Working capital steel

STATEMENT OF WORKING CAPITAL AT RSP

(Rs. In Lakhs)

PARTICULAR 31-3-07 31-03-08 31-03-09 31-3-10 31-3-11

A.CURRENT ASSETS:-

Cash and bank balances

Raw materials

Stores and spares

Finished and semi-finished products

Sundry debtors

Loans & advances

Other current assets/Interest receivable/accrued

2066

17331

30064

39618

1166

24315

158

2244

22547

37600

62709

1332

25724

141

2400

21015

32704

47950

3231

26733

126

2577

25658

30278

80325

1592

37112

106

TOTAL C.A.

B.CURRENT LIABILITIES AND PROVISIONS:-

Sundry creditors

Security & other deposits

Others current liabilities

Provisions(Excl. Leave encashment, Gratuity, Medical benefits)

Advances from customers/others

44024

3325

18305

93967

1554

60228

4377

17671

138372

4335

124734

5604

20054

107030

1325

111265

6445

22955

106116

924

1

TOTAL C.L.

NET WORKING CAPITAL (A-B)

NOTES:

Items of capital account have been excluded.

Current liabilities also exclude provision for gratuity, leave encashment, retirement benefits.

Fig-1 Current assets and current liabilities

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Total C.A 72710 96512 114208 114718 152297 193349

Total C.L 45126 47046 56459 86687 119440 119613

2

Statement change in working capital

(2004-2005 to 2005-2006) Rs. In Lakhs

Particular 2004-2005 Rs.

2005-2006 Rs.

Effect on Working capitalIncrease Rs.

Decrease Rs.

Current Assets: Cash and bank balance

Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance

Other Current Assets

Total Current Assets

Current Liabilities:

Sundry Creditor

Security deposits

Other Liabilities

Provision

Total Current Liabilities

Working Capital

1575

12232

16656

21156

1244

19593

254

72710

23889

3450

12735

5052

45126

27584

1722

12261

20208

39342

1460

21272

247

96512

23304

2708

16077

4957

47046

49466

147

29

3552

18186

216

1679

585

742

95

7

3342

3

(C.A-C.L)

Net Increase In Working Capital 21882 21882

49466 49466 25231 25231

Interpretation:1. The liquidity position has not brought a significant change as the there is only 147

lakhs increase in cash position.2. The overall inventory level has improved but much improvement is been noticed in the

case of finished goods as it is nearly doubled.3. Better credit policy lead to increase in debtors’ level.4. Good credit standing position of the firm shows increase in loan amount.5. Sundry creditors and security position has fallen.6. Other liability have increased to 26.24%* WORKING CAPITAL HAS SHOWN AN INCREASE WHICH SHOWS A GOOD SOLVENCY POSITION.

4


(2005-2006 to 2006-2007) Rs. In Lakhs

Particular 2005-2006 Rs.

2006-2007 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


1722

12261

20208

39342

1460

21272

247

96512

23304

2708

16077

4957

47046

1879

17456

27867

42433

1296

23094

183

114208

29223

3272

15958

8006

56459

157

5195

7659

3091

1822

119

164

64

5919

564

3049

5

Working Capital (C.A-C.L)

Net Increase In Working Capital 8283

49466

8283

57749

57749 57749 18043

18043

Interpretation:1. A little increase in the cash position is seen like the previous year.2. Raw materials, stores and spares and finished goods level have increased.3. Other liabilities have shown an increase of about 8.56%4. Sundry creditors have increased due to increase in raw materials and stores and

spare even which shows that the purchase has been more or less on credit.5. Provisions has also increased nearly 61.51%

* WORKING CAPITAL HAS BROUGHT A SMALL RISE.

6


(2006-2007 to 2007-2008) Rs. In Lakhs

Particular 2006-2007

Rs.

2007-2008 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


1879

17456

27867

42433

1296

23094

183

114208

29223

3272

15958

8006

56459

2066

17331

30064

39618

1166

24315

158

114718

30794

3325

19859

32709

86687

187

2197

1221

125

2815

130

25

1571

53

3901

24703

7

Working Capital (C.A-C.L)

Net Decrease In Working Capital 29718

57749 28031

29718

57749 57749

33323 33323

Interpretation:1. There is a gradual rise been observed in the level of cash of about 187 lakh.2. The closing stock of raw material and finished goods of this year is low compared to

last year reveals that this year there is decrease in purchase level of raw materials and healthy sales lead decrease in the level of finished goods.

3. As the sales level has increased the company to promote sales employed better cash discounts and trade discounts which lead to rise in the level of debtors.

4. Loans and advances and other current assets have increased to level of 5.28% and 13.67% respectively.

5. Creditors level rise shows that creditor are offering lucrative offers which is been utilized by the company.

6. Provisions have shown a remarkable rise also the security deposits.

THE RISE IN THE CURRENT LIABILITY AMOUNT WAS HIGHER THAN THE RISE IN CURRENT ASSETS LEVEL, WHICH LEADS TO FALL IN WORKING CAPITAL

8


(2007-2008 to 2008-2009) Rs. In Lakhs


Rs.

2008-2009 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


Working Capital

2066

17331

30064

39618

1166

24315

158

114718

30794

3325

19859

32709

86687

28031

2244

22547

37600

62709

1332

25724

141

152297

33684

4377

22006

59373

119440

32857

178

5216

7536

23091

166

1409

17

2890

1052

2147

26664

9

(C.A-C.L)

Net increase In Working Capital 48264826

32857 32857 37596 37596

Interpretation:-1. There is a little increase seen in the cash position like the previous year.2. The closing stock of raw material and finished goods in this year has increased as

compared to last year.3. Loans and advances and Sundry debtor have increased to level of 5.7% and 14.2%

respectively.4. Sundry creditors have increased due to increase in raw materials which compare that

the purchase has been more or less on credit.5. Provisions have shown a remarkable rise also the security deposits.

6. The major contribution towards increase in working capital is due to rise in stock of finished goods.RSP should work on marketing of primary products to clear off the stocks.

THE RISE IN THE CURRENT ASSETS WAS HIGHER THAN THE RISE IN CURRENT LIABILITY LEVEL, WHICH LEADS TO RISE IN WORKING CAPITAL

10


(2008-2009 to 2009-2010) Rs. In Lakhs


Rs.

2009-2010 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


Working Capital

2244

22547

37600

62709

1332

25724

141

152297

33684

4377

22006

59373

119440

32857

2200

30612

31000

101552

1918

26067

0

193349

36184

8812

20671

53946

119613

73736

8065

38843

586

343

1335

5427

44

6600

141

2500

4435

11

(C.A-C.L)

Net increase In Working Capital 4087940879

73736 73736 54599 54599

Interpretation:-1. Cash balance for the present year is expected to fall .

2. Loans and advances and Sundry debtor have increased to level of 1.3% and 43.9% respectively .Rise in debtors shows that company is expecting a rise in sales.

3. Sundry creditors have increased due to increase in raw materials which shows that the purchase has been more or less on credit.

4. Provisions have shown a remarkable rise also the security deposits.

5. Other liabilities and provision is expected to decrease which will amount to increase in working capital.

THE RISE IN THE CURRENT ASSETS WAS HIGHER THAN THE RISE IN CURRENT LIABILITY LEVEL, WHICH LEADS TO INCREASE IN WORKING CAPITAL

COMPARATIVE FINANCIAL RATIOS:

( Rs. In crores)

PARTICULARS AS ON

31.3.05

AS ON

31.3.06

AS ON

31.3.07

AS ON

31.3.08

AS ON

31.3.09

AS ON

31.3.10

(BGT)

12

Sales to Gross Block (%)

Net sales Realisation to Gross sales (%)

Stock of Semi/finished Products to

Turnover (%)

Stock of Semi/Finished products in

number of months’ sales

Net profit to Gross Block (%)

Net profit to Turnover (%)

Net profit to Capital Employed (%)

Current Assets to Current Liabilities

(excl.prov.)

Quick Assets to Current Liabilities

Working Capital to Cost of Sales

Working Capital to Net Block

Working Capital to Turnover

Labour cost to turnover

Cost of Sales to Turnover (%)

Inventories (Opn.) to value of

Production

78.03

86.97

4.47

0.54

17.23

22.08

29.76

1.54

0.45

0.09

0.09

0.06

0.13

64.89

0.12

73.52

73.50

82.68

8.49

1.03

7.88

10.72

13.37

1.93

0.47

0.15

0.15

0.11

0.13

71.97

0.18

86.86

101.18

84.54

6.64

0.08

21.14

20.90

37.58

2.05

0.45

0.14

0.19

0.09

0.12

63.64

0.16

75.18

113.27

84.73

5.36

0.65

21.49

18.98

44.27

1.71

0.39

0.06

0.10

0.04

0.15

65.75

0.14

76.78

115.22

87.37

8.10

0.99

15.05

13.06

32.04

1.76

0.32

0.06

0.12

0.04

0.16

74.20

0.13

84.13

88.82

90.88

14.55

1.75

5.11

5.75

9.23

1.15

.34

.12

.20

.11

.16

85.12

.26

93.66

13

Cost of Production to Value of

Production (%)

Sundry Debtors to Turnover (%)

Gross profit to Capital Employed (%)

Gross Profit to Turnover (%)

Stock of Raw Materials in terms of No.

of months, consumption

Stock of stores & spares in terms of no.

of months, consumption

Stock of Finished /Semi finished

products to cost of sales (%)

0.26

42.03

31.57

1.15

6.68

6.89

0.32

24.45

19.80

0.88

6.54

11.80

0.20

46.63

26.17

0.98

8.12

10.43

0.16

56.40

24.38

0.90

7.47

8.16

0.17

44.63

18.48

0.87

9.19

10.92

.27

20.67

12.89

1.13

8.29

17.10

NOTES:

1. Quick assets represent total current assets excluding inventories and sundry debtor.

2. Provisions have been excluded from current liabilities for calculation of quick ratio.

3. Cost of sales means net sales realization less net profit plus net loss4. Cost of production is net expenses less CMO, HO share, freight, excise duty other

revenue and stock accretion/secretion.

14

LIMITATIONS OF WORKING CAPITAL

Every business concern should have adequate working capital to run its business

operations. It should have neither redundant or excess working capital nor inadequate nor

shortage of working capital. However, out of the two, it is the inadequacy of working capital

which is more dangerous from the point of view of the firm.

Disadvantages of Redundant or Excessive Working Capital

Excessive Working Capital means idle funds which earn no profits for the business

and hence the business cannot earn a proper rate of return on its investments.

It may lead to unnecessary purchasing and accumulation of inventories causing more

chances of theft, waste and losses.

It implies excessive debtors and defective credit policy which may cause higher

incidence of bad debts.

It may result into overall inefficiency in the organization.

When there is excessive working capital, relations with banks and other financial

institutions may not be maintained.

Due to low rate of return on investments, the value of shares may also fall.

It gives rise to speculative transactions.

Disadvantages of Inadequate Working Capital

A concern having inadequate working capital cannot pay its short-term liabilities in

time. Thus it will lose its reputation and shall not be able to get good credit facilities.

It cannot buy its requirements in bulk and cannot avail of discounts, etc.

It becomes difficult for the firm to exploit favorable market conditions.

The firm cannot pay day-to-day expenses of its operations, which increases costs and

reduces the profits of the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability of

liquid funds.

The rate of return on investments also falls with the shortage of working capital.

15

RECOMMENDATION & SUGGESTIONS

The recommendation and suggestions for effective management of working capital at RSP

are given below:

RSP should set planning standards for stock days, debtor & creditor days.

Install an understanding amongst the staff that working capital management produces

profit.

Inventory management is a great concern for RSP especially stores and spares. The

purchases manager must take certain steps for proper procurement of inventories.

Keep stock levels as low as possible, consistent without not running out of stocks and

not ordering stock in uneconomically small quantities. Just-in-stock management is

fine, as long as it is JIT and never fails to deliver on time.

Short-term credit period availed must be reduced and sundry creditors should be paid

faster.

Proper planning of production should be made and communicated to all the concerned

departments so as to determine the exact need of materials and prevent unnecessary

blockage of useless materials.

Reassess all significant customers periodically. Stop supplying existing customers

who are poor payers. After all RSP is for quality of business rather than quantity of

business.

Plant should be given freedom in deciding the credit policies, cash discount or credit

rating.

16

CONCLUSION

RSP has not only addressed itself to the country’s need for self sufficiency in Steel,

but has also given the country, the technology edge in producing strategic material. Besides

being the leader in the domestic primary steel market excluding the semi-finished products,

RSP has also earned a good name in the domestic market in manufacture of crude steel . With

its consistent track record in capacity utilization, technology absorption, quality assurance

export performance, servicing of loans, internal source generation and posting of profits, RSP

has chartered a course of confidence among its stake holders.

RSP is a well known public sector unit in the Steel sector in India. It shows how a

well managed company achieves the mission of the company and gives much more profit.

Just as circulation of blood is essential in human body for maintaining life like that working

capital is also an important aspect and can be a main contributor to a company’s profit if

managed efficiently.

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BIBLIOGRAPHY

1. Audited Annual Reports of RSP for the year , 2004,

2005, 2006 and 2007, 2008,2009.

2. BOOKS:

a) Financial Management – I.M.Pandey

b) Management Accounting – R.K.Sharma & S.K.Gupta

c) Financial Management – P.C.Chandra

d) Working Capital Management – V.K.Bhalla

3. WEBSITES:

a) www.google.com

b) www.sail.co.in

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http://www.google.com/

A

0

20000

40000

60000

80000

100000

120000

Rs in Lakhs

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year

Total C.A

Total C.L


0

10000

20000

30000

40000

50000

60000

Rs. in Lakhs

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year

Net W.C

Net W.C

19

2004-05 2005-06 2006-07 2007-080

5

10

15

20

25

Working Capital Turnover Ratio

Ratio

20

Working capital steel

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