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27th June , 2005

K. Kiran Kumar Patra

INDIAN BUSINESS ACADEMY

IBA, BANGALORE

Prof. Arun Mudhol Mr. A. K. Panda

Faculty Member Manager (F & A)

IBA RSP

Bangalore Rourkela

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Mr. Manish Jain

CEO

IBA

Bangalore

!!!!!!!!

Certify that, Mr. K. Kiran Kumar Patra, a student ofIBA, Bangalore, under

going PGDBM programme for session 2004-2006 has obtained my guidance and

supervision from time to time in order to successfully complete the summer practical

training report titled Working CapitalManagement, in RSP, Rourkela.

To the best of my knowledge, this project work is original and is not a part of

any earlier work by Mr. K. Kiran Kumar Patra or anybody else. This report has not

been the basis for the award of any degree or diploma by the university or any other

institution.

Mr. Manish Jain

CEO

Indian Business Academy

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Prof. Ramesh G Tagat

Dean

IBA

Bangalore

!!!!!!!!

Certify that, Mr. K. Kiran Kumar Patra, a student ofIBA, Bangalore, under

going PGDBM programme for session 2004-2006 has obtained my guidance and

supervision from time to time in order to successfully complete the summer practical

training report titled Working CapitalManagement, in RSP, Rourkela.

To the best of my knowledge, this project work is original and is not a part of

any earlier work by Mr. K. Kiran Kumar Patra or anybody else. This report has not

been the basis for the award of any degree or diploma by the university or any other

institution.

Prof. Ramesh G Tagat

DeanIndian Business Academy

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!"#!"#!"#!"#

I would like to express my obligation and references to those whose guidance,

and co-operation helps me lot throughout the project as a source of inspiration.

I convey my heartly gratitude to my esteemed guide possessing a dynamic

personality with high enthusiasm, Prof. Arun Mudhol, Faculty member, IBA,

Bangalore, for his kind cooperation and guidance for successful completion of this

report well before hand.

I am also thankful to Mr. A. K. Panda (Manager F & A) RSP Rourkela and

all other staff of Finance and Accounts Section for their co-operation and help to

prepare this report.

Mr. K. Kiran Kumar Patra

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DECLARATION

I, K. Kiran Kumar Patra of PGDBM (04-06) do hereby declare that the

project report entitled Working Capital Management prepared by me after

undertaking the summer training of eight weeks at Rourkela Steel Plant, Rourkela.

This report has not submitted earlier for publication in any journal, magazine on

anywhere else and it is completely genuine. The facts and findings presented in this

project report are true to the best of my knowledge and belief, which is being

submitted to the IBA, Bangalore.

Place: Bangalore Mr. K. Kiran Kumar PatraDate: Regd No. FP 46/090PGDBM

IBA, Bangalore

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Objective of Study 1

Data and Methodology of Study 2

1. Introduction 3

2. Steel Authority of India Ltd. 5

3. Share Holding Pattern 6

4. Major Units & Joint Ventures of SAIL 7

5. Rourkela Steel Plant 9

6. RSP Profitability since 1990 11

7. Working Capital Management 12

Concept of Working Capital 13

Working Capital Structure 15

Sources of Working Capital 17

Uses of Working Capital 17

Operating Cycle 18

Formulas for Operating Cycle 20

Cash Conversion Cycle (RSP) 21

Inventory Management 21

Receivable Management 22

Types of Working Capital Needs 23

Factors Influencing Working Capital 24

Cash Requirement for Working Capital 25

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8. Optimal Working Capital Policy 26

9. Composition of Working Capital 27

10. Monitoring and Controlling Working Capital 29

Monitoring the Operating Cycle 29

Working Capital Ratios 30

Monitoring the Liquidity 30

11. Ratios

Working Capital or Current Ratio 31

Acid Test or Quick Ratio 32

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EXECUTIVE SUMMARY

The financial manager should continuously monitor the current assets

individually because the level of investment in each of the current assets are vary

from day to day to ensure that the desired levels are being maintained or not. Since,

the amount of money invested in current assets can change rapidly, so does the

financing required. Mis-management of current assets can be costly. Too large an

investment in current assets means tying up funds that can be productively used.

Excess investment may also expose the firm to undue riske.g., in case, the inventory

cannot be sold or the receivables cannot be collected.

Working capital or circulating capital indicates circular flow of cash i.e. a sort of a

revolving fund starting with cash used to pay for raw materials, labour and operating

expenses and when finished products are ready for sale, the cash is recovered through

sale of this goods (on cash or on credit). Thus, we have a circular cash flow from cash

to inventories to receivables and back to cash.

The firm begins with the purchase of raw materials, which are paid for after a

delay, which represents the account payable period. The firm converts the raw

materials into finished goods and then sells the same. The time lag between the

purchase of raw materials and the sale of finished goods is the inventory period.

Customers pay their bills sometime after the sales. The period that elapses between

the date of sales and the date of collection of the receivables is the receivables are the

accounts payable period. But in Rourkela Steel Plant, they received whole payment

as advance from the customer then they go for preparing the finished goods for them.

The investment in inventory is very high in most of the undertakings engaged

in manufacturing, wholesale and retail trade. The amount of investment is sometimes

more in inventory than in other assets. In India, a study of 29 major industries has

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revealed that the average cost of materials is 64 paisa and the cost of labour and

overheads is 36 paisa in a rupee. In industries like sugar, the raw materials cost is as

high as 68.75 percent of the total cost. About 90 percent part of working capital is

invested in inventories. It is necessary for every management to give proper attentionto inventory management. In this company the investment in raw material, spares, and

finished goods are very high. So that the inventory period is very high as compared to

other periods. And for this only the cash conversion cycle increases. But they planed

so many things for this to decrease the inventory period from next year onwards.

The objective of receivable management is to take a sound decision as regards

investment in debtors. In the words of Bolton S.E., the objective of receivables

management is to promote sales and profits until that point is reached where the

return on investment in further funding of receivables is less than the cost of funds

raised to finance that additional credit.

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OBJECTIVE OF THE STUDY

The objectives for which the study has been under taken are: -

1. To assess the significance of the working capital by selecting a few important

parameters such as working capital ratio, acid test ratio, age of inventory and

age of debtors.

2. To make an item wise analysis of the elements/components of working capital

to identify the items responsible for changes in working capital.

3. To study the liquidity position of the company by taking four measures at a

time, namely inventory to working capital, debtors to working capital, creditors

to working capital and other current assets including loans & advances to

current assets.

4. To suggest ways to increase the efficiency of the working capital management.

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DATA & METHODOLOGY OF THE STUDY

The data of Rourkela Steel Plant used in this report have been taken from the

records and annual reports of the company. Classification and tabulation of the financial

data collected from the above-mentioned source and is collected or done as per the

requirements of the study. For assessing the performances of the working capital

management in this study the technique of ratio analysis has been used.

The research design was mainly exploratory in nature. This was sought to

collect adequate background information about the subject of study. It mainly

involved informal meeting with the company executives of Finance department.

The method of collection of information from the executives was through

discussions.

Methodology followed in this study is based mainly on the secondary data.

SOURCES OF DATA

There are two sources from which we get data:

1. PRIMARY SOURCES

From primary source we can get primary data. Primary data are those,

which are collected directly from the customer. As per my project, it need not

require going to customers, so I confined my project data to the Secondary

sources.

2. SECONDARY SOURCES

Secondary data are those which are previously collected and recorded,

available b the organization and out side sources.

1. Direct Interview

2. Annual Report

3. Financial Report

4. Internet ( http://www.sail.co.in/plants_rourkela.asp )

5. Book Management Accounting by R.K Sharma and Shashi K. Gupta

Financial Management by Prasanna Chandra

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INTRODUCTION

The use of iron is as old as civilization. The cave man used different types

of stones for day-to-day activities. Out of these stones the primitives man got

maximum benefit from the ironstone. But the revolution for utilization of metal

mainly iron was seen in the Iron Age. In this age man faced many difficulties due

to less hardening quality of iron. This difficulty continued till the early part of 18th

century. But in the year 1740 BENZAMIN HUNTSMAN devised a method of

melting wrought iron, which had carbon, diffused into it and so produced a

reasonably consistent and hard material i.e. steel. After this steel has been

produced through various processes. Steel now a day produced mainly by the

oxygen process or the electric furnace, but the same basic principle of steel

making is common to all processes.

Since the man knows the use of steel, it has become an inseparable and

indispensable commodity of the modern man. For all the infrastructure of modern

society, steel plays a vital role. After the scientific revolution, the steel power

shifted and concentrated mainly in five countries, viz. UK, USA, USSR, FRANCE

and WEST GERMANY. They have rutted the steel industry for more than 200

years the late 19th

century had seen the rise of steel industry in the Eastern

Hemisphere and the three countries, which are proud of their performance, are

JAPAN, CHINA AND KOREA. Technology in steel industry has taken a great

leap forward in the last three decades.

STEEL INDUSTRY (INDIA)

The modern revolution of the steel industry in INDIA began only after

independence when the country the inevitability of its sponsorship role. Public

sector steel plants were installed for the first time in out country during the late

50s. INDIA is endowed with vast natural resources for uninterrupted raw

materials support to steel works. This advantage has paved the way for the

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emergence of steel industries in country both public sector & private sector

enterprises.

Pt. NEHERU, conceptualized the indispensability of industrialization to

attain overall prosperity of nation thus at first government of INDIA initiated the

first public sector steel industry named as HINDUSTAN STEEL LTD. later

named as SAIL (Steel authority of INDIA Ltd). In the early days only a few steel

industries were there under private sector. But because of increasing importance of

steel in the economic development of a country many private bodies entered the

field. Another strong reason; for this entered charge is liberalization of economy.

THE MAJOR STEEL INDUSTRIES OF INDIA:

1.)SAIL

2.)TISCO

3.)ZINDAL

4.)MUKAND

5.)ESSAR STEEL

6.)RINL

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STEEL AUTHORITY OF INDIA LIMITED SAIL

Steel Authority of India Limited (SAIL) is the leading steel making

company in India. It is a fully integrated iron and steel maker, producing both

basic and special steels for domestic construction, engineering, power, railway,

automotive and defence industries and for sale in export markets.

Ranked amongst the top ten public sector companies in India in terms of

turnover, SAIL manufactures and sells a broad range of steel products, including

hot and cold rolled sheets and coils, galvanized sheets, electrical sheets,

structurals, railway products, plates, bars and rods, stainless steel and other alloy

steels. SAIL produces iron and steel at four integrated plants and three special

steel plants, located principally in the eastern and central regions of India and

situated close to domestic sources of raw materials, including the Company's iron

ore, limestone and dolomite mines.

SAIL's wide ranges of long and flat steel products are much in demand in

the domestic as well as the international market. SAILs own Central Marketing

Organization (CMO) and the International Trade Division carry out this vital

responsibility. CMO encompasses a wide network of 38 branch offices and 47

stockyards located in major cities and towns throughout India.

With technical and managerial expertise and know-how in steel making

gained over four decades, SAIL's Consultancy Division (SAILCON) at New Delhi

offers services and consultancy to clients worldwide.

SAIL has a well equipped Research and Development Centre for Iron and

Steel (RDCIS) at Ranchi, which helps to produce quality steel and develop new

technologies for the steel industry. Besides, SAIL has its own in-house Centre for

Engineering and Technology (CET), Management Training Institute (MTI) and

Safety Organization at Ranchi. Our captive mines are under the control of the Raw

Materials Division in Calcutta. The Environment Management Division and

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Growth Division of SAIL operate from their headquarters in Calcutta. Almost all

our plants and major units are ISO Certified.

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Bhilai Steel Plant (BSP) in ChhattisgarhDurgapur Steel Plant (DSP) in West Bengal

Rourkela Steel Plant (RSP) in Orissa

Bokaro Steel Plant (BSL) in Jharkhand

Alloy Steels Plants (ASP) in West Bengal

Salem Steel Plant (SSP) in TamilNadu

Visvesvaraya Iron and Steel Plant (VISL) in Karnataka

Indian Iron and Steel Company (IISCO) in West Bengal

Maharashtra Elektrosmelt Limited (MEL) in Maharashtra

Bhilai Oxygen Limited (BOL) in New Delhi

SAIL has promoted joint ventures in different areas ranging from power plants to

E-commerce.

!"#$%&'(#!"#$%&'(#!"#$%&'(#!"#$%&'(#

Set up in March 2001, this 50:50 joint venture between SAIL and the

National Thermal Power Corporation (NTPC) operates and manages the

Captive Power Plants-II of the Durgapur and Rourkela Steel Plants, which

have a combined capacity of 240 MW.

)*$&%&'(#%)*$&%&'(#%)*$&%&'(#%)*$&%&'(#%

This 50:50 joint venture between SAIL and the Damodar Valley

Corporation formed in January 2002 is managing the 302-MW power

generation and 1880 tonnes per hour steam generation facilities at Bokaro

Steel Plant.

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)+&%&'(#)+&%&'(#)+&%&'(#)+&%&'(#%%%%

Another SAIL-NTPC joint venture on 50:50 basis formed in March 2002

manages the 74 MW Power Plant-II of Bhilai Steel Plant which has

additional capacity of producing 150 tonnes of steam per hour.

+"#,%!%+"#,%!%+"#,%!%+"#,%!%

This 40:60 joint venture between SAIL and USX Engineers & Consultants,

a subsidiary of the US Steel Corporation, promotes information technology

in the steel sector.

(%'#%(%'#%(%'#%(%'#%

A joint venture between SAIL and Tata Steel on 50:50 basis, this company

promotes e-commerce activities in steel and related areas.

"#"#"#"#----)''(#()''(#()''(#()''(#(

SAIL has formed a joint venture with BMW industries Ltd. on 40:60 basis

to promote a service centre at Bokaro with the objective of adding value to

steel.

).%#%).%#%).%#%).%#%

A joint venture between SAIL and West Bengal Mineral Development

Corporation ltd on 50:50 basis was formed for development of Jayanti

Dolomite Deposit, Jalpaiguri for supply of Dolomite to DSP and other

plants

/%/%/%/%----""""#01##01##01##01#

A joint venture between SAIL, National Mineral Development Corporation

(NMDC) and Russian promoters for marketing Romelt Technology developed by

Russian for reducing of iron bearing materials, which are carried out with carbon

in single stage reactor with the use of oxygen.

23$"#23$"#23$"#23$"#

SAIL plans to raise supplies of steel by 10% in the domestic market in Q4 of

2004-05

GAIL to supply natural gas to SAIL plants

SAIL hands over Dividend Cheque of Rs 532 crore to GoI

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Segment Revenue, Results and Capital Employed for the Quarter/Nine Months

Ended 31st December, 2004

Unaudited Financial Results for the Quarter/Nine Months Ended 31st December,

2004

SAIL Q3 Net Profit Jumps By 105 Per

4$%4$%4$%4$%

The Government of India owns about 86% of SAIL's equity and retains voting

control of the Company. However, SAIL by virtue of its "Navranta" status, enjoys

significant operational and financial autonomy.

ROURKELA STEEL PLANT

Rourkela Steel Plant (RSP), the first integrated steel plant in the Public

Sector in India, was set up with German collaboration with an installed capacity of

1 million tones. Subsequently, the capacity was enhanced to 1.8 million tones.

Recently the plant has been modernized with a number of new units with state-of-

the-art facilities and most of the old units have been revamped and modernized for

effecting substantial improvement in the quality of products, reducing the cost and

ensuring cleaner environment. This is the first steel plant in SAIL where 100% of the

slabs rolled are produced through continuous casting. Almost all major units of the plant

are covered under ISO: 9002 certification. RSPs Silicon Steel Mill has also awarded

ISO: 14001 for Environment Management.

The present capacity of the Pants is 2 million tones of Hot Metal, 1.9 million

tones of Crude Steel and 1.671 million tones of Saleable Steel. Its wide and sophisticated

product range includes various flat, tubular and coated products.

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PRODUCT-MIX TONNES/ANNUM

Plate Mill Plates 2,99,000

HR Plates 92,500

HR Coils 3,98,000

ERW Pipes 75,000SW Pipes 55,000

CR Sheets & Coils 4,33,000

Galvanized Sheets (GP& GC) 1,60,000

Electrolytic Tin-Plates 85,000

Silicon Steel Sheets 73,500

Total Saleable Steel 16,71,000

2*2*2*2*,/,/,/,/

STRENGTHWEAKNESS

Integrated Steel PlantProblems in Product quality

Wide Product range Problems of coordination between

various levels

Wide customer range Cumbersome procedure & system

Large distribution coverage Inconsistency in delivery & feedbackReasonable price

Open and accessible organization

Devoted, dynamic, knowledgeable work

force

Orientation towards customer

satisfaction

####

Rourkela Steel Plant is located at 300 odd km from Bhubaneswar and the main

railway line pass through Rourkela railway station.

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////5555,&66,&66,&66,&66 0/10/10/10/1

-1200 -1000 -800 -600 -400 -200 0 200

1Year

Profits / Loses

2003-042002-03

2001-02

00-01

99-00

98-99

97-98

96-97

95-96

94-95

93-9492-93

91-92

90-91

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24/78"!"#""8++!24/78"!"#""8++!24/78"!"#""8++!24/78"!"#""8++!

The working capital management refers to management of the working

capital, or to be more precise, the management of current assets. A firms working

capital consists of its investment in current assets, which include short-term assets

such as cash and bank balance, inventories, receivables, and marketable securities.

So, the working capital management refers to the management of the level of all

these individual current assets. The need for working capital management arises

from two considerations, first, existence of working capital is imperative in anyfirm the fixed assets which usually require a large chunk of total funds, can be

used at an optimum level only if supported by sufficient working capital, and

second, the working capital involves investment of funds of the firm. If the

working capital level is not properly maintained and managed, then it may result

in unnecessary blocking of scarce resources of the firm. The insufficient working

capital, on the other hand, put different hindrances in smooth working of the firm.

Therefore, the working capital management needs attention of financial manager.

The term working capital refers to current assets, which may be defined as

Those which are convertible into cash or equivalents within a period of one

year,

Those, which are required to meet day-to-day operations.

The level of investment in each of the current assets varies from day to day,

and the financial manager must therefore, continuously monitor these assets to

ensure that the desired levels are being maintained. Since, the amount of money

invested in current assets can change rapidly, so does the financing required. Mis-

management of current assets can be costly. Too large an investment in current

assets means tying up funds that can be productively used elsewhere. Excess

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investment may also expose the firm to undue risk e.g., in case, the inventory

cannot be sold or the receivables cannot be collected.

On the other hand, too little investment also can be expensive. So, in the

working capital management, a financial manager is faced with decisionsinvolving some of the considerations as follows: -

What should be the total investment in working capital of the firm?

What should be the level of individual current assets?

What should be the relative proportion of different sources to finance the

working capital requirements?

4+!4924/78"!"4+!4924/78"!"4+!4924/78"!"4+!4924/78"!"####Working capital or circulating capital indicates circular flow of cash i.e. a

sort of a revolving fund starting with cash used to pay for raw materials, labour

and operating expenses and when finished products are ready for sale, the cash is

recovered through sale of this goods (on cash or on credit). Thus, we have a

circular cash flow from cash to inventories to receivables and back to cash. There

are two concepts of working capital.

1. Gross working capital

2. Net working capital.

82*82*82*82*

Gross working capital is the total of all current assets. The constituents of

current assets are

Inventories

Raw material & components.

Work-in-progress

Finished goods

Others

Trade debtors

Loans & advances

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Investments

Cash & bank balances

Bills receivables, etc.

2*2*2*2*

It represents the excess of total current assets over total liabilities. It is a

qualitative concept indicating the soundness of current financial position. It is if

major importance to investors and lenders. On the basis of this concept the

management will also get an idea about the ease and the cost of raising working

capital. Net working capital is measured by Current Ratio should be 2:1. A larger

ratio indicates greater solvency and vise versa, of course, excessive current ratio

would point out poor financial planning and it would reduce income.

Net working capital

Total Current Assets Total Current Liabilities

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2*,/,9':2*,/,9':2*,/,9':2*,/,9':

Working Capital (Operations) (Rs. In Lakh)

Particulars

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-05

(budgeted)

A. Current Assets:

Cash and Bank Balance 4 10 14 14 12 14

Inventory:Raw Materials 7498 6504 7105 8033 5957 6387

Stores and Spares 20956 16002 15431 16149 15576 13903

Finished and Semi-

finished 50823 63412 51414 44930 25153 46406

Sundry Debtors 3839 2842 824 851 857 832

Loans and Advances 26225 29878 22647 21355 19983 20554

Other Current Assets 3360 2492 2293 1102 1049 841

Total of Current Assets 112705 121140 99728 92434 68587 88937

B. Current Liabilities and Provisions

Sundry Creditors 20661 21824 23683 23004 24875 25291

Security and other Deposits 4687 4194 4483 4455 4068 4180

Others 17667 17876 15955 17658 10590 18389

Provision (Excluding

provision for gratuity) 11525 19961 12425 5677 25285 11244Total of Current Liabilities 54540 63855 56546 50794 64818 59104

Working Capital (A-B) 58165 57285 43182 41640 3769 29833

Inc/dec. in working capital

Over previous year -58421 -880 -14103 -1542 -37871 26064

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!,2*!,2*!,2*!,2*

Issue of Share

Capital

Working capital

pool

Dividend

Payment

Repayment of Long-

term Borrowing

OperationLong-term

Borrowing

Purchase of non-

Current Asset

Sale of non-

current asset

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,$*,$*,$*,$*

The sources of working capital are discussed below: -

The operations of the business generate revenues & entail expenses.

Revenues augment working capital; expenses, other than depreciation &

other amortization, decrease working capital. Hence the working capital

increase on account of operations is equal to profit after tax plus

depreciation.

An issue of share capital results in an inflow of working capital because it

brings cash inflow or an increase in short term receivables.

When a long-term loan is taken there is an increase in working capital

because of cash inflow. A short-term loan however does not have any effect

on working capital because it increases both current asset and current

liability at the same time leaving the working capital position unchanged.

When a fixed asset or a long-term investment or any other non-current asset

is sold there do cash or short-term receivables represent a working capital

inflow?

,$*,$*,$*,$*

The uses of working capital are discussed below

The payment of dividend results in a cash (working capital) outflow.

The repayment of long-term loans, debentures and other long-term

liabilities involves cash outflow and hence a use of working capital. Therepayment of a current liability does not affect the working capital position

because it entails an equal reduction in current liabilities and current assets.

When a firm purchases fixed assets, long-term investments, or other non-

current assets, it pays cash or incurs short-term debts. Hence working

capital decreases.

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4&;"),.4&;"),.4&;"),.4&;"),.

Investment in working capital is influenced by four key events in the

production and sales cycle of the firm.

Purchase of raw material

Payment for raw materials

Sale of finished goods

Collection of cash for sales

The firm begins with the purchase of raw materials, which are paid for after

a delay, which represents the account payable period. The firm converts the raw

materials into finished goods and then sells the same. The time lag between the

purchase of raw materials and the sale of finished goods is the inventory period.

Customers pay their bills sometime after the sales. The period that elapses

between the date of sales and the date of collection of the receivables is the

receivables are the accounts payable period.

The time that elapses between the purchase of raw materials and the

collection of cash for sales is referred to operating cycle.

In case of any steel plant, the product flow starts from coke and lime stone

as the major raw material along with iron ore. The conversion process continues

through blast furnace, steel melting shop and the mills and emerges as various

products.

Incidentally, the operating cycle implies the life span of the current asset. A

faster operating cycle shows the high level of coordination between different

departments.

Operating Cycle

Inventor conversion eriod + Receivable conversion eriod

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It can also mean some financial jugglery by the finance manager between

the different components of current asset and current liability (they will be

described in detail as we move along).

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Formula for calculating various conversion periods for operating cycle is givenbelow: -

RMCP = 365*nconsumptiomaterialRawTotal

stockmateialrawAverage

FGCP = 365*cos soldgoodsoftTotal

goodsfinishedAverage

WPCP = 365*cos productionoftTotal

progressinworkAverage

RCP = 365*Re

salescreditTotal

ceivablesAverage

DP = 365*purchasecreditTotal

payablesAverage

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'&,/'&,/'&,/'&,/

Particulars 03-04 02-03 01-02

Inventory

Raw Material (a) 7.63 10.22 12.92

Stores and Spares (b) 17.32 21.32 29.86

Finished and Semi-Finished Goods (c) 38.26 65.05 109.08

Inventory Conversion Period

d = (a + b + c)

63.21 96.59 151.87

Ave. Collection Period (e) 93.26 113.09 3.48

Operating Cycle f = (d + e) 156.47 209.68 155.39

Ave. Payment Period (g) 60.6 59.16 67.48

Cash Conversion Cycle (f - g) 95.87 150.52 87.87

'&%;'&%;'&%;'&%;

The investment in inventory is very high in most of the undertakings

engaged in manufacturing, wholesale and retail trade. The amount of investment is

sometimes more in inventory than in other assets. In India, a study of 29 major

industries has revealed that the average cost of materials is 64 paisa and the cost of

labour and overheads is 36 paisa in a rupee. In industries like sugar, the raw

materials cost is as high as 68.75 percent of the total cost. About 90 percent part of

working capital is invested in inventories. It is necessary for every management to

give proper attention to inventory management. A proper planning of purchasing

handling, storing and accounting should form a part of inventory management. An

efficient system of inventory management will determine (a) what to purchase (b)

how much to purchase (c) from where to purchase (d) where to store, etc.

There are conflicting interests of different departmental heads over the

issue of inventory. The finance manager will try to invest less in inventory because

for him it is an idle investment, whereas production manager will emphasize to

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acquire more and more inventory, as he does not want any interruption in

production due to shortage of inventory. The purpose of inventory management isto keep the stock in such a neither way that neither there is over-stocking nor

under-stocking. The over-stocking will mean a reduction of liquidity and starving

of other production process; under-stocking, on the other hand, will result in

stoppage of work. The investments in inventory should be kept in reasonable

limits.

For operating cycle inventory is the main mover because for a

manufacturing company, inventory is most important. They have to maintain

proper inventory for future requirements. If you see individually, every item of

inventory is decreasing. Finished and semi-finished goods are decreased by 65%

as compare to 01-02 and 41% as compared to 02-03. That means the company is

improving to maintain inventory. But still its not good for the company. Because

for finished goods, there is a norm that it should maintain for 15 days only. But as

I said they are improving, may be in the near future they will be good in

maintaining inventory.

/'%/'%/'%/'%

Receivable management is the process of making decisions relating to

investment in trade debtors. We have already stated that certain investment in

receivables is necessary to increase the sales and the profits of a firm. But at the

same time investment in this asset involves cost considerations also. Further, there

is always a risk of bad debts too. Thus, the objective of receivable management is

to take a sound decision as regards investment in debtors. In the words of Bolton

S.E., the objective of receivables management is to promote sales and profits

until that point is reached where the return on investment in further funding of

receivables is less than the cost of funds raised to finance that additional credit.

Ave collection period is here 93 days that means approximately 3 months,

which is not good for the company. ACP should be one-month max. If you see the

previous year it decreased some how by 20 days. But if you compare it with 01-

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02, it increased by so many amounts. Because the sales of 01-02 is very less as

compared to the current year.Like this average payment period is for 2 months. But as you know that if

companys cash outflow is lower rate than it is good for the company. But to

maintain the company reputation company should pay the due as soon as possible

and as per the norm also the APP period should be one month.

!&,2*;!&,2*;!&,2*;!&,2*;----

Another important aspect of working capital management is to analyze the

total working capital needs of the firm in order to find out the permanent and

temporary working capital is required because of existence of operating cycle.

Moreover, the lengthier the operating cycle, greater would be the need for working

capital. However, the magnitude and quantum of working capital required will not

be same all the times, rather it will fluctuate.

The working capital need therefore, can be bifurcated into

((((%2*;%2*;%2*;%2*;----

There is always a minimum level working capital, which is

continuously required by a firm in order to maintain its activities.

Even during slack season, every firm maintains some current assets.

This minimum level of current assets which must be maintained by

any firm all the times is known as permanent working capital for that

firm.

((((!%&2*;!%&2*;!%&2*;!%&2*;----

Over and above the permanent working capital, the firm may also

require additional worming capital in order to meet the requirements

arising out of fluctuations in sales volume. This extra working

capital needed to support the increased volume of sales is known as

temporary.

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9,2*;9,2*;9,2*;9,2*;----

In addition to the characteristics peculiar to an enterprise which determinethe quantum of working capital, the following factors are also equally important

and applicable to all enterprise: -

(((()4,);)4,);)4,);)4,);----

The working capital requirement is closely related to the nature of the

business of the firm. In case of retail shop working capital requirement is

much less than as compared to trading and manufacturing concerns.

(((()&,;)&,;)&,;)&,;----Different phases of business cycle i.e. boom, recession etc. also affect the

working capital requirement. In case of boom period working capital

requirement is more, but in case of recession period working capital

requirement is less.

((((,#';,#';,#';,#';----

Working capital level is also changed according to the level of profit level.

Because if profit is more than working capital is more and vice versa.((((.'.'.'.'&;&;&;&;----

Dividend policy of a firm affects the working capital of a firm to a great

extent. Because if firm wants to declare dividend in future then, it has to

maintain more working capital and vice versa.

=(=(=(=(4;4;4;4;----

If a firm is operating in goods and services having seasonal fluctuations in

demand, then the working capital requirement will also fluctuate with every

change. To illustrate, consider a firm manufacturing ceiling fans. The sale

of ceiling fans reaches a peak during the summer months and drops sharply

during the winter period. Working capital requirements of such firm will

increase in summer and decrease in winter season.

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>(&;>(&;>(&;>(&;----

Credit policy of a firm has important bearing in deciding the working

capital

needs of the firm, if the credit policy of the firm is liberal then the firm has

to maintain more working capital, and vice versa.

?(*?(*?(*?(*;;;;----

The degree of competition prevailing in the market place has an important

bearing on working capital needs. When competition is keen, a larger

inventory of finished goods is required to promptly serve customers who

may not be inclined to wit because other manufacturers are ready to meet

their needs.

@(,&;@(,&;@(,&;@(,&;----

The inventory of raw materials, spares, and stores depends on the

conditions of supply. If the supply is prompt and adequate, the firm can

manage with small inventory. However, if the supply is unpredictable an

scant, then the firm, to ensure continuity of production, would have toacquire stocks as and when they are available and carry larger inventory, on

an average.

6(9;6(9;6(9;6(9;----

Future plans of the firm also affect working capital needs of the firm.

Because, if the firm is plan to expand the business in future than more

working capital is required otherwise less.

/A%,2*;/A%,2*;/A%,2*;/A%,2*;---- As a finance manager we will be interested in figuring out how much cash

we need to meet the working capital needs of your firm. To do this, you may

follow a two-step procedure: -

Step 1- Estimate the cash cost of various current assets required by the firm.

Step 2- Deduct the spontaneous current liabilities from the cash cost of current

assets.

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4!"#24/78"!"#4#:4!"#24/78"!"#4#:4!"#24/78"!"#4#:4!"#24/78"!"#4#:

The working capital as a measure of liquidity risk suggests that increasing

working capital will generally, reduce the liquidity risk faced by the firm, whereas

decreasing the working capital will generally increase the liquidity risk. The

effects of working capital changes on the liquidity risk depend on a number of

factors such as: -

01010101+%;+%;+%;+%;----Holding other factors constant, firms typically experience larger

changes in liquidity risk as a consequence of working capital change

when the economy is in recession than when it is in boom.

010101019&;9&;9&;9&;----

To the extent that future operations of the firm are predictable and

stable, the firm can survive with lower investment in working capital

and vice versa.Following points have important bearing in forming optimal working capital

policy: -

i. Individual current assets and current liabilities policies should be

framed.

ii. Moderate working capital policy will be optimal working capital

policy for the firm. This will help in maximizing the value of the

firm.

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%,2*%,2*%,2*%,2*

Particulars 03-04 02-03 01-02Working Capital (in crore) 37.69 416.40 431.82Current Assets: (%age figure)Cash and Bank Balance 0.318 0.033 0.032Raw Material 158.052 19.375 16.454Stores and Spares 413.266 38.782 35.735Finished and semi-finishedgoods 667.365 107.901 119.063

Sundry Debtors 22.738 2.043 1.908Loans and Advances 530.193 51.285 52.445Other Current Assets 27.832 2.646 5.31Total Current Assets (a) 1819.768 222.066 230.948Current Liabilities:Sundry Creditors 659.989 55.245 54.845Security and other deposits 107.933 10.698 10.382Others 280.976 42.4 36.948Provisions 670.867 13.633 28.733

Total Current Liability (b) 1719.765 121.976 130.948Working Capital (a b) 100.003 100.09 100

Note: All figures are percentage figure of respective working capitals.

An element wise analysis of working capital enables one to examine in

which element the working capital funds are locked up and to find out the factors

responsible for the significant changes in working capital of different years. In the

following table the shares of each element in grow working capital has been

calculated in percentage separately for each of the years under study. Out of all

elements of working capital, the element namely inventories contribute major

portion to gross working capital. During the period of study a remarkable change

in the share of different elements of working capital took place. Inventories show

1238.683% in 03-04, 166.058% in 02-03 and 171.252% in 01-02. A large tie up of

funds in inventories adversely affects the profitability of the concern owing to

carry over costs.

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Debtors constituting another element of working capital increased from 02-

03. Because, as you can see the working capital is very less in 03-04 and ascompared to that the debtor is also very less. So it increased for 02-03 and 01-02.

The share of cash & bank balance in gross working capital increases from

01-02 and 02-03. In a comfortably financed business cash & bank balance will

probably not less than 5 to 10 percent of working capital. Inadequate cash & bank

balance will adversely affect the liquidity position of the company and the

company cannot able to meet the short-term obligations.

Another element of working capital is interest accrued included in other

current assets, which shows that company is still going to receive some amount of

interest from outside parties. If it is shows lower percentage than company has

some good collection policies are followed. If it shows higher percentage than

company is unable to collect the money from outside parties and collection policy

will not be good. Which adversely affect the operation of the company.

Another significant feature is loans & advances which is also increased in

the year 03-04. The only reason for that is decease of working capital. As you can

see, the working capital decreased by 91% as compared to the previous year.

The liquidity position of a firm is largely affected by the composition of

working capital in as much as any considerable shifts from the relatively more

current assets to the relatively less current assets or vice versa, will materially

affect a firms ability to pay its current debts promptly. Therefore, to determine the

liquidity position of the company more precisely a comprehensive test has been

done.

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4!4/8B4!/4##824/78"!"#4!4/8B4!/4##824/78"!"#4!4/8B4!/4##824/78"!"#4!4/8B4!/4##824/78"!"#

Care must be taken, so that there shouldnt any excess or shortage of

working capital at a particular point of time. There are different analytical tools

which can help a financial manager in monitoring, reviewing and controlling the

working capital, some of which are discussed below: -

((((!4&;!4&;!4&;!4&;----

It is already noted that the total working capital need depends upon the

length of the operating cycle; the lengthier the operating cycle, the greaterwould be the working capital need. The operating cycle of a firm is consisting

of different cycles for different elements of working capital. Therefore, the

financial manager must monitor the duration of all these individual operating

cycle for different elements in order to effectively control the working capital.

The following points should keep in mind: -

(a)The actual operating cycle period should be ascertained for each

element. Efforts should be made to point out the reasons for

differences in the actual operating cycle period and the standard

operating cycle period.

(b)There should always be an attempt to reduce the length of the

operating cycle, total as well as for each element.

(c)Efforts in particular, are needed to control the receivables conversion

period. If the firm relaxed in collection, the customer will always

like to take liberty.

((((2*/;2*/;2*/;2*/;----

Another analytical tool that can be used to monitor the working capital is

the accounting ratios, particularly the working capital ratios. Following are the

various working capital ratios: -

(a)Current Ratio

(b)Liquid Ratio

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These ratios may be ascertained for a number of years to find out the

emerging working capital position of the firm. Out of these current ration isvery important. If current ratio is more than 1 then net working capital is

positive. If current ratio is equal to 1 then net working capital is nil. If current

ratio is less than 1 then working capital is negative.

((((!#A&;!#A&;!#A&;!#A&;----

Efficient management of different elements of working capital can obtain

sufficient liquidity. If a firm faces liquidity problems, then it must be realizedthat this liquidity problem arises from lack of finance. The liquidity problem

can be overcome in the following ways: -

i. To raise additional funds from different sources.

ii. Reduce the safety stock level resulting in order size. It may

result to stock-out. Thats why it should taken after due

consideration.

iii. Make delay the payments to the creditors

iv. Liquidity can also be improved by concentrating more on

collections of receivables.

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2*2*2*2*////

This ratio expresses the relation of the amount of current assets to the

amount of current liabilities. It indicates, in rough fashion, the liquidity of current

assets or the ability of a business to meet its maturing current obligations. The

higher the working capital ratio, the larger is the amount of rupees available per

rupee of current liability and accordingly, the greater is the feeling of security.

Conventionally, a 2 to 1 ratio, i.e. current assets are twice the current liabilities, is

taken to represent a good short-term solvency position. But it should be stressed

that there can be no such ratio which may be standard or ideal for all firms in

an industry or for similar firms in different industries. Each firm has to develop its

own standard or ideal ration from past experience and this only can be taken as a

norm.

Particulars 03-04 02-03 01-02

Current Asset (Rs in crores) 685.87 924.34 997.28

Current Liability (Rs in crores) 648.18 507.94 565.46

Working Capital Ratio 1.06 1.82 1.76

It is observed from the above table that in the entire three years working

capital ratio is below the standard. The WCR of the company has not achieved the

conventional standard of 2:1. Thus, judged from the conventional standard it

reveals that liquidity position of the company is not satisfactory. And the current

year is very less which is not good for the company.

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"!/"!/"!/"!/

This ratio is concerned with the relationship between liquid asset and liquid

liabilities to supplement the information given by the working capital ratio. It is a

more rigorous test of liquidity than the working capital ratio and gives a better

picture of the firms ability to meet its short-term liabilities out of short-term

assets. Rule of the thumb is 1:1 for the acid test ration so that, if a firm has acid

asset ratio of at least 100%, it is considered to be in a fairly good liquidity

position. The trend of the acid test ratio of the company during the period of study

was alarming.

Particulars 03-04 02-03 01-02

Current Asset 685.87 924.34 997.28

Current Liabilities 648.18 507.94 565.46

Inventories 466.86 691.12 739.5

Acid Test Ratio 0.337 0.459 0.456

From the above table it is observed that Acid Test Ratio is increased from

01-02 to 02-03 but it decreased in 03-04 and it very drastically. Thus, the ratio was

lower than the conventional ratio of 1:1 during the study period. It signifies that

liquid assets were not sufficient to meeting short-term liabilities and a major part

of current assets had been invested in inventory.

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////4/7+#"!++##"!4/7+#"!++##"!4/7+#"!++##"!4/7+#"!++##"!Balance sheet as on 31

st

March 2004As at 31st As at 31st

March, 04 March, 03

SOURCES OF FUNDS

Loan Funds

Secured loans 20.74 35.08Unsecured loans 26.41 39.49

47.15 74.57

Inter unit Current Account 10671.93 10525.82

10719.08 10600.39

APPLICATION OF FUNDS

Fixed AssetsGross Block 6115.54 6153.67

Less: Depreciation 2636.35 2393.34Net Block 3479.18 3760.33

Capital Work-in-Progress 58.44 43.43

3537.62 3803.76

Current Assets, Loans & Advances

Inventories 474.20 698.23Sundry Debtors 8.57 8.51Cash & Bank balances 0.12 0.14

Interest Accrued 3.15 3.91Loans & Advances others 201.25 216.39

687.29 927.18Less: Current Liabilities & provisions

Current liabilities 453.00 513.35

Provisions 649.48 389.48Net Current Asset -415.19 24.35

Miscellaneous Expenditure (to the extent not writtenoff or adjusted) 53.47 79.09

Profit & Loss Account (Debit Balance) 4058.24 3949.41

Inter unit Current Account 3784.94 2743.78

10719.08 10600.39

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/4/7+#"!++##"!/4/7+#"!++##"!/4/7+#"!++##"!/4/7+#"!++##"!Profit & Loss Account for the Year ended 31

st

March, 2004Year ended Year ended

31st

March, 2004 31st

March, 2003

INCOME

Sales 3813.88 3144.88

Less: Excise Duty 417.57 3342.31 414.85 2730.03

Finished Products 20.03 18.92

Interest earned 6.74 7.06

Other revenue 74.69 59.48

Prov. No longer required 14.84 2.86

Stock transfer 31.86 148.16 26.72 115.04

3490.47 2845.07

EXPENDITURE

Depletion to stock 197.77 64.84

Raw Material consumed 1176.47 1132.03

Emp. Remuneration 754.36 576.15

Stores & spares consumed 291.85 291.64

Power & Fuel 318.32 358.49Repair & Maintenance 27.68 31.95

Fright Outward 101.39 107.64

Other expenses 167.06 181.12

Share of expenditure:

Corporate Office 31.26 29.15

CMO 34.05 37.90

CCSO 2.03 2.07

Interest & Finance charges 255.88 365.48

Depreciation 273.78 280.27

Total 3631.90 3458.73Less: Transfer to inter A/C 16.92 3614.98 19.46 3439.27

Loss for the Year -124.51 -549.20

Adj. pertaining to earlier year 15.68 1.04

Net Loss for the Year -108.83 -593.16