WORKING CAPITAL MANAGEMENT FOR SUGAR INDUSTRY

WORKING CAPITAL

It is a measure which gives the operating liquidity of the company

Gross working capital : total of all the current assets

Net working capital : excess of current assets over current liabilities

Working capital components :

1. Accounts receivables

2. Cash and bank balances

3. Inventory

4. Other current assets

5. Accounts payables

6. Short term borrowings

PROCESS OF SUGAR MANUFACTURING

Process of manufacturing of sugar can be broadly classified into 3 stages :

Extraction of juice from sugar cane

Clarification and evaporation of juice

Crystallization and centrifugation

SUGAR INDUSTRY

India is the second largest producer of sugarcane next to Brazil

Modern sugar processing industry in India began in the late 1930’s

o In India, the major sugar cane producing areas are Uttar Pradesh, Maharashtra, Andhra Pradesh, Gujarat, Karnataka, and Tamil Nadu

o These states together account for 85-90 per cent of the sugarcane produced in India.

o In India, around 90 per cent of the sugarcane cultivation is under irrigated land.

SUGAR INDUSTRY

Sugar cane is the key input for sugar production The crop grows for 8-14 months In India sugar production follows a 3-5 year cycle Sugar production is cyclical in nature and is

highly inpredictable The major sugar producers in India are :

Balrampur chini mills ltd,

Bajaj Hindustan Ltd,

Andhra sugars ltd,

Thiru Arooran Sugars Ltd and

Dhampur sugar ltd

FACTORS THAT AFFECT SUGAR INDUSTRY

The financial performance of a sugar factory mainly depends on the following:

Demand-supply position and its impact on prices

Sugarcane prices Utilisation of by-products Plant size and location  Working capital requirement and cost of

funds Interest burden

WORKING CAPITAL REQUIREMENTS Sugar is a working capital intensive industry Mainly produced between November and

May Consumed through out the year Sugar mill owners are forced to carry large

inventories over a long period of time Sugar industry depends on short term funds Funds are available at high interest rates Sugar cane being the main raw material for

sugar constitutes around 65% of the cost of sugar production

Sugar mills should have comfortable cash flow and DER( debt equity ratio ).

DEMAND SUPPLY ANALYSIS

INVENTORY MANAGEMENT Between 2001-03 there was a relatively slower growth

in demand

resulted in massive inventory levels and high inventory holding cost

Govt. decontrolled the sugar industry

In 2004-06 sugar prices increased due to decline in inventory levels

Average DER was high at 2.4 times due to high borrowings required to fund the sugar inventory.

Sugar inventory is generally at its peak in march due to the end of the crushing season.

OPERATING CYCLE IN SUGAR INDUSTRY

SUPPLIER – farmer RAW MATERIAL - sugar cane WIP – industrial alcohol , juice in the form of

thick syrup Finished product – granulated sugar , brown

sugar, liquid sugar Sales to customer – PDS ( levy sugar , non

levy sugar) , general consumer market Cash from customers

WORKING CAPITAL

Current assets in sugar industry comprises of 60-70% of the total assets

Average current ratio for the years 2002-07 has been 0.8 times

Average debt – equity ratio has been 2.5 times

Average return on capital employed is 10.3 % Average debtors days is 15.8 days Average creditors days is 114 days Stock– to use ratio – 55%

CALCULATION OF CASH CYCLE

Inventory period – 180 days Accounts receivable period – 15 .8 days Accounts payable period – 114 days operating cycle = inventory period +

accounts receivable period Therefore , operating cycle = 180 +158 = 195.8 days Cash cycle = operating cycle – accounts

payable periodTherefore, cash cycle = 195.8 – 114 =81.8 days