & Excellance award in Safety, Health & Environment-2004.
MEDA- Energy Conservation Certificate-2004
Best Safe Practices Award from Vidharbha Industrial Safety Committee.
International partnerships and pooling of global resources are vital determinants for success
in the world’s new business landscape. Today, an enterprise is more likely to succeed, if it
fuses local strengths with global competencies.
Our global partners enhance our knowledge and skill base and have helped us bring the
world’s latest, bleeding-edge technologies, products and services to the doorstep of our
customers.
We have inked a strategic partnership with ACCENTURE (formerly Andersen Consulting)
for conceptualizing, building and sustaining an IT environment in tune with our business
goals and processes. Accenture is assisting Indo Rama in the areas of application
development, application management and facilities management. This relationship is aimed
at providing us access to high quality IT expertise, skills and best practices and improving our
service levels and efficiency.
We have tied-up with ERNST & Young who are helping us implement management
assurance global best practices.
The future will see us broaden and strengthen these partnerships and actively seek new ones
that meet our strategic objectives.
At Indo Rama, we are in business of building good relationships with our customers. We are
achieving this by keeping our customers the center of our concern, by listening to their voice,
and by anticipating and satisfying their needs. And most importantly, by steadfastly
maintaining the highest standards of quality and service.
In order to get closer to our customers and deliver speedier service, we have pioneered
concept of direct sales in the industry. An initiative that has also helped us reigns in costs. We
provide 95 percent On Time In Full (OTIF) logistic support to our customers. The orders are
serviced in full truckloads within 24 hours of placement. Furthermore, e-connectivity enables
our customers to place orders electronically and critical information about order acceptance,
dispatch details and order status easily and quickly.
Recently, we teamed up with Accenture to draw up a comprehensive Customers Relationship
Management (CPM) Plan, which has given a cutting–edge to our marketing face.
The market for polyester blends is huge and growing at a fast clip. Indo Rama’s PSF is
emerging as the preferred option for cotton, rayon and acrylic blends.
We have emerged as the country’s pre-eminent exporter of synthetic blended yarns with a
significant market share. We export to more than 60 countries in EUROPE, SOUTH-EAST
ASIA, AFRICA, THE MIDDLE EAST, THE MEDITERRANEAN and LATIN AMERICA.
A testimony to the impeccable quality and consistency of our products.
For us, exports will continue to be an important thrust area. We have drawn up an ambitious
plan to ensure a sustained and accelerated export growth in the next five years. In this
context, we are not only researching new blends, we are also exploring new markets in Latin
America, Argentina, Brazil, Columbia, Venezuela, Africa and SAARC Countries Such As Sri
Lanka, Nepal, Bangladesh and Maldives.
In recognition of our contribution in the field of man made fibre exports, the Government of
India has awarded Indo Rama the status of star Trading House.
A Responsibility Beyond Business:
As a responsible corporate citizen, Indo Rama has always underscored its business
responsibilities by accepting its commitment by accepting its commitment to society at large.
We have made sincere efforts to heal and enrich the communities in which we operate. We
have tapped and brought together the internal and external resources of the company for the
greater common good. Consequently, we have taken several initiatives in the fields of
education, employment and environment.
In 1995, we set up the IRA INTERNATIONAL School (CBSE affiliated) in Butibori, near
Nagpur. The school offers English medium education from nursery to class- XII.
Indo Rama has also initiated an entrepreneurship Development Training programme in
association with the Indian Institute of Youth Welfare for spouses of employees. The aim is
to provide women with entrepreneurial skills, gainful employment and help them augment
family incomes.
Furthermore, under an employee volunteer scheme, ‘Varksharopan Samaroh’ we have made
a modest move in involving our employees to green the area of the staff colony and premises
around the factories.
Structure Of The Company
C.M.D
Executive Director
President
Senior vice President
Assistant Vice President
General Manager
Deputy General Manager
Senior Manager
Manager
Deputy Manager
Assistant Manager
Shift Incharge
Supervisor
Workmen
Product Range
The company basically produces five different products:
1) Polyester Staple Fibre
2) Partially Oriented Yarns
3) Draw Texturised Yarn
4) Fully Drawn Yarn
5) Polyester Chips
Polyester Staple Fibre
Polyester staple fibre (PSF) has emerged as the fastest-growing fibre amongst all types of
manufactured fibres. Polyesters are made by polymerisation of purified terephthalic acid
(PTA) and monoethylene glycol (MEG). The polymer thus obtained is melt spun and the
bundle of continuous filaments obtained by melt spinning is called tow. The tow is subjected
to further processes like drawing, crimping, spin finish application and then cut into fixed
lengths to get cut fibres almost equal in length to cotton fibres. These cut fibres are known as
polyester staple fibres (PSF).
The unique feature of PSF is that it can be blended with natural fibres (e.g., cotton and wool)
and synthetic fibres (e.g., rayon) to produce polyester blended yarns on the conventional
cotton spinning machines.
Fabrics made from polyester blended yarns, also known as blended spun yarn, combine the
values of natural fibres with high tenacity and easy care properties of polyester fibres.
Technology
Constant on-line checks maintain consistent quality.
Superior spin-finish application ensures smoother working of fibre during spinning.
Merge number remains consistent over longer periods.
Standard bale weight is maintained.
Partially Oriented Yarn
Polymer in the melted form from polycondensation section is cooled in polymer cooler,
filtered and after pressure boosting it is distributed to the spinning manifolds and then to the
spinning positions. The polyester melt from spinning position is extruded through spinnerets
by variable speed driven spinning pumps. The extruded filaments are cooled by precisely
controlled conditioned and filtered air in quench chamber. The filaments are then passed
through the finish application system. The filaments are taken on take up winders and finally
wound on bobbins. The yarn produced is extremely fine and the unit of fineness is denier.
Technology
Yarns are produced by a continuous polymerisation process.
Strict quality control of denier orientation and spread, along with computer-controlled
draw force testing, ensures maximum consistency of yarn performance during and
after texturising.
All critical yarn proprietary such as draw force, tenacity, elongation, uster and
shrinkage are closely monitored and controlled.
A special proprietary spin finish protects the colour and lubricity of the yarn over long
periods of storage.
Controlled interlace in filaments as well as the special finish enable the yarns to be
texturised at speeds of 750 mpm and above.
Polyester yarns are produced exclusively from PTA (Pure Terephthalic Acid) to
ensure a pure, uniform polymer of remarkable whiteness.
Fully Drawn Yarn
Fully Drawn Yarn is produced by a process similiar to POY manufacturing except that the
yarn is produced at higher spinning speeds coupled with intermediate drawing integrated in
the process itself. This allows stabilisation through orientation and crystallisation
Yarns are produced by a continuous polymerisation process.
All critical yarn properties such as tenacity, elongation, Uster variation and boiling
water shrinkage are closely monitored and controlled.
Controlled interlace enables the yarns to be twisted or sized in subsequent operations.
Unique features of Indo Rama FDY
Intermingled FDY yarns are suitable for direct twisting, warping and weaving.
Less waste and high efficiency in subsequent processes due to higher package weight
(10 kg).
The fabric made from these yarns have a feel and drape similar to fabrics. produced
from pure silk resulting in high realization of product quality.
These yarns eliminate draw-twisting and sizing process reducing the cost of products
for light and medium range of fabrics.
There is high efficiency and low breakages in warping because of excellent package
quality produced on craft winder.
Draw Texturised Yarn
DTY is a fully drawn, fully oriented polyester multifilament yarn with soft crimp, high bulk
and texture with cotton feel and very high durability and retention properties. This is
manufactured by texturising partially oriented yarn using texturising machines. DTY is
suitable for fabric end uses like outer/inner garments, skin-clinging garments, furnishings,
upholstery, etc. This is a replacementof cotton and cotton blend yarns with very low moisture
content.
Technology
DTY is produced on the latest high-speed draw texturising machines with identical
capability.
Total quality checks are done with respect to dyeability. Bulk and elongation is
closely monitored for consistency on captive weaving installations.
Electronic package-size measuring units ensure uniform texturised yarn package.
A consistent level of high quality anti-static lubricating oils, together with an option of
incorporating adequate interlacement, is applied for purposes of warping without sizing.
Polyester Chips
The balancing stream of the polymer melt from polycondensation section is discharged
through metering pumps to the casting head. The molten ribbons coming out of the casting
head are taken on the cooling chambers of chips cutter where the molten ribbons are cooled
by chilled DM water system. The solidified polymer ribbons are then cut in chips cutter and
dried in the dryer. The dried chips are then passed through the classifier. The properly cut
chips are stored in Chips silo. The chips are conveyed to the bagging silo for bagging.
Technology
Produced in a continuous polyester polymerisation plant
Uniform chemical and physical properties
USAGE OF POLYESTER
Polyester is increasingly being used as an implant in orthopedic and cardiovascular
applications, healthcare and hygiene products.
Poly is an important input in making tamper proof packaging, microwaveable foot trays
and bottles.
Poly is an important element for making printed circuit boards, smart cards, video and
audiotapes.
Poly is used to manufacture x-ray films and holograms.
Poly is a crucial raw material for making houses, power belts, ropes and threads.
Poly is a key input in the manufacture of stealth bombers.
Poly is being used in protective clothing for industrial workers and to make high
performance sportswear.
Poly is an ideal material for finishing nets, plant protection fabrics and sails.
Poly is also used to manufacture floppy disk liners.
Agriculture has greatly benefited from polyester sunscreens, windshields and packing
material for crops.
Proposed Methodology:
The finance and accounts department of IndoRama comprises of various sub-sections which
have responsibilities towards different aspects of business. A brief description about all these
sections is given below:
Sales Accounting-
Sales are an integral part of working capital management. Credit policy is important to arrive
at decisions in extending credit to its customer. The primary goal of credit policy is to avoid
extending loans to unreliable customers. It also monitors the credit to suppliers.
At IndoRama major part of sales is on credit. Majority of its sales are cash sales. Recovery of
credit sales amount quickly is also important in operating cycle of business. There are four
regional offices to manage sales all over India. They are situated in Delhi, Mumbai, Surat and
Coimbatore. Apart from these the company has collection centres in different part of country.
The marketing division provides information about customer requirements to sales
department. Following are the steps in sales:
Customer book contract with marketing department.
Order is placed at Butibori.
Marketing department advises to dispatch goods.
Pre dispatch list is prepared.
If order is placed in bulk and requirement is on different dates then different invoice
are maintained. Else loading of goods is done directly.
Delivery’s detailed packing list is prepared.
Invoice, MODVAT utilization and Lorry receipt are prepared.
Simultaneously excise entry is passed.
The sales accounting department enters accounting entry.
If goods are accepted and payment is done within four days then cash discount of 2%
is provided.
If payment is not on time then interest is charged on the amount receivable.
If goods are rejected due to damage, truck lost or quality disparity then they are
returned.
Sales returned entry is passed.
Generation of sales order against goods returned.
Billing documents are prepared.
Contra entry is passed.
New goods are sent.
All accounts are maintained at SAP. Payment by customer is done through cash
against delivery, telegraphic transfers or letter of credit.
Letter of credit (LC)
A letter of credit is an important instrument at IndoRama. It is a financial instrument that is
drawn on the book of borrower to the lender. But the transaction in this case is between the
bank of borrower and lender. Since the company supplies to both the domestic and
international market, they have different credit terms for both the markets. A LC drawn by a
domestic customer pays interest anywhere between 10-12% whereas the international LC
does not pays interest.
The various documents required for LC are:
1. Invoice
2. Delivery order/ Challan
3. Lorry receipt
4. Packing list
Bill for Laden (in case of Exports)
The company, state bank of India, discounts domestic LC at around 9%p.a. Thus the
company gain anywhere around 1.3% - 3.5% and also liquidates the instrument as and when
it wants. Generally the company discounts the LC at the bank as soon as it arrives. The
payment period is counted from the invoice date.
International LC does not pay interest. It could be either CIF (cost in freight) or FOB (free on
board). FOB is excluding freight and insurance. To recover the amount from overseas
customers company has to appoint agents. The commission paid to agents are on the FOB
amount. The company pays maximum of 3% to the agents. Almost 40% of export is through
agents while rest is directly done by IndoRama. In export on cash 25% of the amount
receivable is paid in advance and rest is paid when consignment is loaded on the ship. In
export through agents company provides 10 interest free days to agents to recover the amount
from due date. After this interest will be charged and deducted from agent’s account.
In India also the company pays brokerage to brokers. A brokerage of 1 rupee/kg is paid on
DTY. For PSF it is 60paisa/kg and for FDY it is 50paisa/kg.
Scrap and waste is sold on cash only. Only after cash or Demand Draft is received then the
goods are dispatched.
In case of power trading the amount should be received within seven days of billing date.
Power trading is through account to account transfer.
It is possible that the goods consigned to the company or by the company may face delays
due to transporters default. The company may face losses due to this as if the raw materials
do not reach on time the company may have to stop production. The company has a
continuous flow of production and cost of restarting the production is very high. Thus the
company has made a policy of charging the transporter with fine for each and every day’s
delay. There can be two types of delays In Transit delay and Detention delay.
There are three ways in which exports can be done:
1. Advance Licence
2. DEPB
3. Duty drawback
The Indian Foreign trade act (1992) is for the development of the foreign trade and regulates
the export import trade of the country. Under this act the Director General of Foreign Trade is
appointed in the Exim policy. The Exim policy is conterminous with the 5yr plan. The
current Exim policy is for the year 2008-2013.
The basic objective of the Exim policy is:
Quality product should be exported.
Import raw materials for some finished goods and re-export them at global
competitive price.
Taxes should not be exported.
The various schemes offered by the government are:
Duty Exemption/ Remission Scheme (Ch 4 of policy)
Export Promotion of Capital Goods (Ch 5 of policy)
Advance Licence:
It is one the scheme announced in the Exim policy for export promotion. Under this scheme
the importer is exempted from paying any customs duty on any import of inputs specified in
SION (Standard Input Output). Advance license is issued for duty free imports which are
physically incorporated in the export product. Thus such goods are exempted from payment
of basic customs duty, surcharge, additional custom duty, dumping duty and safeguard duty.
Advance licence can be issued for:
Physical Exports: when the firm directly exports the goods themselves, where the
goods leaves the country.
Intermediate supplies: when the firm supplies to an ultimate exporter who in turn
holds an advance license for physical exports or deemed exports.
Deemed Exports: when a firm directly exports to a 100% exporter, where the goods
do not leave the country, however contribute to ultimate export.
License issued for each type:
A Acquire & supplies materials outside the Advance license for exports
type country
B
type
Acquires & supplies materials within the
country
Advance license for Intermediate
exports
C
type
Acquires within but supplies materials
outside the country
Advance license for Deemed exports
The above license provides different schemes for different manufacturer. The basic objective
is to make import of inputs available to the exporter freely. The overall worldwide quality
and price competitiveness is thus maintained.
The license is valid up to 18 months. Suppose we are not able to meet the production dead
line then the license validity can be extended for six months at the rate of 2% interest and
further extension for six months at the rate of 5% interest.
DEPB (Duty Entitlement Pass Book Scheme):-
DEPB is an optional facility given for exporter not desiring to go through the licensing route
of Advance license. The objective of the DEPB scheme is to neutralize the incidence of
custom duty on the import content of the export product. The neutralization is provided in
form of duty credit against the export product.
Under the DEPB scheme exporter applies for duty as a percentage of the FOB value of the
exports realized. The credit is granted against such exports, at the rates fixed by DGFT. The
credit can later be used to pay customs duty on import of raw materials or can be freely sold
in the market. The validity of the DEPB credit is for 12 months from the date of issue and
cannot be extended further.
DEPB is a scheme where the exporter can take the benefits of exports in the form of grant in
custom duty. In this scheme there is no obligatory restriction on import and export.
DGFT has defined certain rates which are granted against exports of a particular product.
This credit can be utilized to knock off the custom duty payable to the DGFT on import of
any raw materials. The exporter can either utilize it for his own imports else sell it in the
market.
Duty Drawback:-
Drawback means the rebate of duty chargeable on any imported materials or excisable
materials used in manufacture or processing of goods which are manufactured in India and
exported. Export means taking out of India. Supply of stores for use in vessel or aircraft
proceeding to foreign port is also covered, since it is treated as ‘export’ as per section 89 of
Customs Act.
Duty Drawback is equal to (a) customs duty paid on imported inputs including SAD plus (b)
excise duty paid on indigenous inputs. Duty paid on packing material is also eligible.
However, if inputs are obtained without payment of customs/excise duty, no drawback will
be paid. If customs/excise duty is paid on part of inputs or rebate/refund is obtained, only that
part on which duty is paid and on which rebate/refund is not obtained will be eligible for
drawback. No drawback is available on other taxes like sales tax and octroi.
Duty drawback of SAD (Special Additional Duty) is allowable. – MF (DR) circular No.
58/2002-Cus dated 12-9-2002.
Processing also eligible for Drawback - Drawback is allowable if any manufacture, process or
any operation is carried out in India [section 75(1) of Customs Act]. Thus, drawback is
available not only on manufacture, but also on processing and job work, where goods may
not change its identity and no ‘manufacture’ has taken place.
All Industry Drawback rates are fixed by Directorate of Drawback, Dept. of Revenue,
Ministry of Finance, Govt. of India, Jeevan Deep, Parliament Street, New Delhi - 110 001.
The rates are periodically revised - normally on 1st June every year. Data from industry is
collected for this purpose. The types of rates are as follows :
All Industry Rate - This rate is fixed under rule 3 of Drawback Rules by considering average
quantity and value of each class of inputs imported or manufactured in India. Average
amount of duties paid is considered. These rates are fixed for broad categories of products.
The rates include drawback on packing materials. Normally, the rates are revised every year
from 1st June, i.e. after considering the impact of budget, which is presented in February
every year. All Industry drawback rate is not fixed if the rate is less than 1% of FOB Value,
unless the drawback claim per shipment exceeds Rs 500.
The AIR (All Industry Rate) is usually fixed as % of FOB price of export products. However,
in respect of many export products, duty drawback cap (ceiling) has been prescribed, so that
even if an exporter gets high price, his duty drawback eligibility does not go above the ceiling
prescribed.
The table gives allocation of the drawback allowed fewer than two heads namely - Customs
and Central Excise. The Customs portion covers basic customs duty, surcharge and SAD.
Excise portion covers basic and special excise duty and CVD. Duty drawback of customs
portion can be paid even if exporter has availed Cenvat credit, as Cenvat credit is only of
excise duty and CVD. – MF (DR) circular No. 83/2000-Cus dated 16-10-2000.
The All Industry Rate (AIR) is fixed on the basis of weighted averages of consumption of
imported / indigenous inputs of a representative cross section of exporters and average
incidence of duties. Hence, individual exporter is not required to produce any evidence in
respect of actual duties paid by him on inputs. – MF(DR) circular No. 24/2001-Cus dated
20.4.2001.
Brand Rate - It is possible to fix All Industry Rate only for some standard products. It cannot
be fixed for special type of products. In such cases, brand rate is fixed under rule 6. The
manufacturer has to submit application with all details to Commissioner, Central Excise.
Such application must be made within 60 days of export. This period can be extended by
Central Government by further 30 days. Further extension can be granted even upto one year
in if delay was due to abnormal situations as explained in MF(DR) circular No. 82/98-Cus
dated 29-10-1998.
Special Brand Rate - All Industry rate is fixed on average basis. Thus, a particular
manufacturer may find that the actual duty paid on inputs is higher than All Industry Rate
fixed for his product. In such case, he can apply under rule 7 of Drawback Rules for fixation
of Special Brand Rate, within 30 days from export. The conditions of eligibility are (a) the all
Industry rate fixed should be less than 80% of the duties paid by him (b) rate should not be
less than 1% of FOB value of product except when amount of drawback per shipment is more
than Rs. 500 (c) export value is not less than the value of imported material used in them - i.e.
there should not be ‘negative value addition’.
Forms and procedures have been prescribed for submitting details to jurisdictional
Commissioner of Central Excise, who will fix the rate of duty drawback. [Earlier, it was done
by Director of Drawback, New Delhi, up to 313-2003]
Exporter shall endorse on the ‘shipping bill’ the description, quantity and other details to
decide whether goods are eligible for duty drawback. He should submit one extra copy of
shipping bill for drawback purposes. Copy of Invoice should be submitted.
Declaration by Exporter - A declaration should be made rule 12(1)(a)(ii) of Duty Drawback
Rules, on shipping bill or bill of export that claim of drawback is being made and that duties
of customs and excise have been paid on materials, containers and packing materials and that
no separate claim for rebate of duty will be made. If the exporter or his authorised agent was
unable to make such declaration due to reasons beyond his control, Commissioner of
Customs can grant exemption from this provision of making declaration on shipping bill or
bill of export.
Further declarations are also required when brand rate or special brand rate has been fixed.
These declarations have to be signed by exporter.
Triplicate copy of shipping Bill is the drawback copy and should be marked as ‘Drawback
Claim Copy’. It should be submitted with pre-receipt on reverse side with revenue stamp.
Declaration for non-availment of Cenvat – (a) If the manufacturer-exporter or supporting
manufacturer of merchant exporter is registered with Central Excise, fact of non-availment of
Cenvat credit can be verified from ARE-1 form furnished (b) If the manufacturer-exporter or
supporting manufacturer of merchant exporter is not registered with Central Excise, they
have to submit self-declaration about non-availment of Cenvat in prescribed form. – MF
(DR) circular No. 8/2003-Cus dated 17-2-2003. The drawback rate consists of two
components - customs portion (consisting of basic customs duty, surcharge and SAD) and
excise portion (consisting of basic excise duty, special excise duty and CVD). The Cenvat
credit is only in respect of central excise. Hence, it has been clarified that even if Cenvat
credit has been availed, duty drawback in respect of customs portion will be available.
Raw Material Purchase Accounting
Raw Materials:
Raw materials can either be procured from local market or can be imported. Local
procurement could be either duty paid or deemed supply. While import can be done in three
ways which are advance license, DEPB and duty drawback. The following table shows the
raw materials required by IndoRama along with their suppliers
Raw Materials Suppliers
PTA MCPI, IOCL, Reliance, Import
MEG Import(SABIC, MITSUI)
TR2 Import
MCPI provides 90 days credit period for PTA while IOCL provides 45 days credit period for
the same. MODVAT on PTA is 4.21% while for MEG and TR2 is 8.24%. import prices are
dependent on per day rate of dollar.
Purchase:
The function of the purchase department is to make available the requirements made by
different departments of the company. The motto of this department is to get good quality
products at the lowest market price on time. Thus a list of approved vendors is prepared by
this department and kept as a reference for future dealings.
The purchase department in the company is intimated by the user department about the
present demand of a commodity. The purchase department based on the approved vendor list
ask for quotations for the specific requirements. Different supplier bids different prices along
with their specifications. In the previous system the suppliers did not knew how many more
quotations has the company received and what is the minimum price that the company has
received. So regardless of the price, the vendor quotes his own price according to his own
assumption. The supplier is not knowing the minimum price therefore when the company
tries to negotiate the price, the supplier feels forsaken and looses interest in the company to
supply goods. There is no transparency in the old system as no vendor knew about the lowest
price with the company and was kept in dark.
The purchase department handles the purchase of raw materials as well as stores and spares.
Raw material procurement is handled by the Delhi purchase office only. The payments are
made by the accounts department based on the priority given intimated by the purchase
department.
Purchase procedure:
1. Corporate materials (CM), New Delhi, is kept informed in writing by the plant about
consumption pattern for every item of raw material and chemical from time to time
and any significant change in consumption pattern would be intimated to corporate
material immediately.
2. CM estimates requirements for size and shipment schedule for each item of import.
This is recorded in the planning schedule.
3. CM obtains orders from the approved vendors mentioned in the approved vendor list.
For new vendors orders are obtain along with technical specifications.
4. The offer is then checked whether it is from a new vendor by referring to approved
vendor list.
5. If offer is from new vendor technical evolution from VP(Poly) is done. Approval is
intimated to VP(CM). if required sample materials are also send.
6. VP(CM) evaluates the offer commercially and decides the party to whom the order
has to be placed. Purchase order is then approved and forwarded to the party.
7. Suitable intimations are given to the banking department by the CM who also
establishes LC accordingly.
8. CM arranges for customers clearance from the port through Mumbai office.
9. Respective offices at different locations then make necessary arrangements at their
end for taking delivery of the materials from the port.
10. Mumbai office also arranges to get the materials dispatched to the user department at
plant in trucks/tankers.
11. Records to be fitted are
Record File
a. Planning Schedule Planning File
b. Approved Vendor List Vendor File
c. Purchase Order Material Wise
Entries in the books at the time of purchase:
1 Inventory A/c
To Provisional / GRIR a/c
(at the time of receipt GR stage)
2 S & H E Cess a/c
BED BTB a/c
Education Cess a/c
To MODVAT clearing a/c
3 Provision /GRIR a/c
Excise Duty a/c
To vendor a/c
(at the time invoice verification at the accounts department)
4 Vendor a/c
To Bank a/c
To Discount Receivable a/c
(at the time of payment made to the vendor on due date)
When the goods are received, the truck is unloaded and the goods are weighted for shortage
and quality certificate is also prepared. The stores make an entry in SAP for GR. A provision
account- GRIR a/c is created on the basis of P.O. The papers are forwarded to the accounts
department where the discount as agreed by the party is incorporated in the suppliers account.
Here the GRIR a/c is cancelled and vendors account is created. The supplier gives a credit
note for the amount equivalent to the discount due with him. The rest of the amount is paid
on the due date by the bank if the goods are on a bank LC or by cash.
Packing:
For packing 97% of the packaging material is purchased from local vendors and only 3% is
imported. This is due to strict quality and inventory control adopted by IndoRama. Under
quality control two types of measures are taken i.e. Burning strength and Compressing
strength. Commodity imported is crop papers which are mainly used for covering the finished
goods. The cost of these packaging materials is very competitive in nature so it helps the
company in cost reduction. IndoRama has three continuing process plants at Butibori and
almost 42 vendors for packaging material.
Various raw materials used for packaging are as follows:
1. Adapters
2. Bailing Wire
3. Bale Cover
4. Bopp-Tape
5. Carbon Film
6. Corr. Boxes
7. Film
8. HDPE Bag
9. Jumbo Box
10. Kraft Paper
11. Label/Stickers
12. Miscellaneous
13. P.P. Strip Roll
14. Pallet
15. Paper Tube
16. Polyethylene- HMHD bags
17. Punch Plate
Entries in packing department:
1 Inventory A/c
To Provisional / GRIR a/c
(at the time of receipt GR stage)
2 GR a/c
ED a/c
VAT a/c
To Vendor a/c
(at the time of passing of bill)
3 Vendor a/c
To Bank of India a/c
(at the time of entry in Bank)
Indo Rama has following Continuing Process Plants:
CP1
CP2-3
CP4
CP5
DTY
Company has approximately50 vendors for packaging material.
SAP Integrated System
All the requirements are feed in SAP periodically. The marketing department also estimates
the forecasted requirements based on past performance. The responsibility is then segregated
in SAP automatically and all the departments are intimated about their responsibility. The
logistic department decide for the transporter and transportation of the goods. The insurance
departments get the goods insured, while the excise departments arranges for getting the
import formalities completed. The stores and raw material department are intimated to
arrange for accommodation of the goods at a tentative date. The accounts department
complete the payment formalities to the supplier while the freight department arranges for the
payment to the transporter.
SAP: An Integrated System
SAP
General Ledger
Costing Department
CorporateStores
Administration
Accounts Department
Freight Department
Logistics
Insurance Department
Excise & Customs Department
HUNDI PROCESS
It is the process basically used by the company in case of any funds shortage or for uses of
funds in other important area. In this process, the payment to Vendor is delayed by a
maximum of 90 days from the due date of payment and directing the Vendor to take the
discounted payment from SIDBI by issuing Hundi to him. The steps involved in issuing a
Hundi to final payment to bank are described in the following points:
1. Most of the packing materials are taken from the Vendor at the credit period of 30
days. After the completion of due date, company provides annexure of the bills of
purchasing to the Vendor and offer them to claim Hundi.
2. Vendor after receiving the annexure, adjoin the cover letter with it and send it back to
the company. Cover letter contains the Hundi number, date and period of payment.
3. After verification of the facts in cover letter and annexure, both are duly signed by the
relevant authorities in the company and are returned back to the Vendor accompanied
by issuing of PDC to the Vendor.
4. Vendor then submits original documents including PDC, covering letter, annexure
and the Xerox of all the bill details of the invoices mentioned in the annexure in
SIDBI.
5. Bank then after discounting the price pays rest of the amount to the Vendor. The
discounting rate of the SIDBI is 11.5%
6. Accounting entries at the time of issuing of Hundi and advance entry of PDC is given
as follows:
1. Vendor a/c
To Hundi acceptance a/c
( At the Time of issuing of Hundi)
2. SIDBI a/c
To BOI a/c
7. The company has arrangements with Vendors that packing section will share 50% of
the discounting charges with the Vendor. So after receiving the deducted amount
Vendor issues the debit note of 50% of the discounting charges at the name of Indo
Rama and company books that debit note. Payment is done to the Vendor and
following entry is made in accounting books.
1. Expenditure a/c
To Vendor a/c
2. Vendor a/c
To BOI a/c
8. SIDBI intimates Indo Rama a month before the actual payment of the amount to it.
The notification by the SIDBI is send to the banking section of the company where it
is cross checked and then the relevant amount is credited to the BOI accounts from
where the payment is done.
Following are the important points in Hundi process:
The company cannot issues Hundi before the due date. The same can be issued only
when the due date of payment of Vendor is over.
Hundi can be issued a maximum of 90 days after the due date and 120 days from the
date of the invoice.
Maximum amount of Hundi that can be issued at a particular time is 15 crore.
There are only few Vendors, whose credibility is checked both by company and the
bank, which are entitled for Hundi.
Banking section
The department has four main and essential jobs:
1. Banking section makes a fund plan known as cash budget. The main aim is:
Estimate dispatch of finished goods for excise duty on daily basis.
To estimate requirement for raw materials to get MODVAT/ CENVAT for
final calculation of excise duty.
Calculate payments like:
a. Critical government payment like container co-operation of India, MSEB,
TDS etc.
b. Emergent payment like supplier payment, transporter payment, packing
payment etc.
c. Admission payments are also made like salary, community charges,
travelling, ticketing etc.
2. Multi banking branch (MBB) is one of the advantages of this section; it has availed
this facility and has minimized the risk of transfer of funds. Whenever fund is
required, message is conveyed by the banking section to corporate office in delhi.
Then cash is immediately transferred from the dealing branch of bank in delhi to bank
here in Nagpur through MBB.
3. Negotiation of letter of credit is also done by this section.
4. Scrap payments: banking section collect the draft/pay order and deposit the same in
the bank on same day. Banking section collects the receipt and payments are done
through ButiBori branch. For payment purpose, funds are transferred by the delhi
corporate office. Banking sector gets credit for certain period from the packing parties
and if it pays the same before the said period it gets discount.
Cash budget
It is a statement showing the estimated cash inflows and outflows and the resultant cash
balance for daily monitoring. It serves as device for planning and controlling the sources and
uses of cash to ensure the availability of cash when it is needed.
It helps IndoRama in following ways:
Enables the management to determine the timings when there is likely to be a
surplus/shortage of cash.
Enables the management to determine the quantum of shortage/surplus of cash.
It enables the management to prepare borrowing schedule and also the repayment
schedule well in advance.
It helps to plan for dividend payment.
It helps to plan the financing the expansion/modernization of the existing plan.
Helps the management to plan the financing of a new project.
Enables the management to take advantage of cash discounts.
Cash budget is prepared daily. It is useful for short range planning.
At Indorama annual budget is prepared by each department and send to head office for
approval. Daily budgets are then prepared by the respective department to get a better idea of
cash flows month wise.
Then the department, which needs cash, send a request to the cash foresting department. He
then compiles the requests, cross checks it with the daily budget figures and then send it to
corporate office at delhi. The corporate office then transfers the amount to the branch the next
day.
Establishment accounting means accounting for employees’ remuneration and administrative
payments. It is also known as pay roll accounting.
The basic salary of an employee is decided at the time of recruitment. On the basic salary,
HRA, commuting allowance and conveyance is calculation additional perks like LTA, credit
card, vehicle policy, cellular phone charges, medical allowance, bonus, ex-grating, yearly
attendance incentive etc are also given. There also are some monthly deduction like Provident
Fund, Profession tax, TDS, loans and advances.
In case of workers washing allowance, production incentive and attendance incentive is given
in addition to basic wage.
Administrative overheads include payments made towards establishment. These include
telephone bill payments, electricity bill payment, official postage and couriers, printing and
stationeries, security and canteen, welfare activities etc.
The process for establishment and contract accounting is as follows:
At first work order is prepared which contains details about the work needed to be
assigned and to whom it should be assigned and at what rate.
After the work is completed, service entry is prepared which is duly signed by
relevant authorities.
The contractor submits bills to the relevant department and that department cross
checks it and prepare a brief information letter about the bill.
The bill is then submitted to time office where number of man days and completion of
work is checked.
The company holds the PF amount and after deducting TDS, it pays to contractors.
When the contractor shows the PF challan to company and receives the holdup PF
amount.
The following are the accounting entries:
1 Expenditure A/c
To GRIR a/c
(at the time of service entry)
2 Service tax received a/c
GRIR a/c
To Vendor a/c
To TDS a/c
(at the time of invoice verification)
3 Vendor a/c
To Bank a/c
(at the time of payment made to the vendor on due date)
Stores and Spares
Stores are also an important field that is handled by butibori purchase department. All other
requirements of the company are met by the purchase department. The company has around
500 creditors for stores and spares alone. A credit of 30 days is received on the purchase
made for stores and spares, thereby aiding the working capital requirements of the company.
The process of purchasing in stores and spares department is as follows:
The user (relevant department) provides the purchase requisition to the purchase
department.
Purchase department then asks for quotations from vendors for the required materials.
The quotations received from different vendors goes through comparative analysis
and 2-3 vendors are shortlisted based on price, quality standard and reputation.
Negotiations are done with shortlisted vendors and various purchase terms are
decided with the selected vendor and purchase order is prepared.
As per purchase order vendor delivers the material and gate entry is done with respect
to the purchase order.
After this the goods is send to stores where store keeper checks for the quantity
received and makes an informal entry of goods received.
Authorized person then checks the received goods for quality and then makes an entry
in goods received account.
The accounting entry for this process is as follows:
1 Inventory A/c
To GRIR a/c
(at the time of receipt GR stage)
2 MODVAT a/c
GRIR a/c
VAT a/c
To vendor a/c
(at the time invoice verification at the accounts department)
4 Vendor a/c
To Bank a/c
(at the time of payment made to the vendor on due date)
Advance payment
Most of the materials are purchased on credit but some materials especially from OEM
(original equipment manufacturer) is purchased on advance payment. The process for
advance payment is as follows:
First the order is placed by the user.
Then PRA (payment release advice) is prepared and it is checked whether there is any
past debt or not. If there is past debt then it is cleared first and then advance payment
is done. In some cases when material is urgently required advance payment is done
irrespective of past debts.
After this bank voucher is prepared and sent to banking section.
From banking section it is sent to respective vendor.
There is one more way of purchase that is CAD (cash against document), in this process PO
is prepared and invoice is raised. Vendor sends material through courier and company have to
pay to courier personnel while taking the delivery of the goods.
Conclusion
Thus we see that a firm’s system and cash management employs a combination of
instruments, techniques and services with a goal of achieving an efficient use of corporate
funds. Once the cash budget forecast has been prepared, the analyst can evaluate the firm ‘s
position. An important part of the evaluation deals with adequacy of cash in each quarter as
the concerned firm does by preparing cash budget for coming four months. A safety level
must be defined as the minimum amount of cash needed to conduct firm’s business. It is the
amount of cash and equivalents that the firm has available to meet transactions, contingencies
and opportunity needs.
In comparing cash on hand with the safety level four conditions are possible namely surplus
cash, optimum cash, shortage of cash and deficit or negative cash balance. In all the
conditions the manager must use his discretion to the best so as to maximize the return on
funds available.
Although there is negative working capital which is considered to be good signs for
manufacturing firm. But considerable no its current assets are stuck in non-liquidating stock
like CENVAT receivable and various claims like insurance. Since this are non-liquidating
assets company cannot utilize them and has to bear opportunity cost and also falling on
profitability.
Recommendations
There should be effective monitoring of level of cash, receivables and inventory. Strategies
should be developed to save as much as possible by decreasing cost of funds available should
be other utilised to the optimum level.
The various techniques relating to effective cash management namely reducing the cost of
receivables, prompt payment by customers, decreasing operating cycle so as to increase cash
turn over and decrease cash turn over should be adopted by the firm. Also methodologies
relating to effective inventory management and stretching the time of accounts payable
should be brought into practice. This will help in optimum utilisation of the much needed
funds. Company needs to devise strategy to liquidate the stuck up assets.
Bibliography
1. Principles of Corporate Finance – Brealy and Myers
2. Financial Management – Prasanna Chandra
3. Annual Report of the company 2007-2008
4. www.indo-rama.net