Working Capital Management_vizag (1)

7/24/2019 Working Capital Management_vizag (1)

1/93

WORKING CAPITAL MANAGEMENT

With reference to Visakhapatnam Stee Pant

Rashtri!a Ispat Ni"am Limite#

SUBMITTED BY

S.ANITHAMBA (FINANCE)

Roll no:Y12BU20008

Under G!d"n#e o$

Mr.%.&.S.SURYANARAYANA A.G.M (F'A De.)

(&!*"+ Seel %l"n)

$EPARTMENT O% COMMERCE AN$ &'SINESS A$MINISTRATION

AC(AR)A NAGAR*'NA 'NIVERSIT)

NAGAR*'NANAGAR +G'NT'R

FACI,ITATED BY HR DE%ARTMENT

SRI. -.R.M.RA- AGM (HRD) SRI. M.,.S.&ARMA D/.M (HRD)

CERTIFICATE -F DEC,ARATI-N


2/93

I here by declare that this project entitled or!n+ C"!"l

M"n"+e3en " &!4"5""n"3 Seel %l"n is my original work andprepared by me under the Sable guidance and Supervision of

Mr.%.&.S.Sr/"n"r"/"n" A.G.M ( F ' A ) of Visakhapatnam Steel Plant.

I also declare that, I have not submitted this project report to any other

university (or institution for the award of any degree (or diploma.

!ate"

Place"

Signature of the Student

S.#$I%

'eg.$o.)*+*---

CERTIFICATE


3/93

%his is to certify that this project work entitled /0'1I$2 3#PI%#4 5#$#2656$%7"

&!4"5""n"3 Seel %l"n is a bonafide work of S.ANITHA 'eg no" )*+*---

carried out in partial fulfilment for the award of 5aster of +usiness #dministration (8inance

of #3'# $#2#'9$# $IV6'SI% under my Supervision and guidance at

Vishakhapatnam Steel Plant and completed successfully during *:;9$6;*-)* to);#2;

*-)*.Supervision and guidance during the academic year *-));*-)


4/93

I take this opportunity to e=press my heartfelt thanks to my project

guideMr.%.&.S.Sr/"n"r"/"n"(F'A) for his guidance and suggestions during the

progress of my project. I am thankful to the &ISA7HA%ATNAM STEE, %,ANT,

for giving me an opportunity to undertake my project work.

5y special thanks to Mr. -.R.M.RA-,A.G.M(HRD) 'Mr. M.,.S

&ARMA D/.M (HRD) Gro o$ &ISA7HA%ATNAM STEE, %,ANT for his

valuable suggestions and co;operation throughout the project work.

I want e=press my sincere thanks to my 2uide Mr.%.&.S.SURYANARAYANA

A.G.M(F'A)for his constant moral support and valuable guidance in successful

completion of the project work.

8inally I would like to thank other faculty members for their e=tended co;operation >

suggestions which have helped a lot.

4astly, my heartfelt gratitude to my family and friends for their cooperation.

(S.ANITHA)

%REFACE


5/93

This project report is a presentation of my eort to study

the practice of Financial Management in a public sector

enterprise, with reference to Rashtriy aIspat Nigam Limited,isha!hapatnam" The report presents the practical approach in

the subject of Financial Management, mainly in the #eld of

$WORKING CAPITAL MANAGEMENT%" It intends to pro&ide

brief !nowledge of &arious concepts, 'rinciples, approaches,

considerations rele&ant to this #eld" The 'roject Report has

undergone a realistic sur&ey of actual theory and practices in(' although there may be much gap to be bridged"

This report see!s to co&er the topics of Financial

Management, mainly focusing on the aspects li!e wor!ing

capital Management, )ash Management, Recei&ables

Management, In&entory Management etc"

The report has been di&ided into #&e chapters and the

arrangements of topics in &arious chapters ha&e been grouped

according to the analysis of the subject"


6/93

S.$0 I$!6? P#26 $o.

) I$%'0!3%I0$ );@

* I$!S%' P'08I46 )-;*-

< 305P#$ P'08I46 *);A:

A %&60'I%I3#4 8'#56 /0'1 AB;B

: #$#4SIS #$! I$%6'P'6%#%I0$ B@;*

B S55#' S226S%I0$S 8I$!I$2S for 0ccupational

health > safety (0&S#S;)--).

Visakhapatnam e=ports Huality pig iron > steel products to Srilanka,

5yanmar, $epal, 5iddle 6ast, S#, 3hina, and South 6ast #sia. &aving total

manpower of about )B,B--. VSP has envisaged a labour productivity of *B:

tonnes per man year of liHuid steel

B"#+rond

/ith a view to give impetus to industrial growth and to meet the

aspirations of the people from #ndhra Pradesh, 2overnment of India decided to

establish integrated steel plant in public sector at Visakhapatnam. %he

announcement to this effect was made in the parliament on )Cth

april7)@C- by

the then prime minister of India late Smt. Indira 2andhi. %he foundation stone

for the plant was laid by Smt. Indira 2andhi on *-.-).)@C).

#n agreement was signed between governments of India and the

erstwhile SS' on 9une )*th, )@C@ for setting up of an integrated steel plant to


25/93

produce structural > long products on the basis of detailed project report

prepared by 5Ks 5.$. !astur> 3ompany.

%he construction of the plant was started on )st 8ebruary )@*

2overnment of India on )th 8ebruary )@* formed a new company called

'ashtriyaIspat $igam ltd. ('I$4 and transferred the responsibility of

constructing, commissioning > operating the plant at Visakhapatnam from steel

authority of India 4td. to 'I$4.

%he plant was dedicated to the nation by the then prime minister of India late

Sri P.V. $arasimha'ao on )st#ugust )@@*.

Te#5nolo+/:

state;of;the;art"

i. C meter tall coke oven batteries with coke dry Huenching.

ii. +ell;less top charging system in blast furnace.

iii. )--J slag granulation at the +8 cast house.iv. Suppressed combustion M4! gas recovery system.

v. )--J continuous casting of liHuid steel.

vi. %empcore and stelmor cooling in 4555 > /'5 respectively.

vii. 6=tensive waste heat recovery systems.

viii. 3omprehensive pollution control measures.

"er 4l/:#n operational water reHuirement of


26/93

Visakhapatnam steel plant is supplying B- 5/ power to #ndhra Pradesh state

electricity board.

M"6or Re4or#e o$ R" M"er!"l

'aw material Source

Iron ore lumps > fines +ailadilla, 5P

+8 lime stone 9aggayyapeta, #P

S5S lime stone 5iddle 6ast

+8 dolomite 5adharam, #P

S5S dolomite 5adharam , #P

5anganese 3hipurupalli, #P+oiler coal %alcher, 0rissa

3oking coal #ustralia

5edium coking coal(533 2idiK swangK rajarappaK kargali.

M"6or n!4

!epartment #nnual

capacity

(L--- %

nits(C mtrs height

Sinter plant :,*:B * sinter machines of


27/93

+last furnace


28/93

tension (&% power at classes of work

regularly.

S"$e/ En+!neer!n+ De"r3en:

Safety engineering department advises and assists the management in the

fulfilment of obligation concerning prevention of accidents and maintaining a


29/93

safe working environment.sed conducts safety campaigns and safety

competitions amongst the employees to promote safety.sed co;ordinates and

liaison with #P factories department.

De4!+n ' En+!neer!n+ De"r3en:

Preparation of drawings, design and specifications for #5' and $on

#5' jobs.

4ayout clearances of various facilities coming in the plant and township.

0peration of consultancy contracts.

M"re!n+ de"r3en:

It has *Ano.of branch sales offices all over India and four regional offices

viF. north; !elhi, South;3hennai, /est; 5umbai, 6ast; 1olkata and

&eadHuarter sales. 5ain activities of marketing are as follows"

3ollecting market feedback and customers reHuirements for the

preparation of annual plan in coordination with works department. Preparation of market policies.

8inalising of long term contracts, 5os, spot sale agreements etc., in

domestic and e=port markets. 'endering after sales services, obtaining

customer feedback and customer relations management.

&!4"5""n"3 4eel l"n ol!#!e4:

H3"n re4or#e ol!#/:

%o realiFe the full potential of employees, the company is committed to"

6nsure functioning of effective communication channels with employees.

6mpower employees for enhancing commitment responsibility and

accountability.

6ncourage teamwork, innovativeness and high achievement oriented.


30/93

Provide systems for maintain transparency, fairness and eHuality in

dealing with employees.

H3"n re4or#e deelo3en:

4eadership training.

%raining in motivation and attitude.

%eam building

Skill training

Induction and orientation

Plant practice lectures

+asic engineering lectures Plant specialiFed training

5anagement development

%oll!on #onrol "nd en!ron3en"l roe#!on:

2enerally integrated steel plant is considered as a major contributor to

environmental pollution as it discharges volume of waste products. 6laborate

measures have been adapted to combat air and water pollution. In order to be

echo friendly, Visakhapatnam steel plant has planted more than < million trees

over an area of


31/93

F!n"n#!"l er$or3"n#e (R4.Cr4) $or "4 $!e /e"r4:

ear 2ross margin 3ash profit $et profit*--C;*--


32/93

6=pand plant capacity to B.< 5% by *-)*;*-)< with the mission to

e=pand further in subseHuent phases as per the corporate plan.

Sustain gross margin to turnover ratio O *:J

+e amongst top : lowest cost liHuid steel producers in the world.

#chieve higher levels of customer satisfaction than competitors.

+e recognised as an e=cellent business organisation by *-)*;*-)


33/93

TAB,E SH-ING C-MMERCIA, %ERF-RMENCE

*

+***

***

-***

.***

/****

/+***

(ales Turno&er

0omestic (ales

12ports


34/93

F!n"n#!"l er$or3"n#e:

Visakhapatnam steel plant had to bear the burnt of huge project cost right

from its day of inception. %his has affected the companyEs bKs due to very high

interest burden. %he company in spite of making operating profit every year had

to report net loss during all financial years. %his is on the other hand resulted in

making VSP to take greater in planning the financial resources.

%he financial performance of VSP for the past to present years is as

follows" ('s.in3rores

Sales 3ross 5arin 3ash Profit $et Profit

)@@@;*--- *@C*.B- *:*.*C ;)*@.@ ;:B).B

*---;*--)


35/93

3+***

*

+***

***

-***

.***

/****

/+***

(ales

)ross Marin

)ash 'ro#t

Net 'ro#t

Sor#e4 o$ $nd4:

VSP raise its working capital from of )- +ankers. %he following are the )-

banks. /here funds for finance are raised

State +ank of India

3anara +ank

30 +ank

+ank of +aroda

#ndhra +ank

State +ank of &yderabad

#llahabad +ank

&S+3

Industrial !evelopment +ank of India ( I!+I


36/93

Indian 0verseas +ank ( I0+

A#5!ee3en4 "nd A"rd4:

%he efforts of VSP have been recogniFed at various forums. Some of the

major awards received by VSP are in the area of energy conservation,

environment protection, safety, Huality, circles, 'ajbhasha. 5o, sports and a

number of awards at the individual level.

Indira PriyadarshiniVriksha5itra award ;)@@*;@< $ehru 5emorial

$ational award for pollution control in )@@*;@< >)@@


37/93

A l"nd 3"r /e"r o$ +ro5:

%he year *--:;*--B saw the company registering then best ever sales turnover

of 's.A* cores a


38/93

%he perceived risks that hindered the industryEs resource mobiliFation efforts

are now being replaced by a general feel good factor. %his will help the industry

significantly. %he turn M around in the industry has come at a very opportune

time.

%he Indian steel industries continue to remain focused on the merging

opportunities in the world market. 3hain is offering great. 0pportunities to the

Indian industry. !espite the massive growth in steel output in 3hina, there will

always be opportunities for the Indian e=porters. %he international business has

to be carried out consistently 6lse the market will be lost at the first sign of a

downturn. %he Indian steel industry has come a long way from the days of

control and strive to remain globally competitive. %his is the age of technology

and we have the reHuisite resources to the lead in take the steel sector.


39/93

B-ARD -F DIRECT-RS

3I'5#$;35;5#$#2I$2

!I'63%0'

Sri. #.P 3&0/#!#'

!I'63%0' ( P6'0$$64 .'.'6!!

!I'63%0' ( 30556'I3#4 %.1.3$!

!I'63%0' ( 0P6'#%I0$S 56S& 3$!'#

!I'63%0' (8I$#$36 P.5#!&S!$

!I'63%0' ( P'0963%S Sri $ S '#0

INDEPENDENT DIRECTORS Sri # P V $ S'5#

Sri & S 3'

Sri S/#'&P#/#$ SI$2&

GOVT. DIRECTORS !r !#4IP SI$2&

Sri.S.5#3&6$!'# $#%$

305P#$ S63'6#%#' P.50$ '#0

'62IS%6'6! 088I36 ADMINISTRATI&E BU,DING

&ISA7HA%ATNAM STEE,

%,ANT

&ISA7HA%ATNAM=1


40/93

%ro$!le o$ &!4"5""n"3 4eel l"n:


41/93

Inrod#!on:

Steel occupies the foremost place among the materials in use today and

pervades all walks of life. #ll key discoveries of human genius, for instance,

Steam 6ngine, 'ailway, means of 3ommunication and 3onnection,

#utomobiles, #ero Plane and 3omputers are in one way or other fastened

together with steel and its sagacious and 5ultifaceted applications.

Steel is versatile material with multitude of useful properties, making it

indispensable for furthering and achieving continual growth of economy be it

3onstruction, manufacturing, infrastructure or consumables. %he level of steel

consumption has long been regarded as an inde= of industrialiFation and

economic maturity attained by a country.

1eeping in view of the importance of steel, the following integrated steel plants

with foreign collaborations were set up in public sector in post independence era

Ine+r"ed 4eel l"n4 !n Ind!":


42/93

STEE, %,ANT C-,,AB-RATI-N

!urgapur Steel Plant +ritain

+hilai Steel Plant 6rstwhile SS'

+okaro Steel Plant 6rstwhile SS'

'ourkela Steel Plant 2ermany

-B>ECTI&ES -F THE STUDY

%o find out working capital position of the company for last five years.

%o identify the liHuidity position in the Visakhapatnam steel plant.

%o study the liHuidity position through various working capital related

ratios.

%o e=amine the policies and procedures of the working capital

management.

%o e=amine the cash management policies and practices.

%o e=amine the utiliFation of current assets and management of inventory

receivables.

%o study and analyse the changes in working capital.

%odraw conclusion and to suggest suitable measures to overcome the

problems and to improve its performance.

NEED F-R THE STUDY

%he study is concerned for the following needs.

/orking capital decides not only liHuidity and solvency but also

operating efficiency of the organiFation.


43/93

%his project is done as a whole entirely. It will give overall view of the

organiFation and it is useful in further e=pansion decision to be taken by

management.

%o study the working capital needs and strength of the organiFation inmeeting and managing working capital of the organiFation.

%his project also useful as it combines the present year data with the

previous year data and thereby it shows the trend analysis, i.e. increasing

or decreasing.

METH-D-,-GY

'esearch methodology is a way to solve the research problems

systematically. 'esearch may be one common parlance referred to as

knowledge. In research methodology we not only talk of the research methods,

but also consider the logic behind the methods we use in the content of our

research study and e=plain why we are using a particular method or techniHue.

&ence in this study various steps that are generally adopted in studying research

problem along with the logic behind them. It is a broad outline of the method

and procedure adopted for the purpose of the study.

!ata collection methods"

%he given below diagram shows the data collection methods

!ata collection

%r!3"r/ d"":

Secondary dataPrimary data


44/93

#ny information which is collected a fresh and for the first time is called

primary data the primary data happen to be original in character. %he

information is gathered from concerned employees and managers of the

financial department have provided the information needed for the study.

Se#ond"r/ d"":

Information which has already been collected by somebody else or some other

agency with definite purpose and which has already been proposed is called

secondary data. %he secondary data for the study have been gathered from the

balance sheets, profit and loss accounts, annual reports and other books and

manuals of the '#S&%'I# ISP#% $I2#5 4%!.

SC-%E -F THE STUDY

#s longer as the accounting practices more or less the same over time,

e=amining trends in raw financial data and financial ratios can draw

meaningful interpretations.

Since all the steel industries operate almost similarly, the analysis of the

financial performance of Visakhapatnam steel plant will certainly help in

comparing the performance of the other industries operating in the same

field and analyFe the overall performance of the steel industry.

%he project helps to understanding the financial analysis works carriedover in the organisations on accounting basis.

,IMITATI-NS -F THE STUDY


45/93

%hough this project is completed successfully a few limitations may be

limitations.

#lthough every effort has been made to study the D/0'1I$2 3#PI%#4

5#$#2656$%7 in detail, in an organiFation of VSP siFe, it is not

possible to make an e=haustive study in a limited duration of A weeks.

#part from the above constraints, one serious limitation of the study is

that it is not possible to reveal some of the financial data owing to the

policies and procedures laid down by VSP. &owever the available data is

analyFed with great effort to get an insight into working capital

management in VSP.

#nd analysis of sub topics is limited to some e=tensions.

%he study is carried basing on the information and documents provided by

the organiFation and based on the interaction with the various employees

of the respective departments.

!ue to lack of time constraint data is collected only five years.

!ue to income ta= problem eliminate the top secretes of the company.


46/93

C(APTER,0T(EORITICAL %RAME WORK

THE-RITICA, FRAME -R7


47/93

/orking capital 5anagement is concerned with the problems that arise in

attempting to manage the current assets, current liabilities and the interrelationship between them. Its operational goal is to manage the current assets

and current liabilities in such away that a satisfactory level of working capital is

maintained. Successful and effective 5anagement of working capital results in

improved rate of returns on the capital invested in short term assets.

C-NCE%TS:

%here are two concepts of working capital

).Gro44 or!n+ #"!"l:

2ross /orking 3apital refers to the companyEs investment in

current assets. 3urrent assets are the assets which can be converted into cash

within an 0perating 3ycle time or within an accounting year i.e., within )*

months. %his includes cash, short term securities, debtors. +ills receivable and

inventory. %his 2ross /orking 3apital concept is also called D6conomist

3oncept7.

%he gross working capital concept focuses attention on two

aspects0f current assets management.

a 0ptimum investment in current assets and

b 8inancing of current assets.

*.Ne or!n+ #"!"l: (NC):


48/93

$et working capital refers to the difference between current assets and

current liabilities. %his $et /orking 3apital concept is also called as

D#ccountants 3oncept7. 3urrent liabilities are the claims of outsiders which aree=pected to mature for payment within an accounting year. $et working capital

concept also covers the Huestion of judicious mi= of long term and short term

funds for financing current assets.

%he level of $/3 has a bearing on the 3ompanyEs Profitability as well as

the risk, in the sense that it affects the ability or otherwise of the firm to meet its

obligations as and when they become due. %herefore, a trade off between

profitability and risk is an important element in evaluation of the level of

$/3.In general, the higher the $/3, the lower the risk and profitability and

vice versa.

or!n+ C"!"l M"n"+e3en Go"l:

%he goal of working capital management is to manage the firmsE3urrent

#ssets and 3urrent 4iabilities in such away that a satisfactory level of working

capital is maintained. %his is so because if the firm cannot maintain a

satisfactory level of working capital, it is likely to become insolvent and may

even be forced into bankruptcy. Sometimes, a 3ompany may have tremendous

potential for profitability in the long run, but may languish due to inadeHuate

liHuidity. %he interaction between current assets and current liabilities therefore,the main theme of the theory of working capital management.

T/e4 o$ or!n+ #"!"l:


49/93

/orking 3apital of any enterprise consists of two parts viF.,

1) %er3"nen or!n+ C"!"l "nd

2) Te3or"r/ or &"r!"9le or!n+ C"!"l.

%er3"nen or!n+ C"!"l:

Some portion of the working capital investment is always locked;up in

the form of raw materials, /ork;in;Progress, 8inished 2oods, +ook !ebts,

5inimum 3ash +alance etc. at any point of time. %his portion is the minimum

level of investment that is reHuired to continue the operations of the business

without any interruption is referred to as the Permanent /orking 3apital

portion. #ccording to the %#$!0$ 3055I%%66 recommendations, a

portion of the 3urrent #ssets are to be financed from the 4ong %erm funds.

Variable /orking 3apital"

%his is also known as circulating of transitory /orking 3apital. %his is the

portion of the total /orking 3apital that is reHuired to take care of the seasonal

fluctuations in the business activity.

!eterminants of /orking 3apital"

%he need of working capital is not always the same it varies from year to

year or even month;to;month depending upon a number of factors. %here is no

set of rules or formulate to determine the working capital needs of the firm.

6ach factor has its own importance and its importance of the factors changes for

a firm over time.

In order to determine the proper amount of working capital of concern, the

following factors should be considered.


50/93

$ature of business.

SiFe of the business unit.

Seasonal variation.

%ime consumed in manufacturing.

%urnover of circulating capital.

$eed to stockpile raw material and finished goods.

2rowth and e=pansion.

+usiness cycle fluctuations.

%erms of purchase and sale.

Pricing level changes.

Inventory turnover.

!ividend policy.

#pproaches of /orking 3apital !etermination"

%here are < well known types of deciding on the Huantum of /orking

3apital reHuirement. %hey are

). &edging #pproach

*. 3onservative #pproach


51/93

In &edging approach, the core current assets are financed through long

term funds and the seasonal and other reHuirements are met from temporary

sources. %his approach is more profitable and more risky. In the case of

3onservative approach, the total reHuirement is met from long term sources and

the reHuirement due to cyclical and unforeseen situations are met from short

term funds. %his approach is less profitable and less risky. +oth these

approaches are two e=tremes. %herefore, the rational approach, L%rade off

#pproachE is followed whereby a trade off between profit and risk is arrived and

that level of $et /orking 3apital is decided.

%ro9le34 o$ !n"de


52/93

D"n+er o$ e;#e44!e or!n+ #"!"l:

# firm may be tempted to over trade and lose heavily.

nable to e=tract benefits of customers credit.

%he situation may lead to unnecessary purchases and accumulation of

inventories. %his cause more chances of theft, waste, losses etc.

%here arises an imbalance between liHuidity and profitability.

6=cessive working capital means funds are idle.

%he situation leads to greater production, which may not be having

matching demand.

%he e=cess of working capital leads to carelessness about cost of

production.

R"!o4 o 3e"4re 5e e$$!#!en#/ o$ or!n+ #"!"l:

3urrent 'atio" 3urrent assetsK3urrent liabilities.

uick 'atio" (current assets M Inventories K3urrent liabilities.

Sales to cash" Sales during a period K #verage cash balance.

#verage collection period" !ebtors dividend by annual credit sales and

the resulting figure multiplied by


53/93

or!n+ #"!"l %ol!#/:

/orking capital management policies have a great effect on firmQs profitability,

liHuidity and its structural health. # finance manager should therefore, chalk out

appropriate working capital policies in respect of each component of working

capital so as to ensure high profitability, proper liHuidity and sound structural

health of the organiFation.

In order to achieve this objective the financial manager has

toperform basically following two functions.

). 6stimating the amount of working capital.

*. Sources from which these funds have to be raised.


54/93

3omponents of working capital"

%ARTA: Crren A44e4

". Inenor!e4:

'aw material

/ork in progress

8inished goods

9.Tr"de de9or4:

4oans and advances

Investment (short term

3ash bank balances

%ARTB: Crren l!"9!l!!e4:

Sndr/ #red!or4

%rade #dvances

+orrowings

3ommercial banks

Provisions 3urrent


55/93

-er"!n+ #/#le or #!r#l"!n+ #"45 $or3":

/orking 3apital refers to that part of firmEs capital which is reHuired for

financing short term or current assets such as cash, marketable securities, debtors

and inventories. 8unds thus invested in current assets keep revolving fast and

being constantly converted into cash and these cash flows out again in e=change

for other current assets. &ence it is also known as revolving or circulating capital.

%he circular flow concept of working capital is based upon this operating or

working capital cycle of a firm.

'eceivable conversion 'a'aw materials conversion period

period ('3P ('5S3P

3ash received form

!ebtors and paid to suppliers

4f raw materials

Sales of finished 'aw materials

2oods introduced into process

8inished 2oods

Produced

8inished goods conversion workin process Period (823P3onversion

period

(/IP3P


56/93

On the 1asis of concept On the 1asis of time

Net Workin" capitaPermanent or 23e# 4orkin" capita

Capita

Temporar! or 5aria1e 4orkin" cap

Capita

Gross Workin" capita

or!n+ #"!"l 3"/ 9e #l"44!$!ed !n o "/4:

0n the basis of concept

0n the basis of time

0n the basis of concept, working capital is classified as gross

working capital and net working capital. %he classification is important from the

point of view of the financial manager.

0n the basis of time, working capital may be classified as"

Permanent or 8i=ed working capital

%emporary or Variable working capital

Reser5e

Workin" Re"6ar

Kin#s of Workin" Capita

Specia Workin"

CapitaSeasona

Workin"


57/93

1. %er3"nen or $!;ed or!n+ #"!"l:

Permanent or fi=ed working capital is the minimum amount which is

reHuired to ensure effective utiliFation of fi=ed facilities and for maintaining the

circulation of current assets. %here is always a minimum level of current assets

which is continuously reHuired by the enterprises to carry out its normal

business operations.

2. Te3or"r/ or "r!"9le or!n+ #"!"l:

%emporary or variable working capital is the amount of working capital which

is reHuired to meet the seasonal demands and some special e=igencies.Varibles

working capital can be further classified as second working capital and special

working capital. %he capital reHuired to meet the seasonal needs of the

enterprises is called the seasonal working capital.

%emporary working capital differs from permanent working capital in the sense

that is reHuired for short periods and cannot be permanently employed gainfully

in the business.

T5e need or o96e#4 o$ or!n+ #"!"l:

%he need for working capital cannot be emphasiFed. 6very business

needs some amount of working capital. %he need of working capital arises due

to the time gap between production and realiFation of cash from sales. %here is

an operating cycle involved in the sales and realiFation of cash. %here are time

gaps in purchase of raw materials and production, production and sales,

#nd sales, and realiFation of cash, thus , working capital is needed for the

following purposes"

8or the purchase of raw materials , components and spaces

%o pay wages and salaries

%o incur day to day e=penses and overhead costs such as fuel, power and

office e=penses etc.


58/93

%o meet the selling costs as packing, advertising etc.

%o provide credit facilities to the customers.

%o maintain the inventories of raw materials, work Min; progress, stores

and spares and finished stock.

8actors determining the working capital reHuirement"

%he working capital reHuirements of a concern depend upon a large number of

factors such as nature and siFe of the business, the characteristics of their

operations, the length of production cycle , the rate of stock turnover and the stateof economic situation. &owever the following are the important factors generally

influencing the working capital reHuirements.

N"re or #5"r"#er!4!#4 o$ " 94!ne44:

%he nature and the working capital reHuirement of enterprises are interlinked.

/hile a manufacturing industry has a long cycle of operation of the working

capital, the same would be short in an enterprises involve in providing services.

%he amount reHuired also varies as per the nature, an enterprises involved in

production would reHuired more working capital then a service sector

enterprise.

M"n$"#re rod#!on ol!#/:

6ach enterprises in the manufacturing sector has its own production policy,

some follow the policy of uniform production even if the demand varies from

time to time and other may follow the principles of demand based production inwhich production is based on the demand during the particular phase of time.

#ccordingly the working capital reHuirements vary for both of them.

-er"!on4:


59/93

%he reHuirement of working capital fluctuates for seasonal business. %he

working capital needs of such business may increase considerably during the

busy season and decrease during the

M"re #ond!!on:

If there is a high competition in the chosen project category then

one shall need to offer sops like credit, immediate delivery of goods etc for

which the working capital reHuirement will be high. 0therwise if there is no

competition or less competition in the market then the working capital

reHuirements will be low.

A"!l"9!l!/ o$ r" 3"er!"l:

If raw material is readily available then one need not maintain a

large stock of the same thereby reducing the working capital investment in the

raw material stock . 0n other hand if raw material is not readily available then a

large inventory stocks need to be maintained, there by calling for substantial

investment in the same.

Gro5 "nd e;"n4!on:

2rowth and 6=pansions in the volume of business result in

enhancement of the working capital reHuirements. #s business growth and

e=pands it needs a larger amount of the working capital. $ormally the needs for

increased working capital funds processed growth in business activities.

%r!#e leel #5"n+e4:2enerally raising price level reHuire a higher investment in the working capital.

/ith increasing prices, the same levels of current assets needs enhanced

investments.

M"n$"#r!n+ #/#le:


60/93

%he manufacturing cycle starts with the purchase of raw material and is

completed with the production of finished goods. If the manufacturing cycle

involves a longer period the need for working capital would be more. #t time

business needs to estimate the reHuirement of working capital in advance for

proper control and management. %he factors discussed above influence the

Huantum of working capital in the business. %he assessment of the working

capital reHuirement is made keeping this factor in view.

6ach constituent of the working capital is valued on the basis of valuation

6numerated above for the holding period estimated. %he total of all such

valuation becomes the total estimated working capital reHuirement.

Principles of working capital management policy"

C-M%-NENTS -F -R7ING

CA%ITA, BASIS -F &A,UATI-N

Stock of 'aw 5aterial Purchase of 'aw 5aterial

Stock of /ork ;in; Process

#t cost of 5arket value which is

lower

Stock of finished 2oods 3ost of Production

!ebtors 3ost of Sales or Sales Value

3ash /orking 6=penses


61/93

%he following are the general principles of a sound working

3apital management policy.

1. %r!n#!le o$ r!4 "r!"!on (#rren "44e4 ol!#/):

'isk here refers to the inability of a firm to meet its obligations as and when

they become due for payment. 4arger investment in current #ssets with less

dependence on short term borrowings, increase liHuidity, reduces risk and

thereby decreases the opportunity for gain or loss. 0n the other hand less

investments in current assets with greater dependence on short term borrowings,

reduces liHuidity and increase profitability. In other words there is a definite

inverse relationship between the degree of risk and profitability.

2. %r!n#!le4 o$ #o4 o$ #"!"l:

PRINCIPLES O% WORKING CAPITAL MANAGEMNT POLIC)

PRINCIPLES O%

RISK

PRINCIPLES O%

COST O%

PRINCIPLES O%

E7'IT)

PRINCIPLES O%

MAT'RIT) O%

PA)MENTS


62/93

%he various source of raising working capital finance have

different cost of capital and the degree of risk involved. 2enerally, higher and

risk however the risk lower is the cost and lower the risk higher is the cost. #

sound working capital management should always try to achieve a properbalance between these two.

=. %r!n#!le o$ e


63/93

CASH MANAGEMENT

Me"n!n+ o$ #"45:

%he term LcashE is used in two senses. In a narrower sense it includes currency

notes, cheHues, bank drafts held by a firm with it and the demand deposits held

by it in banks. In a broader sense it also includes near cash assets such as

marketable securities and time deposits with bank.

%he main reason for a firm to hold cash is to meet the needs of day;to;day

transactions and to protect the firm against uncertainties characteriFing its cash

flows. /hile cash serves these functions, it is an idle resource which has an

opportunity cost. %he liHuidity provided by cash holding is at the e=pense of


64/93

profits sacrificed foregoing alternative opportunities. &ence, the finance

manager should carefully plan and control cash.

3ash is the one of the current assets of a business. It is needed at all times

to keep the business going. # business concern should always keep sufficient

cash for meeting its obligations. #ny shortage of cash will hamper the

operations of a concern and any e=cess of it will be unproductive. 3ash is the

most unproductive of all the assets.

3ash itself doesnEt produce goods and services. It is used as a medium to

acHuire other assets. It is the other asset, which is used in manufacturing goods

or providing services. %he ideal cash can be deposited in bank to earn interest. #

business has to keep reHuired cash for meeting various needs. %he assets

acHuired by the cash again help the business in producing cash. %he goods

manufactured are sold to acHuire cash. %he firm will have to maintain a criticallevel of cash. If at a time it doesnEt have sufficient cash with it, it will have to

borrow from the market for reaching reHuired level.

%here remains gap between cash inflows and outflows. Sometimes cash

receipts are more than cash payments. It is called surplus. Sometimes cash

payments are more than cash receipts. %his is called as deficiency. # financial

manager tries to synchronise cash inflows and cash outflows. Perfect

synchroniFation of receipts and payments of cash is only an ideal situation.

3ash management has assured importance because it is the most significant

of all the current assets. It is reHuired to meet business obligations and it is

unproductive when not used. It is deals with the following.


65/93

") C"45 %l"nn!n+:

3ash planning is a techniHue to plan and control the use of cash. #

projected cash flow statement may be prepared, based on the present business

operations and anticipated future activities. %he cash inflows from various

sources may be anticipated > cash outflows will determine the possible uses of

cash.

9) C"45 $ore#"44 "nd 9d+e!n+:

# cash budget is the most important device for the control of receipts and

payment of cash. # cash budget is an estimate of cash receipts. It is an analysis

of flow of cash in a business over a future, short or long period of time. It is a

forecast of e=pected cash intake and outlay. %he short;term forecasts can bemade with the help of cash flow projections. %he long;term cash forecasts are

also essential for proper cash planning. %hese estimates may be for three, four,

five or more years.

") Re#e!4 "nd d!49r4e3en4 3e5od.

9) A "d64ed ne !n#o3e 3e5od.

-96e#!e4:

%o meet cash disbursement need as per the payment schedule.

tiliFation of cash effectively.

%o minimiFe amount locked up as cash balances.


66/93

Mo!e $or 5old!n+ #"45:

%here are four motives for holding cash

%ransaction motive

Speculative motive

3ompensation motive

Precautionary motive

Tr"n4"#!on 3o!e: # firm enters into a variety of business

transactions resulting in both inflows and outflows.

Se#l"!e Mo!e:

# firm keeps cash balance to take advantage of une=pected

opportunities, typically outside the normal course of the business such

motive is therefore is purely speculative motive.

Co3en4"!on 3o!e:+anks provide certain services to their clients free of charge. %hey

therefore, usually reHuire clients to keep to minimum cash balance with them

which keep them to earn interest and they compensate them for the free services

so provided.

%re#"!on"r/ Mo!e:

# firm keeps cash balance to meet une=pected cash needs arising out of

une=pected contingencies.

C"45 3"n"+e3en 9"4!# ro9le34:

3ash is the life blood of a business firm, it is needed to acHuire supplies,

sources eHuipment, and other assets used in generating the products and service

provided by the firm. It is also needed to pay wages and salaries to workers and

managers, ta=es to governments, interest and principal to creditors, and

dividends to shareholders.


67/93

C"45 4/4e3:

%he cash system of a firm is the mechanism that provides the linkage between

cash flows.

6lements of a cash management system"

Re#e!"9le4 3"n"+e3en:2iven a choice, every business would prefer selling its produce on cash

basis. &owever, due to factors like trade policies, prevailing marketing

conditions, etc., businesses are compelled to sell their goods on credit. In certain

circumstances, a business may deliberately e=tend credit as a strategy of

increasing sales. 6=tending credit means creating a current asset in the form of

!ebtors or #ccounts receivables. Investment in this type of current assets needs

proper and effective management as it gives rise to costs such as"

") Co4 o$ #"rr/!n+ re#e!"9le

9) Co4 o$ de9 lo44e4

%hus the objective of any management policy pertaining to accounts

receivables would be to ensure that the benefits arising due to the receivables

)"'"

0eposit)"R"

)"R"

Loc! bo2

ban! +

)"'"

)"'"

0isbursemen0eposit)"R )oncentrati

on ban! )"'")"R"

)"'"0isbursemen

)"R"

Loc! bo2

ban! +)"'"

)"R"


68/93

are more than the cost incurred for receivables and the gap between benefit and

cost increases resulting in increased profits. 6ffective control of receivables

helps a great deal in properly managing it. 6ach business should, therefore try tofind out an average credit e=tended to its client using the below given formula

%otal amount of receivables

Aer"+e #red! e;ended

#verage credit sales per day

6ach business should project e=pected sales and e=pected investment in

receivables based on various factors, which influences the working capital

reHuirement. 8rom this it would be possible to find out the average credit days

using the above seven formula. 0therwise of investment in the working capital

would increase and as a result activities may get sHueeFed. %his may lead to

cash crisis.

Sor#e4 o$ or!n+ #"!"l $nd4:

'I$4 raise its working capital multiple banking which includes

State bank of India, State bank of &yderabad, +ank of +aroda, 3anara

bank, 30 bank, #ndhra bank, PS+, IndusIndbank.etc.

In 'I$4 working capital reHuirement is assessed by

8i=ing the target production for the year

Preparation of +udget (in 'upees

/orking capital reHuirement are prepared taking into account

Previous two years actual


69/93

Projected for the ne=t two years

%ro#edre $or ro#re3en o$ $nd4:

'I$4 applies a 3redit 5onitoring #nd #ppraisal (35# 'eport (a 8orty

pages document consists of historical data about the company and profit and

loss account, balance sheet, current assets, current liabilities, working capital

assessment, fund flows etc., State +ank of India subscribes the ma=imum

working capital limit (up to e=tent of


70/93

# letter of credit is a document typically issued by a bank or financial

institution, which authoriFes the recipient of the letter (the RcustomerR of the

bank to draw amounts of money up to a specified total, consistent with anyterms and conditions set forth in the letter. %his usually occurs where the banks

customer seeks to assure a seller (the RbeneficiaryR that it will receive payment

for any goods it sells to the customer.

In simple terms, a letter of credit could be said to document a bank

customers line of credit, and any terms associated with its use of that line of

credit. 4etters of credit are most commonly used in association with long;

distance and international commercial transactions.

%"/"9le4 3"n"+e3en:

5anagement of accounts payable is as much important as the

management of such accounts receivable. &owever there is a basic difference

between the approaches adopted by the finance manager in both the cases. %he

underlying objective in such case of accounts receivables is to ma=imiFe the

acceleration of collection process while in case of accounts payable it is to slow

down the payments process as much as possible. %he delay in payments of

accounts payable may result in saving of some interests costs but proves very

costly to the firm in the form of loss of credit in the market. %he financemanager therefore has to ensure that the payments to the credits are made at the

stipulated time period after obtaining the best credit term possible.


71/93

Conrol o$ "##on4 "/"9le:

3omputing the average age of payable can be calculated by any of the following

methods. 5onths or days in the period K #ccounts payable turnover T 3redit

purchase in the period K #verage accounts payable.


72/93

)67'T1R3

7N7L8(I( 9 INT1R'R1T7TI4N

DATA ANA,YSIS AND INTER%RETATI-N

Crren r"!o:


73/93

%he current ratio is an indication of a firmEs market liHuidity

and ability to meet creditorEs demands. #cceptable current ratios vary from

industry to industry. If a companyEs current liabilities e=ceed current assets (the

current ratio is below ), then company may have problems meeting its shortterm obligations. If the current ratio is too high, then the company may not be

efficiently using its current assets or its short term financing facilities. %his may

also indicate problems in working capital management.

Crren r"!o:current assets K current liabilities

Crren "44e4:

ears Inventory sundry

debtors

cashKbank

balance

other

current

assets

loans and

advances

%otal

*--B;-C )*-


74/93

*--C;- )B)-.): ):).AC


75/93

from these operations. In a general sense, the higher the working capital turn

over, the better because it means that the company is generating a lot of sales

compared to the money uses to fund the sales.

i.e. working capital T (current assets; current 4iabilities

/orking capital turnover ratio T net salesK working capital

TAB,E SH-ING -R7ING CA%ITA, TURN-&ER RATI-

Sales /orking capital 'atio

*--B;-C C@


76/93

2006-07 2007-08 2008-09 2009-10 2010-11

0

0.5

1

1.5

2

2.5

3

3.5

ratio

Inerre"!on:

%he working capital is increasing year by year. %he company will utiliFes

firms funds, so company is growing in level of assets.

Ne or!n+ #"!"l r"!o:

%his ratio is calculated by dividing net working capital by net assets. %hedifference between current assets and current liabilities e=cluding short term


77/93

borrowings is called net working capital or net assets. $et working capital

sometimes used as a measure of firms liHuidity. &owever measure the firmEs

potential reservoir of funds.

Ne or!n+ #"!"l r"!o: $et working capital K net assets

TAB,E SH-ING NET -R7ING RATI-

ears $et working

capital

$et assets $et working capital ratio

*--B;-C


78/93

2006-07 2007-08 2008-09 2009-10 2010-11

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

ratio

Inerre"!on:

%he net working capital is decreasing year by year. +ut the net assets

are increasing year by year. So the company liHuidity position is good

!# r"!o

In finance the #cid;test or Huick ratio measures the ability of a company

to use its near cash or Huick assets to e=tinguish or retire its current liabilities


79/93

immediately. uick assets include those current assets that presumably can be

Huickly converted to cash at close to their book values. # company with a Huick

ratio of less than I can not currently pay back its current liabilities.

!# r"!o T Huick assets K current liabilities

ears uick assets 3urrent liabilities uick ratio

*--B;-C @*AA.B *)-A.


80/93

2006-072007-082008-092009-102010-11

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

quick ratio

Inerre"!on:

%he ideal ratio is )") therefore, the company has to recogniFe the importance of

liHuidity and tries to increase or utiliFe the Huick assets properly.

DEBT-RS TURN-&ER RATI-


81/93

# firm sells goods for cash and credit. 3redit is used marketing tool by a

number of companies. /hen the firm e=tends credits to its customers, debtors

(accounts receivables are created in the firmsQ accounts. %he debtors aree=pected to be converted into cash over a short period and, therefore, are

included in current assets. %he liHuidity position of the firm depends on the

Huality of debtors to a greater e=tent. !ebtors turnover ratio indicates the

velocity of debt collection of a firm. n simple wards it indicates the number of

times average debtors are turned over during a year.

Sales

!ebtors %urnover 'atio T ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;

!ebtors

Ye"r S"le4 De9or4

De9or 4? rnoer R"!o

*--B;-C @):-.:C *)B.- A*.*-*--C;- )-A


82/93

DEBT-RS TURN-&ER RATI-

+**-3*: +**:3*. +**.3*; +**;3/* +*/*3//*

+***

***

-***

.***

/****

/+***

/***

;/


83/93

S"e3en o$ #5"n+e4 !n or!n+ #"!"l RIN, 200200(!n#rore4)

Particulars

*--B

5arch

*--C

5arch Increase !ecrease

Crren A44e4

Inventories )*).


84/93

Particulars


85/93

Particulars


86/93

Particulars


87/93

Particulars


88/93

)67'T1R3- FIN0IN@( 9 (A@@1TI4N(

8I$!I$2S #$! S226S%I0$S


89/93

!uring the period of study it is observed that the amount of working

capital has been continuously increasing year by year due to the

continuous increase in the value of inventories and cash balance.

&owever, the overall performance of the company during the period of

study is much satisfactory.

%he company has already accumulated funds e=cess of 's. )@:< crore

and can look forward to bigger investment in building up capacity to B.

Working Capital Management_vizag (1)

Documents

Transcript of Working Capital Management_vizag (1)