FM Final Report by Paras

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Narmada Chematur Petrochemicals Limited FinancialReport

The School of Management & Entrepreneurship

Partial completion of Master of Business Administration

[Semester-II Block-III assessment]

FINANCIAL REPORTNarmada Chematur petrochemical Limited

FINANCIAL MANAGEMENT

Prepared by:

Paras K. Savasiya (0120117)

[email protected][email protected]

Submitted to:

Mrs. Meghna Dangi,Professor,

AURO UNIVERSITY,

SURAT

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mailto:[email protected]:[email protected]:[email protected]:[email protected]


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ACKNOWLEDGEMENT

I pray for the blessing of divine authority governing this world and thank him for all thecourage and power that he gave in course of development of my report.

Amongst the wide panorama of people who provided me inspiring guidance and

encouragement, I wish to take an opportunity to thank those who gave me indebted

assistance and constant encouragement for completing this project.

I would also like to express my gratitude to Mr. P. K. JAIN who welcomed me

enthusiastically and helped me in my project report. At the company, In spite of his busy

schedule, he was available whenever I needed his advice and support. He was actively

involved throughout the project.

I personally would like to thank my project guide, Prof. MEGHNA DANGI for guiding me

and also thank to my dean Dr. RANA SINGH to assisting at various stages and for helping

me in preparing this project report. I am also thankful to my faculty advisor Mr. CHIRAG

GUJARATI to help me throughout the project.

I would like to thank all the staff persons ofNarmada Chematur petrochemical Limited

(BHARUCH), they provided me with the necessary information/data and advice, and many

thanks are due for the same they could not have been successful without the valuable input

of the chief financial OfficerMr. KHAN.

I am also grateful to Mr. TEJAS FUNDAWALA, finance department executive. He

provided me a great opportunity to know the practical aspect of the financial management. I

am also thankful to Mr. DINESH RAMANI, chartered accountant who helped me to find

out the link with Mr. P. K. Jain and also for their great help. He taught me the financial

fields practical affairs in the financial department.

Last but not the least this acknowledgement could not be considered complete unless I

record my gratitude to those who have directly or indirectly helped me in completing my

project. This study could not have been successful without the valuable input of the clients

of the Narmada Chematur petrochemical Limited

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Table of Contents

Sr.

No.

Chapter Name Pg. No.

1. Introduction of Narmada Chematur petrochemicalLimited

4.

2. Introduction to Financial Department 22.

3. Working Capital Management 29.

4. Problem Statement and Research Methodology 53.

5. Data analysis and Interpretation 57.

6. Conclusion And Recommendations 92.

7. Limitation of study 95.

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Chapter 1

Introduction of

Narmada Chematur petrochemical Limited

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Introduction:

Narmada Chematur Petrochemicals Limited is an Indo-Swedish joint venturecompany of Gujarat Narmada Valley Fertilizers Company Limited

Narmada Chematur Petrochemical Limited (NCPL) was launched on 29th Sep. 1992by the companies Act 1956.

Narmada Chematur Petrochemical Limited promoted by GNFC Ltd. With M/SChematur AB Sweden and IBI Chematur Bombay has been establish and encourage toproduce annually 25000 MTPA(Metric ton Per Annum) of Aniline and 12500 MTPAToluene Di Isocyanate with Du point technology at an established project cost of 3200million rupees. The project is very beneficial to the chemical industry in the countryproviding intermediates chemical and substituting imports.

Chematur engineering deals in process licensing technical know how and basicengineering since ten year in the whole world. GNFC is also progressive company andproduces fertilizers, Chemicals, Electronics components.

Aniline and Toluene Di Isocyanate TDI projects have received financial assistancefrom IDBI, IFDC and ICICI. Nitric Acid, Water, Hydrogen and Steams are provided byGNFC where as the raw materials like Benzene, Toluene, light Diesel Oil, Sulphuric Acidand Caustic soda are also available through other companies. Electrical Power is company 6MW captive power plants CPP.

Until now Aniline was produced by Hindustan Organic Chemical Ltd. Only but nowNCPLs product is being better in quality and in high demand. TDI is tube manufacturedfirst time in India using Di Nitro Toluene (DNT), Meta Toluene Di amine (TDI), andPhosgene. This will help in saving foreign exchange.

NCPL has already got permission from Gujarat Pollution Control Board regardingeffluence discharge effluent from TDI is tube completely incinerated implant. All kind ofsafety measures are adopted in both aniline and TDI plant to handle such hazardouschemical.

In August 1994, NCPL came out with a public issue to part finance theimplementation of Aniline and TDI plants.

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Beside Aniline and TDI, NCPL also manufactures Nitrobenzene, Liquid Nitrogen,Meta Toluene Di- amine and Ortho Toluene Diamine. It also trying to explore opportunitiesin the rigid polyurethane business arena, thereby, making it among the most customer

oriented companies in its field.

The success story of NCPL is one of identifying opportunity areas and providinginternational quality product at competitive prices. NCPL has thus, aide a giant leap towardsredefining success.

Accredited with ISO 9001: 2000, ISO 14001: 1996 and OHSAS 18001: 1999certification by Loyds Register Quality Assurance (LRQA).

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ISO 14001: 1996

Environment Policy

We at Narmada Chematur Petrochemicals Limited, engaged in the production of world classAniline and toluene Di Isocyanate commit ourselves to:

Develop and maintain Environmental Management System for continual

improvement in preservation of Environment and pollution abatement in the field ofair, water land and solid waste generation.

Comply with applicable Environmental legislation and regulations.

Conserve energy, raw material and natural resources.

Prudent selection of environment friendly technology as possible, with a view to

minimize environmental impact.

Effective waste management with emphasis on waste minimization and by product

recovery.

Bring awareness amongst employees, Vendors and Contractor for cleaner

environment by ensuring their involvement & imparting required training. Promoteawareness amongst local surrounding community for preservation and maintainingclean environment.

Develop and maintain the green belt and landscape in & around the company.

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OHSAS 18001: 1999

Occupational Health and Safety Policy

We at Narmada Chematur Petrochemicals Limited, engaged in the production of world classAniline and toluene Di Isocyanate commit ourselves to:

Development and continual improve the Occupational Health and Safety

performance and system.

Maintain proactive management system for periodical review of various objectives

& targets related to Occupational Health & Safety.

Ensure compliance of all applicable legal & other requirements prescribed under

various Acts & regulations.

Enhance awareness and involvement of our Employees, Contractors and Suppliers

through effective communication & training for safe work practices.

Prevent & minimize risk related to occupational health & safety.

Reduce the accidents and harm to environment, people and property.

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ISO 9001: 2000

Quality Policy

We are a chemical manufacturing Company and strive to achieve utmost customersatisfaction by delivering quality products- Nitrobenzene, Aniline, Toluene Di-isocynate,Ortho Toluene Di-amine, Meta Toluene Di- amine and Hydrochloric acid.

We are committed to excel in business of manufacturing and supply of quality products.

To accomplish above, we are committed to:

Continually upgrade manufacturing process and technology & strive for

enhancement in overall productivity. Develop, implement and continually improve the effectiveness of the Quality

Management System in accordance with the requirement of ISO 90001: 2000.

Impart training to employees for continual improvement in their performance.

Comply with statutory requirements related to products.

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Main Products of NCPL:

ANILINE Capacity 20,000 MTPA (revamped to 25,000 MTPA) Aniline plant of

Narmada Chematur Petrochemicals Limited (NCPL) is Indias largest single streamplant and is based on Du point, USA technology which produces the world classquality Aniline.

TDI (Toluene Di Isocyanate): Capacity 10,000 MTPA (revamped to 12,000 MTPA).

TDI plant of Narmada Chematur Petrochemicals Limited is SAARC countrys onlyplant & is based on Du-point, USA technology which produces the world classquality of Toluene Di Isocyanate.

NITROBENZENE: Capacity 27,000 MTPA Nitrobenzene plant is based on Pump

Nitration technology provided by Chematur Engineering AB, Sweden. It produced as

an intermediate to the Aniline plant.

MDI (Methylene DI-Phenylene Di Isocyanate): Meta Toluene Diamine (MTD) is

high purity aromatic Diamine> MTD finds its primary commercial market as anintermediate in the manufacture of Toluene Di-Isocynate (TDI). MTD can also beused as chain extender, cross linker or intermediate in many applications like rubberchemicals, dyes production and in polyamides.

By-products:

Ortho Toluene Diamine

Hydrochloric Acid

Sodium Hypochlorite

Weak Nitric Acid

Dilute Sulphuric Acid

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Raw Materials:

Material Place Cost

Benzene Reliance , IOCL 12000 Rs/KL

Sulphuric Acid GSFC , GACL 900 Rs/MT

Nitric Acid GNFC 7800 Rs/MT

Hydrogen GNFC 18000 Rs/MT

Nitro Benzene NCPL 18000 Rs/MT

Site Location:

NCPL plant is proposed to be located at Narmada Nagar which is 7 kms away from Bharuchcity on National highway No. 8. This site is selected on bases of following consideration,

There is good facilities for transport system because road line are much nearer so

they are useful for easy transport of raw material and products

Raw material sources are near

Land is cheap

Cheap labors are available from village

There is no pollution problem for residence area because it is away from main city

and village

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List of Competitors:

GNFC (NCPL Unit) has two main products: 1) Aniline and 2) TDI.

ANILINE: The names of competitors are as follows:

USA: 1) Rubicon

2) BASF

3) Bayer

4) Du Pont

Brazil: Bayer

Belgium (Europe): Bayer

U. K.: ICIChina: : Manjing Chemicals

India: 1) Hindustan Organic Chemicals (HOC)

2) Anirox Pigments Company at Dhanbad.

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TDI: GNFC (NCPL Unit) enjoys monopoly for TDI. GNFC (NCPL Unit) is the first and

the only producer of TDI not only in India but also amongst entire SAARC region. GNFC

(NCPL Unit) faces competition from overseas producers only.

PRICE: -

The pricing methods of various products and by - products is kept confidential, the prices of

the product and the material to be sold is solely based on the international markets of the

chemicals produced at GNFC (NCPL Unit). The prices vary from party to party because in

few cases GNFC (NCPL Unit) has greater strength in bargaining and sometime it is the other

way round.

Factors influencing the prices of the chemicals produced:

Raw material costs

Market Scenario domestic as well as international market.

Exchange rates

Market for the derivatives of companys products

Production capacity of the industry

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Seasonal Fluctuations.

Amalgamation with GNFC Ltd.

The Company is a subsidiary Company of GNFC Ltd. The Company was promoted as a

joint venture between GNFC, Chematur Engineering AB, Sweden, the technical collaborator

and its Indian associates, IBI Chematur (Engineering & consultants) Ltd. for manufacture of

TDI and Aniline. IBI Chematur (Engineering & consultants) Limited was associated for

detailed engineering of the Aniline and TDI plants. The technical collaborators were also

ready for equity participation. Accordingly a separate company was formed. The Technical

collaborator having divested its holding in the Company and Chematur Group Directors on

the board of the Company, having thereafter resigned the Company has ceased to be joint

venture Company.

The Company has evolved with strong umbilical ties with GNFC financially through direct

and indirect financial support to the Company, operationally through supply of key inputs

from a neighboring premise and managerially through deputation of GNFC employees to thekey positions in the Company.

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In the background of Globalization it is found that Indian Corporate sector (Public Sector

included) is undertaking massive consolidation both at the industry level and at group levels

through merger.

GNFC is already in the business of industrial chemical and there would be seamlessintegration and coordination of operations of both the Companies both legally and

organizationally.

The Board of Directors has considered various aspects and found that it would be advisable

for the Company to merge the Company with its holding Company, GNFC. The necessary to

put the amalgamation in effect have begun from 15th February, 2007.

Reasons for Merger

As the return at GNFC (NCPL Unit) were much better in comparison to GNFC Ltd.

The investment at GNFC (NCPL Unit) was Rs.400crores and the return was

Rs.100crores having manpower of 314 employees.

Whereas at GNFC Ltd. the investment was Rs.3000crores and the return was

Rs.210crores having manpower of 2500 employees.

Major raw material supplier for GNFC (NCPL Unit) was GNFC Ltd. so in order to get

the tax benefit like elimination in paying Excise Duty which was paid earlier.

Merger will ensure smooth supply of raw materials for GNFC (NCPL Unit).

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GNFC (NCPL Unit) has paid of its all dues. Company has also invested Rs.10crores as

fixed deposit during last financial year which depicts sound position of the Company in the

market.

Expansion: -

The major reason for the merger is that GNFC (NCPL Unit) alone cannot raise funds

for its future expansion of 50000 MT as capacity.

VISION:

To be a world class, growth oriented organization, caring forpeople, customers and neighborhood, achieving corporate

excellence through competence and dynamism with a firmcommitment to quality, safety, health and the environment

Mission:

To establish a global presence as a producer ofinternational quality specially chemicals meeting thecustomers expectation and strive towards excellencethrough proficiency in operating the eco-friendly stateof the art technology.

Values:

Our values are based on the foundation of our unfaltering commitment to our customer,shareholders and colleagues. We work as a team with complete accountability and sheerhonesty dignity and respect to create a safe, healthy and pleasant workplace. A firm belief in

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innovation and an optimum use of our resources ensure a better productivity andpreservation of the environment.

Technology:

Aniline is manufactured by NCPL using Du point technology from USA. Thistechnology is rated as being more superior to other technique. This aniline manufactured byNCPL is of a much superior quality than that manufacture by competitions. Also NCPL isthe only company in India that uses Du point technology manufactured Aniline. Anilineplant of NCPL is the largest in India.

Various Plant at NCPL:

Nitro Benzene plant

Sulphuric Acid Concentration plant

Aniline Plant

Di Nitro Toluene plant

Meta toluene Di amine plant

Phosgene plant

Toluene Di Isocyanate plant

Carbon Monoxide Plant

Nitrogen plant

Effluent Treatment Plant

DM plant

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Organization Structure

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BOARDS OF DIRECTORS

CHAIRMAN

MAMAGING DIRECTOR

ADDITIONAL

MAMAGING DIRECTOR


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GNFC Ltd. at a GLANCE

Gujarat Narmada Valley Fertilizers Company Limited (GNFC) is a joint sector enterprise

promoted by Government of Gujarat and the Gujarat State Fertilizer Company Ltd. (GSFC).

It was set in Bharuch, Gujarat in 1976. It is located at an extremely prosperous industrial

belt.

GNFC started its manufacturing and marketing operation by setting up in 1982. It is a

worlds largest single stream ammonia urea fertilizer plant. Over the next few years,

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CHIEF MANAGER

SENIOR MANAGER

MANAGER / DEPUTY MANAGER

OFFICERS

STAFF


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GNFC successfully commissioned different projects in fields as diverse as chemicals,

fertilizers, electronics and IT.

Since inception, GNFC has worked towards an extensive growth as a Company. The

Company has taken steps towards the environment protection and to achieve the progressive

vision.

Year of the establishment: May 10, 1976

Bankers: Following Banks are main bankers of GNFC

Bank of Baroda (Lead Banker)

State Bank of India

Bank of India

Canara Bank

State Bank of Saurashtra

HDFC Bank

ICICI Bank

Company Secretary: Shri R.B. Panchal

Auditors

M/s CC Chokshi & Company,

Charted Accountants, Ahmedabad.

BOARD OF DIRECTORS:

Shri S. G. Mankad (IAS)Chairman

Dr. Manjula Subramaniam (IAS)

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Dr. Avinash Kumar (IAS)

Shri. P. K. Taneja (IAS)

Shri. Pankaj Kumar (IAS)

Dr. T. T. Ram Mohan

Dr. Ashok Shah

Shri. D. C. Anjaria

Shri. P. N. Vijay

Shri Balwant Singh (IAS) MD

Shri. T. Natarajan (IAS) Joint MD

Executive Directors

Shri D.S. Taunk

Shri P.B. Nanavati

Shri R.P. Vyas

Subsidiary: Narmada Chematur Petrochemicals Ltd. (NCPL) is now merged with GNFC

Ltd. w.e.f 15-02-2007

ORGANIZATION STRUCTURE of GNFC Ltd.

GNFC is the company having organization structure of line & staff type. There is a clear line

of authority and responsibility, i.e. authority flows from top to bottom level.

Following is the authority structure of GNFC:

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Staff


Board of Directors

Chairman

Managing Director

Executive Director

General Manager

Additional General Manager

Chief Manager

Senior Manager

Manager

Officer

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Chapter 2

Introduction to

Finance

Department

Introduction: -

The financial performance of the Company was buoyant during FY 05-06. The Company

achieved ever highest profit tax of Rs. 5,327 lacs during the FY 05-06 as compared to Rs.

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Note: - After merger the Sr. Manager of GNFC (NCPL Unit) is required to report the

Additional General Managers of GNFC Ltd.

Activities of Finance Department: -

1) To make annual A/cs of Co.

2) To make the budgets of all department.

3) Raising funds from banks & financial institutions.

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Executive Director

General Manager

Additional G.M

Sr. Manager

Officer Officer Officer Officer

Staff

(3)

Staff

(3)

Staff

(3)

Staff

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4) Regular repayment of loan & interest.

5) To make payment of creditors.

6) To maintain the debtors & even take legal action in case of overdue.

Areas covered by different officers: -

(1) Banking

(2) Service Tax

(3) Use of funds

(4) Collection of funds

(5) Income tax, Sales tax, Central Accounts

(6) Budgeting

(7) Raw material

(8) Costing

(9) Insurance

(10) Concurrence

(11) Purchase

(12) Stores & stores

Purchase: -

Purchase order (P.O) preparation is the 1st step in purchase section at finance department.

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Details available in Purchase Order (P.O.) are like Party name, dated, Item wise quantity,

etc.

Sr. No. GNFC Code Qty. Unit Price Unit Total

Terms & Conditions

Once goods are received in stores department then they issue the Goods Receipt Note &they send it at Finance Department. After receiving G.R. Note Finance department would

make posting at invoice section in SAP.

Once entry is parked, then it can only be reversed and no modifications can be made in it.Payment is released and majority of it is done through cheques.Raw Material: -

Annual contracts take place with suppliers.

As it is international product so price changes monthly & generally upward trend is

found.

Monopoly product so advance payment takes place and Real Time Gross Settlement

(R.T.G.S.) is done.

To acquire weekly discount proper care is to be taken off.

Costing: -

The Company used to do costing is done on a monthly basis.

The strategy used for the costing purpose is in the following way: -

Consumption norms x per unit price

Variable cost + Expenses

Budgeting: -There is an established system of preparing operational as well as procurement budget for

various cost as well as profit centers at the beginning of each financial year. Actual

expenditure is closely monitored against such budget at specific time intervals. Variances are

analyzed and corrective actions are taken accordingly.

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Steps taken while preparing Budget: -

Initially production budget is prepared for the company.

Points considered in Production Budget: -

No. Of days plant shall run.

Production level based on past experience.

Availability of major raw material i.e. from GNFC Plant.

(Minor raw material supplier like reliance is not taken into much consideration as

it will supply material somehow, but if GNFC plant gets closed then it affects theNCPL plant.)

Once production budget is prepared then it goes to different departments like marketing,

technical, mechanical, electrical, civil, etc. All the different departments would prepare their

own budget based on their past records.

(Weighted average price for last few years is taken into consideration. Expense also taken

into consideration on the basis of weighted average expense.)

The last step is to combine different budget prepared by different departments and the

main budget is being prepared and this is required to get approved by board of directors.

Note: - As the budget was prepared before merger i.e. on 15 th February 2007 so it goes on

in the financial year 2007-08.

Insurance: -

Different types of Insurance at GNFC (NCPL Unit): -

(1) Mega Insurance,

(2) Marine Insurance,

(3) Open Insurance.

Under mega insurance everything gets insured.

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Insurance Process: -

It is required to get recommended from department along with getting value for insurance.

In the next step, GNFC (NCPL Unit) get quotations and select the lowest price.

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Chapter 3

Working Capital

Management

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Introduction of Working Capital Management:

Working capital management is concerned with the problems that arise in attempting tomanage the current assets, the current liabilities and the inter relationship that exists betweenthem. The term current assets refer to those assets, which in the ordinary course of businesscan be, or will be converted into cash within one year without undergoing diminution in valueand without disrupting the operations of the firm. The major current assets are cash,marketable securities, accounts receivable and inventory. Current liabilities are those

liabilities, which are intended, at their inception, to be paid in the ordinary course of business,within a year out of the current assets or earnings of that concern. The basic current liabilitiesare account payable, bank overdraft and outstanding expenses. The goal of working capitalmanagement is to manage the firms current assets and liabilities in such a way that asatisfactory level of working capital is maintained. So I include mainly above things in study.

1. Ratio analysis2. Inventory Management3. Receivable Management4. Cash Management

DEFINITION AND CONCEPT:

There are two concepts of working capital: GROSS and NETThe term gross working capital also refers to as working capital, means that total currentassets.The term net working capital can be defined in two ways:

1) The most common definition of net working capital (NWC) is the difference betweencurrent assets and current liability.

2) Alternate definition of NCW is that portion of current assets, which is financed withlong term fund.

By

Financial Management

M.Y.Khan

P.K.Jain

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NCW is commonly defined as the difference between current assets and current assets andcurrent liability. Efficient working capital management requires that firms should operatewith some amount varying from firm and depending. Among other things on the nature ofindustry.

OPERATING CYCLE CONCEPT

The operating cycle can be said to be at heart of the for need for working capital. Thecontinuing flow from cash to suppliers, to inventory, to account receivable and back into

cash is what is called the operating cycle.

In other words the term cash cycle refers to the length of time necessary to complete thefollowing cycle of events:

Raw material & storage stage

Work in process stage

Finished goods inventory stage

Debtors collection stage

This stage affects cash flow, which most of the time neither synchronized nor certain. Thefirm is therefore required to invest in current assets for a smooth and uninterruptedfunctioning and to maintain liquidity to purchased raw material and pay expenses.

The operating cycle is diagrammatically represented as under:

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Cash inflows and outflows do not match, firms have to necessarily keep cash or invest in

short-term liquid securities so that they will be in a position to meet obligations when theybecome due. Similarly, firms must have adequate inventory to guard against the possibilityof not being able to meet demand for their products.

The operating cycle consist of three phases. In phase one, cash gets converted intoinventory. This includes purchase of raw materials, conversion of raw materials into work-in-progress, finished goods and finally the transfer of goods to stock at the end of the end ofthe manufacturing process. In phase 2 of the cycle, the inventory is converted into receivableinto receivables as credit sales are made to customers.

The last phase that is phase 3 represents the stage when receivables are collected. This phase

completes the operating cycles. This is the firms has receivables are collected. This phasecompletes the operating cycles. This the firm has moved from cash to inventory, toreceivables and to cash again.

FORMULA FOR OPERATING CYCLE:

GROSS OPERATING CYCLE PERIOD (GOCP)

= Raw Materials storage Period

+ Period for Conversion of raw Materials in to finished goods

+ Finished Goods storage period

+ Average Collection period of Sales

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Raw material Work-in-process Finished goods

SalesDebtorsCash


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NET OPERATING CYCLE PERIOD (NOCP):

= GOCP - Average Payment Period

Sources of Additional Working Capital

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Sources of additional working capital include the following:

Existing cash reserves Profits (when you secure it as cash !)

Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretchthe financial resources of the business. This is called overtrading. Early warning signsinclude:

Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash

payment Bank overdraft exceeds authorized limit

Seeking greater overdrafts or lines of credit

Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies

Management pre-occupation withsurvivingrather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending

receipt of a cheque).

PERMANENT AND TEMPORARY WORKING CAPITAL:

The operating cycle creates the need for current assets (working capital). The need does notcome to an end after the cycle is completed. It continues to exist. Business activity does notcome to end after the realization of cash from customers. For a company the processescontinues and the need for a regular supply of working capital. The magnitude of workingcapital is fluctuating. To carry on business minimum level of working capital is necessary ona continuous and uninterrupted basis. For all practical purpose this requirements has to bemeet permanently as with other fixed assets. This requirement as referred a permanent orfixed working capital. Any amount over an above the permanent level of working capital istemporary or variable working capital. Temporary working capital is fluctuating inaccordance with seasonal demand.

CHANGES IN WORKING CAPITAL

The changes in the level of working capital occur for the three basic reasons:

1. Changes in sales and operating expenses: the first factor causing change in theworking capital requirement is a change in the sales and operating expenses. The

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changes in this factor may be due to three reasons: (1) there may be a long run trendof change. (2) Cyclical changes in the economy leading to up and down in businessactivity influence the level of working capital.(3) Seasonality can be the operatingexpenses rise or falls has a similar effect on the level of working capital.

2. Policy changes: The second major cause of changes in the level of working capitalis because of policy changes initiated by the management. The term current assetspolicy may be defined as the relationship between current assets and sales volume. Afirm following s conservative policy in this respect having a very high level ofcurrent assets in relation to sales may deliberately for a less conservative policy andvice versa.

3. Technological Changes: Technological changes can cause significant changes inthe level of working capital. If new process emerges as a result of technological

development, which shortens the operating cycle, it reduces the need for workingcapital and vice versa.

DETERMINANTS OF WORKING CAPITAL:

The following factors are involved in a assessment of the quantum of working capitalrequired:

1) General Nature of Business: The working capital requirements of an enterprise arebasically related to the conduct of business. Enterprises fall into broadcategories depending on the nature of their business. For instances, publicutilities have certain features which bearing on their working capital needs.The two relevant features are, one cash sale, and second sale of services. Inview of these features company do not maintain big inventories and thereforerequire less working capital.

2) Production cycle: The term production or manufacturing cycle refers to the timeinvolved in the manufacturing of goods. It covers the time span between theprocurement of raw material and the completion of the manufacturing processleading to the production of finished goods. There is some time gap beforeraw material becomes finished goods. To sustain such activities the need forworking capital is oblivious. The longer the time span , the larger will be thefunds to be ied up funds and therefore the larger is the working capital neededand vice versa.

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3) Business cycle: Business fluctuation lead to cyclical and seasonal changes which, inturn, cause a shift in the working capital position particularly for capitalrequirements. The variation in business conditions may be in two directions :(1) upward phase when boom condition prevail, and (2) downswing phase

when economy activity is marked by a decline. During the upswing ofincrease sales and receipt of cash as well as to finance purchase of additionalmaterial to cater to the level of activity.

4) Production Policy : In case of certain line business the demand for products isseasonal, that is they are purchased during certain month of the year as in thecase

5) Credit policy:The credit policy relating to the sales and purchase also affects theworking capital. The credit policy influences the requirement of working

capital in two ways: (a) through credit terms granted by the firm to itscustomers/buyers of goods; (b) Credit terms available to the firm from itscreditor.

RATIO ANALYSIS

Ratio analysis is a widely used of financial analysis. It is defined as the systematic use ofratio to interpret the financial statements so that strengths and weakness of a firm as well asits historical performance and current financial condition can be determined. The term ratiorefers to the numerical or quantitative relationship between two items variables.

The alternative, methods of expressing items, which are related to each other, are forpurposes of financial analysis, referred to as ratio analysis. It should be noted that computingthe ratio does not add any information not already inherent in the above figures of profitsand sales. What ratios do is that they reveal the relationship in a more meaningful way so asto enable us to draw conclusions from them.

The rational of ratio analysis lies in the fact that it makes related information comparable. Asingle figure by itself has no meaning but when expressed in terms of a related figure, ityields significant inferences. For instance, the fact that net profits of a firm amount to say,Rs. 10 lacks throws no light on its adequacy or otherwise. Figure of net profit has to beconsidered in relation to other variables. How does it stand relation to sales? What does itrepresent by way of return on total assets used or total capital employed? If therefore netprofits are shown in terms of their relationship with items such as sales, assets, capital

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employed equity capital and so on; meaningful conclusions can be drawn regarding theiradequacy.

Ratio is very useful to for grasping the message of the financial statement and understanding

them. It helps to enlarge and understand the financial health and travel of the business, itpast performance makes it possible to forecast about future state of the business. The ratiouse to measure the effectiveness of the employment of resources is termed as Activity Ratioor Turnover Ratio.

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capitalutilization.

Ratio Formulae Resul

tInterpretation

Stock

Turnover(in days)

Average Stock

* 365/Cost of GoodsSold

= xdays

On average, you turn over the value of your entire stockevery x days. You may need to break this down into

product groups for effective stock management.Obsolete stock, slow moving lines will extend overallstock turnover days. Faster production, fewer productlines, just in time ordering will reduce average days.

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Receivables

Ratio(in days)

Debtors * 365/Sales

=xdays

It take you on average x days to collect monies due to you.If your official credit terms are 45 day and it takes you 65

days... why ?One or more large or slow debts can drag out the averagedays. Effective debtor management will minimize thedays.

Payables Ratio

(in days)

Creditors *365/

Cost of Sales(or Purchases)

=x

days

On average, you pay your suppliers every x days. If younegotiate better credit terms this will increase. If you payearlier, say, to get a discount this will decline. If you

simply defer paying your suppliers (without agreement)this will also increase - but your reputation, the quality ofservice and any flexibility provided by your suppliers maysuffer.

Current Ratio

Total CurrentAssets/

Total CurrentLiabilities

= x

times

Current Assets are assets that you can readily turn in tocash or will do so within 12 months in the course ofbusiness. Current Liabilities are amount you are due topay within the coming 12 months. For example, 1.5 times

means that you should be able to lay your hands on $1.50for every $1.00 you owe. Less than 1 times e.g. 0.75means that you could have liquidity problems and beunder pressure to generate sufficient cash to meetoncoming demands.

Quick Ratio

(Total CurrentAssets -Inventory)/Total CurrentLiabilities

= xtimes

Similar to the Current Ratio but takes account of the factthat it may take time to convert inventory into cash.

WorkingCapital Ratio

(Inventory +Receivables -Payables)/Sales

As %Sales

A high percentage means that working capital needs arehigh relative to your sales.

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Other working capital measures include the following:

Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc.

Debtor concentration - degree of dependency on a limited number of customers.

Once ratios have been established for your business, it is important to track them over timeand to compare them with ratios for other comparable businesses or industry sectors.

When planning the development of a business, it is critical that the impact of working capitalbe fully assessed when making cash flow forecasts. Our financial planning softwarepackages - Ex-Plan and Cash flow Plan - can facilitate this task as they provide for thesetting of targets for receivables, payables and inventory.

Inventory Management

Inventory is composed of assets that will be sold in future in the normal course of businessoperations. The assets which firms stores as inventory in anticipation need are (a) rawmaterials (b) work-in-process, (c) finished goods. The raw material inventory contains itemsthat are purchased by the firm others and are converted into finished goods through the

manufacturing process. The work-in-process inventory consists of items currently beingused in the production process. Finished goods represent final or completed products, whichare available for sale.

The job of the financing manager is to reconcile the conflicting viewpoint of the variousfunctional areas regarding the appropriate inventory levels in order to fulfill the overallobjective of maximizing the owners wealth.

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Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cashresources of a business. Insufficient stocks can result in lost sales, delays for customers etc.

The key is to know how quickly your overall stock is moving or, put another way, how long

each item of stock sit on shelves before being sold. Obviously, average stock-holdingperiods will be influenced by the nature of the business. For example, a fresh vegetable shopmight turn over its entire stock every few days while a motor factor would be much sloweras it may carry a wide range of rarely-used spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all thecomponents to be assembled on a particular today, arrive at the factory early that morning,no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up littlespace, minimize stock-holding and virtually eliminate the risks of obsolete or damagedstock. Because JIT manufacturers hold stock for a very short time, they are able to conservesubstantial cash. JIT is a good model to strive for as it embraces all the principles of prudent

stock management.

The key issue for a business is to identify the fast and slow stock movers with the objectivesof establishing optimum stock levels for each category and, thereby, minimize the cash tiedup in stocks. Factors to be considered when determining optimum stock levels include:

What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without compromising best

sellers?

Remember that stock sitting on shelves for long periods of time ties up money which is notworking for you. For better stock control, try the following:

Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory.

Apply tight controls to the significant few items and simplify controls for the trivial

many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the

longer you keep it. Consider having part of your product outsourced to another manufacturer rather than

make it yourself. Review your security procedures to ensure that no stock "is going out the back

door!"

Higher than necessary stock levels tie up cash and cost more in insurance, accommodationcosts and interest charges.

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Our range of financial planners, Ext-Plan and Cash flow Plan, contain extensive facilities forexploring alternative stock-holding strategies. See also the white paper on Making Cashflow Forecasts and Checklist for Improving Cash flow.

OBJECTIVE OF INVENTORY MANAGEMENT:

The basic responsibility of the financial is to make sure the firms cash flows are managedefficiently. Efficient management of inventory should ultimately result in the maximizationof the owners wealth. It was indicated that in order to minimize cash requirements,inventory should be turned over as quickly as possible, avoiding stock-outs that might resultin closing down the production line or lead to a loss of sales.

The main objective of inventory management consists of two parts :

1. To minimize investment in inventory2. To meet demand for the product by efficiently organizing the production and sales

operations.

The firm should minimize investment in inventory implies that maintaining inventoryinvolves costs, such that the smaller the inventory, the lower is the cost to the firm. Butinventory also provide benefits to the extent that facilitate the smooth functioning of thefirms.

COSTS OF HOLDING INVENTORY:

The costs associated with inventory fall into two basic categories:(A) Ordering costs or set-up costs(B) Carrying costs.

{A} Ordering Costs or Set-up Cost: This category of costs is associated with theacquisition or ordering of inventory. Firms have to place orders with supplier to replenishinventory of raw materials. The expenses involved are referred to as ordering cost. Orderingcosts involved are referred to as ordering cost. Ordering costs involved in (1) preparing apurchased order or requisition form and (2) receiving. Inspecting and recording the goods

received to ensure both quantity and quality. The cost of acquiring materials of clerical costsand cost of stationary. It is therefore, called as set-up-cost. They are generally fixed perorder placed, irrespective of the amount of the order. The larger the order placed, or themore frequent the acquisition of inventory made, the higher are the costs. From a differentperspective, the larger the inventory, the fewer are the acquisitions and the smaller the ordercosts.

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{B} Carrying costs or Set-up Cost: The second broad category of cost associated withinventory is the carrying cost. They are involved in maintaining or carrying inventory. Thecost of holding inventory may be divided into two categories:

a) Those that arise due to storing of inventory.The main components of this category of carrying costs are (1) storing cost,that is tax depreciation, insurance, and maintenances of the building. (2)Insurance of inventory against fire and theft. (3) Deterioration in inventorybecause of pilferage, fire and price decline (4) Serving costs, such as, laborfor handling inventory, clerical and accounting costs.

b) The opportunity cost of funds.This consists of expenses in raising funds to finance the acquisition ofinventory. If funds were not locked up in inventory, they would have earned areturn. This is the opportunity cost of funds or the financial cost component

of the cost.

The sum of the order and carrying cost represent the total cost of inventory. This iscompared with the benefits arising out of inventory to determine the optimum level ofinventory.

BENEFITS OF HOLDING INVENTORY:

Inventories perform certain basic functions, which are of crucial importance in the firmsproduction and marketing strategies. The basic function of inventory is to act as a buffer to

decuple or uncouple the various activities of a firm. The key activities are (1) Purchasing (2)production and (3) selling.

(a) Benefits in purchasing:

If the purchasing of the raw materials and other goods is not tied to production / sales,that is a firm can purchase independently to ensure the most efficient purchase, severaladvantages would become available. In the first place a firm can purchase larger quantitythen is warranted by usage in production or sales level. This will unable it to avail ofdiscounts that are available on bulk purchase. It will lower the ordering cost. Second, firmcan purchase goods before anticipated or announce price increasing. This will lead to a

decline in the cost of production. Inventory serves as hedge against price increase as will asshortage of raw materials.

(b) Benefits in production:

Finished goods inventory serves to uncouple and sales. This enables productions at arate different from that of sales. That is, production can be carried on at a rate higher orlower then the sales rate. This would be of special advantage to firms with seasonal sales

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pattern. In their case the sales rate will be higher than the production rate during a part of theyear and lower during the off-season. The choice before firm is either to product at a level tomeet the actual demand higher production during peak season and lower production duringoff-season, or produce continuously throughout the year and build up inventory, which will

be sold during the period the seasonal demand. Inventory permits least cost productionscheduling; production can be carried on more efficiently.

(c) Benefits in sales:

The maintenance of inventory also helps a firm to enhance its sales efforts. If thereare no inventories of finished goods, the level of sales will depend upon the level of currentproduction. A firm will not be able to meet demand instantaneously. There will be a lagdepending upon the production process. If the firm has an inventory, actual sales will nothave to depending upon the production process. If the firm has an inventory, actual sales willnot have to depend on lengthy manufacturing processes. It the firm has an inventory; actual

sales will not have to depend on lengthy manufacturing processes. Thus, inventory serves tobridge the gap between current production and actual sales.

The manor problem areas that comprise the heart of inventory control are (1) theclassification problem to determine the type of control required (2) the order quantityproblem (3) the order point problem (4) safety stock.

a. classification problem : ABC system :

The first in the inventory control process is classification of difference type ofinventories to determine the type and degree of control required from each. The ABC

system is a widely used classification technique to identify various items of inventory forpurpose of inventory for purpose of inventory control. This technique is based onassumption that a firm should not exercise the same degree of control on all items ofinventory.

On the basis of the involved , the various inventory items are, according to this system,categories into three classes : {1}A,{2}B{3}C, the items included in group A involvesthe largest investment. Therefore, inventory control should be the most rigorous andintensive and the most sophisticated inventory control technique should be applied tothese items. The C group consists of items of inventory, which involve relatively smallinvestment although the number of items is fairly large. These items deserve minimum

attention. The B group stands midway. It deserves less attention then A but more than C.

b. Order quantity problem : Economic order Quantity (EOQ) Model :

On the basis of ABC analysis, the management becomes aware of the type of control thatwould be appropriate for each of the three categories of the inventory items. The

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problem related to inventories like: how much inventory should be brought? Should therequirement of materials during which period of time? Should the quantity to bepurchased be large or small?

The EOQ model is the technique to determine the economic order quantity. The EOQmodel can be illustrated by the long analytical approach or trial and error approach.

Based on EOQ model several working notes are as follows:

i. Number of orders = Total inventory requirement / order sizeii. Average inventory = order size /2

iii. Total carrying cost = avg. inventory x Carrying cost per unitiv. Total ordering cost = No. of order x cost per orderv. Total cost = Cost of items purchased + Total carrying and ordering costs.

EOQ = 2AB/C

A = annual usage of inventoryB = buying cost per orderC = carrying cost per unit

c. Order point problem :

The EOQ technique determines the size of an order to acquire inventory so as to minimizethe carrying as well as the ordering cost. The reorder point is stated in terms of level of

inventory at which an order should be place on replenishing the current stock of inventory.Recorder point may be defined as the level of inventory when fresh order should be placedwith the supplier for procuring additional inventory equal to the economy order quantity.The formula for calculating reordering reorders point.

The reorder point = Lead time in days x Avg. daily usage of inventory

The term lead-time refers to the time normally taken in receiving the delivery after placingorder with the supplier. It covers the time-spent from the point when a decision tools placedthe order for the procurement of inventory is made to the actual receipt of the inventory bythe firms. The avg. usage means the quantity of inventory=consumed daily.

d. safety stock :

safety stock can be defined as the minimum additional inventory to serve assafety margin or buffer or cushion to meet an anticipated increase in usageresulting from an unusually high demand and or an uncontrollable late receipt incoming inventory. The safety stock out cost refers to the stock associatedwith the shortage (stock-out) of inventory.

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Receivable Management

Cash flow can be significantly enhanced if the amounts owing to a business are collectedfaster. Every business needs to know.... who owes them money.... how much is owed.... howlong it is owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business; in particular on small businesses who can

least afford it. If you don't manage debtors, they will begin to manage your business asyou will gradually lose control due to reduced cash flow and, of course, you couldexperience an increased incidence of bad debt. The following measures will help manageyour debtors:

1. Have the right mental attitude to the control of credit and make sure that it gets thepriority it deserves.

2. Establish clear credit practices as a matter of company policy.3. Make sure that these practices are clearly understood by staff, suppliers and

customers.4. Be professional when accepting new accounts, and especially larger ones.

5. Check out each customer thoroughly before you offer credit. Use credit agencies,bank references, industry sources etc.

6. Establish credit limits for each customer... and stick to them.7. Continuously review these limits when you suspect tough times are coming or if

operating in a volatile sector.8. Keep very close to your larger customers.9. Invoice promptly and clearly.10. Consider charging penalties on overdue accounts.11. Consider accepting credit /debit cards as a payment option.12. Monitor your debtor balances and ageing schedules, and don't let any debts get too

large or too old.

Recognize that the longer someone owes you, the greater the chance you will never get paid.If the average age of your debtors is getting longer, or is already very long, you may need tolook for the following possible defects:

weak credit judgment

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poor collection procedures lax enforcement of credit terms

slow issue of invoices or statements errors in invoices or statements

Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally demandimmediate attention. Look for the warning signs of a future bad debt. For example,

longer credit terms taken with approval, particularly for smaller orders

use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one which most people dislike for many reasons and thereforeput on the long finger because they convince themselves there is something more urgent orimportant that demands their attention now. There is nothing more important than gettingpaid for your product or service. A customer who does not pay is not a customer.

Here are a few ideas that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments. Track and pursue late payers.

Get external help if your own efforts fail. Don't feel guilty asking for money.... it is yours and you are entitled to it.

Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder.

It lessens the problem. When asking for your money, be hard on the issue - but soft on the person. Don't

give the debtor any excuses for not paying. Make it your objective is to get the money - not to score points or get even.

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Objective of Receivable Management:

The term receivables defined as debt owned to the firm by customers arising from sales ofgoods or cervices in the ordinary course of business. Account receivable represents anextension of credit to customer, allowing them a responsible period of time in which to payfor the goods receive.

The credit sales are generally made on open account in the sense that there is no formalacknowledgement of debt obligation through a financial instrument. Extension of creditinvolves risk and cost. Management should weigh the benefits as cost to determine the goalof receivables management. The objective of receivable management is to promote sales andprofit until that point reacted where the return on investment is further funding receivable isless than the cost of funds raised to finance.

Costs:

Collection cost: collection cost is administrative costs incurring in collecting thereceivables from the customers to whom credit sales have been made. Included in thecategory of costs are : {a}additional expenses on the creation and maintenance of creditdepartment with staff, accounting records, stationary, postage and other related items. {b}Expenses involved in accruing credit information either though outside specialist agencies orby the staff of the firm itself. These experiences would not be incurred if he firm does notsale on credit.

Capital cost: the increase level of the accounts receivable is an assets. They have to be

financed there by involving a cost. There is a time lag between the sale of goods to andpayment by the customers. The firm has to pay employees and supplier of raw material thereby implying that the firm should arrange for additional fund to meet its owe obligationswhile waiting for payments from its customers.

Delinquency cost: this cost arise out of the customers to meet their obligations whenpayment on credits sales becomes due after the expiry of the credit period. Such costs are thedelinquency cost. The important component of this costs are {1}blocking up of funds foran extended period {2} cost associated with steps that have to be initiated to collect the overdues.

Default cost: The firm may not be able to recover the overdue because of the inability ofthe customers. Such debts are treated as bad debts and have to be return off as they cant berealized.

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CASH MANAGEMENT

Cash management is one of his key areas of areas working capital management. Cash is thecommon denominator to which all current assets can e reduced because the other majorliquid assets, that us, receivable and inventory get eventually converted into cash.

The term cash reference to cash management is used in two senses. In narrow senses, it isused to cover currency and generally accepted equivalent of cash, such as cheques, draft anddemand deposits in bank. The board view of cash also included near cash assets such asmarketable securities and time deposits in banks.

There are for primary motives to maintaining cash balances:

A. Transaction motiveB. Precautionary motiveC. Speculative motiveD. Compensating motive

49

Materials ReceivedMaterials orders

Chequesclearance

Payments Received Cheques Deposited

Goods Sold Payments from

customer

Payments

Fundscollection


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{a} Transaction motive :

Transaction motive refers to the holding of cash meet routine cash requirement to finance

the transaction which a firm caries on in ordinary course of business. A firm enters intovariety of transaction to accomplish its objective, which has to be paid for cash. Cashpayment is like wages, operating expenses, financial charges like interest, taxes, dividends,and so on. There are regular inflows of cash to the firm from sales operations, return onoutside investments and so on. These receipt and payments constitute two-way flow of cash.But the inflow and out flows do not perfectly synchronize. At times, receipt exceedsoutflows while payment exceeds outflows while payment exceeds inflows. To ensure thatthe firm can meet its obligations when payments become due in the situation in whichdisbursement are in excess of the current receipts, it must have adequate cash balance. Therequirement of cash balances to meet routine cash need as known as the transaction motive

and such motive refers to the holding of cash to meet anticipated obligations whose timing is

not perfectly synchronized with cash receipts.

{b} Precautionary motive:

A firm may have to pay cash purpose, which cannot be predicated or anticipated. Theunexpected cash needs:

1. Floods, strikes and failure of important customers.2. Bills may be presented for settlement earlier than expected3. Unexpected slow down is collection of account receivable4. cancellation of some order for goods as the customer is not satisfied

5. Sharp increase in cost of raw materials

The cash balance held in reserve for such random and unforeseen fluctuations in cash flowsare called as precautionary balance. Precautionary cash balance serves to provide a cushionto meet unexpected contingencies. The more unpredictable are the cash flows, the larger isthe need for such balance.

{c} Speculative motive :

The speculative motive helps to take advantages of:1. An opportunity to purchase raw materials at a reduced price on payment of

immediate cash.2. A chance to speculate on interest rate movements by buying securities when interest

rates are expected to decline.3. Delay purchases of raw materials on the anticipation of decline in prices; and4. Make purchase at favorable prices.

{d} Compensating motive:

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Banks provide a variety of services to business firms, such as clearance of cheques, supplyof credit information, transfers of funds, and so on. While for some of these services bankscharge a commission or fee, for other they seek indirect compensation. Clients are requiredto maintain minimum balances of cash at the bank. Since these balance cannot be utilized by

the firms for transaction purposes, the bank themselves can used the amount to earn a return.Such balances are compensating balances.

OBJECTIVE OF CASH MANAGEMENT:

The basic objective of cash management are to fold: (a) to meet the cash disbursement need(payment schedule); and (b) to minimize fund committed to cash balance.

(a) Meeting payments schedule :

Firms have to make payments of cash on continuous and regular basic to suppliers ofgoods, employees and so on. Basic objective of cash management is to meet thepayment schedule that is to have sufficient cash to meet the cash disbursement needsof a firm.

1. It prevents insolvency or bankruptcy arising out of the inability of a firm tomeet its obligations.

2. the relationship with the bank is not strained3. it helps in fostering good relations with trade creditors and supplier of raw

material, as prompt payments may help their own cash management4. A cash discount can be availed of if payment is made within 10 days within

the due dates.5. it lead to a strong credit rating which enables a firm to purchase on

favorable terms and to maintain its line of credit with bank and other sourcesof credit

6. to take advantage of favorable business opportunities that may be availableperiodically

7. The firm can meet unanticipated cash expenditure with a minimum of strainduring emergencies.

{b} Minimizing funds committed to cash balances :

The second objective of cash management is to minimize cash balances. It minimizing cash

balances two conflicting aspects have to be reconciled. A high level of cash balances willensure prompt payments together with all the advantages. But it also implies that large fundswill remain ideal, as cash ia a non-earning assets and the firm will have to forego profits. Alow level of cash balances may means failure to meet the payment schedule. The aim of cashmanagement should be to have an optimal amount of cash balances.

FACTORS DETERMINING CASH NEEDS:

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The factors that determine the required cash balances are1. synchronization of cash flows2. Excess cash balance

3. short costs4. Procurement and management5. Uncertainty

1) Synchronization of cash flows: The need for maintaining cash balances arises fromthe non-synchronization of the inflow and outflow of cash; if the receipt andpayments of cash perfectly coincide or balance each other, there would be no needfor cash balance. The first consideration in determining the cash need is the extent ofno synchronization of cash receipt and disbursements. For this purpose, the inflowsand outflows have to be forecast over a period of time. The technique adopted is acash budget.

2) Short costs :Short costs included followingA. Transaction cost associated with raising cash to be tied over the shortage. This is

usually the brokerage incurred in relation to the sale of marketable securities.B. Borrowing cost associated with borrowing to cover the shortage. These include

items such as interest on loan, commitment charges etc.C. Loss of cash-discounts a substantial loss because of a temporary shortage of cash.D. Penalty rates by banks to meet a shortfall in compensating balances.

3) Excess cash balances costs: The cost of having executively large cash balances isknown as the excess cash balance cost. If large fund are idle, the implication is thatthe firm has missed opportunities to invest those funds and has thereby lost interest,which it would otherwise have earned.

4) Procurement and management: These are the cost associated with establishing andoperating cash management staff and activities. They are generally fixed and aremainly accounted for by salary, storage handling of securities and so on.

5) Uncertainty and cash management: The impact of uncertainty on cashmanagement can be mitigated through (1) improved forecasting of tax payments,capital expenditure, dividends and so on (2) increased ability to borrow throughoverdraft facility.

CASHMANAGEMENT TECHNIQUES/ PROCESS:

There are specific and techniques and process for speedy collection of receivable fromcustomers and slowing disbursements.

Speedy cash collections

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In managing cash efficiently the cash process can be accelerated through systematicplanning and refined techniques. There are two approaches to do, first customer shouldencouraged pay as quickly as possible, and second the payments from customer should

be converted into cash without any delay.

The use of mechanical devices for billing alone with the enclosure of a self-addressedreturn envelope will speed up payments by customers. Another technique to encourageprompt payments by customers is the practices are offering cash discount.There is a lag between the time a cheque is prepared and mailed by the customer and thetime funds are included in the cash from. Within this time interval 3 steps are involved.

A. Transit or mailing time: The time taken by the post offices to transfer thecheques from the customers to the firm. This delay or lag is referred as postalfloat.

B. Time taken in processing the cheques within the firm before they aredeposited in the banks, termed as lethargy.

C. Collection time within the bank that is the time taken by the bank incollecting the payments from the customers bank. This is called as bankfloat.

The collections of accounts receivable can be considerable accelerated, by reducing transit,processing and collection time. This is possible if a firm adopt a policy of decentralizedcollections.

Decentralized process ensures some of the important processes i.e. it reduce (1) the amount

of time that elapses between the mailing of payment by a customer and (2) the point thefunds become available to the firm for use.

The method that ensures the Decentralized process is (a) Concentration banking (b) Lock-box system.

a. Concentration banking :

In the system of decentralized collection of accounts receivables, large firms , whichhave a large number of branches at different places, select some of the strategicallylocated branches as collection centers for receiving payments from customers. Instead of

all payments being collected at a head office of the firm the cheques for a certaingeographical area are required to sned their cheques to the collection cent recovering thearea in which they live and these are deposited in the local account of the concernedcollection center after meeting local expenses. A concentration bank is one with whichthe firm has a major account usually a disbursement account. This arrangement isreferred to as Concentration banking.

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It reduces the time needed in the collection process by reducing the mailing time. Sincethe collection centers are near the customers the time involved in sending the bills to thecustomer is reduced. The time lag between the dispatch of the cheques by the customerand its receipt by the firm is also reduced. Mailing time is saved both respect of sending

the bill to the customer as well as in the receipt of payments.

b. Lock box system :

Under this arrangement firms hire a post office box at important collection centers. Thecustomers are required to the post office lock-box. The local banks of the firm at therespective places are authorized to open the box and pick up the cheques received fromthe customers. The authorized to open the box and pick up the cheques several times aday and deposited them in the firms account after crediting the account of the firm, thefirm by way of proof and record of the collection.

The lock box system is like concentration banking is that the collection is decentralizedand is done at the branch level. They differ in one very important respect. The customerssend the cheques, under the concentration banking arrangement to the collection centershe sends them to a post office box under the lock-box system. The cheques are directlyreceived by the banks which empties the box, and not from the firm or its local branch.The processing time within the firm before depositing cheques in the bank is eliminated.The lock-box system has two advantages: [1] the bank performs the clerical task ofhandling the remittances prior to deposits, services which the bank may be able toperform at lower cost; [2] the process of collection through the banking system beginsimmediately upon the receipt of the cheques and does not have to wait until the firmcompleted its for internal accounting purposes.

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Chapter 4

Problem Statement

andResearch Methodology

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Problem Statement:

To find out the efficiency of cash flow and operating cycle with the help of workingcapital.

Objective of Study:

Primary Objectives:

To know how efficiently NCPL managing their Working Capital

Secondary Objectives:

To know the financial condition of the company

To study cash management

To study inventory management

To analyze the liquidity position of the company

To study receivable management and company credit policy

Literature Review

Financial Management By I.M.PandeyCompany Annual Report

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Research Design: -

A research design is the specification of method and procedure for accruing the informationneeded. It is overall operational pattern of frame work of project that stipulates whatinformation is to be collected for source by that procedures

Descriptive Research design is appropriate for this study.

Descriptive study is used to study the situation. This study helps to describe thesituation. A detail descriptive about present and past situation can be found out bythe descriptive study. In this involves the analysis of the situation using thesecondary data.

Data Collection:

This research study is based on secondary data, means data that are already availablei.e. the data which have been already collected and analyzed by some one else.

Secondary data are used for the study of Working Capital management of thiscompany. To collect the data I have refer Company financial department, inventory statuesreport maintain by stores, other company records.

Book : - I.M. Pandey , Prasanna Chandra , Bagavathi - Pillai

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Method of Analysis:

Ratio analysis :

o Net Working capital ratio

o Current Ratio

o Net Working capital Turn over ratio

o Quick Ratioo Inventory Ratio

o Inventory turnover Ratio

o Debtor turnover ratio

o Current assets turn over ratio

o Cash Ratio

Inventory management :

o Inventory conversion Period

o EOQ analysis

.

Receivable Management :

o Credit Policy Debtors Conversion Period

Cash management : With the help of Cash Flow Statement

Operating Cycle

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Chapter 5

DATA ANALYSIS

AND

INTERPRETATION

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5.1 Ratio Calculations

{5.1.1} Net Working Capital Ratio

Net Working Capital Ratio =

Net Working Capital

Net Assets

Net Assets = Current asset + Fix assets + Miscellaneous expenses Liabilities

For year 02 - 03 = 8015.16 + 31180.46 + 747.81 - 6707.11 = 33239.3203 - 04 = 6494.82 + 29371.61 + 451.72 - 6137.85 = 30180.30

04 - 05 = 7065.44 + 27518.88 + 175.17 - 6930.60 = 27828.89

05 - 06 = 8318.44 + 26931.46 + 130.38 - 4008.34 = 31371.94

Net Working Capital = Current Assets - Current Liabilities

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For year 02 - 03 = 8015.16 - 6707.11 = 1308.05

03 - 04 = 6494.82 - 6137.85 = 356.97

04 - 05 = 7065.44 - 6930.60 = 134.84

05 - 06 = 8318.44 - 4008.34 = 4310.10

Net Working Capital Ratio

For year 02 - 03 = 1380.05 = 0.039 : 1

33239.32

03 - 04 = 356.97 = 0.011 : 1

30180.3

04 - 05 = 134.84 = 0.004 : 1

27828.89

05 - 06 = 4310.1 = 0.137 : 1

31371.94

61

Net Operating Cycle Period

0.039

0.0110.004

0.137

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

2002-03 2003-04 2004-05 2005-06

Year

Series1


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Interpretation:

The difference between current assets and current liabilities excluding short term bankborrowing is called net working capital or net current assets. Net current assets are sometimes used as a measure of a firms liquidity. It is considered that between to firms havingthe large networking capital has the greatest ability meet is current obligation.

As shown in the calculation networking capital is highest compare to previous all years. Thatmeans company has more working capital and it is able to meet its current obligation. So wecan say that the last year working capital position is good

{5.1.2} Current Ratio

Current Ratio =Current Assets

Current Liabilities

Current Assets

For year 02 - 03 = 8015.16

03 - 04 = 6494.8204 - 05 = 7065.4405 - 06 = 8318.44

Current Liabilities

For year 02 - 03 = 6707.11

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03 - 04 = 6137.8504 - 05 = 6930.6005 - 06 = 4008.34

Current Ratio

For year 02 - 03 =8015.16

= 1.19 : 16707.11

03 - 04 =6494.82

= 1.05 : 16137.85

04 - 05 = 7065.44 = 1.01 : 16930.60

05 - 06 =8318.44

= 2.075 : 14008.34

63

Current Ratio

1.191.05 1.01

2.075

0

0.5

1

1.5

2

2.5

2002-03 2003-04 2004-05 2005-06

Series1


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Interpretation:

Higher the current rati , the larger is the amount of rupees available per rupee of currentliabilities , the more is the firms ability to meet current obligation and greater is safety of

fund of short term creditors.From the above calculation we can say that current Ratio of 2006 is 2.075: 1 which is

comparatively higher then the previous years. It indicates the company dealing nicely withtheir current affairs compare to previous years.

{5.1.3} Net working Capital turnover Ratio

Net Working Capital Turnover Ratio =Cost of Sales

Net Working Capital

Cost of Sales = Total Sales Gross ProfitFor year 02 - 03 = 28817.25 6505.86 = 22311.39

03 - 04 = 29843.08 5339.60 = 24503.4804 - 05 = 44177.19 8212.36 = 35964.83

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05 - 06 = 42614.33 8211.02 = 34403.31

Net Working Capital = Current Assets Current Liabilities

For year 02 - 03 = 8015.16 - 6707.11 = 1308.0503 - 04 = 6494.82 - 6137.85 = 356.9704 - 05 = 7065.44 - 6930.60 = 134.8405 - 06 = 8318.44 - 4008.34 = 4310.10

Net Working Capital Turnover Ratio

For year 02 - 03 = 22311.39 = 17.05 : 11308.05

03 - 04 =24503.48

= 68.64 : 1356.94

04 - 05 =35964.83

= 266.72 : 1134.84

05 - 06 =34403.31

= 7.982 : 14310.10

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Net Working Capital Trnover Ratio

17.05

68.64

266.72

7.982

0

50

100

150

200

250

300

2002-03 2003-04 2004-05 2005-06

Series1

Interpretation:

Net working capital turnover ratio measures the firms efficiency that how a firm managesand utilize its working capital as we can see from the above calculation that year 2004-05has a higher working capital turnover ratio that is 266.72 : 1 which is higher then the year2005-06. year 2005-06 has a net working capital turnover ratio is only 7.982 : 1 , which wecan consider too low. So we can say that in 2004 05 working capital efficiency is more

then the year 2005-06. But then after here we can see that the profit of the year 2005-06 isas equally to year 2004-05 because the net working capital of the year 2006 is 4310.10which is only 134.84 in the year of 2004-05.

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{5.1.4} Quick Ratio

Quick Ratio =Quick Assets

Current Liabilities- Bank OD

Quick Assets = Current asset Inventories

For year 02 - 03 = 8015.16 3897.51 = 4117.503 - 04 = 6494.82 4523.99 = 1970.8304 - 05 = 7065.44 3470.81 = 3594.6305 - 06 = 8318.44 4143.44 = 4175

Quick Ratio

For year 02 - 03 =4117.65

= 0.6139 : 16707.11

03 - 04 =1970.83

= 0.321 : 16137.85

04 - 05 =3594.63

= 0.51 : 16930.66

05 - 06 =4175

= 1.04 : 14008.34

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Quick Ratio

0.6139

0.321

0.51

1.04

0

0.2

0.4

0.6

0.8

1

1.2

2002-03 2003-04 2004-05 2005-06

Series1

Interpretation:

Its also known as Acid test ratio. The quick ratio is calculated to overcome the defect ofcurrent ratio. The acid test ratio is superior then current ratio, because here inventory isdeducted, as company cannot fastly convert it into cash. Higher the ratio, higher thecompanys liquidity position is.

We can see that Quick ratio of the year 2005-06 is 1.04: 1 which is higher then all previousyears indicate companys good liquidity position.

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{5.1.5} Inventory Ratio

Inventory Ratio =Inventory

Current Assets

Inventory Ratio

For year 02 - 03 =3897.51

= 0.48 : 18015.16

03 - 04 =4523.99

= 0.695 : 16494.82

04 - 05 = 3470.81 = 0.491 : 17065.44

05 - 06 =4143.44

= 0.498 : 18318.44

Inventory Ratio

0.48

0.695

0.491 0.498

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2002-03 2003-04 2004-05 2005-06

Series1

Interpretation:

The inventory in a company may be assessed by the use of the inventory ratio. The lowerthe ratio shows that company invests low in inventory. The objective of inventory is thatmaterial must available when its required, and to get a discount of bulk purchase.

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As we can see that in the year 2003-04 ratio is 69.5 % that is higher than 2004-05 & 2005-06that is 49.1% and 49.8% respectively. That means investment in inventory is decrease overthe last 2 years, which gives good indication.

{5.1.6} Inventory Turnover Ratio

Inventory

Documents

FM Final Report by Paras