sip project vipin belkhede
TRANSCRIPT
SUMMER INTERNSHIP
REPORT ON
FOR THE ACADEMIC SESSION 2010-12
“Study Of Working Capital Management Of Maharashtra Elektrosmelt Limited” (A Subsidiary of SAIL), chandrapur
PREPARED BY
VIPIN BELKHEDE
PROJECT GUIDE
PROF. Rutuja Deshpande
DEPARTMENT OF MANAGEMENT STUDIES & RESEARCH
TIRPUDE COLLEGE OF SOCIAL WORK,
BALASAHEB TIRPUDE MARG,
CIVIL LINES, SADAR, NAGPUR-440 001
CERTIFICATE
This is to Certify that Ms. Vipin Belkhede is a bonafied Student of the Master of Business Administration (MBA) course specialization in Finance Management, for academic session 2010-2012, of the Department of Management Studies and Research, Tirpude College of Social Work, Nagpur.
The Candidate has worked under the Supervision of Prof. Rutuja Deshpande and has satisfactorily completed project work Summer Internship. The project Submitted, is his own hard work and is complete so as to warranty its presentation for examination.
His project work entitled “Study of Working Capital Management of MEL.” which is fulfillment of the Requirement for the above Course is being forwarded to Nagpur University.
Project Guide Director
Prof. Rutuja Deshpande Prof. Lalit Khullar
Declaration
I, Vipin Belkhede, hereby declare that, with the expectation of Suggestion and guidance received from my Supervisor Prof.Rutuja Deshpande, this Project work Titled “Study of Working Capital Management of MEL.” is my own hard work.
This dissertation as one, which is substantially the same as this, has not been submitted by me for any other examination of this University or any other University.
Nagpur Vipin Belkhede
Date: (MBA-III)
2010-2012
Acknowledgement
This project is the outcome of the help and encouragement provided by all faculty members, who were a continuous source of inspiration and who guided me in all my endeavors.
I take this opportunity to thank all those who were a great support behind this project without their unconditional support this report would have been completed.
EXECUTIVE SUMARRY
The need for working capital to run the day-to-day business activities cannot be overemphasized. One can hardly find a business firm, which does not require any amount of working capital. Indeed, firm differ in their requirements of the working capital.
A firm should aim at maximizing the wealth of its shareholders. In its firm endeavor to do so, a should earn sufficient return from its operation. Earning a steady amount of profit require successful sales activity. The firm has to invest enough funds in current asset for generating sales. Current asset are needed because sales do not convert into cash instantaneously. There is always an operating cycle involve in the conversion of sales into cash.
The project titled “Study Of Working Capital Management Of Maharashtra Elektrosmelt Limited” (A Subsidiary of SAIL), chandrapur, deals with this matter and is based on the in-house industrial training at MEL. Unless the organizations lean to manage its working capital, success will be elusive. Thus, the effectiveness of an organization depends on the strength of its working capital management as it core to the whole system.
The primary objective involves the collection of the data regarding the financial statement for five (2005-2010). It was collected from the annual audited reports of the company.
The secondary objective involve analyzing the working capital management and to determine efficiency in cash, inventories, debtors and creditors. Further, to understand the liquidity and profitability position of the firm.
The objectives are achieved by conducting time series analysis and then arriving at conclusions, which are important to understand the efficiency/inefficiency in the use of working capital.
In the contest of India’s steel industry working capital management holds a greater significance because steel which forms the backbone of any infrastructural facility, in recent years has become more crucial for achieving eapid economic growth of our country. Keeping this background in view, an attempt is made to examine the working capital practices in SAIL with reference to Maharashtra Electrosmelt Limited, Chandrapure. The project contains the basic postulate of working capital, procedure for analysis of working capital, ratio being used to define the working capital and the impact of shortcoming in the management of it. All this had been done to get a clear view of the technique of working capital management in Maharashtra Electosmelt Limited, chandrapure to find out the efficiency of company.
TABLE OF CONTENTS
ACKNOWLEDGEMENT
EXCECUTIVE SUMMARY
Details
• INTRODUCTION
• Introduction
• Performance of The Indian Steel Industry
• Introduction of Maharashtra Elektrosmelt Limited
• PROFILE
• Profile Of Steel Authority Of Indian Limited (SAIL)
• Profile Of Maharashtra Elektrosmelt Limited (MEL)
• RESEARCH METHODOLOGY
• Statement Of The Problem
• Objective Of Study
• Research Methodology
• Limitation Of Study
• REVIEW OF LITERATURE
• Working Capital Management
• ANALYSIS & INTERPRETATION
• Current Ratio
• Quick Ratio
• Absolute Liquid Ratio
• Working Capital
• WC Turnover Ratio
• Current Asset Turnover Ratio
• Inventory Turnover Ratio
• CONCLUSIONS & SUGGESTIONS
• Conclusion
• Suggestion
• BIBLIOGRAPHY
Chapter – 1
Introduction
1.1 Introduction
India’s economic growth is contingent upon the growth of the Indian steel industry. Consumption of steel is taken to be an indicator of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, petrochemicals and fertilizers. India occupies a central position on the global steel map, with the establishment of new state-of-art steel mills, acquisition of global scale capacities by players, continuous modernisationand up gradation of older plants, improving energy efficiency and backward integration into global raw material sources.
Steel production in India has increased by as compounded annual growth rate (CAGR) of 8 percent over the period 2002-03 to 2006-07. Going forward, growth in India, at around 46kg. is well below the world average (150kg) and that of developed countries (400kg). Indian demand is projected to ries to 200 million tones by 2015. Given the strong demand scenario, most global steel players are into a massive capacity expansion mode, either through brownfield or Greenfield route. By 2012, the steel production capacity in Indian is expected to touch 124 million tones and 275 million tones by 2020 . while Greenfield projects are slated to add 28.7 million tones, brownfield expansions are estimated to add 40.5 million tones to the existing capacity of 55 million tones.
Steel is manufactured as a global tradable product with no manor trade barriers across national boundaries to be seen currently. There is also no inherent resource related constraints which may significantly affect production of the same or its capacity creation to respond to demand increases in the global market. Even the government policy restrictions have been negligible worldwide and even if there are any the same or its capacity creation to respond to demand increases in the global market. Even the government policy restrictions have been negligible worldwide and even if there are any the same to respond to specific conditions in the market and have always been temporary. Therefore, the industry in general and at a global level is unlikely to throw up substqantive competition issues in any national policy framework. Further, there are no natural monopoly characteristics in steel. Therefore, one may not expect complex competition issues as those witnessed in industries like telecom, electricity, natural gas, oiliest. This however, does not mean that there is no relevant or serious competition issue in the steel industry. The growing consolidation in the steel industry worldwide through mergers and an acquisition has already thrown up several significant concerns. The fact that mergers and steel has always been an oligopolistic industry sometimes has raised concerns about the anticompetitive behaviors of large firms that dominate this industry. On the other hand the set of large firms that characterize the industry has been changing over time.
Trade and other government policies have significant bearing on competition issues. Matters of subsidies, non-tariff barriers to trade, discriminatory customer duty (on exports and
imports) etc. may bring in significant distortions in the domestic in the domestic market and in the process alter the competitive of individual players in the market. The specific role of the state in creating market distortion and thereby the competitive conditions in the market are a well-known issue in this country.
The country has acquired a central position on the global steel map with its giant steel mills, acquisition of global scale capacities by players, continuous modernization & up gradation of old plants, improving energy efficiency, and backward integration into global raw material sources. Global steel giants form across the world have shown interest in the industry due to its phenomenal performance. For instance-the crude steel production in India registered a year-on-year growth of 6.4% in 2010 and reached 66.8 million metric Tons.
Our new research report “Indian steel Industry Outlook to 2012” says that the, Indian crude steel production will grow at a CAGR of around 10% during 2010-2013. Moreover, with the government proactive incentive plans to boost economic growth by injection funds in various industries, such as construction, infrastructure, automobile, and power will drive the steel industry in future. The report also reveals that, steel consumption in India is expected to grow significantly in coming years as per capita finished steel consumption is far less than its regional counterparts.
“Indian steel Industry Outlook to 2012” is an outcome of an extensive research and conceptual analysis of the Indian steel industry. The report provides detail information on steel industry in India. The report also presents an insight into the future outlook of various vertical industry segments, including automotive, aerospace, marine, consumer durables, power, categories – Alloy and Non-alloy. Report also covers information on industry-wise steel demand, overall steel consumption, production and trading market. Besides industry forecast for different market segments.
1.2 PERFORMQANCE OF THE INDIAN STEEL INDUSTRY
Data from a range of sources including Joint plant Committee, prowess Database, as well as international trade data, all reveal that there is no single entity that dominates either the sector as a whole, or any of the major product segments. Tables are provided at the end of this chapter.
But the key point is that this is not a monopoly, either in its aggregate form, or in an of its components. Later chapters will discuss whether there is any evidence of anti-competitive behavior by the incumbents.
In segment after segment, the pattern is very clear; the more aggressive growth oriented firms have been capturing greater market shares. In some cases, they may be
relatively smaller secondary producers, and in others the larger one. T here is no evidence, of expansion of output or profitability, that anti-competitive behavior of any of these firms, should have resulted in
1.3 MAHARASHTRA ELEKTROSMELT LIMITED (MEL)
Maharashtra Elektrosmelt Limited (MEL) is a subsidiary of steel Authority of India Limited (SAIL). It is the largest Manganese based Ferro-Alloy producer in India.
The plant is situated amongst picturesque surroundings at Chandrapur (Maharashtra). It is located 166 km away from Nagpur on Delhi-Chennai rail route and is well connected by road to the major cities of India.
MEL’s Ferro-Alloys complex has created direct development for 1035 peoples by supporting various auxiliary industries. MEL is quickening the pace of industrialization of region having ample amount of natural resources.
MEL is established under socio-economic theory. The company manufacturing based
The products are:
• High Carbon Ferro Manganese (HCFM)
• Medium Carbon Ferro Manganese (MCFM)
• Silico Manganese (SIM)
Chapter – 2
Profile
2.1 PROFILE OF STEEL AUTHORITY OF INDIA LIMITED (SAIL)
2.1.1 An Overview of Steel Authority of India Limited (SAIL)
Steel Authority of India Limited (SAIL) is the leading steel- making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for sale in export markets. SAIL is among the five Maharanis of the country’s Central public Sector Enterprises.
SAIL manufactures and sells a broad range of steel products, including including hot and cold rolled sheets and coils, galvanized sheets, electrical sheets, structural’s, railway products, plates, bars and rods, stainless steel and other alloy steels, SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company’s iron ore, limestone and dolomite mines. The company has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.
SAIL’S wide ranges of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAL’S own Central Marketing Organisation (CMO) That transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Office. CMO’s domestic marketing effort is supplemented by its ever widening network of rural dealers who meet the demands of the smallest customers in the remotest corners of the country. With the total number of dealers over 2000, SAIL’s wide marketing spread ensures availability of quality steel in virtually all the districts of the country.
SAIL’s International Trade Division (ITD), in New Delhi-as ISO 9001:2000 accredited unit of CMO, undertakes exports of Mild steel products and pig Iron from SAIL’s five integrated steel plants.
With technical and managerial expertise and know-how in steel making gained over four decades, SAIL’s Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide.
SAIL’s has a well-equipped Research and Development Center for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Center for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organization at Ranchi. Our captive mines are under the control of the Raw Materials Division in Kolkata. The Environment Management
Division and Growth Division of SAIL operate from their headquarters in Kolkata. Almost all our plants and major ISO Certified.
2.1.2 Vision of SAIL
The vision of SAIL is to achieve market leadership and prosper in business through satisfaction of customer needs by continual improvement in quality. To help in rapid cost, delivery of products and services.
2.1.3 Objective of SAIL
To create necessary economic growth and industrialization of country. To generate different employment infrastructure for economic development. To assist to promote balanced regional development avenes is country. The development of small scale industries.
• 100% production of steel through Basic oxygen Furnace (BOF) route.
• 100% processing of steel through continues casting.
• Value addition by reduction of semi-finished steel.
• Auxiliary fuel injection system in all the Blast Furnaces.
• State-of-art process control computerization/automation.
• Energy saving schemes.
2.1.4 Major Units
Integrated Steel Plants
• Bhilai Steel plant (BSP)in Chhattisgarh
• Durgapur Steel Plant (DSP) in West Bengal
• Rourkela Steel plant (RSP) in Orissa
• Bokaro Steel plant (BSL)in jharkhand
• IISCO Steel plant (ISP) In West Bengal
Special Steel Plants
• Alloy steels Plants (ASP) in west Bengal
• Salem Steel Plant (SSP) In Tamil Nadu
• Visvesvaraya Iron and Steel Plant (VISL) in Karnataka
Subsidiary
• Maharashtra Elektrosmelt Limited (MEL)
2.1.5 Joint Ventures
NTPC SAIL Power Company pvt. Limited (NSPCL): A 50:50 joint venture between steel Authority of India Ltd (SAIL) and National Thermal Power Corporation Ltd (NTPCLtd); manages SAIL’s captive power plants at Rourkela, Durgapur and Bhilai with a combined capacity of 814 megawatts (MW).
Bokaro power supply Company pvt. Limited (BPSCL): This 50:50 joint venture between SAIL and the Damodar Valley Corporation (DVC) is managing managing the 302-MW power generating station and 600 tons per hour steam generation facilities at Bokaro Steel Plant.
Mjunction Services Limited: A 50:50 joint venture between SAIL and That Steel; promotes e-commerce activities in steel and related areas. It’s newly added services include e-assets sales, events & conferences, coal sales & logistics, publications, etc.
SAIL- Bansal Servicer Centre Limited : A Joint venture with BMW Industries Ltd. on 40:60 basis for a service centre at Bokaro with the objective of adding value to steel.
Bhilai JP Cement Limited : Another joint venture company with Jaiprakash Associates Ltd on 26:74 basis to set up a 2.1 MT slag-based cement plant of Bokaro.
Bokaro JP Cement Limited: Another joint venture company with Jaiprakash Associates Ltd on 26:74 basis to set up a 2.1 MT slag-based cement plant at Bokaro.
SAIL & MOIL Ferro Alloys (pvt). Limited : A joint venture company with Manganese Ore (India) Ltd on 50:50 Basis to produce Ferro-manganese and silico-manganese required in production of steel.
S & T Mining Company Pvt. Limited: A 50:50 joint venture company with Tata Steel for joint acquisition & development of mineral deposits; carrying out mining of minerals including exploration, development, mining and beneficiation of identified coking coal blocks.
International Coal Ventures private Limited: A joint venture company/SPV promoted by five central PSUs, viz. SAIL, CIL, RINL,NMDC and NTPC (WITH RESPECTIVELY 28.7%,
28.7%, 14.3%, 14.3%, and 14.3% shareholding) aiming to acquire to acquire stake in coal mines/blocks/companies overseas for securing coking and thermal coal supplies.
SAIL SCI Shipping Pvt. Limited: A 50:50 joint venture with shipping corporation of India for provision of various shipping and related services to SAIL for importing of coking coal and other material and other shipping-related business.
SAIL RITES Bengal Wagon Industry Pvt. Limited: A 50:50 joint venture with RITES to sell, market, distribute, manufacture and export railway wagons, including high-end specialized wagon, wagon protypes, and fabricated components/parts of railway vehicles, rehabilitation of industrial locomotives, etc, for the domestic market.
SAIL SCL Limited: A 50:50 JV with Government of Kerala where SAIL has management control to revive the existing facilities at steel complex Ltd, Calicut and also to set up develop and manage a TMT rolling mill of 65000 MT capacity along with balancing facilities and auxiliaries.
2.2 PROFILE OF MAHARASHTRA ELEKTROSMELT LIMITED (MEL)
2.2.1 An Overview of Maharashtra Elektrosmelt Limited (MEL)
Maharashtra Elektrosmelt Ltd (MEL) is a Subsidiary of steel Authority of Indian Ltd, a Government of Indian Enterprise and the largest Manganese based Ferro Alloy producer in the country.
MEL has an installed capacity of 1, 00,000 TPY equivalent Ferro Managanese. An product range of MEL includes High Carban Ferro Manganese, silico Manganese and Medium/Low Carbon Ferro Manganese. It is accredited with Quality Assurance Certificate ISO 9001:2000.
MEL’s major infrastructure facilities include two nos. of 33 MVA Submerged Electric Are Furnaces for the production of Ferro Alloys, Manganese are sintering plants, Furnace gas based Power Plant and one small Electric Arc Furnace for the production of MC/LC Ferro Manganese with Lime Calcinations and Manganese Ore Roasting Unit.
2.2.2 Vision Statement
To be a leader in Indian Ferro Alloy industry in technology, productivity, quality and customer satisfaction.
2.2.3 Strategic Goals
• To continua in the business of manganses based Ferro Alloy and related activity.
• To enhance market share.
• To improve profit by productivity improvement, cost reeducation and customer satisfaction.
• To achieve landmark in safety, health, and environment.
2.2.4 Technological Development
Over the Years, MEL has emerged as a leader in ferroalloy technology with technological developments in many areas like raw material preparation, raw material substitution, furnace operation, ferroalloy casting and processing etc.
Cost reduction through utilization of wastes has been the area of prime concern at MEL. Utilization of /Ferro Manganese slag in the production of silico Manganese,sintering of Manganese Ore Fines and its use in production process, Utilisation of furnace gas as fuel for power generation, lime calcinations and manganese ore roasting are some of the major areas of waste utilization.
2.2.4 Total Quality Management
Total Quality Management is an integral part of the day to day activities of the company The ISO 9001:2000 Quality Assurance System is being maintained since its accreditation, which covers all the sections of the plant.
2.2.5 Environment & pollution Control
Environment Management and pollution control gets top priority in the areas of green belt development in and around the plant premises, solid waste management, monitoring of liquid and air effluent for various environmental parameters etc
2.2.6 Human Resource Management
Effectiveness of the Human resource is considered and identified as a major factor for sustained high level of performance to improve the overall performance of the company. The creative ideas put up by the employees are
recognized through a suggestion scheme. Under companywide training programs the employees are trained in various disciplines.
2.2.7 Safety
The company has gained a prestigious position in the area of safety and environment. It has been awarded with various international and national awards from British Safety Council USA, Govt. of India etc. MEL has also made great strides in establishing industrial safety consciousness in the industrial belt of vidarbha.
2.2.8 Community
Under the Corporate social Responsibility, MEL has taken up several schemes and projects in and around the villages of its plant. Some of them are donation of stationery items and bags to the school children providing street light fittings, organizing medical checkup camps for women and children, training the youth in the villages for getting self-employment and beautification of chandrapur city etc. In addition, plans are made to provide a mobile Ambulance with medical staff and medicine and also constructing a market yard for small vendors in the villages in the vicinity of the villagers.
2.2.9 Production Facilities in the plant
• Two submerge Arc Furnace (annual production rated capacity- 1Lakh tons of equivalent Ferro Manganese)
• One Electric Arc furnace for production of Medium Carbon Ferro Manganese (Annual production capacity – 2500 tons.)
• One power plant of capacity 4.2 MW.
Chapter – 3
Research Methodology
3.1 STATEMENT OF THE PROBLEM
The need for working capital to run the day-to-day business activities cannot to overemphasize. We will hardly find a business firm that does not require any amount of working capital. Thus the study was to determine the working capital management of Maharashtra Elektrosmelt Limited (Subsidiary of SAIL), Chandrapur. The study covers a period of 5 years from 2005-2010.
3.2 OBJECTIVE OF THE STUDY
• To determine efficiency in cash, inventories, creditors.
• To understand the liquidity and profitability position of the firm.
• To conduct a time series analysis to understand the efficiency/ inefficiency in the use of working capital.
3.3 RESEARCH METHODOLOGY
Research design:
The research design used is that of an analytical study. An analytical study is the researchers use facts or information\ already available, and analyze these to make a critical evaluation of the material.
Sources of data:
The data required for the study was collected from primary and secondary sources.
Primary data:
The primary data regarding the various financial information was collected directly from the finance and accounts department staff off Maharashtra Elektrosmelt Limited. The departments that had been visited are:
Pay section, Budget Department, Billing and Operation Department, Excise Department, sales Department, Miscellaneous Bill section and project Management Department.
Secondary data:
The secondary data for the analysis from the annual report of Maharashtra Elektrosmelt Limited for the period 2005-2010.
Following are the main sources of secondary data:
• Annual Reports and Budget Report
• Raw cash Report and Inventory Report
• Debtors Reports and Creditors report
• Sales Report of MEL
• Production Report
• Material Report
Data analysis tool:
The data analysis tools used to analyze and interpret the data is listed below:
• Bar charts
• Line chart
• Percentage analysis
• Ratio analysis
3.4 LIMITATIONS OF THE STUDY
• Officials were likely to be reluctant to supply any information regarding working capital Management.
• Current ratio only quantitative not qualitative
• Price level changes made interpretation of ratio varied
• The period of the study limited to 5 years
Chapter - 4
Review of Literature
4.1 WORKING CAPITAL MANAGEMENT
By definition working capital is the excess of current assets over current liabilities, computed by subtracting current liabilities from current asset. It provides an index of financial soundness of current creditors and is one of the primary indicators of short run solvency for a business. When a financial analysis is performed a measurement of a working capital should be considered in conjunction with the liquidity ratios. In today’s dynamic and tough competitive business environment, sound working capital management has become an indispensable precondition for corporate success.
The accounting principles board of the American institute of certified public accountants, USA, has defined working capital as follows:
“Working capital, sometimes called net working capital, is represented by the excess of current assets over current liabilities and identifies the relatively liquid position of total enterprise capital which contributed a margin or buffer for maturing obligation within the ordinary operating cycle of the business.”
The working capital management refers to management of the working capital, or to be more clearly it includes efficient handling of current assets, which normally includes short-terms asset such as cash and bank balances inventories, debtors, receivables and marketable securitized and cities. So working capital management implies in determining the required amount, economic procurement and efficiency in utilization of these current assets.
The need for working capital management arises from two considerations. Firstly, maintaining the working capital at a reasonable level is essential in firm. The fixed asset which usually requires a huge quantity of working of working capital and secondly, the working capital involves investment of firms of the firm. If working capital level is not properly maintained and managed, then it may result in unnecessary blockage of scarce resources of the firm. On the other hand the insufficiency of working capital, cause different hindrances in smooth operations of the firm. Therefore proper management of working capital is utmost importance for all corporate houses.
Effective working capital management includes one prime objective to determine the optimal size of working capital. If size more than optimal, liquidity will be greater but profitability will be eroded, as a part of current asset will remain unutilized and non-paying. If it is less than optimal, then it will surely affect the day-to-day operations of the business and the
firm will fail in meeting its regular obligations. This means a clear-cut trade-off between liquidity and profitability is imperative that helps determine the optimal size of current assets. Other objective is to see that these should be an optimal mix of long term and short-term fund utilized for financing the current asset. Because long term and short term funds have different liquidity and their cost is also different. So again it is the question of a perfect tradeoff between profitability and liquidity.
Basically, companies follow any of the following three policies towards working capital:
• Relaxed policy involving sufficient cushion for all expected requirements and a position for the unexpected.
• Restricted policy involving a stringent estimate of requirement and forcing the organization to adhere to this estimate, and not providing for any unexpected event.
• Moderate policy involving availability a of funds at level in between the above two extremes.
4.1.1 Concepts of working capital:
There are two concepts of working capital, namely gross concept and net concept.
4.1.2 Gross working capital:
According to this concept working capital refers to a firm’s investment in current asset. The amount of current liability is not deducted from the total of current asset. This concept views working capital and aggregate of current asset as two interchangeable terms. This concept is also referred to as “current capital” or “circulating capital”
4.1.3 Net working capital:
The net working capital refers to the difference between current liability are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors dues, bills payable, bank overdraft and outstanding expenses. Net working capital can be positive or negative. A positive working capital will arise when current assets exceed current liabilities. A negative working capital occurs when current liabilities are in excess of current asset.
4.1.4 Kinds of working capital:
Working capital is classified into two categories:
• Fixed, regular or permanent working capital and
• Variable, fluctuating, seasonal, temporary working capital
4.1.5 Fixed working capital:
The need for current assets is associated with the operating cycle. The magnitude of investment in current assets however may not always be the same. The need for investment in current asset may increase or decrease over a period of time according to the level of production. Nevertheless, there is always a certain minimum level of current asset, which is essential for the firm to carry on its business respective of the level of operations. This is the irreducible minimum amount necessary for maintaining the circulation of the current asset. The minimum level of investment in current asset is permanently locked up in business and is therefore referred to as fixed or regular or permanent working capital. It is permanent in the same way as investment in the firms fixed asset is.
4.1.6 Fluctuating working capital:
Depending upon the changes in production and sales the needs of working capital, over and above the permanent working capital, will fluctuate. The need for working capital may also vary on account of seasonal changes or abnormal of unanticipated conditions. Any special advertising campaign organized for increasing sales other promotional activities may have to be financed by additional working capital. The extra working capital needed to support the changing business activity is called fluctuating working capital.
4.1.7 Importance of working capital management:
• The level of current assets changes constantly and regularly depending upon the level of actual and forecasted sales. This requires that the decisions to bring the levels of current assets to be desired levels of current asset should be made at the earliest opportunity and as frequently as required.
• The changing levels of current asset may also require review of the financing pattern. How much working capital needs to be financed by different sources of financing must be periodically reviewed.
• Inefficient working capital management may result in loss of sales and consequently decline in the profits of the firm.
• Inefficient working capital management may also lead to insolvency of the firm if it is not in a position to meet its liabilities and commitments.
• Current assets usually represent a substantial portion of the total assets of the firm, resulting in the investments of large chuck of funds in the current asset.
• There is an obvious and inevitable relationship between the sales growth and the level of current asset. The target sales level can be achieved only if supported by adequate working capital and thus the financial manager must be able to respond quickly in providing and arranging additional working capital.
4.1.8 Working Capital-Monitoring and Control:
There are different analytical tools:
• Monitoring the operating cycle- Total working capital need depends upon the length of the operating cycle. The lengthier the operating cycle, the greater would be the working capital need.
• Working capital ratio- It includes the
• Current ratio
• Liquid ratio
• Current asset to total asset ratio
• Current asset to total sales ratio
• Monitoring the liquidity – Sufficient liquidity can be obtained by efficient management of different elements of working capital. The liquidity problem can be solved in two ways.
• By raising additional funds from different sources
• By following ways to ease the liquidity problem.
Thus, the need for working capital to run the day-to-day business activities cannot be overemphasized. One can hardly find a business firm, which does not require any amount of working capital. Indeed, firms differ in their requirement of the working capital.
Chapter- 5
Analysis and Interpretation
ANALYSIS AND INTERPRETATION
From the data collected, the following tables are formed and analysis and interpretation are made accordingly.
5.1 Current Ratio:
Current Ratio = Current Assets/Current Liabilities
YEAR CURRENT ASSET CURRENT LIABILITIES RATIO2005-2006 1182275000 937450000 1.26122006-2007 1110437000 765890000 1.44982007-2008 1771647000 1239279000 1.42962008-2009 1948887000 1213446000 1.60612009-2010 2268553000 1146257000 1.9791
Table 5.1 Current Ratio
2005-06 2006-07 2007-08 2008-09 2009-100
0.5
1
1.5
2
2.5
Current Ratio
Current Ratio
Years
Ratio
s
Table 5.1 shows a slight decrease in the ratio from 2007-08 i.e. decreases by 1.40% but has increased to 1.60 in 2008-09 i.e. increase by 12.34% From 2008-09 onward ratio increasing
constantly because of increase in current asset compare to current liabilities. This shows that MEL maintaining higher current assets and having less liabilities.
5.2 Quick Ratio:
Quick Ratio = (Current Assets-Inventory)/Current Liabilities
Year Current Assets Inventory Current Liabilities
Quick Ratio
2005-2006 1182275000 682875000 937450000 0.53272006-2007 1110437000 650274000 765890000 0.60082007-2008 1771647000 421939000 1239279000 1.08912008-2009 1948887000 605189000 1213446000 1.10732009-2010 2268553000 581875000 1146257000 1.4715
Table 5.2
2005-06 2006-07 2007-08 2008-09 2009-100
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Quick Ratio
Quick Ratio
Years
Ratio
s
From Table 5.2 it is clear that the Quick ratio is constantly increasing for every year and highest in 2009-2010 compare to other years. The liquid ratio of 1:1 suppose to be standard or ideal but here company maintaining quick ratio more than 1:1 over the period of time, it indicates that firm maintain the over liquid assets than actual requirement of such assets.
In the year 2008 and 2009, company has approximately Rs. 1.09 for every 1 rupee of expenses and Rs. 1.11 for every 1 rupee of expenses respectively. Such policy is called conservative approach of finance for working capital, Rs 0.09 and Rs. 0.11 is the ideal
investment which affects on the cost of fund and returns on the funds for year 2008 and 2009 respectively.
5.3 Absolute Liquid Ratio:
Absolute Liquid Ratio = Absolute Liquid Assets/Current Liabilities
Year Absolute Liquid Ratio
Current Liabilities Ratio
2005-2006 217924000 539693000 0.40382006-2007 71943000 472280000 0.15232007-2008 861023000 679242000 1.26762008-2009 599030000 456941000 1.31092009-2010 936742000 452224000 2.0714
Table 5.3
2005-06 2006-07 2007-08 2008-09 2009-100
0.5
1
1.5
2
2.5
Absolute Liquid Ratio
Absolute Liquid Ratio
Years
Ratio
From table 5.3 it is clear that the ratio was highest in 2009-2010 with 2.0714. In 2006-2007 ALR decrease by 62.28% due to decrease in cash credit account balance, liabilities and sales tax, But in 2007-08 it increase and attain 1.2676. In the year 2007-08 ALR increased because company
Carry more cash balance, as such a cash balance is ideal assets and company has take control on such availability of funds which is affect on cost of the fund.
In the year 2009-10 ALR increased more it means company carry more cash balance and also having more number of lone & Advance.
5.4 Working Capital:
Working Capital = Current Assets – Current Liabilities
Year Current Assets Current Liabilities
WC % Change
2005-2006 1182275000 937450000 244825000 --2006-2007 1110437000 765890000 344547000 40.732007-2008 1771647000 1239279000 532368000 54.512008-2009 1948887000 1213446000 735441000 38.152009-2010 2268553000 1146257000 1122296000 52.60
2005-06 2006-07 2007-08 2008-09 2009-10
Working Capital 2448.25 2445.47 5323.68 7354.41 11222.96
1000
3000
5000
7000
9000
11000
Working Capital
(Rs .
In La
c)
From table 5.4 it is observed that how company working capital increasing year by year. In 2009-10 WC attaints highest value compare to other year working capital value. In year 2006-07, current assets decrease by 6.08% where as current liabilities by 18.30% which affect as working capital increase by 40.73%. Similarly for year 2007-08, Current assets increase by 59.55% where as current liabilities by 61.81% which affect as working capital increase by 54.51%. After year 2007-08, Current assets where increasing trend and current liabilities in decreasing trend.
IT shows that management has enough short term fund to pay its short term borrowing. The fall in working capital is a clear indication that the company is utilizing its short term resources with efficiency.
5.5 Working Capital Turnover Ratio:
WC Turnover Ratio = Sales/Net Working Capital
Year Sales Net Working Capital Ratio2005-2006 2473271000 244825000 10.10222006-2007 2915360000 344547000 8.46142007-2008 3964112000 532368000 7.44622008-2009 4250570000 735441000 5.77962009-2010 3820566000 1122296000 3.4042
2005-06 2006-07 2007-08 2008-09 2009-100
2
4
6
8
10
12
WC Turnover Ration
WC Turnover Ration
Years
Ratio
It signifies that for amount of sales, a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level of working capital. The ratio measures the efficiency with which the working capital is being used by a firm.
High working capital ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in working capital, From Table 5.5; it is observed that company gain higher working capital turnover ratio i.e. 10.10 in the year 2005-06.
5.6 Current Assets Turnover Ratio:
Current Assets Turnover Ratio = Net Sales/Current Assets
Year Net Sales Current Assets Ratio2005-2006 2473271000 1182275000 2.09192006-2007 2915360000 1110437000 2.62542007-2008 3964112000 1771647000 2.23752008-2009 4250570000 1948887000 2.18102009-2010 3820566000 2268553000 1.6841
2005-06 2006-07 2007-08 2008-09 2009-10
Current Asset Turnover Ra-tio
2.0919 2.6254 2.2375 2.181 1.6841
0.25
0.75
1.25
1.75
2.25
2.75
Current Asset Turnover Ratio
Ratio
Table 5.6
From it is observed that the current asset turnover ratio increase in highest in year 2006-07 but from year 2007-08 onwards the Current Assets Turnover Ratio indicates downward trend over the period of time. Current Assets Turnover Ratio was approximately 2.09 in the year 2005-06 and approximately 1.68 in the year 2009-10.
5.7 Inventory Turnover Ratio:
Inventory Turnover Ratio = Sales/Average Inventories
Year Sales Average Inventory Ratio2005-2006 2473271000 682875000 3.621852006-2007 2915360000 650274000 4.48332007-2008 3964112000 421939000 9.39502008-2009 4250570000 605189000 7.02352009-2010 3820566000 581875000 6.5659
2005-062006-07
2007-082008-09
2009-10
0123456789
10
Inventory Turnover Ratio
Years
Ratio
Inventory Turnover Ratio indicates the efficiency of the firm in producing and selling its products. The average inventory is the of opening and closing balance of inventory in a manufacturing of company like MEL, Inventory finished goods is used to calculate inventory turnover ratio.
Table 5.7 infers a highest ratio i.e. 9.39 in 2007-08 due to increase in sales and minimum level of inventory held on stock. A high ratio is good from the viewpoint of liquidity, However, the ratio has decreased from 7.0235 in 2008-09 to 6.56 in 2009-10, which has to be considered.
Chapter- 6
Conclusion & Suggestions
6.1 Conclusion
The working capital position of Maharashtra Elektrosmelt Limited is commendable. From the analysis it was found that the company also projects the adequate cash in running through business indication a good position in Maharashtra Elektrosmelt Limited. The company has the ability to meet all outside liabilities and is having capacity to handle fixed charges liabilities. A verage payment period exhibits stronger liquidity potion of the company. It is found that the company is having high margin of safe and protection against shrinkage of assets and also exposes creditors to lesser risk.
The inventor management of the company Indicates satisfactory results by holding minimum amount of inventory and by utilizing minimum period for converting raw material into Ferro-Alloys products and finally reaching the hands of ultimate customers. Res both the me
The proper working capital management requires both the medium term planning and also the immediate adaptation to change arising due to fluctuation in operating levels of firms
The study of working capital management of Maharashtra Electrosmelt Limited has revealed that the current ratio was as per the slandered industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital , ratio analysis and working capital component which help the company to manage its working capital efficiency and affectively
• Working capital of company was increasing and showing positive working capital per year. It shows good position.
• Positive working capital indicates that company has the ability of payment of short term liabilities.
• Working capital increases because of increase in the current assets is more than increase in the current liabilities.
• Company’s current asset were always more than requirement, it affects on profitability of the company.
• Current assets are more than current liabilities indication that company used long term funds for short terms requirement, where long term funds are most costly than short term funds.
• Current assets a component shows sundry debtors were the major’s part in current assets. It shows that the inefficient receivables collection management.
• Inventory was supporting to sales. But from the year 2008-2009 sales where decreases than the inventory and thus inventory turnover ratio in downward trend from 2008-2009.
6.2 Suggestion
Recommendation can be use by firm for better improving of financial position of firm. After study and analysis of project report on study and analysis of working capital of Maharashtra Elektrosmelt Limited, I would like to suggest following points to the company which will help to improve better financial position of company.
• The working capital turnover ratio, which showed a decreasing trend during 2005-06 to 2009-10, because in sales. So company should concentrate on sales to improve the working capital turnover ratio so that from next year onward it will be increasing trend.
• The higher debt collection period reduces liquidity position of the company. Therefore, it is suggested that efficiency of staff employed for the collection of debts should be checked.
• Company has to take control on debtor’s collection period which is major part of current assets.
• Company should raise fund through short term sources for short term requirement of funds, which comparatively economical as compare to long tern funds.
• Company has to take control on cash balance cash is non earning assets and increasing cost of funds.
• Company should reduce the inventory holding period with use of zero inventory concepts.
• Company has to invest its cash balance for a period shorts term in stocks and mutual funds.
• It is suggest that the company can do better b reducing the periods for all cash processes by some means.
• It is recommended that the company should tighten collection efforts and immediate steps are to be taken to check the downward trend of turnover of accounts receivable.
• Profitability of the company can be improved by reducing current asset utilization in order to earn profit to the company.
Overall company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance. Company is increasing sales volume per year which supported to company for sustain good position in producing Ferro-Alloy in India.
Bibliography
• Audited Report Of2005-06
• Audited Report Of2006-07
• Audited Report Of2007-08
• Audited Report Of2008-09
• Audited Report Of2009-10
• Books
• I.M Pandey, Financial management, Ninth Edition, Vikas Publishing House Pvt. Ltd.
• M.Y. Khan- P.K Jain, Management Accounting, Third edition, Tata Mc Graw-Hill Publishing co. Ltd.
• R.K Jain Central Excise Tariff of India with Commodity Index, CENTAX Publication Limited.
• R.K Jain, Service Tax Law Guide, CENTAX Publication Limited.
• Journals
• The Hindu Business Line Indian Survey 2010
• ICFAI Business Magazine.
• Website
• www.sail.co.in
