A STUDY ONCAPITAL BUDGETING

IN

K P R FERTILISERS LIMITED

A project submitted to the A.U.,

In partial fulfillment for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BY

K.Raja Rajeswara RaoDeclaration

I hereby, declare that the project work entitled A Study On Capital Budgeting with reference to KPR FERTILIZERS LIMITED is a bonafide work done by me.

I further state that this project is not submitted elsewhere for the award of any Degree or Diploma either in partial or full to any University. The content of this Report is based on the Data and information collected by me.

K.Raja Rajeswara Rao

Place: Balabadrapuram

Date:

PROJECT STUDY REPORT

I N D E X

S. noChapterSubject details

1Project study1.1 Project title

1.2 Project work-introduction

1.3 Importance of study

1.4 Sketch of study

1.5 Methodology of study

1.6 Limitations of study

2Organization & Industry (of Study)2.1 Fertilizer Industry Profile

2.2 Company (of study) Profile

3Financial Management3.1 General Theories

3.2 Finance Management

3.3 Practice in Industries

4Project Reports of the Company ( under Study)4.1 Project Appraisal Report of the Lender Bank

4.2 Projected Balance Sheet (10 yrs)

4.3 Projected Profit and Loss Account (10 yrs)

4.4 Projected Cash Flow Statement (10 yrs)

4.5 Balance Sheets of the Co. (3 yrs)

4.6 Profit and Loss Accounts of the Co. ( 3 yrs)

4.7 Cash flows Statements of the Co.(3 yrs)

4.8 Funds Flow Statements of the Co. ( 3 yrs)

4.9 DSCR calculations

5Capital Budgeting5.1 Theoretical sketch

5.2 Practice in Industries --financial projections

5.3 Project promotion

5.4 Project financial management

5.5 Project working statements

6General Findings and Conclusions 6.1 Observations, Analysis and Interpretation

6.2 CONCLUSIONS AND Suggestions

Introduction

Finance in the modern business world is regarded as life blood of a business enterprise. Finance function has become so important that it has given birth to Financial management as a separate subject. So this subject has universal applicability and importance. Financial management is that part of managerial activity, which is concerned with the planning and controlling of the Person, Entity or Firms financial resources. It was a branch of economics till 1890 and even though it emerged as a separate entity of discipline, it draws heavily on economics as mother for its theoretical concepts.

Financial management is broadly concerned with the acquisition and use of funds by a Business firm.

It deals with:

How large should the Firm be and how fast should it grow?

What should be the composition of the Firms levels?

What should be the mix of the Firms financing?

How should the Firm analyze, plan and control its financial affairs?

While the first three questions express Ezra Solomons conception of Financial management as discussed in his clerical world. The Theory of Financial Management ,the fourth one represents an addition that is very relevant in the light of the responsibilities shouldered by Finance managers in practice. The modern thinking in financial management accords a far greater importance to management in decision making and formulation of policy. Financial management occupies key position in top management and plays a dynamic role in solving complex management problems. They are now responsible for shaping the fortunes of the enterprise and are involved in allocation of capital to various uses.

1.3 IMPORTANCE OF STUDY:

Financial management is of greater importance in the present Corporate world. It is a science of money, which permits the authorities to generate Funds and get into stabilised growth.

The significance of Financial management can be summarized as under:

It assists in the assessment of financial needs of Industry ,large or small and indicates the internal and external resources for meeting them.

It assesses the efficiency and effectiveness of the financial initiation in mobilizing individual or corporate savings. It also prescribes various means for such mobilization of savings into desirable investment channels.

It assists the management while investing funds in profitable projects by analyzing the viability of that project through capital budgeting techniques.

It permits the management to safeguard the interest of shareholder by properly utilizing funds procured from different sources and regulates , controls the Funds to procure maximum yields.

1.4 Significance of the Study:

Financial Management in an Industrial organization consists of both capital projects management and working capital management, former covering projects both in promotional stage, implementation stage, while the latter relates to operational activities. .

Now-a-days, study of Capital Budgeting including Project Finance and its management is necessary , because we can assess the viability of the Project and implement effectively for long term and short term , good working results. For capital budgeting, lot of preliminary efforts have to be made in selecting long term sources, assessing long term uses, review during implementation. Analysing the Projects by assessing financial ratios helps in viability of the Projects and reviewing the progress from time to time.

Generally, Projections of capital budgeting is made keeping in view 7 to 10 years projections, as projects occupy gestation period, implementation period, and loan repayment period etc.,

We can also understand how the allocation of financial resource in the implementation of new project or expansion project , diversification or existing project of any Company can be economically and fruitfully done.

While the Project financing of any Project has similar methods and processes, my study has centered around its special application of the Projects in Fertiliser Industry, by analyzing the information and data of the Projects undertaken by KPR Fertilisers Limited for its existing, expansion and diversification Projects.

I have also utilized the opportunity to assess the Procedures and Practices in Industry to implement the Projects and how effectively they undertake financial management for achieving good working results.

The Financial planning for the fertilizers projects in the KPR Fertilizers Limited, allocation of financial resources for the projects have been studied by me towards the Project.

1.5 OBJECTIVES OF THE STUDY

Analyzing weather project is financially viable or not.

Analyzing return on investment by evaluating investment with evaluation techniques such as payback period, internal rate of return, net present value etc.

Analyzing different sources of finance for a financial viable project.

Determining proper financial structure for project.

Rising of funds after considering structure and sources of finance.

Investment of amount raised in project related costs.

Finally achieving the targeted results.

1.6 METHODOLOGY OF THE STUDY:

Methodology is a systematic procedure of collecting information and data in order to analyze and verify a phenomenon. The collection of information is done through two principal sources.

1. Primary Data.

2. Secondary Data.

Primary data

It is the information and data collected directly from Finance department for studies and analysis. This is done mainly through interviews with concerned officers and staff of the Organization under study , either individually or collectively, and some of the information has been verified or supplemented with personal observations.

The data collection includes meetings of the concerned Managers and Officers of Finance department of the Organization .

SECONDARY DATA

This is obtained from the Annual reports, websites, Company journals, Magazines , Industry Journals , brochures and other sources of information available with the Organization.

LIMITATIONS OF THE STUDY:

Though the project study is completed successfully , the work is subject to the limitations explained below:

Since the procedure and policies of the Company do not allow disclosing confidential financial information, the project has to be completed with the available data given to us.

The period of study that is 8 weeks is not enough to conduct detailed study of the Financial management techniques adopted by the Organization for the project planning, implementation.

The study is carried out basing on the information and documents provided by the Organization and based on the interaction with the various employees of the respective departments., when they spared time for the study.

CHAPTER-II

ORGANISATION AND INDUSTRY UNDER STUDY

2.1. Fertiliser INDUSTRY PROFILE

The Organization in which I have undertaken study is a Fertilizer Industry. The Financial Management Procedures & Systems are common to all Industries with some special features particular to specific industries. Hence, the Fertiliser Industry Profile as studied is enunciated hereunder :

Fertilizer Industry:

India has been predominantly considered as an agricultural dependent economy. Agriculture plays a very dominant role as more than one-fourth of our GDP come from this sector. Nearly 70% of population depends on the agriculture for their lively-hood. The basic need for an agricultural dependant economy is fertilizers and urea is one of the main fertilizers. India is the second largest manufacturing country in the world.

All fertilizers consist if three main ingredients.

Nitrogen(N) -- which promotes general plant growth

Phosphorous(P) -- which promotes flowering

Potassium (K) -- which promotes strong roots.

1. The ingredients are mixed in various combinations because plants have different needs.

2. The combinations are indicated by a three number code:

3. The first number is the percent of nitrogen (N)

4. The second number is the percent of phosphorus (P)

5. The third number is the percent of potassium (K)

About Fertilizer

Fertilizer is simply, plant food. Just like the human body needs vitamins and minerals, plants need nutrients in order to grow. Plants need large amounts of three nutrients nitrogen, phosphorus, and potassium. These are commonly referred to as macronutrients. Fertilizer makers take those three nutrients from nature and put them into soluble forms that plants can easily use.

There are a number of other nutrients plants need in small amounts. These are referred to as the minor nutrients, or micronutrients. These many nutrients are typically produced separately, but end up being mixed together in varying amounts to match the needs of a particular crop. The analysis found on each bag or bulk shipment of fertilizer tells the farmer or consumer the amount of nutrients being supplied. States have a system of laws and regulations that ensure the fertilizer is properly labelled and delivers the amount for nutrients stated on the bag.

Our world would be vastly different without commercial fertilizers. Following World War II, new technologies allowed for the rapid expansion of fertilizer production. Coupled with growing food demand and the development of higher-yielding crop varieties, fertilizer helped fuel the Green Revolution. Today, the abundance of food we enjoy is just one way fertilizers help enrich the world around us.

While fertilizers provide many important benefits that are necessary for our way of life, the improper use of fertilizers can harm our environment. Weve used the most recent developments in science to study our products and make sure safety comes first.

Fertilizer:

Fuel for growing plants just like humans and animals, plants need adequate water, sufficient food, and protection from diseases and pests to be healthy. Commercially produced fertilizers give growing plants the nutrients they crave in the form they can most readily absorb and use: nitrogen (N), available phosphate (P) and soluble potash (K), Elements needed in smaller amounts, or micronutrients, include iron (Fe), zinc (Zn), copper (Cu) and boron (B).Each crop year, certain amounts of these nutrients are depleted and must be returned to the soil to maintain fertility and ensure continued, healthy future crops. Scientists project that the earths soil contains less than 20 percent of the organic plant nutrients needed to meet our current food production needs. Therefore, through the scientific application of manufactured fertilizers, farmers are meeting the challenge of the future, today.

Another component of plant DNA is phosphate, which helps plants to use water efficiently. It also helps to promote root growth and improves the quality of grain and accelerates its ripening. And potassium, commonly called potash, is important because it is necessary for photosynthesis, which is the production, transportation and accumulation of sugars in the plant. Potash makes plants hardy and helps them to withstand the stress of drought and fight off disease.

Fertilizer Types:

Because every crop is different and the soils and weather conditions crops are grown in vary dramatically around the world, commercial fertilizers, which are manufactured from natural sources, come in many formulations.

Combining air with hydrogen using natural gas as the feedstock makes ammonia, the building block for nitrogen fertilizers. Ammoniated phosphates, which include mono ammonium phosphate (MAP) and dominium phosphate (DAP), are made by reacting ammonia with phosphoric acid. Muriate of potash, also called potassium chloride, is made from mine ores that have been processed to remove naturally occurring salts.

Ammonium nitrate is a solid fertilizer containing approximately 34 percent nitrogen that is water soluble and used in various fertilizer solutions. Aqua ammonia is another nitrogen-based fertilizer made by combining ammonia with water. It contains up to 25 percent nitrogen and is either applied directly to the soil or is used to manufacture phosphate fertilizers.

Nitrogen solutions are water solutions of ammonia, ammonium nitrate and, sometimes, urea, a solid fertilizer containing approximately 45 percent nitrogen, and other soluble compounds of nitrogen. Nitrogen solutions are used in ammoniating super phosphate, the manufacture of complete fertilizer and for direct injection into the soil. They vary in composition and nitrogen content and are sometimes applied under pressure.

Nitrogen (N):-

Nitrogen is a part of all plant proteins and is a component of DNA and RNA the blueprints for genetic characteristics. It is necessary for plant growth and chlorophyll production. Nitrogen is the building b lock for many fertilizers. Where does N come from? Nitrogen is present in vast quantities in the air, making up about 78 percent of the atmosphere. Nitrogen from the air is combined with natural gas in a complex chemical process to make ammonia.

Phosphorus/Phosphate(P):

Phosphorus as a nutrient is sometimes most valuable to plants when put near the seed for early plant health and root growth. Plant root uptake is dependent on an adequate supply of soil P. Phosphorus is relatively insoluble in water. The water in most soils must replace all of the P in the soil water 2 to 3 times each day to meet the crops demand for P. Phosphorus compounds help in directing where energy will be used. Phosphorus compounds are needed in plant photosynthesis to repackage and transfer energy. Phosphate is also a component of DNA, so it is one of the building blocks of genes and chromosomes. Phosphorus is involved in seed germination and helps plants to use water efficiently. Where does P come from? Phosphorus occurs in natural geological deposits. Deposits can be found in the U.S. and other parts of the world.

Potassium/Potash (K):

Potassium protects plants against stresses. Potassium protects plants from cold winter temperatures and helps them to resist invasion by pests such as weeds and insects. Potassium stops wilting, helps roots stay in one place and assists in transferring food. Potassium is a regulator. It activates plant enzymes and ensures the plant uses water efficiently. Potassium is also responsible for making sure the food you buy is fresh. Where does K come from? The element potassium is seventh in order of abundance in the Earths crust.

Through long-term natural processes K filters into the oceans and seas. Over time, these bodies of water evaporate, leaving behind mineral deposits. Although some of these deposits are covered with several thousands of feet of earth, it is mined as potash or potassium chloride. Potash ore may be used without complex chemical conversion; just some processing is necessary to remove impurities such as common salt.

Fertiliser Industry at a glance:

Since 1883 the industry has worked to promote the advances in the development and application of fertilizers that have helped to feed a hungry world. The revolutionary concept of plant nutrition was born from the discovery of the biological role of chemical elements in plant nutrition and the need to feed a growing population concentrated away from the farm in the rising industrial centers of the world.

Because of modern fertilizers, world food production since 1960 has more than doubled, keeping pace with the population explosion. Today, the fertilizer industry is poised to help produce the food that will be needed to feed the worlds projected 9 billion people in 2025.

The fertilizer industry is essentially concerned with the provision of three major plant nutrients nitrogen (N), phosphorous (P) and potassium (K) in plant available form. Each nutrient is responsible for different aspects of plant growth and health.

Fertilizers regulations:

Regulated for quality and safety like other manufactured goods, fertilizers are regulated for quality and safety at the federal and state levels. Every state in the country, plus Puerto Rico, has its own fertilizer regulatory program, usually administered by the state department of agriculture.

State Regulations:

State regulation is concerned with consumer protection, labeling, the protection of human health and the environment, and the proper handling and application of fertilizers. Fertilizers are regulated at the state level because soil conditions vary dramatically from state to state across the country. For example, the rocky, thin soils of New England are vastly different from the deep, Rich black soils of the Midwest Corn Belt. A different level of fertilizer nutrients in the soil, different crops (potatoes versus corn, for instance) and different weather and cropping patterns require state-specific regulation.

Where Science and safety come first the modern commercial fertilizer industry was founded on the revolutionary scientific discovery in the last part of the 18th century that chemical elements play a direct role in plant nutrition. This initial concept was supported by direct scientific experiment and opened the way for industrial-scale manufacturing of fertilizers of all types in the 19th century, beginning with super phosphate in 1843. This was followed by ammonium sulphate, sodium nitrate and, finally, in the first two decades of the 20th century, the manufacturing of synthetic nitrogen fertilizers directly from atmospheric nitrogen.

Assessing Fertilizer Safety:

Fertilizer research and development historically have been focused on maximizing economic crop yields from given rates of nutrient application. Since the advent of the modern environmental movement in the 1960s, research has also been concerned with minimizing potentially adverse human health and environmental effects from fertilizer manufacture and application.

As part of its continuing commitment to safety, in 1996. The Fertilizer Institute initiated a comprehensive safety assessment project to determine the risks, if any, of metals in fertilizer. Small amounts of metals are found in phosphate and potash fertilizers due to their presence in the mined ore bodies. In addition to phosphate and potash products, some micronutrient fertilizers. Which come from both mined ores and recycled wastes, also contain metals.

Fertilizers Enrich our World:

Improvements in agricultural efficiency through research and technology increase food output while protecting the environment and enriching our world in numerous ways.

Fertilizers feed the growing world. As the worlds population continues to climb toward an estimated 8.5 billion in 2040, experts estimate that food production must increase more than two percent annually to even maintain current diets. Commercial fertilizers will be key in the fight to feed the growing world.

Fertilizers protect the environment. The efficient use of fertilizer also helps to conserve the natural environment. With fertilizers and modern high yield farming practices, more food is produced per acre each year, so land may be conserved. Fertilizers, used properly, help to prevent the widespread loss of habitat that results from wasteful slash and burn low-yield farming, which is a major global environmental threat.

Fertilizers at work in industry:-

Aside from their benefits to agriculture, fertilizer components are central to such industrial process as semiconductor chip making, resin manufacture, cattle feed production, metal finishing, the manufacture of detergents, fiberglass insulation and more, even rocket fuel.

Global Fertilizer Consumption

Major Fertilizer Producing Countries:

Million metric tons, years ending June 30*

COUNTRY2002-032003-042004-052005-062006-07

Nitrogen

China20.221.522.821.522.1

India10.110.510.910.9107

United States13.813.511.29.910.6

Russian Federation4.14.15.05.45.5

Canada3.73.74.13.93.5

Phosphate

United States9.09.08.57.37.6

China6.46.76.46.77.4

India3.03.23.43.73.9

Russian Federation1.91.72.02.32.4

Brazil1.41.41.41.51.4

Potash

Canada9.09.28.29.28.2

Russian Federation3.43.54.03.74.3

Belarus3.33.43.63.43.7

Germany3.43.63.53.43.5

Israel1.51.71.71.71.8

Source: Food and Agriculture Association (FAO) and The Fertilizer Institute (TFI)

* For countries that report their fertilizer statistics on a calendar-year basis, data are shown under the fertilizer year that begins in that calendar year; for example, 2001 data are under 2002/07

2.2 COMPANY PROFILE

INTRODUCTION:-

The Organization in which I have undertaken Project Study is K.P.R.FERTILISERS LIMITED

Company : K.P.R. Fertilizers Ltd

K.P.R. Fertilizers Ltd is a Company incorporated under Companies Act 1956 on 02.01.2007 as a Private Ltd Company with Registered Office at Balabhadrapuram, East Godavari district, Andhra Pradesh.

Subsequently the Company has been converted into a Public Ltd Company with CIN: U24129AP2007PLC052216 effective from 19-12-2008.

K.P.R.Group:

This Company has been promoted by a Group of Agriculturist families lead by Mr. Kovvuri Papa Reddy, resident of Komaripalem, Biccavolu Mandal, East Godavari District, Andhra Pradesh , an Agriculturist for over 3 decades. He has promoted several Agricultural based industries, including Poultries, Rice Mills, Fertilizer, Chemical Industries etc., and is known as K.P.R. Group of Industries, extending operations both in Andhra Pradesh and Karnataka.

Management :

The Board of Directors of the Company consists of the following:

1. Sri Kovvuri Papa Reddy, Chairman

2. Sri Karri Venkata Mukunda Reddy, Managing Director

3. Sri Kovvuri Rajasekhara Reddy, Executive Director

Company Secretary & Chief Financial Officer :

Sri P. Narayana Rao. B.A., M.Com., LL.B.,FCMA., FCS.

Industrial Units:

KPR Fertilisers Limited has the following Industrial and Manufacturing Units:

1. Pesticides Unit at Balabhadrapuram, East Godavari dt., Andhra Pradesh.

2. Fertilizers Unit at Biccavolu, East Godavari Dt., Andhra Pradesh

3. Fertilizers Unit at Halvarthy, Koppel dt., Karnataka

4. Wind Mill Unit at Tirunelveli Dt., Tamilnadu

These units are run by experienced and skilled personnel and working operations are managed efficiently.

Products:

The industrial Units manufacture the following Products:

1. Pesticides (Insecticides, Herbicides), Micro nutrients

2. Fertilisers (SSP, NPK Mixtures, DCP), Sulphuric Acid

1. Company History:

K.P. R Fertilisers Limited (the Company) is a Public Limited company incorporated under Companies Act, 1956, registered in India with the Registrar of Companies, Govt of India, Andhra Pradesh, Hyderabad with CIN: U24129AP2007PLC05226.

This Company was originally incorporated on 02.01.2007 under Companies Act, 1956 in Andhra Pradesh State , originally as a Private Limited company.

This Company has been promoted by a group of Agricultural families in Andhra Pradesh , lead by Mr. Kovvuri Papa Reddy who have over 3 decades of experience in Agriculture and related Industrial and business activities including Rice mills, Poultries, Pesticides etc., and hails from Komaripalem, Biccavolu Mandal, East Godavari District, Andhra Pradesh. The other main promoters are Mr. Karri Venkata Mukunda Reddy and Mr. Kovvuri Rajasekhar Reddy, both hailing from the same place with rich industrial & business experience of over two decades.

Later, the Private Limited company has been converted into Public limited company on 19.12.2008 .

It is a Prime company of KPR Group of Industries set up in private sector.

2. Industries

The Company is undertaking Fertiliser Industry and is also engaged in incidental businesses such as Pesticides, Chemicals, Seeds and Power.

3. Registered Office of the Company.

The Registered Office of the Company is situated as enunciated below:

D.No. 8-2-416

Stone Vally Apts, C2

Banjara Hills, Road No.4

Hyderabad- 500 034

Andhra Pradesh

India

Ph: 91-40-23354777

Fax: 91-40-23359936

4. Corporate & Administrative Office of the Company

The Corporate & Administrative office of the Company is situated as follows:

D No: 8-256,Tatanagar

Balabhadrapuram -533343

East Godavari District

Andhra Pradesh

India

Ph: 91-8857 236767, 237367

Fax: 91-8857 23333

Email: fertilisers@kprgroup.in2: Board of Directors of the Company :

The Company is m

anaged by the Board of Directors as detailed below:

Name of the DirectorExperience YrsDt. of AppointmentDesignation

Kovvuri Papa Reddy 3602.01.2007Chairman

Karri Venkata Mukunda Reddy2602.01.2007Managing Director

Kovvuri Rajasekhar Reddy1002.01.2007Executive Director

Company Secretary & Chief Financial Officer :Mr. P.Narayana Rao, B.A, M.Com, LLB., FCMA., FCS

The Company is also supported by qualified and experienced Managerial, Administrative and Technical Personnel

5. Manufacturing concerns/ Undertakings.

This Company has the following Manufacturing concerns:

1. Fertilisers Unit at Biccavole , East Godavari Dt., Andhra Pradesh

2. Pesticides Unit at Balabhadrapuram, East Godavari dt., Andhra Pradesh

3. Fertilisers Unit at Halvarthy , Koppal Dt., Karnataka

The Company is in Fertiliser Industry and manufactures the following major products:

1. Fertilisers-- SSP

NPK Mixtures

DCP (Animal feed)

DAP (trading)

Mineral mixtures

Micro nutrient fertilisers

Sulphuric acid

Pesticides-Pesticides

Herbicites,Insecticites

CHAPTER III

FINANCIAL MANAGEMENT

3.1 Financial Management-General theories.

FINANCE

INTRODUCTION:-

Finance is a specialized field found under the general classification of business administration finance can be defined as the management of the flow of the money through any organization whether it could be corporation, Government, bank, agency etc., and finance concerns itself with the actual flows of money, as well any clients against money. As a business discipline, finance can be differentiated from accounting and economics. Accounting is concerned with the reporting, recording and measuring of business transaction. Where as finance used the information provided by accounting system of make decision to help organization to achieve their objectives. Economics is concerned with analyzing the allocation of resources in society.

It studies transactions among people involving goods and services with or without the exchange of money, business face problem dealings with the Acquisitions of funds to carry their activities and with determination of optimum methods of employing funds. In finance tools help the manager to determine activities will provide the greatest return on invested capital, a successful business management for enterprise use a good oriented financial structure.

The finance manager performs certain tasks that help to achieve the goals of the financial department. These goals in turn help of objectives. The important goals of financial management are:

1. Wealth maximization of shareholders.

2. Liquidity, profitability of the firm.

Financial analysis is the process of identifying strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and profit and loss account.

Meaning Of Financial Management:-

Financial management is an appendage of the financial functions. We have already discussed the financial functions and the significance with the creation of a complex industrial structure this function has growth so much that it has give birth to a separate subject Financial Management which is today recognized as the most important branch of business activity in isolation from its financial implications. The management may accept or reject a business proposition on the base of its financial availabilities.

Financial management is that point of management which is concerned is that mainly with raising funds in most economic and suitable manner, using these funds as profitable as possibly planning future operations controlling current accounting budgeting. Statistics and other means. Financial management cant responsibility for obtaining and efficiently.

Utilization funds necessary for the efficient use of an enterprises planning is the one of the most important activity of the financial management.

Financial management is the dynamic evolving or making of day-to-day activities of a firm. Raymond chambers observe Financial Management may be considered to be the management of the function. It should be taken to be a profit extra active device. Financial management does not mean management of business organizations with a wave to making profits.

Nature:-

Financial management is the branch of overall management family, which is concerned with the planning and controlling of the financial resources of an enterprise. As a separate and independent discipline of academics it is of recent organ prior to this the subject was studied as an activity of economics.

The subject as lately attained from both academicians as well as practicing managers since the subject to financial management as still developing there fore the academicians are taking great interest in it as there are severally are as where controversies do exist and unanimous view points have not been formed as at the subject equally interests the practicing managers, this is so because the subject provided them the conceptual and analytical insight to enable them to make the most crucial decision pertaining to the business relating to finance.

As regards the scope and the coverage of the subject finance management as under one fundamental charge. Previously the subject was identified as an activity concerned with the raising of funds, it is currently covering not only procuring the funds but their efficient utilization as well.

Scope Of Financial Management:-

What are the firms financial activities, how are they related to the firm other activities for production of goods, some provide services to customers.

The approach to the scope and functions of financial management is divided for purposes of exposition, into two broad categories:-

A. Traditional approach.

B. Modern approach.

A.Traditional approach:-

The traditional approach to the scope of financial management refers to its subject matter in the academic literature in the initial stages of its evaluation as a separate branch of academic study. The term corporate finance as the name suggests, the concern of the corporation finance is the financing function was treated by the traditional approach in the narrow sense of procurement of funds by corporate enterprises to meet their financing needs. The term procurement was used in a broad sense so as to include the raising funds externally. Thus defined, the field of study dealing with finance was treated as encompassing three inter-related aspects of raising and administrating resources from outside:

1.The industrial arrangement in the form of financial institution which comprise the organization of the capital market.

2.Financial instruments through which funds are raised from the capital markets and the related aspects of practices and the procedural aspects of capital markets.

3.The legal and accounting relationships between a firm and its sources of funds.

B.Modern Approach:-

The modern approach views the term financial management in a broad sense and provides a conceptual and analytical framework for financial decision making. According to it, the finance function covers both acquisitions of funds as well as their allocation. Thus, apart from the issues involved in acquiring external funds, the main concern of financial management is the efficient and wise allocation of funds to various uses. Defined in a broad sense, it is viewed as an internal part of overall management.

The new approach is an analytical way of viewing the financial problems of a firm. The main content of this approach are:- what is the total volume of funds an enterprise should commit? What specific assets should the funds required be financial alternatively, the principal contents of the modern approach to financial management can be said to be:

1. How large should an enterprise be, and how fast should it grow?

2. In what form firm should it hold assets?

3. What should be the composition of its liabilities?

The three questions posed above cover between them the major financial problems of a firm, in the modern sense of the term, can be broken into three major decisions as functions of finance. They are:

a. The Investment decision.

b. The Financing decision.

c. The Dividend policy decision.

Functions Of Financial Management:-

The function of rising funds investing them in assets and distributing returns earn from assets to share holders are respectively know as financing investment and dividend decisions while performing these functions. A firm attempts to balance cash inflows and outflows. This is liquidity and we may add it to the list of important finance decisions of functions. Those functions financial management include:

1. Investment or long-term asset mix decision.

2. Financing or capital-mix decision.

3. Dividend or profit allocation decision.

4. Liquidity or short term asset mix decision.

A firm performs finance function simultaneously and continuously in the normal course of the business. They dont necessarily occur in a sequence. Finance functions called for skillful planning, control and execution of firms activities.

1.Investement Decision:-

Investment decision or capital budgeting involved the decision of allocation of capital or commitment of fund to long-term assets that would yield benefits in the future. Two important aspects of the investment decision are:

a. The evaluation of the prospective profitability of new investments.

b. The measurement of a cut of rate against.

2. Financing Decision:-

Financing decision is the second important function to be performed by the financial manager. Broadly he or she much decide when, where and how to acquire funds to meet the firm investment needs. The central issue before him or her is to determine the proportion of equity and debt. The mix of equity and debt is known as the firms capital structure. The financial manager is able to determine the best combination of debt and equity he or she must raise the appropriate amount through the best available sources. In the practice, a firm considers any other factors such as control, flexibility and loan covenants, and legal aspects in deciding its capital structure.

3. Dividend Decision:-

Dividend decision is the third major financial decision. The financial manager must decide whether the firm should distribute all profits or retain them or distribute a portion and retain the balance. Like that debt policy, the dividend policy should be determined in term of its impact on the shareholders value. The optimum dividend policy is one that maximizes the market value of the firms shares. Thus if shareholders are not in different to the firms dividend policy the financial manager must determine the optimum dividend paid out ratio; equal to the percentage; of dividends to earning available to shareholders

4. Liquidity Decision:-

Current assets management that effects, a firms liquidity is at another important finance function. A conflict exists between profitability and liquidity while managing current assets. If the firm doesnt invest sufficient funds in current assets it becomes liquid. But it would loss profitability, as idle current assets would not earn anything. Thus a proper trade off must be achieved between profitability and liquidity.

Objectives Of Financial Management:-

To make wise decisions a clear understanding of the objectives. Which, are ought to be achieved is necessary. The objective provides a framework for optimum financial decision making in their words, of operating the internal investment and financing of a firm.

The alternative approach is the financial literature. There are two widely discussed approaches.

1. Profit maximization.

2. Wealth maximization.

1. Profit Maximization:-

Profit maximization means maximizing the rupee income of firms. Firms produce goods and services. They may function in a market economy, or in a government controlled economy. In a market economy prices of goods and services are determined in competitive market. Firms in a market economy are expected to produce goods and services desired by society as efficiently as possible. Goods and services in great demand command higher prices. This result in higher profit for firms ultimately with intensifying competition an equilibrium price is reached at which demand and supply match prices are determined by the demand and supply condition as well as competitive forces, and they guide the allocation of resources of various productive activities.

It is thus generally held by the economists following smiths logic that under the condition of free competition. Businessmens purchasing their own self-interest also serves the interest of society. It is also assured that when individual firms pursue the interest of maximizing profits, societys resources are efficiently utilized. In the economic theory the behavior of a firm either produces maximum output for a given amount of output. Thus the underlying logic of profit maximization is efficiency.

2. Wealth Maximization:-

The objective of share holders wealth maximization is an appropriate and operationally feasible criterion measure to choose among the alternative financial actions. It provides an unambiguous measure of what financial management should seek to maximize in making investment and financing decision on behalf of owners.

Share holders wealth maximization means maximization of the net present value of a course of action to share holders. The net present value of a course of action is the difference between the present value of its benefits and the present value of its costs. A financial action that has a positive N.P.R. creates wealth for share holders and there fore is desirable. Between a numbers of mutually exclusive projects the one with the highest N.P.R. should be adopted. Therefore the wealth will be maximized of these criteria are followed in making financial decision.

Financial Statements:-

Meaning:

A firm communicates financial information to the users through financial statements and reports. The financial statements contain summarized information of the firms financial affairs, organized systematically. They are means to present the firms financial situation to the users. Preparation of the financial statements is the responsibility of the top management. Investors and financial analysts examine the firms performance and use these statements in order to make investment decisions. They should be prepared very carefully and contain as much information as possible.

Two basic financial statements prepared for the purpose of external reporting to owners, investors and creditors are

A. Balance sheet.

B. Profit & Loss A/c.

For internal management purpose, i.e., planning and controlling much more information is needed than the information contained in the financial statements. Therefore, the financial accounting information is presented in different statements and reports in such a way to serve the internal needs of management.

Objectives:-

Financial statements are prepared from the accounting records maintained by the firm. The general accepted accounting principles and procedures are followed to prepare these financial statements. The basic objective of the financial statements is to assist decision-making. The various other objectives are:

1. To provide reliable financial information about economic resources and obligations of a business enterprises.

2. To provide reliable information about changes in net resources of an enterprise that result from profit directed activities.

3. To provide financial information that assists in estimating the earning potential of the enterprise.

4. To provide other needed information about changes in economic resources and obligations.

5. To disclose to the extent possible other information related to financial statement that is relevant to the statement users

Nature And Scope Of Financial Statements:-

A.Balance Sheet:-

Balance sheet is one of the most significant financial statements. It indicates financial condition or the state of affairs of a business at a particular moment of time. More specifically, balance sheet contains information about resources and obligations of a business entity and about its owners interest in the business at a particular point of time. Thus, the balance sheet of a firm prepared on 31st December reveals the firms financial position on the specific date. In the language of accounting, balance sheet communicates information about assets, liabilities and owners equality for a business firm as on specific date. It provides a snap shot of the financial position of the firm at the class of firms accounting period.

1) Assets:-

Assets represent the economic resources, what a firm owns and other valuable possessions. These possessions should be capable of being measured in monetary terms. Assets are of future benefits.

They represent

a) Stored purchasing power (cash).

b) Money claims (receivable).

c) Tangible and intangible items that can be sold or used in business to generate earnings.

Tangible items include land, building, plant, equipment or stock of materials and finished goods and all such other items, which have physical substance. Intangible items dont have physical existence, but they have value to the firm. They include patents, copyrights, trade name and goodwill.

Assets may be classified as current assets and long-term assets. Current assets sometimes also called as liquid assets are those resources of the firm, which is either healthy form of cash or expected to be converted to cash within the accounting period or the operating cycle of the business. The accounting period is of one year duration. The operating cycle is the time period, which is taken, convert raw material into finished goods, sell finished goods and convert receivables (goods sold on credit) into cash. In majority of the cases, the operating cycle is equal to or less than the accounting period. Current assets generally include cash, marketable securities, book debts (account receivables) and stock of raw materials, work in process and financial goods.

1.Cash:-

Cash is the most liquid current asset. It is the current purchasing power in the hands of the firm and can be used for the purpose of acquiring some resources or some obligations. Cash includes actual money in hand and cash deposits in bank account.

2.Marketable securities:-

These are the temporary or short-term investments shares, bonds and other securities. These securities are readily marketable and can be converted into cash within the accounting period. A firm usually invests in marketable securities when it has temporary surplus cash. A number of Indian companies invest their surplus cash in the unit trust of Indias units or other securities.

3.Book debts or accounts receivables:-

These are the amounts due from debtors to whom goods or services have been sold on credit. These amounts generally realizable into cash within the accounting period. The firm may not realize all book debts. Some may remain uncollected the debts which will never be collected are called bad debts. Accounting generally makes an estimate or provision for bad debts and shows good debts separately from bad debts in the balance sheet.

4.Bills Receivables:-

It represents the promise made in writing by debtors to pay definite sum of money after some specified period of time. Bills are written by the firm and become effective when expected by debtors.

5.Stock or Inventory:-

It includes raw material, work in progress and finished goods in the case of manufacturing firms. Raw materials and work in progress inventories are needed for smooth production. The stocks of finished goods are kept for serving customers on a continuing basis. A merchandised business may not have raw materials and work in progress inventories as it has no manufacturing activities. Inventories are carried in the balance sheet in the original cost or the market price, which ever is less. The inventories are the least liquid current assets have to be collected.

6.Prepaid expenses and accrued income:-

These are also including on current assets, prepaid expenses are the expenses future period paid in advance. Examples are prepaid rent, prepaid insurance and taxes. They are current assets because their benefits will be received within the accounting period. Accrued incomes are the benefits, which the firm has earned but they have not been received in cash yet. They include items such as accrued dividend, accrued commission or interest.

7.Long Term Assets:-

Long term assets are held for periods longer than the accounting period, they are held for use in business, and not for the purpose earning power of a firm due to special advantages that it possess. Costs of intangible fixed assets are amortized over their useful lives.

The term gross block is used to represent the original cost of total fixed assets. When accumulated depreciation is subtracted from the gross block, the difference is called net block.

8.Investments:-

Long-term investments represent firms investment in shares, debentures and bonds of other firms of government bodies for profits and control. These investments are held for a period of time greater than the accounting period. Usually the long term investments are shown at the original costs, but the current market prices may be given parenthesis.

9.Other assets:-

All other assets, which cant be included in any of the above categories, are grouped as other assets. Usually, they represent differed changes, prepayments for services are benefits for period longer than the accounting period are referred to as deferred changes and include advertising expenditure, preliminary expenses.

b) Liabilities:-

Liabilities are the debts payable in future by the firms to its creditors. They represent economic obligations to pay cash or provide goods or services in some future period. Generally, borrowing money or purchasing goods or services on credit creates liabilities. Example of liabilities are creditors, bills payable, wages and salaries payable, interest payable, tax payable, bonds, debentures borrowing from bank and financial institutions, public deposits etc.,

Liabilities may be of two types: current liabilities and long-term liabilities.

1. Current Liabilities:-

These are the debts payable within an accounting period. Current assets are converted into cash to pay current liabilities may be incurred to liquidate the existing current liabilities. The typical example of current liabilities is creditors, tax payable, bills payable, and bank overdraft, outstanding expenses and income received in advance.

2.Sundry Creditors:-

It represents current liabilities towards suppliers from whom the firm has purchased raw materials on credit. This liability is also known as account payable and it is shown in the balance sheet till the payment has been made to the creditors.

3.Bills Payable:-

These are the promises made in writing by the firm to make payment of a specified sum to creditors at some specific date. Bills are written by creditors over the firm and become bills payable once the firm accepts them. Bills payable have life of less than a year; therefore they are shown as current liability in the balance sheet.

4.Bank Borrowings:-

It forms a substantial part of current liabilities of a large number of companies in India. Commercial banks advance short term credit to firms for financing their current assets. Banks also provides funds for financing the firms fixed assets: such loans will be grouped under long term liabilities.

5.Provisions:-

They include provision for taxes or provision of dividends. Every business has to pay taxes on its income. Usually it takes sometime to finalize the amount of tax with tax authorities. Therefore the amount of tax is estimated and shown as provision for taxes or tax for liability in the balance sheet. Similarly provision for paying dividends to shareholders may be created and shown as current liability.

6.Outstanding Expenses And Income Received In Advance:-

These are other example of current liabilities. The firm may own payments to its employees and other at the end of accounting period for the services received in the current year. These payments are payable with a very short period. Examples of outstanding expenses are wage payable, rent payable and commission payable. A firm can sometimes receive income for groups or services to be supplies in future. As goods or services have to provide within the accounting period, such receipts are shown as current liabilities in the balance sheet.

7. Long-Term Liabilities:-

These are sometimes called as fixed liabilities or the obligations or debts payable in period of time greater than the accounting period. These usually represent borrowing of a longer period of time. They include debentures, bonds and secured long-term loans from financial institutions.

When the firm has to raise large sum of money as debt from the public, it issues debentures or bonds. A debenture or bond is a general obligation of a firm to pay interest and return principal sum on the agreement. Loan raised through the issue of debentures are secured or unsecured.

Secured loans are mortgages are the long-term borrowing with fixed assets pledged as security, mortgages are shown as secured long term liabilities in the balance sheet. Term-loans from financial institutions and banks are secured against the assets of the firm.

8.Owners Equity:-

The financial interests of owner are called owners equity. The owners interest is residual in nature, reflecting the excess of the firms assets over its liabilities. As liabilities are the claims of outside parties. Owners equity represents owners claims against the business entity as of the balance sheet date. But the nature of the owners claim is not same as the claims of creditors. Creditors claim is defined and has to be met within a specified period. The claim of owners changes and amount payable to them can be determines only when the firm is liquidated. Since assets are recorded at costs, there can be considerable difference between the owners book claim and original claim.

Incase of company owners of a firm are called shareholders equity or shareholders fund or capital or share capital. It has two parts namely paid-up share capital and reserves and surplus (retained earnings) representing undistributed profits. Paid up capital is the amount of funds directly contributed by the shareholders If shareholders are actually required to pay more than the stated or pay valor per share, the amount is separately known as share premium

The second part of the share capital is referred to as retained earnings or surplus and reserves. The difference between the total earnings to date and the total amount of dividends to dare is reserves and surplus. Undistributed profits may be earmarked for some specific purpose, such as replacement or debenture redemption. Reserves which are not earmarked are called free reserves.

In India, the term reserves and surplus is used for retained earnings. This can be misleading as the term can notes something tangible, something left over. In fact, the tangible items owned by the business are shown on the assets side of the balance sheet

The term net worth is used for the owners equity. The term is misleading. Ii can note the erroneous meaning that owners equity in the balance sheet is recorded at the book value.

Functions Of Balance Sheet:-

The three important functions served by the balance sheet are:

1. It gives concise summary of the firms resources and obligations (liabilities and owners equity).

2. It is a measure of the firms liquidity.

3. It is a measure of the

4. Firms solvency.

In the definition of accounting we noted that it has a custodian or stewardship role to play fulfills this function. It reports to owners and others the state of affairs assets owned by the firm and the claims against them. It reflects the economic result of management policies.

Profit & Loss Account:-

Bankers and other lenders consider the balance sheet as significant statement. It indicates the firm financial strength, as measured by its resources and obligations. However, creditors particularly bankers and financial analysts in India have recently started paying more attention to the firms earning capacity as measure of its financial strength. The income statement or the profit & loss a/c reflects the earning capacity and potential of the firm.

The profit & loss a/c is the scoreboard of the firms performance during a particular period of time. The generally accepted is to show one year events in the profit & loss a/c. since the profit & loss a/c

reflects the result of the operations for the period of time, its a flow statement. In contrast, the balance sheet is a stock or a statement as it shows assets, liabilities and owners equity at a point of time.

The profit & loss a/c presents the summary of the revenues, expenses and net income or net loss of a firm for a period of time. Thus, it serves as a measure of the firms profitability. The net income, which is an indicator of the firms profitable operations, it is the amounts by which the revenues earn during the period exceed expenses during that period of time. If the firm operation proves to be unprofitable, total expenses will exceed total revenues and the difference is referred to as net loss.

Revenues are the amounts, which customers pay to the firm for providing them goods and services. The firm uses economic resources in providing goods and services to the customers. The cost of the economic resources use to earn revenues during a period of time are called expenses.

Thus, to determine net income/loss the accounting system matches the expenses incurred during the accounting period against the revenues earned during the period. This matching of the expenses with revenue is called as matching concept. The time period for which matching is done is called the accounting period. Normally it could be one year duration. Therefore the income statement is prepared on annual basis.

Nature Of Revenues:-

Revenues are the values of output supply to the customers. More specifically revenue is the gross inflow of assets or the gross decrease in liabilities that results from certain profit directed activities of the firm that can change owners equity. As such revenue can rise from

1. The sale of products to customers.

2. Rendering service are the supply of the firms resources to others, resulting in the receipt of rent, interest, dividend, royalties, commission, fees, etc.,

3. The sale of assets of the firm other than those held has stock in trade such as plant, machinery, land, buildings and investments.

The example of revenues from rendering services is that of a doctor who perform services for patients and then bills him say Rs. 100. The doctor may receive payment in cash immediately or increase the accounts receivable. In any case, the revenue has resulted and there has been inflow of asset-cash or receivable and increase in the owners equity.

The firm can also earn revenue by loaning its economic resources. For example a firm can lend its excess funds and earn interests. Similarly a part of funds buildings may rent. The firm also extends its marketing facilities to others and earns revenue by way of commission or fees. Revenue in all these cases will recognize at the time when the owners equity increases.

Revenues are sometimes categorized as operating revenues and non operating revenues. Revenues arising from the main operations or business of the firm are called operating revenue. For example gross proceeds from the sale of products manufactured by the firms are operating revenue. Revenues are incidental or in directed to the main operation of the firm are called non-operating revenues. For example the gross proceeds from the sale of old equipment or non-operating revenue. Generally its recognized when the goods have been sold or services have been rendered. The earning process is treated complete with the sale of or the performance of the service. When the product has been sold or service performs, the firm in exchange would have received as inflow of assets in the form of cash or receivable or decrease in liabilities. From a legal point of view, a sale take place when title to or ownership of the goods passes from seller to buyer.

Nature Of Expenses:-

Simply stated the cost of earning revenue is called the expense. Expenses occurred when the assets are consumed or liabilities are increased in order to produce revenue. Expenses represent a gross decrease in asset or gross increase in liabilities that result from profit directed activities that change owners equity.

If a firm pays wages to the workers, then it incurs an expense. The firm used the services of its workers in manufacturing the products. Which have been sold and resulted in revenue. The wages are paid in cash, the assets have decreased. As this does not affect liabilities the decrease will be in owners equity. Even the wages are not paid in cash rather are payable still an expense is incur. If the workers have rendered

the services, the firm has an obligation to pay them. So there is an increase in liabilities of the firm. A net assets of the firm decrease due to increase in liabilities, owners equity decrease.

Cost is not same thing as an expense. Cost is an outlay to acquire Cost is distinguished as expired cost and UN expired cost. Expired cost is the Once, which have held to produce revenues expired cost are recognized in the income statement and also known as revenue expenditure. Unexpired cost is those cost which will help to produce revenue in future. Such cost is recognized as assets in balance sheet. Thus, assets become expenses are used up and loss. Their ability to generate revenue in the future period. Unexpired cost is also known as capital expenditure.

The accrual concept is followed in recognizing expenses. Expenses are recognizing in the income statement in the period during which the cost expired. In contrast the case concept recognizes expenses only when cash is paid. Like revenues, expenses can be classified as operating and non-operating expenses.

Expenses relating to the main operation or business of the firm are called operating expenses. Example includes manufacturing expenses general and administrative and selling and distributing expenses. Expenses that are incidental are in directed to the main operation of the firm are called non-operating expenses.

3.2 Finance Management

Finance management takes important decisions regarding capital investments, working capital procurement and utilisation, dividend decisions, liquidity decisions, besides normal finance and accounts management activities.

1.Strategic financial management:

Strategic financial management is resorted to when the Industry is looming under depression or suffering from severe competition from the large scale industries. The ability of the finance management is reflected in formulating contingent plans in adverse situations. They also keep different sources of finance in the capital structure to diversify when necessity arises. A successful finance manager formulates the Project cost suitably , so that the project is not effected due to the contingencies.

2.Foreign investment decisions:

Foreign direct investment is generally allowed by RBI subject to certain norms and conditions. The instruments in international market are euro loans ,commercial papers, floating rate instruments, loans syndication, EURO deposits, international bonds, EURO bonds, GDR , ADR deposits. Many multinational companies maintain funds in multi currencies to reduce the risk in foreign exchange fluctuations and reduce the effects of foreign currency transactions. There are companies who take advantage of the foreign exchange fluctuations in their favour by strategic planning

3.Mutual fund:

MF generally provide risk coverage to the investors to gain advantage over the frequent fluctuations of share prices of individual companies investment

4.Venture capital:

With a view to encourage the first generation entrepreneurs, venture capital is provided to the new entrepreneurs to assist them in large investments in the project in initial stages by Venture capital institutions.

5.Time value of Money:

It was simply a rupee that is receivable today is more valuable than a rupee receivable in future. Its main object is the basics if the mathematics of finance that is the time value of money in financial decision making is extremely important.

6.Simple interest:

Simple interest is the interest paid (earned) on only the original amount or principal borrowed (lent). Simple interest is a function of three components (variables) such as principle amount borrowed or lent, interest per annum and the number of years for which the interest rate is calculated.

7.Compound interest:

There is significant difference between simple and compound interest. In simple interest there is no opportunity to earn interest each on interest where as in compounding interest each interest payment is (reinvested) having the opportunity to earn interest on interest.

8.Present Value:

The concept of the present value is the exact opposite of the compound value. compound value is helpful to know the interest added to principle amount at a given compound interest rate and given number of years, where as in the present value we can know the present value of a sum that is receivable in future.

Simple present value is the future cash inflow is the amount of current that is of equivalent of the present value.

The process of determining present value of a future cash flows (cash inflow or outflow) is called discounting.

Organization of finance function:

Finance function is very essential for any business undertaking. It is necessary to set up a sound and efficient department for the purpose of achieving its objectives.

There is no tailor made structure of finance function. The importance of the finance function depends on the size of the firm. financial management is an integral part of the overall management of the firm.in small firms, the finance functions are generally performed by the accounting departments.

In large firms, there is a separate department of finance headed by a specialist known by different designations such as vice president, director of finance officer and so on. The functions is described below:

1.Treasurer:

The main concern of the treasurer is with the financing of the firm included in the range of his functions are

a. Obtaining finance

b. Banking Relationship

c. Investor Relationship

d. Short term financing

e. Cash management

f. Investments

g. Insurance

2.Controller:

The functions of the controller are related mainly to accounting and control. The typical functions performed by him include:

a. Financial accounting

b. Internal audit

c. Taxation

d. Management accounting and control

e. Budgeting, planning

f. Economic appraisal and so on.

3.3 Financial Management (Practice in Industries)

The authority for Management of Corporate body (Industrial Organisation) is Board of Directors of the Company.

The Board consists of Chairman, Managing Director, Executive Director, Director (Finance), Director (Commercial), Director (Technical) etc., They are assisted by Professionals such as Company Secretary and Chief Financial Officer.

The Key Managerial Personnel are assisted by various executives at different levels. They are :

Vice President (Finance), (Commercial), (Engineering), ( Technical), General Managers, Dy General Managers, Asst. General Managers, Sr Managers, Managers, dy. Managers, asst. Managers, Sr officers, officers, sr. Assistants, assistants, jr. Assistants.

There are several committees which coordinate functional activities such as purchase committee, budget committee, etc.,

Finance Management and administration:

The Finance and Accounts Department under the control of Vice President (Finance) or General Manager ( Finance) consists of the following sections, which depict the functional activities undertaken by the financial management and administration of the Company:

1. Central Accounts

2. Cost accounts

3. Purchase accounts

4. Stores accounts

5. Fixed assets and insurance accounts

6. Establishment accounts

7. Time office accounts

8. Building materials accounts

9. Civil construction accounts

10. Forest accounts

11. Cash and bank accounts

12. Finance section

13. Sales tax section

14. Central excise and service tax section

15. Income tax section

16. Internal audit section

17. Legal claims section

18. Branch accounts

19. Electronic data processing accounts

20. Management Accounts

All these sections undertake the comprehesive activties of finance management and administration of the Organisation

CHAPTER-IV

PROJECT REPORTS OF THE COMPANY

( UNDER STUDY)

4.1 Project Appraisal and evaluation by Lending Banks (practices_). The project financial estimates of K. P. R Fertilizers LTD ,the public limited company which has undertaken expansion projects is furnished Annexure.

Review of the project financial statements:

KPR Fertilizers Ltd is a public limited company which is engaged in fertilizers industries has undertaken the projects in March 2010 and applied to bank for appraisal and sanction of the loans

Rs. in crores

. Power plant with20mw capacity based on gas 19.60

. DMS plant 30tpd (AP) 3.50

3. Allam 30 tpd (AP) 2.50

4. CSA 30 tpd 10.10

5. Dms Karnataka 30tpd 9.90

6. Alum 30tpd Karnataka 3.50

7. Sulphuric acid plant30tpd 35.00

8. Dcp 30tpd 9.30

These expenses are undertaken in Fertilizer unit at Biccavolu and also similar unit in Karnataka .The capacity of the projects is mentioned in the project report . The infrastructure facilities like availability of plant, construction of buildings ,details of plant and machinery, availability of water ,full arrangements for procurements of raw materials, arrangements for marketing of products, arrangement of time and disposal and various temporary storage approvals are detailed in the report. The time schedules for implementation of the projects is detailed in the report. The project report envisages commercial projections for 2 units in January 2011 and 2 units in October 2011.

The summary of the project cost (Capital Budget) is as follows:

Rs .in Crores Buildings 32.00

Plant and machinery 134.90

Working capital margin 0.60

Preliminary and 3.10

Total 170.60

Means of finance:

The project cost is proposed to be meet as follows

a). Promoters contribution 49.25

b). Term loans of bank 121.35

Total 170.60

The bank insists that the company should bear margin money of about 30 to 40 %, while the bank approves term loan for the balance amount of the project cost. The detailed financial workings are provided in the project financial statements.

The retained earnings in the profitability statement are arrived at by deducting material cost , manufacturing expenses ,depreciation administration and selling expenses from Total Income and after providing for tax and dividends. The retained earnings together with depreciation is considered by the bank for computing internal accruals..

The summary of computation of the Operating Budget is as follows :

. Sales

Material consumption

Manufacturing expanses

Depreciation

Administration

Selling

Stock variation

EBDIT

Operating profit

PBT

PAT

Provision for tax divided

Retained earnings

In the projected balance sheet ,the estimates of internal accruals of the current year in the projection of next 10 years is made. there is provision of 25crores additional share capital in 2010-11 and 25crores 2011there is substantial increase surplus every year which indicates generation of addition approvals who can also observe from BF and CF that the term loans provided for the banks is reflected there in and repayment of the loans.

The long term loans are completely repaid by 2009-18 that is the end of 8th year the reserves have accumulated up to 470cr by 2018-19 which indicates that the concern go in farther expanses and capital expenditure for sestinas and growth for subsequent years

The bank borrowings for working capital have been pegged at 91cr prices. which occurs further increase if production levels have to be increase the cash and bank balances have increased to 353.83cr which indicates scope for capital investment the inventory levels are maintain by the companies at the current production levels for with provision for influencer prices the fixed asserts also continued subject to expanse.

Cash flow:

The cash flow statement indicates the company is borrowing about 120cr during 2011-12 to meet the capital expenditure of 166.95cr during the period as regards equity the cash generation during 2011-12 is about 83cr which after repayment loans to extent of 35cr as contributed for the capital expenditure of the project.

The company as also gored up the working capital by about 69cr out of which they able to procure bank borrowing by way of cash credit living balance to be meant out of internal approvals. Every year there was surplus in the cash flow which indicates scope farther expanses.

Important financial ratios:

DSCR was ranging from 1.60 to 8.30 in the tenure and an average 2.34 the intuitions recognized companies with DSCR of two and above is good for considering sanction of term loans.

Debt equity ratio:

Debt equity ratio was 2.02 while for the project the bank concerned 2.46 for the projects as per the sensitivity analysis they have assessed that if the raw material price increases for 5 % the average DSCR will fall for 2.34 1.84 while the IRR false for 21.18% 2.16.40%

BEP is important ratio the bank as assets the BEP is 47.92% which indicates that if the concerts makes 48% it comes under profit area

Internal rate of return:

For the project the IRR is conceder at 21.18% which indicated that is the project get backs in the investments in about 5years.evaenthough the payback period 5 years the banks allowed in 6 years to allow marginal constancies the bank as also allowed an moratorium 6 months to the project to enable it to sustain, get over the teething problems and commercial repayment of the loans as of now the company is again planning for their expanses to utilize to surplus approval is available to them.

Project appraisal and evaluation statement and report of the company By Lending bank. (ANNEXURE)

I. Brief particulars of the capital investments proposed:(Such as setting up of a new unit, need for modification/expansion etc...)

The capital investment is required for expansion of the present manufacturing facilities:

The company is proposing to setup:

Power plant with 20MV capacity based on gas with a project cost of Rs.90.60 crores in AP

Unit to manufacture DMS with a capacity of 30 TPD with a project cost of Rs.9.55 crores in AP

Unit to manufacture Alum with a capacity of 30 TPD with a project cost of Rs.3.25 crores in AP

Unit to manufacture CSA with a capacity of 30 TPD with a project cost of Rs.10.10 crores in AP

Unit to manufacture DMS with a capacity of 30 TPD with a project cost of Rs.9.55 crores in Karnataka

Unit to manufacture Alum with a capacity of 30 TPD with a project cost of Rs.3.25 crores in Karnataka

Unit to manufacture CSA with a capacity of 30 TPD with a project cost of Rs.9.30 crores in Karnataka

Sulphuric Acid plant with a capacity of 200 TPD with a project cost of Rs.35.00 crores

Project to manufacture DCP with a capacity of 30 TPD with a project cost of Rs.9.30 crores

The investment will be made to construct factory buildings and to acquire plant and machinery.

The unit expansion is proposed at kopal Taluk, Karnataka and Blabhdrapuram in Andhra Pradesh.

II.Technical aspects of the proposal (enclose feasibility report)

1.1. Name of the product to be

Manufactured * 5SP

NPK 20.20.0

NPK 14 35 14

NPK 17 17 17

DCP

Pesticides

Seeds

Mineral Mixture

Sulphuric Acid

Power

DMS

Alum

CSA

1.2. Uses of the product SSP Fertilizer

NPK Fertilizer

DCP Cattle and Poultry

Feed (feed Supplement)

Pesticide To control pests

Seeds Seeds dealt are Paddy and

Maize

Power Connected to Grid

1-3 Manufacturing process

1-4 Capacity for each product Product Capacity

Pesticides

Single Super 600 TPD

Phosphate

(SSP) Powder

NPK 540TPD

DCP 50TPD

Sulphuric Acid 200TPD

DMS 30TPD

Alum 30TPD

CSA 30TPD

Power Plant

Units in Karnataka

SSP 150TPD

NPK Mixtures 300TPD

DCP 30TPD

Sulphuric Acid 200TPD

DMS 30TPD

Alum 30TPD

1-5.Particulars of collaboration, if any Not applicable

(Names of collaborators and details of

Collaboration agents):

1-6.Location advantages the unit is located at Halavarthy, Koppel

Taluk, Karnataka and Biccavolu in

Andhra Pradesh which have many

advantages.

There are no civic restrictions for establishing

The fertilizer manufacturing industry in the Area

The location is in Karnataka and Andhra Pradesh

And the demand for the products in the area can be met from both the unit

The place is in the midst of area where paddy is grown and the product is used as nutrient and fertilizer

The power supply position is satisfactory

The place has industrial atmosphere and no labor problems are envisaged

The promoters have good reputation and have high social standing

1-7 Infrastructure facilities required and arrangements made for the same:

Land The land exists and no additional land is now proposed for

Expansion project.

Building The buildings are proposed for installing the proposed

Machinery.

The additional buildings are estimated at Rs.32.00 crores

Plant & Machinery The machinery proposed is for:

200 TPD Sulphuric Acid Plant in Karnataka

30 TPD DCP Plant in Karnataka

30 TPD DMS Plant in Karnataka

30 TPD Alum Plant in Karnataka

30 TPD DMS Plant in Andhra Pradesh

30 TPD Alum Plant in Andhra Pradesh

30 TPD CSA Plant in Andhra Pradesh

20 MW Power Plants in Andhra Pradesh

The company obtained quotations and will be purchased from Standard manufacturers

Power & Fuel The Power requirement is estimated at 2000 KVA

Labor The total employees estimated for plant will be deployed

From Local areas

Water The water is drawn from the bore well available in the

Factory site.

1-8. Arrangements made the raw materials required are:

For procurement of raw Rock Phosphate

Materials: Sulphuric acid

Sculpture

Urea

DAP

Dolomite

MOP

Lime

Bauxite

The rock phosphate and sulphur are imported and other materials

Are purchased locally for the present. The letter of credit arrangement will be

Used for import of raw Materials.

1-9.Arrangments made The Company has segmented the market geographically

And for marketing of expands their network in the

States of Andhra Pradesh, Orissa and Karnataka.

The company commenced their operations in Andhra

Pradesh now by appointing dealers in all the

Districts. The dealer network Consists of 600 outlets and

The company has been adding the dealers every month.

The dealers are also appointed in Orissa and

Karnataka.

The needs of Dealers in Karnataka and Orissa are met from the proposed unit in Karnataka.

IV) Reasonability of other items of expenditure projected

a. Stores and sparesThe cost of spares is included in consumable and are estimated at 0.51% of sales on average for project duration of 10year period

b. power and fuelThe cost of power is worked out to 1.16% of sales on average for 10-year period. This is in tune with industry standards ,the captive power generated is also included in the cost while same amount is taken as income for sulphuric acid plant

c. direct lab ourThe labor cost works out to 1.59% of sales on average for 10 years period