anant project report on working capital
TRANSCRIPT
A PROJECT REPORT OF
“WORKING CAPITAL MANAGEMENT ON BOKARO STEEL PLANT (BSL)”
Submitted Toward in Fulfillment of the Requirement of Two Year Fulltime Degree “MASTER OF BUSINESS ADMINISTARTION”
SUBMITED TO:- SUBMITED BY:- PROF. C. GANGULY ANANT LAL SAHU
SRIMT,GREATER NOIDA MBA (2010-2012)
ROLL NO.-1027970006
SRIRAM INSTITUTE OF MANAGEMENT & TECHNOLOGY
2010-2012
CERTIFICATE
1
This is to certify that the project entitled “WORKING CAPITAL MANAGEMENT ON
BOKARO STEEL PLANT (BSL)” at SAIL- BOKARO STEEL PLANT has been carried
out by ANANT LAL SAHU under my supervision in partial fulfillment of his MBA
Program at Sriram Instutute of management & Technology, Greater Noida.
I am satisfied with his sincere performance and study about SAIL-BOKARO STEEL
PLANT. The project is hereby approved as a bonafied work carried out and presented in a
manner satisfactory to its acceptance area to the post graduate degree for which it has been
submitted.
This is also certified that the project work is original and has not been submitted to any other
place.
Prof. Suman Sarkar Mrs. C. Ganguly(Dean of SRIMT) (Mentor)
2
ACKNOWLEDGEMENT
I Anant lal Sahu, sincerely thankful to all those people who have been giving me
any kind of assistance in the making of this project report.
I express my gratitude to Mrs. C. Ganguly , who has through his vast experience
and knowledge has been able to guide me, both ably and successfully towards the
completion of the project. I express my gratitude to Sriram Institute of Management &
Technology, Greater Noida
I would hereby, make most of the opportunity by expressing my sincerest thanks to
all my faculties whose teachings gave me conceptual understanding and clarity of
comprehension, which ultimately made my job more easy. Credit also goes to all
my friends whose encouragement kept me in good stead.
Their continuous support has given me the strength and confidence to complete the
project without any difficulty.
Last of all but not the least I would like to acknowledge my gratitude to the
respondents without whom this survey would have been incomplete.
I am also thankful to authority of BOKARO STEEL PLANT (BSL) for providing me
the information.
Anant lal Sahu
3
DECLARATION
I hereby declare that the following documented project report titled “Working Capital
Management in Manufacturing Sector" is an authentic work done by me as a part of my
study on finance.
I also further state that the project has been prepared by my own with the secondary data
provided in the reports of the company, which were essential for the completion of the
project. The project was undertaken in fulfillment of the course curriculum of MBA Program
M.T.U, GREATER NOIDA. This has not been submitted to any other Examination body
earlier.
ANANT LAL SAHUANANT LAL SAHU
4
INDEX
Contents :- page no.
1. Introduction 06 Global Steel Scenario and Indian Steel Industry Global Steel Scenario and Indian Steel Industry
1.1 SAIL 12
1.2 BSL 23
2. Research Objective 37
3.1 Sub Objective 37
3. Research Methodology 37
4.1 Research Design 37
4.2 Data Source 37
4. Working Capital – Overall View 39
5.1 Cash Management 39 5.2 Inventory Management 47 5.3 Receivable Management 60
5. Financial Statements and Ratio Analysis 65
6.1 Trade-off between profitability and risk 69
6.2 Ratio Analysis 74
6. Flow chart of sales process followed in BSL 79
7. Executive Summary 81
8. Finding & Suggestion 82
9. Conclusion 83
Abbreviation 84 Bibliography ` 85
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1.- INTRODUCTION1.- INTRODUCTION
GLOBAL STEEL SCENARIO AND INDIAN STEEL INDUSTRYGLOBAL STEEL SCENARIO AND INDIAN STEEL INDUSTRY
Though evidences indicate that iron and steel have been used by for almost 6000 years, the
modern form of iron and steel industry came into being only during the 19th century. The
growth and development of Iron and Steel Industry in the world until the Second World War
was comparatively slower. But the industry has grown very rapidly after the Second War
was. World production of steel, which was only 28.3 million tones (MT) in 1900, rose to 695
MT by 1992. The oil crisis of the seventies affected the entire economy of the world
including the steel industry. The position started improving after 1983 and peaked at 780 MT
in 1989. It starred declining till 1994 (723MT), picked up again to 755.8 in 1995. The World
Steel production is around 1132 MT in 2005, registering a growth of 6% over 2004.
HISTORICAL BACKGROUNDHISTORICAL BACKGROUND
The antiquity of man’s use of iron attested by references to that metal both in fragmentary
writing & inscriptions that survived ancient civilization of Babylon, Mexico, Egypt, China,
India, Greece & Rome. However, it is believed that most of the iron used by pre–historic
people might have been obtained by fragment of meteorites and it remained a rare metal for
many centuries.
For many years after man learned how to extract iron from its ores, the product probably was
so relatively soft and unpredictable, that bronze continued to be preferred for many tools and
weapons. Eventually iron replaced the non–ferrous metal for these purposes when man
learned how to master the difficult arts of smelting, forging, hardening and tempering iron.
Archeological findings in Mesopotamia and Egypt have proved that iron or steel has been in
the service o mankind for nearly 6000 years. The origin of the methods used by early man for
extracting iron from its ores is unknown. Some have suggested that many learned the method
accidentally.
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Iron, in the beginning was smelted by charcoal made from wood. Later coal was discovered
as a great source of heat. Subsequently, it was converted into coke, which was found to be
ideal for smelting of iron. Iron kept its dominant place for 200 or more years after the Saugus
works that was the first successful Iron Works in America founded in 1646, with the advance
of Industrial Revolution, iron formed the rails for newly invented railroad trains. It was also
used to amour the sides of the fighting ships. About the mid 19th century the new age of steel
began with the invention of Bessemer process (1856) making steel available in large
quantities at reasonable cost.
INDIAN HISTORYINDIAN HISTORY
Indian history is also replete with references to the usage of iron and steel. Some of the
ancient monuments like the famous iron pillar near New Delhi or the massive beams used in
the Sun Temple at Konark bear ample testimony to the technological excellence of the Indian
metallurgists.
The history of iron in India goes back to the ancient era. Our ancient literary sources like Rig
Veda, the Atharva Veda, the Puranas and other Epics are full of references to iron and its uses
in peace and war. According to one of the studies, iron has been produced in India for over
3000 years.
GLOBAL SCENARIOGLOBAL SCENARIO
WORLD STEEL PRODUCTION REPORT
ISSB Monthly World I & S Review
WORLD STEEL REVIEW, JUNE 2008
Production of crude steel for the 66 countries reporting to the IISI in April was estimated to
be 116.4 million tones, an increase of 5.6% over April 2007. The total of the 4 months to date
was 457.3 million tones, 5.7% above the January to April period in 2007. Excluding China,
which accounted for 37% of world production in the first four months of 2008, the rise in
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April was only 2.9%, with the four months total only up by 3.7%. Global trade in steel was
440 million tons in 2007 (including internal EU trade), 5% higher than in 2006. China
increased its exports by one third to 68 million tones, almost double the Japanese total.
In the European Union 27, crude steel production was flat in April at 18.2 million tones
compared to April 2007, and fell by 0.7% in the 4 month to date to 71.6 million tonn4es.
Monthly production in Germany decreased by 1.3% in April, and by 1.9% in the January to
April period to 16.1 million tones. Steel production in France fared even worse dropping by
9% in the month, and by 7.9% in the four months to date to 6.5 million tones.
However, Italian crude steel production increased by 7.2% in April, and by 1.5% in the year
to date to 11.2 million tones. Spanish production rose by 1% in April, while the year to date
was up 2.5% to 6.4 million tones. In the UK, production fell by 10.3% in April, bringing the
4 months total down 0.8% to 4.8 Million tones. In the rest of Europe Turkish production
increased by 2.7% in April and by 8.2% in the four months to 9.2 million tones.
The four months total for Serbia was up 14.1% to 664 thousand tones. Crude steel production
in the CIS countries only rose by 0.3% in April, with Russian production down 0.4%,
bringing the year to date for the CIS up 3.0% with Russia four month total up 3.6% to 25.3
million tones. Ukrainian steel production increased by 2.7% in April, with the year to date
total up 3.3% to 14.7 million tones. Kazakhstan steel production fell by 12.4% in the four
months to 1.3 Million tones.
In 2007 the Ukraine overtook Russia as the third largest exporter of steel after China and
Japan, and it has remained third into 2008. In the first four months of 2008 Ukraine exported
to 10.9 million tones of steel, up 6.2% on the same four months in 2007. Exports of semis
rose by 13.5% to 4.6 million tones, with hot rolled plate lengths up 20.7% to 1.6 million
tones. Exports of hot rolled wide coil fell slightly to 1.1 million tones. The large increase in
semis was primarily in semis over 0.25% carbon, with some increase in slabs until 0.25%
carbon. The rise in plate exports was mostly in plate over 10mm thick, with some increase in
the 4.75 to 10mm range.
In terms of markets, the Middle East was the destination for 20% of total Ukrainian exports
in the first four months of 2008, up 48% from the previous year. The next largest market was
the EU 27 at 17.5%, with Italy by far the largest recipient, although the EU total was down
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12% from 2007. The other CIS countries received a further 15% of Ukrainian exports, with
the tonnage to the Far East more than doubling to 14% of the total. Turkey remained the
largest single market at 1.3 million tones, followed by Russia at one million tones.
On the North American continent US steel production increased by 1.1% in April, bringing
the year to date total up 6.5% to 33.8 million tones. Canadian steel production rose by 3.7%
in April, while the four months total was up 3.0% to 5.6 million tones. Mexican steel
production, however, increased by 10.5% in April, with the year to date total up 10.4% to 6.3
million tones.
Crude steel production in South America showed an increase with Brazilian production up
7.1% in April and by 7.8% in the year to date to 11.5 million tones. Steel production in
Venezuela fell by 2.1% in April, while the four months total was down 13% to just under 1.5
million tones. Argentinean production, however, rose by 5.9% in April, while the year to date
total was up 9.9% to 1.9 million tones.
In Africa and the Middle East, South African production rose by 0.5% in April, although the
year to date total was down 2.6% to 3 million tones. Egypt’s steel production, however,
increased by 1.7% in April, while the four months total was 14.% up at 2.3 million tones.
Iranian production increased by 3.1% in the month, although the year to date total was down
1.1% to nearly 3.4 million tones.
Turning to the Far East, Chinas steel production increased by 10.2% in April to 44.7 million
tones, and by 9.1% in the four months to 1679.8 million tones. Japanese crude steel
production was up 4.2% in April, while the January to April total increased by 4.4% to 41
million tones. South Korean production fell by 0.4% in April with the year to date total at
17.5 million tones, 3.7% up on the same period in 2007. In India, production showed a rise of
12.7% in April, bringing the four months total up by 7.7% to 19 million tones. Crude steel
production in Taiwan was up 12.2% in April, while the year to date total was up by 11.2% to
7.6 million tones.
Japanese steel exports increased by 15.7% to 13.4 million tones in the first four months of
2008 compared to 2007. Hot rolled coil exports were 3.1 million tones, up 15.4%, semis were
1.8 million tones, up 16.2%, and galvanized steel exports were just below 1.8 million tones,
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up 10.5%. Some 84% of Japanese exports in 2008 went to other far eastern countries with 3.5
million tones to South Korea, up 19%, 2.3 million tones to China, up 12%, 1.5 million tones
to Thailand, up 9%, and 1.3 million tones to Taiwan, up 18.5%. These four countries a
counted for 64% of Japanese exports, the same percentage as in the previous year.
OUTLOOK FOR THE INDIAN ECONOMY
After witnessing rapid strides during the years after the liberalization process was set in
motion, India’s GDP grew at an average rate of 5.2 % during the period 1998–99 to 2002–03.
However, there was a break from the trend in 2003–04, during which the economy is
estimated to have grown at more than 8%. The economy of India, measured in USD
exchange – rate terms, is the twelfth largest in the world, with a GDP of around $1 trillion
(2008). It recorded a GDP growth rate of 9.0% for the fiscal year 2007 – 2008 which makes it
the second fastest high emerging economy, after China, in the world. The economy is
expected to continue on a high growth path with continued macroeconomic stability.
Over the years there has been a downward trend in interest rates accompanied by moderate
inflation and adequate liquidity in economy. In April 2003, the Bank Rate was reduced to
6%, which was a 30 – years low. Commercial Banks have also resorted to sub–PLR lending.
With sub PLR lending and reduction in maximum spread over PLR, lending rates have
effective come down Infrastructure development has been a focus area for the Government in
recent years. In the road and highway network, India is witnessing development of multiple–
lane, safe and well designed interstate highways. Recently the Government has announced a
planned outlay for the rural road and highway network development. The Golden
Quadrilateral Project is an ambitious project that would connect the four major metros via
state of the art highways. The East–West and North – South corridors would link up the
remotest parts of the country. The Government is also planning to facilitate investments in
seaports and airports in a major way.
STEEL DEMAND SCENARIO
India’s steel production is likely to surpass the domestic requirement by 2011–12, easing
pressure on prices of the alloy, which has been adding to the spiraling inflation.
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“We shall achieve 124 million tons of steel capacity by 2011–12, well exceeding the
requirement that would be to the tune of about 110 million tons at that point of time,” Steel
Minister Paswan said.
Steel prices shot up by over 50 percent since January, adding to the woes of the UPA
government, which is battling a seven–year high inflation of 8.75 percent in its last year. The
annual demand for steel in India has been rising by about 13 per cent, but production is
growing by over 6 percent, according to official sources. Last fiscal, the country’s crude steel
production stood at 53.9 million tons, of which about 5 million tons were exported. To bridge
the demand – supply mismatch, India had to import nearly 7 million tons of steel. Steel
Secretary R S Pandey while endorsing India becoming a net steel importer from being a net
exporter till a few years ago, said the trend is likely to continue for some time as increase in
capacity takes at least three to four years.
As per official figures, country’s finished steel import went up by over 300 percent from 1.6
million tons in 2002–03 to nearly 7 million tons in 2007–08 (provisional). In view of the
growing demand, the government plans to scale up steel production to over 290 million tons
by 2020. It has also envisaged that the sector will see an investment of Rs. 8, 70,640crore by
that time.
Going by an estimate of Rs. 4,000-crore outlay per million tones of additional capacity, an
investment of Rs. 2, 76,000crore is likely to take place by 2012 and Rs. 8,70,000crore by
2020. As of now, both domestic and foreign steel players have signed 193 memoranda of
understanding with states for setting up new units with a total planned capacity of around 243
million tons and a total proposed investment of over Rs. 5,14,000crore.
Private and public sector steel companies have also embarked on capacity expansion, Steel
Authority of India Limited plans to take up its hot metal production to 26.13 million tons by
2010 from the present 12.84 million tons. Private steel majors including Tata, JSPL, ISPAT
and JSW Steel have also lined up expansion of their existing production strength.
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1.1- SAIL
Satisfaction Customer
Aspiration Unlimited
Improvement Continual
Leadership Market
VISION
To be a respected world class corporation and the leader in Indian steel business in quality,
productivity, profitability and customer satisfaction.
CREDO
We build lasting relationships with customers based on trust and mutual benefit.
We uphold highest ethical standards in conduct of our business.
We create and nurture a culture that supports flexibility, learning and is proactive to change.
We chart a challenging career for employees with opportunities for advancement and
rewards.
We value the opportunity and responsibility to make a meaningful difference in people's
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lives.
BACKGROUND & HISTORY
A Rich Heritage
The Precursor
SAIL traces its origin to the formative years of an emerging nation - India. After
independence the builders of modern India worked with a vision - to lay the infrastructure for
rapid industrialisaton of the country. The steel sector was to propel the economic growth.
Hindustan Steel Private Limited was set up on January 19, 1954. The President of India held
the shares of the company on behalf of the people of India.
Expanding Horizon (1959-1973)
Hindustan Steel (HSL) was initially designed to manage only one plant that was coming up at
Rourkela. For Bhilai and Durgapur Steel Plants, the preliminary work was done by the Iron
and Steel Ministry. From April 1957, the supervision and control of these two steel plants
were also transferred to Hindustan Steel. The registered office was originally in New Delhi. It
moved to Calcutta in July 1956, and ultimately to Ranchi in December 1959.
A new steel company, Bokaro Steel Limited, was incorporated in January 1964 to construct
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and operate the steel plant at Bokaro. The 1 MT phases of Bhilai and Rourkela Steel Plants
were completed by the end of December 1961. The 1 MT phase of Durgapur Steel Plant was
completed in January 1962 after commissioning of the Wheel and Axle plant. The crude steel
production of HSL went up from .158 MT (1959-60) to 1.6 MT. The second phase of Bhilai
Steel Plant was completed in September 1967 after commissioning of the Wire Rod Mill. The
last unit of the 1.8 MT phase of Rourkela - the Tandem Mill - was commissioned in February
1968, and the 1.6 MT stage of Durgapur Steel Plant was completed in August 1969 after
commissioning of the Furnace in SMS. Thus, with the completion of the 2.5 MT stage at
Bhilai, 1.8 MT at Rourkela and 1.6 MT at Durgapur, the total crude steel production capacity
of HSL was raised to 3.7 MT in 1968-69 and subsequently to 4MT in 1972-73.
Holding Company
The Ministry of Steel and Mines drafted a policy statement to evolve a new model for
managing industry. The policy statement was presented to the Parliament on December 2,
1972. On this basis the concept of creating a holding company to manage inputs and outputs
under one umbrella was mooted. This led to the formation of Steel Authority of India Ltd.
The company, incorporated on January 24, 1973 with an authorized capital of Rs. 2000 crore,
was made responsible for managing five integrated steel plants at Bhilai, Bokaro, Durgapur,
Rourkela and Burnpur, the Alloy Steel Plant and the Salem Steel Plant. In 1978 SAIL was
restructured as an operating company.
Since its inception, SAIL has been instrumental in laying a sound infrastructure for the
industrial development of the country. Besides, it has immensely contributed to the
development of technical and managerial expertise. It has triggered the secondary and tertiary
waves of economic growth by continuously providing the inputs for the consuming industry.
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JOINT VENTURES
SAIL has promoted joint ventures in different areas ranging from power plant to e-commerce.
The important joint ventures of the company, among others, are:-
COMPANY LOCATION JV PARTNER EQUITY PROFILE
NTPC-SAIL
Power Company
Pvt. Ltd
NEW
DELHI
NTPC 50:50 Operates & manages the captive
power plants of durgapur,
Rourkela & Bhilai
Bokaro Power
supply company
Pvt. Ltd
BOLARO DVC 50:50 Manages 302MW power
generation 660tonnes per hour
steam generation facilities at
Bokaro steel plant.
M- Junction
services Ltd.
KOLKATA TATA Steel 50:50 Promotes e-commerce activities
in steel and related areas.
SAIL & MOIL
Ferro Alloys Pvt.
Ltd.
BHILAI MANGANESE
ORE (INDIA)
LIMITED
50:50 Production of ferro -manganese
and silicon – Manganese at Bhilai
with furnace operation at
Nandini/ Bhalai
Bhilai jaypee
cement limited
SANTNA &
BHILAI
Jaiparkash
Associates Ltd.
26:74 To set up and operate a cement
plant of 2.2 million tones per
annum capacity at split location
at satna & Bhilai , using slag
generated during blast furnace .
Bokaro jaypee
cement Ltd.
BOKARO Jaiparkash
Associates Ltd.
26:74 To set up and operate a cement
plant of 2.1 million tones per
annum capacity, utilizing
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generated slag during Blast
furnace operation at BSL.
MEMORANDUM OF UNDERSTANDINGS
Larsen & Toubro Ltd.
to set up, develop, manage and own captive/independent power plant (s) at suitable location/s to meet future power requirements of SAIL. The scope of agreement also includes exploration of opportunities to own captive thermal coal blocks to cater to the power plant requirements.
Shipping corporation of India.
to promote a Joint Venture Company, which shall primarily provide shipping related services to SAIL for imported coking coal and also participate in world wide dry bulk shipping trade.
Government of Kerala to increase production from the existing facilities at Steel Complex Limited (SCL), Calicut and also set up, develop & manage a 50,000 TMT Rolling Mill along with its balancing facilities and auxiliaries at SCL, Calicut.
POSCO to collaborate in a wide range of strategic business and commercial areas of mutual interest.
Rashtriya Ispat Nigam Ltd. (RINL)
to jointly explore and develop low silica limestone mines in the Sultanate of Oman.
Mineral Exploration Corporation Ltd. (MECL)
for exploration by MECL at all SAIL mines for assessing the reserves and quality of ore available. It has already started exploratory work in Gua and Chiria mines.
Heavy Engineering Corporation (HEC)
for equipment/spares required for modernization/expansion.
Bharat Earth Movers Limited (BEML)
for supply of crucial equipment.
Rajasthan State Mines & Minerals Limited (RSMML)
for long-term supply of low-silica limestone.
IIM, Ahmedabad and Management Development Institute (MDI), Gurgaon
knowledge sharing.
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Indian Railways
for procurement of high power locomotives
PRESENT & FUTURE
SAIL Today
SAIL today is one of the largest industrial entities in India. Its strength has been the
diversified range of quality steel products catering to the domestic, as well as the export
markets and a large pool of technical and professional expertise.
Today, the accent in SAIL is to continuously adapt to the competitive business environment
and excel as a business organisation, both within and outside India.
SAIL - Into the Future
Modernisation and Expansion Plan of SAIL Corporate Plan-Expansion Plan, 2010
The Corporate Plan, 2012 was reviewed by Hon’ble Minister of Steel in Jul’06, wherein it
was decided to take up the Expansion of Integrated Steel Plants and Special Steel Plant in one
go based on Composite Project Feasibility Report (CPFR).
By that time Expansion of IISCO Steel Plant and Salem Steel Plant was already approved
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“in-principle” based on the Techno-Economic Feasibility Report (TEFR) of MECON. For the
Expansion of other four integrated Steel Plants, MECON was assigned the job of Preparation
of CPFR in Aug’06. The CPFR for the four integrated steel plants was prepared by MECON.
‘In principle’ approval has been accorded by SAIL Board for the expansion plans of IISCO
Steel Plant (Jul’06), Salem Steel Plant (Jun’06), Bokaro Steel Plant (Dec’06), Bhilai Steel
Plant (Apr’07), Rourkela Steel Plant (May’07) and Durgapur Steel Plant (Jul’07).
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Item 2006-07
(Actual)
Capacity as per
Expansion Plans
2010
Hot Metal 14.61 26.18
Crude Steel 13.51 24.59
Saleable Steel 12.58 23.13
Plant-wise Capacity Envisaged After Expansion (Mtpa)
Plant Hot Metal Crude Steel Saleable Steel
BSP 7.5 7.0 6.53
DSP 3.5 3.0 2.83
RSP 4.5 4.2 3.8
BSL 7.44 7.00 6.53
ISP 2.91 2.5 2.37
SSP - 0.18 0.34
ASP - 0.48 0.43
VISL 0.33 0.23 0.22
Total 26.18 24.59 23.13
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Objective of Growth Plan
• 100% production of steel through Basic Oxygen Furnace (BOF) route
• 100% processing of steel through continuous casting
• Value addition by reduction of semi finished steel
• Auxiliary fuel injection system in all the Blast Furnaces
• State-of-art process control computerisation/ automation
• State-of-art online testing and quality control
• Energy saving schemes
• Secondary refining
• Adherence to environment norms
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The investment for modernization and expansion programme of SAIL is
estimated at about Rs.54,333 crores.
Plant ExpansionSustenance/
on-goingTotal
BSP 11,262 1,716 12,978
DSP 5,549 114 5,663
RSP 7,668 1,121 8,789
BSL 8,952 2,167 11,119
ASP 49 49
SSP 1,902 - 1,902
VISL 121 121
ISP 12,743 494 13,237
MINES 195 195
OTHERS 280 280
TOTAL 48076 6257 54,333
% 88 12 100
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Plant-wise Expenditure in Expansion (Rs. Crore)
Plant2006-07 2007-08
TotalActual RE Actual
BSP 12.66 35.95 66.63 79.29
DSP - 10.00 16.09 16.09
RSP - 20.00 36.85 36.85
BSL 12 11.17 28.92 40.92
ISP 72.69 340.00 495.70 568.39
SSP 3.26 40.00 35.75 39.01
ASP - - - -
VISL - - - -
TOTAL 100.61 457.12 679.94 780.55
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1.2 – BSL PLANT
BOKARO STEEL PLANT - A PARTNER IN NATION BUILDING
Bokaro Steel Plant - the fourth integrated plant in the Public Sector - started taking shape in
1965 in collaboration with the Soviet Union. It was originally incorporated as a limited
company on 29th January 1964, and was later merged with SAIL, first as a subsidiary and
then as a unit, through the Public Sector Iron & Steel Companies (Restructuring &
Miscellaneous Provisions) Act 1978. The construction work started on 6th April 1968.
The Plant is hailed as the country’s first Swadeshi steel plant, built with maximum
indigenous content in terms of equipment, material and know-how. Its first Blast Furnace
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started on 2nd October 1972 and the first phase of 1.7 MT ingots steel was completed on 26th
February 1978 with the commissioning of the third Blast Furnace. All units of 4 MT stage
have already been commissioned and the 90s' modernization has further upgraded this to 4.5
MT of liquid steel.
The new features added in modernization of SMS-II include two twin-strand slab casters
along with a Steel Refining Unit. The Steel Refining Unit was inaugurated on 19th
September, 1997 and the Continuous Casting Machine on 25th April, 1998. The
modernization of the Hot Strip Mill saw addition of new features like high pressure de-
scalers, work roll bending, hydraulic automatic gauge control, quick work roll change,
laminar cooling etc. New walking beam reheating furnaces are replacing the less efficient
pusher type furnaces.
A new hydraulic coiler has been added and two of the existing ones revamped. With the
completion of Hot Strip Mill modernization, Bokaro is producing top quality hot rolled
products that are well accepted in the global market.
Bokaro is designed to produce flat products like Hot Rolled Coils, Hot Rolled Plates, Hot
Rolled Sheets, Cold Rolled Coils, Cold Rolled Sheets, Tin Mill Black Plates (TMBP) and
Galvanized Plain and Corrugated (GP/GC) Sheets. Bokaro has provided a strong raw material
base for a variety of modern engineering industries including automobile, pipe and tube, LPG
cylinder, barrel and drum producing industries.
People The moving force
Bokaro Steel values its people as the fulcrum of all organizational activities. The saga of
Bokaro Steel is the story of Bokaro erecting a gigantic plant in the wilderness of
Chhotanagpur, reaching milestones one after another, staving off stiff challenges in the
liberalized era, modernizing its facilities and innovating their way to the top of the heap.
Directions
Bokaro Steel is working towards becoming a one-stop-shop for world-class flat steel in India.
The modernization plans are aimed at increasing the liquid steel production capacity, coupled
24
with fresh rolling and coating facilities. The new facilities will be capable of producing the
most premium grades required by the most discerning customer segments.
Brand Bokaro will signify assured quality and delivery, offering value for money to the
customers.
BOKARO STEEL PLANT – FACILITIES
Raw Materials & Material Handling Plant
The Raw Materials and Material Handling Plant receives, blends, stores and supplies
different raw materials to Blast Furnace, Sinter Plant and Refractory Materials Plant as per
their requirements. It also maintains a buffer stock to take care of any supply interruptions.
Some 9 MT of different raw materials viz. Iron ore fines and lumps, Limestone (BF and SMS
grade), Dolomite lumps and chips, hard Coal and Manganese ore are handled here every year.
Iron ore and fluxes are sourced from the captive mines of SAIL situated at Kiriburu,
Meghahataburu, Bhawanathpur, Tulsidamar and Kuteshwar. Washed coal is supplied from
25
different washeries at Dugda, Kathara, Kargali and Giddi, while raw coal is obtained from
Jharia coalfields.
Coke Ovens & By-product Plant
The Coke Oven Complex at Bokaro converts prime coking coal from Jharia, Dugda and
Moonidih and medium coking coal form Kargali, Kathara and Mahuda, blended with
imported coal, into high quality coke for the Blast Furnaces, recovering valuable by-products
like Anthracene Oil, Benzene, Toluene, Xylene, Light Solvent Naphtha, Ammonium
Sulphate and Extra-hard Pitch in the process. Bokaro is situated in the prime coal belt of the
country.
The Coke Oven battery has 8 batteries with 69 ovens each, maintained meticulously in terms
of fugitive emission control, use of phenolic water and other pollution control measures.
Blast Furnaces
Bokaro has five 2000-cubic metre Blast Furnaces that produce molten iron - Hot Metal - for
steel making. Bell-less Top Charging, modernised double Cast Houses, Coal Dust Injection
and Cast House Slag Granulation technologies have been deployed in the furnaces. The
process of iron-making is automated, using PLC Charging System and Computer Controlled
Supervision System. The wastes products like Blast Furnace slag and gas are either used
directly within plant or processed for recycling / re-use.
Steel Melting Shops
Hot Metal from the Blast Furnaces is converted into steel by blowing 99.5% pure Oxygen
through it in the LD converter. Suitable alloying elements are added to produce different
grades of steel.
Bokaro has two Steel Melting Shops - SMS-I and SMS-II. SMS-I has 5 LD converters of
130T capacity each. It is capable of producing Rimming steel through the ingot route. SMS-II
has 2 LD converters, each of 300 T capacities, with suppressed combustion system and
Continuous Casting facility. It produces various Killed and Semi-Killed steels.
Continuous Casting Shop
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The Continuous Casting Shop has two double-strand slab casting machines, producing high
quality slabs of width ranging from 950 mm to 1850 mm. CCS has a Ladle Furnace and a
Ladle Rinsing Station for secondary refining of the steel. The Ladle Furnace is used for
homogenizing the chemistry and temperature. The concast machines have straight moulds,
unique in the country, to produce internally clean slabs.
Argon injection in the shroud and tundish nozzle prevent re-oxidation and nitrogen pick-up,
maintaining steel quality. The eddy current based automatic mould level control, unique in
the country, gives better surface quality. The air mist cooling and continuous straightening
facilities keep the slabs free from internal defects like cracks. The casters are fully automated
with dynamic cooling, on-line slab cutting, de-burring and customized marking. The shop is
equipped with advanced Level-3 automation and control systems for scheduling, monitoring
and process optimization.
CCS produces steel of Drawing, Deep Drawing, Extra Deep Drawing, Boiler and Tin Plate
quality. It also produces low alloy steels like LPG, WTCR, SAILCOR and API Grade.
Slabbing Mill
Slabbing Mill transforms ingots into slabs by rolling them in its 1250 mm Universal Four-
High Mill. The rolling capacity of the Mill is 4 MT per annum. The shop has Hot and Cold
Scarfing Machines and 2800 T Shearing Machine. Controlled heating in Soaking Pits, close
dimensional accuracy during rolling and hot and cold scarfing help produce defect-free slabs.
Hot Strip Mill
Slabs from CCS and Slabbing Mill are processed in the state-of-the-art Hot Strip Mill. The
fully automatic Hot Strip Mill with an annual capacity of 3.363 million tonnes has a wide
range of products - thickness varying from 1.2 mm to 20 mm and width from 750 mm to
1850 mm. The mill is equipped with state-of-the-art automation and controls, using advanced
systems for process optimisation with on-line real time computer control, PLCs and
technological control systems.
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Walking Beam Reheating Furnaces provide uniform heating with reduction in heat losses,
ensuring consistency in thickness throughout the length. High-pressure De-scaling System
helps eliminate rolled-in scale. Edger in the roughing group maintain width within close
tolerance. The roughing group has a roughing train of a Vertical Scale Breaker, one 2-high
Roughing Stand and four 4-high Universal Roughing Stands. The finishing group consists of
a Flying Shear, Finishing Scale Breaker and seven 4-high Finishing Stands. Hydraulic
Automatic Gauge Control system in the finishing stands ensures close thickness tolerance.
The Work Roll Bending System ensures improved strip crown and flatness. The rolling speed
at the last finishing stand is between 7.5-17.5 meters per second. The Laminar Cooling
System is a unique feature to control coiling temperature over a wide range within close
tolerance. The Hydraulic Coilers maintain perfect coil shape with On-line Strapping system.
On-line Robotic Marking on the coil helps in tracking its identity.
Hot Rolled Coil Finishing
All the Hot Rolled coils from the Hot Strip Mill are received in HRCF for further distribution
or dispatch. HR Coils rolled against direct shipment orders are sheared and finished to
customer-required sizes and dispatched to customers. The material is supplied as per Indian
specifications and many international/ foreign specifications. The shop has two shearing lines
with capacities of 6, 45,000 Tonnes/ year and 4, 75,000 Tonnes/ year respectively.
Cold Rolling Mill
The Cold Rolling Mill at Bokaro uses state-of-the-art technology to produce high quality
sheet gauge material, Tin Mill Black Plate and Galvanized Products. Cold rolling is done to
produce thinner gauge strips of very smooth and dense finish, with better mechanical
properties than hot rolling strips. Rolling is done well below re-crystallization temperature
without any prior heating of the material. The products of CRM are used for deep drawing
purposes, automobile bodies, steel furniture’s, drums and barrels, railway coaches, other
bending and shaping jobs and coated steels. The CRM complex comprises of two Pickling
Lines (including a high speed Hydrochloric Acid Pickling Line with re-generation facilities),
two Tandem Mills, an Electrolytic Cleaning Line, a Continuous Annealing Line, Bell
28
Annealing Furnaces, two Skin-Pass Mills, a Double Cold Reduction Mill (DCR), Shearing
Lines, Slitting Lines and a packaging and dispatch section. The 5-stand Tandem Mill is
capable of rolling sheet gauges upto 0.15 mm thickness. It has sophisticated Hydraulic
Automatic Gauge Control, computerised mill regulation and optimisation control.
Hot Dip Galvanizing Complex
The Hot Dip Galvanizing Complex integrated with the CRM produces zinc-coated Cold
Rolled strips resistant to atmospheric, liquid and soil corrosion. The Continuous Coil
Corrugation Line in the HDGC produces corrugated sheets and the Galvanized Sheet
Shearing Line produces galvanized plain sheets for a variety of applications. The first shop of
Bokaro Steel to get the ISO-9001 certification way back in 1994, this complex has
maintained a high-standard of coating quality and its SAILJYOTI branded products enjoy a
loyal market.
This complex made certain innovations for higher productivity to help re-build earthquake
ravaged Gujarat.
Services - a valuable support network
The service departments like Traffic, Oxygen Plant, Water Management and Energy
Management provide invaluable support to this gigantic plant. Bokaro Steel has a vast
networked of railway tracks and over 40 diesel locos to smoothly run its operations. The
Oxygen Plant provides Oxygen, Nitrogen and Argon for processes like steelmaking and
annealing. Water Management looks after the huge water requirements of the plant and the
township, providing different grades of water and taking care of recycling needs. Energy
Management juggles the supply and demand of by-product gases and their demand as process
fuel.
Maintenance Departments
Bokaro has centralised maintenance departments for large-scale electrical and mechanical
maintenance, in addition to shop-based maintenance wings for running repairs and
maintenance. These facilities are capable of executing massive capital repairs, supported by
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the fabrication facilities of the auxiliary shops.
Auxiliary Shops
To meet its needs for maintenance and repairs, Bokaro has a cluster of engineering shops
such as Machine Shop, Forge Shop, Structural Shop, Steel Foundry, Ingot Mould Foundry,
Cast Iron and Non-Ferrous Foundry, Electrical Repair Shop and Power Facilities Repair Shop
in addition to shop-specific Area Repair Shops. Most of the repairs and maintenance
requirements of the plant are met in-house.
The auxiliary shops and maintenance wings of Bokaro Steel, aided by in-house design teams,
have executed a number of highly sophisticated procurement-substitution, productivity
enhancement and quality improvement jobs, saving revenues and enhancing equipment
availability.
BOKARO STEEL PLANT - Community
Peripheral Development
Bokaro Steel is striving to reach the glow and warmth of its furnaces to people living at the periphery
of this thriving steel city. All villages and residential settlements within a radius of 20 kilometers are
covered under the peripheral development programmes that benefit some 3 lakh persons. In recent
years, the stress has been on developing basic and infrastructure facilities like roads, bridges,
schools, primary health centre’s, wells, pumps etc. and renovating the existing facilities.
30
Regular health camps are organised to reach immunisation and free medicines to people. Free
medicines are also supplied to Asha Dan, a hospital for the lepers, and to government hospitals in
the event of natural calamities.
Bokaro Steel pitched in with its share in the relief of victims of natural calamities like the Orissa
cyclone, Gujarat earthquake and Bihar floods.
For a number of years, Bokaro Steel has been sponsoring a First Aid camp during Shravani Mela for
the Kanwariyas walking with holy water from Sultanganj in Bihar to Deoghar in Jharkhand - a holy
journey of some 100 kilometers.
Community Care
In a uniquely sensitive gesture of social care, Bokaro Steel has adopted children belonging to
the primitive Birhor tribe that has a very limited population. These children live under the
love and care of Bokaro Steel, getting free board, lodging, dresses and education. They are
getting developmental opportunities of the modern world, without having to shun their own
cultural moorings.
Encouraging Ancillaries
The ancillaries under the Bokaro Industrial Area Development Authority symbolise the spill-
over of economic activities due to Bokaro Steel. The Plant aids these industrial units by
providing testing facilities, technical support for modernisation and upgradation, and
preferential procurement orders in their areas of strength that match Bokaro Steel's
requirements.
To keep them abreast of the prevailing quality assurance standards, Bokaro Steel has been
giving free consultations to these units for developing their ISO 9001 QA Systems.
Bokaro Mahila Samiti
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Founded in 1964, Bokaro Mahila Samiti is a leading philanthropic organisation of the
spouses of steelmen, giving succour to needy people and creating opportunities for skill
enhancement and self-employment. The Samiti runs a number of schools for poor children
and for uneducated elderly and a children's library. The training centre and Udyog Kendra
with wings for making spices, flour, safety gloves, soap, shawls, apparel and embroidered
clothes, provide livelihood to a number of women. Free medical consultation for neonates
and their mothers and mobile dispensary play a key role in providing primary healthcare to
needy persons. The Samiti organises aid drives for lepers, victims of natural calamities,
children from poor families and other resource-constrained people.
BOKARO STEEL PLANT - PRODUCT BASKET
Mill Capabilities
Shop Products Facility Annual
Capacity
(,000
Tonnes)
Thickness
range (mm)
Width
range
(mm)
Length
(metre)
HSM HR Coils/ Sheets/ Plates Continuous Mill 3955 1.6 -16 900-1850
HRCF HR Sheets/ Plates Shearing Line-I - 5-10 1800 2.5-12
HR Sheets/ Plates Shearing Line-II 1.6-4 1500 1.5-4.5
HR Coil Slitting Line
CRM 1660
CR Coils/ Sheets CRM-I complex 0.63-2.5 700-1850
CR Coils/ Sheets CRM-II complex 0.63-1.6 650-1250
CR Coils/ Sheets, TMBP DCR Mill 100 0.22-0.8 650-1040
GP Coils & Sheets GC
Sheets
HDGL 170 0.3-1.6 650-1250
By-products
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Nitration-grade Benzene
Nitration-grade Toluene
Light Solvent Naphtha
Still Bottom Oil
Hot Pressed Naphthalene
Anthracene Oil
Extra-hard Pitch
Hard-medium Pitch (solid/ liquid)
Ammonium Sulphate
Pitch Creosote Mixture
BF Granulated Slag
Liquid Nitrogen
Phenol Fraction
Special Grades of Steel
Special Steel Grades Application
SAE 1541 Automobile Industry
MC 11 Cycle Industry
SPC 370/390 Cycle Industry
C 15 Cycle Industry
API X-42, X-46, X-52, X-56, X-60 (SAILAPI) Pipe Line
SAILCOR (corrosion resistant) Railways
SAILMEDSi (Medium Silicon Steel) Heavy Electrical Winding
SAILPROP Propeller Shaft
Strapping Steel (for internal use only) Strapping Finished Products
Full-hard Galvanised Coil Extra hard roof of houses
Cold Rolled Medium Electrical Steel Transformer core
Extra-low Carbon Extra Deep Drawing (HR & CR) White goods
DMR 249A Grade Steel Defence Research Development Organisation
(DRDO) for fabrication of Submarine parts
(import substitution)
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E460/E500/E550 Floating bridges for Defence. For M/S BEML;
for making. (import substitution)
IS8500 Fe 540B high strength low alloy steel with UTS
value in excess of 540 Mpa
Kolkata fly-over
Low Carbon, Low Manganese, High Strength
Structural Steel without microalloying (Carbon 0.10%)
Structural purposes. Thermo-mechanically
Controlled Processing.
2.- REVIEW OF LITERATURE
Working Capital management is the management of assets that are current in nature. Current
assets, by accounting definition are the assets normally converted in to cash in a period of one
year. Hence working capital management can be considered as the management of cash,
market securities receivable, inventories and current liabilities. In fact, the management of
current assets is similar to that of fixed assets in the sense that is both in cases the firm
analyses their effect on its profitability and risk factors, hence they differ on three major
aspects:
1. In managing fixed assets, time is an important factor discounting and compounding
aspects of time play an important role in capital budgeting and a minor part in the
management of current assets.
2. The large holdings of current assets, especially cash, may strengthen the firm’s
liquidity position, but is bound to reduce profitability of the firm as ideal car yield
nothing.
3. The level of fixed assets as well as current assets depends upon the expected sales, but
it is only current assets that add fluctuation in the short run to a business.
To understand working capital better we should have basic knowledge about the various
aspects of working capital. To start with, there are two concepts of working capital:
Gross Working Capital
Net working Capital
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Gross Working Capital: Gross working capital, which is also simply known as working
capital, refers to the firm’s investment in current assets: Another aspect of gross working
capital points out the need of arranging funds to finance the current assets. The gross working
capital concept focuses attention on two aspects of current assets management, firstly
optimum investment in current assets and secondly in financing the current assets. These two
aspects will help in remaining away from the two danger points of excessive or inadequate
investment in current assets. Whenever a need of working capital funds arises due to increase
in level of business activity or for any other reason the arrangement should be made quickly,
and similarly if some surpluses are available, they should not be allowed to lie ideal but
should be put to some effective use.
Net Working Capital: The term net working capital refers to the difference between the
current assets and current liabilities. Net working capital can be positive as well as negative.
Positive working capital refers to the situation where current assets exceed current liabilities
and negative working capital refers to the situation where current liabilities exceed current
assets. The net working capital helps in comparing the liquidity of the same firm over time.
For purposes of the working capital management, therefore Working Capital can be said to
measure the liquidity of the firm. In other words, the goal of working capital management is
to manage the current assets and liabilities in such a way that a acceptable level of net
working capital is maintained.
Importance of working capital management:
Management of working capital is very much important for the success of the business. It has
been emphasized that a business should maintain sound working capital position and also that
there should not be an excessive level of investment in the working capital components. As
pointed out by Ralph Kennedy and Stewart MC Muller, “the inadequacy or mis-management
of working capital is one of a few leading causes of business failure.
Current assets, in fact, account for a very large portion of the total investment of the firm.
Determinants of Working Capital:
There is no specific method to determine working capital requirement for a business. There are a number of factors affecting the working capital requirement. These factors have different importance in different businesses and at different times. So a thorough analysis of all these factors should be made before trying to estimate the amount of working capital needed. Some of the different factors are mentioned here below:-
Nature of business: Nature of business is an important factor in determining the working
capital requirements. There are some businesses which require a very nominal amount to be
invested in fixed assets but a large chunk of the total investment is in the form of working
35
capital. There businesses, for example, are of the trading and financing type. There are
businesses which require large investment in fixed assets and normal investment in the form
of working capital.
Size of business: It is another important factor in determining the working capital
requirements of a business. Size is usually measured in terms of scale of operating cycle. The
amount of working capital needed is directly proportional to the scale of operating cycle i.e.
the larger the scale of operating cycle the large will be the amount working capital and vice
versa.
Business Fluctuations: Most business experience cyclical and seasonal fluctuations in
demand for their goods and services. These fluctuations affect the business with respect to
working capital because during the time of boom, due to an increase in business activity the
amount of working capital requirement increases and the reverse is true in the case of
recession. Financial arrangement for seasonal working capital requirements are to be made in
advance.
Production Policy: As stated above, every business has to cope with different types of
fluctuations. Hence it is but obvious that production policy has to be planned well in advance
with respect to fluctuation. No two companies can have similar production policy in all
respects because it depends upon the circumstances of an individual company.
Firm’s Credit Policy: The credit policy of a firm affects working capital by influencing the
level of book debts. The credit term is fairly constant in an industry but individuals also have
their role in framing their credit policy. A liberal credit policy will lead to more amount being
committed to working capital requirements whereas a stern credit policy may decrease the
amount of working capital requirement appreciably but the repercussions of the two are not
simple. Hence a firm should always frame a rational credit policy based on the credit
worthiness of the customer.
Availability of Credit: The terms on which a company is able to avail credit from its
suppliers of goods and devices credit/also affects the working capital requirement. If a
company in a position to get credit on liberal terms and in a short span of time then it will be
in a position to work with less amount of working capital. Hence the amount of working
capital needed will depend upon the terms a firm is granted credit by its creditors.
Growth and Expansion activities: The working capital needs of a firm increases as it grows
in term of sale or fixed assets. There is no precise way to determine the relation between the
36
amount of sales and working capital requirement but one thing is sure that an increase in sales
never precedes the increase in working capital but it is always the other way round. So in case
of growth or expansion the aspect of working capital needs to be planned in advance.
Price Level Changes: Generally increase in price level makes the commodities dearer.
Hence with increase in price level the working capital requirements also increases. The
companies which are in a position to alter the price of these commodities in accordance with
the price level changes will face fewer problems as compared to others. The changes in price
level may not affect all the firms in same way. The reactions of all firms with regards to price
level changes will be different from one other.
3.-RESEARCH OBJECTIVE
The project attempts to study the intricacies of the Working Capital .To generate a better
idea regarding Working Capital Management in a large scale enterprise.
3.1- SUB OBJECTIVE
To know the various concepts and functions of Working Capital Management.
To know the procedure of Working Capital in SAIL-BSL.
To have an idea of payment methods used in import of materials.
Various documents relating to Working Capital Management
4.-RESEARCH METHODOLOGY
4.1-Research Design:
Data Collection: Data has been collected through secondary approach.
4.2- Data SourcesThe research involved gathering Secondary data. Lot of data has been pooled from
Bokaro Steel Plant to use in the study.
Scope of the Study
37
The data has been collected from the secondary sources comprising Annual Reports of the
firm, other journals and periodicals.
Apart from conducting this research work on the basis of this information, various techniques
of financial management e.g., comparative statement and ratio analysis etc. were used in the
present study. To present a broad view so far the purpose of the analysis and to make it easy
to understand the problem/concept of a few graphs and tables shall also be presented. In each
chapter, the analysis has been compared with actual management practices of the company
under study. The project is strictly on financing the companies for their day to day
transactions. The broad parameters being current assets ratio, quick test ratio etc.
Limitation of the Study
The present study is limited to Bokaro Steel Plant.
The authenticity of the suggestions and recommendations depend upon the rationality of
the data provided to me.
Have to rely upon the data supplied.
Executives are not ready to part with the information beyond a limit.
38
5 - WORKING CAPITAL- OVERALL VIEW
5.1- CASH MANAGEMENT
Cash is the important current asset for the operations of the business. Cash is the basic input
needed to keep the business running on a continuous basis It is also the ultimate output
expected to be realized by selling the service or product manufactured by the firm. The firm
should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s
operations while excessive cash will simply remain idle, without contributing anything
towards the firm’s profitability. Thus a major function of the Financial Manager is to
maintain a sound cash position.
Cash is the money which a firm can disburse immediately without any restriction The term
cash includes currency and cheques held by the firm and balances in its bank accounts.
Sometimes near cash items, such as marketable securities or bank time deposits are also
included in cash. The basic characteristics of near cash assets are that they can readily be
converted into cash. Cash management is concerned with managing of:
i) Cash flows in and out of the firm
ii) Cash flows within the firm
iii) Cash balances held by the firm at a point of time by financing deficit or inverting
surplus cash.
Sales generate cash which has to be disbursed out. The surplus cash has to be invested while
deficit cash has to be borrowed. Cash management seeks to accomplish this cycle at a
minimum cost. At the same time it also seeks to achieve liquidity and control. Therefore the
aim of Cash Management is to maintain adequate control over cash position to keep firm
sufficiently liquid and to use excess cash in some profitable way.
The Cash Management is also important because it is difficult to predict cash flows
accurately, particularly the inflows and that there is no perfect coincidence between the
inflows and outflows of the cash. During some periods cash outflows will exceed cash
inflows because payment for taxes, dividends or seasonal inventory etc., build up. On the
other hand cash inflows will be more than cash payment because there may be large cash
sales and more debtors’ realization at any point of time. Cash Management is also important
because cash constitutes the smallest portion of the current assets, yet management’s
considerable time is devoted in managing it. An obvious aim of the firm now-a-days is to
manage its cash affairs in such a way as to keep cash balance at a minimum level and to
invest the surplus cash funds in profitable opportunities. In order to resolve the uncertainty
about cash flow prediction and lack of synchronization between cash receipts and payments,
39
the firm should develop appropriate strategies regarding the following four facets of cash
management.
1. Cash Planning: - Cash inflows and cash outflows should be planned to project cash
surplus or deficit for each period of the planning period. Cash budget should prepared for this
purpose.
2. Managing the cash flows: - The flow of cash should be properly managed. The cash
inflows should be accelerated while, as far as possible decelerating the cash outflows.
3. Optimum cash level: - The firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be matched to
determine the optimum level of cash balances.
4. Investing surplus cash: - The surplus cash balance should be properly invested to earn
profits. The firm should decide about the division of such cash balance between bank
deposits, marketable securities and inter corporate lending.
The ideal Cash Management system will depend on the firm’s products, organization
structure, competition, culture and options available. The task is complex and decision taken
can affect important areas of the firm.
Functions of Cash Management:
Cash Management functions are intimately, interrelated and intertwined Linkage among
different Cash Management functions have led to the adoption of the following methods for
efficient Cash Management:
Use of techniques of cash mobilization to reduce operating requirement of cash
Major efforts to increase the precision and reliability of cash forecasting.
Maximum effort to define and quantify the liquidity reserve needs of the firm.
Development of explicit alternative sources of liquidity
Aggressive search for relatively more productive uses for surplus money assets.
The above approaches involve the following actions which a finance manager has to perform.
1. To forecast cash inflows and outflows
2. To plan cash requirements
3. To determine the safety level for cash.
4. To monitor safety level for cash
5. To locate the needed funds
40
6. To regulate cash inflows
7. To regulate cash outflows
8. To determine criteria for investment of excess cash
9. To avail banking facilities and maintain good relations with bankers
Motives for holding cash:
There are four primary motives for maintaining cash balances:
1. Transaction motive
2 .Precautionary motive
3. Speculative motive
4. Compensating motive
1. Transaction motive: - The transaction motive refers to the holding of cash to meet
anticipated obligations whose timing is not perfectly synchronised with cash receipts. If the
receipts of cash and its disbursements could exactly coincide in the normal course of
operations, a firm would not need cash for transaction purposes. Although a major part of
transaction balances are held in cash, a part may also be in such marketable securities whose
maturity conforms to the timing of the anticipated payments.
2. Precautionary motive: - Precautionary motive of holding cash implies the need to
hold cash to meet unpredictable obligations and the cash balance held in reserve for such
random and unforeseen fluctuations in cash flows are called as precautionary balances. Thus,
precautionary cash balance serves to provide a cushion to meet unexpected contingencies.
The unexpected cash needs at short notice may be the result of various reasons as:
unexpected slowdown in collection of accounts receivable, cancellations of some purchase
orders, sharp increase in cost of raw materials etc. The more unpredictable the cash flows, the
larger the need for such balances. Another factor which has a bearing on the level of
precautionary balances is the availability of short term credit. Precautionary cash balances are
usually held in the form of marketable securities so that they earn a return.
3. Speculative motive: - It refers to the desire of a firm to take advantage of opportunities
which present themselves at unexpected movements and which are typically outside the
normal course of business. The speculative motive represents a positive and aggressive
approach. Firms aim to exploit profitable opportunities and keep cash in reserve to do so. The
speculative motive helps to take advantage of: opportunity to purchase raw materials at a
reduced price on payment of immediate cash; chance to speculate on interest rate movements
41
by buying securities when interest rates are expected to decline; delay purchases of raw
materials on the anticipation of decline in prices; etc.
4. Compensation motive: - Yet another motive to hold cash balances is to compensate
banks for providing certain services and loans. Banks provide a variety of services to
business firms, such as clearances of cheques, supply of credit information, transfer of funds,
etc. While for some of the services banks charge a commission of fee for others they seek
indirect compensation. Usually clients are required to maintain a minimum balance of cash at
the bank. Since this balance can not be utilized by the firms for transaction purposes, the bank
themselves can use the amount for services rendered. To be compensated for their services
indirectly in this form, they require the clients to always keep a bank balance sufficient to
earn a return equal to the cost of services. Such balances are compensating balances.
Compensating balances are also required by some loan agreements between a bank and its
customer.
Cash Management: Objectives
The Basic objective of cash management is twofold:
(a) To meet the cash disbursement needs (payment schedule);
(b) To minimize funds committed to cash balances. These are conflicting and mutually
contradictory and the task of cash management is to reconcile them.
Meeting the payments schedule: A basic objective of the cash management is to meet the
payment schedule, i.e. to have sufficient cash to meet the cash disbursement needs of the
firm. The importance of sufficient cash to meet the payment schedule can hardly be over
emphasized. The advantages of adequate cash are : (i) it prevents insolvency or bankruptcy
arising out of the inability of the firm to meet its obligations; (ii) the relationship with the
bank is not strained; (iii) it helps in fostering good relations with trade creditors and suppliers
of raw materials, as prompt payment may also help their cash management; (v) it leads to a
strong credit rating which enables the firm to purchase goods on favorable terms and to
maintain its line of credit with banks and other sources of credit; (vi) to take advantage of
favorable business opportunities that may be available periodically; and (vi) finally the firm
can meet unanticipated cash expenditure with a minimum of strain during emergencies, such
as strikes , fires or a new marketing campaign by competitors.
Minimizing funds committed to cash balances: The second objective of cash management is
to minimize cash balances. In minimizing cash balances two conflicting aspects have to be
reconciled. A high level of cash balance will, ensure prompt payment together with all the
advantages, but it also implies that large funds will remain idle ultimately results less to the
42
expected. A low level of cash balances, on the other hand, may mean failure to meet the
payment schedule that aim of cash management should be to have an optimal amount of cash
balances
Cash Management Techniques & Processes
The following are the basic cash management techniques and process which are helpful in
better cash management:
Speedy cash collection: In managing cash efficiently the cash in flow process can be
accelerated through systematic planning and refined techniques. These are two broad
approaches to do this which are narrated as under:
Prompt payment by customer: One way to ensure prompt payment by customer is prompt
billing with clearly defined credit policy. Another and more important technique to encourage
prompt payment the by customer is the practice of offering trade discount/cash discount.
Early conversion of payment into cash: Once the customer has makes the payment by writing
its cheques in favor of the firm, the collection can be expedited by prompt encashment of the
cheque. It will be recalled that there is a lack between the time and cheque is prepared and
mailed by the customer and the time funds are included in the cash reservoir of the firm.
Concentration Banking: In this system of decentralized collection of accounts receivable,
large firms which have a large no. of branches at different places, select some of these which
are strategically located as collection centers for receiving payment for customers. Instead of
all the payments being collected at the head office of the firm, the cheques for a certain
geographical areas are collected at a specified local collection centers. Under this
arrangement the customers are required to send their payments at local collection center
covering the area in which they live and these are deposited in the local account of concerned
collection, after meeting local expenses, if any. Funds beyond a predetermined minimum are
transferred daily to a central or disbursing or concentration bank or account. A concentration
banking is one with which the firm has a major account usually a disbursement account.
Hence this arrangement is referred to as concentration banking.
Lock-Box System: The concentration banking arrangement is instrumental in reducing the
time involved in mailing and collection. But with this system of collection of accounts
receivable, processing for purposes of internal accounting is involved i.e. sometime in elapses
before a cheque is deposited by the local collection center in its account. The lock-box system
takes care of this kind of problems, apart from effecting economy in mailing and clearance
times. Under this arrangement, firms hire a post office box at important collection centers.
The customers are required to remit payments to lock-box.
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The local banks of the firm, at respective places, are authorized to open the box and pick up
the remittance received from the customers. Usually the authorized bank picks up the cheques
several times a day and deposits them in the firm’s account. After crediting the account of the
firm the banks send a deposit 4epo slip along with the list of payments and other enclosures,
if any, to the firm by way of proof and record of the collection.
Slowing disbursements: A basic strategy of cash management is to delay payments as long as
possible without impairing the credit rating/standing of the firm. In fact, slow disbursement
represents a source of funds requiring no interest payments. There are several techniques to
delay payment of accounts payable namely (1) avoidance of early payments; (2) centralized
disbursements; (3) floats; (4) accruals.
Avoidance of early payments: One way to delay payments is to avoid early payments.
According to the terms of credit, a firm is required to make a payment within a stipulated
period. It entitles a firm to cash discounts. If however payments are delayed beyond the due
date, the credit standing may be adversely affected so that the firms would find it difficult to
secure trade credit later. But if the firm pays its accounts payable before the due date it has no
special advantage. Thus a firm would be well advised not to make payments early i.e. before
the due date.
Centralized disbursements: Another method to slow down disbursements is to have
centralized disbursements. All the payments should be made by the head office from a
centralized disbursement account. Such an arrangement would enable a firm to delay
payments and conserve cash for several reasons. Firstly it involves increase in the transit
time. The remittances from the head office to the customers in distant places would involve
more mailing time than a decentralized payment by a local branch. The second reason for
reduction in operating cash requirement is that since the firm has a centralized bank account,
a relatively smaller total cash balance will be needed. In the case of a decentralized
arrangement, a minimum cash balance will have to be maintained at each branch which will
add to a large operating cash balance. Finally, schedules can be tightly controlled and
disbursements made exactly on the right day.
Float: A very important technique of slow disbursements is float. The term float refers to
amount of money tied up in the cheque that have been written, but have yet to be collected
and encashed. Alternatively, float represents the difference between the bank balance and
book balance of cash of a firm. The difference between the balance as shown in the firm’s
record and the actual bank balance is due to transit and processing delays. There is time lag
between the issue of a cheque by the firm and its presentation to its bank by the customer’s
bank for payment. The implication is that although a cheque has been issued cash would be
required later when the cheque resented for encashment. Therefore, a firm can send
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remittance although it does not have cash in its bank at the time of issuance of cheque.
Meanwhile, funds can be arranged to make payments when the cheque is presented for
collection after a few days. Float used in this sense is called cheque kitting.
Accruals: Finally, a potential tool for stretching accounts payable is accruals which are
defined as current liabilities that represent a service or goods received by a firm but not yet
paid for. For instance, payroll, i.e., remuneration to employees, who render services in
advance and receive payment later. In a way they extend credit to the firm for a period at the
end of which they are paid, say, a week or month. The longer the period after which payment
is made, the greater the amount of free financing and the smaller the amount of cash balances
required. Thus, less frequent payrolls, i.e. monthly as compared to weekly, are important
sources of accruals. They can be manipulated to slow down disbursements.
Determining the optimal level of cash balance:
Cash balance is maintained for the transaction purposes and additional amount may be
maintained as a buffer or safety stock.
The Finance manager should determine the appropriate amount of cash balance. Such a
decision is influenced by trade-off between risk and return. If the firm maintains small cash
balance, its liquidity position becomes week and suffers from a paucity of cash to make
payments. But a higher profitability can be attained by investing released funds in some
profitable opportunities. When the firm runs out of cash it may have to sell its marketable
securities, if available, or borrow. This involves transaction cost.
On the other hand if the firm maintains a higher level of cash balance, it will have a sound
liquidity position but forego the opportunities to earn interests. The potential interest lost on
holding large cash balance involves opportunities cost to the firm.
Thus the firm should maintain an optimum cash balance, neither a large nor a small cash
balance.
To find out the optimum cash balance the transaction cost and risk of too small balance
should be matched with opportunity costs of too large a balance should be matched with
opportunity cost of too large a balance. Figure shows this trade-off graphically. If the firm
maintains larger cash balances its transaction cost would decline, but the opportunity cost
would increase. At point X the sum of two costs is minimum. This is the point of optimum
cash balance. Receipts and disbursement of cash are hardly in perfect synchronization.
Despite the absence of synchronization it is not difficult to determine the optimum level of
cash balance.
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If cash flows are predictable it is simply a problem of minimizing the total costs - the
transaction cost and the opportunity cost.
The determination of optimum working cash balance under certainty can thus be viewed as
an inventory problem in which we balance the cost of too little cash ( transaction cost) against
the cost of too much cash( opportunity cash)
Cash flows, in practice, are not completely predictable. At times they may be completely
random. Under such a situation, a different model based on the technique of control theory is
needed to solve the problem of appropriate level of working cash balance.
With unpredictable variability of cash flows, we need information on transaction costs,
opportunity costs and degree of variability of net cash flows to determine the appropriate cash
balance. Given such data the minimum and maximum of cash balances should be set. Greater
the degree of variability, higher the minimum cash balance. Whenever the cash balance
reaches a maximum level, the differences between maximum and minimum levels should be
invested in marketable securities. When balance is falls to zero, marketable securities should
be sold and proceed should be transferred to the working cash balances.
PRACTICE OF CASH MANAGEMENT IN BOKARO STEEL CITY
Cash management of Bokaro Steel Plant is totally governed at Corporate Level. Here fund
are provided from Corporate Office after every 10 to 15 days as per requirement by BSL.
YEARS CASH & BANK
BALANCE (IN
LAKHS)
TOTAL CURRENT
ASSETS (IN LAKHS)
% OF CASH & BANK
BALANCE TO CURRENT
ASSETS
2006 3790 182611 2.08
2007 4108 186244 2.21
2008 4400 183588 2.40
2009 4660 231202 2.02
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Figure 1: Composition of Cash & Bank Balance in Total Current Assets
5.2- MANAGEMENT OF INVENTORY
Inventories are the stock of the product made for sale by the company or semi finished goods
or raw materials. Inventory of finished goods which are ready for sale is required to maintain
smooth marketing operation. The inventory of raw material and work in progress is required
in order to maintain an unobstructed flow of material in the production line. These
inventories serve as a link between the production and consumption of goods.
The aspect of management of inventory is especially important in respect to the fact that in
country like India, the capital block in terms of inventory is about 70% of the current assets.
It is therefore, absolutely imperative to manage efficiently and effectively in order to avoid
unnecessary investment in them. Although to maintain low inventories may prove to be
profitable but to maintain very low inventories may prove risky on the contrary.
This aspect of management if tackled in a proper way may prove to be a boon its effective
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and efficient management would result in the maintaining of optimum level of inventories. At
this level the profitability of the organization will not be jeopardized at the cost of inventory.
Now from the above stated facts it is clear that maintaining of optimum level of inventory
involves huge cost, so why should keep the inventories at all. Basically there are three main
reasons for which inventories are stocked and they are:-
1. Transaction Motive: This motive lays emphasis on maintaining of inventories
in order
2. to maintain a smooth and unobstructed supply of materials for the sales and
production operations.
3. Precautionary Motive: This motive emphasizes on the stocking goods in order
to
4. guard against the uncertainties of future i.e. unpredictable changes in the
forces of demand, supply and other forces.
3. Speculative Motive: This motive influences the decisions regarding the increase or
decrease in the level of inventory in order to take advantage of price fluctuations.
A company should maintain adequate stock of materials for a continuous supply to the
factory for an uninterrupted production. It is not possible for a company to procure raw
material instantaneously whenever needed. A time lag exists between demand and supply of
material. Also, there exists an uncertainty in procuring raw material in time at many
occasions. The procurement of materials may be delayed because of factors beyond
company’s control e.g. transport disruption, strike etc. Therefore, the firm should keep a
sufficient stock of raw material at a time to have streamline Other factors which may incite us
to keep stock of inventories is the quantity discounts, expected rise is price.
The work in process inventory builds up because of the production cycle. Production cycle is
the time span between the introduction of raw material in to the production and the
emergence of finished goods at the completion of production cycle. Till the production cycle
completes, the stock of work in process has to be maintained.
Efficient firms constantly try to make the production cycle smaller by improving their
production techniques.
The stock of finished goods has to be held because production and sales are not
instantaneous. A firm cannot produce immediately when goods are demanded by customers.
Therefore to supply finished goods on regular basis, their stock has to maintain for sudden
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demand of customers, in case the firm sales are seasonal in nature, substantial finished goods
inventory should be kept to meet the peak demand. Failure to supply products to customer,
when demanded, would mean loss of the firm’s sales to the competitors.
The basic objective in holding raw material inventory is separate purchase and production
activities and in holding finished goods inventory is to separate production and sales
activities. If raw material inventory is not held, purchase would have to be made regularly at
the time of usage. This would mean production interruptions and high cost of ordering.
A sufficiently large inventory has to be maintained of finished goods so as to meet the
fluctuating demands. If a close link is maintained between the sales and the production
department then an organization can do with a small inventory also. In the process, inventory
is also necessary because production cannot be instantaneous. But it should be seen that the
size of production cycle should be small.
Objectives of Inventory Management
In the modern business world there is practically nothing that is done without objective. The
objective is also one that would help the organization in reaching its goals in a better way.
Hence it can be inferred that the importance given to management of inventory in the
business world is not devoid of a concrete reasons behind it.
The two main reasons behind all this are, firstly, to maintain a inventory big enough that the
production and sales operation are carried on without any hindrance and secondly, to
minimize the investment in inventory, in order to maximize the profits. Both, excessive as
well as inadequate inventory level is not good. They are the two danger points that a
company should try to avoid and should always try to maintain optimum level of inventory.
The excessive investment in the inventory has the following drawbacks:
Unnecessary tie up of firm’s fund and loss of profit.
Excessive carrying cost.
The risk of liquidity.
The over investment of funds in inventory eat up the precious funds which could have been
put to some profitable use. The carrying cost incurred, can not be ignored, this is the cost of
storage, handling insurance, recording and inspecting. These all costs incurred in order to
have large inventories impair the profitability of the firm. Another danger of carrying
excessive inventory is the deterioration, obsolescence and pilferage of raw materials.
Maintaining inadequate inventory is also dangerous. The consequences of under investment
in inventory are
Production hold ups;
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Failure to meet commitment
If the inventory of finished goods is not adequate than the demand of customer is peak
periods may be left unmet and it the under investment is in the area of raw materials that is
likely that the production process may be held up frequently.
The aim of inventory management thus should be to avoid excessive and inadequate level of
inventory and to maintain sufficient inventory for smooth production and sales operation
efforts should be made to place an order at the right time to right source to acquire right
amount at the right price and for right quantity. The aspects of a effective inventory
management should take care of are
Ensure continuous supply of material to facilitate uninterrupted production.
To maintain sufficient stocks of raw material in the periods of short supply and
evident price rise.
To maintain sufficient inventory of finished goods for smooth sales operation.
Minimize carrying cost and time.
Control investment and keep it to the optimum level.
Before discussing the inventory control technique, here is the discussion of the various terms
such as economic order quantity, carrying cost etc.
1. Economic Order Quantity: It is the inventory level which minimizes the total of
ordering and carrying cost. Determining economic order quantity involves two types of
costs i.e. ordering cost and carrying cost.
2. Ordering Cost: This is used especially in the case of raw materials and is included in
the cost incurred in acquiring the raw material. It is proportional to the number of
orders and inversely proportional to the size of inventory. Apart from the cost of
acquired raw material this also includes requisitioning, purchasing order, transporting
receiving, inspecting and sorting cost.
3. Carrying Cost: This is used in the case of all types of inventories. There are the costs
which are incurred for holding a given amount of inventory, they include opportunity
cost of funds invested is inventories insurance, taxes, storage cost and the cost of
deterioration and obsolescence. It is directly proportional to the size of inventory.
4. Reorder Points: Reorder point is the inventory level at which an order must be placed
to replenish the inventory and evade the risk of running out of raw material. To
determine the reorder point under uncertainty we should know the lead time, the
average usage, economic order quantity etc.
5. Safety Stocks: It is difficult to predict usage and the lead time accurately. The demand
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for material is never constant. Similarly the actual delivery time may be different firm the
normal lead time. In case of increased usage or delivery delayed, there is bound to be
problem of stock out. Stock out can prove to be costly affair for a company. Therefore in
order to guard against the stock out, the company may keep some buffer stock as a cushion
against expected increased and/or delay in delivery .This buffer stock is called as safety
stock.
The various techniques or approaches used in the management of inventory by different firms
to calculate the economic order quantity are here given below: -
1). Trial and Error Approach: This is the technique to resolve the economic order
quantity problem. In this technique we take the annual requirement, purchasing cost per unit,
ordering cost per order and carrying cost per unit for the computation of economic order
quantity. We suppose a constant usage and then considering different sizes of orders and
calculate the different total costs. The order corresponding to the minimum total cost has the
economic order quantity.
2). EOQ Model: This is quite an easy approach to calculate the economic order quantity
than the trial and error approach. Here we find the economic order quantity with the help of
the formula
EQ = Sqrt (2AO / C)
Where A -> Total Annual Requirement
O -> Ordering cost order
C -> Carrying cost per unit
3). Graphic Approach: Here the economic order quantity is found out with the help of a
graph. We take the order size on horizontal axis and cost incurred on the vertical axis. Now
we plot the graph regarding the carrying cost and the ordering costs. Now with the help of
these two we draw a graph of minimum total cost. The economic order point is the point at
the lowest value of the total minimum costs.
PRACTICE OF INVENTORY MANAGEMENT IN BOKARO STEEL CITY
In case of raw materials, ABC analysis is followed on consumption pattern and XYZ analysis is followed on stock available at the end of year. For optimum utilization of inventory a proper blend between ABC & XYZ analysis is used.
AP MANAGEMENT
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When common items are put under centralized procurement then Automatic Procurement Management come into action. It is helpful in maintaining the uniqueness of an item.
Management of AP Items
AP items shall have the following characteristics:-
1. It should be a general consumable with standard specification.
2. It should be generally required by more than one department. However, items required by only one department shall also be included into AP list as recommended by the Standing AP Committee and approved by Head of Maintenance & Head of Material Management. For such cases, Stock control may also obtain approval of Head of Material Management for inclusion into AP without routing through the committee depending upon the exigency.
3. It should have regular consumption pattern.
The objective of Stock Control is to make AP items available.
Standing Committee on AP
There shall be a standing committee for AP items constituted with the approval of Head of Maintenance. The Standing Committee shall review the AP items every three years for up gradation of specifications with possible vendor base where felt necessary. However, any issue relating to specification shall be referred to the Standing Committee for revision.
The Standing Committee for AP, shall review the list for deletions/ additions of items into list. The item shall be deleted/ added into AP list after the recommendation of the Standard Committee is approved by Head of Maintenance & Head of Materials. The list for addition/ deletion shall be put up to the Standing Committee every year by Stock Control.
Raising Of MPRs
All MPRs for AP items shall be raised through Computer. Since intending is based on an approved logic, no screening shall be done for AP indents.
All AP items shall be classified into vital & non-vital categories. Vital items are those which directly affect production & shall be identified with the help of users.
The AP items shall be classified into ABC category based on consumption value during the previous financial year:-
Top 10% = A class
Next 20% = B class
Last 70% = C class
Lead Time is the time taken from MPR to the receipt of materials. Lead time data shall be up dated once in every financial year on the basis of last two financial year’s data.
Safety Stock shall be the stock to take care of variation in demand and supply. Safety stock for each class of AP items shall be as follows:
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AV = 3 months (V= vital)
ANV = 1 month (NV= non-vital)
BV = 4 months
BNV = 3 months
CV = 6 months
CNV = 4 months
Maximum Level shall be the highest level of Stock permissible for an item under normal course. It is Annual quantity + Lead time consumption + safety stock.
Annual Quantity = Weighted average of last three years consumption with the latest year consumption having weight of 50% & previous two years having weight of 25% each.
There are total 39 groups under which all items are classified. There will be CALANDER for MPR raising for each group of items. MPR for one group of items shall be raised at a time.
MPR quantity shall be = maximum level-Stock-Dues in.
Dues in shall be pending MPR or pending Purchase Order after giving due consideration to bad dues in.
Bad dues in shall not be considered for calculation of outstanding supply.
Items of same group, similar nature & same vendor base shall be combined & indented against single MPR as far as possible.
Continuous Review
Apart from annual review, continuous review of stock and dues in shall be done every 15 days & if the stock falls below the reorder level, MRP shall be raised for the quantity equal to the consumption between annual review calendar period and current period. Additional requirement for capital repair etc shall be taken care of.
Follow Up & Review
Status Report shall be obtained from system once a month and information given to purchase for making available Nil stock and critical stock items.
The vital item shall be reviewed once a week.
The daily position of certain selected vital items shall be monitored for replenishment and to avoid stock out.
There shall be a structured follow-up with Purchase Department.
An annual report of slow moving/ non-moving AP items shall be submitted to standing committee on AP for consideration of deletion of these items from AP list.
A weekly report of items having less than Safety Stock shall be send to purchase department for timely follow up to avoid stock out.
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A weekly report of stock out items shall be sent to Purchase Department for intensive follow up.
Bad Dues In: Bad dues in are quantities supply against which are not expected in normal course. In case supplies against had dues in are received, same should be taken care in the next cycle of planning. Bad dues in shall not be taken into account while calculating MPR quantity. Following cases shall be treated as bad dues in:-
1. MPRs more than 12 months old, either part or full.
2. Purchase Order more than 18 months old.
3. Outstanding Purchasing Order quantity > 10% of the original Purchase Order quantity & last supply is more than six month old.
4. MPR& Purchase Order against which supplies are not likely to materialized on account of any dispute.
In consultation with purchase, the bad dues in shall be reviewed and dropped/ closed/ short closed wherever felt necessary.
Delivery: Delivery schedule shall be decided depending upon nature & criticality of the item.
Estimated Value: Estimated value shall be based upon the last purchase price (LPP) obtained against a normal MPR. LPP against an emergency MPR shall not be considered.
MPRs for Specific Requirement like Capital Repair, planned special repair etc. shall be received only with the approval of HOD (not below the rank of E7). Approval of Head of Stores shall be obtained for raising MPRs for such requirements.
Proprietary Approval: An item to be procured on proprietary basis shall have the approval of Head of Maintenance & General Manager (Material Management). The proprietary status after approval shall be incorporated into system. Separate approval every time at the time of indenting shall not be required. However, proprietary item shall be reviewed every year by the Standing Committee on AP item.
Emergency MPR: Emergency MPR shall be raised with the approval of competent authority as per Department of Purchase.
Short Closure Of Purchase Order/ MPR: The outstanding supply against MPR and Purchase Order shall be reviewed once in 6 months and closed/ short closed wherever felt necessary.
Release Of Materials: Stock Control shall be the releasing agency unless otherwise specified. Materials shall be released on the basis of consumption trend, stock in hand and any other relevant information i.e. special repair etc. The details of releasing agencies are given below:
Group of items Releasing Agency
Safety items
Electrodes, Lifting Tools & tackles
Safety Engg. Deptt.
R & R
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Wire Ropes
Electrical items
Paints
Ammonia Paper
Crane Inspection
Standardization Cell (Elec.)
CED
Plant Design
Procurement Process: Being indentor of AP items. Stock Control shall be associated in finalization of cases for procurement in areas like Vendor Selection, Mode of Tendering, TC, Negotiation, TR whenever felt necessary.
Technical Recommendation: For AP items being of Standard specification, Technical recommendation by Stock Control shall not be required. However, in case of any doubt or clarification, the cases shall be referred to Stock Control for TR. Help of centralized agencies or main user may be obtained for TR wherever felt necessary.
Figure 2: Graphical presentation of EOQ model of Automatic Procurement item
Minimum Level (Safety Stock) = 3 months
Buffer Stock = 6 months
Reorder Level = 9 months of NOMC (No. of Monthly Consumption)
Procurement Lead Time = 6 months
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ROLE OF STORE & PURCHASE DEPTT. IN PURCHASING PROCESS
The most important function of public procurement is to maintain transparency which not only ensure a level of playing field to the suppliers/ contractors but also result in qualitative improvement in material/ services received due to increased competition.
CMO (Central Marketing Organization) places an order with specification to Bokaro Steel Plant as per demand. Now inside plant, Production Planning Control & Sales Co-ordination department makes production planning for different department.
Raising Of Indents or MPRNow according to production planning, the indents for purchase of materials called MPR (Material Purchase requisition) shall be raised by the department(s) concerned or designated centralized agencies. These Indents shall be prepared in the prescribed format (to be designed by each Plant/ Unit). The indent shall be signed by the Head of the Department (HOD). The Plant/ Unit shall devise a proper system of numbering the Indents initially and their processing reference at different stages to facilitate cross reference. Suitable Index registers shall also be maintained for such numbering/ references at different stages for control purposes. It will be the prime responsibility of the Indentor to prepare judicious estimate of the current value of the Indent. The Indentor shall take the help of Engineering Services and other Centralized Agencies, if so required, for the preparation of judicious estimate using scientific/ technical methods. The estimated value of each and every item to be procured/each and every item of work to be executed will be filled in the appropriate column in the indent. The detailed estimate signed by the Head of the Indenting Department will be enclosed with the indent.The names of the suggested registered manufacturers/ suppliers/ traders/ contractors, as the case may be, may be indicated by the Indentor in the Indent on the basis of past experience of parties along with order references, if any.
In case, it is desired to split the order on more than one of the above, the Indentor shall specify so in the Indent giving the maximum number of suppliers/ contractors desired to be engaged, justifying the reasons for the same. In such case, a minimum of X+2 offers should have been received (‘X’ is the number of supplier/ contractor on whom order is to be placed) during opening of the tenders. The dealing executive will inform the Tender Opening Cell, the minimum number of offers required in each case. In case of 2/3 part quotation, for opening the price bids, there should be minimum X+2 techno-commercially acceptable offers in all cases provided that:
(a) In case of open/ global tenders, if less than the specified (X + 2) numbers of offers are received; same can be processed without going for re-tender/ TOD Extension with the approval of the authority one stage higher than the authority competent to approve the enquiry proposal or Chief Executive.
(b) In case of LTE, if less than specified X + 2 numbers of offers are received in the first attempt, a second attempt may be made by inclusion of new venders or extension of due date if there is no scope of adding new vendors. In case adequate number (X + 2)
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of offers are not obtained even in response to the second attempt, the offers received shall be processed with the approval of the authority, one stage higher than the authority competent to approve the enquiry proposal. Where the approving authority of Enquiry proposal is the Chief Executive of the Plant/ Unit, the approving authority for processing the case where offers received are less than X + 2 shall also be the Chief Executive of Plants/ Units, who shall have full powers to approve such proposals.
In case there are certain quantifiable factors required to be considered/ loaded while evaluating the prices quoted by the tenderers, such factors in clear quantifiable terms should be mentioned in the Indent by the Indentor.
In case the tenderers are required to submit samples along with the quotation, the same should be clearly mentioned in the Indent itself. However, no sample should be called for the items for which detailed/standard specifications are available. For procurement of clothing and textile items detailed specifications may be mentioned & no sample shall be called. However, if required, provision for submission of an advance sample by successful bidder(s) may be stipulated for indeterminable parameters such as, shade/tone, size, make-up, feel, finish and workmanship, before giving clearance for bulk production of the supply.
The Indents for purchase of material shall be scrutinized by the Screening Committee constituted by the Competent Authority for the nature of the items concerned, comprising the representatives of the related departments such as Centralized Maintenance, Central Workshop, Indentor, MM Deptt., Finance, etc. The executives nominated for the Screening Committee shall be in the rank of E-5 and above. The Screening Committee shall scrutinize the Indent within a week of the receipt by it.
Scrutiny of indents:In case of computer generated indents of automatic procurement (AP) items, based on the re-order level, screening is not required by the Screening Committee.Indents value below Rs. 5 Lacs, covering the annual requirement (excludingProprietary items and Non-Proprietary STE items) need not be scrutinized by the screening committee and shall be cleared by the Head of Indenting department for further processing by the MM Deptt.
The scrutinized Indent, found complete in all respects, shall be sent to the MM Deptt/ Contract Cell after obtaining approval of the Competent Authority.On receipt of the Indent by the MM Deptt./ Contract Cell, an entry will be made in the Indent Register/Computer and a case-file opened. While processing the indent for tendering, if any discrepancy is found, the MM Deptt./ Contract Cell shall return the indent to the Screening Committee/ Indentor for compliance/ clarification by either Screening Committee or by Indentor, on such discrepancies.
Considering the nature of item / job, its value / cost involved, knowledge of suppliers/ contractors, prevailing market scenario, etc., the mode of tendering for indent value Rs. 5 Lacs and above shall be suggested by the respective Screening Committee and for indents valuing below Rs.5 Lacs, covering the annual requirement (excluding Proprietary items and Non-Proprietary STE items) need not be scrutinized by the screening committee and shall be cleared by the Head of Indenting department, the mode of tendering shall be suggested by the MM Deptt./ Contract Cell., for approval of Competent Authority.
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Mode of TenderingAfter screening process is complete, Purchase department will now issue a purchase order.The recommended modes of tendering for placement of orders are as under:
(a) Open Tender/ Global Tender,(b) Limited Tender Enquiry (LTE),(c) Single Tender for Proprietary items (Original Equipment Manufacturers). (d) Single Tender (other than Proprietary item)
Open/Global tender: Tender is open for everyone. Open/ Global tenders are to be considered under the following circumstances:
When reliable manufacturers/ suppliers/ traders/ contractors as well as latest technology are not clearly known.
When it is felt that advertising may elicit better response. For any other commercial consideration i.e. as a policy, DOP/ estimated value of
purchase/ job contract, formation of cartel/ ring like situations etc.
Limited tender enquiry: Tender is issued to limited parties; those were registered to Bokaro Steel Plant. LTE should be issued only when reliable manufacturers/ suppliers/ traders/ contractors are known. For this purpose, the MM Deptt./ Contract Cell shall maintain a list of registered parties
Single tender enquiry: Tender is issued to only one specific party because that party may enjoy monopoly.
Proprietary (Original Equipment Manufacturers - OEM) Enquiry: Enquiries for Proprietary items (OEM) should be issued with the approval of Competent Authority as per the DOP. Such Proprietary items should be purchased from their manufacturers or their authorized dealers only, where he manufacturer does not supply the equipment directly. In case there is more than one dealer authorized to sell a particular proprietary item, to Plant/ Units, discount may be possible through Limited Tender Enquiries, therefore LTE may be issued to the authorized dealers.
Single Tender Enquiry (Other than Proprietary Items): Single Tender Enquiries should be issued as an exception only. Such enquiries should be processed, after recording reasons and indenter should take approval of Chief Executives of the Plant/ Unit in all cases except procurement from PSUs/ State Government Undertakings where approval of Competent Authority shall be obtained.
After winning the tender supplier now sends the order as per contract, which will receive by stores department and DCR (Daily Collection Report) is issued. On DCR, an inspection is done by CRS (Central Receiving Section). After finding every thing correct CRS will issue GRN (Goods Receipt Note) to Finance department. On basis of GNR, Finance department will pay for the consignment to the supplier.
During purchase of raw materials reverse auction is adopted, where that party will get the tender who will meet the specification and quote the minimum price. In case of selling finished/semi-finished product forward auction is adopted, where product is selling to that party who will quote the maximum price.
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Year Inventories (in crore) Total current assets % of inventories to
current assets
2007 1365.6 1826.1 74.78
2008 1185.5 1835.9 64.59
2009 1755.02 2312.02 75.87
Figure 3: Contribution of Inventories in Total Current Assets
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5.3 -MANAGEMENT OF RECEIVABLES
The term receivables are defined as ‘debt owed to the firm by customers arising from sale of
goods or services in the ordinary course of businesses’. Receivables management is also
called trade credit management. Trade credit, the tool which as a bridge for movement of
goods through production and distribution stages to customer, is a force in the present day
business and an essential device. Trade credit is granted with a motive of protecting the sale
from ones, competitors and attaching more of the potential customers. Trade credit is said to
be extended to a customer when a firm sell its services or goods and does not receive the
payment for them immediately. Thus trade credit creates receivable which refer to the amount
which a firm is expected to collect in near future.
The book debt or receivable which arise a result of trade credit have the following features:
It involves a element of risk and hence should never to be fiddled with. As credit sale
leave a sum to be recovered in future and future can never be the certainty, hence it is
risky.
It is based on economic value, while for the buyer, the economic value in goods
passes immediately at the time of purchase, while the seller expects an equivalent
value to be received later on.
It represents futurity. The cash payments for the goods or services received by the
buyer will be made in future.
The management of receivable gain more importance in the view of the fact that more than
one third of the total current assets is blocked in the form of trade debtors. The interval
between the date of sale and the date of payment is financed by working capital. Thus trade
debtors represent the investment. As substantial amount are tied up as trade credit hence it
requires careful analysis and proper management.
Goals Of Management Of Receivables
As all other aspects of management, this also aims at the maximization of wealth by a
beneficial trade off between liquidity risk and profitability. The main aim of management is
not to maximize sales or minimize bad debt risk but in a way it is to expand sale to the extent
that the bad debt risk remained within the limits. So in a effort to maximize the wealth, the
goals of management of receivable are:
To obtain optimum value of sales
To control the cost of credit and keep it to the minimum level.
To maintain investment in debtors at optimum level.
Sales maximization is not the purpose of credit management but an effective and efficient
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credit management helps in expanding sales and acts as a marketing tool. A good and well
administered credit means profitable credit accounts.
In order to maximize the wealth of the firm, the cost involved in the credit and its
management has to be controlled within the acceptable limits. These costs can brought to
zero level but that would adversely affect the sales, therefore the objective should be to kept
receivable to the minimum level. A dynamic credit policy and its management will help to
optimize the sale at a minimum cost.
Debtors involve funds, which have an opportunity cost. Therefore the investment in debtors
should be never be excessive. Extending liberal credit pushes the sale and results in higher
profitability but the increase in level of investment in debtors result in increased cost. Thus
we are to bring the investment at a optimum level by doing trade off between the costs and
benefits. The level of debtors to a large extent depends on external factors such an industry
norms, level of activity, seasonal variations etc. But there are lot of internal factors which
affects the firm’ credit policy. These factors include credit terms, standard, limits and
collection procedures. The internal factors should be well administered to optimize the
investment in debtors.
Optimum Credit Policy
The whole set of decision variables that affects the investment in receivable is termed as
credit policy. Generally, we can divide the credit policy into two types
Lenient Credit Policy
Stringent Credit Policy
The firms following Lenient Credit Policy tend to sell on credit to its customers very readily,
without even knowing the credit worthiness of the customers. The firms with lenient credit
policy will have more sales and higher profits. But they can also incur high bad debts losses
and face the problem of liquidity. The firm which follows Stringent Credit policy are very
selective in extending credit, and credit is extended to those customer only whose credit
worthiness is well proven. These firms follow tight credit standards and terms as a result,
minimize cost and chances of bad debts.
The stringent credit policy never poses the problem of liquidity but restrict the sale and profit
margins.
Extension of credit increases the sale of the firm. The number of customers purchasing the
firm’s goods and services increases as it makes its credit policy liberal. If the cost do not
increase at a greater rate, the increased revenue will increase the profit of the firm. As a
consequence, the market value of firm’s share will rise.
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The extent to which the sales will be affected by pursuing a particular credit policy can not be
gauged with accuracy. Sales forecast with respect to a particular credit policy can be made
with regards to prevailing economic condition. However, cost benefit analysis has to be done
in order to anticipate the acceptability of a credit policy.
Credit extension involves cost, the incurred cost can be of many types such as bad debt
losses, production and selling costs, administrative expenses, cash discounts, opportunity cost
etc.
Bad debt losses are incurred when a firm is unable to collect the book debts. Bad debt losses
are more if the credit policy is lenient. This never means that a company should its credit
policy, in case the profit generated by additional sales are more than corresponding costs the
firm should surely go in for credit policy relaxation.
The additional sales resulting from the relaxed credit policy will increase the production and
selling costs. Only the incremental production or selling costs should be estimated. Similarly,
the expenses incurred in the administration of credit should be included in the costs of
extending credit. The cost of administration generally includes the credit supervision costs
and collection costs. Again, these costs will be nil if the credit policy simply utilize the idle
capacity of the credit department.
The opportunity cost is the cost of foregone profits of the amount blocked as trade credit to
customers in order to sustain or increase sales. As a result of the funds tied up in credit
accounts often the firms have to go in for credit from banks in order to sustain their
operations.
In order to collect the trade credits at an early date, often cash discounts have to be extended.
As a result of these cash discounts firms are not in a position to collect the remuneration for
their sales in full. This is essentially a tool to bring the trade credit to an optimum level.
Aspects of Credit Policy:
The important aspects of credit policy should be identified before establishing an optimum
credit policy. The important decision variables of the credit policy are:
Credit Terms: Credit terms are the conditions or stipulations under which the firm
extends credit. The terms and conditions can be clubbed according to the period for
which they are extended and according to the amount of discount offered thereby
there are two important components of trade credit namely cash period and cash
discounts. Credit terms can be effectively used as a tool to boost sales. The most
desirable credit terms which increases the overall profitability of the firm, should be
offered to the customers cost benefit trade off between credit terms should be done to
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choose the best one. If the action of relaxation of the credit terms is followed by the
competitors. Then the firm may have to pay instead of gaining anything.
The time duration for which the credit is extended to the customers is referred to as
credit period. Usually the credit period of the firm is governed by the industry norms,
but firms can extend credit duration to stimulate its sales. If the firm’ bad debts build
up, it may tighten up its credit policy as against the industry norms.
Cash discounts are the offer made by the firm to customer to pay less if the required
amount is paid earlier. The cash discount terms indicate the rate of discount and the
period for which discount has been offered. If the customer does not avail this
offer, he is expected to make the payment by the due date.
Credit Standards: The credit standards followed by the firm have an impact on sales
and receivable. The sales and receivable levels are likely to be high if the credit
standards of the firm are relatively loose. In contrast, if the firm has relatively tight
credit standards, the sales and receivable are expected to be low. The credit standards
are governed by various aspects such as the willingness of customer to pay, the ability
of customer to pay in the economic conditions etc.
Collection Policy: The need to collect the payments early gave rise to a policy
regarding it, called as the collection policy. It aims at the speed recovery from slow
payers and reduction of bad debts losses. The firm has to very cautious while it goes
in for collection from slow payers. The various aspects such as willingness,
capabilities, and external conditions should be taken care of before you go in
collection procedure. The optimum collection policy will maximize the profitability
and will be consistent with the objective of maximizing the value of the firm.
Credit Procedure
A clear cut guiding policy regarding the granting of credit to individual customers and the
collection from individual account should be laid down. The collection procedure of the firm
differs from customer to customer. The credit evaluation procedure before extending of credit
is done in the following ways:
1) Credit Information: In extending credit to customers, the firm would ensure that the
receivable are collected in full and on due date. To ensure this, the firm should have credit
information concerning each customer to whom credit is given. Collection of credit
information involves expenses. The cost of collecting information should therefore be less
than the potential profitability. In addition to the cost, the time required to collect information
should be considered. This information can be collected from financial statement, bank
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references, trade references, credit bureau reports etc.
2) Credit Investigation: After the collection of credit information the firm needs to go in
for further investigation. These investigations are different for different people and depend
upon the type of customers, customer’s background, nature of our product, size of the other,
firm’s credit policy etc.
Credit investigations involve cost. But a credit decision without adequate investigations can
be more expensive in terms of excessive collection costs and possible bad debts losses.
Therefore credit investigations should be cared so long as the savings, in terms of speedy
collection and prevention of bad debts losses, from it exceed the cost incurred in the process.
3) Credit Analysis: In the credit procedure, the next step is of credit analysis. The
appraisals regarding the financial strength, nature of business, type of management with
respect to the other party are to be considered. The decision to extend credit to the customers
will basically depend upon the judgment of the credit analyst, although numerical, credit
evaluation systems exist, if it is expected that more and more of qualitative systems will
evolve in near future.
4) Credit Limits: Once the decision regarding the extending of credit has been taken then
the decision regarding the duration and the amount of credit are to be taken. The credit limit
is to be periodically reviewed and alterations, continuously done. The decision on the
magnitude of credit will depend upon the amount of contemplated sale and the customer’s
financial strength.
5) Collection Procedure: A clear cut and well administered collection procedure will
speed up the rate of dues collection if collection is delayed then the chances of bad debts also
increases. The procedure of collection can not be same for everyone, it has to down according
to the relation of the firm with its customer the responsibility of follow up and collection
should be clearly designated. To speed up the process of collection after we use discount
schemes etc.
PRACTICE OF RECEIVABLE MANAGEMENT IN BOKARO STEEL CITY
In Bokaro Steel Plant all finished/ semi-finished and by-products are sold on the basis of
advance payment made by party, so there is no receivable management is practiced here.
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6.- FINANCIAL STATEMENTS AND RATIO ANALYSIS
WORKING CAPITAL STATUS OF BSL
Rs.
Lakhs
PARTICULARS 2005-06 2006-07 2007-08 2008-09
(A) CURRENT ASSETS
CASH & BANK BALANCES 3790 4108 4400 4660
RAW MATERIALS 25621 25113 16828 28811
STORES &SPARE PARTS 34129 37846 46798 54047
FINISHED/SEMI-FINISHED PRODUCTS 76806 77790 54948 92644
SUNDRY DEBTORS 1251 895 774 903
LOANS & ADVANTAGES 39118 39090 58745 49296
OTHER CURRENT ASSETS 1896 1402 1095 841
TOTAL 182611 186244 183588 231202
(B) CURRENT LIABILITIES & PROVISIONS
SUNDRY CREDITORS 30572 32507 43268 45387
SECURITIES & OTHER DEPOSITES 4291 6768 2369 13189
ADVANCES RECEIVED 2427 2568 10404 2789
OTHER LIABILITIES 38824 38204 35706 28049
PROVISIONS (EXCLUDING PROVISIONS FOR VRS,
GRATUITY & ACCUMULATED LEAVES) 9482 9151 60254 111898
TOTAL 85596 89198 152001 201312
WORKING CAPITAL (A-B) 97015 97046 31587 29890
INCREASE/DECREASE IN WORKING CAPITAL OVER 44566 31 -65459 -1697
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PREVIOUS YEAR
NOTE:-ITEMS ON CAPITAL ACCOUNT HAVE BEEN EXCLUDED
Figure 4: Four year comparative studies between current assets, current liabilities and working capital of Bokaro Steel Plant
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Figure 5: Four year comparative studies between current assets composition
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Figure 6: Four year comparative studies between current liabilities composition
6.1- TRADE-OFF BETWEEN PROFITABILITY AND RISK
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In evaluating a firm’s NWC position, an important consideration is the trade-off between profitability and risk. The term profitability used in this context is measured by profit after expenses. The term risk is defined as the probability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment.
In evaluating the profitability-risk trade-off related to the level of NWC, three basic assumptions, which are: (a) that we are dealing with manufacturing firm; (b) that current assets are less profitable than fixed assets; and (c) that short-term funds are less expensive than long-term funds.
Effect of the level of current assets on the profitability-risk trade-off
This effect can be shown by using the ratio of current assets to total assets.
Effect of increase/higher ratio: An increase in the ratio of current assets to total assets will lead to a decline in profitability because current assets are assumed to be less profitable than fixed assets. A second effect of the increase in the ratio will be that the risk of technical insolvency would also decrease because the increase in current assets, assuming no change in current liabilities, will increase NWC.
Effect of decrease/lower ratio: A decrease in the ratio of current assets to total assets will lead to an increase in profitability as well as risk. The increase in profitability will primarily be due to the corresponding increase in fixed assets which are likely to generate higher returns. Since the current assets decrease without a corresponding reduction in current liabilities, the amount of NWC will decrease, thereby increase risk.
Effect of the level of current liabilities on the profitability-risk trade-off
Effect of increase/higher ratio: An increase in the ratio of current liabilities to total assets will lead to a increase in profitability. The reason for the increased profitability lies in the fact that current liabilities, which are a short term sources of finance will be reduced. As short term sources of finance are less expensive than long-run sources, increase in the ratio will, in effect, mean substituting less expensive sources for more expensive sources of financing. There will, therefore, be a decline in cost and a corresponding rise in profitability.
The increase in the ratio will also increase the risk. Any increase in current liabilities, assuming no change in current assets, would adversely affect the NWC. A decrease in NWC leads to an increase in risk. Thus, as the current liabilities-total assets ratio increases, profitability increases, but so dose risk.
Effect of decrease/lower ratio: A decrease in the ratio of current liabilities to total assets will lead to decrease in profitability as well as risk. The use of more long term funds which, by definition, are more expensive will increase the cost; by implication, profits will also decline. Similarly, risk will decrease because of the lower level of current liabilities on the assumption that current assets remain changed.
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Rs. In lakh
2007-08 2008-09Current Assets 183588.00 231202.00Fixed Assets 265877.00 342467.00
Total Assets 449465.00 573669.00
Current Liabilities 152001.00 201312.00
Current Assets/Total Assets (% age) 40.85 40.30
Current Liabilities/Total Assets (% age) 33.82 35.09
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SAIL/BOKARO STEEL PLANT
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Profit & Loss Account for the year ended 31st March, 2009
Year ended Year ended
31st March,
2009 31st March,
2008(Rupees in
crores)
INCOME
Sales 11857.69 12037.57
Less : Excise duty 1394.90 10462.79 1660.95 10376.62
Finished products internally consumed 37.41 42.59
Interest earned 24.71 16.85
Other revenues 133.79 115.68
Provisions no longer required written back 20.09 12.59
Stock transfer to other units 427.03 719.47
11105.82 11283.80
EXPENDITURE
Accretion(-)/Depletion to stocks -392.29 188.88
Raw materials consumed 5458.55 3672.82 Purchase of finished / semi-finished products 0.00 0.00
Employees' Remuneration & Benefits 1930.04 1956.93
Stores & Spares Consumed 824.79 845.37
Power & Fuel 933.36 857.52
Repairs & Maintenance 120.08 96.01
Freight outward 143.63 168.18
Other expenses 400.32 360.56
Share of expenditure over income
- Corporate Office 199.23 115.56
- CMO 67.68 63.45
- CCSO 2.07 2.82
Interest & finance charges 52.77 40.41
Depreciation 246.74 246.70
Total 9986.97 8615.21
Less : Inter Account Adjustments 167.65 9819.32 161.84 8453.37
1286.50 2830.43
Adjustments pertaining to earlier years 6.28 0.00
Profit /Loss(-) before Tax 1292.78 2830.43
Balance brought Forward 16187.50 13357.07
Less: Extraordinary items 0.00 0.00
Amount available for appropriation 17480.28 16187.50
APPROPRIATIONS
Balance carried over to BalanceSheet 17480.28 16187.50
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17480.28 16187.50
Significant Accounting Policies and Notes on Accounts
Schedules 2 and 3 annexed hereto, form part of the Profit & Loss Account.
SAIL/BOKARO STEEL PLANT
Balance Sheet as at 31st March, 2009
As at 31st As at 31st
March, 2009 March, 2008(Rupees in
crores)
SOURCES OF FUNDS
Shareholders' Fund
Reserves and Surplus 17480.32 17480.32 16187.54 16187.54
Loan Funds
Secured Loans 89.26 69.42
Unsecured Loans 0.00 89.26 0.00 69.42
Inter Unit Current Account 4538.70 2602.88
22108.28 18859.84
APPLICATION OF FUNDS
Fixed Assets
Gross Block 7226.17 7072.41
Less: Depreciation 4980.46 4790.17
Net Block 2245.71 2282.24
Capital Work-in-Progress 1178.96 3424.67 376.53 2658.77
Investments 0.10 0.10
Current Assets, Loans & Advances
Inventories 1755.02 1185.74
Sundry Debtors 9.03 7.74
Cash & Bank Balances 46.60 44.00
Interest Receivable/Accrued 8.41 10.95
Loans & Advances 492.96 587.45
2312.02 1835.88
Less: Current Liabilities & Provisions
Current Liabilities 1066.36 1024.56
Provisions 2512.13 1870.81
3578.49 2895.37
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Net Current Assets -1266.47 -1059.49
Miscellaneous Expenditure 0.00 14.81
(to the extent not written off or adjusted)
Inter Unit Current Account 19949.98 17245.65
22108.28 18859.84
Significant Accounting Policies and Notes on Accounts
Schedules 1 and 3 annexed hereto, form part of the Balance Sheet.
6.2 -RATIO ANALYSIS:
LIQUIDITY RATIO:
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Liquidity ratio shows the firm’s short term solvency and its ability to pay off the liabilities. It has been devised to keep a track of their firm’s exposure the risk that it will not be able to meet its short term obligations. It provides a quick measure of liability of the firm by establishing a relationship between its current assets and its current liabilities.
Some of the liquidity ratio:
a) Current ratio:The current ratio gives the margin by which the value of the current assets may go down without creating and payments the firms. The total current assets include prepaid expenses and short term investments. Whereas the current liability includes all types of liability which will mature for payments within a period of one year e.g. bank overdraft, bills payable, trade creditor, outstanding etc. the current ratio throw light on the firms ability to pay its currents liabilities out of its currents assets.
The current ratio is compared with the standard ratio of two times for 2: 1
b) Quick ratio / Acid test ratio / Liquid ratio:This ratio establishes relationship between quick current assets and current liabilities. A current assets is considered to be liquid if it I convertible into cash without loss of time and value. Therefore
Liquid assets = currents assets – (inventory + prepaid expenses)
The inventory is singled out of the total current assets as the inventory is considered to be the potential illiquid. The reason for keeping inventory out is that it may become absolute, un saleable or out of fashion and always requires time for realizing into cash. Generally a quick ratio of 1:1 is considered to be satisfactory because this mean that the quick assets of the firm are just equal to the quick liability and there has not been seen to be a possibility of default in payments by the firm.
c) Net Working Capital Ratio:It indicates the firms’ potential reservoir of fund.Net Working Capital Ratio= Net Working Capital/ Net Assets
ACTIVITY / TURNOVER / PERFORMANCE RATIO:It is measure of movement and thus indicates as to how frequently an account has moved over during a period. It shows as to how efficiently and effectively the assets of the firm are being utilized. These ratios are usually calculated with references to sales / cost of goods sold and its expressed in terms of rate or times.
a) Working capital turnover ratio:The WCT ratio studies the velocity or utilization of the working capital of the firm during a year. The WC here refers to the net working capital which is equal to the total current assets less total current liabilities.
The higher the WCT ratio the lower is the investment in the working capital and higher would be the profitability. A high WCT ratio reflects the better utilization of the WC of the firm. However, a high WCT ratio implies a low net working capital in relation to the sales volume and therefore implies over trading by the firm in relation to its net WC.
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b) Fixed assets turnover ratio:This ratio shows the contribution of average fixed assets to net sales. Higher the ratio better will be the sales per unit of fixed assets.FA turnover ratio = (net sales) / average fixed assets
c) Capital turnover ratio:Capital turnover ratio = (net sales) / average capital employed.
I. Ratio Analysis Calculations (2007–08)
Liquidity position:
a) Current Ratio:Current assets = Rs. 1835.88 croreCurrent liability & provisions = Rs. 1520.01 crore.Current ratio = current assets / current liabilities
= 1835.88/1520.01= 1.21 times
b) Quick Ratio:Inventory = Rs. 1185.74 croreQuick ratio = (total CA – inventory)/total current liabilities = (1835.88 – 1185.74)/1520.01 = 650.14/1520.01 =0.43 times.
c) Net Working Capita Ratio:Net Working Capital = 315.87Total Assets = Fixed Assets + Current Assets =1835.88+ 2658.77=4494.65Net Assets = Total Assets - Current Liabilities =4494.65-1520.01 =2974.64Net Working Capital Ratio= Net Working Capital/ Net Assets =315.87/2974.64 = 0.11
Activity Ratio:
a) Capital turnover ratio:Net sales = Rs. 12037.57 croreWorking Capital = Total CA – Total CL
= Rs. 315.87 crore
Net capital employed = Net block + working capital(Here Net block = gross block – depreciation)
= 2282.24 + 315.87= Rs. 2598 .11 crore
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Capital turnover Ratio = net sales / net capital employed = 12037.57 / 2598.11
= 4.63 times
b) Working capital turnover ratio:Net sales = Rs. 12037.57 croresWorking capital = Rs. 315.87 crores
Working capital turnover ratio = Net sales / W.C. = 12037.57 / 315.87
= 38.11 times
c) Fixed Turnover Ratio:Net sales = Rs. 12037.57 crore Net fixed assets = Rs. 2658.77
Fixed turnover ratio = Net sales / net fixed assets = 12037.57/ 2658.77
= 4.53 times
II. Ratio Analysis Calculations (2008–09)
Liquidity position:
a) Current ratio:Current assets = Rs. 2312.02 croreCurrent liability = Rs 2013.12 croreCurrent ratio = current assets / current liabilities = 2312.02 / 2013.12 = 1.15 times b) Quick Ratio:Inventory = Rs. 1755.02 croreQuick ratio = (total CA – inventory) /total current liabilities
= [2312.02 – 1755.02]/2013.12= (557)/ 2013.12= 0.28 times
c) Net Working Capita Ratio:Net Working Capital = 298.90Total Assets = Fixed Assets + Current Assets =3424.67+ 2312.02 =5736.69Net Assets = Total Assets - Current Liabilities = 5736.69-2013.12=3723.57Net Working Capital Ratio= Net Working Capital/ Net Assets =298.90 /3723.57 =0.08
Activity Ratio:
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a) Capital turnover ratio:Net sales = Rs. 11857.69 croreWorking capital = total CA – Total CL
= Rs. 298.90 croreNet capital employed = Net block + working capital
= 2245.71 + 298.90= Rs. 2544.61 crores
Capital turnover Ratio = net sales / net capital employed= 11857.69 / 2434.15= 4.66 times
b) Working capital turnover ratio:Net sales = Rs. 11857.69 croreWorking capital = Rs. 298.90Working capital turnover ratio = net sales / W.C
= 11857.69 / 298.90 = 39.67 times
c) Fixed turnover ratio:Net sales = Rs. 11857.69 croreNet fixed assets = RS. 3424.67Fixed turnover ratio = Net sales / net fixed assets
= 11857.69/3424.67 = 3.46 times
YEAR 2007-08 2008-09
CURRENT RATIO 1.21 1.15
QUICK RATIO 0.43 0.28
NET WORKING CAPITAL RATIO 0.11 0.08
CAPITAL TURNOVER RATIO 4.63 4.66
WORKING CAPITAL TURNOVER RATIO 38.11 39.67
FIXED TURNOVER RATIO 4.53 3.46
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Interpretation Current ratio is decreasing because of increase in provisions (mainly due to pay
revision), security & other deposits (by contractors involve in different projects) and decrease in loans & advances (due to change in policies).
Quick ratio is decreasing because of increase in inventory and provisions. Net working capital ratio is decreasing because of decrease in working capital (i.e.
increase in provisions) and huge investment in fixed assets. Capital turnover ratio is slightly increased because of decrease in net block and
working capital. Working capital turnover ratio is increasing because of decrease in working capital
(i.e. in provisions, security & other deposits). Fixed turnover ratio is decreasing because of huge investment in fixed assets.
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7.- SALES PROCESS OF PRODUCTS MANUFACTURED IN BOKARO STEEL
PLANT
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PLANT
Sales Stock Transfer
Export Sales Stockyard Transfer
Direct Sales
IPT Transfer
CMO Direct SalesPlant Direct Sales
Sales of Primary Product
CMOSales of Secondary Products
BSO A, B, C ……….. Sister Plants A, B …...
Party A, B, C, D ……………………
CMO: Central Marketing Organization
IPT: Inter Plant Transfer
BSO: Branch Sales Office (there are total 45 BSO of SAIL situated in different States of India)
Primary Product: Product made or manufactured as per specification.
Secondary Product: These are effective items but not meeting the specification.
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8.- EXECUTIVE SUMMARY
Steel Authority of India Limited (SAIL) is the leading steel making company in India. It is
fully integrated iron and steel maker, producing both basic and special steel for domestic
construction engineering, power, railway automotive and defense industries and for safe in
export markets. Bokaro Steel Plant – The fourth integrated plant in the public sector taking
shape in 1965 in collaboration with the Soviet Union.
It was originally incorporated as a limited company on 29 thJanuary 1964, and was later
merged with SAIL first as a subsidiary and then as a unit through the public sector iron &
steel companies act1978. Working capital management is concerned with the problem that
arises in attempting to manage the current assets, current liabilities and the interrelationship
between them. Its operational goal is to manage the current assets and current liabilities in
such a way that a satisfactory level of working capital is maintained.
The working capital ratio is calculated as Positive working capital means that the company is
able to pay off its short-term liabilities. Negative working capital means that a company
currently is unable to meet its short-term liabilities with its current assets (cash, accounts
receivable and inventory).
Working capital also gives investors an idea of the company’s underlying operational
efficiency. Money that is tied up in inventory or money that customers still owe to the
company cannot be used to pay off any of the company’s obligations.
To measure efficiency we have used ratio analysis as a technique and the main ratio we have
used are liquidity ratio and activities ratio. One more tool we have used is calculation of
operating cycle which shows how effectively the firm is using its resources or how much
time it takes to convert its investment back into cash. By looking previous data we came to
know BSL have done a great job in this field operating cycle by 30% in just three financial
years.
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9.- FINDING & SUGGESTION
In view of the analysis and with the change in industrial scenario it is felt that a company must reorient its policies for betterment. BSL produces flat product and now a days there is tough competition in the market of flat product. Hence company needs certain best policies for competition with its competitor in domestic as well as global market.
In brief the following suggestions are:-
Company use perpetual inventory, which is very costly. Hence the company should use both perpetual and periodic inventory.
Besides automatic procurement items there is no specific system for calculating reorder level, minimum and maximum level. A proper system for different items should be developed.
Lead time for receipt of stores and spare items is around 6 months, which is very high. The lead time should be brought down by decreasing the time duration in paper work.
As understand from the explanation of the management, there is huge volume of non-moving and obsolete stores and spare items which are yet to be disposed of.
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10.- CONCLUSIONS
Summer internship has given lot of practical experiences from on the job culture to theoretical implications at different levels. There is a great learning in financing to corporate.
During 2008–09, profit before tax of Bokaro Steel Plant is Rs. 1286.50 which is less as
compared to profit before tax of 2007-08 that is Rs. 2830.43, although production has been
increased. It is because of decrease in price of flat product in domestic and global market due
to recession. Although the market is dull, BSL is able to make profit which shows the
continuous strengthening of the company’s financial fundamentals. This was the outcomes of
multi-pronged strategy – including increase in production and sales volume, improvement in
product mix, cost reduction major, reduction in borrowing coupled with buoyancy in the steel
market.
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11- ABBREVIATION
SAIL – Steel Authority of India LimitedBSL- Bokaro Steel LimitedISP-Indian Iron and Steel Company Steel PlantASP – Alloy Steel PlantSSP –Salem Steel PlantRMD –Raw Material DivisionBRL- Bharat Refractoriness LimitedSMS-Steel Melting ShopCCS-Continuous Casting ShopCRM-Cold Rolling MillHRM – Hot Rolling MillCR – Cold RolledHR- Hot RolledGP – Galvanized Plate GC - Galvanized CoilMIS- Management Information SystemCMO- Central Marketing OrganizationIBAN NO-The International Bank Account NumberBIC COED-Bank Identifier CodeSWIFT CODE-Society for Worldwide Interbank Financial TelecommunicationLC-Letter of CreditCAD-Cash against DocumentTT-Telegraphic TransferS&T-Sales and Transport
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BIBLIOGRAPHY
BOOKS& REFERENCES:
C.R. Kothari, Research methodology, 2nd ed. Wishwa Prakashan, New DelhiBeri G.C, Marketing Research, 4th ed.Tata McGraw Hill
V.k.Bhalla, Working Capital Management 13th ed. Anmol Publication Pvt. Ltd.
Ravi M Kishor, Financial Management 3rd Taxman Allied Services
Training Manual for Junior Executive in BSL
WEBSITES:
www.sail.co.inwww.google.co.inwww.sail.co.in
www.metaljunction.comwww.steelrx.comwww.bokaro.nic.inwww.steel.nic.inhttp://money.rediff.com/money/jsp/p_l.jsp?companyCode=15510002http://www.jstor.org/pss/3516789
http://www.planware.org/workingcapital.htmhttp://www.osi.hu/cpd/policyresources/fmbp/chapter_06_page1_fmbp.htmlhttp://www.osi.hu/cpd/policyresources/fmbp/chapter_06_page1_fmbp.htmlhttp://www.studyfinance.com/lessons/workcap/http://www.thehackettgroup.com/expertise/working-capital-management.jsphttp://www.svtuition.org/2010/02/working-capital-management.html
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