mba wcm project

A STUDY ON WORKING CAPITAL MANAGEMENT AT VSP 2011

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Synopsis

Steel is identified with industrial, infrastructural and urban development, as it is associated

with various machinery, construction, railways, automobiles, household appliances, and

space and defense equipment. Thus, steel occupies strategic position in a nation’s effort to

attain a solid and self-reliant industrial base. In spite of the iron and steel industry being a

capital, labor and energy intensive industry, subjected to rapid technological up-gradations

the astonishing fact is that, 85% of the metals (both ferrous &non-ferrous put together)

produced in the world, is accounted by steel alone. Hence, steel is identified as an

international industry, with global focus on steel making and steel technologies,

emphasizing quality, productivity, and cost reductions.

The crude steel production, which has a level of 1.4MT in 1950 rose to a level of 7MT by

late 70s. However, the industry grew in a highly protected & controlled environment with

massive import tariff & administrative control over pricing & distribution. Till 60s the

Indian industry retaining a clear &substantial manufacturing cost, competitive advantage

with respect to overseas producers. However, over the past two decades India lost much of

the competitive edge in the world market mainly due to protectionism & policies of isolation

from the global market.

Among the top steel producing countries of the world, the USA maintained the position as

the biggest steel producer until 70’s, when the Erstwhile USSR taken over the USA and has

remained on the top of the world since then. In this process Japan also developed its steel

industry significantly and took over the USA to become the first biggest producer in the

world.

Maintaining an edge in cost and quality competitiveness in the export markets, low labour

cost (15% of the steel) and well-trained human resources as well as good quality inputs, is

one of the major strengths of the Indian Steel Industry. India has the advantage of possessing

large costal line. Further the geographical advantage of being in South East Asia for import

of cooking coal and export of finished steel add to the strengths.

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100% changing over from conventional steel making through ingots casting, open route to

continuous casting to beams and slabs resulted in costs reductions, energy savings and

improved efficiencies.

Diseconomies of scale of operation by various mini steel plants and inadequate investment

opportunities for modernization and up gradation due to high cost of inflation and rising

interest and financing rate posing a major threat to the industry as a whole.

To meet the growing domestic needs of steel, Government of India decided to setup an

integrated Steel Plant at Visakhapatnam. An agreement was signed with erstwhile USSR

in1979 for co-operation in setting up 3.4 MT integrated steel plant at Visakhapatnam. The

foundation stone for the plant was laid by the then Prime Minister on 20th January 1971.

“To attain 16 million ton liquid steel capacity through technological up-gradation,

operational efficiency and expansion; to produce steel at international standards of cost and

quality; and to meet the aspirations of the stakeholders” is the main objective VSP.

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INTRODUCTION:

The growth of any organization depends on overall performance of all the

departments. A firm’s financial performance reflects its strength, weaknesses,

opportunities and threats of the organization with respect to profits earned,

investments, sales realization, turnover, and turn on investment, net worth capital.

Efficient management of financial resources and analysis of financial result

are prerequisite for success of an enterprise. In that working capital management is

one of the major areas of financial management. Managing of working capital implies

managing of current assets of the company like cash, inventory, accounts receivable,

loans and advances and current liabilities like sundry creditors, interest payment and

provision.

Working capital management is concerned with the problem which arise

while attempting to manage the current liabilities and the interrelationship that exist

between them.

The term current assets which in ordinary course of business can be, or,

will be turned in to cash within one year without undergoing a diminution in value

and without disrupting the operation of the firm

The major current assets are cash, marketable securities, accounts receivable and inventory.

current liabilities which intended at their inception to be paid in ordinary course of

business, within a year, out of the current assets or earnings of the concern.

The basic current liabilities are account payable, bill payable, bank overdraft,

and outstanding expenses.

The goal of working capital management is to manage the firm’s current

assets and current liabilities in such a way that the satisfactory level of working Capital is

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maintained. The current assets should be large enough to cover its current liabilities in order

to ensure a reasonable margin of the safety.

Like most other financial terms, different writers use the concepts “working capital”

in different connotations. There are two different concepts of working capital, viz., gross

concepts and net concepts. The “Gross Working capital” also known as ‘current capital’ or

circulating capital is represented by the sum total of all current assets of the enterprise. On

the other hand, the term net working capital refers to the difference between current assets

and current liabilities.

Gross working capital refers to the firm’s investment in current assets.

Current assets are the assets which can be converted in to cash within a year includes

cash, short term securities, debtors, bills receivable and inventory.

Net working capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to mature for

payment within an accounting year and include creditors,

Bills payable and out standing expenses. Net working capital can be positive or

negative. Efficient working capital management requires that, firms should operate with

some amount of net working capital, the exact amount varying to firm and depending,

among other things; on the nature of industries.net working.

Capital is necessary because the cash outflows and inflows do not coincide.

The cash outflows resulting from payment of current liabilities are relatively

predictable. The cash inflow are however difficult to predict. The more predictable the cash

inflows are, the less net working capital will be required.

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NEED FOR THE STUDY

The main aim of any firm is to maximize the wealth of shareholders. This can be

achieved only by a steady flow of profits. Which in turn depends on successful sales

activity? To generate sales, investment of sufficient funds in current assets is required. The

need of current assets should be emphasized, as the sales convert into cash immediately but

involved a cycle of operations, namely operating cycle.

Capital is essential for the setting up and smooth running of any business. Investment

made on fixed asset will yield excess cash inflows apart from payback amount and is spread

over a longer period of time. Hence the cash inflows (or) benefits associated are not

immediate but are expected in the future. Cash inflows & outflows occur on a continuous

basis in case of current assets. Credit forms an essential feature in the business (credit given

to customers & credit from suppliers). Since there is some time lag from the time of sales

&sales realization current assets &current liabilities, which together constitute the net

working capital, supports the business in its normal of operations. This calls for an efficient

management of working capital.

VSP is multi product manufacturing unit with varying cycle for each product. The

capital requirement for each department in an organization of VSP is large which (depends

on the product target for that particular year) calls for an effective working capital

management. Monitoring the operation on cycle duration is an important aspect of working

capital.

The policies, procedures and measures taken for managing of working capital gain

further importance in an organization like VSP where the working capital requirements runs

in cores of rupees. Any mismanagement on the part of authority will not just cause loss but

may even impair business operations. It is in this context working capital has gained

importance.

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OBJECTIVES OF THE STUDY

BROAD OBJECTIVES:

To find out the efficiency of working capital management in Vishakhapatnam Steel

Plant.

To have a practical experience of the functioning of the Finance Department of a

steel producing company.

To study how working capital management practices plays an important role in

supporting other activities of an integrated steel plant.

SPECIFIC OBJECTIVES:

To gain familiarity with the various components of working capital in

Vishakhapatnam Steel Plant.

To gain an in-depth knowledge of the tricks of managing the daily financial activities

of VSP.

To find out the difference between the theoretical and practical aspect of working

capital management.

To study and come out with any solution for improvement of working capital

management at Vishakhapatnam Steel Plant.

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METHODOLOGY

The analysis of the project was based on the available information. Any information

about the topic is called the data. The data was collected from this project is form of both

primary and secondary sources.

PRIMARY DATA:

This data had been collected through meetings and interviews with various

managers and employees of the finance department located in the administrative building of

Vishakhapatnam Steel Plant. At the same time the researcher visited various departments for

collection of data. The departments that had been visited are as follows:-

Main Cash Department

Pay Section

Sales Department

Treasury Department

SECONDARY DATA:

Apart from the primary data certain secondary data were required for this project.

Following are the sources of secondary data:-

Annual Reports

Cost & Budget Reports

Cash Report

Raw Materials Report

Production Reports

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Sales Reports

Time period: 5years data was taken for analysis.

Statistical tools: To analysis the data collected the researcher used the following

Techniques or Tools

Cash by current assets

Cash to working capital

Cash to current liabilities

Cash to current ratio

Cash to equity ratio.

LIMITATIONS OF THE STUDY

Although every effort has been made to study the “working capital management” in

detail, in an organization of VSP size, it is not possible to make an exhaustive study

in a limited duration of months.

It is not possible to include data of 2009-2010, as the audited report has not come yet

(at time of preparation of this report). However data of 2009-2010 is included

partially from the un-audited financial reports of VSP.

Apart from the above constraint, one serious limitation of the study is that it is not

possible to reveal some of the financial data owing to the policies and procedures

laid down by VSP. However the available data is analyzed with great effort to get an

insight into Working Capital Management in VSP.

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STEEL INDUSTRY IN INDIA

India got into the steel making in the early 20th century when JRD Tata set up the

first steel mill in the country in 1907 in Jamshedpur. Since then, the steel industry has under

gone a lot of changes but the Tata Iron and Steel Company continue to the largest private

steel maker in the country. The steel industry in the 70s and 80s was dominated by TISCO &

SAIL. With the price control regime in place, the steel companies could turn in a profit

without any major effort. But the situation soon changed when the country decided to open

the doors for foreign investment in 1991.

In the initial economic reforms, industrialists saw the economy growing at 7% per

annum and since steel consumption is directly linked to the growth in economy, it was

assumed that demand for steel in the country would explode. This led to huge flow of

investments in to the steel industry and many EAF based steel units were set up. The 1st

phase (1914-1947) of its evolution can be traced to the beginning of 20 th century when the

steel industry made a beginning as an icon of active patriotism, thanks to the pioneering

spirit of “Swadeshi” entrepreneurs in the private sector. This period saw a small but viable

steel capacity of about 1 million tones.

PROFILE OF VISAKHAPATNAM STEEL PLANT

The Government of India has decided to setup an integrated steel plant at the

Visakhapatnam to meet the growth domestic needs of steel. The Visakhapatnam steel plant

was the effect of the persistent demands and mass movements. It is another step towards

increasing the country’s steel production. The decision of the government to setup an

integrated steel plant was laid down by then the Prime Minister Smr. Indira Gandhi. The

prime minister laid the foundation stone on 20th January 1971.The consultant, M/s M N

Dastur & Co (pvt) Submitted a techno- economic feasibility report in February 1972, and

detailed project report for the plant, with an annual capacity of 3.4 MT of liquid steel.

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The Government of India and USSR signed an agreement on 12 th June 1979 for the

cooperation in setting up 3.4 MT integrated steel plant. The project was estimated to cost of

Rs. 3,897.28 cores based on prices as on 4th quarter of 1981. However, on completion of the

construction and commissioning of the whole plant in 1992, the cost escalated to Rs. 8755

crores based on prices as on 2nd quarter of 1994.Unlike other integrated steel plants in India,

Visakhapatnam steel plant is one of the most modern steel plants in the country. The plant

was dedicated to the nation on 1st August 1992 by the then prime minister, Sri.

P.V.Narasimha Rao.

VISION&MISSION

Vision :

To be a continuously growing world-class company we shall

Deliver high quality and cost competitive products and be the first choice of

customers

Create an inspiring work environment to unleash the creative energy of people

Achieve excellence in enterprise management

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Be a respected corporate citizen, ensure clean and green environment and develop

vibrant communities around us.

Harness our growth potential and sustain profitable growth

Mission:

To attain 16 million ton liquid steel capacity through technological up gradation,

operational efficiency and expansion; to produce steel at international standards of cost and

quality; and to met the aspirations of the stakeholders.

Core Values:

Commitment

Customer Satisfaction

Continuous Improvement

Concern for Environment

Creativity & Innovation

MAJOR SOURCE OF RAW MATERIALS

Raw Materials The place where the steel plant is getting it supplies of raw materials

Iron or lumps & fines

Bailadill, M.P

BF Line stone Jaggayyapeta, A.P

SMS Line stone UAE

BF Dolomite Madharam, A.P

SMS Dolomite Madharam, A.P

Manganese Ore Chipuripalli, A.P

Boiler Coal Talcher, Orissa

Cooking Coal Australia

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Medium Coking Coal

(MMC)

Gidi / Swang

/ Rajarappa / Kargila

MAJOR UNITS

Department Annual cap ‘000 T Units (3.0 MT stage)

Coke ovens 2261 3 Batteries each of 67 ovens and 7 Meter height

Sinter Plant 5256 2 Sinter machines of 213 m2 grate area each

Blast furnace 3400 2 Furnaces of 3200 m3 volume each

Steel melt shop 3000 3 LD converters each of 150 m3 volume and strand bloom casters

LMMM 710 3 Stand finishing mill

WRM 850 2 x 10 stand finishing mill

MMSM 860 6 stand finishing mill

Main products of VSP

Steel Products By products

Angles Granulate slag

Billets Lime fines

Channels Coal tar

Beams Anthracene OIL

Squares HP Naphthalene

Flats Benzene

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Round Toluene

Rears Zylene

Wire rods Wash oil, Ammonium Soleplate

RINL’s FUTURE PLAN

The expansion project for increase in capacity to 6.3Mtpa Liquid Steel is under

implementation. Capacity Augmentation would help the company consolidate its Leadership

in bars and structural Market and help the country in bringing the Demand-Supply gap.

RINL is continuing its efforts to have Raw Material security through the Joint

Venture route and in this direction a separate Special Purpose Vehicle for oversees coal

mines i.e. International Coal Ventures Ltd. (ICVL) has been formed. Further, JV for Ferro

Alloys with M/s MOIL was entered into. Besides, various proposals for limestone and iron

ore are under active consideration. Also major equipment like Blast Furnaces and converters

has exceeded their normal life and are therefore due for major repairs, revamp and

modernization.

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REVIEW OF LITERATURE

Working capital is so much in use in common parlance and is so much

misunderstood. Even among the professional managers the controversy and confusion

persists. In an economist’s point of view capital is often used to refer to capital goods

consisting of a great variety of things, namely, machines of various kinds, plants, houses,

tools, raw materials and goods in process. A finance manger of a firm looks for these things

on the asset side of the balance sheet. For capital, he turns his attention to the other side of

the balance sheet. An accountant will regard working capital as current assets minus current

liabilities and call it as net working capital. While a finance manager will consider gross

current assets as the working capital. In case of accountant and finance manager both may be

true, but there concerns differ. The former’s concern is arithmetical accuracy trained as he is

to tally the two sides of the balance sheet. But the finance manager’s concern is to find fund

for each item of current assets at such costs and risks that the evolving financial structure

remains balanced between the two. When one asks a production controller: what is working

capital? His answer is very simple and straightforward. To him working capital is the fund

needed to meet the day-to-day working expenses, i.e. to pay for materials, wages and other

operating expenses. Are there any differences between the statements of the accountant, the

finance manager and the production controller? In the ultimate analysis; the later may be

true, but according to the accountant or the finance manager it is the very working expenses

that get blocked in current asset along the productive-distributive line of an enterprise, and

net working capital is that liquidity which takes care of the working expenses if the line get

extended due to any reason.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital-gross and net.

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Gross working capital refers to the firm’s investment in current assets. Current

assets are the assets which can be converted in to cash within an accounting year and include

cash, short term securities, debtors, (accounts receivables or book debts) bills receivable and

stock (inventory).

Net working capital refers to the difference between current assets and current liabilities.

Current liabilities are those claims of outsiders which are expected to mature for payment

within an accounting year and include creditors (accounts payable), bills payable, and

outstanding expenses. Net working capital can be positive or negative. A positive net

working capital will arise when current assets exceeds current liabilities. A negative working

capital occurs when current liabilities are in excess of current assets.

The two concepts of working capital-gross and net – are not exclusive: rather, they

have equal significance from the management view point.

FOCUSING ON MANAGEMENT OF CURRENT ASSETS

The gross working capital concept focuses attention on two aspects of current assets

management: (1) how to optimize investment in current assets? (2)How should current

assets be financed?

The consideration of the level of investment in current assets should avoid two danger

points- excessive or inadequate investment in current assets. In vestment in current asset

should be just adequate to the needs of the business firm. Excessive investment in current

asset should be avoided because it impairs the firm’s profitability, as idle investment earns

nothing.

On the other hand inadequate amount of working capital can threaten solvency of the

firm because of its inability to meet its current obligations.

It should be realized that the working capital needs of the firm may be fluctuating

with changing business activity.

This may cause excess or shortage of working capital frequently. The management

should be prompt to initiate an action and correct imbalances.18


Another aspect of the gross working capital points to the need of arranging funds to

finance current assets. Whenever a need for working capital funds rises due to the increasing

level of business activity or for any other reason, financing arrangement should be made

quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to

remain idle, but should be invested in short term securities. Thus, the financial manager

should have knowledge of the sources of working capital funds as well as investment

avenues where idle funds may be temporarily invested.

FOCUSING ON LIQUIDITY MANAGEMENT

Net working capital is a qualitative concept. It indicates the liquidity position of the

firm and suggests the extent to which working capital needs may be financed by permanent

sources of funds. Current assets should be sufficiently in excess of current liabilities to

constitute a margin or buffer for maturing obligations within the ordinary operating cycle of

a business. In order to protect their interests, short term creditors always like a company to

maintain current assets at a higher level than current liabilities. It is a conventional rule to

maintain the level of current assets twice the level of current liabilities. How ever, the

quality of current assets should be considered in determining the level of current assets vis-

à-vis current liabilities.

A weak liquidity position posses a threat to the solvency of the company and makes

it unsafe and unsound. A negative working capital means a negative liquidity, and may

prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It may be

due to mismanagement of current assets. Therefore, prompt and timely action should be

taken by management to improve and correct the imbalances in the liquidity position of the

firm.

OPERATING AND CASH CONVERSION CYCLE

Operating cycle is the time duration required to convert sales, after the conversion of

resources in to inventories, in to cash. The operating cycle of a manufacturing company

involves three phases:

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Acquisition of resources such as raw material, labor power and fuel etc

Manufacture of the product which includes conversion of raw material in to work-in-

progress in to finished goods.

Sale of the product either for cash or on credit. Credit sales create account receivable

for collection.

Purchases payment credit sale collection

RMCP+WICP+FGCP

Inventory conversion period Receivable conversion price

Gross operating cycle

Payable Net operating cycle

(Operating cycle of a manufacturing firm)

The length of operating cycle of a manufacturing firm is the sum of inventory conversion

period (ICP), and debtors (receivable) conversion period (DCP). The inventory conversion

period is the total time needed for producing and selling the product. It includes raw material

conversion period (RMCP), work-in-progress conversion period (WIPCP) and finished

goods conversion period (FGCP). The debtor conversion period is the time required to

collect the out standing amount from the customers. The total inventory conversion period

and debtor’s conversion period is referred to

As gross operating cycle (GOC). The creditor’s deferral period (CDP) the length of

time the firm is able to defer payments on various resource purchases.

The difference between gross operating cycle and payables deferral period is net

operating cycle (NOC).

If depreciation is excluded from expenses in the computation of operating cycle, the

net operating cycle also represents the cash conversion cycle (CCL). It is the net time

interval between cash collection from sale of the product and cash payments for resources

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acquired by the firm. It also represents the time interval over which additional funds, called

working capital, should be obtained in order to carry out the firms operations.

GROSS OPERATING CYCLE (GOC)

The firm’s gross operating cycle can be determined as inventory conversion period

(ICP) plus debtor conversion period (DCP). Thus GOC is given as follows:

Gross operating cycle = Inventory conversion period + debtor conversion period

GOC = ICP + DCP

Inventory conversion period (ICP) is the sum of raw material conversion period

(RMCP), work-in-progress conversion period (WICP), and finished good conversion period

(FGCP).

ICP = RMCP + WICP + FGCP

Raw material conversion period (RMCP) - It is the average time period taken to

convert raw material in to work-in-progress. RMCP depends on raw material consumption

per day and raw material inventory. Raw material consumption per day is given by the total

raw material consumption divided by the number of days in the year (say 360). The raw

material conversion period is obtained when raw material inventory is divided by raw

material consumption per day.

Raw material conversion period = Raw material inventory

(Raw material consumption)/360

RMCP = RMI×360

RMC

Work in progress conversion period (WIPCP) - It is the average time taken to complete the

semi finished or work-in-progress.

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Work-in-progress conversion period = Work-in-progress inventory

(Cost of production)/360

WIPCP = WIPI×360

COP

Finished good conversion period (FGCP) - It is the average time taken sell the finished

goods.

Finished goods conversion period = Finished goods inventory

(Cost of goods sold)/360

FGCP = FGI×360

CGS

Debtor conversion period (DCP) - It is the average time taken to convert debtors in to cash.

DCP represents the average collection period.

DCP = debtors × 360

Credit sales

Creditor’s deferral period (CDP) - it is the average time taken by the firm in paying its

suppliers (creditors).

CDP= Creditors×360

Credit purchases

DETERMINANTS OF WORKING CAPITAL

There are no set rules and formulae to determine the working capital requirements

of a firm. A large no of factors each having a different importance influences working

capital needs of a firm. The following is the common factors that generally influence the

working capital requirements of a firm.

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Nature of business

Market and demand conditions

Technology and manufacturing policy

Credit policy

Availability of credit from suppliers

Operating efficiency

Price level changes

THE DANGERS OF EXCESSIVE WORKING CAPITAL

It results in unnecessary accumulation of inventories. Thus chances of inventory

mishandling, waste, theft and losses increase.

It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts results, which adversely affect profit.

Excessive working capital makes management complacent which degenerates in to

managerial efficiency.

Tendencies of accumulating inventories tend to make speculative profits grow. This

may tend to make dividend policy liberal and difficult to cope with in future when

the firm is UN able to make speculative profits.

THE DANGERS OF INADEQUATE WORKING CAPITAL

It stagnate growth. It becomes difficult for the firm to undertake profitable projects

for non availability of working capital funds.

It becomes difficult to implement operating plans and achieve the firm’s profit target.

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Operating in inefficiencies creep in when it becomes difficult even to meet day to

day commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds. Thus

the firm’s profitability would deteriorate.

Paucity of working capital funds render the firm unable to avail attractive credit

opportunities etc.

The firm losses its reputation when it is not in a position to honor its short term

obligations. As a result, the firm faces tight credit terms.

An enlightened management should, therefore, maintain the right amount of working

capital on a continuous basis. On then a proper functioning of business operations will be

ensured. Sound financial and statistical techniques, supported by judgments, should be used

to predict the quantum of working capital needed at different time periods.

RECEIVABLES MANAGEMENT AND FACTORING

INTRODUCTION

Trade credit arises when a firm sells its products or services on credit and does not

receive cash immediately. It is essential marketing tool acting as abridge for movement of

goods through production and distribution stages to customers. A firm grants trade credit to

protect its sales from the competitors and to attract the potential customers to bye it’s at

favorable terms. Trade credit creates accounts receivable or trade debtors also referred to

book (debts in India) that the firm is expected to collect in the near future. The customers

from whom receivable or book debts have to be collected in the future are called trade

debtors or simply as debtors and represents the firm’s claim or asset.

A credit sale has three characteristics. First, it involves an element of risk that should

be carefully analyzed. Case sales are totally risk less but not the credit sales as the cash

payments are yet to be received. Second, it is based on economic value. To the buyer, the

economic value in goods or services passes immediately at the time of sale, while the seller

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expects an equivalent value to be received later on. Third it implies futurity. The buyer will

make the cash payment for goods or services received by him in a future period.

CREDIT POLICY: NATURE AND GOALS

A firm’s investment in accounts receivable depends on: the volume of credit sales

and the collection period. For example if a firm’s credit sales are Rs 30 lakh per day and

customers, on an average, take 45 days to make payment, then the firm’s average investment

in accounts receivable is:

Daily credit sales × average collection period

Rs 30 lakh×45=Rs 1,350 lakh

The investment in receivables may be expressed in terms of costs of sales instead of

sales value. The volume of credit sales is a function of the firm’s total sales and the

percentage of credit sales to total sales. Total sales depend on market size, firms market

share, product quality, intensity of competition, economic condition etc. the financial

manager hardly has any control over these variables. The percentage of credit sales to total

sales is mostly influenced by the nature of business and industry norms.

There is one way in which the financial manager can affect the volume of credit sales

and collection period and consequently, investment in accounts receivable. That is through

the changes in credit policy. The term credit policy is used to refer to the combination of

three decision variables:

Credit standard, credit terms and collection efforts, on which the financial manager

has influence.

Credit standards are the criteria to decide the type of customers to whom goods

should be sold on credit. If a firm has more slow paying customers, its investment in

accounts receivable will increase. The firm will also be exposed to higher risk of default.

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Credit terms specify duration of credit and terms of payment by customers.

Investment in accounts receivable will be high if customers are allowed extended time

period for making payments.

Collection efforts determine the actual collection period. The lower the collection

period, the lower the investment is in accounts receivable and vice versa.

GOALS OF CREDIT POLICY

A firm may follow a lenient or a stringent credit policy. The firm following a lenient

credit policy tends to sell on credit to customers on very liberal terms and standards, credits

are granted for longer period even to those customers whose creditworthiness is not fully

known or whose financial position is doubtful. In contrast, a firm following a stringent credit

policy sells on a credit on a highly selective basis only to those customers who have proven

creditworthiness and who are financially strong. In practice, firms follow credit policies

ranging between stringent to lenient.

Marketing tool

Firms use credit policy as a marketing tool for expanding sales. In a declining market

it may be used to maintain the market share. Credit policy helps to retain old customers and

create new customers by weaning them away from competitors. In a growing market, it is

used to increase the firm’s market share. Under a highly competitive situation or

recessionary economic conditions, a firm may loosen its credit policy to maintain sales or to

minimize erosion of sales.

.

Maximization of sales vs. incremental profit

Is sales maximization the goal of firm’s credit policy? If it is so the firm would follow

a very lenient credit policy, and would sell on credit to every one. Firms in practice don’t

follow very loose credit policy just to maximize sales. Sales don’t expand without costs. The

firm will have to evaluate its credit policy in terms of both return and cost of additional

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costs. Additional sales should add to the firm’s operating profit. There are three types of

costs involved.

Production and selling costs- These costs increase with expansion of sales. If sales expand

within the existing production capacity, then only the variable production and selling costs

will increase. If capacity is added for sales expansion resulting from loosening of credit

policy, then the incremental production and selling costs will include both variable and fixed

costs.

The difference between incremental sales revenue and the incremental production and

selling cost is the incremental contribution of the change in the credit policy. We should note

that a tight credit policy means rejection of certain type of accounts whose credit worthiness

is doubtful. This results in to loss of sales and consequently, loss of contribution. This is an

opportunity loss to the firm. As the firm starts loosening its credit policy, it accepts all or

some of the accounts which the firm had earlier rejected. Thus the firm will recapture lost

sales and thus, lost contribution. The opportunity cost of lost contribution declines with the

loosening of credit policy.

Administrative cost- Two types of administrative cost are involved when a firm loosens its

credit policy. (a) Credit investigation and supervision costs (b) collection costs. The firm is

required to analyze and supervise large number of accounts when it loosens its credit policy.

Similarly, the firm ill have to intensify its collection efforts to collect outstanding bill from

financially less sound customers.

The incremental cost of credit administration will be nil if the existing credit

department without any additional costs can implement the new credit policy. This will be

the case when the credit department has idle capacity.

Bad debt losses- These arise when the firm is unable to collect its accounts receivable. The

size of the bad debt depends on the quality of accounts accepted by the firm. This firm tends

to sell to customers with relatively less credit standing when it loosens its credit policy.

Some of these customers delay payments, and some o f them don’t pay at all. As a result bad

debt losses increase. The firm can certainly avoid or minimize these losses by adopting a

very tight credit policy. Is minimization of bad debt losses a credit policy? If it is so no firm

will ever sell on credit to any one. If this happens, then the firm is not availing the

opportunity of using credit policy as a marketing tool for expanding sales, and will incur

opportunity cost in terms of lost contribution. Thus the evaluation of a change in firm’s 27


credit policy involves analysis of Opportunity cost of lost contribution Credit administration

cost and bad debt losses

These two costs behave contrary to each other. We can see that as the firm moves

from tight to loose credit policy, the opportunity cost declines ( i.e. the fir recaptures lost

sales and thus, lost contribution), but the credit administration costs and bad debt loses

increase( i.e. more accounts have to be handled which also include bad accounts which

ultimately fail to pay). How should the firm determine its credit policy? The firm’s credit

policy will be determined by the trade-off between opportunity cost and credit

administration costs and bad-debt losses. In the figure, this trade-off occurs at point ‘A’

where the total opportunity costs of lost contribution and credit administration costs and

bad-debt losses is minimum.

Costs and benefits cost of administration

And bad-debt loss

Opportunity cost

Tight credit policy loose

(Cost of credit policy)

28


Optimum credit policy:

A marginal cost- benefit analysis

The firms operating profit is maximized when total cost is minimized for a given

level of revenue. Credit policy at point ‘A’ in the above figure represents the maximum

operating profit (since total cost is minimum). But it is not necessarily the optimum credit

policy. Optimum credit policy is one which maximizes the firm’s value. The value of the

firm is maximized when the incremental or marginal rate of return of an investment is

equal to the incremental or marginal cost of the funds used to finance the investment. The

incremental rate of return can be calculated as incremental operating profit divided by the

incremental investment in receivable. The incremental cost of fund is the rate of return

required by the suppliers of funds, given the risk of investment in accounts receivable. We

should note that the required rate of return is not equal to the borrowing rate. Higher the risk

of investment, higher the required rate of return. As the firm loosens its credit policy, its

investment in accounts receivable becomes more risky because of increase in slow paying

and defaulting accounts. Thus the required rate of return is upward slopping curve.

In sum we may state that the goal of the firm’s credit policy is to maximize the value

of the fir. To achieve this goal the evaluation of investment in accounts receivable should

involve the following four steps.

Estimation of incremental operating profit

Estimation of incremental investment in accounts receivable.

Estimation of the incremental rate of return of investment

Comparison of the incremental rate of return with the required rate of return.

29


Cost and return (%) marginal cost of capital (k)

Marginal rate

Optimum investment in receivable of return (r Stringent

credit policy (Optimum level of receivables)

MONITORING RECEIVABLES

A firm needs to continuously monitor and control its receivable to ensure the

success of collection efforts. Two traditional method of evaluating the management of

receivable are average collection period (APC) and aging schedule. These methods have

certain limitations to be useful in monitoring receivable. A better approach is collection

experience matrix.

COLLECTION EXPERIENCE MATRIX

30


The major limitation of the traditional method is that they are based on aggregated

data and fail to relate outstanding receivables of a period with the credit sales of the same

period. Thus using the traditional method two analysts can came up with entirely different

signals about the status of receivables if they aggregate sales and receivables data

differently. Using disaggregated data for analyzing collection experience can eliminate this

problem. The key is to relate receivables to sales of the same period. When sales over a

period of time are shown horizontally and associated receivables vertically in a tabular form,

a matrix is constructed. Therefore, this method of evaluating receivables is called collection

experienced matrix. Let us take an example.

Suppose that the financial manager of affirm is analyzing its receivables from the

credit sales of past six months starting from July to December. The credit sales of the

company are as follows.

Rs in lakh Rs in lakh

July 400 October 220

August 410 November 205

September 370 December 350

From the sales ledger the financial manager gathered out standings receivables data

for each month’s sales. For example he found that for July, there was a sale of 400 lakh, the

out standing receivables during July, august and September were Rs 330 lakh, Rs 242 lakh,

and Rs 80 lakh. Similarly he ascertained receivables for sales of other months. This

information is shown in table-3.

How do we interpret the information contained in table-1? We can convert the table to a

collection experience matrix by dividing the out standing receivables in each column by

sales amount in that column. This is shown in table-4, which contains information on the

percentage of receivable on the credit sales from which those receivables have originated.

For example for the sale of July, 82.5 per cent receivables (i.e. 330/400) were outstanding at

the end of July, 60.5 per cent (i.e. 242/400) at the end of august and 20 per cent (i.e. 80/400) 31


at the end of September. In other words, 17.5 per cent receivables were paid by the end of

July, 39.5 per cent by the end of august (viz., 39.5-17.5=22 per cent additional receivables

were paid in august), 80 per cent by the end of September (viz., 80-39.5=41.5 per cent

additional receivables were paid during September) and remaining receivables were

collected during October so that the balance of book debts became nil at the end of October.

Receivables of other months can also be analyzed in the same way. Thus when we read a

column top down, we get an idea of the manner in which the firm collects a given month’s

sales. How well a firm does collect current month’s sales? This can be ascertained by

reading the diagonals drawn in table-2. For example the top diagonal shows the manner in

which current month’s sales are collected. The next diagonals show receivables one month

older and so on. For the firm in our example, we find the table-4 that about 80 per cent of

sales in a given month remain uncollected by the end of that month. In other words, about 20

per cent of sales in a given month are collected in the same month. If the percentages

increase as we move down by diagonal, it implies that the firm is unable to collect its

receivables faster. This requires an investigation for appropriate remedial action.

Table-1:

Sales and receivables from July to December

Rs in lakhs

Month July Aug Sept oct Nov Dec

Sales 400 410 370 220 205 350

Receivables July 330

Aug 242 320

Sept 80 245 320

Oct 0 76 210 162

Nov 0 0 72 120 160

Dec 0 0 0 40 130 285

32


Table-2: Collection experience matrix

Rs in lakhs

Month July Aug Sept oct Nov Dec

Sales 400 410 370 220 205 350

Receivables (%) July 82.5

Aug 60.5 78.0

Sept 20.0 59.8 86.5

Oct 0 18.5 56.8 73.6

Nov 0 0 19.5 54.5 78.0

Dec 0 0 0 18.2 63.0 81.4

Factoring

It is a method of converting a non productive inactive asset (i.e. receivable) in to a

productive asset (cash) by selling receivables to a company that specializes in their

collection and administration. A factor makes the conversion of receivable in to cash

possible.

Factoring services

While purchase of receivable is the fundamental to the functioning of factoring, the

factor provides the following three basic services to the clients:

Sales ledger administration and credit management.

33


Credit collection and protection against default and bad debt losses.

Financial accommodation against the assigned book debts (receivables).

In developed countries like USA, factors provide many other services. They include:

Providing information on prospective buyers.

Providing financial counseling.

Assisting the client in managing its liquidity and preventing sickness.

Financing acquisition of inventories.

Providing facilities for opening letters of credit by the client etc.

DIFFERENT WORKING CAPITAL RATIOS

Although working capital management particularly its receivable component,

apparently takes on a short term approach, commitment to a particular receivables policy

and the customer relation ship that emanates from it are long term in nature. Hence, the

credit manager must take a long term as well as short term view of the business to which he

is going to commit him self.

It is not important to have a strong accounting background to make intelligent use of

financial statements. A credit manager is required to calculate and interpret certain key ratios

which will tell him where his account receivables are in danger or not.

Classification of ratio:

Liquidity ratio

Solvency ratio

Profitability ratio

Among these three ratios the liquidity ratio is generally important for the working

capital management. So let us discuss about the liquidity ratio first.

Liquidity ratio- This ratio measures the ability of a business organization to pay short term

obligations in time. The liquidity ratio can be sub classified into two groups.

Liquidity study34


Efficiency study

The liquidity study can be further classified in to three categories.

Current ratio

Quick ratio(acid test ratio)

Absolute liquid ratio

The efficiency study can be further classified in to three categories.

Inventory turn over ratio(ITR)

Debtor turn over ratio(DTR)

Creditors turn over ratio(CTR)

Current ratio

It establishes the relationship between the current assets and current liabilities.

Mathematically,

Current ratio=current assets/ current liabilities

Rule of thumb: The standard fixed for current ratio is 2:1

The current ratio is a crude measure of liquidity.

Quick ratio (acid test ratio)

It establishes the relationship between liquid asset and current liability.

Mathematically,

Quick ratio=liquid assets /current liabilities

It is the absolute measure of liquidity.

Rule of thumb: The normal standard fixed for the quick ratio is 1:1

35


It is a rigorous measure of examining the liquidity of a business concern. Its other name is

also acid test ratio.

Absolute liquid ratio

It establishes the relationship between absolute liquid assets and current liabilities.

Mathematically,

Absolute liquid ratio=absolute liquid assets/current liability

Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2

A rare measure of liquidity used under certain special circumstances.

Inventory turn over ratio (stock velocity)/ (ITR)

ITR measures the relationship between cost of goods sold and the average inventory

during the period.

Mathematically,

ITR=cost of goods sold/average inventory

Its main objective is to measure the movement of stock. It is an absolute measure of

movement of stock or inventory.

Inventory holding period=365/ITR (days)

Debtor turn over ratio (DTR)

It measures or establishes a relationship between the net sales and the average debtor.

Mathematically,

DTR=net sales/average debtors

It measures the conversion of debtors in to the cash. It is an absolute measure of measuring

the turn over or conversion of debtors. There is a relative measure also namely average

collection period.

36


Average collection period=365/DTR (days)

Creditors turn over ratio (CTR)

While receivables turn over ratio of the customer organization measures the

vulnerability of the sources from which payables of the vendor-organizations are satisfied,

the creditors turn over ratio indicates the actual payment behavior of the customer

organization.

CTR=purchases/trade creditors (payables)

Conversion of this ratio in number of days = 365/CTR

INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the most significant part of current assets of a large majority

of companies in India. On an average, inventories are approximately 60 per cent of current

assets in public limited companies in India. Because of the large size of inventories

maintained by firms, a considerable amount of funds is required to be committed to them. It

is, therefore, absolutely imperative to manage inventories efficiently and effectively in order

to avoid UN necessary investment.

OBJECTIVE- To balance among smooth production, sales, operations and minimum

inventory to maximize profitability.

Motives of inventories management

Transaction motive-emphasizes the need to maintain inventories to facilitate

smooth production and sales operations.

Precautionary motive-necessitates holding of inventories to guard against the risk

of unpredictable changes in demand and supply forces and order factors.

37


Speculative motive-influences the decision to increase or reduce inventory levels to

take advantage of price fluctuations.

INVENTORY MANAGEMENT TECHNIQUES

To manage inventories answer should shout to the following two questions-

How much should be ordered?

When should it be ordered?

The answer to the first question is economic ordering quantity (EOQ)

Then what is economic ordering quantity?

It is that quantity of raw materials to be purchased at a time where both carrying cost and

ordering cost are at minimum.

Or the optimum quantities where both ordering cost and carrying cost are minimums.

Ordering cost- The cost involved to place an order for the purchase of raw material and to

receive the raw materials there to.

Ordering costs include-

Cost of staff

Traveling cost

Inspection cost

Office costs like- stationary, typing, postage, telephone.

Carrying cost- the cost of keeping the raw materials in the store is termed as

carrying cost.

Cost of capital(interest)

Cost of storage

38


Insurance cost

Cost of spoilage in handling

Methods of calculation of EOQ

Trial and error approach

Formula approach

Graphical approach

Trial and error approach

Example-

A firm’s inventory planning period is one year. Annual requirement is 1600 units. The

ordering cost per order is assessed as Rs 50.00. The carrying cost is calculated at Rs 1.00 per

unit. The firm can procure the materials in various lots like-1600, 800, 400, 200 and 100

units. Which order quantity is EOQ? Show the analysis in trial error approach.

Ans:

Carrying cost (c) =Rs 1.00/ units

Ordering cost (o) =Rs 50 / order Total annual consumption (A) =1600 units

As

the No. of orders 1 2 4 8 16

Ordering cost per order 50 50 50 50 50

Total ordering cost 50 100 200 400 800

Carrying cost per unit 1 1 1 1 1

Average inventory 800 400 200 100 50

Total carrying cost 800 400 200 100 50

Total cost(ordering cost +

carrying cost) 850 500 400 500 850

39


ordering cost and carrying cost is minimum at 400 units of lots purchase (i.e. Rs400.00), the

EOQ is 400 units.

Formula approach

There is a formula for calculation of EOQ

‘Ordering cost’ is taken as per order ordering cost..

Here in our example the EOQ is 400 units according to the formula approach also.

Graphical approach

Our answer to the second question (When should it be ordered?) is Reordering point.

40


Reordering point

The reordering point is that inventory level at which an order should be placed to

replenish the inventory. Before knowing the reordering point we should first know the lead

time, average usage and EOQ. Lead time is the time normally taken in replenishing

inventory after the order has been placed.

According to the formula

Re-order point =lead time ×average usage + safety stock

Safety stock- It is difficult to predict usage and lead time accurately. The demand

for material may fluctuate from day to day or even week to week. Similarly the actual

delivery time may be different from the normal lead time. If the actual usage in creases and

the delivery of inventory is delayed, the firm can face a problem of stock out which can

prove to be closely for the firm. Therefore, in order to guard against the stock out the firm

may maintain a safety stock- some minimum or buffer inventory as cushion against expected

increased usage and/ or delay in delivery time.

Optimum production run

The use of the EOQ approach can be extended to production runs to determine the

optimum size of manufacture. Two costs involved are set up cost and carrying costs. Set up

cost includes cost of the following activities: preparing and processing the stock orders,

preparing drawings and specifications, tooling machines set up, handling machines, tools,

equipments and materials, over time etc. production costs or set up costs will reduce with

bulk production runs, but carrying costs will increase as large stocks of manufactured

inventories will be held. The economic production size will be the one where the total of

set up and carrying costs minimum.

41


Costs Minim total cost Carrying cost

Order size ‘Q’

Q Ordering cost

The following equation can be used to determine economic lot size (ELS) or economic

production size.

INVENTORY CONTROL SYSTEMS

A firm needs an inventory control system to effectively manage its inventory. There

are several inventory control systems in vague in practice. They range from simple systems

to very complicated systems. The nature of business and size dictate the choice of an

inventory control system.

There are five important practices of inventory control systems:

Two bin system

ABC inventory control system

42


Just-In-Time (JIT) systems

Out-sourcing

Computerized inventory control systems

Two-bin-system

Under this system, the company maintains two bins. Once inventory in one bin is

used, an order is placed, and mean while the firm uses inventory in the second bin. For a

large departmental store that sells hundreds of items, this system is quite unsatisfactory.

The departmental store will have to maintain a self operating, automatic computer system

for tracking the inventory position of various items and placing order.

ABC inventory control system.

Large number of firms has to maintain several types of inventories. It is not

desirable to keep the same degree of control on all the items. The firm should pay maximum

attention to those items whose value is highest. The firm should, therefore, classify the

inventories to identify which item should receive the most effort in controlling. The firm

should be selective in its approach to control investment in various types of inventories. This

analytical approach is called ABC analysis and tends to measure the significance of each

item of inventories in terms of its value. The high value items are classified as ‘A’ terms and

would be under the tightest control. ‘C’ items represent relatively least value and would be

under simple control. ‘B’ items fall in between those two categories and require reasonable

attention of management. The ABC analysis concentrates on important items and is also

known as (control by importance and exception CIE). As the items are classified in the

importance of there relative value, this approach is also known as proportional value

analysis (PVA).

The following steps are involved in implementing the ABC analysis.

Classify the items of inventories, determining the expected se in unites and the price

per unit for each item.

43


Determine the total value of each item by multiplying the expected units by its unit’s

price.

Rank the item in accordance wit the total value, giving first rank to the item with

highest total value and so on.

Compute the ratios (percentage) of numbers of units of each item to total units of all

items and the ratio of total value of each item to total value of all items.

Combine items on the basis of their relative value to form three categories-A, B and

C.

Just-In-Time(JIT) systems

Japanese firm popularized just in time (JIT) system in the world. In a JIT system

material or manufactured components and parts arrive to the manufacturing sites or stores

just few hours before they are put to use. The delivery of material is synchronized with the

manufacturing cycle and speed. JIT system eliminates the necessity of carrying the large

inventories, and thus, saves carrying and other related costs to the manufacturer.

The system requires perfect understanding and co-ordination between the

manufacturer and the suppliers in terms of the timing of delivery and quality of material.

Poor quality material or components could halt the production. The JIT inventory system

complements the total quality management (TQM). The success of the system depends on

how well a company manages its suppliers. The system puts tremendous pressure on its

suppliers. They will have to develop adequate systems and procedures to satisfactory meet

the needs of manufacturers.

Out sourcing

A few years ago there was a tendency on the parts of many companies to

manufacture all components in-house. Now more and more companies are adopting the

practice out-sourcing. Out-sourcing is a system of buying parts and components from out

sides rather than manufacturing tem internally. Many companies develop a single source of

44


supply, and many others help developing small and middle size suppliers and components

that they require.

CASH MANAGEMENT

Cash and near cash; what is blood to human body, cash is to company. It is like oil

to lubricate the over turning wheels of business; without it the process grinds to a stop. Cash

is an asset which earns only when it is in use. It is the basic input needed to keep the

business running on a continuous basis.

MOTIVES OF HOLDING CASH

The firms need to hold cash may be attributed to the following three motives.

Transaction motive-The transaction motive requires cash to conduct its business in the

ordinary course. The firm needs cash primarily to make payments for purchases, wages and

salary, other operating expenses, taxes dividend etc.

Precautionary motive- It is need to hold cash to meet contingencies in the future. It

provides a cushion or buffer to withstand some UN expected emergency. The precautionary

amount of cash depends upon the predictability of cash flows. If cash flows can be predicted

with accuracy, less cash will be maintained for an emergency.

Speculative motive- The speculating motive for holding of cash is for investing in profit

making opportunities when they arise. The opportunities to make profit may arise when the

security prices changes. The firm will hold cash, when it is expected that interest rate will

rise and security price will fall. Securities can be purchased when the interest rate is

expected to fall; the firm will benefit by subsequent fall in interest rates and increase in

security prices. The firm may also speculate on material prices. If it is expected that the

material’s price will fall, the firm can postpone purchase of materials and make purchases in

future when price actually falls.

45


Some firm may hold cash for speculative purposes. By and large, business firms

do not engage in speculations. Thus the primary motive to hold cash and marketable

securities are: the transaction and precautionary motives.

The firm should evolve strategies regarding the following four facets of

cash management.

Cash planning- Cash in flows and out flows should be planned to project cash

surplus or deficit for each period of the planning period. Cash budget should be

prepared for this purpose.

Managing the cash flows- The flow of cash should be properly managed. The cash

in flows should be accelerated while, as far as possible, the cash out flows should be

decelerated.

Optimum cash level- the firm should decide about the appropriate level of cash

balances. The cost of excess cash and danger of cash deficiency should be matched

to determine the optimum level of cash balances.

Investing surplus cash- The surplus cash balance should be properly invested to

earn profits. The firm should decide about the division of such cash balance between

alternative short term investment opportunities such as bank deposits, marketable

securities, or inter corporate lending.

46


47


ANALYSIS AND INTERPRETATION

Statement of change in working capital for the year 2006-2007(Figures in

crores)

Particulars 2006 2007 Increase Decrease

Current Assets:

Inventories

Sundry Debtors

Cash & Bank balance

Other Current Assets

Loans & Advances

Total Current Assets

Current Liabilities:

Liabilities

Provision

Total current Liabilities

1216.45

165.65

5621.70

184.36

1063.84

8252.00

871.49

716.37

1587.86

1203.24

216.80

7194.68

314.48

1518.90

10448.10

1011.53

1092.77

2104.30

51.15

1572.98

130.12

455.06

13.21

140.04

376.40

Net working capital(CA-CL)6664.14 8343.80

Net increase in working capital 1679.66 1679.66

Total 8343.80 8343.80 2209.31 2209.31

Source: Annual report of VSP

ANALYSIS:

There is a net increase in working capital of 1679.66cr. Total current asset has increased

from Rs8252crores to Rs10448.10 crores. This is due to increase in the value of sundry

debtors, cash and bank balances, other current assets and loans and advances. Current

48


liabilities have also increased from Rs1587.86 crores to Rs2104.30 crores. But the effect on

net working capital is that it has increased from Rs666.14 crores to Rs8343.80 crores.

Statement of change in working capital for the year 2007-2008(Figures in crores)


Current Assets:

Inventories

Sundry Debtors

Cash & Bank balance


Loans & Advances



Liabilities

Provision


1203.24

216.80

7194.68

314.48

1518.90

10448.10

1011.53

1092.77

2104.30

1761.15

93.41

7699.11

292.43

1958.49

11804.59

1610.15

1581.47

3191.62

557.91

504.43

439.59

123.39

22.05

598.62

488.70

Net working capital(CA-CL) 8343.80 8612.97

Net increase in working capital 269.17

269.17

Total 8612.97 8612.97 1501.93 1501.93


ANALYSIS:

There is a net increase in the value of working capital of 269.17 crores. Total current asset

has increased from Rs10448.10 crores to Rs11804.59 crores. This is due to increase in

inventories, cash & bank balances and loans & advances. Total Current liabilities has also 49


increased from Rs2104.30 crores to Rs3191.62 crores but the effect on net working capital is

that it has increased from Rs8343.80 crores to Rs8612.97 crores.

Statement of change in working capital for the year 2008-2009 (Figures in crores)


Current Assets:

Inventories

Sundry Debtors

Cash & Bank balance


Loans & Advances



Liabilities

Provision


1761.15

93.41

7699.11

292.43

1958.49

11804.59

1610.15

1581.47

3191.62

3215.28

191.27

6624.17

258.91

1569.69

11859.32

2560.79

1620.53

4181.32

1454.13

97.86

1074.94

33.52

388.80

950.64

39.06


Net decrease in working capital 934.97

934.97

Total 8612.97 8612.97 2486.96 2486.96


ANALYSIS: Here there is a net decrease in working capital of Rs934.97 crores. Total

current asset has increased but very less in comparison to total current liabilities. This is due

to reduction in current assets like cash & bank balances, other current assets and loans &

advances. Total current asset has increased from Rs11804.59 crores to Rs11859.32 crores.

50


Similarly current liabilities have also increased from Rs3191.62 crores to Rs4181.32 crores.

The effect is that there is a net decrease in working capital. This is not a good sign for the

organization. Efforts should be made to reduce current liabilities.

Statement of change in working capital for the year 2009-2010 Figures in

crores)


Current Assets:

Inventories

Sundry Debtors

Cash & Bank balance


Loans & Advances



Liabilities

Provision


3215.28

191.27

6624.17

258.91

1569.69

11859.32

2560.79

1620.53

4181.32

2451.52

181.18

5415.54

137.40

1365.02

9550.66

2871.95

1435.89

4307.84

311.16

763.76

10.09

1208.63

121.51

204.67

184.64


Net increase in working capital 2435.18

2435.18

Total 7678.00 7678.00 311.16 2493.3


ANALYSIS: Here there is a net increase in working capital of Rs2435.18 crores. Total

current asset has increased but very less in comparison to total current liabilities. This is due

to reduction in current assets like cash & bank balances, other current assets and loans &

51


advances. Total current asset has decreased from Rs11859.32 crores to Rs9550.66 crores.

Similarly current liabilities have also increased from Rs4181.32 crores to Rs4307.84 crores.

The effect is that there is a net decrease in working capital. This is not a good sign for the

organization. Efforts should be made to reduce current liabilities.

GRAPHICAL REPRESENTATION:

The following graph shows the Net Working Capital (NWC) Figures of four

consecutive years. There is increase in NWC up to 2007-08 but decreased in the next year.

ANALYSIS OF VARIOUS COMPONENTS OF WORKING CAPITAL

INVENTORY ANALYSIS:

Inventory in RINL is composed of the following three things:

Raw Materials

Stores and Spares

Finished and Semi-finished products

POSITION OF RAW MATERIALS IN VISAKHAPATNAM STEEL PLANT

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

RAW MATERIALS CONSUMED 3584.62 3889.04 4280.22 5896.25 5535.11

RAW MATERIALS INVENTORY 470.61 454.66 686.10 1194.32 865.0352


DAILY CONSUMPTION* 9.82 10.65 11.72 16.15 15.16

HOLDIND PERIOD(in day 48 43 59 74 57

SOURCES:ANNUAL REPORTS OF VSP

*Daily consumption=Raw materials consumed/No. of days in a year

*Holding period=Raw materials inventory/ Daily consumption

ANALYSIS: The year 2009-10 is the best in terms of holding period of Raw materials.

Higher holding period means blockage of funds which can be used by the company for other

business activities. In the year 2007-08 and 2008-09 the consumption has gone up and at the

same time the holding period has also risen which reflects poor efficiency of the

management. Visakhapatnam Steel Plant should frame plans to reduce the holding period of

Raw materials for the coming period.

POSITION OF STORES AND SPARES IN VISAKHAPATNAM STEEL

PLANT

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

STORES AND SPARES CONSUMED 338.95 357.27 364.06 501.23 466.48

STORES AND SPARES INVENTORY 275.44 300.04 283.34 312.6 293.48

DAILY CONSUMPTION* 0.92 0.97 0.99 1.37 1.27

HOLDING PERIOD(in days)* 300 310 287 229 231

*Daily consumption=Stores and spares consumed/No. of days in a year

*Holding period=Stores and spares inventory/ Daily consumption

53


ANALYSIS: The year 2008-09 is the best in terms of holding period of stores and spares.

Higher holding period means blockage of funds which can be used by the company for other

business activities. From the above data it can be noted that consumption has gone up and at

the same time the holding period has also fallen subsequently which reflects very good

efficiency of the management. The lesser the holding period the chances of blockage will be

less which the VSP has maintained properly.

RATIO ANALYSIS:

WORKING CAPITAL RATIOS

Different working capital ratios can be calculated for different financial years of RINL by

using the data available in the balance sheets and profit and loss accounts of the

organization. These ratios will help us to say whether the organization is currently able to

meet its short term obligations in time or not.

Current Ratio- (Current Assets/Current Liability) (Rs in crores)

YEAR Current Asset Current Liability Ratio

2005-06 8252.00 1502.14 5.5:1

2006-07 10448.10 2104.30 4.9:1

2007-08 11804.59 3191.62 3.6:1

2008-09 11859.32 4181.32 2.8:1

2009-10 9550.66 4307.84 2.2:1

Source: Annual Reports of VSP

54


ANALYSIS: The standard fixed for the current ratio is 2:1. The current ratio of RINL is

found to be in a very good position from 2005-06 to 2008-09. Always it is satisfying the

thumb rule i.e. 2:1. This is a very good indication for the organization as the firm is able to

meet its short term obligations. It can be noted that the ratio has been decreased but still at

manageable position. This is due to current asset has increased less than proportionately to

current liability.

QUICK RATIO

Quick Ratio- (Liquid Asset/ Current Liability) (Rs in crores)

YEAR Liquid Asset Current Liability Ratio

2005-06 6849.29 1502.14 4.5:1

2006-07 8930.38 2104.30 4.2:1

2007-08 9751.01 3191.62 3.0:1

2008-09 8385.13 4181.32 2.0:1

2009-10 6961.74 4307.84 1.6:1


55


ANALYSIS: The standard fixed for the current ratio is 1:1. The quick ratio of RINL is in a

very good position through out the years. In the year 2005-06 it was highest. This shows that

the organization’s capacity to pay off current obligations immediately. From the above table

it can be seen that the ratio is decreasing but still in a good position. Current liability

increased mainly due to sundry creditors, earnest money, security & other deposits etc. The

firm should take necessary steps to reduce its current liabilities.

ABSOLUTE LIQUID RATIO

Absolute liquid ratio- (Absolute Liquid Asset/Current Liability) (Rs in crores)

YEAR Absolute Liquid Asset Current Liability Ratio

2005-06 5621.70 1502.14 3.7:1

2006-07 7194.68 2104.30 3.4:1

2007-08 7699.11 3191.62 2.4:1

2008-09 6624.17 4181.32 1.5:1

2009-10 5415.54 4307.84 1.2:1


56


ANALYSIS: The standard fixed for the current ratio is 1:2. The absolute liquid ratio in

the year 2005-06 is the highest and lowest in 2008-09. But according to the rule of thumb it

should be 1:2 or 0.5:1. The firm has sufficient absolute liquid assets to meet its current

liabilities in time. Although the ratio has decreased over the period but still it is in a good

position. The main reason to maintain the ratio is that firm’s absolute liquid asset has

increased over the years but suddenly decreased in 2008-09 due to decrease in term deposits

with scheduled banks in comparison to the previous year.

INVENTORY TURN OVER RATIO

Inventory Turnover Ratio= (Cost of Goods Sold/Average Inventory) (Rs in crores)

YEAR Cost of Goods Sold Average Inventory Ratio

(No of Times)

2005-06 5864.42 1236.99 4.74

2006-07 6368.01 1210.79 5.25

2007-08 6989.42 1482.14 4.71

2008-09 8071.74 2488.21 3.24

2009-10 8716.15 2523.36 3.45

57



ANALYSIS: Inventory Turnover Ratio (ITR) measures the velocity of conversion of stocks

into sales. As it can be seen from the above table ITR is the highest in 2006-07. It implies

that RINL has efficiently managed its Inventories. In the year 2008-09 it has declined to

3.24 which is a sign of inefficient management of inventories. This is due to accumulation of

inventories. In 2009 inventory is Rs3215.28 crores compare to 2008 it was Rs1761.15

crores. But in the year 2009-10 it has increased to 3.45 which show slightly improving their

inventories.

NET WORKING CAPITAL RATIO

Net Working Capital Ratio- (Net Working Capital/Net Assets) (Rs in crores)

YEAR Net Working Capital Net Assets Ratio

2005-06 6749.86 2078.24 3.24

2006-07 8343.80 1790.46 4.66

2007-08 8612.97 1384.64 6.22

2008-09 7678.00 1256.25 6.11

58


2009-10 5242.82 825.48 6.35


ANALYSIS: Net Working Capital Ratio of RINL has increased over period of time. In the

year 2005-06 it was 3.24 and increased to 4.66 in 2006-07, 6.22 in 2007-08 and there is a

little decline in the ratio in 2008-09. The main reason is that Net Working Capital has

decreased from Rs8612.97 crores in 2007-08 to Rs 7678.00 crores in 2008-09. So RINL

must maintain a healthy balance between current assets and current liabilities. Efforts should

be made to reduce liabilities. In 2009-10 again ratio increased from6.11 to 6.35 so slowly it

reduces its healthy position, it is not good for the organization.

WORKING CAPITAL TURN OVER RATIO

Working Capital Turn Over Ratio- (Sales/Net Working Capital) (Rs in crores)

YEAR Cost of Sales Net Working Capital Ratio

2005-06 7314.14 6749.86 1.08

2006-07 7932.66 8343.80 0.88

2007-08 9088.37 8612.97 1.05

59


2008-09 9128.38 7678.00 1.18

2009-10 9809.15 5242.82 1.87


ANALYSIS: The working capital turnover ratio for the year 2005-06 is 1.08. But it

decreased to 0.88 in 2006-07 which is not good for the organization from the view point of

efficient utilization of working capital. A higher ratio indicates efficient utilization of

resources. In 2008-09 the ratio increased and in 2009-10 it is the highest which indicates that

the company has efficiently utilized its working capital.

60


SOURCES OF CASH INFLOWS:

There are three main sources of cash inflows.

Operating

Non operating

Financial

The main sources of funds are sales realization. Sales are carried out at head quarters and of

various branches located throughout India. The funds collected are received at the head

quarter in such a way to minimize the delays in remittance of funds from the place of

collection to head quarter.

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The sales realization in head quarters includes both domestic and export sales receipts.

Domestic receipts are directly credited to cash credit negotiating banks.

In VSP working capital requirement is assessed by

Fixing the target production.

Preparation of budget (in rupees).

Working capital requirement are prepared taking into account:

Actual value of the previous two years working capital.

Projected value for the next two years.

Types of working capital source: Funds based limits: under this source, Visakhapatnam steel plant can obtain working

capital finance by bank borrowing in the form of cash credit of export packing credit.

Non-fund based limits: Visakhapatnam Steel Plant receives non-fund based working

capital in the form of letter of credit or bank guarantee.

Limits:

Total value of fund based and non-fund based limits of Visakhapatnam steel plant is

about Rs3000 crores.

Procedure for procurement of funds:

Visakhapatnam steel plant applies a credit monitoring and appraisal (CMA) reports

(a 40 - pages document). The document consists of historical data about the company and

profit and loss account, balance sheet, current assets, current liabilities, working capital

assessment, funds flow etc. The banks with which RINL is having funded based and non-

fund based limits will asses those documents. If they are satisfied that RINL is doing good

business and proved its creditworthiness then they will extend credit over and above the

fund required by it.

The banks finance RINL for its working capital requirements against the security of

hypothecation of current assets.

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CASH MANAGEMENT IN VSP

OBJECTIVE OF CASH MANAGEMENT

Transfer of cheques/ DD on day zero bases from branches/consignment stock

agencies to the designated account at Visakhapatnam.

Method of cash management:

In VSP cash requirement is planned and arrived at in the following manner:

The chairman cum managing director of VSP in consultation with board of directors

decides the production schedule for the following year.

The production schedule as approved by the directors is then circulated to all

departments, after which production target for each month is set.

The heads of each of 35 budgets, the directors formulate a master budget allocation

for each section.

After receiving all the budgets, the directors formulate master budget for the

particular year and the monthly budget allocation for each section.

At the end of each of month, the actual versus the projected budget is put up to the

management and directors discuss the reason for the variances. Any deficit in the

cash flow is adjusted by pushing the sales in the following month.

MAJOR BANKS OF VSP

State Bank of India.

Canara Bank.

UCO Bank.

Bank of Baroda.

Andhra Bank.

63


Bank of India.

State Bank of Hyderabad.

State Bank of Mysore.

Indian Overseas Bank.

Oriental Bank of Commerce.

The Federal Bank.

HSBC Bank Ltd.

Allahabad Bank.

IDBI Bank Ltd.

ICICI Bank

Indian Bank

Syndicate Bank

HDFC Bank

Karur Vysya Bank

Central Bank Of India

64

RANCHES AND OFFICES

(Region-Wise Network of RINL)

EASTERN REGION WESTERN REGION

1. BHUBNESWAR 16. MUMBAI.

2. KOLKATTA 17. AHMADABAD.

3. PATNA 18. INDORE.

4. JAMSHEDPUR (CSA) 19. NAGPUR

5. GUWAHATI (CSA) 20. PUNE

NORTHERN REGION SOUTHERN REGION

6. AGRA. 21. BANGLORE.

7. CHANDIGAR 22. COCHIN.

8. NEW DELHI 23. COIMBATORE.

9. FARIDABAD. 24. CHENNAI.

10. GHAZIABAD. 25. HYDERABAD.

11. JAIPUR. 26. KADAPPA (CSA).

12. LUDHIANA. 27. VIZAG (HQ)

13. KANPUR 28. VIZAG (CSA)

14. DHERADUN 29. VIZAG (BY PRODUCT).

15. DAMTAL.


Management of cash credit limit:

As the company is maintaining cash credit accounts with 7 to 8 Banks mentioned

above, it does not maintain cash balance except some petty cash expenses. The company

maintains two types of accounts at the branches and head quarters viz, collection account and

imprested account for petty expenses. Therefore, the question of managing surplus cash does

not a rise. However the management has to keep an eagle’s eye on fund flow and working

capital limit. They have to see that the balance will not go out of the limits given by the

balance will not go out of the limits given by the banks. At the same time they should be

position of utilize funds to the extent of the limits available.

As regards to information reports section generates daily:

Daily collection banks with branch wise break up

Daily position as regards to utilization of cash credit / packing credit limits with various consortium member banks financing their working capital requirements.

Statement showing the details of payments released in the day,

Statement showing the details of payments outstanding at the end of the day after taking into account the payments released on the.

Monthly cash flow statement showing the actual cash flow in the month with the projected expenditure of the ensuing month.

From the above it can be seen that the section interacts with numerous agencies such as the

various other departments of the organization, branch collection centers, suppliers and

customers.

As many critical decisions are made based on the reports generated at the cash section,

accuracy of the same assumes significance.

66


Fund collection mechanism:

The sales are affected by way of DD/Pay orders and cheques payable at respective

branches. All the branches have to inform about the each day sales report to the head quarter

which is located at Visakhapatnam. Since VSP has a centralized system, all the funds

collected from the branches all over India has to be deposited at the Visakhapatnam by

2pm.Pooling of funds to the centralized system is done in this way. It’s a regular activity and

banks providing cheapest rate of interest are engaged in this act of pooling funds through

their unique Cash Management Services (CMS). Average intra day cash flow to the RINL

headquarter is approximately 20/25 crores. Cash section has a system of monitoring the

receipts of the accounts of the above mentioned banks at their head quarters, which enables

the release of payment. The major objective of cash section is to avoid delays between the

time of deposition of funds in the banks at collection centers and the time at which the same

are received at head quarters. To achieve this is need continuous liaison between the banks,

collection centers and head quarters are a must. A glimpse of CMS service, features, policy

and guidelines followed by banks are given below.

Present policy:

Services are available with the banks providing the best service at most.

Features:

The collection of each day at the branches of RINL will be deposited in the bank

before 11 am of the next working day.

The bank will provide pick up facility for collection of cheques from the respective

RINL branches at their risk and responsibility.

The funds so deposited at various branches will be pooled and credited to the account

of RINL held at Visakhapatnam on the same day by 2 p.m. as long as cash

management system is vogue.

67


Banks must be capable to switch over immediately to Real Time Gross Settlement

(RTGS) at those VSP locations once RBI enables and the credit to the account of

RINL at Visakhapatnam must be as per the system in vogue at time.

The bank at Visakhapatnam should honor the cheques received in the clearing or

transfers issued by RINL against the anticipated funds for the day.

The bank shall allow for temporary overdraft in case of mismatch i.e. if the payments

of the day are more than the receipts, the short fall shall be adjusted by way of

overdraft which will be mitigated by the next working day or two.

The overdraft allowed by the bank and the charges payable for returned cheques shall

be at safer rate of interest charge.

The bank will submit MIS report on daily basis to respective RINL branches showing

cheques / DD deposited, it’s clearing status, details of returned cheques, amount

transferred and a consolidated report on a fortnightly to headquarters at

Visakhapatnam in mutually agreed user friendly format.

CASH MANAGEMENT SERVICE (CMS) AT RINL:

The objective of availing CMS is to transfer funds from the branches and CSAs of

RINL to its headquarters at Visakhapatnam with out any transit time i.e. “Day Zero” at the

designated account at Visakhapatnam and make payments to customers and suppliers by way

of credit to their accounts by electronic mode i.e. National Electronic Fund Transfer (NEFT)

& Real Time Gross Settlement (RTGS).The basic difference between NEFT & RTGS is that,

in case of NEFT 48hrs is the settlement period and any amount can be transferred, while the

settlement is done on the same day and sanction limit is above 1lakh in case of latter. Around

85% of transactions of RINL are done through these services.

The bank agreed that above mentioned services will be made available to the company in the

manner and subject to the terms and conditions set below.

The branches of the Bank shall arrange to pick up instruments i.e. Cheues, Demand Drafts for payment through NEFT/ RTGS etc. from branches of RINL on daily basis by 11a.m. Any default in picking up instruments shall attract a penalty @ overnight MIBOR+200 basic points per annum.

68


The Bank branches will also receive funds directly by means of RTGS, NEFT, and e-receipt any other mode permissible etc. These are also to be transferred to the credit of RINL A/c at Visakhapatnam with in the time permissible by RBI. Any delay will attract @ overnight MIBOR rate + 200 basic points per annum.

As the funds transferred by the Bank to Visakhapatnam will be used by RINL on the same day on estimation basis, the designated Branches of Bank at Visakhapatnam should sanction temporary clean / unsecured Over Draft limit up to the exact of short fall.

Total value of instruments i.e. cheques, Demand Drafts etc. collected / deposited at various branches of the bank are to be credited to RINL A/c in the designated branch at Visakhapatnam before 4p.m on the same day.

The bank branches shall furnish MIS report on daily basis latest by 4p.m to the branches of RINL at respective locations showing cheques/DDs etc. deposited, their clearing status, returned cheques, amount transferred to Visakhapatnam.

All payments executed by way of RTGS/NEFT are free of cost and at the same time all DDs/ Cheques are also issued at free of cost.

In case of NEFT/RTGS or other online facility, the credit to customer accounts shall be affected with in the time period permissible by RBI.

In case of any mismatch between A/c number, party’s name & banks branch code, the payment instruction shall be returned to RINL for rectification.

WEEKLY PROJECTED CASH FLOW OF VSP

FOR INVESTEMENT OF SURPLUS FUNDS from………..To………..

Description Rupees in crores Basis for projection

A. Sources: 1. Expected receipts from Branches.2. TDR maturities during the week including transfer there on.

****

****

Trend

Actual

Total ****

69


B. Utilization: 1. LCs-Import-for Raw materials.2. Iron Ore and Ferrow Alloys- Indigenous Payment.3. Coal & Coke-Indigenous Payment.4. Railway Freight.5. Ocean Freight, Customs duty.6. Excise Duty/Sales Tax.7. Stores & Spares.8. Project Expenses.9. Maintenance & Works contract.10. Other Administrative expenses.11. Branch Transfer & Sales Tax.12. Employee Related Payments.13. Advance Tax/TDS Payments.14. CC/WCDL outstanding.15. Loan against TDR Outstanding.

****

****

****

****

****

****

****

****

****

****

****

Trend

Trend

Trend

Trend

Trend

Projection

Trend

Projection

Trend

Trend

Trend

70


****

****

****

****

Trend

Trend

Projection

Projection

Total ****

The above table shows the weekly cash flows i.e. from Tuesday to Monday. When

the value of A-B is positive if there is surplus funds would be invested after approval from

CMD and Director (Finance). A situation of deficit arises when total utilization of funds

exceeds total sources of funds i.e. when the value of A-B is negative. In this situation funds

are required to meet the expenses.

Short term borrowings from banks are a form of source of fund which is decided by

the competent authority of the company.

COMMERCIAL PAPERS

RINL invests its surplus cash in marketable securities i.e. commercial papers. Credit

rating agency CRISIL has awarded P1+ which is considered as very strong. Size of a single

issue of CPs is about Rs500000 and total size of the issue is approximately Rs1000 crores.

Besides this RINL also invests its surplus funds in banks which provides better interest rates.

Commercial Papers (CPs) are important money market instruments introduced in

India, on the recommendation of Vaghul Working Group by Reserve Bank of India (RBI) in

the year 1989. Those companies are allowed to issue CPs which has,

A net worth of Rs 10 crores.

71


Maximum Permissible Bank Finance (MPBF) of not less than Rs 25 crores.

Listed on the stock exchange.

The Vaghul Working Group recommended that the size of single issue should be at

least 1 crore.

The size of single issue of CPs of RINL is about Rs50 crores and the total size is

approximately Rs1000 crores. Credit rating agency CRISIL has awarded P1+ for CPs of

RINL which is considered as very strong.

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73


FINDINGS & SUGGESTIONS

VSP is a multi product manufacture unit with varying cycle time for each product. The

capital required by each manufacturing unit of VSP depends on the individual’s products

cycle of each item.

The department wise capital whose capital requirement coupled with their

production target for a year invites and effective working capital management.

In finance, working capital is synonymous with current assets; VSP is a multi product

large organization with huge capital turnover where the working capital requirement

depends on the level of operation and the length of operation cycle.

Monitoring the duration of the operating cycle is an important aspect of current assets

management and control.

The year 2008-09 witnessed an unprecedented rise in prices of raw materials like iron

ore and coking coal and RINL had to battle the double impact of plugging steel prices

and high contracted prices of raw materials.

Definite shift in the product mix towards value added steel and continuous

performance at above the rated capacities helped VSP in capitalizing on favorable

markets during the first half of the year.

The company could crossed the landmark level of Rs10, 000 crores for the

consecutive second time in a row and also recorded a net profit of Rs1336 crores.

From the analysis of the financial data of RINL from 2005-06 to 2008-09, it can be

seen that company is maintaining a good working capital position.

The net working capital has increased up to 2007-08 showing that company is

maintaining balance between current asset and current liabilities. There is a net

decrease in working capital of Rs934.97 crores in the year 2009.

74


Total current asset has increased but very less in comparison to total current liabilities.

This is due to reduction in current assets like cash & bank balances, other current

assets and loans & advances.

The current ratio of RINL is also in a good position though it has decreased from

5.5:1 to 2.8:1 since 2005-06. This shows that the firm is able to meet its short term

obligations in time.

Quick ratio shows that the organization is capable of paying the current obligations

immediately though it has been decreased from 2005-06.

The absolute liquid ratios from 2005-06 of RINL shows that the organization has

sufficient absolute liquid assets to meet its current liabilities.

The important part of the project I.e. Cash Management at RINL, which is organized

in a proper manner through its various branches located all over India. RINL is having

23 branches and tie ups with more than 20 banks which provide Cash Management

Service (CMS) at a marginal rate. Since RINL has a centralized system, so funds are

collected and deposited with the RINL head quarter by 2p.m every day.

Cash section has a system of closely monitoring the receipts of the accounts of the

above mentioned banks at their head quarters, which enables the release of payment.

The major objective of cash section is to avoid delays between the time of deposition

of funds in the banks at collection centers and the time at which the same are received

at head quarters. To achieve this is need continuous liaison between the banks,

collection centers and head quarters are a must.

Funds are transferred by way of RTGS/NEFT and e-transfer facility provided by the

banks. 85% of the transactions are done through these facilities. Daily MIS report of

funds transfer, rejected cheques etc. are submitted to RINL.

A weekly projected cash flow is also prepared where sources and utilization of funds

are given. The main sources are expected receipts from the branches and TDR

maturities. Funds are utilized for various purposes e.g. raw material payments, wages

& salaries, Railway freight, Ocean freight, customs and excise duties, Project

expenses, maintenance work etc.

75


RINL is having cash credit limit with 7/8 banks mentioned earlier. Visakhapatnam

steel plant submits a credit monitoring and appraisal (CMA) reports (a 40 - pages

document). The document consists of current data and future projection of next two

years about the company and profit and loss account, balance sheet, current assets,

current liabilities, working capital assessment, funds flow etc. Banks extends credit

basing upon the documents in a mutually agreed manner.

Besides this if we look at the marketing performance; during the 2008-09 RINL sold

1, 06,705 tones of steel products through 1975 e-auctions. In addition to these 5

auctions were held for sale of 595 tones of Pig Iron and 365 e-auctions were held for

sale of 14042 tones of by products.

During the year 2008-09, 6.71 lakh tones have been sold to project customers

compared to 7.21 lakh tones in the year 2007-08.

RINL is the first integrated steel plant built with modern technology. It has already

crossed a turnover of Rs10, 000 crores. Credit sale of the organization is very less so

there is very less chances of bad debt losses. Performance of the company is

increasing day by day. For improvement of organization’s profitability, much

emphasis is needed to improve the better working capital management by decreasing

the current liabilities.

In the year 2008-09 Sales turnover of the company has reduced due to reduction in

exports which also affected its profitability. So the company should look into the

matter and exports must be increased to earn foreign currencies provided domestic

needs must be satisfied first.

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Conclusion

Steel consumption in India has gone up during the past decade from the level of 10 MT(1993-

94). The past decade was not significant only for higher growth rate of iron and steel

consumption in the country compared to previous few decades (during 1960-61 steel

consumption in the country has gone up from 3.6 MT to 8.9 MT only), but some vital events

have also taken place which brought an overall change in the Indian steel scenario. The recent

policy of the government of India for liberalizing the Indian iron and steel sector from age-

old control and equalized freight system has changed the basis structure of the industry

thoroughly. The policy of liberalized import has also put the Indian steel industry open to

global competition.

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BIBLIOGRAPHY

Financial Management by -I. M. Pandey.

Working Capital Management by - Hrisikesh Bhattacharya.

Financial Management by - M. Y. Khan & P. K. Jain.

Financial Management by - Prasanna Chandra.

Financial Management by - Sharma & Gupta.

Financial Management by - S. P. Jain.

Annual Financial Report of - VSP.

WEBSITES:

www.dpe.nic.in

www.rbi.org

www.themanagementor.com/.../cfa/miller.htm

www.vizagsteel.com

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http://www.rbi.org/

http://www.dpe.nic.in/

mba wcm project

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