Cash Mgt on Fertilizer

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SUMMER TRAINING REPORT

ON

CASH MANAGEMENTIn

NATIONAL FERTILIZERS LIMITED

Submitted By: Submitted to:


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INSTITUTE OF MANAGEMENT STUDIES

DEHRADUN

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Acknowledgement

No task is a one-man effort. Co-operation and Co-ordination of various people at different

times go into successful completion and achievement of set goals. It is a great pleasure to

extend my heartfelt thanks to everybody who helped me through the successful completion

of this Summer Internship Project.

Firstly I wish to express my sincere thanks to MR. TOLIA, Chief Manager (H.R), for

providing all facilities and permission during the course of my research.

Secondly,I would hereby like to offer my sincere thanks to my Company Guide, Mr. M A

KHAN, Dy manager (Finance &Accounts), NFL, who helped me as a torch bearer, a friend,

and guide during my entire project duration. I would also like to thank MR.NARESH

KUMAR SUBRAMANIAN, Deputy Manager (finance & accounts) who provided me a

opportunity to work in this esteemed organization and helped me with getting relevant data

related to this project.

I would also like to take the opportunity to express a token of my appreciation for all the

support, help and constant inspiration that I received from my Mentor (Faculty Guide), Mr.

Pradeep suri, IMS (Institute of Management Studies), Dehradun. I would like to thanks him

because without his cooperation and assistance, this project would not have been possible.

I would like to thank IMS (Institute of Management Studies), Dehradun which provided me

with such a wonderful opportunity to do a project in an industry concurrently while pursuing

the MBA course.

I am also thankful to many others who indirectly helped me in the successful completion of

this project.

Neha GuptaIMS, Dehradun

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RESEARCH METHODOLOGY

The methodology used for carrying out this project is as follows:

Studying the annual accounts of the company for obtaining related

financial data.

Studying the accounting records and arrangements with the

consortium of banks, Commercial paper, working capital demand

loan (WCDL), FDRs and short term loans.

Analyzing the guidelines and norms laid down by the department of

public enterprises(DPE) for the investment of funds by PSUs.

Reviewing RBI bulletins and RBI policies and guidelines.

Studying the cash flow statement. Cash budgets and cash reports.

Analyzing the various ratios in order to find out the liquidity position

of NFL.

Rationale of the study:

The rationale of this project is to understand the real life management practices going on in

the firms and to link it with theoretical concepts. This project study is aimed to understand

the intricacies involved in analyzing, granting and managing current assets. Its a kind of

industrial exposure that is being given to us through this project.

Scope of the study:

This project aims at studying and analyzing the management of working capital in National

Fertilizers Limited. My study has focused more on the operating cycles of working capital

components and comparing it with bank norms, a ratio analysis of NFL with other industry

players and the sources of working capital financing.

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FINDINGS

1. NFL requires no long term loan. All NFL bonds will be redeemed by 30th

June`04.

Since its interest cost is very high. They cab do without bonds since they have

sufficient funds with the banks. It has repaid all its debts & has become a Zero-Debt

Company.

2. At the time of receiving payments NFL is using drafts while at the time of making

NFL uses cheques.

3. There is no fixed system of interest reduction adopted by NFL. It varies according to

changing situations and on the intellectual judgment of the financial officials. Here

the Consortium of Banks & Multi banking System is used for interest reduction.

4. Inter-banking system poses disadvantage i.e. the funds when transferred from one

bank to another may be wrongly transferred to a personal account rather than the

company account.

5. The interest rate of cash credit is quite high i.e. 9-10%. Very rarely NFL is using it.

6. The interest rate of commercial paper is also high i.e. 6-7% therefore its use has been

stopped. It involves too much manpower, too much bookwork and its effective rate of

interest is also high.

7. NFL is now using the most efficient and effective system known as CASH

MANAGEMENT SYSTEM (CMS).

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RECOMMENDATIONS

1. NFL should exercise tight control over inter-bank transfers of cash and transfers

between various units of NFL such as divisions or subsidiaries. Excessive funds may

be tied up in various division of the firm, which company should give due attention

to.

2. NFL should give special attention to the handling of large remittances so that they

may be deposited in a bank as quickly as possible e.g. personal pick-ups, air mart,

special delivery etc.

3. when a small no. of remittances account for a large proportion of total deposits, it

may be worthwhile to initiate controls to accelerate the deposits and collection of

their cheques.

4. Investments in treasury bills and government securities of three yrs maturity, call

money deposits. NFL can also deposit its surplus funds in UTI & ILFS.

5. Monthly report for the total payments released during the month along with details of

the major recipients should be prepared for reporting to the management.

6. Surprise checks of the physical cash should be made periodically. When cash is lying

at more than one place, cash verification for all the places should be attempted at one

time.

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INTRODUCTION

Looking for an interesting way to undertake a study for my summer project in

business management. I took a mentorship with National fertilizers ltd (NFL).

I took the mentorship as an opportunity to enhance my knowledge of the field of

business.

I had many question pertaining to the business conducted by the NFL, a leading

Indian company, engaged in fertilizers business, as well as question pertaining to

business in general.

Through my time spent with the NFL, I was able to answer many of my question &

learn how business is conducted in India.

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BACKGROUND

HISTORY OF FERTILIZERS PRODUCTION

As we all know, food is a basic necessity of life.

Thats why when a country is faced with shortages of food & famine, it is in the

worst of situations.

India was in that situation just 60yrs ago, after obtaining its independence in

1947.

The Indian govt knew that it would have to give top priority to feed all of its

people.

Along with the production of fertilizers, one of the important activity is

working capital management. NFL is a multi-unit company having five plants and is

involved with the production of nitrogenous fertilizers. It has wide network of dealers

and customers. Moreover it procures raw material from a large no. of suppliers. A

huge amount of funds is involved which includes both receipts and payments. A

proper working capital management is necessary to handle efficiently & effectively

all these activities.

Our project basically dealt with understanding NFLs system and giving

recommendations for improving upon it.

The areas, which we emphasized upon were the cash management where we

studied the various cash management techniques being followed by the organization,

understand its working and tried to improve upon it. Our findings revealed that NFL follows

very efficient & effective management system.

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FERTILIZER INDUSTRY IN INDIA

Definition of Fertilizers:

Fertilizers are defined as those chemicals which when added to soil, supply the essential

nutrients required for plant growth in the soil.

Need for Fertilizers:

Fertilizer is an essential input in modern agricultural practice because it helps in maintaining

the fertility of the soil. Whenever land is used continuously for farming, its organic matter

gets reduced. Therefore, it is essential that some extra nutrients be provided to the soil to get

maximum returns from the money invested in the land. Chemical fertilizers increase fertility

of the soil by providing chemical inputs to the soil.

The pressure of increasing population and shrinking land resources has had an adverse effect

on agriculture activities, which results in multiple cropping systems for different agro-climate

conditions. Multiple cropping systems drain the soil very heavily; therefore fertilizers are a

must to increase the fertility of the soil.

Although the production of fertilizers is continuous throughout the year, yet its use is

seasonal. The requirement is limited to a very short period of months i.e. Kharifseason and

Rabi season. Kharif season starts from April 1 and ends on September 30. The peak time of

use of fertilizers during Kharif is June and July. The other season is Rabi, which is from

October 1 to March 31, and here the peak time for the use of fertilizers is November &

December.

The attention of both the government and the industry is focused toward achieving the

objectives of reducing the cost of fertilizers for farmers so that it is affordable to them, and at

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the same time improve productivity of the system to optimize return from heavy investment.

It will therefore be appropriate to have a hard look at the current situation identifying gaps

and development guidelines and specific plans of action to achieve these objectives.

Types of Fertilizers:

Mainly there are three types of fertilizers: Nitrogenous fertilizers, Phosphoric fertilizers and

Potash fertilizers.

Salient features of the Indian Fertilizer industry:

Fertilizer sector is very crucial for Indian economy because it provides a very

important input to agriculture. It is regulated by government policies administering

the price of fertilizer and the production

Urea production is an energy intensive process

Natural gas, naphtha, LSLS/fuel oil are used as feedstock for producing urea

Cost of energy varies from 65% to 87% of production costs

Specific energy consumption of sample plants covered under this study varies

between 5.53 Gcal/MT of urea and 10.2 Gcal/MT

Majority of the industry is energy conscious and focuses on energy management

Over the years, the industry has improved its energy performance by bringing down

specific energy consumption and improving capacity utilization

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PROFILE OF NATIONAL FERTILIZERS LIMITED

National Fertilizers Limited (NFL) is a profitable public sector undertaking which operates

under the administrative control of the Department of Fertilizers, Ministry of Chemicals &Fertilizers. It is a Schedule-A & Mini-Ratna Category-I company, and is among one of the

major players in the fertilizer industry in India with 16.6% share in urea production during

2005-06.

The company manufactures nitrogenous fertilizers, mainly urea. It also produces and markets

bio-fertilizers and various industrial products like Methanol, Sodium Nitrite, Sulfur, Liquid

Oxygen and Liquid Nitrogen.

National Fertilizers Limited was incorporated on 23rd August, 1974 for implementation of

fertilizers plants, based on gasification technology of feed stock/LSHS at Bathinda, Punjab

and Panipat, Haryana having an installed capacity of 5.11 lakh tons of Urea each. In April

1978, the Nangal group of plants of Fertilizer Corporation of India (FCI) was transferred to

NFL consequent upon recognition of FCI. The Govt. of India in the year 1984 entrusted the

company to execute its first inland gas based fertilizer project of 7.26 lakh tons urea capacity

in Guna district of Madhya Pradesh. On completion of this project received the First Prize for

Excellence in Project Management from the Ministry of Programme Implementation, Govt.

of India. Subsequently, a second plant at Vijaipur was installed in the year 1993 for doubling

its current annual production capacity. NFLs registered office is at Scope Complex, Core III,

7 Institutional Area, Lodhi Road, New Delhi 110003 and its corporate office is at A-11,

Sector-24, Noida, UP.

All NFL plants have been certified ISO 9002 for conforming to international quality

standards and International Environmental Standard i.e. ISO 14001. With the certification of

Corporate Office / Marketing operations under ISO 9001:2000, NFL has become the first

fertilizer company in the country to have its total business covered under ISO 9001

certification.

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The company has an installed capacity of 35.49 lakh MT nitrogenous fertilizers and has

recorded an annual sales turnover of Rs 3591 crores during 2005-06. The companys strength

lies in its sizeable presence, professional marketing and strong distribution network

nationwide.

Products and Services:

NFL manufactures and markets nitrogenous fertilizers and a wide range of industrial

products which are used in industries like steel, rubber, glass, paint & dyes and many more.

Two most popular brands of NFL are Kisan Urea and Kisan Khad which has a substantial

market across the country.

Kisan Urea is a high concentrated, solid, nitrogenous fertilizer. It is completely soluble in

water hence Nitrogen is easily available to crops.

Kisan Urea is ideally suitable for all types of crops and for foliar spray which instantly

removes nitrogen deficiency. Carbonic acid present in Kisan Urea helps in absorption of

other nutrients like phosphate and Potash by roots of crop.

The Company has developed Neem-coated urea which on demonstration has improved the

crop yield by 4-5%. The company is focusing on widening the marketing operations of

Neem-coated urea.

NFL also manufacturers and markets three types of Bio-fertilizers: Rhizobium, Phosphate

Solubilising Bacteria (PSB) and Azetobactor. These Bio-fertilizers are used to supplement

chemical fertilizers and also to maintain soil fertility.

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NATIONAL FERTILIZERS LIMITED

NFL was incorporated on 23rd august, 1974 with two manufacturing units at Bathinda and

panipat. Subsequently, on the reorganization of fertilizer group of companies in 1978, the

Nangal unit of fertilizers corporation of India came under the NFL fold. The company

expand its installed capacity in 1984 by installing and commissioning of its vijaipur gas

based plant in Madhya Pradesh.

The Vijaipur plant was a land mark achievement in project management in India. The plant

was completed well within time and approved project cost. In recognition of this

achievement, the project was awarded the first prize in excellence in project management by

govt of India. Subsequently the Vijaipur plant doubled its capacity to 14.52 laky MTs by

commissioning Vijaipur expansion unit i.e. vijaipur-2 in 1997. the plant annual capacities

have now been re-rated w.e.f. 1.4.2000 from 7.26 lakh MT of urea to 8.64 lakh MT for

Vijaipur-1 & Vijaipur-2 plants each.

Three of the units are strategically located in the high consumption areas of Punjab and

Haryana. The company has an installed capacity of 35.49 lakh MTs of nitrogenous fertilizers

and has recorded an annual sales turnover of RS 3,395 crores during 2003-04. Thecompanys strength lies in its sizeable presence, professional marketing and strong

distribution network nationwide.

NFL, a profitable public sector undertaking operates under the administrative control of

deptt. of fertilizers in the ministry of chemical and fertilizers.

Kisan urea and kisan khadNFLs popular brands are sold over a large marketing territory

spanning the length and breadth of the country. The company also manufactures and markets

Biofertilizers and a wide range of industrial product like methanol, nitric acid, sulphur, liquid

oxygen, liquid nitrogen etc. the company has developed neem coated ureas which on

demonstration has improved the crop yield by 4-5%. The company is focusing its thrust to

widen the marketing operations of neem coated urea.

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NFL over the years has developed a team of dedicated professionals in the areas of

production, maintenance, project management, safety and environment control. These

professionals are sought after in the industry both in India & abroad for their specialized

sevices.

NFL is known in the industry for its work culture, value added human resources, safety,

environment, concern for ecology and its commitment to social upliftment. All NFL plants

have been certified for ISO-9002 for conforming to international quality standards and

international environmental standards i.e. ISO-14001. with the certification of corporate

office/marketing operations under ISO-9001:2000, NFL has become the first fertilizer

company in the country to have its total business covered under ISO-9001 certification.

Urea is an essential commodity under the essential commodities act, 1955. The deptt. of

fertilizers plans and monitors production, import and distribution of fertilizers and

management of subsidy for indigenous and imported fertilizers in the country.

The system of marketing of urea has undergone a change w.e.f. 1.4.2003 when company

has been allowed to market 25% of its produce outside ECA during kharif 2003. This

percentage of sales outside ECA was raised to 50% in Rabi 2003-04, the same portion

prevails for Kharif 2004.

NFL enters into a Memorandum of understanding (MoU) with the government for each

year under which the government undertakes to assist NFL with regard to availability of

inputs, obtaining ECA allocations commensurate with the availability of fertilizers from NFL

plants etc. NFL on its part, undertakes to adhere to its production and movement plans,

achieve its ECA allocation and provide regular feed back to the administrative department.

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OBJECTIVES

Basic corporate objectives

In terms of memorandum of association, NFL was set up to manufacture and market

chemical fertilizers, other chemical and by-product as well as to provide the allied services.

In order to achieve and maintain a leading position in the production and marketing of

fertilizers, the following micro objectives have been intensified:-

1. Research and development

To carry out R&D activities for:-

(a) increasing plant availability

(b) saving use of energy in different forms

(c) better recovery of saleable by-product

(d) process improvement/ development and

(e) increasing efficiency utilization on a sustained basis in the application of chemical

fertilizers in combination with other agriculture inputs.

2. Productivity

maintenance of plant and machinery and pollution control. More specifically(a)to strive to

raise capability utilization (b)to improve upon consumption norms consistently.

3. Profitability

To manage the asset, men and material in most effective and efficient manner ensuring

(a)reasonable return on investment commensurate with the principles laid down by the

government from time to time, and (b)generation of increasing internal resoures.

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4. Marketing & consumer services

(a) To provide the farmers high quality products in right time and in quantities and with a

package of modern agricultural practices, at the same time maintaining for fair

business practices.

(b) To further intensify promotional efforts for increased use of fertilizers and to

maximize distribution of companys product within the areas covered by the company

consistent with government policy.

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NFL MISSION

To be a market leader in fertilizers; and a significant players in all its other business;

reputed for customer delight, optimum rewards shareholder, ethics, professionalism and

concern for the ecology and the community.

NFL VISION 2008

NFL will be a reputed, valuable, major Indian enterprise, with domestic and international

operations in addition to the core fertilizer business, and into chemical, petrochemical and

related services and trading business.

NFL GOALS 2008

To achieve a group turnover of Rs.10,000 crores, from the diverse business; with the net

profit of Rs.1200 crores and additional outlay of Rs.6000 crores, financed by a mix of equity,

debt and portfolio investment.

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AWARDS

AWARDS YEAR UNIT

National Productivity Award for Bio-

Fertilizers

2002-03 Vijaipur

FAI Award for Best Overall Performance

of an Operating Nitrogenous

Fertilizer unit

1999-00 Vijaipur

Productivity Award by NPC 1997-98 Bathinda

Certificate of Merit from NPC 1997-98 Bathinda

Certificate of Merit by NPC 1996 Nangal

Commendation certificate for outstanding

work in Energy Conservation

by the Ministry of Power, Govt. of India

1996 Vijaipur

Second Best Productivity Award by 1993-94 Panipat

Second Best National Productivity Award

by National Productivity

Council (NPC)

1993-94 Panipat

Certificate for Productivity Improvement

by National Productivity

Council

1991-92 Bathinda

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OTHER PRESTIGIOUS

AWARDS & RECOGNITIONS

AWARDS YEAR UNIT

Golden Peacock Innovation Award from

IOD, N. Delhi.

2005 Panipat

National Energy Conservation Award

from the Ministry of Power

2005 Vijaipur-I

National Energy Management Award

from CII

2005 Vijaipur

Golden Peacock Innovation Award from

IOD

2005 Panipat

Energy Conservation Award from the

Ministry of Power.

2000 Vijaipur

Best Energy Conservation

Implementation Gold Award by

Institutional

Green Land Society, Hyderabad.

1999-00 Panipat

National Energy Conservation Award by

Ministry of Power, G.o.I

1995 Vijaipur

Udyog Excellence Gold Medal and

Citation by Industrial Economic

Forum, G.o.I

1995 Bhatinda

Corporate Performance Award by

Economic Times.

1993-94 NFL

First Prize in Excellence in Project Mgt.

By Ministry of Program

Implementation.

1989 Vijaipur

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POLLUTION CONTROL AWARDS

AWARDS YEAR UNIT

Silver Award for outstanding achievement

in Environment Management by M/s

Green tech Foundation,Hyderabad

2004-05 Vijaipur

Madhya Pradesh State Level Annual award

on Environment

1999-00 Vijaipur

11th Indira Gandhi Memorial National

Gold Award for Environmental &

Ecological Implementation

1998-99 Vijaipur

Best Pollution Control Implementation

Gold Award from International Green land

Society, Hyderabad

1998-99 Vijaipur

Environment Protection Award by

Fertilizer Association of India

1995-96 Vijaipur

Environment Protection Award by

Fertilizer Association

of India

1991-92 Vijaipur

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SAFETY AWARDS

AWARDS YEAR UNIT

Prashansha Patra by National SafetyCouncil of India

2005 Vijaipur

Suraksha Puruskar for adopting

Occupational Safety and Health

Management Systems from NSC.

2004 Bathinda

Yogyata Praman Patra 2001 award by

NSC

2003-04 Bathinda

National Safety Award 2002 2003-04 Nangal

National Safety Award 2002(Runner up) 2003-04 Bathinda

Punjab State Safety Award 2003 2003-04 Nangal

Yogyata Praman Patra 2003 2003 Bathinda

Prashansa Puraskar 2000 award by NSC 2000 Bathinda

Haryana State Safety & Welfare Award 1999-00 Panipat

National Safety Award 1999 & 2000 Bathinda

Yogata Praman Patra by NSC, Mumbai 1998-99 Vijaipur

Safety awards (5 Nos.) by Punjab Govt. 1998 & 1999 Bathinda

Award for Excellence in Safety by FAI 1997-98 Nangal

Award from National Safety Council, USA 1997 Panipat

British Safety Council Safety Award 1997 Nangal

Award of Honour by NSC,USA 1996 Nangal

British Safety Council Award 1996 Nangal

Sarv Sresht Safety Award 1994 & 96 Vijaipur

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Longest Accident Free Period by NSC,

USA

1992 Nangal

Longest Accident Free Man days by NSC,

USA

1990 Panipat

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EMPLOYEES SKILL AWARDS

AWARDS YEAR UNIT

Punjab State Krit Veer Award 2003 Bathinda

Krit Veer Award to 1 employee by Punjab

Govt.

2002 Nangal

Vishwakarma Rashtriya Puraskar from the

Ministry of Labour & Employment, G.o.I

1999 Bathinda

Krit Vir awards to 13 employees by Punjab

Govt.

1995, 96 & 98 Bathinda

Krit Vir awards to 13 employees by PunjabGovt. 1995 & 1996 Nangal

Vishwakarma Rashtriya Puraskar to three

employees.

1993 Bathinda

Krit Award to 6 Employees by Punjab

State Labour Deptt.

1993 Bathinda

Vishwakarma Rashtriya Puraskar to one

Employee by Ministry of Labour, G.o.I

1992 Nangal

Krit Vir Award to 5 employees by PunjabState Labour Deptt.

2002 Nangal

Prime Ministers Shramvir Award to four

employees for Unconventional repairs of

Air Compressor Blades

1984 Panipat

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ISO CERTIFICATIONS

PLANTS / OFFICE CERTIFICATION AWARDED SINCE

Vijaipur Plant ISO-9002/ISO-14001 1997-98/98-99

ISO 9001:2000 2003-04 Panipat Plant ISO-9002/ISO-14001 1999-00/2000-01

ISO 9001:2000 2003-04

OHSAS-18001 2004-05

Bathinda Plants ISO-9002/14001/18001 2000-01/2001-02/03-04

ISO 9001:2000 2003-04

OHSAS-18001 2003-04

Nangal Plant ISO 9001: 2000 2002-03

ISO-14001 2001-02

CO/CMO ISO 9001:2000 2002-03

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NFLS PLANTS

NANGAL UNIT

INSTALLED CAPACITY

Location district: ropar(Punjab)

Urea 4,78,500 MT

Methanol 22,110 MT

Project cost urea (including revamp) Rs.283.11crores

Foreign exchange component (including revamp) Rs.118.49crores

Commissioned (urea revamp) 1.2.2001

This plant purchases power for its own use.

This plant produces industrial products along with urea.

Land 1800 acres

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PANIPAT UNIT

INSTALLED CAPACITY

Location district: karnal(Haryana)

Urea 5,11,500 MT

Commissioned 1.9.1979

Project cost Rs.223.50 crores

Foreign exchange component Rs.55.79 crores

Factory area 442 acres

Township+ low lying 131 acres

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BATHINDA UNIT

INSTALLED CAPACITY

Location District:Bathinda

Urea 5,11,500 MT


Project cost Rs.239.30 cr

Foreign exchange component Rs.67.87 cr

Factory area 450 acres

Township 285 acres

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VIJAIPUR UNIT-1

INSTALLED CAPACITY

First inland location plant based on gas from Bombay high/south basin.

Location District:Guna(M.P)

Urea 8,64,600 MT


Project cost Rs.533 crores

Foreign exchange component Rs.185.20 crores

Land 1250 acres

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VIJAIPUR UNIT-2

INSTALLED CAPACITY

Urea 8,64,600 MT


Project cost Rs.1071 crores

Foreign exchange component Rs.431 crores

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MEMORANDUM OF UNDERSTANDING

Memorandum of understanding (Mou) is a negotiated agreement between government as

owner of public enterprises and the management of the public sector enterprise (PSEs). Mou

is meant to measure the performance of management of PSE at the end of the year in an

objective and transparent manner.

In the search of improving accountability and giving higher operational autonomy to public

sector undertaking, the department of public sector enterprise (DPE) government of India

introduced the concept of memorandum of understanding (Mou) in early nineties. The new

industrial policy of 1991 made it mandatory for all PSUs to enter in to MOU with their

respective administrative ministries. The Mou over these years has gained significant

improvement from the fact that it reflect the companys overall composite rating and

secondly the performance of the chief executive of the company is partly seen through Mou.

The strengthening of existing system of monitoring PSUs through Mou is an important

element of the present policy of the government.

NFL started signing Mou from the year 1991-1992 and has been getting excellent rating for

most of the years. NFLs Mou rating from 1991-92 to 2005-06 is given below:

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MOU RATING

YEAR RATING

1991-92 Excellent

1992-93 Excellent

1993-94 Excellent

1994-95 Excellent

1995-96 Excellent

1996-97 Fair

1997-98 Very good

1998-99 Good

1999-00 Very good

2000-01 Excellent

2001-02 Excellent

2002-03 Excellent

2003-04 Excellent

2004-05 Excellent

2005-06 Excellent

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COMPANY PROFILE

loan funds

In 1998 NFL had taken the loan from many of the places, given below:-

SECURED LOANS

Non-convertible redeemable bonds (A) : 5496.60

Cash credit (B) : 39339.85

TERM LOAN FROM

Housing development finance corp. Ltd (C) : 6375.00

DEMAND LOAN FROM :

State bank of PATIALA (D) : 5000.00

UNSECURED LOANS

Short term loan from

Bank of MAHARASHTRA : 5000.00

A) NFL had purchased the bonds i.e the secured non convertible redeemable bonds of Rs

100,000/- each for cash at par redeemable at the end of 4th year

33%, 5th

year 33% and 5th

year34% from 1.07.98/31.07.98.

These bonds were secured by PARI-PASSU first charge on land owned by BHATINDA

unit / fixed assets of Panipat (excluding land) & BHANTINDA units. Means as a security

these assets were kept for taking the loan.

B) The cash credit from consortium of bankers. As a security they kept hypothecation of

stores, spares, raw material, finished and semi finished goods, books debts and other current

assets.

C) The company had also taken the term loans from HDFC bank and Secured by equitable

mortgage of land situated at Noida & Panipat and all fixed assets of Nangal unit.

D) The demand loan was taken from SBP, Secured by PARI-PASSU first charge on the

current assets of the company.

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INTRODUCTION TO CASH MANAGEMENT

1. Cash Credit:

It is also known as drawing account. Under this arrangement a business is authorized to draw

cash subject to the limit prefixed by the bank. Under term-loan where the full amount is

available to the borrower, in case of case credit, a credit limit is put at its disposal. This gives

the borrower a lot more flexibility. The business can avail funds to the extent it desires. The

interest is charged only for the amount against the limit. The borrower is accorded the facility

of reducing the debit balance in his account as per his convenience and save interest. At

times cash credit and overdraft are taken to be identical but a bank extends cash credit facility

to its valued customers on a regular basis for a long tenure. On the contrary overdraft facility

is provided occasionally and for shorter durations.

2. Working Capital Demand Loan (WCDL):

It is a part of cash credit but the rate of interest is different. It is always given for a particular

period and it is not possible to repay before the maturity date. The rate of interest is lower

than that for cash credit.

3. Short-term loans:

When a company is in need of extra funds, it can go for short-term loans over and above the

cash credit limit for a maximum period of 6 months, at a relatively lower rate of interest.

Non-fund based sources of finance:

1. Letter of Credit (L/C):

Letter of credit has unique features making it a favorite instrument in the commercial world,

especially in international trade. The basic advantage is that of guaranteed payment is case

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the order is executed as per the terms. As an additional advantage, it acts as a cash

management tool also. The business can get instantaneous payment of full amount or as

agreed with the customer through the bank, against delivery of dispatch documents. It need

not wait till the goods reach the customer. Sometimes even before the dispatch of goods, the

bank provides advances against the Letter of credit.

Letter of credit is now also being used in the domestic trade. A L/C is being issued by a bank

on behalf of its customer (buyer) to the seller. As per this document the bank agrees to honor

drafts drawn on it for the supplies made to the customer if the seller fulfills the conditions

laid down in L/C.

The L/C serves various useful functions, which are as under:

i. It virtually eliminates credit risk, if the bank has a good standing

ii. It reduces uncertainty, as the seller knows the conditions that should be fulfilled to

receive payments

iii. If offers safety to the buyer who wants to ensure that payment is made only in

conformity with the conditions of the L/C

2. Bank Guarantee (B/G):

Bank guarantee is one in which the banker takes responsibility on behalf of its customers to

pay the suppliers, the amount due to its customer. The bank takes the responsibility only

when its customers credit standing and relation with the bank is good.

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STRATEGIES FOR UTILIZING CASH

The company is required to formulate strategies regarding the utilization of cash more

efficiently by the following methods:-

To manage cash efficiently and effectively, budgets are prepared to give an estimate

of future inflow and outflow of cash over a specified period of time. This enables the

management in taking decision regarding the investment of surplus cash if any in

various short-term securities.

A firm can utilize its cash by following a collection policy which would enable it to

adapt to the changing situations and must delay their payment till the last date without

damaging the firm credit rating.

Payments are made to:-

ONGC gas/coal

IOC -oil

Rail freight

Sources of funds are:-

Sale of urea

Subsidy

Price of urea is fixed by government.

On receipt of subsidy

1. cash credit utilization shall be made nil.

2. to make urgent payments from subsidy.

3. all balance amount shall be surplus fund which shall be invested according to

DPE guideline.

4. ask for quotas from consortium banks and other empanelled banks.

5. select best quota.

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Cash management of NFL aims at evolving strategies for delaying with various facts

of cash management which include the followings:

1. OPTIMUM UTILIZATION OF OPERATING CASH FLOWS

Implementation of a sound management programme is based on rapid generation,

efficient utilization & effective conservation of its cash resources. The cash flows in a

circle, therefore prudent financial planning facilitating the running of the business with

minimum cash balance. This is achieved by making a proper analysis of operative cash

flow cycle and forecsted cash flow statement.

2. CASH FORECASTING

RTGS

The Real Time Gross Settlement (RTGS) provided by RBI enables real-time

settlement of fund transfers by processing and settling the payment instructions

between banks individually and continuously throughout the day.

The Reserve Bank of India has prescribed that all RTGS payment transactions

(processed before cut off timing) have to be settled by the Beneficiary Bank within

two hours from the time the same has been received by the Beneficiary Bank.

Only transactions above INR 100,000 should be routed through RTGS.

Instructions received by the Bank before

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WORKING CAPITAL MANAGEMENT

A company starting with cash purchases raw materials, components etc. on a cash or credit

basis. These materials will be converted into finished goods after undergoing the stage of

work-in-progress. For this purpose, the company has to make payments towards wages,

salaries and other manufacturing costs. Payments to suppliers have to be made on purchase in

the case of cash purchases and on the expiry of credit period in the case of credit purchases.

Further, the company has to meet other operating costs described as financial costs (interest

on borrowed capital). In case the company sells its finished goods on cash basis, it will

receive cash along with profit with least delay. When it sells goods on a credit basis, it will

pass through one more stage, viz, accounts receivable and gets back cash along with profit on

the expiry of credit period. Once again the cash will be used for the purchase of raw materials

and/or payment to suppliers and the whole cycle termed as working capital cycle or

operating cycle repeats itself. This process indicates that each stage or component of

working capital is dependent on its previous stage or component.

Figure: The Working Capital (Operating) Cycle

38

Cas

h

Wages, Salariesand

Manufacturing

costs

Work-In-Process

Raw materials,

components,stores etc.

Sundry

Creditors orAccounts

Payable

Finished

Goods

Selling and

Distribution,General

Administration

and Financial

costs

Sundry Debtors

OrAccounts

Receivable


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The figure above shows the normal operating cycle of a company. It indicates that the normal

business operations of a manufacturing and trading company start with cash, go through the

successive segments of the operating cycle, viz, raw material storage/conversion period,

work-in-process conversion period, finished goods storage/conversion period and average

collection period before getting back cash along with profit. The total duration of all the

segments mentioned above is known as Gross operating cycle period. In case the

company is placed in an advantageous position of being able to sell its products for cash,

then the segment of average collection period will disappear from the gross operating cycle

period and hence, the total duration of the cycle gets reduced.

In case advance payments are to be made for procuring materials, the operating cycle

increases. When the average payment period of the company to its suppliers is deducted from

the gross operating cycle period, the resultant period is called the Net operating cycle

period or simply Operating cycle period.

The following steps are the steps used to calculate the operating cycle of a company:

1. Raw Material Conversion Period (RMCP) -> Raw Material Inventory / Daily Raw

material consumption

Raw Material Inventory = (Opening stock + Closing Stock of raw material) / 2

Daily consumption of raw material = Annual raw material consumption / 365

2. Work-in-Process Conversion Period (WIPCP) -> WIP Inventory / Daily Cost of

Production

Work-in-Process Inventory = (Opening WIP + Closing WIP) / 2

Daily Cost of Production = Annual Cost of Production / 365

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Annual Cost of Production = Opening stock of WIP + Raw material consumed +

Other manufacturing costs such as wages and salaries, power and fuel etc. +

Depreciation Closing stock of WIP

3. Finished Goods Conversion Period (FGCP) -> Finished Goods Inventory / Daily

Cost of Goods Sold

Finished Goods Inventory = (Opening stock of FG + Closing stock of FG) / 2

Daily Cost of Goods Sold (COGS) = Annual COGS / 365

Annual COGS = Opening stock of finished goods + Cost of Production + Excise duty

+ Selling and distribution costs + General administrative costs + Financial costs

Closing stock of finished goods

4. Debtors Conversion Period -> Sundry Debtors / Daily Sales

5. Creditors Deferral Period -> Sundry Creditors / Daily Purchases

Application of the Operating Cycle

The operating cycle approach proves quite useful as a technique for exercising control over

working capital. Each segment of the operating cycle can be compared with the norms set by

banks used for hypothecation of stocks. Significant deviations call for closer scrutiny by the

management, who can seek the reasons for such occurrences. The deviations may have

occurred due to a variety of reasons. For example, an increase in the average conversion

period may have occurred due to the shortage of an important raw material (in which case the

purchase manager can be asked for an explanation), plant break-down (in which case the

maintenance manager may be asked for an explanation), a strike by workers (which calls for

an explanation from the chief of personnel and industrial relations) etc. Once the reasons are

known, remedial measures can be taken in respect of immediately controllable factors and

other factors may be accepted as constraints for the time being, pending long-term solutions.

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For example, frequent break-down of plant may call for replacement of certain sectors and/or

modernization which cannot be implemented immediately, but can be implemented say in

about a year.

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Company Analysis

On reviewing the financial condition of National Fertilizers Limited from the company

accounts, I compiled the following data shown in graphical form; it shows a clear picture of

the health of the company for the past 5 years.

1.

42

2950

3654 3388 3474 3591

0

1000

2000

3000

4000

(RS. IN CRORES)

2001-02 2002-03* 2003-04 2004-05 2005-06

SALES TURNOVER


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2.PBT and PAT

43

48.33 40.61

448.43

286.27

119.10

85.04

214.55

160.91

179.30

116.40

0.00

100.00

200.00

300.00

400.00

500.00

(RS. IN CRORES)

2001-2002 2002-2003* 2003-2004 2004-2005 2005-2006

PROFIT BEFORE TAX PROFIT AFTER TAX


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3. BREAK UP OF COST OF SALES (%)

44

54.68

21.03

4.76

5.26

1.763.47

3.810.23

5.00 RAW MATERIAL (54.68% )

POWER & FUEL (21.03% )

SALARY & WAGES (4.76% )

FREIGHT & HANDLING (5.26% )

REPAIR & MAINTAINANCE(1.76% )

DEPRECIATION (3.47% )

ADMN., FACTORY AND OTHERS (3.81% )

PROFITS (5.00% )

INTEREST & FINANCING CHARGES


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4. INTEREST AND FINANCE CHARGES

5. LONG TERM LOANS

45

378

290

123

0 0

0

50

100

150

200

250

300

350

400(RS. IN CRORES)

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006


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6. SUNDRY DEBTORS

(RS. IN CRORE)

PARTICULARS 2005-2006 2004-2005

TRADE DEBTORS

UPTO 6 MONTHS 52.53 62.02

ABOVE 6 MONTHS 13.40 13.86

SUB TOTAL 65.93 75.88

FICC 771.38 372.47

TOTAL 837.31 448.35

LESS : PROVISION FOR

DOUBTFUL DEBTS

12.84 13.29

NET SUNDRY DEBTORS 824.47 435.06

TRADE DEBTORS DECREASED BY RS.9.95 CRORES AS COMPARED TO PREVIOUS YEAR.

IN TERM OF PERCENTAGE TRADE DEBTORS ARE 4.04% (PREVIOUS YEAR 4.40%) OF

MARKETING TURNOVER.

7. SOLVENCY

2005-2006 2004-2005

EQUITY 490.58 490.58

FREE RESERVES 763.18 676.56

NETWORTH (EQUITY PLUS FREE RESERVE) 1253.76 1167.14

CAPITAL EMPLOYED 1688.65 1456.14

NET FIXED ASSETS 963.02 1049.52

WORKING CAPITAL 725.63 405.67

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NFL has become a Zero-Debt company since July 2004

8. WORKING CAPITAL

9. INVENTORY

47

818730

775

406

726

-100

100

300

500

700

900

1100

(RS. IN CRORE)

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006


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(RS. IN CRORE)

MAJOR ITEMS 2005-2006 2004-2005 VARIANCE

FURNANCE OIL/LSHS 73.72 37.59 36.13

COAL 37.07 20.08 16.99

PACKING MATERIAL 9.34 7.10 2.24

SPARES 72.19 112.85 (40.66)

GENERAL STORES 24.41 29.07 (4.66)

OTHERS 32.32 47.29 (14.97)

SUB-TOTAL (A) 249.05 253.98 (4.93)

FINISHED / SEMI FINISHED GOODS

UREA (CY 1.03 LMT, PY 1.24 LMT) 61.05 79.72 (18.67)

IP & OTHERS 14.39 17.14 (2.75)

SUB-TOTAL (B) 75.44 96.86 (21.42)

TOTAL (A+B) 324.49 350.84 (26.35)

10. LIQUIDITY

2005-2006

(ACTUAL)

2004-2005

(ACTUAL)

CURRENT ASSETS (RS. IN CRORE) 1271.73 1007.32

CURRENT LIABILITY (RS. IN CRORE) 546.10 601.65

NET CURRENT ASSETS

(WORKING CAPITAL)

(RS. IN CRORE) 725.63 405.67

CURRENT RATIO 2.33:1 1.68:1

ACID TEST RATIO 1.71:1 1.06:1

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RATIO ANALYSIS

Ratio for the year 2005-06

CURRENT RATIO

This ratio measures t

current ratio of 2.3:1

CURRENT ASSETS=

127173

CURRENT LIAB. 55273.82

= 2.300782

QUICK RATIO

It is a rigorous meas

current ratio. One de

assets of any firm. However, since inve

referred to as quick r

cash, in order to meeratio of NFL is lower

QUICK ASSETS=

CURRENT ASSETS-INVENTORY- LOAN

CURRENT LIAB. CURRENT LIABILITIES

=127173-32449.46-1585.86

55273.82

= 93137.68

55273.82

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FIXED ASSETS RATIO

FIXED ASSETS

LONG TERM FUNDS

From two years there is no long term funds in NFL,

So long term fund is zero.

CURRRENT ASSETS TO TOTAL NET ASSETS

CURRENT ASSETS

TOTAL NET ASSETS

127173

169946.7+ 55273.82

127173

225220.5

0.56466

Working Capital Financing in NFL

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The need for financing working capital arises mainly because the investment in working

capital/current assets i.e. raw materials, work-in-process, finished goods and receivables

typically fluctuates during the year. Although long-term funds partly finance current assets

and provide the margin money for working capital, such assets/working capital is almost

exclusively supported by short-term sources.

When NFL has to procure working capital, a Board resolution has to be passed to resolve the

cash credit limit of the company to meet the working capital requirements. The board also

has to decide upon the following issues.

How much funds to be procured?

Who will be the signing authority?

How power has to be delegated?

After the resolution has been passed, the Finance department will decide upon the

Consortium of Banks and meet the bank officials.

All the banks in the consortium have to sign the agreements shown below:

I. Working capital consortium agreement (CF 1)

II. Joint deed of hypothecation (CF 2)

III. Inter Se Agreement among consortium of banks. (CF 3)

IV. Letter regarding the grant of individual limits within the overall limit(CR 5)

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WORKING CAPITAL CONSORTIUM AGREEMENT:

Bank Cash Credit limit (Rs in Crores) Effective Interest Rate

SBI 125.00 10.50%

UBI 55.00 11.50%PNB 75.00 11.75%

SBP 5.00 11.00%

BOI 90.00 12.00%

SBH 50.00 10.50%

OBC 50.00 10.25%

TOTAL 450.00

Fund-based sources of working capital in NFL

1.Cash Credit

NFL can raise up to Rs. 450 crores from the consortium of banks, as shown in the table

above. Each banks individual limit and the effective rates of interest are also shown.

2.Working Capital Demand Loan (WCDL)

It is part of the cash credit limit. NFL can either avail the full amount of Rs. 450 crores as

cash credit or partly as WCDL and partly as cash credit. For NFL, the interest rate of WCDL

is around 9.75% - 10.00% pa. Here, no documentation is required.

3. Short-term loan

After exhausting the working capital limit, if NFL requires extra funds, it can raise additional

funds through short-term loans. It can procure short-term loans up to a limit of Rs. 100 crores

for a maximum period of 6 months. The interest rate for short-term loans is 9.75% to

10.00%. It is also called Clear loan since it is unsecured. No paper work is involved and it

is issued in the form of a Promissory Note.

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4.Commercial Paper (CP)

NFL has currently stopped using Commercial Paper for financing, as it involves a lot of

paper work and it has higher interest cost too.

As NFLs financial position is sound and it has a very strong repaying capacity, so CRISIL

has rated NFL as P1 for short-term loans and as A1 for long-term loans. The following

are the steps for issuing a commercial paper in NFL:

Step 1: NFL appoints an agent

Step 2: Submit the following documents to a regulatory authority like National Securities

Depository Limited (NSDL)

i. Letter of Intent.

ii. Letter to issue CP in demat from

iii. Master creation form for CP

iv. Corporate action information.

Step 3: Information required from bank:

i. Depository Participant ID

ii. CP allotment number.

iii. CP redemption number.

iv. CP redemption certificate after maturity.

Step 4: Information and documents to be submitted to Bank by NFL:

i. Offer letter Annexure VI

ii. Deal confirmation Annexure VII

iii. Jumbo commercial paper Annexure V

iv. Agreement in stamp paper (Rs. 100) Annexure IV

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v. CRISIL rating Annexure III

vi. Performa for submitting to RBI Annexure II

vii. Board Resolution Annexure I

viii. Confirmation compliance with RBI requirement Annexure II & VII

Non-fund Based sources of working capital in NFL

1. Letter of Credit (L/C):

Letter of credit is commonly used in international trade. It is now also used in domestic trade.

A L/C is issued by the bank on behalf of NFL to the seller. As per the document, the bank

agrees to honour drafts/cheques drawn on it for the supplies made to NFL if the seller fulfills

the condition laid down in the L/C.

The benefits of issuing L/C to NFL are as under:

i. It eliminates the credit risk if the bank has a good standingii. It reduces uncertainty, as the seller knows the conditions that should be fulfilled to

receive payments

iii. If offers safety to NFL, as it will be making payment only in conformity with

conditions laid down in L/C

A foreign L/C requires the following documents along with it - Bills of Entry, Bills of

Exchange, bank advice copy, foreign message, Bill of Lading (airway/shipping), and

certificates.

An inland L/C requires the following documents - Bills of Exchange, bank advice copy and

certificate.

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2. Bank Guarantee

When NFL takes a loan from any party, then a banker of NFL (like SBI) takes the

responsibility i.e. if the company defaults or is unable to repay the amount, then the bank

guarantees the creditors that it will pay the stipulated amount on behalf of NFL.

Apart from the above sources, a huge amount of funds are also sourced through

1. The Central Marketing Office (CMO) i.e. through the sale of fertilizers

2. Subsidies from the Fertilizer Industry Coordination Committee (FICC)

Guidelines specified by government for investment of Surplus Funds by PSUs

There are some guidelines specified by the government for Investment of Surplus Funds by

PSUs. These guidelines put restrictions on PSUs from investing their surplus funds in risky

securities/ventures. These guidelines are important as they affect the availability of surplus

funds which can be used as an effective source of working capital. The following is a brief

overview of the guidelines specified:

1. Investments should be made only in instruments with maximum safety.

2. There should be no element of speculation on the yield obtained from the investment.

3. There should be a proper commercial appreciation before any investment decision of

surplus funds is taken. The surplus availability may be worked out for a period of

minimum one year at any point of time.

4. Funds should not be invested by a PSU at a particular rate of interest for a particular

period of time, while the PSU is resorting to borrowing at an equal or higher rate of

interest for its requirements for the same period of time.

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5. Investment decisions should be based on sound commercial judgment. The

availability should be worked out based on cash flow estimates taking into account

working capital requirements, replacement of assets and other foreseeable demands.

6. The remaining period of maturity of any instrument of investment should not exceed

one year from the date of investment where the investment is made in an instrument

already issued. Where investment is made in an instrument newly issued, the final

maturity of the instrument should not exceed one year. However, only in the case of

term deposits with banks, it can be up to three years.

7. Investments may be made in one or more of the following instruments, subject to

principles outlined in the previous paragraphs:

a. Term deposits with any scheduled commercial bank (i.e. banks incorporated

in India) and with a paid-up capital of at least Rs. 100 crores, fulfilling the

capital adequacy norms as prescribed by the RBI from time to time. These

adequacy norms should be reflected in the last published balance sheet.

b. Instruments which have been rated by an established Credit Rating agency

and have been accorded the highest credit rating signifying highest safety, e.g.

Certificates of Deposit, deposit schemes or similar instruments issued by

scheduled commercial banks/term-lending institutions including their

subsidiaries, as well as commercial papers of corporate.

c. Inter-corporate loans are permissible to be lent only to Central PSUs, which

have obtained highest credit rating awarded by one of the established credit

rating agencies for borrowings for the corresponding period.

d. Any debt instrument which has obtained highest credit rating from an

established credit rating agency.

8. Decisions on investment of surplus funds shall be taken by the PSU Board. However,

decisions involving investing short-term surplus funds up to one year maturity may

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be delegated up to prescribed limits of investment, to a designated group of

Director(s), which should invariably include CMD and Director (Finance) internally.

Where such delegation is made, the delegation order should spell out the levels of

approval and the powers of each official which should be strictly observed. Where

such delegation is made, there should be a proper system of automatic internal

reporting to the Board at its next meeting in all cases.

Fertilizer Pricing Policy of the Government

The Government of India has introduced a New Pricing Scheme (Stage III) which is

administered by the Fertilizer Industry Coordination Committee (FICC) for all urea

producing units in India. This scheme is intended to sustain and ensure the healthy

development of the urea industry based on international standards of efficiency. The FICC

consists of representatives from all fertilizer companies in India and the government. It

passes all necessary resolutions and policies and strives to safeguard the interests of fertilizer

companies.

The following is a brief summary of the major points covered in the New Pricing Scheme:

The scheme mentions the concession rates of urea for all fertilizer units.

Transportation cost of gas is computed and paid separately.

The scheme aims at greater efficiency in urea production and its distribution in the

country. It seeks to promote the usage of natural gas, the most efficient and

comparatively cheaper feedstock, for production of urea. A definite time schedule has

been provided for conversion of all non-gas based urea units to gas within the next

three years, failing which they would find their subsidy grant lowered substantially.

The policy also encourages setting up of joint venture projects abroad where gas is

readily available at reasonable prices.

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The policy aims to establish a more efficient urea movement and distribution network

with the objective of ensuring availability of urea in all parts of the country. The

government will continue to regulate movement of urea up to 50 per cent of the

production depending upon the exigency of the situation. The monitoring of the

movement and distribution of urea throughout the country will be done by an online

computer-based monitoring system.

The policy seeks to encourage urea production from indigenous urea units beyond

100 per cent of their installed capacity by introducing a system of incentives for

additional urea production. The present provision of prior government permission for

additional urea production has been dispensed with.

The policy also mentions the guidelines for freight reimbursement for all urea units.

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ANNEXURE-I

1. ANNUAL ACCOUNTS OF NFL

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ANNEXURE II

Bank Norms for Inventory and Receivables for fertilizer industry

For Nitrogenous fertilizers:

Raw materials (including stores and other items used

in the process of manufacture) (Months' consumption)

3/4 (units near refinery)

1.5 (units away from

refinery)

Stock-in-process (Months' cost of production) Negligible

Finished Goods (Months' cost of sales)

Busy season 1.75

Off season 2.25

Receivables (Months' sales)Busy season 1.50

Off season 1.75

Note: Busy season October to February

Off season - March to September

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BIBLIOGRAPHY

Financial management I.M. Pandey

Cash management R.N.Joshi

Perspective,principles,practices

How to borrow from financial & banking institutions Nabhis

Financial management K.G.Gupta

BROUCHERES:

Companys annual report 2004-2005

Companys annual report 2005-2006

Companys weekly magazine

WEBSITES:

www.nationalfertilizers.com

www.cashmanagement.com

www.workingcapital.com
http://www.nationalfertilizers.com/http://www.cashmanagement.com/http://www.workingcapital.com/http://www.nationalfertilizers.com/http://www.cashmanagement.com/http://www.workingcapital.com/

Documents

Cash Mgt on Fertilizer