Working capital ak

A SUMMER INTERNSHIP

INDIAN OIL CORPORATION LIMITED

PUNJAB TECHNICAL UNIVERSITY K.C COLLEGE OF ENGINEERING $ IT ,

IN PARTIAL FULFILMENT OF TWO YEAR FULL TIME

MASTER OF

UNDER THE GUIDANCE OFMR.PANKAJ KUMAR MEEN

(CHARTERED ACCOUNTAN

SUBMITTED TO:-(H.O.D)

MR.SACHIN VERMA

1

A SUMMER INTERNSHIP PROJECT REPORTON

CAPITAL BUDGTING

AT


PUNJAB TECHNICAL UNIVERSITY K.C COLLEGE OF ENGINEERING $ IT ,

NAWANSHAHR,PUNJAB.

AL FULFILMENT OF TWO YEAR FULL TIME COURSE

MASTER OF BUSINESS ADMINISTRATION(FINANCE)

UNDER THE GUIDANCE OF SUBMITTED BYMR.PANKAJ KUMAR MEENA AKHILESH KUMAR

(CHARTERED ACCOUNTANT) ROLL NO 1315536

(H.O.D)

PROJECT REPORT


AL FULFILMENT OF TWO YEAR FULL TIME

BUSINESS ADMINISTRATION

SUBMITTED BY:-AKHILESH KUMAR

ROLL NO 1315536

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ACKNOWLEDGEMENT

It is a matter of great satisfaction and pleasure to present this report on Working Capital Management of Indian Oil Corporation Ltd. (IOCL), Barauni Refinery Unit, Begusarai. I take this opportunity to owe my thanks to all those involved in my training.

First of all I would like to thanks my Institute, my Director Sir and Placement Cell for giving me this privilege to have a feel of the professional world.

This project report could not have been completed without the guidance of our Prof. Mr. SK Sinha & project guide Mr. R Ballabh. Their timely help & encouragement helped me to complete this project successfully.

I would like to thank Mr. W.Kullu (STRM), Mr. J.N.Bhilware (TRO), and entire training department for giving me an opportunity to do my training and to gain experience in a known and recognized organization like IOCL. It was a wonderful experience to working with this Organization. People here were veryhelpful and rendered the best help they could, at every point of time.

I would like to take the opportunity to thank my respected project guide Mr. Pankaj kumar meena(CA) for his valuable enlightened guidance, suggestion, direction and information in the completion of this Project Report.

Finally I would like to thank my loving parents and my Guardians, who encouraged and supported me to complete this Project Report. Their blessing and love helped me to reach the present position.

I express my gratitude towards staff of IOCL, those who have helped me directly or indirectly in completing the training.

THANKING YOU

Akhilesh kumar

.

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PREFACE

It give me great pleasure to present this project report on “Working Capital Management” of Indian Oil Corporation Limited, Barauni Refinery Unit, Begusarai. This project report is intended to fulfil the partial requirement for the completion of Post Graduation Program.

The real objective behind the partial training and presentation of the report is to gain experience to the actual work environment and the required knock to guide knowledge towards facilitating its application for any professional practical training and close contact with the prevailing system in an organization is of great importance.

Efforts have been made to prepare this Project Report in most simple language. While preparing this Project Report, a care has been taken to make it comprehensive, reliable and analytical to make it easy to understand. Charts and Diagram have been used to avoid difficulties.

I am grateful to my project guide Mr.Pankaj kumar meena (CA) who has rendered his best possible help and guidance in the presentation of this project report. I am grateful to my Institute who gave me an opportunity to do this project. And I am also grateful to my parents and guardians who encouraged and supported me to complete this Project Report.

Akhilesh kumar

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INDEX:-

Chapter No.

Particulars: Page No:

Chapter 1. INTRODUCTION TO YHE STUDAY 5-7

Chapter 2. OVERVIEW OF INDIAN OIL CORPORATION LTD 8-16

Chapter 3. PRODUCT PROFILE 16-20

Chapter 4. WORKING CAPITAL MANAGEMENT 20-30

Chapter 5. WORKING CAPITAL MANAGEMENT IN CONTEXT TO BARAUNI REFINARY 30-56

Chapter 6. INVENTORY MANAGEMENT 56-70

Chapter 7. CASH MANAGEMENT 70-80

Chapter 8. RECEIVABLES MANAGEMENT 80-82

Chapter 9. PAYABLE MANAGEMENT 83-85

Chapter 10. RATIO ANALYSIS 85-89

Chapter 11. BIBLOGRAPHY 90

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CHAPTER: 1

INTRODUCTION TO THE STUDY

The study of “Working Capital Management (Including Ratio Analysis)” is an attempt to resolve the problems that which arise in attempting to manage the Current Assets and Current Liabilities And is an attempt to overlook the performance of the company.

The basic objective of Working Capital Management is to manage the firms Current Assets and Current Liabilities in such a way that the satisfactory level of Working Capital is maintained i.e. it neither inadequate nor excessive. The basic objective of Ratio Analysis is to find out the performance of the company of current year as compared to its previous year.

Control on Working Capital is very important for any organization because by controlling Working Capital, company can able to have control on its cash flow in order to meet its Operating Expenses. With the help of Working Capital company can control its current Assets, Current Liabilities, its Inventories, its Debtors, Creditors, etc. working Capital ensures that there is sufficient cash flow in an organization. Working Capital also identifies the profitability of the company. Therefore control on Working Capital is an important task.

Objective:

The primary objective of working capital management is to ensure that sufficient cash is available to:

Meet day-to-day cash flow needs; Pay wages and salaries when they fall due; Pay creditors to ensure continued supplies of goods and services; Pay government taxation and providers of capital, dividends; and ensure the

long-term survival of the business entity.

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Calculation of working capital gives clear idea about the requirement of the needed inventories in the production and Ratio Analysis gives idea about performance of the company. Besides that it also takes account of required current assets. So, the calculation of working capital is an essential part of financial planning.

My Objective Behind this Project is:

To find out all the component that should considered while calculating, working capital in Barauni Refinery Unit (IOCL).

To find out all the component that should considered while calculating, ratio analysis of Barauni Refinery Unit (IOCL)

To find out the problem area which affects the credibility of calculating working capital.

To overtook the performance of Barauni Refinery Unit (IOCL) The working capital management is elaborately done at head office

(New Delhi) but still the Barauni Refinery Unit needs to assists the head office in taking such decisions. How this work is done is the topic of my concern.

With the help of ratio analysis I would like to reveal the financial performance of the company.

To have a feel of an organization and it’s working. To identify the financial strengths & weakness of the company. Through the net profit ratio & other profitability ratio, understand the

profitability of the company. Evaluating company s performance relating to financial statement

analysis. To know the liquidity position of the company with the help of current

ratio. To find out the utility of financial ratio in credit analysis &

determining the financial capacity of the firm.

IMPORTANCE OF THE STUDY

In the area of financial management, “Working Capital Management” plays an important role. Working capital management is concerned with two fold important factors Viz., the level of current assets to be held and the level of currentliabilities to be paid.

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The most important thing is that working capital is the one way through, which a company’s profitability can be determined. Therefore, this study is confined to how Barauni Refinery Unit (IOCL determines the amount of working capital.

METHODOLOGY USED

The methods adopted for the collection of data and information for this work was gathered mostly through various books, annual report and discussion with various executives and office staff of Barauni Refinery Unit (IOCL). Moreover, selective literature, previous research works and internet have also been referred for the purpose.

LIMITATIONS OF THE STUDY

I found the following difficulties during my training session.

Scarcity of Printed materials on the topic. Since the Finance Department of Barauni Refinery Unit keeps the

reports confidential, so exact date analysis is not possible. Studying the balance sheet of the company was not easy. Impact of individual thinking and perception. All the employees and executives were found busy during their

working hour so they co-operated partially.

CHAPTER: 2

OVERVIEW OF INDIAN OIL CORPORATION LTD

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INTRODUCTION:

Indian Oil Corporation Ltd. is India's flagship national oil company with business interests straddling the entire hydrocarbon value chain – from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas, marketing of natural gas and petrochemicals. It is the leading Indian corporate in the Fortune 'Global 500' listing, ranked at the 88th position in the year 2010. It began operation in 1959 as Indian Oil Company Ltd. The Indian Oil Corporation was formed in 1964, with the merger of Indian Refineries Ltd. Indian Oil and its subsidiaries account for a 47% share in the petroleum products market, 40% share in refining capacity and 67% downstream sector pipelines capacity in India. The Indian Oil Group of Companies owns and operates 10 of India's 19 refineries with a combined refining capacity of 60.2

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million metric tons per year.On 30th June 2014 IndianOil will complete 50 years of its existence and a series of events are being planned to celebrate its Golden Jubilee Year.

Indian Oil was formed as joint ventures between one company and Government of India but later become fully owned government undertaking. Indian Oil established as an oil marketing entity on 30th June 1959, Indian Oil company ltd was renamed Indian Oil Corporation Ltd. on 1st September 1964 following merger with the refining entity. Indian Refineries Ltd. that was established in August 1958.

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VISION:

“A major diversified, trans-national, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution”.

MISSION:

To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services, and cost reduction.

To maximize creation of wealth, value and satisfaction for the stakeholders. To attain leadership in developing, adopting and assimilating state-of-the-art

technology for competitive advantage. To provide technology and services through sustained Research and

Development. To foster a culture of participation and innovation for employee growth and

contribution. To cultivate high standards of business ethics and Total Quality

Management for a strong corporate identity and brand equity.

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To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment conscience.

OBJECTIVE

To serve the national interests in oil and related sectors in accordance and consistent with Government policies.

To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently.

To enhance the country's self-sufficiency in crude oil refining and build expertise in lying of crude oil and petroleum product pipelines.

To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country.

To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products.

To optimize utilization of refining capacity and maximize distillate yield and gross refining margin.

To maximize utilization of the existing facilities for improving efficiency and increasing productivity.

To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation.

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To earn a reasonable rate of return on investment. To avail of all viable opportunities, both national and global, arising out of

the Government of India’s policy of liberalization and reforms. To achieve higher growth through mergers, acquisitions, integration and

diversification by harnessing new business opportunities in oil exploration & production, petrochemicals, natural gas and downstream opportunities overseas.

To inculcate strong ‘core values’ among the employees and continuously update skill sets for full exploitation of the new business opportunities.

To develop operational synergies with subsidiaries and joint ventures and continuously engage across the hydrocarbon value chain for the benefit of society at large.

FINANCIAL OBJECTIVES:

To ensure adequate return on the capital employed and maintain a reasonable annual dividend on equity capital.

To ensure maximum economy in expenditure. To manage and operate all facilities in an efficient manner so as to generate

adequate internal resources to meet revenue cost and requirements for project investment, without budgetary support.

To develop long-term corporate plans to provide for adequate growth of the Corporation’s business.

To reduce the cost of production of petroleum products by means of systematic cost control measures and thereby sustain market leadership through cost competitiveness.

To complete all planned projects within the scheduled time and approved cost.

PRESENT POSITION:

State-owned Indian Oil Corporation Ltd. (IOCL) has surpassed Reliance Industries to regain its position as India’s biggest refiner. This was achieved after completion of expansion of its Barauni Refinery & Panipat Refinery.

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Indian Oil Corporation Ltd. is India’s largest company by sales with a turnover of Rs. 271,074 crore and profit of Rs. 10,221 crore for the year 2009-10.

IndianOil is the highest ranked Indian company in the latest Fortune ‘Global 500’ listings, ranked at the 125th position. IndianOil’s vision is driven by a group of dynamic leaders who have made it a name to reckon with.

IOCL DISTINCTIONS:

IndianOil tops the Fortune India 500 Rankings IndianOil in top five in Business India’s Super 100 IndianOil is India’s Biggest Company: ET 500 IndianOil in Platts ‘Top 250 Global Energy Company’ Rankings IndianOil in top ten of BT 500 PSU rankings IndianOil: India’s largest PSU and Highest Revenue Earner in BW Real 500

rankings IndianOil: One of ‘India’s Most Valuable Brands 2010’ IndianOil tops ‘BS 1000’ rankings IndianOil in Top Ten of the Most Recognised & Respected Indian MNCs IndianOil in ‘Top 50’ Best Companies To Work For

HISTORY:

2001:Public sector oil major Indian Oil Corporation has tied up with Standard Chartered Bank to mobilize Rs 400 crore from the overseas market. Stan Chart is the book-runner, lead arranger and the facility agent, and Union Bank of India is the joint arranger for this loan syndication of IOC.

2002:IOCL has bought out IBPs 25 per cent stake in Indian Oil Tanking (IOT), a company engaged in the storage and handling of petroleum products, for Rs 44 crore.

2003:IOCL has appointed McKinsey for conducting a 'structure, process, people' study.

2004:

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IOCL the petroleum refining and marketing major, plans to merge with itself its subsidiary, IBP Ltd, and also set up a new exploration company with an investment of $2 billion

2005:Tata Motors has initiated an informal project with Indian Oil Corporation for the use of bio-diesel blended fuels in its buses. There is no written agreement between the two companies for the project.

2006:IOCL has signed an agreement with the West Bengal government for setting up a petrochemical hub in the state. The company would be the primary investor in theproposed hub housing petrol, chemical and petrochemical units.

2007:Dabur India Ltd has entered into an agreement with IOCL to service rural market demand for consumer goods through the latter's chain of Kisan Seva Kendra (KSK).

2008:Haldia refinery alone is expected to save an average Rs450 crore a year once crude is sourced from Paradip IOCL's refineries had a capacity utilization of 104 per cent in 2008, processing 48.9 million tonne of crude oil.

2009:Essar Oil is reported to have expanded the number of its fuel retail outlets to over 1,000, with plans to have around 1,400 outlets operational by April 2009. Unconfirmed reports said that Essar claimed a market share of around four per cent, and was aiming to increase it further to over six per cent

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OVERVIEW OF BARAUNI REFINERY:

Barauni Refinery, the second public sector oil refinery of the country, was built in collaboration with the erstwhile USSR and limited Rumanian participation.Situated 125 kilometeres from Patna, Barauni Refinery was commissioned in 1964 with a refining capacity of 1 Million Metric Tonnes Per Annum (MMTPA). The refining capacity was increased to 3.0 MMTPA by 1969. It was built with an initial cost of Rs. 49.40 Crore. It was dedicated to the Nation by the then Union Minister for Petroleum, Prof. Humayun Kabir in January 1965. After de-bottlenecking, revamping and expansion projects, its current capacity 6 MMTPA. With various revamps and expansion projects at Barauni Refinery, capability for processing high-sulphur crude has been added, thereby increasing not only the capacity but also the profitability of the refinery.

Barauni Refinery was initially designed to process low sulphur crude oil (sweet crude) of Assam. After establishment of other refineries in the Northeast, Assam crude is unavailable for this refinery. Hence, sweet crude is being sourced from African, South East Asian and Middle East countries. The refinery receives crude oil by pipeline from Paradip on the east coast via Haldia.

Matching secondary processing facilities such Resid Fluidised Catalytic Cracker (RFCC), Diesel Hydrotreater (DHDT), Sulphur Recovery Unit (SRU) have been added. These state-of-the-art eco-friendly technologies have enabled the refinery to produce green fuels complying with international standards. The third reactor has been installed in the DHDT unit of Barauni Refinery to produce Diesel that complies with the Bharat Stage-III auto fuel emission norms. The MS Quality

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Upgradation project of Barauni Refinery is in full swing to supply Bharat Stage-III compliant petrol to the market.

The year 2008-09 saw Barauni Refinery achieve the highest ever-crude throughput of 5.94 MMT, beating the previous best of 5.63 MMT, which was achieved in 2007-08, along with sustaining the distillate yield of more than 85% (i.e. 85.7%) year after year

Barauni refinery achieved lowest ever 65.5 MBN of energy in the year 2008-09. It reduced energy consumption by almost 10% over the previous fiscal year of 2007-08. It excellence safety record during the year 2008-09 is another feather. Barauni Refinery Coker unit was declared as a zero steam leak unit it has avoided any accidents in the unit during the year 2008-09

Barauni petrochemicals plant is in the country the second oil refinery in the public sector and forms an important part of the Indian petrochemical industryIndian Oil Corporation Ltd is speeding up work on the high sulphur crude maximization project at its Barauni refinery in Bihar. The project is estimated to cost Rs 790 crore.

Barauni Refinery supplies distillate products to eastern India, Nepal and northern India through Road & Rail. Product is also sent to Northern India through product pipeline.

CHAPTER: 3

PRODUCT PROFILE

PRODUCTS:

Indian Oil is not only the largest commercial enterprise in the country it is the flagship corporate of the Indian Nation. Besides having a dominant market share, Indian Oil is widely recognized as India’s dominant energy brand and customers perceive Indian Oil as a reliable symbol for high quality products and services. Indian Oil is a heritage and iconic brand at one level and a contemporary, global brand at another level. While quality, reliability and service remains the core benefits to our customers, our stringent checks are built into operating

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systems, at every level ensuring the trust of over a billion Indians over the last four decades. Indian oil has many products but few products are as follows.

1) Auto Gas:

Auto Gas (LPG) is a clean, high octane, abundant and eco-friendly fuel. It is obtained from natural gas through fractionation and from crude oil through refining. It is a mixture of petroleum gases like propane and butane. The higher energy content in this fuel results in a 10% reduction of CO2 emission as compared to MS. Auto Gas is a gas at atmospheric pressure and normal temperatures, but it can be liquefied when moderate pressure is applied or when the temperature is sufficiently reduced.

2) Indian Oil Aviation Service:

IndianOil Aviation Service is a leading aviation fuel solution provider in India and the most-preferred supplier of jet fuel to major international and domestic airlines. Between one sunrise and the next, IndianOil Aviation Service refuels over 1500 flights – from the bustling metros to the remote airports linking the vast Indian landscape, from the icy heights of Leh (the highest airport in the world at 10,682 ft) to the distant islands of Andaman & Nicobar. IndianOil is India's first ISO-9002 certified oil company conforming to stringent global quality requirements of aviation fuel storage & handling. IndianOil Aviation also caters to the fuel

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requirements of the Indian Defense Services, besides refueling VVIP flights at all the airports and remote heli-pads/heli-bases across the Indian subcontinent.

3) Bitumen:

The common binders used in bituminous road constructions are road tars and Bitumen. Bitumen has gradually replaced road tar for road construction purposes mainly because of its greater availability as compared to road tars. It is principally obtained as a residual product in petroleum refineries after higher tractions like gas, petrol, kerosene and diesel, etc., are removed generally by distillation from suitable crude oil. Indian standard institutions define Bitumen as a black or dark brown non-crystalline soil or viscous material having adhesive properties derived from petroleum crude either by natural or by refinery processes.

4) High Speed Diesel

Indian Oil’s XTRAMILE Super Diesel, the leader in the branded diesel segment is blended with world-class ‘Multi Functional Fuel Additives (MFA). XTRAMILE has brought in a huge savings in the high mileage commercial vehicle segment. Transport fleets that operate a large number of trucks crisscrossing the country are using XTRAMILE to not only obtain a higher mileage but also for low maintenance costs.

5) Indane Gas:

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Indane is today one of the largest packed-LPG brands in the world. IndianOil pioneered the launch of LPG in India in the 1970s and transformed the lives of millions of people with the introduction of the clean, efficient and safe cooking fuel. LPG also led to a substantial improvement in the health of women in rural areas by replacing smoky and unhealthy chullahs with Indane. It is today a fuel synonymous with safety, reliability and convenience.

6) SERVO LUBRICATING AND GREASES

Indian Oil’s SERVO range of lubricants reigns as the undisputed market leader in the Indian lubricants market. Known for its cutting-edge technology and high-quality products, SERVO backed by Indian Oil’s pioneering R&D, extensive blending and distribution network, sustained brand enhancement and new generation packaging is a one-stop shop for complete lubrication solutions in the automotive, industrial and marine segments.

7) MS/Gasoline:

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Automotive gasoline and gasoline-oxygenate blends are used in internal combustion spark-ignition engines. These spark ignition engine fuels are primarily used for passenger cars. XTRAPREMIUM Petrol is India’s leading branded petrol boosted with new generation multifunctional additives known as friction busters that prevent combustion chamber deposits. XTRAPREMIUM is custom designed to deliver higher mileage, more power, better pick up, faster acceleration, enhanced engine cleanliness and lower emissions.

CHAPTER: 4

WORKING CAPITAL MANAGEMENT(A theoretical framework)

INTRODUCTION:

Management is an art of anticipating and preparing for risks, uncertainties and overcoming obstacles. An essential precondition for sound and consistent assets management is establishing the sound and consistent assets management policies covering fixed as well as current assets. In modern financial management, efficient allocation of funds has a great scope, in finance and profit planning, for the most effective utilization of enterprise resources, the fixed and current assets have to be combined in optimum proportions.

Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. Finance manager should develop sound techniques of managing current assets.

WHAT IS WORKING CAPITAL?

Working capital refers to the investment by the company in short terms assets such as cash, marketable securities. Net current assets or net working capital refers to the current assets less current liabilities.

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Symbolically, it means,

Net Current Assets = Current Assets - Current Liabilities.

DEFINITIONS OF WORKING CAPITAL:

The following are the most important definitions of Working capital:

1) “Working capital is the difference between the inflow and outflow of funds. In other words it is the net cash inflow”.

2) Working capital represents the total of all current assets. In other words it is the “Gross working capital”, it is also known as “Circulating capital” or “Current capital” for current assets are rotating in their nature.

3) Working capital is defined as “The excess of current assets over current liabilities and provisions”. In other words it is the “Net Current Assets or Net Working Capital”.

IMPORTANCE OF WORKING CAPITAL

Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully.

In the business the Working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. The inadequacy or mismanagement of working capital is the leading cause of business failures.

To meet the current requirements of a business enterprise such as the purchases of services, raw materials etc. working capital is essential. It is also pointed out that working capital is nothing but one segment of the capital structure of a business.

In short, the cash and credit in the business, is comparable to the blood in the human body like finance s life and strength i.e. profit of solvency to the business

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enterprise. Financial management is called upon to maintain always the right cash balance so that flow of fund is maintained at a desirable speed not allowing slow down. Thus enterprise can have a balance between liquidity and profitability. Therefore the management of working capital is essential in each and every activity.

The working capital is the amount resolving capital to meet the day today requirements of the firm. The other facets of the working capital is circulating capital, floating capital and moving capital which are required to meet the immediate requirements of the firm.

WORKING CAPITAL MANAGEMENT INTRODUCTION:

Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash.

Long term finance involves the cash flow over the extended period of time i.e 5 to 15 years, while short term financial decisions involve cash flow within a year or within operating cycle.Working capital management is a short term financial management.

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities & the inter relationship that exists between them. The current assets refer to those assets which can be easily converted into cash in ordinary course of business, without disrupting the operations of the firm.

Composition of working capital Major Current Assets

Cash Accounts Receivables Inventory Marketable Securities

Major Current Liabilities Bank Overdraft Outstanding Expenses Accounts Payable Bills Payable

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The Goal of Capital Management is to manage the firm s current assets & liabilities, so that the satisfactory level of working capital is maintained. If the firm can not maintain the satisfactory level of working capital, it is likely to become insolvent & may be forced into bankruptcy. To maintain the margin of safety current asset should be large enough to cover its current assets.

Main theme of the theory of working capital management is interaction between the current assets & current liabilities.

CONCEPT OF WORKING CAPITAL:

There are 2 concepts:

Gross working capital(GWC): - It is referred as total current assets.Focuses on, Optimum investment in current assets: An excessive investment impairs

firm s profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Therefore there should be adequate investment in current assets.

Financing of current assets: Whenever the need for working capital funds arises, agreement should be made quickly. If surplus funds are available they should be invested in short term securities.

Net working capital (NWC):- It defined by 2 ways. Difference between current assets and current liabilities Net working capital is that portion of current assets which is financed

with long term funds.

If the working capital is efficiently managed then liquidity and profitability both will improve. They are not components of working capital but outcome of working capital. Working capital is basically related with the question of profitability versus liquidity & related aspects of risk.

Implications of Net Working Capital:

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Net working capital is necessary because the cash outflows and inflows do not coincide. In general the cash outflows resulting from payments of current liability are relatively predictable. The cash inflows are however difficult to predict. More predictable the cash inflows are, the less NWC will be required. But where the cash inflows are uncertain, it will be necessary to maintain current assets at level adequate to cover current liabilities that are there must be NWC.

For evaluating NWC position, an important consideration is trade off between probability and risk.

The term profitability is measured by profits after expenses. The term risk is defined as the profitability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. The risk of becoming technically insolvent is measured by NWC.

If the firm wants to increase profitability, the risk will definitely increase. If firm wants to reduce the risk, the profitability will decrease.

PLANNING OF WORKING CAPITAL:

Working capital is required to run day to day business operations. Firms differ intheir requirement of working capital (WC). Firm s aim is to maximize the wealth of share holders and to earn sufficient return from its operations.

WCM is a significant facet of financial management. Its importance stems from two reasons: Investment in current asset represents a substantial portion of total

investment. Investment in current assets and level of current liability has to be geared

quickly to change in sales.

Business undertaking required funds for two purposes:

To create productive capacity through purchase of fixed assets. To finance current assets required for running of the business.

The importance of WCM is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities.

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The extent to which profit can be earned is dependent upon the magnitude of sales. Sales are necessary for earning profits. However, sales do not convert into cash instantly; there is invariably a time lag between sale of goods and the receipt of cash. WC management affect the profitability and liquidity of the firm which are inversely proportional to each other, hence proper balance should be maintained between two.

To convert the sale of goods into cash, there is need for WC in the form of current asset to deal with the problem arising out of immediate realization of cash against good sold. Sufficient WC is necessary to sustain sales activity. This is referred to as the operating or cash cycle.

FACTORS AFFECTING WORKING CAPITAL

The working capital needs of a firm are affected by numerous factors. The important factors are as follows:

(i) Nature of business: In some business organizations, the sales are mostly on cash basis and the operating cycle (explained later) is also very short. In these concerns, the working capital requirement is comparatively less. Mostly service giving companies come in this category. In manufacturing concerns, usually the operating cycle is very long and a firm has to give credit to customers for improving sales. In such cases, the working capital requirement is more.

(ii) Production Policy: Working capital requirements also fluctuate according to the production policy. Some products have a seasonal demand but in order to eliminate the fluctuations in working capital, the manufacturer plans the production in a steady flow throughout the year. This policy will even out the fluctuations in working capital.

(iii) Market Conditions: Due to competition in the market, the demands for working capital fluctuate. In a competitive environment, a business firm has to give liberal credit to customers. Similarly, it will have to maintain a large inventory of finished goods to service the customers promptly. In this situation, larger amount of working capital will be required.

On the other hand, when a firm is in seller’s market, it can manage with a smaller amount of working capital because sales can be made on cash basis and

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there will be no need to maintain large inventory of finished goods because customers can be serviced with delay.

(iv)Seasonal Fluctuation: A firm, which is producing products with seasonal demands, requires more working capital during peak seasons while the demand for working capital will go down during slack seasons.

(v) Growth and expansion activities: The working capital needs of the firm increase as it grows in terms of sales or fixed assets. A growing firm may need to invest funds in fixed assets in order to sustain its growth of production and sales. This will in turn increase investments in current assets, which will result in increase in working capital needs.

(vi)Operating efficiency: The operating efficiency of the firm relates to the optimum utilization of resources at minimum cost. The firm will be effectively contributing to its working capital if it is efficient in controlling operating cost. The working capital is better utilized and cash cycle is reduced which decreases working capital needs.

(vii) Credit Policy: Credit term granted by the concern to its customers as well as to its suppliers will also effect the working capital requirements. If the concern has allowed very liberal credit terms to its customer and has adopted a slack collection procedure, more funds will be tied in book debts and working capital needs will also be high. Where suppliers have granted liberal credit terms to the concern, there will be less need for working capital. Not only will the Ratio of cash and credit sales or purchase also effect the level of working capital.

(viii) Sales Growth: As the sales grow, the working capital needs also go up. Actually it is very difficult to establish an exact proportion of increase in current assets, as a result of increase in sales. Advance planning of working capital becomes essential because current assets will have to be employed even before growth in sales takes place. Once sales start increasing, they must be sustained. For this a firm will have to expand its production facilities, which will require more investments in fixed assets. This will in turn result in more requirements of current assets, which will increase working capital needs.

(iX) Dividend Policy: A company has to pay dividends in cash as per company Act. 1956. If a liberal policy is followed for payment of dividends, more

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working capital will be required. The needs for working capital will be substantially reduced if dividend policy is conservative.

(X) Working Capital Operating Cycle: in a manufacturing concern the working capital cycle starts with the purchase of raw materials and ends with the realization of cash from the sale of finished products. This involves purchase of raw materials and spares, its conversion into stock of finished goods through work-in-process with progressive increment of labour and service costs, conversion of finished stock into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on.

Thus, there are several factors affecting the working capital requirements.

NEED FOR WORKING CAPITAL MANAGEMENT

1. There is a positive correlation between the sale of the product of the firm and the current assets. An increase in the sale of the product requires a corresponding increase in current assets. It is therefore indispensable to manage the current assets properly and efficiently.

2. More than half of the total capital of the firm is generally invested in current assets. It means less than half of the capital is blocked in fixed assets. We pay due attention to the management fixed assets through the capital budgeting process. Management of working capital too, therefore, attracts the attention of the management.

3. In emergency (non-availability of funds etc.) fixed assets can be acquired on lease but there is no alternative for current assets. Investment in current assets, i.e. inventory or receivables can in no way avoided without sustaining loss.

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4. Working capital needs are more often financed through outside sources so it is necessary to utilize them in the best way possible.

5. The management of working capital is more important for small units because they scarcely rely on long term capital market and have an easy access to short term financial sources i.e. trade credit, short term bank loan etc.

6. In the modern system approach to management, the operations of the firm are viewed as a total that is an integrated system. In this sense it is not possible to study one segment of the firm individually or leave it out completely. Hence an overall look on the management of working capital is necessary.

MERITS OF ADEQUATE WORKING CAPITAL

Regular payment of salaries wages and other day-to-day commitments.

Sense of security and confidence.

Solvency of continuous production.

Sound goodwill (Prompt Payment)

Easy loams form banks

Distribution of dividends.

Exploitation of good opportunity.

Meeting unseen contingences.

Increase in efficiency of fixed assets.

High moral.

Increase production efficiency.

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Cash discounts.

Quick and regular return on investment

EVILS OF INADQUATE WORKING CPITAL

Loss of credit worthiness and goodwill

Operating inefficiency.

Low rate of return on fixed assets.

Increase in business risk. Cannot achieve profit target.

Low moral of business executives

Weakening of financial capacity

Cannot pay day-to-day expenses of its operations.

Delaying payments of wages, salaries, etc.

All this indicates that proper estimation of working capital requirements is a must of running the business efficiently and profitably. Therefore, the basic objective of working capital management is manage the firm’s current assets and current liabilities in such a way that the satisfactory level of working capital is maintained, i.e. it is neither inadequate not excessive.

In the management of working capital it is mandatory to know that what should be the level of current assets. There are two policies, which determines the level of current assets

Flexible Policy:- Under his policy the investment in current assets is high maintains a huge balance of cash and marketable securities, carries a large amount of inventories and grants feverous terms of credit to customers, which leads to a high level of debtors.

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Restrictive Policy:- Under this policy the investment in the current assets is low. This means that the firm keeps a small balance of cash and marketable securities, managers with small amount of inventories and offers terms of credit, which leads to a low level of debtors.

TYPES OF WORKING CAPITAL

There are two types of working capital: -

Permanent or Regular Working Capital:- It represents the minimum amount of investment in current assets that is seemed necessary to carry the operation at time .It is a continuous process of working capital management in any organization . In this process there is a certain level of current assets, which is maintained every time or every operating cycle.

Variable Working Capital: - It represents additional assets required at different time during the operating year to cover any change or variations form the normal operations. As for example-during the winter season the sales of the winter garments company increase. To fulfill the demand of woolen clothes the company requires additional account of current assets or working capital such as-cash, raw material, etc.

However, as a general rule, it can be concluded that in most cases the period which elapses between purchase of material and the receipt of sale proceeds of the finished goods will determine the working capital requirements of any business.

CHAPTER: 5WORKING CAPITAL MANAGEMENT IN CONTEXT TO

BARAUNI REFINERY UNIT (IOCL)

Barauni Refinery Unit (IOCL) follows a restrictive policy. It maintains minimum level of current assets. But this unit does not maintain the working capital fund separately; it shows this account in their annual budget. Barauni Refinery Unit does not deal directly. All the dealings are handled or controlled by

31

the Head Office. Barauni Refinery Unit does not purchase raw materials directly. Head Office provides raw materials to this unit as and when required. Through this unit does not purchase raw materials directly so it has no creditors. The major raw materials of the Refinery Division are the CRUDE OIL. Since there are not creditors, it acts as a limitation as it does not present the true picture of the working capital requirement for the corporation. But in spite of this, there are all the transaction done by the Head Office only. The Naraimo Refinery Unit maintains the working capital at some extent to meet out the following requirements:

To maintain inventories (Raw materials, work-in-process, finished goods, chemical, stores and spares)

To pay wages and salary

To incur day-to-day expenses and overheads cost such as fuel, power and office expenses.

Note: To provide credit facilities to the customers is not applicable to Barauni Refinery. It is because the finished products are directly sent to the Marketing Division. Yet creditors may arise due to the lengthy process of book payment system.

INDIAN OIL CORPORATION LIMITED Barauni Refinery Balance Sheet as at 31 March 2013 Particulars note march-13 march-12

EQUTY AND LIABILITIES

As it is shown in the graph the Net Working Capital of Barauni Refinery Unit (IOCL) has been decreased during the year 2008-09 as compared to the previous years. The reason behind this decrease is that the current asset which has been brought in, in the year 2008-09 is less than the current assets in the previous years and total liabilities which have been brought in, in the year 2008-09 is greaterthan the current assets in the previous years.

Determinants of working capital: -

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The following factors, which determined the working capital requirement of the firms. The descriptions of these factors have already been discussed in the previous chapter.

Nature of Business

Production Policy

Market condition

Seasonal Fluctuations

Growth and expansion activities

Operating Efficiency Credit Policy

But in the context of Barauni Refinery Unit (IOCL), the working capital requirement is mainly determined by factors like nature of the business, manufacturing process, sales volume and turnover, production policy and operating efficiency. Credit policy, seasonal fluctuation and are not applicable in Barauni Refinery. This is a manufacturing concern and its working depends on the manufacturing cycle and the time tag between production and sale. The sales volume and turnover also has an impact on the holding period of raw materials, work-in-progress and finished goods and ultimately affects the working capital requirement for the concerned department. The cyclical and seasonal fluctuations as do not affect the business as the final product are utilized throughout the year.

OPERATING CYCLE

An operating cycle is the technique to forecast the working capital requirement. The operating cycle can be said to be at the heart of the need for the working capital. The continuous flow from cash to suppliers, to inventory, to account receivable and back into cash is called the operating cycle. In other words, operating cycle is a time gap required to convert the sales and their actual realization in cash.

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Operating cycle of Barauni Refinery

If we analyze the above chart of operating cycle of Barauni Refinery we find that there is a Marketing Division in place of Debtors. It is due to the only reason that the Barauni Refinery unit (IOCL) does not sell its product directly, consequently debtors do not arise. Barauni Refinery Unit sent its product to the Marketing Division for sell.

The operating cycle of manufacturing company involves three phases: -

Acquisition of resources such as Raw material, Labour and Fuel, etc. Manufacturing of the product which includes conversion of raw material

into work-in-progress into finished goods Sale of the product either for cash or on credit sales create account

receivable for collection.

The term cash cycle refers to the length of time necessary to complete the following cycle of events: -

Raw material conversion period: -

Raw material turnoverRaw material holding period

Marketing division

Cash

Raw Material(Crude Oil)

Work-in-process(Gasoline, Diesel, Nephtha)

Finished goods(LPG, Kerosene, Petrol, Diesel, etc)

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Raw material inventory

Work-in-progress conversion period: -

Work-in-progress turnoverWork-in-progress holding periodWork-in-progress inventory

Finished goods conversion period: -

Finished goods turnoverFinished goods holding periodFinished goods inventory

Indian Oil Corporation Ltd.(Refinery Division) Barauni Refinery

Cost SheetParticular Amount (Rs)

2008-09Amount (Rs)

2009-10

Opening stock of Raw material+ Purchases + Pipe line freight

Less: Closing stock of Raw material

Raw material consumed Add: Manufacturing Expenses:

7,264,607,814 184,882,113,070

3,549,326,897

1,052,398,617156,580,858,532 5,642,945,764

195,696,047,781 1,088,830,365

163,276,202,9133,244,599,731

194,607,217,416 160,031,603,182

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Chemicals, Stores and sparesPower and FuelsRepairs and MaintenanceFreight and Transportation chargeOther manufacturing expenses:(Salary and wages to employees, overtime, etc)Add: Opening stock of work-in-process

Less: Closing stock of work-in-process

Works Cost:Add: Office and Administrative expenses

Cost of Production:Add: opening stock of finished goods

Less: closing stock of finished goods

Cost of Goods Sold:

Add: profit

Transfer to Marketing Division:

643,947,098 50,467,626

671,090,249 816,995,132

1,886,908,800

198,676,626,321 1,971,777,039

200,648,403,360 2,115,521,609

198,532,881,751 3,775,958,673

202,308,840,424 4,094,970,406

206,403,810,830 4,363,813,291

202,039,997,539

88,350,568

202,128,348,107

1,147,217,840 49,902,519

912,475,932 540,696,053

1,486,366,329

164,168,261,855 2,115,521,609166,283,783,464 3,081,839,768

163,201,943,696 345,294,023

163,547,237,719 4,363,813,291

167,911,051,010 4,252,292,110

163,658,758,900

189,512,622

163,848,271,522



2007-08Amount (Rs)

2006-07




7,866,033,711143,272,803,666 1,031,874,186

7,421,419,792132,976,533,414 1,012,811,000

152,170,711,563 7,264,607,814

141,410,764,2067,866,033,711

144,906,103,749 133,544,730,495

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ChemicalsStores and sparesPower and FuelsRepairs and MaintenanceFreight and Transportation chargeOther manufacturing expenses:(Salary and wages to employees, overtime, etc)

Add: Opening stock of work-in-process


Works Cost:Add Office and Administrative expenses:

Cost of Production:Add opening .stock of finished goods:

Less closing stock of finished goods

Cost of Goods Sold:

Add: profit


759,020,855 46,480,030 49,576,516 955,066,394 634,409,180

1,115,911,307

148,466,568,031 1,766,187,119150,232,755,150 1,971,777,039

148,260,978,111 789,691,553

149,050,669,664 4,167,577,708

153,218,247,372 4,094,970,406

149,123,276,966

7,448,693,896

156,571,970,862

639,199,259 45,149,240 38,008,324 882,564,438 856,638,760

1,028,129,248

137,034,419,764 2,126,733,280139,161,153,044 1,766,187,119

137,394,965,925 795,284,058

138,190,249,983 3,140,400,210

141,330,650,193 4,167,577,708

137,163,072,485

773,326,289

137,936,398,774



2005-06Amount (Rs)

2004-05




15,901,070,579105,924,004,243 290,460,000

8,709,063,24286,877,980,982 217,508,000

122,115,534,822 7,421,419,792

95,804,552,22415,901,070,579

114,694,115,030 79,903,481,645

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ChemicalsStores and sparesPower and FuelsRepairs and MaintenanceFreight and Transportation chargeOther manufacturing expenses:(Salary and wages to employees, overtime, etc)

Add: Opening stock of work-in-process


Works Cost:Add: Office and Administrative expenses

Cost of Production:Add: opening stock of finished goods

Less: closing stock of finished goods

Cost of Goods Sold:

Add: profit


613,844,086 48,446,036 52,510,171 498,949,542 400,362,721

783,052,036

117,091,279,622 2,120,551,481119,211,831,103 2,126,733,280

117,085,097,823 971,428,338

118,056,526,161 3,504,702,083

121,561,228,244 3,140,400,210

118,420,828,034

4,018,075,333

122,438,903,367

467,601,342 22,096,267 32,465,854 430,421,808 500,309,128

880,634,729

82,237,010,773 1,709,783,21583,946,793,988 2,120,551,481

81,826,242,507 634,067,792

82,460,310,299 2,344,285,920

84,804,596,219 3,504,702,083

81,299,894,136 6,340,434,077

87,640,328,213

For the year 2009-10

Raw Materials Conversion period: -

Average stock of R.M = Opening stock of R.M + Closing stock of R.M2

= 1,052,398,617 + 3,244,599,731 2

= Rs 2,148,499,174

Raw Material Turnover = Raw Material consumed

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Average Stock of R.M

= 160,031,603,182 2,148,499,174

= 74 times

R.M Holding Period = Average stock of R.M x 365 R.M Consumed

= 2,148,499,174 x 365160,031,603,182

= 5 days

R.M Inventories = R.M Consumed x R.M Holding Period 365

= 160,031,603,182 x 5 365

= Rs 2,192,213,742

Work-in-process Conversion period: -

Average stock of W.I.P = Op. stock of W.I.P + Cl. stock of W.I.P2

= 2,115,521,609 + 3,081,839,768 2

= Rs 2,598,680,689

W.I.P Turnover = Cost of Production Average stock of W.I.P

39

= 163,547,237,719 2,598,680,689

= 63 times

W.I.P Holding Period = Average stock of W.I.P x 365Cost of Production

= 2,598,680,689 x 365 163,547,237,719

= 6 days

W.I.P Inventories = Cost of Production x W.I.P Holding Period365

= 163,547,237,719 x 5 365

= Rs 2,240,373,119

Finished Good Conversion period: -

Average stock of F.G = Op. stock of F.G + Cl. Stock of F.G2

= 4,363,813,291 + 4,252,292,110 2

= Rs 4,308,052,701

F.G Turnover = Cost of good sold Average stock of F.G

40

= 163,658,758,900 4,308,052,701

= 38 times

F.G Holding Period = Average stock of F.G x 365 Cost of good sold

= 4,308,052,701 x 365 163,658,758,900

= 10 days

F.G Inventories = Cost of good sold x F.G Holding Period365

= 163,658,758,900 x 8 365

= Rs 3,587,041,291

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Operating Cycle Diagram for the year 2009-10

Holding Period and Working Capital Required for 2009-10

Stock Holding Period W.C. Requirement

Raw Material 5 days Rs 2,192,213,742

Work-In-Process 6 days Rs 2,240,373,119

Finished Goods 10 days Rs 3,587,041,291Total W.C. Requirement Rs 8,019,628,152


CashRaw Material(Crude Oil)

Rs 2,192,213,742For 5 days

Rs 2,240,373,119For 6 days

Work-in-process(Naphtha, etc)

Finished Goods(Petrol, Diesel, etc)

Rs 3,587,041,291 For 10 days

Transferred to Mktg. Division

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Average stock of R.M = Opening stock of R.M + Closing stock of R.M2

= 7,264,607,814 + 1,088,830,365 2

= Rs 4,176,719,090

Raw Material Turnover = Raw Material consumedAverage Stock of R.M

= 194,607,217,416 4,176,719,090

= 47 times


= 4,176,719,090 x 365194,607,217,416

= 8 days


= 194,607,217,416 x 8 365

= Rs 4,265,363,669

43



= 1,971,777,039 +2,115,521,609 2

= Rs 2,043,649,324


= 202,308,840,424 2,043,649,324

= 99 times

W.I.P Holding Period = Average stock of W.I.P x 365 Cost of Production

= 2,043,649,324 x 365202,308,840,424

= 4 days


= 202,308,840,424 x 5 365

= Rs 2,771,353,978


Average stock of F.G = Op. stock of F.G + Cl. Stock of F.G

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2

= 4,094,970,406 + 4,363,813,291 2

= Rs 4,229,391,849


= 202,039,997,539 4,229,391,849

= 48 times


= 4,229,391,849 x 365 202,039,997,539

= 8 days


= 202,039,997,539 x 8 365

= Rs 4,428,273,919


45





Finished Goods 8 days Rs 4,428,273,919Total W.C. Requirement R 11,464,991,566




Rs 4,265,363,669For 8 days

Rs 2,771,353,978For 4 days



Rs 4,428,273,919 For 8 days


46

Average stock of R.M= Opening stock of R.M + Closing of R.M2

= 7,866,033,711 + 7,264,607,814 2

= Rs 7,565,320,763


= 144,906,103,749 7,565,320,763

= 19 times


= 7,565,320,763 x 365144,906,103,749

= 19 days


= 144,906,103,749 x 19 365

= Rs 7,543,057,455



47

= 1,766,187,119 + 1,971,777,039 2

= Rs 1,868,982,079


= 149,050,669,664 1,868,982,079

= 80 times


= 1,868,982,079 x 365149,050,669,664

= 5 days


= 149,050,669,664 x 5 365

= Rs 2,041,789,995



= 4,167,577,708 + 4,094,970,406 2

48

= Rs 4,131,274,057


= 149,123,276,966 4,131,274,057

= 36 times


= 4,131,274,057 x 365149,123,276,966

= 10 days


= 149,123,276,966 x 10 365

= Rs 4,085,569,232



Rs 7,543,057,455For 19 days

49








Average stock of R.M= Opening stock of R.M + Closing of R.M2

= 7,421,419,792 + 7,866,033,711 2

= Rs 7,643,726,752

Rs 2,041,789,995For 5 days



Rs 4,085,569,232 For 10 days


50


= 133,544,730,495 7,643,726,752

= 17 times


= 7,643,726,752 x 365133,544,730,495

= 21 days


= 133,544,730,495 x 19 365

= Rs 7,683,395,453



= 2,126,733,280 + 1,766,187,119 2

= Rs 1,946,460,100


51

= 138,190,249,983 1,946,460,100

= 71 times


= 1,946,460,100 x 365138,190,249,983

= 5 days


= 138,190,249,983 x 5 365

= Rs 1,893,017,123



= 3,140,400,210 + 4,167,577,708 2

= Rs 3,653,988,959


= 137,163,072,485 3,653,988,959

= 37 times

52


= 3,653,988,959 x 365137,163,072,485

= 10 days


= 137,163,072,485 x 10 365

= Rs 3,757,892,397



Rs 7,683,395,453For 21 days

Rs 1,893,017,123For 5 days



Rs 3,757,892,397 For 10 days


53






Graphically Presentation

RAW MATERIAL TURNOVER: -

RAW MATERIAL HOLDING PERIOD: -

17 19

47

74

01020304050607080

2006-07 2007-08 2008-09 2009-10

TIM

ES

YEAR

RAW MATERIAL TURNOVER

TIMES

54

WORK-IN-PROCESS TURNOVER: -

WORK-IN-PROCESS HOLDING PERIOD: -

2119

85

0

5

10

15

20

25

2006-07 2007-08 2008-09 2009-10

DA

YS

YEAR

RAW MATERIAL HOLDING PERIOD

DAYS

7180

99

63

0

20

40

60

80

100

120

2006-07 2007-08 2008-09 2009-10

TIM

ES

YEAR

W.I.P TURNOVER

TIMES

55

FINISHED GOOD TURNOVER: -

FINISHED GOOD HOLDING PERIOD: -

5 5

4

6

0

1

2

3

4

5

6

7

2006-07 2007-08 2008-09 2009-10

DA

YS

YEAR

W.I.P HOLDING PERIOD

DAYS

37 36

48

38

0

10

20

30

40

50

60

2006-07 2007-08 2008-09 2009-10

TIM

ES

YEAR

FINISHED GOOD TURNOVER

TIMES

56

CHAPTER: 6INVENTORY MANAGEMENT

INTRODUCTION:

Every enterprise needs inventories for smooth running of its activities. It serves as a link between production and distribution process. There is generally a time lag between the recognition of needs and its fulfillment. The greater the time-lag, the higher the requirement for inventory. It also provides a cushion for future price fluctuations.

The investment in inventories constitutes the most significant part of current assets/working capital in most of the undertakings; thus, it is very essential to have proper control and management of inventories. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories.

The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with

10 10

8

10

0

2

4

6

8

10

12

2006-07 2007-08 2008-09 2009-10

DA

YS

YEAR

FINISHED GOOD HOLDING PERIOD

DAYS

57

customers. Inventory Management and the activities of Inventory Control do not make decisions or manage operations; they provide the information to Managers who make more accurate and timely decisions to manage their operations. Effective Inventory Management helps organizations to meet or exceed customers' expectations of product availability while maximizing the organization's net profits and/or minimizing its inventory and its related costs.

NATURE OF INVENTORY:

The various forms in which inventories exit in a manufacturing companies are:

Row Material: Raw materials are materials and components that are inputs in making the final product through the manufacturing process. Purchasing and production executives shape raw material policies.

Work-in-Process: Work-in-process inventories are semi-manufactured products. They represent products that need more work before they become finished products for sale. Work-in-process inventories are influenced by the decision of production executives.

Finished Goods: Finished goods are those completely manufactured products, which are ready for sale. Stock of raw materials and work-in-process facilitate production, while stock of finished goods is required for smooth marketing operations.

NEED TO HOLD INVENTORIES:

Inventory

Raw material Work in progress Finished goods

58

Maintaining inventories involves tying up of the company’s funds and incurrence of storage and handling costs. There are three general motives for holding inventories:-

Transaction Motive: - This emphasizes the need to maintain inventories to facilitate smooth production and sales operations. To increase the production to fulfill the demand whether seasonal or regular the organization needs to hold inventories and there should not be any opportunity loss.

Precautionary Motive: - It is necessary to hold inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. For example a manufacturing company.

Speculative Motive: - It influences the decision to increase or reduce inventory levels to take advantage of price fluctuation. There are some concerns which maintain the level of inventories either it is raw material or finished goods and waits for the increase in the price.

The Various methods of requisitioning of Materials

Reordering Level

This is the level at which the firm should go for fresh purchase requisition of material through the storekeeper to meet the requirements. The reordering level which takes into consideration of minimum level of consumption of raw material during the course of production process as well as the amount material required by the firm during period of purchase and goods in transit immediately after the order.

Reordering Level

Minimum LevelAmount of materials required during the period of consumption

59

Reordering Level = Minimum level of stock for uninterrupted flow of production process

+Amount of materials required during the period of consumption

OrLead-time stock level

Alternate method is available by using the maximum consumption and maximum reorder period.

Reordering level = Maximum consumption x Maximum Re-order period

This method registers the maximum consumption of the firm during the production as well as the maximum time period required for the supply of required materials.

Under this alternate approach, the firm at any moment will not face any difficulties due to short supply or insufficient amount of materials.

Minimum Level/Safety level:

The firm should at always maintain minimum amount of material in its hands to facilitate the low of production process as unaffected due to short fall in the quantum of materials.

The following points are most important in designing the minimum level of stock:

Lead-time should be predominantly considered to determine the time lag in between the materials ordered and received. The firm should find out the practical difficulty of the vendor in supplying the material for the determination for minimum level of stock.

Amount of consumption of the material during the lead-time.

Minimum stock level=Reordering level-(Normal level consumption x Normal Reorder period)

60

Average and normal level of consumption is synonymous with each other. If normal or average consumption is not given, the formula is as follows.

Average consumption +Minimum level consumption + Maximum level consumption2

Maximum Level

This is the level at which the firm holds maximum quantity of materials as stock during the process. The ultimate aim of fixing the level of maximum level is that to avoid the overstocking. If the stock level of the firm exceeds the maximum level already fixed is known as overstocking level of the firm, more than the requirement.

Why over stocking is considered not advisable?

It leads to excessive investment on inventory more than the requirement.

It leads to unnecessary wastage of the materials due to excessive stock.

The excessive storage of materials may certainly affect the price of the product.

Maximum stock level = Reordering level + Reordering quantity – (Minimum consumption X Minimum reordering period).

Danger level

At this level, the firms should not further issue any materials to the various functional departments. At the danger level, the purchase department is vested with greater responsibility to immediately arrange the supply of raw materials in order to maintain the flow of production as uninterrupted.

The consumption level of the materials is getting varied from one time period to another. During the specified period, there may be maximum consumption and minimum consumption which should be averaged to find the mid point in between

61

the two, in order either fulfilled the maximum consumption or maximum consumption to the content possible.

Why the maximum reorder period is taken into consideration?

The purpose of considering is that the greater period taken by the supplier to supply the required materials.

Danger level = Average consumption X Maximum reorder period.

Average Stock Level

Average level = Minimum stock level + ½ of the reorder quantity.

Economic Ordering Quantity

The ordering of materials using tagged with three different components of cost viz.

Acquisition cost of materials Ordering cost of material Carrying cost of material

The ordering quantity of materials may larger either or meager in volume, which carries its own advantages and disadvantages.

If the quantity ordered is larger in volume, the following are the some of important advantages: -

The bulk purchase order reduces the ordering cost of the materials. The greater the size of the order, which leads to reduce the numbers of the orders in procuring the materials.

Quantity discount – The discount can be classified into two categories viz. trade discount and cash discount.

What is trade discount?

Trade discount is the discount granted by the supplier to the buyer of the materials at the movement of bulk purchase. This percent of discount is greatly possible only

62

during the periods of greater of volume of purchase; which reduces the overall cost of the acquisition.

If the quantity is procured in meager volume, the following are constructed as advantages;

The carrying cost will come down in the case of lesser inventories. The cost of storage is lesser as far as the meager quantities of materials. Lost due deterioration of obsolescence, wastage will be minimum. Insurance cost is less due to meager volume of materials.

2AOEconomic Ordering Quantity = ------------

I A = Annual requirements in units.

O = Ordering costI = Cost of storing per year or cost of carrying the inventory.

Objective of inventory management

To maintain a large size of inventory for efficient and smooth production and sales operations.

To maintain a minimum investment in inventories to maximize profitability.

IN CONTEXT TO BARAUNI REFINERY (IOCL)

The Indian Oil Corporation (Barauni Refinery unit) needs to hold inventories for the purpose of transactions motive and precautionary motive. In this unit production is a continuous process. For the smooth production, the company needs to maintain or keep an adequate level of ram material inventory to avoid any shut down position. For every production unit the inventory of raw material plays a lead role.

The Indian Oil Corporation (Barauni Refinery unit) maintains all these sort of inventories. This unit maintains adequate stock of inventories of raw material for the smooth functioning of the process of production. The company also maintains an adequate level of inventories for work-in-process as per the

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requirement. Till the completion of the production cycle, the work-in-process inventories are maintained and some part of it is also used as fuel in the unit. Stock of finished goods also has to be maintained by the Barauni Refinery unit. This unit does not have authority to sell the finished product in the market directly. It has to be sent to the Marketing division for further sale. As per the instruction of the Head Office they have to keep an adequate level of finished goods for compensating any loss of production during the period of election (governmental hazards), production break down and other contingencies. It also sells finished goods like LPG, Petrol, Diesel, etc. on behalf of the Marketing division. That’s why a stock of finished goods also needs to be maintained.

System of identification of needs

There are mainly three types of inventories maintained by Barauni Refinery Unit (IOCL) such as:

Crude Oil Inventories

Inventories for chemicals

Inventories for stores and spares

Identify the need for Crude Oil Inventories and system of placing the order

The Barauni Refinery Unit (IOCL) identifies the need for inventories for crude oil through Revenue Budget that is prepared on yearly basis. in the Revenue Budget, the estimate for the consumption of Crude Oil inventories for the next year is estimated on the part experience basis. Here a brief introduction about Revenue Budget of Barauni Refinery Unit (IOCL) is given.

The Revenue Budget is basically a budget of income and expenditure. The objective of preparing the Revenue Budget is to fix a target in respect of physical parameters such as, throughput, product pattern, fuel and loss and also that of operating expenses which become the basis for monitoring and control and to estimate, based on targeted physical parameters of operating expenses, the likely profit or internal sources for income, which helps in the fund management.

The Barauni Refinery Unit (IOCL) prepares Revenue Budget every year in mid September. In the month of September, the Budgeted Estimates (BE) for the

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next year and Revised Estimates (RE) for the current year are prepared for which the Budgeted Estimates (BE) is prepared in the previous year.

For example:- In the financial year 2007-08 in the month of September, the Budgeted Estimates (BE) for the financial year 2008-09 the Revised Estimates (RE) for the next six months 2007-08 were prepared.

Budgeted Estimates (BE): Budgeted Estimates is that which is prepared for the next month in which all the items (inflow and outflow) are included on full estimation.

Revised Estimates (RE): Revised Estimates is prepared after six months of applications of budget estimates. The purpose of preparing Revised Estimates is to know that during the present six months what are the actual expenses or income exits and on what basis they have been prepared. They collect this information, about expenses or incomes from the concerned officers or employees. They also provider information regarding what will be the expenses and incomes for the basis they next six months. On this basis they estimate for the next six months.

There is no system for placing order for crude oil in the Barauni Refinery Unit (IOCL). Because they do not deal or purchase crude oil directly. The hear office handles determination of crude oil and its supply to the Refinery unit. Head office provides crude oil to the Refinery as and when required as per the estimation. There is continuous supply of crude oil through pipelines and tankers to the Refinery.

Identify the need for chemicals and spares:

Identification for need for chemicals basically depends on the quantity and types of crude oil processed. The quantity for chem8icals is decided in the ratio of quantity and types of crude oil processed. Orders regarding the purchase of chemicals and spares are made on past experiences. Inventory is maintained on approximation. The user department sends the need for the item_ to the Material department along with the consumption pattern. The reorder point is fixed in certain cases and then the order goes to the Purchase department. Two kinds of indent is raised:

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Inventory control items, which are fixed where the reorder point or indent, is raised and the consumption pattern is studied.

Where consumption pattern is not known, preventive maintenance processes are undertaken on cash basis.

When an indent is raised and if it is universally available quotations or order is placed and the best is selected amongst all. Ain case of wholesale items order is placed to the authorized dealer who manufactures the items as per the requirement.

Issue system of inventory for Barauni Refinery Unit

Firstly it is needed to explain how many types of issue system for Inventories are there, and then which system is opted by the Barauni Refinery Unit, will be explained.

First in First Out Method (FIFO) : In this method or issue system inventories, are issued for the production process or for sales which are purchased first or which enter in the stores first. And in the determination of cost of product, cost of that issued material is considered. In this case most recent purchase is as closing stock in the stores.

Last In First Out Method (LIFO): This method is absolutely different from FIFO method. N this method or issue system inventories are issued for the production process or for the sale, which are purchased or enter in the stores recently. The purpose for doing so is that issued price is valued at the recent market price. This method is mostly used when price of inventories are continuously in the position of rising.

Highest In First Out Method (HIFO):- In this method or issue system inventories are issued for the production process or for the sale whose cost is high The purpose for doing so is that the company wants to sell or utilize that material at its fullest and that there should be no opportunity loss. This method is not mostly in use because; stock is valued at lowest price.

Barauni Refinery Unit (IOCL): issues inventories for the production process and for the sale to the Marketing Division on First in First Out (FIFO)

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basis. Here there is a continuous flow of crude oil. Every day crude oil is supplied to Refinery and also there is a continuous supply of finished product to the Marketing Division. Every day crude oil is processed or converted in to finished product and everyday it is sent to the stores and thereafter it is sent to the Marketing Division. Crude oil enters in the tank and it is sent for the process and after processing it is sent to the stores. All this happens automatically. This means that the crude oil, which enters the tank, first, is sent for the processing first and after processing it is sent to the sores. From the stores it is sent to the Marketing Division and then the crude oil is sent for the process and so on. This is a continuous process and it works on FIFO basis.

Stores Management: -

There is a separate department in Barauni Refinery Unit (IOCL) Oil Storage and Movement Department, which manages and maintains the movement of crude oil, intermediate products and finished goods. Actual job of this department is to receive the raw material, intermediate products and finished goods and dispatch all this, such as raw material for processing, intermediate products for further processing and some of the intermediate products to the Marketing Division for sale and finished products to the marketing department for the same purpose. This department receives raw material as crude oil and issues for the further processing at First in First Out basis. After processing finished products are issued and dispatched to the Marketing Division for Sale. They receive more than one type of finished products for which there is different maintenance cost. The maintenance cost for LPG is more than the other products. There should be certain temperature, which has to be maintained. And for other products like Petrol, Diesel, Etc., which is stored in tanks, should not be filled up to the brim. A certain portion of the tank is kept empty.

Valuation of Inventory: -

Generally the valuation of closing stock is done on the basis of market price or cost price which ever is less. But here we will see how Indian Oil Corporation (Barauni Refinery Unit) evaluates its stock, what rules and regulations are followed by them etc. At first we will see how many types of closing stock they maintain: -

Types of Closing Stock in Indian Oil Corporation Ltd.:

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Crude Oil

Crude Oil Stock in Transit.Crude Oil Stock in PipelineCrude Oil Stock in Refinery Tanks.

Intermediate Stock or Work-in-Process

Finished Goods

There are many types of crude oil such as, indigenous crude oil and imported crude oil. There are two types of indigenous Crude Oil (1) off-shore crude oil and (2) on shore crude oil and imported Crude Oil separately for (1) High Sulphur and (2) Low Sulphur.

Valuation of Crude Oil Stock

Crude Oil Stock to be valued at “Cost” or Replacement Cost”

For valuation at replacement cost following conditions should be satisfied:

There should be fall in the price of Crude Oil after the date of closing (31st

March). The expected realization from products to be produced out of crude oil inventory results in realization lower than cost of crude oil.

For the purpose of valuation of crude oil following three elements are required: -

1) Cost of Crude Oil.

2) Expected realization from products produced from crude oil.

3) Replacement of cost of crude oil.

Cost of Imported Crude Oil (High Sulpher & Low Sulpher)

1. All elements which are a part of imported crude oil are to be considered in the cost of stock at Refinery such as FOB, marine

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freight, marine insurance, and other landing charges, custom duty, pipeline cost, entry tax (if applicable).

2. All the above elements to be considered are booked in the purchase cost of crude oil

3. For crude oil in transit FOB and other elements are booked in purchase cost.

4. The above elements are to be considered for the purpose of valuation of crude oil stock at cost.

5. All elements as considered for Refinery stock to be taken on notional basis for crude oil stock in transit and in pipeline e.g. Custom duty, entry tax etc.

6. Operating cost as per budget estimated of the next year should be included for comparison with realization.

Valuation of Crude Oil Stock: -

Expected realization value: -

1. If the crude oil quantity is processed during April, the realization of the products is at the price applicable for the month of April.

2. For balance crude oil quantity (if any), the expected product realization for the month of May will be considered based on Inventory Logistic Plan (ILP)

3. Specific customer price and excise duty benefit to be considered for above

Replacement cost of crude oil stock: -

The elements for replacement cost will be same as considered for cost of crude oil, however, following are to be taken additionally: -

1. FOB as intimated by HO based on actual price during April

2. Other element to be considered by the unit based on the estimated actual cost.

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3. Customs duty as based on percentage; the same should be revised taking revised FOB value.

Valuation of Intermediate StockThe valuation will be lower than the cost of intermediate products or

realization of the products, to be produced out of the intermediate stock, whichever is lower.

Cost (Including conversion cost)

The cost of intermediate stock will be based on cost of crude oil as for Refinery stock and 50% of operating cost as considered for product valuation and 50% of fuel and loss for the month.

Expected realizable value

The realizable value will be similar to crude oil stock valuation, however, the balance operating cost & fuel & loss (50%) adjustment has to be done while comparing with the cost of intermediate products.

Valuation of crude Oil

Pipeline Cost, crude oil valuation

For pipeline cost, the operating cost to be considered as fixed & variable

Fixed cost to be allocated based in installed capacity if the capacity utilization is below installed capacity.

Variable cost will be allocated based on the pumped quantity by pipeline during the year.

Valuation of finished products

Finished stock to be valued at cost or realization value whichever is lower.

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Finished products to be divided into two categories.

Straight run products

Especially products for which there is a separate production plant such as benzene, toluene, FGH, propylene, lubes etc.

CHAPTER: 7

CASH MANAGEMENT

The starting point for avoiding a cash crisis is to develop a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to gain an understanding about where all the money went.

Efficient cash management processes are pre-requisites to execute payments, collect receivables and manage liquidity. Managing the channels of collections, payments and accounting information efficiently becomes imperative with growth in business transaction volumes. This includes enabling greater connectivity to internal corporate systems, expanding the scope of cash management services to include “full-cycle” processes (i.e., from purchase order to reconciliation) via ecommerce, or cash management services targeted at the needs of specific customer segments. Cost optimization and value-add services are customer demands that necessitate the creation of a mechanism to service the various customer groups.

Cash is the most liquid asset in any business. It is a very crucial asset in the day-to-day operations of a business firm. Cash is the basis input required to run thebusiness continuously. A firm has to stike a balance between maintaining a very high cash balance and very small amount of cash balance. It excessive cash balance is maintained, the excess cash will remain idle affecting the profitability of the business adversely. On the other hand, if too small amount of cash balance is maintained, it will lead to shortage of cash resulting into disruption of

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manufacturing operations of a business firm. Therefore, the major aspect of cash management is to keep a peoper cash balance.

Cash management thus is concerned with, the managing of,i) Cash flows into and out of the firm.ii) Cash flows within the firm.iii) Cash balances held by the firm at a point of time by

financing deficit or investing surpuls cash

It can be represented by cash management cycle: -

Cash management cycle

Sales generate cash, which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control. Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a firm holds. The aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently and to use excess cash in some profitable way.

Business operation

Information $ control

Cash payment

Cash collection

Deficit

Surplus

Borrow

Invest

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IN CONTEXT TO BARAUNI REFINERY (IOCL)

The first and the foremost step in managing cash are identifying its requirement.

The Indian Oil Corporation Ltd. (Barauni Refinery Unit) identifies the need for cash for meeting its working capital requirement and for day-to-day operations of business is through the preparation of the cash budget. Budgeting is the technique by which financial and/or quantitative expressions are given to a set policy in the form of a plan prior to a defined of time.

It involves the coordination of the activities dictated by plans and sets up a control mechanism to bring to the notice of management how far the entire activities are geared upon to get the desired results and corrective action wherever and whenever necessary so as to comply with the goals set up.

The Indian Oil Corporation Ltd. (Barauni Refinery Unit) prepares the cash budget on the value dating system. As per this system the Barauni Refinery (IOCL) maintains a special current account with the SBI. Barauni Refinery Unit maintains this account with the campus branch as well as the Kolkata branch. Cheques make every payment by this branch. Cash payment is made in rare cases. Only for the payment to the employees, up to Rs. 20,000 is mae by cash above the payment made by cheques. The arrangement of this cash payment is made through the State Bank of India on behalf of the Head Office. Barauni Refinery Unit issues cheques for the payment to the party every day as and when required. Out of those cheques how many cheques are present for payment does not matter. Every day payment is made for the Barauni payment Refinery Unit and every day they are sent to the bank for payment for which the Head officer makes payment ultimatelyto the Bank. It is a continuous or a cyclical process. It prepares the Estimated Budget and the Revised Budget every month and every year. The estimated budget is prepared every 10th of a month and the revised budget is prepared every 25th of the same month and the revised budget is prepared as per the approval of the Head Office every cash budget is prepared as per the approval of the Head Office. This cash budget is sent to the Refinery Head quarters New Delhi.

The SBI Branch at Kolkata maintains an account for the Barauni division in order to make payment to the parties who are interested in getting the payments

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conveniently form the Kolkata Branch. For example payments have to be made to auditors, suppliers for chemicals and stores and spares, entry tax, excise duty, etc. An amount of Rs. 10 crores is kept and maintained for payments to the concerned parties and is authorized to spend Rs. 9 cores at a stretch.

The branch has to keep Rs 1 crore as a reserve. The amount of Rs. 9 crores can be spent at any may be, within an hour or a day or a week. As and when it is spent the amount is again reimbursed by the Indian Oil Head Office. The Kolkata Head Office provides all details regarding the payment made to various parties, after adjusting the amount received and paid, to the Head Office as a proof of its payment

Estimated Cash Budget:

This Estimated cash budget is prepared in every month till the date of 10th

for the next month. In this it is estimated how much cash is required for the next month. In this all the expected expenses are included and forecasted.

Revised Cash Budget:

Revised cash budget is also prepared in the same month of the estimated cash budget till the 25th of the month. It is also prepared for the next year for which estimated cash budget is required. It is nothing but the system of finalizing the cash budget. The only difference is that during the period of 15 days from 10th to 25th

there may be some expenses, which are included, further.

Items included in the Cash Budget: -

These are some items, which are included in the Cash Budget: -

Projected Expenditure:

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This expenditure is capital in nature. As it is not finalized, it is considered to be revenue in nature. When the project gets over then all the expenses relating to this are capitalized. At present a project related the installation of 3rd sector of Diesel Hydrogenating Treating Unit in under consideration.

Custom & Excise Duty and Entry Tax:

These expenses are paid on the basis of occurrence. When these transactions occur then it is shown in the cash budget. These expenses are on payment basis. For example: - Expenses for the month of My will be paid in the month of June. The Refinery pays custom duty, Excise Duty and Entry Tax on Crude Oil Consumption.

Additional Facilities:

These expenses are also of Capital Nature. These expenses are related to Plant, Furniture, Constructions, etc. Need for furniture for the coming period is estimate basically in places where construction work is done. The repairs and maintenance department of each section do this estimation.

Employee Payments:

This expense mainly depends on the existing number of employees INS the Refinery and their pay scale. The estimation is done on the basis of how many new employees are appointed, how may of them get retired, how many of them get promoted, how many of them require advanced payment of salary, etc.

Other Expenses:

Other expenses are related to payment to suppliers, contractors, etc. Budgeting is not only a financial function performed by the Financial Department alone. The Planning and Budgeting have to be grassroots operation in which all levels of management participate. The business of Finance Department is to receive the operating plans of the line managers and other Department Heads and transplant those plans into comprehensive projection of financial condition and operating results. After the budgets are approved, the actual results are also forwarded to various Departments by Finance for analysis and corrective action as required.

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System of managing cash:

The Barauni Refinery basically does not deal with raw cash, at this division, As the cash management is thoroughly dealt at Delhi and Mumbai Head Office. The daily requirement of cash is met by direct transitions with the SBI where a special current account is maintained. The income earned by the Barauni Division is maintained and kept only on books.

It mainly deals with payments to various parties, which are:

The internal customers who are the employees

The external customers who are the contractors.

For statutory deposits i.e. payment as the Bihar Entry Tax.

The requirements of cash are met as per time and fulfilled by the Finance department, which deals with the State Bank of India. Cash for petty uses are paid to the concerned departments and maintained for further uses. Salary to the staff is directly debited to the concerned accounts. This is how cash is managed in the Barauni Division.

Cash Budgeting

Budgeting Principles and Practices in Barauni Division

Types of plans/budget

The corporate objective, as approved by the Board of Directors, forms of basis for long term/short term budgets so as to attain the desired objectives. The long terms plans comprises of:

1. Perspective plan covering a duration of 10 – 15 years2. Long range plans covering duration of 5 years.

Perspective Plan

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The perspective plan sets the long-term goals to be attained by the corporation in line with the corporate objectives. The corporate goals are further divided into Divisional goals and Units’ goals. The purpose of perspective plan is to achieve efficiency and supremacy in the existing operation and also to diversify into other areas of operation as may be possible taking into account the opportunities thrown up by the environment. The perspective plan is updated once in 2 years is available. This plan is prepared by the corporate planning dept based on the inputs received by the divisions

Long range Planning:

Long range planning is aimed to achieve the broad objectives envisaged in the perspective plan by fixing specific targets and action plas for various functions. The long range planning dept coordinates the long-range plan are reviewed periodically at units/ HO with reference to actual performance. An in addition to perspective and Long-range plan, the corporation is closely associate in the five year Plans of the government insofar as it related to petroleum sector. The corporate plans have to take into consideration the objectives as laid down by the government in the Five Year Plans. The new projects, which are to be, included in the long-range plan takes into consideration the stated objective of the Government in the Five Year Plans.

Short Term Plans:

In the short term the corporation prepares Revenue and Capital budgets indicating the Revised Estimates for the current yea5r and the budget estimates fort the next year. These budgets are more detailed and indicate the expected physical/finance performance of operations and projects for close monitoring and control.

In addition to these budgets Purchase Budget. Working capital budget or capital budget or capital budgets are also prepared to now the availability of internal resources for financing projects and for further Fund management in case of surplus/deficit. The Foreign Exchange budget is also prepared for submission to the Government our requirements of the Public section in perspective form Balance of Payment (BOP) angle.

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The Barauni Division deals with the planning and the preparation of the short-term budget and the long range planning and the HO Delhi Prepares the perspective plans.

Revenue Budget:

The revenue budget is basically a budget of income and expenditure. The objective of revenue budget is two fold:

1. To fix a target in respect of physical parameters viz., throughput production pattern, fuel and loss and also that of operating expenses which then become the basis for monitoring and control.

2. To estimate based on the targeted physical parameters/operating expenses, the likely profit/internal source generation which will then form the basis of funds management.

Components of Revenue Budget:

The components of Revenue Budget are:

Throughput, Product Pattern, Fuel and loss Operating income Raw material Operating expenses

Based on the above, the summarized position of Revenue Budget is prepared indicating the estimate profit or loss during the budget period.

Throughput, Product Pattern and Fuel and Loss:

For the preparation of Revenue Budget, Basic requirement is the estimation of likely throughput/product pattern for Refineries and estimated throughput of Pipelines.

This estimation is done by interactive process between refinery units and HO taking into consideration the shut down schedules, Crude oil availability and other

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technical considerations. Each Refinery indicates at the beginning of the Year, the shut down schedules, on-Stream days available, etc. to HO. Head Office interacts with OCC to ensure the availability of various type of crude and also projected the demand for different products. Base doesn’t this data, the Unit’s workout the possible product pattern which is again sent to the HO for review and confirmation.

Operation Income:

Transfer of Products

Based on the projected throughput/product pattern, the stocks in hand at the beginning of the year, and the anticipated stock at the end of the year the dispatches to the Marketing Division shall be worked out. The same is to be valued at the existing ex-refinery prices for formula products and transfer price for free trade products.

Pool Accounts adjustments:

The Pool Account adjustments relating to products viz. product pattern variation, the sex-refinery-retention price differential price, etc. shall be worked out as per instructions of OCC/Govt.

Stock Variation:

The variation between the opening stock of finished/intermediate stocks and the anticipated closing stock shall be furnished.

Raw Material Cost:

Based on the types of crude to be processed as already determined, the raw material cost shall be worked out taking into consideration the prevailing cost of crude and the various Pool Account (COPE), Cost and Freight Adjustment Account (E&F) etc.

Operating Expenses

Controllable Cost:

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The operating cost is estimated based on zero based budgeting concepts in respect of controllable items of expenditure. Zero based budgeting is a process in which each manager is required to justify his requirements after evaluation of various alternatives and raking them in order of importance by systematic analysis. No allocation of funds can be justified merely because an activity was taken up in the past The continuation of any activity is required to be justified along with other competing claims. The following illustrative items are covered under ZBB:

Chemicals and catalysts Repairs and maintenance Overtime Traveling and conveyance Communication expenses Printing and stationary Staff car expenses

Petty Cash Management:

In every business, of whatever size, there are payments, which are of small amounts and high frequency, Examples are: payments of stationary, postage, telegrams, carriage, leaning, traveling. If all these payments are record in the cashbook, it will unnecessarily be overburdened. In order to make the task of the cashier easy, a petty cashier is appointed and is handed over a small sum (say Rs. 100.00), which, from past experience, has been found sufficient enough to meet the requirements of a given period (say one month). This small amount is called “imprest’ or ‘float’. The petty cashier makes the payment of petty expenses for which he is authorized and records them in his cashbook called “Petty cash book”. Voucher and receipts support all these payments. All the end of the given period, the petty cashier submits the account to the cashier show, after having examined the accounts, makes the payment of the amount spent by the petty casher. Thus again on the first day of the next month, the petty casher is found with the same cash balance, which he had on the first day of the previous month.

For the daily requirements of the Corporation petty cash is required in each department. Every department gets and maintains around Rs. 5000 as impressed balance, even through there is no direct cash dealt by the Barauni Refinery unit. The State Bank of India, Campus Branch, provides this cash. This a mount is provided to the required department. It is not necessary to maintain or provide cash to each and every department. When the department makes cash expenses up to Rs.

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4500, they have to give the information to the cash department, to the cashier for up dating the account for Rs. 5000. The departments have to give information to the cashier when they make cash expenses up to Rs. 4500. They have to keep a balance of cash of Rs. 500 for special cases. But they are authorized for making cash expenses more than Rs. 5000 in times of need. On the next day or time they are paid Rs. 5000 and the extra payment they had made. But till the 31st of March of every year, each department is required to deposit the balance amount, which they have at the end of the Year. It is necessary that on the March 31st of March every department closes its petty cash account and sends a report to the cashier. Again on the 1st of April the cash department distributes the amount of Rs. 5000 to each department for the Petty cash requirement. Petty requirements of each department are maintained with this balance and are updated at the end of every year that is the 31st of March. This amount of cash is utilized only in case of contingencies. They are not authorized to use that amount of money for their personal requirements such as tea or coffee.

Thus this is how the “Petty Cash Book” is maintained in the Barauni Refinery Unit.

CHAPTER: 8

RECEIVABLES MANAGEMENT

In today’s competitive business scenario any company wants to maximize sales rather than the profit. For maximizing the sales it is essentially required that the company should sale its product more and more on credit rather than on cash sales.

Trade credit arises when a firm sells its products or services on credit and doesn’t receive cash immediately. A firm grants trade credit to protect its sales from the competitors and to attract the potential customers to buy its products at favorable terms.

The receivables out of the credit sales crunch the availability of the resources to meet the day today requirements. The acute competition requires the firm to sustain among the other competitors through more volume of credit sales and in the intention of retaining the existing customers.

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OBJECTIVES:

2) Achieving the growth in the volume of sales3) Increasing the volume of profits4) Meeting the acute competition

COST OF MAINTAINING THE ACCOUNTS RECEIVABLES:

Capital cost:Due to in sufficient amount of working capital with reference to more

volume of credit sales which drastically affects the existing of the working capital of the firm. The firm may be required to borrow which may lead to pay certain amount of interest on the borrowings. The interest, which is paid by the firm due to the borrowings in order to meet the shortage of working capital, is known as capital cost of receivables.

Administrative cost:

Cost of maintaining the receivables.

Collection cost:

Whatever the cost incurred for the collection of the receivables are known as collection cost.

Defaulting cost :

This may arise due to defaulter and the cost is in other words as cost of bad debts and so on.

FACTORS AFFECTING THE ACCOUNTS RECEIVABLE

Level of sales:

The volume of sales is the best indicator of accounts receivables. It differs from one firm to another.

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Credit Policies:

The credit policies are another major force of determinant in deciding the size of the accounts receivables. There are two types of credit policies.

1. Lenient credit policies: Enhances the volume of the accounts receivable due to liberal terms of the trade, which normally encourage the buyers to buy more and more.

2. Stringent credit Policies : It curtails the motive buying the goods on credit due stiff terms of the trade put forth by the supplier unlike the earlier

Terms of Trade :

The terms of the trade are normally bifurcated into two categories viz credit period and cash discount.

Credit period :

Higher the credit period will lead to more volume of receivables, on the other side that will lead to greater volume of debts from the side of buyers.

Cash discount:

It the discount on sales is more, that will enhance the volume of sales on the other hand that will affect the income of the enterprise.

The full-fledged Receivable management is not done in the Barauni Unit

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CHAPTER: 9

PAYABLE MANAGEMENT

While business firms would like to sale on cash, the pressure of competition and the trend persuades them to sell on credit. Firms grant credit to facilitate or escalate sales. The credit period extended by business firms usually ranges from 15 days to 60 days. This helps them to have a much better hold in the market. Payable management has become mandatory for any business firm, which wants to exist in this world of competition because the system of payment is what decides the fate of the business credibility

TERMS OF PAYMENT:

When goods are sold on cash, the payment is received either before the goods are shipped (cash in advance) or when goods are delivered (cash on delivery). Cash in advance is generally insisted upon when goods are made to order. In such a case, the seller would like to finance production and eliminate marketing risk. Cash on delivery is often demanded by the seller if it is in a strong bargaining position and the customer is perceived to be risky open account system. In this case the seller first delivers the goods and then sends the invoice (bill). The creditor (cash period, cash discount for prompt payment, the period of discount as on) are stated in the invoice which is acknowledged by the buyer.

CREDIT PERIOD:

The credit period refers to the length of time the customer is allowed to pay for its purchases. It is usually mentioned in days from the date of invoice. For example 15 days, 30 days, 60 days etc.

CASH DISCOUNT:

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Firms generally offer cash discount to include customer to make prompt payment. For example 2/10 which means if the payment is made within 10 days one will get 2% discount.

DRAFT:

Whether goods are sent on an open account or consignment, the seller doesn’t have strong evidence of the buyer’s obligation. So a more secure arrangements usually in the form of draft, is sought. A draft represents an unconditional order issued by the seller asking the buyer to pay on demand or a certain future date. It serves as a written evidence of definite obligation

LETTER OF CREDIT :

A letter of credit is issued by a bank on behalf of its customers (buyers), to the seller. As per this document, the bank agrees to honour he drafts as drawn on it for the suppliers to the customer (buyer), if the seller fulfils the condition laid down in the letter of credit.

IN CONTEXT OF BARAUNI REFINERY UNIT (IOCL)

Through bank payment mode is followed in Barauni Refinery unit (IOCL). The vendor sends two intimation copies to the bank and one copy to the Finance Department. The two intimation copies include Lorry Receipt (LR) and the invoice. The units begin operation only when it gets the intimation letter from the bank. Cheques is drawn by the Finance Department first in the name of “Yourself” account and then transferred to the bank. The bank then receive the cheques, first credits to the party account with the amount of payment and then releases the original endorsement consignee copy to the Finance Department. It is then sent to the stores department, which takes it to the transporters and gets the possession of the materials.

There are as such no creditors of this unit but the time it takes the payment to the parties (For Chemicals and stores and spares) creates such creditors for that period.

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PERIOD OF CREDIT ALLOWED:

The period of credit depicts the period for which any firm is allowed to have possession of the materials without prior payment. The Barauni unit basically dos not deal with any sort of credit as per the main goods for the unit is concerned. Thus there isn’t any such credit payment except the accessories, which are used for the comfort of the staff members here.

CHAPTER: 10

RATIO ANALYSIS

Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment.

Financial ratio analysis groups the ratios into categories, which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below.

Leverage Ratios, which show the extent that debt, is used in a company's capital structure.

Liquidity Ratios, which give a picture of a company's short-term financial situation or solvency.

Operational Ratios, which use turnover measures to show how efficient a company, is in its operations and use of assets.

Profitability Ratios, which use margin analysis and show the return on sales and capital employed.

Solvency Ratios, which give a picture of a company's ability to generate cash flow and pay it financial obligations.

Importance of ratio analysis:

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Financial ratio reveals the financial position of the company. This helps the investors for finding the profitability of the company.

The ratios are very useful in inter-firm and intra-firm comparisons. Inter-firm comparison is necessary to find out the exact position of a firm as compared to other firm in the same industry. Intra-firm comparison is also necessary to compare the performance of a firm of current year with that of previous years.

If financial ratios are calculated for a number of years, a trend can be established. This trend helps in setting future plans and forecasting.

Financial ratios are of great assistance in locating the weak spots in the organization.

Limitation of Ratio Analysis:

1) One of the serious limitations of ratio analysis is that there are difficulties in the comparison between various firms through ratios.

2) Ratio shows position only on a particular day and not the picture of the entire year.

3) Inflationary factors are not taken into account in computing Ratio Analysis. Thus when past performance is analyzed, the figures may have become outdated.

INTRA-FIRM RATIO ANALYSIS For the Year 2009-10 And 2008-09


1) Current Ratio = Current AssetsCurrent Liability

= 13,487,811,770 = 4.30 : 13,134,060,391


Current Ratio = 10640642854 = 1.18 : 18969905285

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2) Quick Ratio = Current Assets – Stock – Prepaid exp.Current Liability – Bank Overdraft

= 13,487,811,770 – 12,280,694,768 - 03,134,060,391 – 0

= 0.38 : 1


Quick Ratio = 10,640,642,854 – 9,554,181,511 - 08,969,905,285 – 0

= 0.12 : 1

Since idle Current Ratio is 1 : 1. Therefore this ratio shows that Barauni Refinery has less ability to pay its short-term liabilities in this year as compared to its previous year.


3) Net Profit Ratio = Net Profit x 100 Sales

= 189,512,622 x 100 = 0.11%163,848,271,522


Net Profit Ratio = 88,350,568 x 100 = 0.04%202,128,348,107

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For the year 2009-104) Working Capital Turnover Ratio = Sales

Working Capital

= 163,848,271,522 = 15.82 times 10,353,751,379


Working Capital Turnover Ratio = 202,128,348,107 = 120.00 times1,670,737,569

Working Capital Turnover Ratio has been increased by 7.6 times. This shows that the year 2009-10 is better utilization of the Working Capital as compared to its previous year.

NET PROFIT RATIO

2009-10

2008-09

WORKING CAPITAL TURNOVER RATIO

2009-10

2008-09

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CONCLUSION

After completing this Project Report I would like to conclude that the Working Capital occupies a major portion of the working of any type of Organization whether it is small or big. This Project Report has been prepared highlighting the need, use and the functioning of the Working Capital.

After completing this Project Report in Indian Oil Corporation Ltd., Barauni Refinery Unit, I must say that working condition of Barauni Refinery is very good. That’s why the position of Barauni Refinery unit is getting better day by day and days are not far when this Unit will be the best among the all. The Technology is getting upgraded day by day in order to cope up with rising competition. The cash here is not dealt with actually but only on books. The chemicals, stores and spares inventories is kept and maintained as per the past experience. The proper coordination between the production department, stores and the Finance department has let to the effective and efficient utilization of Raw Material at its fullest. This Unit provides all relevant information to the head quarters through application software (SAP), which helps the head office to take corrective decision.

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BIBLIOGRAPHY

INTERNET GOOGLE WWW.IOCL.IN WWW.GOOGLE.COM I. M. Pandey – Financial Management Khan And Jain –Financial Management iocl.in investopedia.com

Data & Analytics

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