iffco wc mgmt

A PROJECT REPORTON

WORKING CAPITAL MANAGEMENT OF

INDIAN FARMERS FERTILIZER

COOPERATIVE LIMITED (IFFCO)

SUMMER TRAINING PROJECT REPORTSUBMITTED TOWARD PARTIAL FULFILLMENT

OFPOST GRADUATE DIPLOMA IN MANAGEMENT

(2008-2010)

UNDER THE GUIDANCE OFPROF. MANURAJ JAIN

Submitted By:ASHISH GUPTAPGDM – 09DM026

Birla Institute of Management TechnologyPlot No. 5, Knowledge Park II, Greater Noida

Uttar Pradesh - 201306Ph: 9899965470

Email: [email protected]

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Summer Project Certificate

This is to certify that Mr. / Ms. Ashish Gupta

. Roll No. 09DM026 a student of PGDM has worked

on a summer project titled Working Capital

Management . at Indian Farmers Fertilizer

Cooperative Limited (IFFCO) . after Trimester-III in

partial fulfilment of the requirement for the Post

Graduate Diploma in Management programme. This is

his/her original work to the best of my knowledge.

Date: ___________ Signature ________________

(_________________________)

Name of Faculty

BIMTECH SEAL

Working Capital Management

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(Industry guide declaration - This will change as per the company certificate)

To whom it may concern

This is to certify that Mr. _____Ashish Gupta______ a student of

PGDM from Birla Institute of Management Technology, Greater

Noida has undergone summer training at our organization from 08

April’10 to 02 june’10 as a part of his academic curriculum. The

project of the study was Working Capital Management .

Date: ___________ Signature ________________

(_________________________)Name of Guide

OFFICIAL SEAL


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Faculty Guide Declaration

This is to certify that Ashish Gupta from Birla Institute of

Management Technology , Greater Noida (BIMTECH) has done summer

training at Indian Farmers Fertilizer Cooperative Limited (IFFCO) from

08April’2010 to 07 June’2010.

The project work titled Working Capital Management embodies the

original work done by Ashish Gupta during his summer project.

Signature ________________

(_________________________)Name of Faculty

BIMTECH SEAL


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Acknowledgement

I take this opportunity to place on my grateful thanks and sincere gratitude to the organization

INDIAN FARMERS FERTILIZERS COOPERATIVE LTD. (IFFCO) for providing me

a wonderful chance of working in a prestigious company.

Any attempt at any level can never be satisfactorily completed without expert guidance. I

would like to thank Mr. Praveen Agarwal, Deputy G. M (Finance and Accounts) for giving

me a lot of their precious time and inputs to make this project. His deep knowledge and

understanding of the topic is an inspiration to one and all. My study could not have been

completed if I had not been able to get all the valuable data and reference materials from the

company.

I am also thankful to other members of the Finance & Accounts Department for making

available all the resources required for the completion of this project report.

Last but not the least I would like to thank my faculty guide Prof. Manuraj Jain, without

whose feedback and encouragement this project have not been possible. His help has gone a

long way in successful completion of my project.

ASHISH GUPTA

Table of Contents


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Summer Project Certificate 2

Industry Guide Declaration 3

Faculty Guide Declaration 4

Acknowledgement 5

Executive Summary 7

Objectives of the Study 8

Methodology of the Study 9

Limitations of the Study 9

IFFCO – The Organization 10

Chapter 1 Working Capital Management 29

Data Analysis 30

Findings 58

Conclusion and Suggestions 59

Chapter 2 Cash Management 61

Cash Management at IFFCO 62

Observations 73

Conclusion 76

Suggestions 77

References 78

Appendix

A Working Capital Management 79

B Cash Management 108

C Financial Statement 112

D Significant Financial Indicators 116

E Provisional highlights of IFFCO performance during 2008-09 117

F Value Added Statement 118

G Some of the well known fertilisers used in India 119

H Some Calculations 120


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Executive Summary

Indian Farmers Fertiliser Co-operative Limited (IFFCO) is a Multistate Co-operative

Society. It was a unique venture in which the farmers of the country through their own Co-

operative Societies created this new institution to safeguard their interests. IFFCO

manufactures Urea and NPK/ DAP fertilizers and sells them to the co-operative societies.

The project is Working Capital Management of IFFCO. The objectives of the project are:

To analyse the working capital and working capital management policies at IFFCO

To analyse the cash management practices at IFFCO

The study is mainly based on the secondary data which refers to that form of information that

has already been collected and is available. The analysis of working capital is based on ratio

analysis to monitor overall trends in working capital and to identify areas requiring closer

management.

Working capital is not measurable by only current assets & current liabilities but there are

some other factors also that have an influence on the working capital. From the analysis of

the components of working capital, it was found that the organization is utilizing its funds

properly, the inventory is managed efficiently and the organization is able to get sufficient

short term financing. It is clear that the working capital of IFFCO is in sound position. The

suggestions can be made in the management of inventory by implementation of JIT or

Kanban and management of liquid assets including the subsidy provided by the government.

The Cash Management System at IFFCO is very sound and efficient. It has enabled the

organization to manage its funds in a proper manner resulting in better utilization and

availability of funds in cash deficit periods. IFFCO has a tie up with banks such as IOB,

HSBC Bank, ICICI Bank that are providing IFFCO with facilities such as cash management

services, personalized financial MIS to enable IFFCO to accelerate the collection and

payment of funds, debit sweep option, Anywhere banking facility, etc. The suggestion that

can be given to the organization is the implementation of RTGS (Real Time Gross

Settlement) and NEFT (National Electronic Fund Transfer) facilities which will improve the

cash transfer at IFFCO.


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Objectives of the Study

To analyse the Working Capital and Working Capital Management policies at IFFCO

To understand Working Capital Management of the organization

To analyze Liquidity position of the organization

To find out the Profitability and operating efficiency of the organization

To understand the importance of Working Capital Management

To analyze the short term financing patterns, which affect the working capital of the organization

To study the factors that affects the Working Capital Management at IFFCO

To analyze the data and information of the previous years to know the actual position of funds, investments and liabilities of the organization

To identify some broad policy measures to improve the working capital position of the organization

To estimate the working capital requirements of the organization in the near future

To analyse the Cash Management Practices at IFFCO

To understand the cash management process followed at the organization

To study the factors both intrinsic and extrinsic that influences the cash management at the organization

To study and analyze the changes being brought about the existing cash management system

To study the salient features, methodology and advantages of the new cash management system being implemented at the organization

To suggest some recommendations to the organizations for the improvement of the cash management practices and the new cash management MIS


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Methodology of the study

The basic type of research used to prepare this report is Descriptive.

The study is mainly based on the secondary data which refers to that form of information that

has already been collected and is available. These include some internal sources within the

company and externally these sources include books and periodicals, published reports and

data of IFFCO and the annual reports of the company. Interaction with the various employees

of the marketing accounts department has also been a major source of information. No

primary data has been used as a part of this study.

The analysis of working capital is based on ratio analysis to monitor overall trends in

working capital and to identify areas requiring closer management.

Limitations of the Study

The following are the limitations of this summer project training:

The study is limited to five financial years i.e. from 2005-2009.

The data used in this study has been taken from the Financial Statements & their

related schedules of IFFCO Ltd., New Delhi as per the requirement.

Some of the information that was essential for this study cannot however be given in

this report due to their confidential nature.

The scope and area of the study was limited to corporate office of IFFCO, New Delhi

only.


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IFFCO – The Organization

Indian Farmers Fertiliser Co-operative Limited

(IFFCO) was registered on November 3, 1967

as a Multi-unit Co-operative Society. It was a

unique venture in which the farmers of the

country through their own Co-operative

Societies created this new institution to

safeguard their interests. The numbers of co-

operative societies associated with IFFCO have

risen from 57 in 1967 to 38, 155 at present. On

the enactment of the Multistate Cooperative Societies act 1984 & 2002, the Society is

deemed to be registered as a Multistate Cooperative Society. The byelaws of the Society

provide a broad frame work for the activities of IFFCO as a Cooperative Society.

IFFCO commissioned an Ammonia - urea complex at Kalol and the NPK/DAP plant at

Kandla both in the state of Gujarat in 1975. Another Ammonia - urea complex was set up at

Phulpur in the state of Uttar Pradesh in 1981. The ammonia - urea unit at Aonla was

commissioned in 1988.

In 1993, IFFCO had drawn up a major expansion programme of all the four plants under

overall aegis of IFFCO VISION 2000. The expansion projects at Aonla, Kalol, Phulpur and

Kandla have been completed on schedule. Thus all the projects conceived as part of Vision

2000 have been realised without time or cost overruns. All the production units of IFFCO

have established a reputation for excellence and quality.

A new growth path has been chalked out to realise newer dreams and greater heights through

Vision 2010 which is presently under implementation. As part of the new vision, IFFCO has

acquired fertiliser unit at Paradeep in Orissa in September 2005. As a result of these

expansion projects and acquisition, IFFCO's annual capacity has been increased to 3.69

million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes of P2O5.


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Mission

IFFCO's mission is "to enable Indian farmers to prosper through timely supply of reliable,

high quality agricultural inputs and services in an environmentally sustainable manner and to

undertake other activities to improve their welfare."

To provide to farmers high quality fertilizers in right time and in adequate quantities

with an objective to increase crop productivity.

To make plants energy efficient and continually review various schemes to conserve

energy.

Commitment to health, safety, environment and forestry development to enrich the

quality of community life.

Commitment to social responsibilities for a strong social fabric.

To institutionalise core values and create a culture of team building, empowerment

and innovation which would help in incremental growth of employees and enable

achievement of strategic objectives.

Foster a culture of trust, openness and mutual concern to make working a stimulating

and challenging experience for stake holders.

Building a value driven organisation with an improved and responsive customer

focus. A true commitment to transparency, accountability and integrity in principle

and practice.

To acquire, assimilate and adopt reliable, efficient and cost effective technologies.

Sourcing raw materials for production of phosphatic fertilisers at economical cost by

entering into Joint Ventures outside India.

To ensure growth in core and non-core sectors.

A true Cooperative Society committed for fostering cooperative movement in the country.

IFFCO is emerging as a dynamic organisation, focussing on strategic strengths, seizing

opportunities for generating and building upon past success, enhancing earnings to maximise

the shareholders' value.


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Vision

To augment the incremental incomes of farmers by helping them to increase their crop

productivity through balanced use of energy efficient fertilizers, maintain the environmental

health and to make cooperative societies economically & democratically strong for

professionalized services to the farming community to ensure an empowered rural India.

Vision 2010

Encouraged by the success of Vision 2000, IFFCO has charted on a new course of action to

realise a fresh set of dreams. A high powered committee has been constituted to steer the

organisation through this Road Map. Activities being actively pursued through the strategy

are:

Phosphoric Acid plant

Foray into Power Sector to set up a 500 MW power project

Ammonia Plant for supplies to Kandla Unit

IFFCO Kisan Bazar

IFFCO Bank

Multi Commodity Exchange

Acquisition of Fertilizer Plants

Nellore Fertilizer Project

Agri business

The Approach

To achieve their mission, IFFCO as a cooperative society, undertakes several activities

covering a broad spectrum of areas to promote welfare of member cooperatives and farmers.

The activities envisaged to be covered are exhaustively defined in IFFCO’s Bye-laws.

The Commitment

The thirst for ever improving the services to farmers and member co-operatives is insatiable,

commitment to quality is insurmountable and harnessing of mother earths' bounty to drive

hunger away from India in an ecologically sustainable manner is the prime mission.


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Plants owned by IFFCO

Kalol Unit (Ammonia - Urea complex)

P. O. Kasturinagar, District Gandhinagar, Gujarat - 382423

Kandla Unit (NPK/DAP plant)

P. O. Kandla, Gandhidham, Kandla (Kachchh), Gujarat - 370201

Phulpur Unit (Ammonia - urea complex)

P. O. Ghiyanagar, District Allahabad, Uttar Pradesh - 212404

Aonla Unit (Ammonia - Urea unit)

P. O. IFFCO Township, Paul Pothen Nagar, Bareilly, Uttar Pradesh - 243403

Paradeep Unit (NPK/DAP and Phosphoric Acid Fertiliser unit)

Village Musadia, P. O. Paradeep, District Jagatsinghpur, Orissa - 754142

Production and Sales

During the year 2008-09 IFFCO produced 71.68 Lakh (7.168 million) MT (Metric Tonnes)

of fertiliser material, consisting of 40.68 lakh MT of Urea and 31.00 lakh MT NPK/DAP. It

contributes 21.4% of country’s total nitrogenous fertiliser production and 27% of total

phosphatic fertiliser production in the same period.

PRODUCTION

(in LAKH MT)

YEAR UREA NPK / DAP TOTAL

2006-07 37.87 32.26 70.132007-08 39.63 28.84 68.472008-09 40.68 31 71.68


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SALES OF FERTILIZER MATERIAL

(in Lakh MT)

Material 2008-09 2007-08 2006-07

UREA 58.69 54.29 52.41

NPK/ DAP 53.89 38.95 33.69

TOTAL 112.58 93.24 86.10

PLANT WISE PRODUCTION

Unit 2008-09 2007-08

ProductionCapacity

UtilizationProduction

Capacity Utilization

(Lakh MT) (percent) (Lakh MT) (percent)UREAKalol 5.60 102.80 5.45 100.00


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Phulpur –I 6.63 120.30 6.30 114.30Phulpur – II 8.40 97.20 9.24 106.90Aonla – I 9.87 114.10 8.76 101.30Aonla – II 10.18 117.80 9.89 114.40SUB TOTAL UREA 40.68 110.30 39.63 107.40NPK / DAPKandla 17.94 74.30 20.18 83.50Paradeep 13.06 68.00 8.66 45.10SUB TOTAL NPK / DAP 31.00 71.40 28.84 66.50

TOTAL PRODUCTION 71.68 89.20 68.47 85.30

All India Capacity, Production and Capacity Utilization of Fertilizer Industry

Year N P2O5

Capacity ProductionCapacity

Utilization (%)

Capacity ProductionCapacity

Utilization (%)

2004-05 12208 11304.9 93.4 5480.4 4038.4 75.52005-06 12288.4 11332.9 94.5 5459.6 4202.6 78.52006-07 12290.4 11524.9 95.6 5736.3 4440 78.52007-08 12290.4 10902.8 95.2 5874.6 3714.3 64.72008-09 12290.4 10900.2 95.2 5892.3 3417.3 58.5

Sector Wise Capacity and Production of N and P2O5

(capacity: As on 1.11.2009)(production: 2008-09 April-March)

(Figures in '000 tonne nutrient)Sector N P2O5

Capacity Production Capacity ProductionNP/

NPKs SSP Total NP/NPKs SSP TotalPublic 3591.5 2973.2 386.7 - 386.7 191.7 - 191.7


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Private 6030.3 4829.9 2860.1 1225 4085.1 1903.9 405.4 2309.3

Cooperative 3423.4 3133.1 1712.8 - 1712.8 916.3 - 916.3

Total 13045.2 10900.2 4959.6 1225 6184.6 3011.9 405.4 3417.3

Capacity and Investment in the Fertilizer Industry

Year / Period Capacity During the Investments During the Period ( in Rs. Crore )Period

(in '000 tonnes) Sectors

N P2O5

Public Cooperative Private Total

2004-2005 62 39 - - 10 10

(as on 1.11.2004) 12229 54277474.

5 4231.5 14227.9 25933.92005-2006 -21 1 - - 3 3

(as on 1.11.2005) 12208 54287474.

5 4231.5 14230.9 25936.92006-2007 52 243 350 - 35 385

(as on 1.11.2006) 12260 56717824.

5 4231.5 14265.9 26321.92007-2008 30 204 - - 15 15

(as on 1.11.2007) 12290 58757824.

5 4231.5 14280.9 26336.92008-2009 - 17 - - 55 55

(as on 1.11.2008) 12290 58927824.

5 4231.5 14335.9 26391.92009-2010 755 293 - 350 470 820

(as on 1.11.2009) 13045 61857824.

5 4581.5 14805.9 27211.9

BIO – FERTILISERS

Bio-fertilisers are capable of fixing atmospheric nitrogen when suitable crops are inoculated

with them. Bio-fertilisers are low cost, effective, environmental friendly and renewable

source of plant nutrients to supplement fertilisers. Integration of chemical, organic and

biological sources of plant nutrients and their management is necessary for maintaining soil


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health for sustainable agriculture. The bacterial organisms present in the bio-fertiliser either

fix atmospheric nitrogen or solubilise insoluble forms of soil phosphate. The range of

nitrogen fixed per ha/year varies from crop to crop; it is 80 - 85 kg for cow pea, 50 - 60 kg for

groundnut, 60 - 80 kg for soybean and 50 - 55 kg for moongbean.

All India Production and Dispatches of Bio Fertilizers

( in tonnes)Year Production Dispatches

2004-05 10479 10427.62005-06 11752.4 11357.62006-07 15871 157452007-08 20111.1 201002008-09 24455 24400

Prices of IFFCO's Fertilisers

(Applicable only within India)

UREA NPK DAP MOP

N-46% 10-26-26 12-32-16 20:20:00 18-46-0 K-60%

M.R.P. 4830 7197 7637 6295 9350 4455

Local Taxes Extra, where ever applicable.

Joint Ventures of IFFCO

Indian Potash Limited (IPL)

The Society holds an investment of Rs. 2.68 Crore (2008-09) in Indian Potash

Limited (IPL) with equity share holding of 34 per cent in the paid up equity share

capital of IPL. IPL is primarily engaged in trading of imported Potassic and Non-

Potassic Fertilisers.


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Industries Chimiques Du Senegal (ICS)

The Society holds 18.54 per cent equity (2008-09) in ICS, which manufactures

Phosphoric Acid for exports and Phosphatic Fertilisers for domestic consumption.

ICS has the capacity to produce 660000 MT of Phosphoric Acid (as P2O5) per year.

The Government of Senegal and IFFCO signed an Agreement on 16th July, 2007 and

Amendment on 14th January, 2008, for the debt restructuring and recapitalisation of

ICS. Post restructuring and recapitalisation, the new Board has been reconstituted and

the IFFCO Consortium has taken over the management control of ICS.

Indo Egyptian Fertilisers Company, SAE (IEFC)

The Society promoted a joint venture in Egypt, namely ‘Indo Egyptian Fertilisers

Company SAE’ (IEFC) along with El Nasr Mining Company of Egypt to set up a

Phosphoric Acid plant with a capacity of 1500 tonnes P2O5 per day. IEFC was

incorporated in Egypt as a Joint Stock Company on 15th November, 2005 with

shareholding of IFFCO and its affiliates at 76 percent and El Nasr Mining Co. Egypt

holding 24 per cent equity.

Oman India Fertiliser Company (OMIFCO)

Oman India Fertiliser Company (OMIFCO) is a Joint Venture Company in Oman in

which the Society has invested an amount of Rs. 329.08 Crore (2008-09) to acquire

25 percent equity in OMIFCO, which has an installed capacity of 16.52 lakh tonne

Urea and 2.5 lakh tonne surplus Ammonia. OMIFCO commenced commercial

production at its plant at Sur (Oman) with effect from 14th July, 2005.

Jordan India Fertilizer Company (JIFCO)

IFFCO and Jordan Phosphate Mines Company (JPMC), Jordan have formed a

Limited Liability Joint Venture Company, namely Jordan India Fertilizer Company

(JIFCO) on 6th March, 2008 in Amman, Jordan under the ‘Free Zone’ system to set

up a phosphoric acid plant of capacity 1500 tonnes per day P2O5 at Eshidiya in

Jordan. In this company, IFFCO holds 52 per cent equity, while JPMC holds 48 per

cent equity.

Aria Chemicals (Orissa) Limited


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Aria Chemicals (Orissa) Ltd. is a joint venture between IFFCO and Aria Chemicals

Private Limited, Chennai wherein IFFCO holds 40 percent equity in this project. This

Company will set up an Aluminium Fluoride facility at Paradeep.

Sector Diversification of IFFCO

IFFCO-TOKIO General Insurance Company Limited (ITGI)

IFFCO TOKIO General Insurance Company Limited (ITGI) was formed as a Joint

Venture Company in the year 2000 for underwriting general insurance business in

India. Out of total equity capital of Rs. 247 Crore in ITGI, the Society and its

associates hold 74 percent equity and Tokio Marine Asia holds 26 percent.

ITGI had launched products like, ‘Barish Bima Yojna’, ‘Mausam Bima Yojna’ and

‘Kisan Suvidha Bima Yojna’ to cater to the insurance requirements of the farmers.

During the year ITGI has launched various micro insurance policies like ‘Janta Bima

Yojna’, ‘Jansuraksha Bima Yojna’, ‘Janswasthya Bima Yojna’ and ‘Mahila Suraksha

Bima Yojna’ to provide protection to the farmers and their families and also poorer

sections for their household goods, personal accident and health.

IFFCO Chhattisgarh Power limited (ICPL)

The Society has diversified into the Power Sector by incorporating a Joint Venture

Company namely ‘IFFCO Chhattisgarh Power Limited’ (ICPL) with Chhattisgarh

State Electricity Board (CSEB) to set up a 1320 MW coal-based Mega Power Plant in

District Surguja of Chhattisgarh. The Society will hold 74 per cent equity in ICPL.

National Commodity and Derivatives Exchange Ltd. (NCDEX)

The Society holds 12 percent equity in the Paid-up Share Capital (Rs. 30 Crore) and

the entire preference capital of Rs. 10 Crore in the National Commodity and

Derivative Exchange Limited (NCDEX).

NCDEX is a demutualised, on-line national level commodity exchange providing a

trading platform for futures trading in commodities in the country and offers its

market participants opportunity at price discovery and price risk hedging. Currently,

NCDEX offers contracts in 56 commodities, that is, 42 agricultural commodities, 2

bullion, 6 metals, 2 energy and 3 polymers and 1 environment (carbon credit).


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National Collateral Management Services Ltd. (NCMSL)

Along with other reputed institutions, IFFCO co-promoted National Collateral

Management Services Limited (NCMSL) in the year 2004. The Society holds 13.56

per cent of the paid up equity capital in NCMSL. NCMSL is engaged in providing

various risk management services related to commodities like Storage and

Preservation services, Collateral Management services, Procurement services, Quality

Testing and Certification services and Information services.

Freeplay Energy India Pvt. Ltd.

During the year 2008-09, the Society made an investment of Rs. 4.83 Crore to acquire

30 percent shareholding in Freeplay Energy India Pvt. Ltd. (FPEI), which is engaged

in the field of non-conventional energy products and devices suitable for rural India.

These products are being marketed to co-operative societies through Society’s another

subsidiary company, that is, ‘IFFCO Kisan Sanchar Ltd’. The utility of these products

has been greatly appreciated by the rural farmers.

Organizations promoted by IFFCO

IFFCO has promoted several institutions and organisations to work for the welfare of

farmers, strengthening cooperative movement, improve Indian agriculture.

Indian Farm Forestry Development Cooperative (IFFDC)

Indian Farm Forestry Development Cooperative, a multi-state cooperative society

promoted by IFFCO, has been implementing afforestation projects in Uttar Pradesh,

Rajasthan & Madhya Pradesh. The Society has been floated under contribution

agreement signed between IFFCO and India - Canada Environment Facility (ICEF).

Development of Primary Farm Forestry Cooperative Societies (PFFCS) is an

important activity undertaken towards afforestation of waste lands. High participation

of women is an important feature of the IFFDC.

Cooperative Rural Development Trust (CORDET)

IFFCO promoted Cooperative Rural Development Trust (CORDET) in the year 1979

to provide education and training to farmers on various aspects of crop production,

horticulture, animal husbandry, farm machinery etc.


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IFFCO Kisan Sewa Trust (IKST)

Objective: A Relief Trust for the Welfare of the Victims of Natural Calamities

Kisan Sewa Trust Fund was created out of contributions from:

IFFCO

Employees of IFFCO

Cooperative Societies and others

TOTAL

Rs 100 million

Rs 10 million

Rs 90 million

Rs 200 million

IFFCO had always been in the forefront of activities for the rescue of victims of

natural calamities. Every year significant contributions, both monetary as well as in

kind, are made by IFFCO along with separate contributions by the employees.

IFFCO Kisan Sanchar Limited (IKSL)

IFFCO Kisan Sanchar Limited was incorporated in April, 2007 with the objective to

use the information technology to empower farmers in rural areas and to strengthen

the cooperative network in the country. The highlight of IKSL’s services in the rural

telecom domain continues to be Valued Added Services (VAS) extended to the

subscribers. Five free voice messages of immediate relevance to people living in rural

areas, a Help Line with experts to provide information inputs to the farmers and

several other innovative activities for subscribers constitute a major source of

knowledge transfer.

An ambitious project 'ICT Initiatives for Farmers and Cooperatives' is launched to

promote e-culture in rural India. IFFCO obsessively nurtures its relations with farmers and

undertakes a large number of agricultural extension activities for their benefit every year.

At IFFCO, the thirst for ever improving the services to farmers and member co-operatives is

insatiable, commitment to quality is insurmountable and harnessing of mother earths' bounty

to drive hunger away from India in an ecologically sustainable manner is the prime mission.

All that IFFCO cherishes in exchange is an everlasting smile on the face of Indian Farmer

who forms the moving spirit behind this mission.

IFFCO, to day, is a leading player in India's fertiliser industry and is making substantial

contribution to the efforts of Indian Government to increase food grain production in the

country.


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IFFCO is also behind several other companies with the sole intention of benefitting farmers.

The distribution of IFFCO's fertiliser is undertaken through over 38155 co-operative

societies. The entire activities of Distribution, Sales and Promotion are co-ordinated by

Marketing Central Office (MKCO) at New Delhi assisted by the Marketing offices in the

field.

In addition, essential agro-inputs for crop production are made available to the farmers

through a chain of 158 Farmers Service Centre (FSC).

Subsidiaries of IFFCO

Kisan International Trading FZE (KIT)

Kisan International Trading FZE (KIT) was set up as a wholly owned subsidiary of

the Society in Dubai in April 2005. KIT has become a leading international trading

organisation, which handles the import and export of various fertilisers and fertiliser

Raw Materials and Intermediates.

IFFCO Kisan Bazar Ltd.

IFFCO Kisan Bazar Ltd. (IKBL) was incorporated on 26th February, 2004 as

IFFCO’s wholly owned subsidiary company for inter-alia undertaking business in

agri-inputs and consumer goods for the benefit of farmers/cooperatives.

Business and Financial Review of Subsidiaries and Associates

Even in the year of global economic meltdown, the business portfolio has been steadily

growing in tandem with the high growth aspirations. The organization have stepped up

investments in related businesses through various Joint Ventures and Associate Companies in

order to strengthen themselves further by looking at new opportunities that are unfolding and

create value addition in the core fertiliser sector.

On 31st March 2009, the total investments were Rs. 914 Crore in comparison to Rs.770.57

Crore on 31st March 2008 as per the following break-up:

(Rs. In Crore)

As on 31st March

2009 2008

Investment in Jt. Ventures/Subsidiaries 888.27 750.13

Investment in Business Associates 25.73 20.44


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Total 914.00 770.57

Financial Performance

As per its tradition, the Society has again exhibited an impressive financial performance in all

its major parameters, namely, Revenue Growth and Resource Utilisation, testifying to the

robustness of its Corporate Strategy of creating multiple drivers of growth in spite of

constraints in the availability of raw materials, the Global Economic Meltdown and

inordinate delays in receipt of large subsidy amounts from the Government of India. This was

possible due to higher production, sales volume and improvement in operating efficiencies.

The Society achieved the highest ever sales turnover of Rs 32,933 Crore. This represents an

increase of 170 per cent over the previous year. While, the sales volume of fertiliser material

increased by 20 per cent to 112.58 lakh MT fertiliser during 2008-09, as against 93.24 lakh

MT in the previous year, the major increase in the sales turnover was on account of

substantial increase in the commodity prices. The performance is even more satisfying when

viewed in the light of the challenging business environment of the fertiliser industry.

Sources and Uses of Funds

The Cash Flow from Operating, Investing and Financing activities as reflected in the Cash

Flow Statement is summarised in the following table:

(Rs. In Crore)

2008-09 2007-08

Cash provided by operating activities 1560 1072

Cash Used in Investing activities (6578) (970)

Cash provided by financing activities 4844 (190)

Decrease in cash and cash equivalents (174) (88)

Corporate Governance

The Society has consistently followed transparent, democratic and professional practices in

Corporate Governance since its inception. We have carved out a strong ‘Cooperative

Identity’ and are making sincere efforts to uphold the ‘Cooperative Values’ by cherishing

‘Cooperative Principles’. The Society’s endeavour has been to achieve the highest levels of

transparency, accountability and full disclosure to its shareholders in a bid to uphold the spirit

of Cooperative Principles and Cooperative Values by following the charter as lay down by


24

International Cooperative Alliance (ICA). The activities of the Society have been conducted

within the provisions of the Multi State Cooperative Societies Act/Rules and IFFCO Bye-

laws. A separate detailed report on Corporate Governance is given along with the Annual

Report.

Financial Ratings

The Society’s excellent credit ratings with bankers and rating agencies allows access to short

term funds including foreign currency borrowings at competitive rates. Ratings assigned by

different Rating Agencies to the Society were as under:

CRISIL Ratings

Rating for Governance and Value Creation (GVC) Practices of IFFCO

CRISIL has, assigned a “GVC Level 2” rating to IFFCO. This rating indicates that

the capability of the Society with respect to wealth creation for all its stakeholders,

while adopting sound corporate governance practices, is high.

Rating for the Rs. 100 crore Commercial Paper Programme of IFFCO

CRISIL has assigned a “P1+ (pronounced “P One Plus”) rating to IFFCO’s

Rs.100 Crore Commercial Paper Programme. This rating indicates that the degree

of safety with regard to timely payment of interest and principal on the instrument

is Very Strong.

Rating for the Rs. 400 crore Bonds Programme of IFFCO

CRISIL has assigned the rating on IFFCO’s Long Term Borrowing Programme to

AA/Stable. The rating indicates high degree of safety with regard to timely

payment of interest and principal on the instrument.

FITCH Ratings

Rating for the Rs. 100 crore Commercial Paper Programmes of IFFCO

FITCH Ratings has assigned a National Short Term Rating of ‘F1+ (Ind)’to

IFFCO’s Rs. 100 crore Commercial Paper Programme. This rating indicates that

the degree of safety with regard to timely payment of interest and principal on the

instrument is Very Strong.

Rating for Long Term Borrowing Programme of IFFCO

FITCH Ratings assigned National Long - Term Rating of ‘AA+ (Ind)’ to the Long

Term Debt Programme of IFFCO. The outlook on the Long Term Rating is


25

“Stable”. This rating indicates high degree of safety with regard to timely

payment of interest and principal on the instrument.

CARE Ratings

PR 1+ (P One Plus) rating to IFFCO’s Working Capital facilities/Short Term

Loans having tenure of up to one year.

CARE AA’ (Double A) rating to External Commercial Borrowings and other

existing long term borrowings having tenure of over one year.

Value Added

Value Added is the wealth which an enterprise has been able to create through the collective

effort of capital, management and employees. In economic terms, value added is the market

price of the output of an enterprise less the price of the goods and services acquired by

transfer. Value Added can provide a useful measure in gauging performance and activity of

the company.

Figure: Allocation of Value Added


26

Significant Accounting Policies

1. Basis of Preparation of Financial Statements

The Financial Statements are prepared on accrual basis of accounting under the

historical cost convention in accordance with the generally accepted accounting

principles in India, the Accounting Standards issued by the Institute of Chartered

Accountants of India and the relevant provisions of Multi State Co-operative Societies

Act, 2002.

2. Use of Estimates

The preparation of financial statements, in conformity with the generally accepted

accounting principles, require estimates and assumptions to be made that affect the

reported amount of assets and liabilities as of the date of the financial statements and

the reported amount of revenues and expenses during the reporting period.

Difference between the actual results and estimates are recognized in the period in

which the results materialise.

3. Fixed Assets

(i). Fixed Assets are stated at historical cost less accumulated depreciation. Cost

comprises of the purchase price and any attributable cost of bringing the asset

to its working condition for its intended use.

(ii). Assets retired from active use and held for disposal are shown separately

under Fixed Assets at lower of net book value and estimated realisable value.

4. Expenditure incurred during Construction Period

In respect of new/major expansion of units, the indirect expenditure incurred during

construction period up to the date of the commencement of commercial production,

which is attributable to the construction of the project, is capitalised on proportionate

basis.

5. Intangible Assets

An intangible asset is recognised where it is probable that the future economic

benefits attributable to the asset will flow to the Society and the cost of the asset can

be measured reliably. Such assets are stated at cost less accumulated amortisation.

6. Impairment of Assets

At each balance sheet date an assessment is made whether any indication exists that

an asset has been impaired. If any such indication exists, an impairment loss i.e. the


27

amount by which the carrying amount of an asset exceeds its recoverable amount, is

provided in the books of account.

7. Investments

i) Long Term Investments are carried at cost. Provision for diminution in the value

of such investments is made to recognise a decline, other than temporary, in the

value of the investments.

ii) Current Investments are valued at lower of cost and fair value determined on an

individual investment basis.

8. Depreciation / Amortisation

(a) Depreciation on Fixed Assets is provided on Straight Line Method as

follows:

(i) In respect of assets acquired up to 31st March, 1990 at the rates

prescribed under Income tax Act, 1961 and rules framed there under.

(ii) In respect of assets acquired after 31st March,1990 at the rates based on

schedule XIV to the Companies Act,1956 except for fixed assets taken

over at Paradeep Unit which are depreciated based on useful life of

such assets.

(b) Assets are depreciated to the extent of 95% of the original cost except

assets individually costing up to Rs.5000/- which are fully depreciated in

the year of acquisition.

(c) Railway wagons under "Own Your Wagon Scheme" are depreciated over a

period of ten years.

(d) Machinery Spares which can be used only in connection with an item of

Plant & Machinery and its use is expected to be irregular, are fully

depreciated over the remaining useful life of the related asset.

(e) Premium paid for acquisition of leasehold land, other than those acquired

under perpetual lease basis, is amortised over the period of lease.

(f) Leasehold Buildings are fully depreciated over the period of lease in case

period of lease is less than the useful life derived from the rates as per

Schedule- XIV of Companies Act.

(g) Additions to assets are depreciated for the full year irrespective of the date

of addition and no depreciation is provided on assets sold/ discarded

during the year. However, in the case of capitalisation of project,


28

depreciation is provided on a pro-rata basis from the date of

commencement of commercial production.

(h) Intangible assets are amortised over their estimated useful lives but not

exceeding ten years when the asset is available for use.

9. Provisions, Contingent Liabilities and Contingent Assets

(a) Provisions are recognised for liabilities that can be measured by using a substantial

degree of estimation, if:

i) The Company has a present obligation as a result of a past event;

ii) A probable outflow of resources embodying economic benefits is

expected to

settle the obligation; and

iii) The amount of the obligation can be reliably estimated.

(b) Contingent liability is disclosed in case of :

i) Present obligation arising from a past event when it is not probable that an

outflow of resources embodying economic benefits will be required to settle

the obligation.

ii) Possible obligation, unless the probability of outflow in settlement is remote.

(c) Reimbursement expected in respect of expenditure required to settle a provision is

recognised only when it is virtually certain that the reimbursement will be received.

(d) Contingent assets are neither recognised nor disclosed in the financial statements.

10. Operating Leases

Assets acquired on leases wherein a significant portion of the risks and rewards of

ownership are retained by the lessors are classified as operating leases. Lease rentals

paid for such leases are recognised as an expense on straight line basis over the term

of lease.

11. Prior Period Income / Expenditure

Income/Expenditure items relating to prior period(s) not exceeding Rs.2,00,000/- each

is treated as Income/ Expenditure for the current year.

12. Pre-Paid Expenses

Expenditure up to Rs.50000/- in each case except Insurance Premium is accounted for

in the year in which the same is incurred.


29

CHAPTER 1


30


Data AnalysisOperating Cycles

1. Days Inventory Outstanding (DIO)

Days Inventory Outstanding (DIO)

=Average Inventory

Cost of Goods sold (COGS) / 365

(in Rs. Crores)

Year Average Inventory COGS DIO (number of days)

2004-05 976.03 6809.48 52.317

2005-06 1225.57 9166.48 48.801

2006-07 1901.79 9578.09 72.473

2007-08 1930.52 11336.77 62.155

2008-09 1654.23 31496.75 19.170


31

Analysis

The smaller the number of days of inventory outstanding, the more efficient a company is.

IFFCO day inventory outstanding is around 19 days for the year 2008-09 which is very

good. Inventory is held for less time and less money is tied up in inventory. Instead, money is

freed up for things like research and development, marketing or even share buybacks and

dividend payments.

The DIO had always been showing a decreasing trend apart from the period of 2006-07 in

which inventory was build up due to the purchase of Paradeep plant.

2. Days Sales Outstanding

Days Sales Outstanding (DSO)

=Average Accounts Receivable

Net Sales / 365

YearAvg. A/c Receivables

(in crores)Net Sales

(in Crores)DSO (number of

days)

2004-05 397.025 7396.87 19.591

2005-06 399.495 9942.93 14.665

2006-07 418.04 10330.11 14.771

2007-08 387.72 12162.82 11.635

2008-09 410.495 32933.30 4.550


32

Analysis

Days Sales Outstanding (DSO) looks at the number of days needed to collect on sales and

involves Accounts Receivables. While cash-only sales have a DSO of zero, people do use

credit extended by the company, so this number is going to be positive.

Most of sales of IFFCO are on cash basis and sales to large institutions only are on

credit basis. The DSO for the year 2008-09 is 4.550, which is very good for the company.

The DSO is showing a decreasing trend meaning that the days to collect on sales are

decreasing every year.

3. Days Payable Outstanding

Days Payable Outstanding (DPO)

=Average Accounts Payable


(in Rs. Crores)

YearAverage Accounts

PayableCOGS

DPO (number of days)

2004-05 728.425 6809.48 39.0452005-06 934.165 9166.48 37.1982006-07 913.425 9578.09 34.8092007-08 833.87 11336.77 26.8472008-09 1664.225 31496.75 19.286


33

Analysis

This involves the company's payment of its own bills or Accounts Payables. If this can be

maximized, the company holds onto cash longer, maximizing its investment potential.

The DPO of IFFCO is around 19 days for the year 2008-09. It is also observed that DPO

is decreasing every year. From the data provided, it is found out that IFFCO had sufficient

funds to make payments of its own bills and make investments in various activities.

4. Gross Operating Cycle

Gross Operating cycle (GOC)

= DIO + DSO

(in Days)Year DIO DSO GOC

2004-05 52.317 19.591 71.908

2005-06 48.801 14.665 63.466

2006-07 72.473 14.771 87.244

2007-08 62.155 11.635 73.791

2008-09 19.170 4.550 23.720


34

Analysis

Gross operating cycle is a tool which measures the total number of days from the day the

purchases are made or the stock arrives to the day all the collections are made. Cash is said to

be blocked till the collections have been collected. So the sooner the cash is received from the

consumers the better is for the company as they get cash for further production.

IFFCO gross operating cycle is around 24 days. This is very good for the company as a

fast turnover rate of these assets is what creates real liquidity and is a positive indication of

the quality and the efficient management of inventory and receivables.

5. Cash Conversion Cycle (CCC)

Cash Conversion

Cycle (CCC)= DIO + DSO - DPO

(in Days)Year DIO DSO DPO CCC

2004-05 52.317 19.591 39.045 32.863

2005-06 48.801 14.665 37.198 26.269

2006-07 72.473 14.771 34.809 52.435

2007-08 62.155 11.635 26.847 46.943


35

2008-09 19.170 4.550 19.286 4.434

Analysis

The cash conversion cycle (CCC) measures how fast a company can convert cash on hand

into even more cash on hand. The CCC does this by following the cash as it is first converted

into inventory and accounts payable (AP), through sales and accounts receivable (AR), and

then back into cash.

IFFCO CCC is of around 4.4 days in the year 2008-09. This means that the company is

able to generate the cash within this period after making it payments of its own bills. Since it

is very low, it is good for the company.

Ratios related to Inventory Management

1. Inventory Turnover Ratio

Inventory Turnover Ratio

= Cost of Goods sold (COGS)Average Inventory

(in Rs. Crores)

Year COGS Average InventoryInventory Turnover

Ratio

2004-05 6809.48 976.03 6.977

2005-06 9166.48 1225.57 7.479

2006-07 9578.09 1901.79 5.036

2007-08 11336.77 1930.52 5.872

2008-09 31496.75 1654.23 19.040


36

Analysis

The inventory turnover ratio at IFFCO is 19.040 in 2008-09. It means that that the

company is turning its inventory of finished goods into sales 19.040 times in a year and is in

good position. There had been a decrease in the inventory turnover ratio from 7.479 in 2005-

06 to 5.036 in 2006-07. During this period, there was a large amount of inventory in the

company because of the purchase of the Paradeep production plant. During all other period,

the turnover is always increasing.

2. Inventory to Working Capital Ratio

Inventory to Working

Capital Ratio

= Inventory X 100Working Capital

YearInventory (in Crores)

Working Capital (in Crores)

Inventory to Working Capital

Ratio

2004-05 931.50 1499.14 62.136

2005-06 1519.64 3387.39 44.862

2006-07 2283.94 4880.05 46.802

2007-08 1577.10 4404.17 35.809

2008-09 1731.36 4490.10 38.559


37

Analysis

The Inventory to Working Capital Ratio measures how well the company is able to

generate cash using working capital at its current inventory level. An increasing inventory to

working capital ratio is generally a negative sign, showing the company may be having

operational problems. If a company has too much working capital invested in inventory, they

may have difficulty having enough working capital to make payments on short term liabilities

and accounts payable.

Inventory to working capital ratio for IFFCO has been decreasing consistently with

increasing very marginally in the year 2006-07 and in 2008-09.

3. Inventory to Current Assets Ratio

Inventory to Current Assets

Ratio

= Inventory X 100Current Assets


Current Assets (in Crores)

Inventory to Current Assets Ratio

2004-05 931.50 2603.98 35.7722005-06 1519.64 4748.98 31.9992006-07 2283.94 6081.28 37.5572007-08 1577.10 5775.74 27.3062008-09 1731.36 7672.99 22.564


38

Analysis

The Inventory to Current Assets Ratio measures that how much percentage of current

assets is formed by the inventories. An increasing inventory to current assets ratio is a

negative sign. It means that more & more percentage of current assets is being constituted by

the inventories. This indicates poor operational efficiency of the organization. Also it shows

that the funds invested in current assets to meet obligations on a short notice are actually

illiquid to some extent and it may be difficult to convert them into cash immediately.

Normally, less than 50 % of current assets are treated as average position of inventory.

IFFCO has shown a decrease in this ratio over the past years, which indicates a GOOD

inventory position for IFFCO and, the ratio was never been above 38%.

4. Inventory to Sales Ratio

Inventory to Sales Ratio

= Inventory X 100Sales


Sales (in Crores)


2004-05 931.50 7396.87 12.5932005-06 1519.64 9942.93 15.2842006-07 2283.94 10330.11 22.1102007-08 1577.10 12162.82 12.9672008-09 1731.36 32933.30 5.257


39

Analysis

The Inventory to Sales Ratio measures the percentage of inventory the company currently

has on hand to support the current amount of sales. An increasing Inventory to Sales ratio is

generally a negative sign, showing the company may be having trouble keeping inventory

down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the

company may be facing.

As per the data of IFFCO, this ratio had increased initially till the year 2006-07 but is falling

down consistently after that time, which is a POSITIVE sign indicating good movement of

inventory.

Ratios related to Receivable Management

1. Debtors turnover ratio

Debtor Turnover Ratio

= Net SalesAverage Accounts Receivable

YearNet Sales

(in Crores)Avg. A/c Receivables

(in Crores)Debtor Turnover

Ratio

2004-05 7396.87 397.03 18.6312005-06 9942.93 399.50 24.8882006-07 10330.11 418.04 24.7112007-08 12162.82 387.72 31.370


40

2008-09 32933.30 410.50 80.227

Analysis

This ratio is also known as Accounts Receivable Turnover Ratio and measures the number

of times Accounts Receivables were collected during the year. This is also a measure of how

well the company collects sales on credit from its customers.

IFFCO have a high and increasing Accounts Receivable Turnover which is a Positive

Sign. The company is able to turnover its debtors 80.227 times in a year.

2. Average collection period

Average Collection

Period=

360Debtor Turnover

Ratio

YearSales

(in Crores)

Average Debtors

(in Crores)

Debtor Turnover

Ratio

Average Collection

Period

2004-05 7396.87 397.03 18.631 19.3232005-06 9942.93 399.50 24.888 14.4652006-07 10330.11 418.04 24.711 14.5692007-08 12162.82 387.72 31.370 11.4762008-09 32933.30 410.50 80.227 4.487


41

Analysis

The Average Collection Period represents the average number of days for which a firm

takes to collect accounts receivables. It measures the quantity of debtors.

The Average Collection Period for IFFCO was around 4.5 days in 2008-09. This is extremely

good considering the fact that IFFCO is a fertilizer company, and functions as a cooperative.

The maximum collection period during this five year period is around 17 days in the year

2005-06 and is decreasing since then.

3. Debtors to current assets ratio

Debtors to Current Assets

Ratio

= Debtors X 100Current Assets

YearDebtors

(in Crores)Current Assets

(in Crores)Debtors to Current

Assets Ratio

2004-05 324.59 2603.98 12.4652005-06 474.40 4748.98 9.9902006-07 361.68 6081.28 5.9472007-08 413.76 5775.74 7.1642008-09 407.23 7672.99 5.307


42

Analysis

Debtors to Current Assets Ratio indicates the position of debtors in total current assets.

This ratio is calculated by debtors with current assets. If debtors are average or less than

average, it indicates proper realization of debtors. On the other hand, if debtors are very

heavy in respect of other current assets, it indicates poor recovery of the company.

As Per the table, the Debtors to Current Assets Ratio for IFFCO decreased from 2004-05 to

2006-07 and then increased in the year 2007-08 and then decreasing onwards. The decrease is

a healthy sign showing proper realization of debts in 2008-09.

4. Debtors to working capital ratio

Debtors to Working

Capital Ratio

= Debtors X 100Working Capital

YearDebtors

(in Crores)Working Capital

(in Crores)Debtors to Working

Capital Ratio

2004-05 324.59 1499.14 21.6522005-06 474.40 3387.39 14.0052006-07 361.68 4880.05 7.4112007-08 413.76 4404.17 9.3952008-09 407.23 4490.10 9.070


43

Analysis

Working capital is directly related with the position of debtors. If debtors are lower as

compared to Working Capital, then it indicates proper and smooth utilization of working

capital. But on the other hand, the amount of debtor is very large in that condition, Working

capital blocked and operational efficiency is directly affected.

From the data, it can be seen that this ratio for IFFCO has been decreasing which is good for

the company. There was a increment in the year 2007-08 due to increase in the debtors but

again it continued to decrease.

5. Debt to Equity Ratio

Debt to Equity Ratio

= DebtTotal Equity

Year Debt

(in Crores)Equity

(in Crores)Debt to Equity Ratio

2004-05 647.09 3301.15 0.1962005-06 5035.39 3555.38 1.4162006-07 6486.12 3641.84 1.7812007-08 6775.64 3688.66 1.8372008-09 12802.78 3958.87 3.234


44

Analysis

The ratio shows the extent to which debt financing has been used in the business. A high ratio

means that claims of creditors are greater than those of owners. A high level of debt

introduces inflexibility in the firm’s operations due to the increasing interference and pressure

from creditors. A low debt-equity ratio implies a greater claim of owners than capital.

At IFFCO, this ratio is increasing every year. It means that increase in debt of the

company is more than the increase in the equity. In the year 2008-09, it increased to 3.234

from 1.837 in the year 2007-08 because of the major increase in the short term loans from the

banks.

Ratios Related to Cash Management

1. Working capital ratio or current ratio

Current Ratio = Current AssetsCurrent Liabilities

YearCurrent Assets

(in Crores)Current Liabilities

(in Crores)Current Ratio

2004-05 2603.98 1104.84 2.357


45

2005-06 4748.98 1361.58 3.4882006-07 6081.28 1201.23 5.0632007-08 5775.74 1371.57 4.2112008-09 7672.99 3182.89 2.411

Analysis

Working Capital Ratio is used to analyze the short term solvency of the company. Usually a

ratio of 2:1 is considered to be the best current ratio. Higher the ratio, greater is the ability of

the firm to meet its short term obligations.

Current Ratio at IFFCO is always greater than 2 in all five years for which data has been

analyzed indicating that IFFCO never really face a major problem in meeting its short-term

liabilities.

2. Liquid ratio or Acid-test ratio or Quick ratio

Quick Ratio = Current Assets - InventoriesCurrent Liabilities

YearCurrent Assets

(in Crores)

Inventories (in Crores)

Quick Assets

(in Crores)

Current Liabilities (in Crores)

Quick Ratio

2004-05 2603.98 931.50 1672.48 1104.84 1.5142005-06 4748.98 1519.64 3229.34 1361.58 2.3722006-07 6081.28 2283.94 3797.34 1201.23 3.1612007-08 5775.74 1577.10 4198.64 1371.57 3.061


46

2008-09 7672.99 1731.36 5941.63 3182.89 1.867

Analysis

Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered to be

satisfactory. This is so because if the quick assets are equal to the current liabilities then the

company may be able to meet its entire short-term obligations pretty conveniently.

The quick ratio of the company is above 1 for all the five years. The quick ratio was 3.161

and 3.061 during the year 2006-07 and 2007-08 respectively. This is due to large amount of

inventory at IFFCO during that period. However, the reason for this is the purchase of

Paradeep production plant during that period.

3. Cash to current assets ratio

Cash to Current Asset

Ratio=

CashX 100

Current Assets

YearCash


(in Crores)Cash to Current Asset Ratio (%)

2004-05 199.10 2603.98 7.6462005-06 98.22 4748.98 2.0682006-07 330.84 6081.28 5.4402007-08 243.32 5775.74 4.213


47

2008-09 69.63 7672.99 0.907

Analysis

The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of

cash at hand and cash at bank.

Upon analyzing the data of the past 5 years for IFFCO it was observed that the cash balances

formed only a very small percentage of the current assets. In the last 5 years, the highest was

7.65% in the year 2004-05 after which it is decreasing. The ratio had variations in this period

an in the year 2008-09, it was 0.91%. This is a POSITIVE SIGN as it shows effective

utilization of the funds of the organization and there is not much of idle cash with the

organization.

4. Sales to current assets ratio

Sales to Current Asset Ratio

= SalesCurrent Assets

YearSales


(in Crores)Sales to Current Asset

Ratio

2004-05 7396.87 2603.98 2.8412005-06 9942.93 4748.98 2.0942006-07 10330.11 6081.28 1.6992007-08 12162.82 5775.74 2.106


48

2008-09 32933.30 7672.99 4.292

Analysis

The Sales to Current Assets Ratio basically measures how well a company is making use of

its assets in generating sales. An increasing sale to current assets ratio is a POSITIVE SIGN

as it indicates that the company has a healthy production scenario because of which most of

inventory is being converted into sales for the company.

IFFCO has shown a decrease in its sales to current assets ratio from 2004-05 to 2006-07

after which it is constantly increasing which implies that the company is doing well and

inventory is not being held up at any stage in the production process.

5. Working capital turnover ratio

Working Capital = Current Assets - Current Liabilities

Working Capital

Turnover Ratio=

Sales

Average Working Capital

YearSales


(in Crores)Working Capital Turnover Ratio

2004-05 7396.87 1580.36 4.6802005-06 9942.93 2443.27 4.070


49

2006-07 10330.11 4133.72 2.4992007-08 12162.82 4642.11 2.6202008-09 32933.30 4447.14 7.406

Analysis

IFFCO has a high working capital turnover ratio.

A high or increasing Working Capital Turnover is usually a Positive Sign, showing the

company is better able to generate sales from its Working Capital. The company has been

able to gain more Net Sales with the smaller amount of Working Capital in 2008-09 as

compared to that in 2007-08. The working capital turnover had been decreasing from 4.860 in

the year 2004-05 to 2.499 in 2006-07 but it increasing since then to 7.406 in the year 2008-

09.

6. Sales to working capital ratio


Sales to Working

Capital Ratio=

Sales


YearSales


(in Crores)Sales to Working

Capital Ratio

2004-05 7396.87 1580.36 4.6802005-06 9942.93 2443.27 4.070


50

2006-07 10330.11 4133.72 2.4992007-08 12162.82 4642.11 2.6202008-09 32933.30 4447.14 7.406

Analysis

The Sales to Working Capital ratio measures how well the company's working capital is

being used to generate sales. Working Capital represents the major items typically closely

tied to sales, and each item will directly affect this ratio. Increasing Sales to Working Capital

ratio is usually a positive sign, indicating the company is more able to use its working capital

to generate sales.

The sales to working capital ratio has been increasing from 2007-08 for IFFCO which is

good as it implies that the company is generating more & more sales and is able to utilize its

working capital more efficiently with the passing years. The decrease of the ratio in the previous

years was due to the increase in inventory holding which was required for the Paradeep production

plant.

Profitability Ratios

1. Return on Assets

Return on Assets (ROA)

= Profit After Tax

Average Total Assets


51

Analysis

ROA is an indicator of how profitable a company is relative to its total assets. The ROA

figure gives investors an idea of how effectively the company is converting the money it

has to invest into net income. The higher the ROA number, the better, because the company

is earning more money on less investment.


Year Profit After Tax

(in Crores)

Average Total Assets

(in crores)ROA

2004-05 319.64 4449.22 0.0722005-06 341.35 6709.33 0.0512006-07 175.02 9855.58 0.0182007-08 257.59 10830.24 0.0242008-09 360.01 14151.13 0.025

52

At IFFCO, the ROA is increasing from the year 2006-07 which is good for the company.

Earlier it was decreasing as there was increase in the assets due to purchase of the production

plants.

2. Return on Equity

Return on Equity (ROE)

= Profit After TaxAverage Equity


(in Crores)Average Equity

(in crores)ROE

2004-05 319.64 3205.37 0.1002005-06 341.35 3428.27 0.1002006-07 175.02 3598.61 0.0492007-08 257.59 3665.25 0.0702008-09 360.01 3823.77 0.094

Analysis

Return on Equity measures the rate of return on the ownership interest of the common stock

owners. It measures a firm's efficiency at generating profits from every unit of shareholders'

equity. ROE shows how well a company uses investment funds to generate earnings growth.

From the data, IFFCO ROE had always been good. There was a decrease in the year

2006-07 due to the purchase of Paradeep plant which increased the purchases of the

organization.


53

3. Return on Capital Employed

Year Profit Before Tax

(in Crores)

Average Capital Employed (in crores)

ROCE

2004-05 470.92 4449.22 0.10582005-06 481.90 6709.33 0.07182006-07 251.25 9855.58 0.02552007-08 380.52 10830.24 0.03512008-09 441.95 14151.13 0.0312

Analysis

ROCE is used to prove the value the business gains from its assets and liabilities. It basically

can be used to show how much a business is gaining for its assets, or how much it is losing

for its liabilities. At IFFCO, ROCE had shown variable changes. This is due to the


Return on Capital Employed (ROCE)

=Profit Before Tax

Average Capital Employed

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variable increments in the capital employed (majorly the loan funds) as compared to the

profit before tax.

4. Net Profit Margin

Net Profit Margin

= Profit After TaxSales


(in Crores)Sales

(in Crores)Net Profit Margin

2004-05 319.64 7396.87 0.0432005-06 341.35 9942.93 0.0342006-07 175.02 10330.11 0.0172007-08 257.59 12162.82 0.0212008-09 360.01 32933.30 0.011

Analysis

Net profit margin ratio establishes a relationship between net profit and sales and indicates

management’s efficiency in manufacturing, administering and selling the products. This ratio

is the overall measure of the firm’s ability to turn each rupee sales into net profit.

From the data, IFFCO have a variable net profit margin. The sales turnover depend upon

the element of subsidy which is decided by the government from time - to - time depending

on the condition of international market. During the year 2008-09, the component of subsidy

increased tremendously due to high international fertilizer price. Looking at the turnover of


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2008-09, the subsidy amounted to Rs. 25545.60 crores vis-à-vis to subsidy amounted to Rs.

6194.35 crores for the year 2007-08.

Loans and Advances to Current Assets


Ratio

=Loans and Advances

X 100Current Assets

YearLoans and Advances


(in Crores)


Ratio

2004-05 1148.77 2603.98 44.1162005-06 2656.70 4748.98 55.9432006-07 3104.82 6081.28 51.0552007-08 3541.56 5775.74 61.3182008-09 5464.77 7672.99 71.221

Analysis

As per the data, it can be clearly said that the position of the Loans & Advances with respect

to current assets is increasing every year (a marginal decrease in the year 2006-07) which is

very Good for IFFCO. The ratio was around 44.116% in 2004-05 which had increased to

71.221% in 2008-09.


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Loans and Advances to Working Capital


Ratio=

Loans and Advances X 100

Working Capital

YearLoans and Advances


(in Crores)


Ratio (%)

2004-05 1148.77 1499.14 76.6292005-06 2656.70 3387.39 78.4292006-07 3104.82 4880.05 63.6232007-08 3541.56 4404.17 80.4142008-09 5464.77 4490.10 121.707

Analysis

This ratio shows how significant Loans & Advances Are to Working Capital and that Loans

& Advances plays an important role in working capital management of IFFCO. This ratio

shows that the company has more cash in hand and can utilize these funds as per the

company requirement.

At IFFCO, this ratio has always been increasing which is good for the organization. This

means that company is having enough cash and utilizing it effectively.


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Working Capital Position


YearCurrent Assets

(in Crores)Current Liabilities


(in Crores)

2004-05 2603.98 1104.84 1499.142005-06 4748.98 1361.58 3387.402006-07 6081.28 1201.23 4880.052007-08 5775.74 1371.57 4404.172008-09 7672.99 3182.89 4490.10

Analysis


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Working Capital Position indicates changes in Current Assets and Current Liabilities over

the study period and also during a particular year. Working capital position shows operational

efficiency & proper utilization of short term resources in an organization.

The trend of working capital with respect to Current Assets and Current Liabilities for IFFCO

is increasing. This shows a GOOD GROWTH of the company. The Working Capital is

managed properly & efficiently by the organization. However, there was decrease in the year

2007-08 due to decrease in the level of inventory.

Comparison with some competitors in the Industry

IFFCOCoromandel International

National Fertilizers

Fertilizers and

Chemicals Travancore

Chambal Fertilizers

Net Worth 3958.87 1127.14 1470.70 647.94 1234.35

Sales Turnover 32933.30 9374.98 5127.10 706.89 4595.53

Net Profit 360.01 496.38 97.46 42.95 230.56

Inventory 1731.36 1347.51 348.68 412.60 316.82

Total Current Assets 7672.99 3726.38 1525.51 823.53 1566.28

Total Current Liability 3182.89 1755.02 886.65 392.21 1288.58

Working Capital 4490.10 1971.36 638.86 431.32 277.70

Total Assets 17303.77 2926.50 1851.19 1457.77 3982.04

Working Capital to Sales Turnover 0.136 0.210 0.125 0.610 0.060

Inventory to Working Capital 0.386 0.684 0.546 0.957 1.141

Working Capital Ratio 2.41 2.12 1.72 2.10 1.22

Working Capital Turnover 7.41 6.21 7.06 1.97 9.63

Inventory to Current Assets 0.226 0.362 0.229 0.501 0.202


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Inventory to Sales 0.053 0.144 0.068 0.584 0.069

Net Profit Margin 0.011 0.053 0.019 0.061 0.050

Findings

After the analysis of the components of current assets & current liabilities and the

trends of working capital, we find that

Current assets are increasing more than current liabilities. But the current ratio has

decreased as the percentage increase in current liabilities is more than the current

assets.

Cash and Bank Balances have decreased during this period which indicates proper

utilization of funds at IFFCO.

Position of inventory is Very Good in current assets (22.564%). Inventory Turnover

Ratio increases consistently, which shows greater degree of utilization of inventory

during the study period.

Position of Debtors to Current Assets is 5.307%. This ratio had decreased during this

period with an increase in the year 2007-08. This increase was due to the significant

increase in the debts of the company.

Loans and Advances are increasing every year and contribute majorly to current

assets. This means that the company is not facing any problem to get the required

short term financing.

Large part of working capital is involved in maintaining inventory and it depends on

the level of inventory every year.

Working capital of the company had increased till 2006-07 after which it has remain

constant with small changes.

Debt to equity ratio increased during the year 2008-09 as the debt increased due to

increase in short term borrowings.


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Inventory as a component of current assets was high during the beginning of the

period after which it has continuously decreasing.

Net profit margin decreased in the year 2008-09 because of the significant increase in

the raw material prices and consequent increase in subsidy. Looking on the trends,

IFFCO has been able to manage the profits.

The major variation in the ratios during this period is due to the purchase of Paradeep

production plant.

Conclusions and Suggestions


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Working capital is one of the most important aspects of operational efficiency of business.

Working Capital plays a very important role in the functioning of any organization. Both the

current assets and current liabilities are very much influencing factors on the working

capital of an organization.

After the discussion and analysis of the financial position of IFFCO Ltd., it is clear that the

working capital of IFFCO is in sound position. Working capital is not measurable by only

current assets & current liabilities but there are some other factors also that have an

influence on the working capital.

In current assets, there are two most important factors, Debtors and Inventory that affect

working capital. In IFFCO Ltd., Inventory and Debtors are efficiently managed to strengthen

the position of the organization both in short term and long terms.

After analyzing and interpreting the financial data of INDIAN FARMERS FERTILIZER

COOPERATIVE LIMITED (IFFCO) with the help of Ratio Analysis, the following

suggestions were given to the organization for further betterment & improvement in the

working capital:

The present status and levels of current assets is extremely good and therefore it

requires proper maintenance.

The current percentage of inventory is high which is not good for operational

efficiency and sound working capital and thus, it need to be controlled by using

various inventory management techniques such as JIT or Kanban. Another alternative

would be to have varying stock or inventory levels during the different seasons or

even months and, thereby, altering the production to suit such needs.

Cash balances have a lower percentage in current assets. This requires some concern

as cash and bank balances are the most liquid of all current assets.

As the sales turnover majorly consists of subsidiary, the company shall also depend

less on subsidy which is dependent on the annual budget fixed by the government of

India, i.e., when the total outflow of any financial year is more than the budgeted

subsidiary, the manufacturers/ importers have to wait for additional budget or their

subsidiary get realized in the next financial year.


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As the Government of India wants the fertilizers to be supplied at minimum price,

they are compensating manufacturers/ importers by means of subsidy. The

government should device a method whereby the price of fertilizers should increase

every year to some extent. This will reduce the subsidy burden on the government and

companies will be able to realize cash against their sales.


63

CHAPTER 2

Cash Management


64

CASH MANAGEMENT AT IFFCO

IFFCO, a large co-operative society, has been generating large amount of profits over the

years from the date of its commercial production. Its internal sources generation has been

adequate enough to finance the working capital need besides its other long term commitments

though to meet its working capital requirements. The main objective of Cash Management of

IFFCO is not different from the basic objective of cash.

Figure: Cash flow at the Organization

The cash is collected by Marketing Central Office (Mkco) and is transferred to the Head

Office (HO). From the Head Office, the cash is provided to the plants depending on their

requirements. The plants produce fertilizers and the sale of products provides cash which is

collected by Marketing Central Office. Sales are often termed as Release Order (RO).

The fertilizers are sold to corporate societies and most of the payments are made on prepaid

basis. The payments are done through the means of demand drafts/ pay orders. The system of

payment through cheques is not used further. There are very few service centres which

transacts in cash. There is very small amount of credit for a defined credit period, only to

large federations. The Field Representatives (FR) takes Demand Drafts/ pay orders from the

corporate societies before the Release Order.


65

IFFCO has been effectively managing the cash in the following ways:

To measure the cash flow time line and assess the magnitude of savings that could result from the alternative management strategies.

To compare the length of timeline with that of other companies in the industry or standard set by the company.

To not permit cash to stand idle for as much as a day

To know the requirements of funds at various units at different periods of time

Repayment of loans and debt has been one of the prime objectives

To make every effort to speed up the flow

Bankers of IFFCO

Indian Overseas Bank

State Bank of India

Bank of Baroda

Standard Chartered Bank

The Maharashtra State Cooperative Bank Ltd.

The West Bengal State Cooperative Bank Ltd.

Madhya Pradesh State Cooperative Bank Ltd.

The Karnataka State Cooperative Bank Ltd.

The Punjab State Cooperative Bank Ltd.

The Hong Kong and Shanghai Banking Corporation Ltd. (HSBC)

ICICI Bank Ltd.

IDBI Bank Ltd.

HDFC Bank Ltd.

Punjab National Bank

Axis Bank

BNP Paribas

Implementation of Cash Management at IFFCO

In order to effectively manage its cash, so as to sustain liquidity and profitability, IFFCO has

chosen to go for a Centralized Cash Management System. The Centralized Cash Management

System means that the cash of IFFCO is basically managed from the Head Office situated at


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New Delhi. In order to smoothly manage the cash, IFFCO takes the service of IOB, its main

bank from the consortium of bank. IOB plays the part of maintaining the daily fund

position of IFFCO i.e. on a daily basis the cash inflows and outflows are recorded in

computer and are daily analyzed by the cash and bank section of IFFCO, which also carries

out its daily position on the fund statement book.

This Centralized Cash Management at IFFCO also helps in to check the idle cash, which

would otherwise have a cost structure attaches to it. Through this system, the cash is not

allowed to remain idle at various branches and is used by the co-operative giant to pay its

short term liabilities, which may arise. This system of centralized cash management gives an

added advantage to IFFCO to effectively implement a policy of cash flow timeline

management. IFFCO maintains a strict vigil on the movement of funds for collection and

payments both. Although manufacturing units are independent enough to issue cheques, but

they still have to inform the head office. It also prepares the budgets and forecasts and

matches the actual with that, so as to have a proper control over transaction.

A very efficient Management Information System has been introduced at IFFCO which

facilitates:

Forecasting of cash flows on monthly basis or weekly or daily basis,

Helps in cash planning

A Consolidated Statement is prepared at the corporate office which forms the main basis for

planning of funds flow for the continuing month.

Sales Procedure in IFFCO

In IFFCO, there are three systems of sales:

1. Sales through Societies

In the case of Sales through societies, Demand Drafts are received in advance by

IFFCO, i.e. no credit sales are allowed to them. The Demand Drafts are collected

from them and then they are either deposited with the concern district bank or are sent

to state office for deposit with the respective bank.


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2. Sales through Federation

In the case of Sales through Federation, the sales are normally made on credit basis

with a defined credit period. The payments are normally received by IFFCO’s State

Office and are deposited with the respective bank.

3. Sales through IFFCO’s Own Service Centre

The sales through IFFCO’s own outlets are made on cash basis. These outlets are

called as Farmers Service Outlet (FSC). The funds are deposited with the bank on

daily basis and are transferred by the bank to IFFCO’s state office.

In IFFCO, all the realization of sale proceeds is centralized to IFFCO’s Delhi Office i.e. the

funds are ultimately reaching Delhi for utilization, for IFFCO’s manufacturing units. The

funds that are sent to Delhi are then again redistributed to the manufacturing units and all the

other offices, farmer service centers, cooperative societies etc. for meeting their expenses.

Collection Procedure

In earlier times, Field Representatives takes the Demand Drafts/ pay orders and deposits into

Area Office. From Area Office it goes to State Office. From State Office, Demand Draft goes

to Marketing Central Office and in the end, to the Head Office. This process takes around six

days. Due to this delay, the transaction cost was high and there was a loss of interest on the

payments received.

After the implementation of CMS, bank services are hired for better management of cash.

The Field Representatives collects the Demand Drafts from the societies. The bank agent

collects these Demand Drafts and deposits them into the State offices, either in person or

through courier. From State Offices, the drafts get deposited into the banks through bank

agents only. The bank then transfers the money to the Head Office. This process takes one

day or a maximum of two days. Thus, it saves at least four days and cash of the organization.

There are different banks for different state offices. For the service provided by the banks,

different banks charge the organization differently.

Cash savings can be classified as follows:

Direct savings

Direst Savings are the savings on the interest of the days for which the organisation

has received its cash earlier.


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Indirect savings

It includes administrative cost reduction (transaction and transportation cost). Since

the bank is agreement bound, in case of delays, it covers up some of the losses of the

organisation.

The savings can be explained as following. The collection through CMS in the year 2008-09

was approximately Rs. 5250 crores. As there is more than one bank in the CMS, an

approximate interest rate of 8 % p.a. is taken for calculations. Also, a difference of four days

is taken. On calculating, the interest comes out to be Rs. 4.6 crores. This means that IFFCO

saves around Rs. 4.6 crores in the year 2008-09 due to implementation of CMS.

Cash Management Services (CMS)

The Cash Management Services (CMS) is a technology driven system in which bank is under

contractual obligation to make payment at the designated branch on the stipulated date as

agreed in the agreement. Under this system, the banks pick up the Demand Drafts from

IFFCO’s designated locations and pool the same with them. A High Value Demand Draft of

the consolidated amount is deposited by the collecting bankers in IFFCO’s central account

for which IFFCO receives the credit the same day. Thus, the amounts which are collected on

day zero are received on IFFCO’s Central Account on day one.

Salient features of Cash Management Services (CMS)

Cash Management is the stewardship or proper use of an entity’s cash resources. It serves as

the means to keep an organization functioning by making the best use of cash or liquid

resources of the organization. At the same time, the organization has the responsibility to use

timely, reliable and comprehensive financial information systems. Cash Management helps

the organization in:

Eliminating idle cash balances

Monitoring exposure and reducing risks

Ensuring timely deposit of collections

Properly timing the disbursements

Reducing the interest costs

Improving the liquidity as it reduces the transit time enabling the firm to realize drafts

earlier.


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Better accounting and Reconciliations as detailed information on drafts deposited are

made available on a daily, weekly/periodically basis, thus simplifying accounting,

reconciliation and query resolution. Customized Management Information System

(MIS) as per requirements of the firm can also be made available.

Interconnectivity with the branch offices increases as these banks provide a host of

internet software on the CMS account that allows the firm to view current account

balances, download statements, view CMS collections, effect payments/receive

payments online, plus a host of other activities.

Collection Services by these banks ensure quick realization of local and outstation

drafts on day zero and provide the funds in a central collection account on day one.

Costs and Benefits of CMS

Before the introduction of cash management services, various branches of banks at

area offices used to take 2-3 days in transferring the funds to IFFCO’s Central

Account. But with the coming of the CMS, the amount which are collected (as a high

value drafts) on day zero, are received on IFFCO’s Central Account on day one.

Due to late transfer of funds, late payments were made due to which IFFCO was

losing a lot of amount of money in the form of interests and penalties. But now, since

the transfer of funds is done through CMS, IFFCO is saving a lot of interest as the

cash credit utilization has been reduced to the extent of amount received in that

account.

With the introduction of CMS, there is a timely remittance of funds and in the case

the bank with whom the CMS agreement has been made fails to make timely

remittance, then they are bound to pay interest on late transfer of funds.

DETAILS OF STATE WISE EXISTING CMS BANKS

NAME OF BANK STATEPICK UP LOCATION

SERVICE CHARGES

PAY OUT DAY

HSBC Punjab Chandigarh NIL Day 1Haryana Chandigarh NIL Day 1Rajasthan Jaipur NIL Day 1West Bengal Kolkata NIL Day 0 (HV)

Day 1


70

Maharashtra Mumbai NIL Day 0 (HV)Day 1

Pune NIL Day 1Nagpur NIL Day 1Aurangabad NIL Day 2Other Districts NIL Day 2

BNP PARIBAS Nasik 0.15/1000 Day 2Kholapur 0.15/1000 Day 2Other Districts 0.15/1000 Day 2

Standard Chartered Assam Assam NIL Day 1Bank A. P. A. P. NIL Day 1

Karnataka Karnataka NIL Day 1Tamil Nadu Tamil Nadu NIL Day 1Orissa Orissa NIL Day 1Kerala Kerala NIL Day 1

HDFC Bank HP NIL Day 2J & K NIL Day 1Bihar Patna NIL Day 1

Gaya NIL Day 2Bhagalpur NIL Day 2Muzzafarpur NIL Day 2

Jharkhand Ranchi NIL Day 2Uttaranchal Dehradoon NIL Day 2

Haldwani NIL Day 2Rudraprayag NIL Day 2

ICICI Bank Uttar Pradesh Lucknow NIL Day 0 (HV)Day 1

All 13 Area Offices 0.02/1000 Day 1

IOB Gujrat Ahemdabad NIL Day 1Chhatisgarh Raipur NIL Day 1MP Bhopal NIL Day 1

SBI Uttar Pradesh FSC NIL Day 1

Axis Bank Uttar Pradesh 38 Districts NIL Day 1

HV: High Value

FSC: Farmers Service Centre


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Cash Management Services (CMS) Agreement through the HSBC Bank

Introduction of Cash Management Services (CMS)

IFFCO is availing the cash management services of m/s HSBC bank for remittances of sale

proceeds in the states of Punjab, Haryana, Rajasthan, West Bengal and Maharashtra.

Collection services agreement was made on 28th December’2001 between IFFCO and HSBC.

The bank will be providing its services known as Collection Services in the manner and

subject to terms and conditions set out hereunder:

1. These services shall cover instruments (demand drafts/ pay orders) favouring IFFCO

and marked “A/c Payee only”, that are

Locally payable at specified HSBC branch locations

Locally payable at other specified locations

Outstation instruments payable at specified locations

Outstation instruments payable at all other locations

2. Demand drafts etc., pickups by courier services shall be arranged at IFFCO’s offices

in Mumbai, Pune, Aurangabad, Nagpur, at 1000 hrs and 1430 hrs by HSBC free of

charge. This will aid HSBC in maintaining their service levels of Day 1 credits for

Mumbai, Day 1 credit for Pune, Day 1 credit for Nagpur and Day 2 credit for

Aurangabad for all cheques picked up on Day 0. (Day 0 being the date of collection in

the clearing locations.)

3. HSBC shall refund interest @ HSBC PLR 15.50% - 4 % to IFFCO in case of delayed

credits to IFFCO’s account. IFFCO will be required to pay interest @ HSBC PLR

15.50% - 4% to HSBC in case of demand draft returns for the period during which the

bank will be out of funds.

4. In the unlikely event of an instrument being misplaced whilst in transit after being

picked up/ acknowledged by HSBC’s courier and credit not made available to IFFCO

as per the contracted agreement, HSBC shall pay interest to IFFCO @ HSBC PLR

15.50% - 4% for the delayed period to a maximum period of 30 days. HSBC shall

provide all assistance to IFFCO to procure a duplicate demand draft to put a stop

payment in order that a duplicate instrument is issued at the earliest.


72

5. In the event drafts are lost in transit, HSBC shall debit IFFCO for the same, and

HSBC’s statement intimating the non-payment of the instrument(s) will be final and

binding on IFFCO.

6. HSBC can make MIS available at the check pickup points, the State Offices as well as

Marketing Head office in New Delhi to aid reconciliation and to help IFFCO

exercised greater control on the collections. The MIS can be amended to contained

draft wise or deposit slip wise details as per IFFCO’s requirements.

Management information system (MIS) report

MIS report contains the demand draft number, amount collected and the cheques deposit slip

number. Marketing Central Office checks the amount collected by different State Offices and

verifies it to that collected by banks. A customized MIS provided by HSBC bank can

include:

Daily report of deposits made at various locations

Location wise report

Credit Forecast report

Monthly cumulative report-date wise/location wise

Monthly charging statement

Monthly draft return statement

Customized reports as per mutual agreement

HSBC has a large pool account which has a dummy account of IFFCO. The bank takes one

day for realization of money and deposits it directly in the account of Head Office at New

Delhi. The bank provides details to Marketing Central Office (Mkco) and other offices (SO,

AO, FR) through Management Information System (MIS) report.

If there is any mismatch in the value of MIS report or any other problem/ query, the

department contacts it immediate lower department only.


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In CMS, the banks used are as follows:

The HSBC Bank

BNP Paribas

Indian Overseas Bank

Standard Chartered Bank

The ICICI Bank

State Bank of India,

HDFC Bank

Axis Bank

The collection of BNP Paribas, Standard Chartered Bank, ICICI Bank, HDFC Bank and Axis

Bank are deposited into the centralized account of IOB whereas the collection of HSBC bank

is deposited into centralized account of SBI. SBI manages the collection of 5 states only out

of total of 20 states. As the money comes into these banks, it is transferred to the Head Office

by the evening. Through Head Office, the money is distributed into various departments as

per the requirements.


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For Collecting Payment

Current Features

1. DDs collected by the state/area offices are picked up by an authorized agent of the

banks and sent for collection.

2. Banks also pick up the high value instruments from the pickup location before the

high value cut off time, present for clearing and effect the pooling on the same day at

the nodal account.

3. Banks gives credit to the main pooling account on a pre agreed day.

4. The collections are transferred the same day to the cash credit account of IFFCO as

per the standing instructions through a high value instrument.

5. Banks gives detailed management information system report as per the requirements

of IFFCO.

6. This collection account is used for funding the disbursement of manufacturing units.

Reporting

The month wise projections of collections for the year are made in advance. Daily reports of

collection against sales proceeds are made and are submitted in the higher departments for

comparison with the projections.

Disbursement of Funds

In addition to CMS, IFFCO has an innovative disbursement scheme known as Anywhere

Banking Overdraft Account facility with IDBI and HDFC Bank. Under this scheme, the

balances of all the state offices maintain are transferred to the Central Account having

overdraft facilities whereby the balances with the state offices remain zero.

Anywhere banking (ANB) Facility

ANB facility offers IFFCO the flexibility of making at par payments across multiple

locations by using a single current account maintained at Delhi.


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All the payments are made through IDBI and HDFC banks. IDBI is used in 17 states and

HDFC in 3 states (Jammu, Assam, HP). Overdraft limit of IDBI is Rs. 229 crores whereas

that of HDFC bank is Rs. 20 crores. Till the overdraft amount is being paid, interest is debited

by the bank to Head Office through Marketing Central Office.

For all transactions within the local region (within the New Delhi offices), IOB is used. It

also transacts all the local expenses of the Marketing Central Office.

All payments are made through cheques only. But, all employee payments and

reimbursements are made through cash.

Advantages of ANB Facility

Better Fund Management by Reducing Idle Balances: ANB obviates the need to

maintain idle funds at multiple locations leading to better funds management.

Minimum Multiple Bank Account: ANB obviates the need for having multiple

accounts at different locations. It, thus, reduces the number of bank accounts at

different locations leading to lower administrative load and reduces bank

reconciliation.

No service charges: As there is no need of transfer of funds under anywhere banking

system, the organization saves service charges which they used to pay earlier under

the traditional system.

Observations

70 % of Sales activity in the business of fertilizers is in Monsoons and the balance

30% is spread throughout the rest of the year. The month from April to September is

known as Kharif Season and from October to March is known as Rabi Season. The

GOI is estimating the demand based on Kharif and Rabi season and is allocating the

supply plans accordingly.

Investments made by IFFCO

As on 31st March 2009, the Society holds Government of India Fertilizer Bonds

amounting to Rs. 6,638.95 Crores (previous year Rs. 646.16 Crores) bearing different

rates of interest as per details hereunder:


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Investments(in Rs. Crores)

As at 31.03.2009

As at 31.03.2008

7.95% Fertilizer Companies GOI Special Bonds, 2026 646.167.00% Fertilizer Companies GOI Special Bonds, 2022 2900.976.20% Fertilizer Companies GOI Special Bonds, 2022 2106.336.65% Fertilizer Companies GOI Special Bonds, 2023 1631.65

TOTAL 6638.95 646.16

Since the GOI was short of funds, they have issued the above bonds which have disturbed the

cash position of the society.

Subsidies from government

The entire fertilizer industry gets subsidy from the government of India.

In IFFCO, since the society is dealing in Urea and Phosphate Fertilizer, there are

two system of claiming subsidy.

The subsidy on urea is received on the retention price fixed for the group of

companies. That is, under this the subsidy is given as a difference between the

sales price and the retention price. Retention Price includes cost of production

(i.e. cost of raw materials, utilities, fixed cost, freight cost, marketing & selling &

distribution expenses). Norms are set in by GOI for fixing retention price from

time to time.

The basic intention of following the retention price scheme is to give fertilizers to

the farmers at a subsidized rate.

In addition to the retention price subsidy, GOI is also reimbursing Freight

towards primary and secondary freights to the manufacturers of controlled

fertilizers (Urea) to cover the cost of transportation from the production plants to

the consumption centres.

Nitrogenous Fertilisers are under the Concession Scheme as notified by

Government of India (GOI) from time to time. The subsidy on Nitrogenous

Fertilisers is decided on month to month basis depending upon the input price

escalation/ de-escalation based on the norms prescribed or notified under the

subsidy scheme. The GOI is also reimbursing the actual fright on primary

transportation and fixed amount on secondary transportation.


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The Phosphatic Fertilizer has been decontrolled and Concession on Phosphatic

Fertilisers has been accounted for based on monthly concession rate as notified by

Government of India. Pending notification of monthly concession rate applicable

for the period January, 2009 to March, 2009, the same has been accounted for on

an estimated basis in line with the known policy parameters.

However, in order to make available the fertilizer at a low rate to the farmers, the

government is allowing subsidy to the manufacturers. This amount is notified by the

government for every month on the basis of the raw material prices of fertilizer.

Central Subsidy on FertilizersYear Urea Decontrolled Total Subsidy

Imported Indigenous Total P & K Fertilizers on all Fertilizers2004-05 494 10243 10737 5142 158792005-06 1211 10653 11864 6596 184602006-07 3274 12650 15924 10298 262222007-08 6606 16450 23056 16934 399902008-09 10981 19517 30498 65351 958492009-10 5948 9780 15728 34252 49980*

*budgeted

In the year 2008-09, there was a large increase in the subsidy. This was due to the increase in

the prices of the imported raw materials and finished goods (for resale). The price for these

goods is usually US$370 per metric tonne but during 2008-09 it was US$1200 per metric

tonne.


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Conclusion

The organization IFFCO is basically a Farmer’s Organization. It functions in the

cooperative sector of India and is owned by the Government of India along with the

cooperative societies. IFFCO is one of the most profitable and financially secure

fertilizer companies in India.

The generation of funds through sale is a seasonal factor. 70% of Sales activity in the

business of fertilizers is in Monsoons and the balance 30% is spread throughout the

rest of the year. The month from April to September is known as Kharif Season and

from October to March is known as Rabi Season. Thus, it becomes imperative for the

organization to have such cash management system in place that would enable the

organization to plan the excess cash obtained during surplus periods and ploughs them

back into the operations of the organization during deficit periods.

The Cash Management System at IFFCO is very sound and efficient. It has enabled

the organization to manage its funds in a proper manner resulting in better utilization

and availability of funds in cash deficit periods.

Today IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI Bank that are

providing IFFCO with facilities such as cash management services, personalized

financial MIS to enable IFFCO to accelerate the collection and payment of funds,

debit sweep option, Anywhere banking facility, etc. All these facilities have helped

IFFCO in having faster, more secure and more reliable collection and payments of

funds and cheques from its various Area/State Offices.

However, despite all the advantages of this New Cash Management System such as

receiving the proceeds from the sale of fertilizers within First day of sale, reduction

in the amount of interest loss suffered by IFFCO due to late arrival of payments, daily

report of deposits made at various locations, location wise report, credit forecast

report, monthly cumulative report date wise/ location wise, monthly charging

statement, monthly cheque return statement, customized reports as per mutual

agreement etc. the cash management system can be further improved.


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Suggestions to Improve the Cash Management System

By making an analysis of all the collection at other locations and implementing the

same at state offices also.

At present, the banks with whom the CMS agreements have been made are not the

consortium members of IFFCO’s Lead bank. In case, these banks are also included as

consortium members, IFFCO shall have an additional advantage as they shall be in

the position to utilize their payments directly from their Cash Credit Accounts.

IFFCO should focus on implementation of RTGS (Real Time Gross Settlement) and

NEFT (National Electronic Fund Transfer) facilities which will improve the cash

transfer at IFFCO.


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References

Books

Brealey, R A, Myers, S C, Alan, F and Mohanty, P 2008. Principles of

Corporate Finance. Tata McGraw-Hill Publications, New Delhi, 8th SIE

Edition.

Chandra, T K, Seti, Kuldeep and Robertson, C 2010. Fertilizers Statistics

2008-09. Fertilizers Association of India (FAI), New Delhi.

Ramachandran, N and Kakani, Ram 2008. Financial Accounting for

Management. Tata McGraw-Hill Publications, 2nd Edition.

Pandey, I M 2005. Financial Management. Vikas Publishing House, 9th

Edition

Reports

Annual reports of IFFCO

Agreement files of IFFCO

Websites and Internet

www.iffco.nic.in

www.wikipedia.com

www.investopedia.com

www.fert.nic.in

www.faidelhi.org

www.moneycontrol.com


http://www.moneycontrol.com/

http://www.faidelhi.org/

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Appendix A: Working Capital Management

Working Capital Management is the interaction between current assets and current liabilities.

The current assets refer to those assets, which in ordinary course of business can be, or will

be turned into cash within one year without undergoing a diminution in value and without

disrupting the operation of the firm.

Decisions relating to working capital and short term financing are referred to as Working

Capital Management. This involves managing the relationship between a firm's short-term

assets and its short-term liabilities. The major thrust is on managing the current assets

because a current liability arises in context of current assets.

The goal of working capital management is to ensure that a firm is able to continue its

operations and that it has sufficient ability to satisfy both maturing short-term debt and

upcoming operational expenses. The management of working capital involves managing of:

Accounts receivable (current asset)

Inventory (current assets),

Accounts payable (current liability), and

Cash (current asset)

The management of current assets is similar to that of fixed assets in the sense that in both

cases the firm analyses their effects on its return and risk. However, the management of fixed

and current assets differs in THREE ways:

1. In the management of fixed assets, time is very important consequently, discounting

and compounding aspects of time element play a significant role in capital budgeting

and a minor one in the management of current assets.

2. Large holdings of current assets especially cash strengthen times liquidity (and

reduces riskiness) but also reduces overall profitability.

3. The levels of fixed as well as current assets depend upon the “expected sales”, but it is

only the current assets, which can be adjusted with sales fluctuations in short runs.

In examining the management of current assets, answers will be sought to the following

questions:

What is the need to invest funds in the current assets?

How much funds should be invested in each type of current assets?

What should be the proportion of long term and short term funds to finance current assets?


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What appropriate sources of funds should be there to finance current assets?

A company can be endowed with assets and profitability but short of liquidity if its assets

cannot readily be converted into cash. Positive working capital is required to ensure that a

firm is able to continue its operations and that it has sufficient funds to satisfy both maturing

short-term debt and upcoming operational expenses.

Working Capital Management is a significant part of financial management. Its importance

arises from two reasons:

Investment in current represents assets a substantial portion of total management.

Investment in current assets and the level of current liabilities have to be geared

quickly to changes in sales. To be sure, fixed assets investment and long term

financing are also responsive to variations in sales. However this relationship is not as

close and direct as it is in the case of Working Capital Management.

Hence in this study an attempt has been made to analyze the size and composition of working

capital and whether such an investment has increased or declined over a period of time.

Financial manager now a day is responsible for shaping the fortunes of the enterprise, and is

involved in the most vital decision of the allocation of capital. There is a need to have a

broader and farsighted outlook and must ensure that the funds of the enterprise are utilized in

the most efficient manner .One of the most important task of financial manager is to select an

assortment of appropriate sources of finance for the current assets. Normally the excess of

current assets over current liabilities should be financed by long-term sources. Precisely it is

not possible to find out which long term sources has been used to finance current assets, but it

can be examined as to what proportion of current assets has been financed by long term

funds. Therefore, an attempt has been made in this regard.

In working capital analysis the direction of change over a period of time is of crucial

importance. Not only that, analysis of working capital trends provides a base to judge

whether the practice and prevailing policy of the management with regards to the working

capital is good enough or an improvement is to be made in managing the working capital

funds.


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Hence in this study, an attempt is made about the trends of the working capital management

of selected enterprise. In addition, to have higher profitability the firms may sacrifice

solvency and maintained a relatively low of current assets. When the firms do so their

profitability will improve and less are tied up in the idle current assets, but their solvency will

be threatened. Hence, an attempt is made to study the association of profitability with the

working capital ratios. With this view, an effort has been made in this project report to make

an in-depth study of IFFCO in respect of its performance and its working capital

management.

Types of Capital

Every business needs funds for two purposes for its establishment to carry out its day-to-day

operations. Capital required for business can be classified under two main categories:

1) Fixed Capital

2) Working Capital

Fixed Capital

Long term funds are required to create production facilities through purchase of fixed assets

such as plant & machinery, land, buildings, furniture, etc. investments in these assets

represents that part of firm’s capital, which is blocked on a permanent or fixed basis and is

called fixed capital.

Working Capital

Funds are also needed for short-term purpose for the purchase of raw materials, payment of

wages and other day-to-day expenses, etc. These funds are known as Working Capital. There

are two concepts of working capital:

1. Gross working Capital

2. Net working Capital

Gross Working Capital

Gross working capital refers to the firm’s investment in current assets. Current assets are the

assets which can be converted into cash within an accounting year or within an operating

cycle. The items comprising of current assets are:

Cash

Marketable securities


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Accounts receivable

Notes or bills receivable

Prepaid expenses

Merchandise inventory

Manufacturing inventory

Net Working Capital

Net Working Capital refers to the difference between the current assets and current liabilities.

Current liabilities are those claims of outsiders which are expected to mature for payment

within an accounting year or the operating cycle of the business. The items comprising of

current liabilities are:

Accounts Payable

Acceptance

Promissory Notes Payable

Accrued Liabilities

Estimated Liabilities or Provisions

Bank Overdraft

Contingent Liabilities

Net working capital can be positive or negative. A positive net working capital will arise

when current assets exceed current liabilities. A negative net working capital occurs when

current liabilities are in excess of current assets. If current assets are less than current

liabilities, an entity has a working capital deficiency, also called a working capital deficit.

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

An increase in working capital indicates that the business has either increased current assets

(that is received cash, or other current assets) or has decreased current liabilities.

Types of Working CapitalWorking Capital can be further divided into two types namely:

1) Permanent or fixed working capital

2) Variable or temporary working capital

Permanent or Fixed working capital


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There is always a minimum level of current assets which is continuously required by a firm to

carry on its business operations. Permanent or Fixed working capital is the minimum level of

current asset. It is permanent in the same way as the firms fixed assets are. Depending upon

the changes in production and sales, the need for working capital, over and above permanent

working capital will fluctuate. For example: every firm has to maintain a minimum level of

raw material, work-in-progress, finished goods and cash balance. As the business grows, the

requirements of permanent working capital also increase due to the increases in current

assets.

Temporary or Variable Working Capital

Variable working capital is the extra working capital needed to support the changing

production and sales activities of the firm. Both kinds of working capital – permanent and

temporary – are necessary to facilitate production and sale through the operating cycle. But

the firm to meet liquidity requirements that will last only temporarily creates a temporary

working capital. Variable working capital can be further classified as seasonal working

capital and special working capital. Most of the enterprises have to provide additional

working capital to meet the seasonal and special needs. The capital required to meet the

seasonal needs of the enterprise is called seasonal working capital. Special working capital is

that part which is required to meet the special exigencies such as launching of extensive

marketing campaigns for conducting research etc.

Temporary working capital differs from Permanent working capital in the sense that it

is required for short periods and cannot be permanently employed gainfully in the

business.

Wor

king

Cap

ital

(in

Rs.

) Temporary Working Capital

Permanent Working Capital


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TimeGood Management of Working Capital

Good management of working capital is part of good financial management. Effective

use of working capital will contribute to the operational efficiency of a department;

optimum use will help to generate maximum returns.

Ratio analysis can be used to identify working capital areas, which require closer

management. Various techniques and strategies are available for managing specific

working capital items.

The areas of working capital management are as follows:

Cash management: Identify the cash balance which allows for the business to

meet day to day expenses, but reduces cash holding costs.

Inventory management: Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and

minimizes reordering costs - and hence increases cash flow

Debtor management: Identify the appropriate credit policy, i.e. credit terms

which will attract customers, such that any impact on cash flows and the cash

conversion cycle will be offset by increased revenue and hence Return on

Capital (or vice versa);

Short term financing: Identify the appropriate source of financing, given the

cash conversion cycle: the inventory is ideally financed by credit granted by

the supplier; however, it may be necessary to utilize a bank loan (or overdraft),

or to "convert debtors to cash" through "factoring".

Objectives of Working Capital Management

Liquidity vs. Profitability

The basic objective of working capital is to provide adequate support for the

smooth functioning of the normal business operations of the company. The

quantum of investment in current assets has to be made in such a manner that it

not only meets the needs of the forecasted sales but also provides a built in

cushion in form of safety stocks to meet unforeseen contingencies.


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Based on this the companies can follow any of the two approaches or even a

combination of both. A company opting for high investment in current assets

follows the Conservative Approach i.e. subjected to lower degree of risk. This

approach imparts greater LIQUIDITY to the company.

The other approach is the Aggressive Approach in which the firm goes for fewer

investments in current assets, thus leaving more amounts of funds for investment

in more profitable ventures. This approach imparts greater PROFITABILITY to

the company. An ideal policy would be the moderate policy, which strikes a

balance between the two approaches.

Choosing the pattern of financing

The management of financing the chosen level of current assets once again

takes into consideration the attitude of management towards risk.

Determinants of Working Capital

The working capital requirements of a concern depend upon a large number of factors. It is

not possible to rank them because all such factors are of different importance and the

influence of individual factors changes for a firm over time. However the following are the

factors generally influencing the working capital requirements:

Nature or character of business

The working capital requirements of a firm basically depend upon the nature of the

business. Public undertakings like electricity, water supply, and railways need very

limited working capital because they offer cash sales only and supply services.

Trading and financial firms require less investment in fixed assets but have to invest

large amounts in current assets, as they need large amount of working capital. The

manufacturing undertakings also require sizable working capital along with fixed

investments.

Size of business

The working capital requirements of a concern are directly influenced by the size of

the business. Greater the size of a business unit, generally larger will be the

requirements of working capital.

Manufacturing process

In manufacturing business, the requirements of working capital increase in direct

proportion to length of manufacturing process. Larger the process period of

manufacture, larger is the amount of working capital required. The longer the


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manufacturing time, the raw material and other supplies have to be carried far a

longer period in the process with progressive increment of labor and service costs the

finished product is finally obtained.


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Seasonal variations

In certain industries raw material is not available throughout the year. They have to

buy raw materials in bulk during the season to ensure the uninterrupted flow and

process them during the entire year. A huge amount is thus blocked in the form of

material inventories during such seasons, which gives rise to more working capital

requirements.

Rate of stock turnover

There is a high degree of inverse co-relationship between the quantum of working

capital and the velocity or speed with which the sales are affected. A firm having a

high rate of stock turnover will need lower amount of working capital as compared to

a firm having low rate of turnover.

Firm’s credit policy

A concern that purchases its requirements on credit and sells its products/services on

cash requires lesser amount of working capital. On the other hand the concern buying

its requirements for cash and allowing credit to its customers shall need larger amount

of working capital.

Advantages of Adequate Working Capital

The main advantages of maintaining adequate amount of working capital are as follows:

Solvency of the business

Adequate working capital helps in maintaining solvency of the business by providing

uninterrupted flow of production.

Goodwill

Sufficient working capital enables a business concern to make prompt payments and

hence helps in creating and maintaining goodwill.

Quick and regular return on investments

Every investor wants a quick and regular return on his investments. Sufficiency of

working capital enables a concern to pay quick and regular dividends to its investors,

as there may not be much pressure to plough back profits. This gains the confidence

of its investors and creates a favorable market to raise additional funds in the future.


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Ability to face crises

Adequate working capital enables a concern to face business crises in emergencies

such as depression because during such periods, generally, there is much pressure on

working capital.

Regular payments of salaries, wages and other day-to-day commitments

A company which has ample working capital can make regular payments of salaries,

wages and other day-to-day commitments which raise the morale of its employees,

increases their efficiency, reduces wastages and costs and enhances production and

profits.

Easy loans

A concern having adequate working capital, high solvency and good credit standing

can arrange loans from the banks and others on easy and favorable terms.

Regular supply of raw materials

Sufficient working capital ensures regular supply of raw materials and continuous

production.

Balanced Working Capital

Every business concern should have adequate working capital to run its business operations.

It should have neither redundant for excess working capital nor inadequate or shortage of

working capital. Both Excess, as well as short Working capital positions is bad for any

business.

Disadvantages of Redundant or Excessive Working Capital

Excessive working capital means idle funds, which earn no profit for the business,

and hence the business cannot earn proper rate of return on investments.

When there is a redundant working capital, it may lead to unnecessary purchasing and

accumulation of inventories causing more changes of theft, losses and waste.

Excessive working capital implies excessive debtors and defective credit policy,

which may cause higher incidents of bad debts.

When there is excessive working capital, relations with the bank and other financial

institutions may not be maintained.

It may result into overall inefficiency in the organization and also due to low rate of

return on investments the value of shares may also falls.


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Dangers of Inadequate Working Capital

A concern, which has inadequate working capital, can pay its short-term liabilities in

time. Thus, it will lose its reputation and shall not be able to get good credits facilities.

It becomes difficult for the firm to exploit favorable market conditions and undertake

profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and creates inefficiencies,

increase costs and reduces the profits if the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability of

liquid funds.

It cannot buy its requirements in bulk and cannot avail of discounts, etc. and also the

rate of return on investments also falls with the falls with the shortage of working

capital.

Issues in Working Capital

The financial manager must determine levels and composition of current assets. He must see

that right sources are tapped to finance current assets, and that current liabilities are paid in

time.

There are many aspects of working capital management which make it an important function

of the financial manager:

Time Working capital management requires much of the financial manager’s time.

Investment Working Capital represents a large portion of the total investment in

assets.

Critically working Capital management has great significance for all firms but it is

very critical for small firms.

Growth The need for working capital is directly related to the firm’s growth.

It is necessary for a financial manager to manage working capital in the best possible way to

get the maximum benefit.

Financial manager should pay special attention to the management of current assets on a

continuing basis. Actions should be taken to curtail unnecessary investment in current assets.

There is a direct relationship between a firm’s growth and its working capital needs. As sales

grow, the firm needs to invest more in inventories and debtors. These needs become very

frequent and fast when sales grow continuously. The financial manager should be aware of


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such needs and finance them quickly. Continuous growth in sales may also require additional

investment in fixed assets.

The finance manager should pay particular attention to levels of current assets and the

financing of current assets.

Policies for Financing Current Assets

A firm can adopt different financing policies vis-à-vis current assets. Three types of financing

may be distinguished:

Long-term financing The sources of long-term financing include ordinary share

capital, preference share capital, debentures, long-term borrowings from financial

institutions and reserve and surplus (retained earnings).

Short-term financing The short-term financing is obtained for a period less than one

year. It is arranged in advance from banks and other suppliers of short-term finance in

the money market. Short-term finances include working capital funds from banks,

public deposits, commercial paper, factoring of receivable etc.

Spontaneous financing Spontaneous financing refers to the automatic sources of

short-term funds arising in the normal course of business. Trade (suppliers) credit and

outstanding expenses are examples of spontaneous financing. There is no explicit

cost of spontaneous financing. A firm is expected to utilize these sources of finances

to the fullest extent. The real choice of financing current assets, once the spontaneous

sources of financing have been fully utilized, is between the long-term and short-term

sources of finances.

Depending on the mix of short-term and long-term financing, the approach followed by a

company may be referred to as:

Matching approach

Conservative approach

Aggressive approach

Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum balance of each of

the working capital components. This includes making sure that funds are held as cash in

bank deposits for as long as and in the largest amounts possible, thereby maximizing the


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interest earned. However, such cash may more appropriately be "invested" in other assets or

in reducing other liabilities.

Working Capital Management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital and to identify

areas requiring closer management

The individual components of working capital can be effectively managed by using

various techniques and strategies

When considering these techniques and strategies, departments need to recognize that each

department has a unique mix of working capital components. The emphasis that needs to be

placed on each component varies according to department. For example, some departments

have significant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of the

department's overall management. The needs of efficient working capital management must

be considered in relation to other aspects of the department's financial and non-financial

performance.

The main purposes of Working Capital Ratio Analysis are:

To indicate working capital management performance; and

To assist in identifying areas requiring closer management

Three key points need to be taken into account when analyzing financial ratios. These

key points are as follows:

The results are based on highly summarized information. Consequently, situations,

which require control, might not be apparent, or situations, which do not warrant

significant effort, might be unnecessarily highlighted.

Different departments face very different situations. Comparisons between them, or

with global “ideal” ratio values, can be misleading.

Ratio analysis is somewhat one-sided; favourable results mean little, whereas

unfavourable results are usually significant.

However, financial ratio analysis is valuable because it raises questions and indicates

directions for more detailed investigation.


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Sources of Cash

The various sources of cash that provide the money to fund the working capital include the

following:

Existing cash reserves

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Long term loans

Profit or net income

Inventory Management

Inventories constitute the most significant part of current assets. Inventories are stock of the

product, a company is manufacturing for sale and components to make that product. The

various forms of inventory in a fertilizer manufacturing company are:

Raw Materials are those basic inputs that are converted into the finished products

through the process of manufacturing.

Work-In-Progress inventories are semi-manufactured products.

Finished Goods inventories are completely manufactured products.

Stores & Spares, loose tools, chemical catalysts, packing & Construction

materials

Objectives of Inventory Management

The problems faced by an organization in the context of inventory management are:

To maintain a large size of inventory for efficient and smooth production & sales

operation

To maintain minimum investment in inventories to maximize profitability

To ensure continuous supply of materials, spares & finished goods.

To avoid both overstocking & under stocking of inventory

To eliminate duplicate stock orders. This is possible with the help of a centralized

purchasing system.

To design proper organization for inventory management


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Both Excessive & Inadequate Inventories are not desirable. The objective of Inventory

Management is to determine & maintain the optimum level of inventory investment. The

optimum level of inventory will lie between two danger points of excessive & inadequate

inventories.

Excessive stocks can place a heavy burden on the cash resources of a business.

Insufficient stocks can result in lost sales, delays for customers etc.

The key is to know how quickly the stocks are moving or how long each item of stock sits on

shelves before being sold. Average stock holding periods are influenced by the nature of the

business.

The key issue for a business is to identify the fast and slow stock movers with the objective

of establishing optimum stock levels for each category and thereby minimize the cash tied up

in the stocks.

Factors to be considered when determining the optimum stock levels include:

What are the projected sales of each product?

How widely available are each component, raw materials, etc.?

How long does it take for delivery by the suppliers?

Can one remove the slow movers from one’s product range without compromising on

the best- sellers?

For better stock control, following measures can be adopted:

Review the effectiveness of existing purchasing & inventory systems.

Know the stock turnover for all major items of inventory.

Apply tight controls to the significant few items & supply control for the remaining.

Sell off outdated or slow moving merchandise.

Consider the idea of outsourcing the manufacturing of the product to another

manufacturer.

Review security procedures to minimize losses through deterioration, pilferage,

wastage & damages.

To facilitate furnishing of data for short-term & long-term planning & control of

inventory


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Receivable Management

Accounts Receivable refers to the amount owed by the debtors to the business. They are

usually created because of trade credit that is given to the customers of the business.

These receivables have three characteristics:

It involves an element of risk, which should be carefully analyzed.

It is based on economic value

It implies futurity.

To maintain a proper flow of funds in the business in order to make timely payments to the

creditors, to buy raw materials & to run the day-to-day activities of the business, it is essential

that the debtors make their payments on time. The interval between the date of sale & the

date of payment has to be financed out of the working capital. Thus, trade debtors represent

investment.

Objectives of Receivable Management

The objective of Receivable Management is to promote sales & profits until that point is

reached where the returns that the company gets from funding receivables is less than the

cost that the company has to incur in order to fund these receivables. However, to maintain

these receivables the company has to incur certain costs such as:

Additional fund requirements for the company – When a firm maintains

receivables, some of its resources remain blocked in them so to finance the activities

during that time gap the firm requires funds.

Administrative Costs

Collecting Costs

Defaulting Costs

The size of receivables or investment in Receivable Management is determined by the

firm’s credit policy & level of sales. Receivable management is the process of making the

decision of selection of trade debtors in which the funds could be invested or to whom money

can be given.

Receivable management involves the careful consideration of the following aspects: -

Forming the credit policy


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Executing the credit policy

Formulating & executing the collection policy

The Credit Policy is the policy followed by the company with respect to the credit standards

adopted, any incentive in the form of cash discount offered, and also the period over which

the discount can be utilized by the customers & the collection effort made by the company.

All these variables underlying a company’s credit policy influence the volume of sales and

hence the profits of the company.

Cash Management

Cash, the most liquid asset and also referred to as the life blood of a business enterprise and

is of vital importance to the daily operations of the business firms. Its efficient management

is crucial to the solvency of the business because cash is the focal point of the fund flows in a

business. If a business has no cash and no way of getting any cash, it will have to close down.

Cash Management is concerned with the managing of:

Cash flows into and out of the firm.

Cash flows within the firm

Cash balances held by the firm at a point of time for financing deficits or investing

Surplus cash.

Cash Management refers to management of cash balance and the bank balance and also

short term deposits. The term cash may be used in two different ways:

1) It may include currency, cheques, drafts, demand deposits held by the firm i.e. pure

cash or generally accepted cash equivalents.

2) In a broader sense, it also includes near cash assets such as marketable securities and

short term deposits with banks. For cash management purposes, the term cash is

used in this broader sense i.e. it covers cash, cash equivalents and those assets which

are immediately convertible to cash.


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Objectives of Cash Management

The cash management strategies are generally built around two goals:

To provide cash needed to meet the obligations, and

To minimize the idle cash held by the firm

The risk return trade-off of any firm can be reduced to two prime objectives for the firm’s

Cash Management System:

1) Meeting the Cash Outflows: This will help the firm in avoiding the chance to

default in meeting financial obligations otherwise the goodwill of the firm is

adversely affected. Also this will further help in availing the opportunities of getting

cash discounts by making early or prompt payments and meeting unexpected cash

outflows without much problem.

2) Minimizing the Cash Balance

Loans and Advances

Loans and Advances are one of the important factors of working capital. In current assets

loans and advances play a significant role. When we talk about the working capital

management it is necessary to consider Loans & Advances, as they are a major component of

Current assets and along with the equity of the company for a source of generating cash in the

organization.

While analyzing the loans & advances position of IFFCO the following ratios have to be

calculated for better understanding i.e.

Loans and advances to Current Assets ratio

Loans and advances to Working capital ratio


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Operating Cycle

Operating Cycle is the times duration required to convert sales, after the conversion of

resources into inventories, into cash. The operating cycle of a manufacturing company

involves three phases:

Acquisition of resources such as raw material, labour, power and fuel etc.

Manufacture of the product which includes conversion of raw material into work-

in-progress into finished goods.

Sale of the product either for cash or on credit. Credit sales create account receivable

for collection.

PurchasesCredit Sales Collection

Inventory PeriodAccounts Receivable

Period

Accounts Payable Period Cash Conversion Cycle

Payments

Operating Cycle

The operating cycles are of two types:

1. Gross Operating Cycle

2. Net Operating Cycle or Cash Conversion Cycle

Gross Operating Cycle

Gross operating cycle is a tool which measures the total number of days from the day the purchases

are made or the stock arrives to the day all the collections are made. Cash is said to be blocked till

the collections have been collected. So the sooner the cash is received from the consumers the

better is for the company as they get cash for further production. Gross Operating Cycle is given as

follows:

Operating cycle (OC)

=Days Inventory Outstanding(DIO) + Days Sales Outstanding(DSO)


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Cash Conversion Cycle

The cash conversion cycle (also referred to as CCC or the net operating cycle) is the

analytical tool of choice for determining the investment quality of two critical assets -

inventory and accounts receivable. The CCC tells us the time (number of days) it takes to

convert these two important assets into cash. A fast turnover rate of these assets is what

creates real liquidity and is a positive indication of the quality and the efficient management

of inventory and receivables.

The cash conversion cycle is comprised of three standard, so-called activity ratios relating to

the turnover of inventory, trade receivables and trade payables. These components of the

CCC can be expressed as a number of times per year or as a number of days.

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO)

- Days Payable Outstanding (DPO)

The cash conversion cycle (CCC) measures how fast a company can convert cash on hand

into even more cash on hand. The CCC does this by following the cash as it is first converted

into inventory and accounts payable (AP), through sales and accounts receivable (AR), and

then back into cash. Generally, the lower this number is the better for the company.

The components of CCC are calculated as follows:

Days Inventory Outstanding (DIO)

This addresses the question of how many days it takes to sell the entire inventory. The

smaller this number is the better.

Days Inventory

Outstanding (DIO)=

Average Inventory


Broadly, the smaller number of days, the more efficient a company - inventory is held

for less time and less money is tied up in inventory. Instead, money is freed up for

things like research and development, marketing or even share buybacks and dividend

payments. If the number of days is high, that could mean that sales are poor and

inventories are piling up in warehouses.

If inventory days are increasing, that’s not necessarily a bad thing. Companies

normally let inventories build up when they are introducing a new product in the

market or ahead of a busy sales period. However, if you don’t foresee an obvious

pickup in demand coming, the increase could mean that unsold goods will simply

collecting dust in the stockroom.


101

Days Sales Outstanding (DSO)

This looks at the number of days needed to collect on sales and involves Accounts

Receivables. While cash-only sales have a DSO of zero, people do use credit

extended by the company, so this number is going to be positive. Again, smaller is

better.

Days Sales

Outstanding (DSO)=

Average Accounts Receivable

Net Sales / 365

If a company's collection period is growing longer, it could mean problems ahead.

The company may be letting customers stretch their credit in order to recognize

greater top-line sales and that can spell trouble later on especially if customers face a

cash crunch. Getting money right away is preferable to waiting for it - especially since

some of what is owed may never get paid. The quicker a company gets its customers

to make payments, the sooner it has cash to pay for salaries, merchandise and

equipment, loans and, best of all, dividends and growth opportunities.

Days Payables Outstanding (DPO)

This involves the company's payment of its own bills or Accounts Payables. If this

can be maximized, the company holds onto cash longer, maximizing its investment

potential; therefore, a longer DPO is better.

Days Payable

Outstanding

(DPO)

=

Average Accounts Payable

Cost of Goods sold (COGS) /

365

Key Ratios

The ratios can be divided into following categories according to financial activity or

functions to be evaluated:


Ratios related to Receivables Management

Ratios related to Cash Management



102



2. Inventory to Working Capital Ratio




The inventory turnover measures that how well the company can manage to sell its

inventory. Another way of saying is how efficiently the company turns inventory into

sales. The purpose is to ensure the blocking of only required minimum funds in

inventory.

Importance of Inventory Turnover

If the company can quickly sell its inventory, the inventory turnover will be

higher. Conversely, if the company cannot sell its inventory well, then the

inventory turnover will be low. One has to watch this figure closely – if the

inventory ratio climbs too high, then the company may be keeping too little

inventory. This could cause lost profits due to customer orders that had to wait

until inventory arrived.

Inventory

Turnover Ratio=

Cost of Goods sold (COGS)

Average Inventory


103

2. Inventory to Working Capital ratio

The inventory to working capital ratio measures how well the company is able to

generate cash using working capital at its current inventory level. This ratio shows the

relationship between investments made in inventory & the total net investment in

working capital. Inventory is an important part of working because of its direct impact

on the profits of the organization. The value of inventory is susceptible to changing

price levels, fluctuation in business activities, variation in consumer demand,

obsolescence & other unpredictable factors that determine the market conditions.

Therefore, working capital should be sufficient to provide a cover for the possible

losses in inventory value.

Importance of Inventory to Working Capital

An increasing Inventory to Working Capital ratio is generally a negative sign,

showing the company may be having operational problems. If a company has

too much Working Capital invested in Inventory, they may have difficulty

having enough Working Capital to make payments on Short-Term Liabilities

and Accounts Payable. This is a great ratio to be used with several others to

really pick apart the inner workings of a company.

Inventory to

Working Capital

Ratio

=Inventory

X 100Working Capital


104


Inventory is one of the largest components of the current assets. The position of

inventory indicates operational efficiency of organization. The inventory to current

assets ratio measures how much percentage of current assets is formed by the

inventories. This ratio is essential as inventories are the most illiquid of all current

assets as sometimes it becomes difficult to convert inventory ( raw materials, work-in-

progress and finished products ) into cash on a short notice.

Importance of inventory to current assets

An increasing inventory to current assets ratio is a negative sign. It means that more &

more percentage of current assets is being constituted by the inventories. This

indicates poor operational efficiency of the organization. Also it shows that the funds

invested in current assets to meet obligations on a short notice are actually illiquid to

some extent & it may be difficult to convert them into cash immediately. On the other

hand, if the position of inventory is lower in current assets, it indicates higher

operational efficiency of the organization. Normally, less than 50 % of current assets

are treated as average position of inventory.

Inventory to Current Assets Ratio

= Inventory X 100Current Assets


The Inventory to Sales ratio measures the percentage of inventory the company

currently has on hand to support the current amount of sales.

Importance of Inventory to Sales

An increasing Inventory to Sales ratio is generally a negative sign, showing

the company may be having trouble keeping inventory down and/or Net Sales

have slowed, and can sometimes indicate larger financial problems the

company may be facing. Viewing this ratio over several periods reveals the

important aspect of the company's ability to manage inventory while

attempting to increase sales. It is also important to compare this ratio among

several companies to gauge how well each one performs, and to compare

their ratios to industry averages.


= Inventory X 100Sales


105

Ratios related to Receivable Management

1. Debtors turnover ratio

2. Average collection period

3. Debtors to current assets ratio

4. Debtors to working capital ratio


1. Debtors Turnover Ratio

This ratio is also known as Accounts Receivable Turnover Ratio. Accounts

Receivable is the amount that customers owe the company. The Accounts

Receivable Turnover measures the number of times Accounts Receivables were

collected during the year. This is also a measure of how well the company collects

sales on credit from its customers, just as Average Collection Period measures this in

days.

Importance of Accounts Receivable Turnover

A high or increasing Accounts Receivable Turnover is usually a positive sign –

showing the company is successfully executing its credit policies and quickly turning

its Accounts Receivables into cash. A possible negative aspect to an increasing

Accounts Receivable Turnover is that the company may be too strict in its credit

policies and missing out on potential sales.


= Net SalesAverage Accounts Receivable


106

2. Average Collection Period

The Average Collection Period measures the average number of days it takes for the

company to collect revenue from its credit sales. The Average Daily Sales is the Net

Sales divided by 365 days in the year. The company will usually state its credit

policies in its financial statement, so the Average Collection Period can be easily

gauged as to whether or not it is indicating positive or negative information.

Importance of Average Collection Period

This ratio reflects how easily the company can collect on its customers. It

also can be used as a gauge of how loose or tight the company maintains its

credit policies. A particular thing to watch out for is if the Average Collection

Period is rising over time. This could be an indicator that the company's

customers are in trouble, which could spell trouble ahead. This could also

indicate the company has loosened its credit policies with customers, meaning

that they may have been extending credit to companies where they normally

would not have. This could temporarily boost sales, but could also result in an

increase in sales revenue that cannot be recovered, as shown in the

Allowance for Doubtful Accounts.

Average Collection

Period=

360


3. Debtors to Current Assets Ratio

Debtor to current assets ratio indicates the position of debtors in total current assets.

This ratio is calculated by debtors with current assets. Debtors are one of the

largest components of current assets. If debtors are average or less than

average, it indicates proper realization of debtors. On the other hand, if

debtors are very heavy on respect of other current assets, it indicates poor

recovery of the company.

Debtors to Current Assets

Ratio

= Debtors X 100Current Assets


107

4. Debtors to Working Capital Ratio

Debtor to working capital ratio is one of the important ratios for analysis of working

capital management. Working capital is directly related with the position of debtors. If

debtors are lower as compared to working capital, it indicates proper and smooth

utilization of working capital. But on the other hand, the amount of debtor is very

large in that condition, working capital blocked and operational efficiency is directly

affected.

Debtors to Working Capital

Ratio

= Debtors X 100Working Capital


Debt to Equity ratio describes the lenders contribution for each rupee of the owners’

contribution. The ratio is directly computed by dividing total debt by equity or net

worth.

Debt to Equity

Ratio=

Debt

Equity

Importance of Debt to Equity Ratio

The ratio shows the extent to which debt financing has been used in the business. A

high ratio means that claims of creditors are greater than those of owners. A high level

of debt introduces inflexibility in the firm’s operations due to the increasing

interference and pressure from creditors. A low debt-equity ratio implies a greater

claim of owners than capital.

Ratios Related to Cash Management

1. Working capital ratio or current ratio

2. Liquid ratio or Acid-test ratio

3. Cash to current assets ratio

4. Sales to current assets ratio

5. Working capital turnover ratio

6. Sales to working capital ratio


108

1. Working Capital Ratio or Current Ratio

The working capital ratio (or current ratio) attempts to measure the level of liquidity,

that is, the level of safety provided by the excess of current assets over current

liabilities. The current ratio compares all the Current Assets of a company to all the

Current Liabilities. What this ratio basically tells us is if the company had to sell all

its readily available assets, would it be able to pay off its immediate debt?

Importance of Working capital ratio or current ratio

At a minimum, you would hope the company whose financial performance you are

analyzing could meet to pay its Current Liabilities if it were to liquidate all its Current

Assets. This would translate to a Current Ratio of 1:1 - the point where the Current

Assets equal the Current Liabilities. As with all the other performance ratios,

the Current Ratio value depends on the industry in which the company is

operating. It is also important to know what assets make up most of the

Current Assets. Inventory and Accounts Receivable, which are part of the

Current Assets, cannot always be counted on as easily transferred to cash.

Cash and Marketable Securities comprising the majority of the Current Assets

would definitely be favorable. Knowing this, would the company you are

analyzing truly be able to meet its financial obligations is it in fact had to sell

its Current Assets? The Current Ratio rising over time will be favorable.

Current Ratio =Current Assets

Current Liabilities


109

2. Liquid Ratio or Acid-Test Ratio or Quick Ratio

Liquid ratio is also known as Acid-test ratio or Quick ratio. Liquid ratio is a more

vigorous test of liquidity than current ratio. The term “liquidity” refers to the ability of

the firm to pay its short term obligations as & when they become due. Current assets

include inventories and prepaid expenses, which are not easily converted into cash

within a short span of time. So, quick ratio may be referred to as the relationship

between quick assets i.e. (current assets – inventories) & current liabilities. An asset is

said to be liquid if it can be converted into cash within a short span of period without

loss of value.

Importance of Liquid Ratio

If a company one is analyzing looks good while testing it against the Current Ratio,

then the Quick Ratio should be your next test to apply. Companies with steadily

rising Inventories may look good with the Current Ratio, but will have a deteriorating

effect on the Quick Ratio, since we subtract the Inventory out. The Quick Ratio rising

over time is favorable.

Quick Ratio =Current Assets – Inventories

Current Liabilities

3. Cash to Current Assets Ratio

This ratio basically measures what percentage of the current assets is formed by the

cash component. This is a more stringent measure of liquidity as it considers the most

liquid current asset.

Importance of Cash to Current Assets Ratio

High or increasing Cash to Current Assets ratio is generally a positive sign,

showing the company's liquid assets represent a larger portion of its Total

Current Assets. It also indicates the company may be better able to convert its

non-liquid assets, such as inventory, into cash.

Cash to Current Asset Ratio

= Cash X 100Current Assets


110

4. Sales to Current Assets Ratio

The Sales to Current Assets ratio measures how well a company is making use of its

assets in generating sales. This ratio is most valid in industries where companies hold

the majority of their own inventories in-house, as opposed to having their customers

hold their inventory for them.

Importance of Sales to Current Assets

The Sales to Current Assets ratio is best measured over several periods

compared to industry averages, as the amount of Current Assets varies widely

among companies and industries. Decreasing Sales to Current Assets ratio is

generally a negative sign, indicating the company may have slowed production,

decreasing the amount of inventory and resultantly the Current Assets.

Sales to Current Asset Ratio

= SalesCurrent Assets

5. Working Capital Turnover Ratio

The Working Capital Turnover ratio measures the company's Net Sales from the

Working Capital generated. Note that another ratio exists, the Sales to Working

Capital Ratio also measures Net Sales to Working Capital. We chose to interchange

the usual components of Working Capital (Total Current Assets - Total Current

Liabilities) with an alternate method (shown above). With two similar ratios using

slightly different methods to compute Working Capital, plotting both of these ratios

together to see their differences would be wise.

Importance of Working Capital Turnover

A high or increasing Working Capital Turnover is usually a positive sign, showing

the company is better able to generate sales from its Working Capital. Either the

company has been able to gain more Net Sales with the same or smaller amount of

Working Capital, or it has been able to reduce its Working Capital while being able to

maintain its sales. Efforts to streamline the operations of the company will often

show favorably in this ratio.

Working Capital

Turnover Ratio=

Sales



111

6. Sales to Working Capital Ratio

The Sales to Working Capital ratio measures how well the company's cash is being

used to generate sales. Working Capital represents the major items typically closely

tied to sales, and each item will directly affect this ratio.

Importance of Sales to Working Capital

An increasing Sale to Working Capital ratio is usually a positive sign, indicating the

company is more able to use its working capital to generate sales. Although

measuring the performance of a company for just one period reveals how well it is

using its cash for that single period, this ratio is much more effectively used over a

number of periods. This ratio can help uncover questionable management decisions

such as relaxing credit requirements to potential customers to increase sales,

increasing inventory levels to reduce order fulfillment cycle times, and slowing

payment to vendors and suppliers in an effort to hold on to its cash.

Working Capital Turnover Ratio

= SalesAverage Working Capital


1. Return on Assets (ROA)

2. Return on Equity (ROE)

3. Return on Capital Employed (ROCE)


1. Return on Assets (ROA)

ROA is an indicator of how profitable a company is relative to its total assets. ROA

tells how efficient management is at using its assets to generate earnings. The ROA figure

gives investors an idea of how effectively the company is converting the money it has to

invest into net income. The higher the ROA number, the better, because the company is

earning more money on less investment.

Return on Assets (ROA)

= Profit After TaxAverage Total Assets

2. Return on Equity (ROE)


112

The return on equity is net profit after taxes divided by average equity. It measures the

rate of return on the ownership interest of the common stock owners. It measures a

firm's efficiency at generating profits from every unit of shareholders' equity. ROE

shows how well a company uses investment funds to generate earnings growth.

Return on Equity (ROE)

= Profit After TaxAverage Equity

3. Return on Capital Employed (ROCE)

ROCE is used to prove the value the business gains from its assets and liabilities, a

business which owns lots of land but has little profit will have a smaller ROCE to a

business which owns little land but makes the same profit.

It basically can be used to show how much a business is gaining for its assets, or how

much it is losing for its liabilities.


Net Profit Margin ratio is measured by dividing profit after tax by sales:

Net Profit Margin

= Profit After TaxSales

Importance of Net Profit Margin

Net profit margin ratio establishes a relationship between net profit and sales and

indicates management’s efficiency in manufacturing, administering and selling the

products. This ratio is the overall measure of the firm’s ability to turn each rupee sales

into net profit.


Return on Capital Employed (ROCE)

= Profit Before TaxAverage Capital Employed

113

Appendix B: Cash Management

Cash, the most liquid asset and also referred to as the life blood of a business enterprise and

is of vital importance to the daily operations of the business firms. Its efficient management is

crucial to the solvency of the business because cash is the focal point of the fund flows in a

business. If a business has no cash and no way of getting any cash, it will have to close down.

Cash Management refers to management of cash balance and the bank balance and also

short term deposits. A Cash Management System is essential for a company for the following

two reasons:

Uncertainty of cash flows

Lack of synchronization of inflows and outflows

Cash Management is concerned with the managing of:

Cash flows into and out of the firm.

Cash flows within the firm

Cash balances held by the firm at a point of time for financing deficits or investing

Surplus cash.

Goals of Cash Management

The Cash Management Strategies are generally built around Two Goals:

To provide cash needed to meet the obligations, and

To minimize the idle cash held by the firm

In order to resolve the uncertainty about cash flow prediction and the lack of synchronization

between cash receipts and payments, the firm should develop appropriate strategies for cash

management. The firm should evolve strategies regarding the following four facets of Cash

Management:

Cash Budgeting/ forecasting: Cash inflows and Cash Outflows should be planned to

protect cash surplus or deficit for each period of planning. Cash Budget should be

prepared for this purpose.

Manage the Cash Flows: The flow of cash should be managed properly. The cash

inflows should be accelerated, while, as far as possible, decelerating the cash

outflows. Managing of cash is done through:

Organized collection management


114

Proper disbursement management

Optimum Cash Level: The firm should decide about the optimum 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.


115

Investment of Surplus Cash: The surplus cash balances 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.

Motives for Holding Cash

There are four primary motives for holding cash.

1. Transaction Motive

Business firms as well as individuals keep cash because they require it for meeting

demand for cash flow arising out of day-to-day transactions. The firm needs cash

primarily to make payments for purchases, wages & salaries, other operating

expenses, taxes, dividends, etc. The need to hold cash would not arise if there were

perfect synchronization between cash payments and cash receipts, i.e. enough cash is

received when the payment has to be made. For those periods, when cash payments

exceeds the cash receipts, the firm should maintain some cash balance to be able to

make required payments. For transaction purpose, a firm may invest its funds in

marketable securities. The Transaction Motive mainly refers to holding cash to meet

anticipated payments whose timing is not perfectly matched with cash receipts. In

other words, the necessity of keeping minimum cash balance to meet payment

obligations arising out of expected transactions is known as Transaction Motive for

holding cash.

2. Precautionary Motive


116

A firm should maintain larger cash balance that required for day-to-day transactions

in order to avoid any unforeseen situation arising because of insufficient cash. The

necessity of keeping cash balance to meet any unforeseen situation or unpredictable

obligation is known as Precautionary motive for holding cash. The Precautionary

motive for holding cash depends on the predictability of cash flows. The amount of

precautionary cash is also influenced by the firm’s ability to borrow at short notice

when the need arises. Stronger the ability of the firm to borrow at short notice less is

the need for precautionary balance. The precautionary balance may be kept in the

form of cash or marketable securities. Marketable securities play an important role

here. The amount of cash set aside for precautionary reasons may not earn anything,

but if these funds are invested in high liquid marketable securities, then they can give

a lot of profits.

Hence, the amount of cash, a firm holds for transaction and precautionary

depends upon:

The expected cash inflows and cash outflows based on the cash budget and

forecasts, encompassing long and short range cash needs of the firm i.e.

Degree of Predictability of its cash flows

The degree of deviation between the expected and actual cash flows

Efficient planning and control of cash

The firm’s ability to borrow at short notice in the event of any emergency

The willingness and the capacity of the firm to take risk of running short of

cash

3. Speculative Motive

The firm’s desire to keep some cash balance to capitalize an opportunity of making an

unexpected profit is known as Speculative Motive for holding cash. The Speculative

Motive provides affirm with sufficient liquidity to take advantage of unexpected

profitable opportunities that may suddenly appear (And just as suddenly disappear if

not capitalize immediately). However, not many firms engage their funds in

speculative motives to a great extent. Thus, the primary motives to hold cash and

marketable securities are: Transaction Motive and Precautionary Motive.


117

Cash Management, thus, deals with optimization of cash as an asset and for this purpose the

financial manager has to take various decisions from time to time. He has to deal as the cash

flows in the direction of the firm. Even if a firm is highly profitable, its cash inflows may not

exactly match the cash outflows.

He has to manipulate and synchronize the two for the advantage of the firm by investing

excess cash if any as well as arranging funds to cover the deficiency.

Factors affecting the Cash Needs

Intrinsic factors influencing the cash management

Cash Cycle: The term cash cycle refers to the length of the time between the payment

for the purchase of raw materials and the receipts of the sales revenue.

Cash Inflows and Cash Outflows

Cost of Cash Balance

Other Consideration: There may be several subjective considerations such as

uncertainties of a particular trade, staff required for cash management etc., which will

have a bearing on determining the cash balance required by a firm.

Extrinsic factors influencing the cash management

Management Information System (MIS) of the banks: They provide full details of

the payments received. The details provided by them contain information of the

payment of the Field Representative (FR), Area Office (AO) and State Office (SO).

The report is made such that it can be used by the Marketing Central office (Mkco),

State Office, Area Office and Field Representative for verification of payments

received and to find out any discrepancies, if there any.

Innovative Schemes: Banks generates various new schemes time to time which

changes the cash flow of the organization.

Interest Lost: If any payment gets delayed even by one day, there is a loss of

investment over that income. So banks are bound by the agreement by which they pay

interest for any delay on their part.

Bank Charges: Banks arrange their representatives for pick up of demand drafts from

the Field Representatives, Area Offices and State Offices and deposit them in the

banks. For this service they charges transportation cost and transaction cost, which

vary depending on the banks.


118

Appendix C: Financial Statements

BALANCE SHEET

(Rs. in Crores)Schedule As At 31.03.2009 As At 31.03.2008

SOURCES OF FUNDS Shareholders' funds:

Share capital 1 426.28 423.93 Share Application Money Reserve and Surplus 2 3532.59 3958.87 3264.73 3688.66

Loan Funds: Secured Loans 3 7373.18 2404.67 Unsecured Loans 4 5429.6 12802.78 4370.97 6775.64

Deferred Tax Liability ( Net ) 542.12 534.19

TOTAL 17303.77 10998.49

APPLICATION OF FUNDS Fixed Assets: 5

Gross block 8808 8138.98 Less: Accumulated Depreciation 3842.16 3400.04 Net Block 4965.84 4738.94 Capital Work-In-Progress 6 290.98 5256.82 430.85 5169.79

Investments 7 7552.95 1416.73Current Assets, Loans and Advances

Inventories 8 1731.36 1577.1 Sundry Debtors 9 407.23 413.76 Cash and Bank Balances 10 69.63 243.32 Loans and Advances 11 5464.77 3541.56

7672.99 5775.74 Less: Current Liabilities and Provisions

Current Liabilities 12 2860.18 1048.49 Provisions 13 322.71 323.08

3182.89 1371.57


119

Net Current Assets 4490.10 4404.17Miscellaneous Expenditure (to the extent not written off)

Voluntary Retirement Scheme Expenses 3.9 7.8

TOTAL 17303.77 10998.49

PROFIT AND LOSS ACCOUNT(Rs. in Crores)

Schedule For yr 31.03.2009 For yr 31.03.2008INCOME FROM OPERATIONS Turnover Sales 7387.70 5968.47

Less: Excise Duty - - 7387.70 5968.47

Subsidy on Fertilizers 25545.60 32933.30 6194.35 12162.82

Other Revenue 14 499.00 345.77

Increase/ (Decrease) in Stocks 15 280.51 (1136.21)

33712.81 11381.38LESS: COST OF OPERATIONS Consumption of Raw Materials, Stores etc. Raw Materials 13997.22 6646.44 Stores and Spares 108.34 96.26 Chemicals and Catalysts 41.38 38.22 Packing Materials 200.39 170.43

Power, Fuel and Water 981.80 756.48 15329.13 7707.83

Less: Stock Transfer for Self Consumption 159.41 15169.72 118.81 7589.02Purchase of products for resale 14539.23 1245.44Employees' Remuneration & Benefits 16 595.96 405.75Manufacturing, Administration, Distribution and Other Expenses 17 1481.91 959.49Interest 18 1023.20 389.37Depreciation/ Amortisation 470.40 410.93Prior Period Adjustments (Net) 19 (13.46) (3.00)Deferred Revenue Exp. Written-off 3.90 3.86

(Voluntary Retirement Scheme Expenses)

33270.86 11000.86Profit Before Tax 441.95 380.52Provision for Taxation Current Tax 92.80 61.80 Fringe Benefit Tax 8.02 6.50 Deferred Tax 7.93 56.14

Earlier Years (26.81) 81.94 (1.51) 122.93Profit After Tax 360.01 257.59


120

Profit transferred to: Capital Repatriation Fund 0.47 0.46 Dividend Equalisation Fund

Contribution towards Approved Donations 1.00 1.47 - 0.46

(Under Income Tax Act, 1961) Net Profit as per Multi state

Cooperative Societies Act, 2002 358.54 257.13

CASH FLOW STATEMENT(Rs. In Crores)

Year Ended 31.3.2009

Year Ended 31.3.2008

(A) Cash Flow from Operating Activities:Net Profit before Tax 441.95 380.52Adjustment for:Depreciation 470.40 410.93Interest (Net) 857.19 362.71Provision for Doubtful Debts 0.01 0.31Loss on Damaged Goods 17.60 -Write down of Value of Goods-in-Transit 107.68 -Amount charged off / adjusted 0.04 0.20Assets Written-off 13.41 2.27Loss on Sale of Investments (Net) 83.16 15.47Exchange Rate Variations (Net) 148.84 5.10Loss on Sale of Fixed Assets (Net) 4.29 2.75Dividend Income (274.42) (132.54)Profit on sale of Investments - (115.22)Deferred Revenue Exp. Written off - VRS 3.90 3.97Diminution in value of Long Term Investments 81.16 -Liabilities / Provision written back (3.88) (14.12)

Prior Period Depreciation (0.12) 1509.26 2.95 544.78Operating Profit before Working Capital Changes 1951.21 925.30Adjustment for:Inventories (279.54) 706.83Trade and Other Receivables (1717.19) (487.06)

Trade Payable and Provisions 1747.04 (249.69) 3.43 223.20Cash Generated from Operations 1701.52 1148.50Direct Taxes Paid(Net of Refunds) (135.23) (72.07)Payment towards Cooperative Education Fund (2.57) (1.75)Payment to Cooperative Welfare Fund (1.90) (1.60)

Donations Paid (1.87) (141.57) (0.67) (76.09)

Net Cash From Operating Activities (A): 1559.95 1072.41


121

(B) Cash Flow from Investing Activities:Purchase of fixed Assets including C.W.I.P. (590.82) (594.93)Proceeds from Sale of Fixed Assets 11.50 31.89Purchase of Investments (Net) (6300.54) (691.73)Dividend Received 246.61 132.74Profit on Sale of Investments - 115.22Interest received 55.66 26.26

Net Cash used in Investing Activities (B): (6577.59) (970.55)

(C) Cash Flow from Financing Activities:Proceeds from issue of Share Capital 2.35 0.01Repayment of Term Loans (362.67) (153.97)Repayment of Deferred Trade Tax Loan (Net) (9.21) (4.10)Increase in Cash Credit 589.37 160.88Increase in Short Term Loans 5809.65 286.72Interest Paid (1008.14) (389.37)Dividend Paid (84.53) (84.45)Exchange Rate Variation (Net) (92.87) (5.10)

Net Cash used in Financing Activities (C): 4843.95 (189.38)

NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C) (173.69) (87.52)CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 243.32 330.84CASH AND CASH EQUIVALENTS AT THE

CLOSE OF THE YEAR 69.63 243.32NET INCREASE/ (DECREASE) IN CASH

AND CASH EQUIVALENTS (173.69) (87.52)


122

Appendix D: Significant Financial Indicators

2008-09 2007-08 2006-07 2005-06 2004-05FINANCIAL RATIOS :Operating Profit to Sales (%) 6.5 7.8 6.69 6.92 6.52Profit before Tax to Sales (%) 1.34 3.13 2.43 4.85 6.37Return on Capital Employed (%) 3.12 3.5 2.53 7.18 10.58Profit before Tax to Net Worth (%) 11.16 10.31 6.9 13.55 14.27Profit After Tax to Net Worth (%) 9.09 6.99 4.81 9.6 9.68Fixed Assets Turnover (Times) 6.32 2.38 2.2 3.01 3.57Working Capital Turnover (Times) 7.41 2.62 2.5 4.07 4.58Inventory of Finished Goods (Months Sales)

0.12 0.76 1.48 0.74 0.9

Inventory of Raw Material & PackingMaterial (Months Consumption) 0.74 1.25 1.01 0.86 0.79Sundry Debtors (Months Sales) 0.67 0.78 0.9 0.89 1.17Current Ratio 2.41:1 4.21:1 5.06:1 3.49:1 2.36:1Quick Ratio 1.87:1 3.06:1 3.15:1 2.37:1 1.51:1Debt Equity Ratio 3.23:1 1.84:1 1.78:1 1.42:1 2.20:1Employees ProductivityNo. of Employees 6757 6743 6826 6506 5752Sales per Employee (Rs. Crore) 4.87 1.8 1.51 1.77 1.29


123

Appendix E: Provisional highlights of IFFCO performance during 2008-09

Highest Production of Fertilisers

(Previous Best 70.12 lakh MT in 2006-07)

71.68 lakh MT

Highest Production of Urea

(Previous Best 39.63 lakh MT in 2007-08)

40.68 lakh MT

Production of NPK/DAP/NP

(Best 32.26 lakh MT in 2006-07)

31.00 lakh MT

Highest Sales of Fertilisers

(Previous best 93.24 lakh MT in 2007-08)

112.58 lakh MT

Highest Sales of Urea


58.69 lakh MT

Highest Sales of NPK/DAP


53.89 lakh MT

Profit Before Tax

(Best PBT 807.1 crore in 2002-03)

Rs.441.95 crore

Profit After Tax

(Best PAT 557.2 crore in 2002-03)

Rs.360.01 crore

Highest Turnover

(Previous best Rs.12163 crore in 2007-08)

Rs 32933 crore

Plant Productivity

(Best 1669 MT in 2005-06)

1376 MT per employee

Highest Marketing Productivity

(Previous best 6158 MT in 2007-08)

7397 MT per employee

Composite Energy Consumption

(Lowest 5.907Gcal / MT in 2007-08)

5.941 Gcal/ MT


124

Appendix F: VALUE ADDED STATEMENT

(Rs. In Crore)Particulars Year ended 31.3.2009 Year ended 31.3.2008

Income from Sales 32933.30 12162.82Dividend and Other Income 499.00 354.77

33432.30 12517.59

Less:Cost of Materials 29418.89 9971.54Manufacturing, Admn., Distribution 1481.91 959.49& Other Expenses Total Value Added 2531.50 1586.56

Applied to meet:Employee Cost 595.96 405.75Interest Payment 1023.20 389.37Income Tax (Net) 74.00 66.79Dividend 85.10 84.53Donations 1.75 0.75Cooperative Education Fund 3.59 2.57Retained Cash Profit 747.90 636.80 Total Utilisation of Value Added 2531.50 1586.56

RatiosValue added to Total Income (%) 7.57 12.67Value added to Capital Employed (%) 17.89 14.65Value added to Net Worth (%) 63.95 43.01Value added per Employee(Rs. Lakh) 37.46 23.53


125

Appendix G: Some of the well known fertilisers used in India

Nitrogenous Fertilisers

Urea 46%N

Ammonium Sulphate (As) 21%N

Ammonium Chloride (ACl) 26%N

Calcium Ammonium Nitrate (CAN) 25%N

Phosphatic & Potassic Fertilisers

Single Super Phosphate (SSP) 16% P2O5

Muriate of Potash (MOP) 60%K2O

Sulphate of Potash (SOP) 48%K2O

Di-ammonium Phosphate (DAP) 18 – 46

Rock Phosphate (RP) 16 - 20% P2O5

NPK Grades

10:26:26

12:32:16

14:35:14

15:15:15

16:20:00

17:17:17

19:19:19

20:20:00

23:23:00

28:28:00


126

Appendix H: Some Calculations

Calculation of Cost of Goods Sold (COGS)

(in Rs. Crores)

Year Opening Stock Closing Stock Purchases COGS

2004-05 495.27 353.65 6667.86 6809.482005-06 353.65 593.33 9406.16 9166.482006-07 593.33 1347.34 10332.1 9578.092007-08 1347.34 211.13 10200.56 11336.772008-09 211.13 491.64 31777.26 31496.75

Calculation of Average Inventory

(in Rs. Crores)

YearOpening

InventoryClosing

InventoryAverage

Inventory

2004-05 1020.56 931.50 976.032005-06 931.50 1519.64 1225.572006-07 1519.64 2283.94 1901.792007-08 2283.94 1577.10 1930.522008-09 1577.10 1731.36 1654.23


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