Professional Documents
Culture Documents
WCM
WCM
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ACKNOWLEDGEMENT
At the prime outset I owe my sincere gratitude to the management and allied discipline of TRL, Belpahar for giving me an opportunity to undergo training for a period of 2 month. A large number of individual have contributed in making this project analysis of Trend analysis. I am thankful to all of them for their help and encouragement. My project has been influenced by annual report of the company and information provided by employee in the field. As far as possible they have been fully acknowledge at their appropriate places. I express my gratitude to all of them. My deepest sense of gratitude goes to Mr. C.S. Panigrahi and Mr. A.K. Mohanty. My special thank to Mr.K.V.Rao for his special guidance. I would very much appreciate and sincerely acknowledge suggestions from Mr. M.K.Patel who has always been a source of incessant motivation and encouragement to mean who has always extended his UN stinted support to me in making this project.
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Date
Faculty Guide
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Date
Signature of Candidate
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TABLE OF CONTENTS
1. EXECUTIVE SUMMARY 05 2. METHODOLOGY 06 3. OBJECTIVES OF STUDY 07 4. INDUSTRY ANALYSIS 08 5. COMPANY ANALYSIS 16 6. WORKING CAPITAL MANAGEMENT 28 7. RECEIVABLE MANAGEMENT 43 8. INVENTORY MANAGEMENT 55 9. CASH MANAGEMENT 62 10. 74 WORKING CAPITAL FINANCE
12. BIBLIOGRAPHY 80
13. APPENDIX 81
EXECUTIVE SUMMARY
This project is aimed at studying Working Capital Management at TATA REFRACTORIES LIMITED for five years (2003-04 to 2007-08). The analysis of working capital management of the company includes Operating cycle, Receivables management, Inventory management, Cash management and Working capital financing of the company. In the operating cycle Net Working Capital is required to be calculated. Net working capital includes Raw material conversion period, Work in progress conversion period, Stores and Spares conversion period, Fuel conversion period, finished goods conversion period, Account receivable conversion period and Payable deferral period. Liquidity ratios, Activity ratios and Profitability ratios are calculated. For receivable management, collection procedure of a company is studied and outstanding debtors are also ascertained. For inventory management inventory control system of the company is studied and its effect on working capital. An overview of cash management has been undertaken in order to ascertain the cash position of the company. By studying the working capital of a company the efficiency of different functional departments come into picture along with that of finance department. Though TRL is managing its working capital well, a thorough study of the working capital management of the company brings out many opportunities for improvement.
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METHODOLOGY
This report is based on experience while working as a trainee at TATA REFRACTORIES LTD, Belpahar. Two sources of data are used: Primary data Information gathered from discussion with officers in the finance department and materials department on various aspects of working capital formed the primary source of data for the analysis. Secondary data Annual report (2003-04 to 2007-08), magazines and journals in knowledge centre in TRL; internet formed the secondary information source.
The following steps have been taken while preparing the report: Observation and handling of activities in the finance department Preparing financial statements, cash flow statement, operating cycle and other related documents.
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CHAPTER-1
INDUSTRY ANALYSIS
REFRACTORY INDUSTRY REFRACTORY INDUSTRY LINKED TO IRON AND STEEL INDUSTRY INDIAN REFRACTORIES INDUSTRY SIZE OF THE INDUSTRY CRITICAL APPRECIATION OF DOMESTIC REFRACTORIES INDUSTRY
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REFRACTORY INDUSTRY
Refractories are a term given to a class of materials which are produced from non-metallic mineral and possess capability to withstand heat and pressure. These are products that confer properties like high temperature insulation, resistance to corrosive and erosive action of hot gases, liquids and solids at high temperatures in various kilns, furnaces, driers, gas fires and reformers. Refractories are consumed by the iron and steel, non-ferrous, cement, copper, glass, aluminum, fertilizer, thermal power plants and petro-chemical industries etc, which are witnessing robust growth. These sectors are giving high thrust on productivity, quality cost, energy, conservation and cleaner environment which necessitates new generation of Refractories with specific requirements.
Sources: www.irmaindia.org
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Sources: www.irmaindia.org
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Sources: www.irmaindia.org
Global capacity is also expected to continue to grow strongly, as some governments have been encouraging investments in the steel industry in order to meet growing infrastructure needs and demand from expanding industrial sectors. Robust demand scenario in the steel industry in India and globally has prompted both Indian industrial houses and multinationals like Mittal Steel and POSCO to set up Greenfield steel units in India. Based on the major expansion and green field projects coming up in the steel sector, the refractory production is expected to increase by 16% per annum for the next few years.
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Its been a long journey for the Indian refractory industry since the first factory line production of Refractories started in Kolkata or Calcutta as the city was called then in the year 1874. Today, the industry comprises over 100 established units, with 11 large plants, 24 medium-scale units and the rest in the small-scale sector. However, while the refractory industry in India took off in the late 19th century, the real growth came in th e late 1950s when the public sector steel plants were set up and Tata Steel embarked upon its expansion plans. Currently, the Indian refractory industry has an aggregate production capacity of 20 lakh tones per annum. The capacity utilization, however, currently stands at around 60 per cent, or 11.5-12 lakh tones per annum. About 75 per cent of the Refractories that are manufactured find application in the steel industry, 12 per cent in the cement industry, 5-6 per cent in non-ferrous industries, three per cent in the glass industry and the balance in other industries. Necessarily, Refractories are used either where high temperature or high rate of abrasion / corrosion/erosion is involved. Traditionally, Refractories are made of naturally-occurring minerals, such as bauxite, kyanite, magnetite, fireclay, chrome ore, etc. Lately, however, the industry has been using man-made raw materials, such as brown-fused alumina, tabular alumina, fused magnesia, silicon carbide, magnesia alumina, etc.
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The size of the Indian refractory industry has been pegged at Rs 2,300 crore and it is stated to be growing at 8-10 per cent per annum. Although the specific consumption of Refractories has gone down from 30 kg per tone of steel about 20 years ago to 12-13 kg on an average for the steel industry as a whole and as low as 7-8 kg in the case of some more efficient steel units, the scope for growth is good in view of the continuing growth in the Indian economy and the governments focus on infrastructure development. Says Dr J.J. Irani, Director of Tata Sons and Former Managing Director of Tata Steel: With the government aiming to invest more and more on infrastructure development, the steel industry in the country is slated to grow to, possibly, 120 million tones or even up to 150 million tones by 2015. According to most reports, the cement, aluminum and other industries are also to grow to unprecedented heights. This should be good news for refractory producers in India. According to Dr Irani, Refractory producers in India have to rise to the occasion by providing ready, regular, speedy and consistent supplies. It would also be important for Indian refractory manufacturers to focus on their raw materials security, he says. Industry insiders do acknowledge that raw materials security is a concern especially with China imposing quantitative restrictions on export of raw materials and also jacking up prices over the last year or so. Cheaper refractory imports from China are also putting a pressure on the industrys margins . Hiring and retaining skilled manpower is a major challenge that the Indian refractory industry has to cope with.
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This was mentioned by Mr C.D. Kamath, the immediate past chairman of Indian Refractory Makers Association, at its AGM held here on July 22 last. The upturn in export performance, in these circumstances, has, therefore, come as a major relief and confidence booster. The value of the refractory industry's exports, which stood at Rs 55 crore in 1998-99, rose to Rs 86 crore in the last financial year. Judging by the orders already received and expected, the industry is hoping to register exports worth Rs 100 crore in 2002-03. Its assessment is that if the trend persists, Rs 200 crore worth of exports will be a reality, say, by the terminal year of the Tenth Plan. Some 13 years ago, it could export only Rs 1 crore worth of refractories. The volume of exports and unit realization in 1998-99 were 23,682 tones and Rs 23,500 respectively. The figures in 2001-02 were 29,912 tones and Rs 29,000 respectively. Earlier, exports would be only to Bangladesh, Sri Lanka, Malaysia, Indonesia, Egypt and Syria. Now, its products are also being shipped to the US, the UK, Germany, Sweden, Finland and Chile. The market diversification has given the industry a confidence level that it never had in the past. The export growth logically should facilitate better capacity utilization.
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CHAPTER-2
COMPANY ANALYSIS
TATA GROUP TATA REFRACTORIES LIMITED SWOT ANALYSIS FINANCIAL OVERVIEW OF TRL
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TATA GROUP
Group Turnover
US $ 70 Billion
5 % of Indias GDP
US $ 1.42 Billion
300000 Employees
PURPOSE
Improve the quality of life through leadership in targeted sectors of national economy significance.
GROUP AS A PIONEER
Indias first indigenous steel mill. Indias first power utility. Indias first hotel chain. Indias largest salt work. Indias first international airline. Indias first fully indigenous passenger car. Indias first software venture.
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VISION
A Global Refractories Company.
MISSION
TATA Refractories shall be a high performance and technology driven organization committed to create value for all its stakeholders.
VALUES
Customer delight Leadership by example Integrity and transparency Fairness Furthering excellence
QUALITY POLICY
We, at TATA Refractories, dedicate ourselves to Total Quality. We are committed to enhance customer satisfaction on a continuous basis through implementation of an effective Quality Management System. Continuous improvement, credibility, consistency and concern shall be our guiding values.
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FOREIGN COLLABORATIONS
Various organizations have made collaborations with TRL viz. M/S KROSAKI REFRACTORIES, JAPAN. M/S DOLOMIT WERKE, GMBH, GERMANY M/S STOPINC SWITZERLAND. A.P. GREEN U.S.A. ELKEM, NORWAY
MAJOR PRODUCTS
Basic bricks High Alumina bricks Silica bricks Dolomite bricks Monolithic refractories Flow control products.
MAJOR SERVICES
Total refractories solution for equipment for making steel, copper, aluminum, glass etc. Total refractories management i.e. providing running maintainces of customers equipment such as ladles, kilns, Furnaces etc.
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SWOT ANALYSIS
Strength:
Tata brand image & code of conduct. Implementation of TQM. Implementation of ERP system (Baan). TRL provides Total Refractory Solutions (TRS) Technical collaboration with global alliances. Set up of high tech machinery ex- SACMI for pressing of products. New packaging solution. Team TRL.
Weakness:
Lack of profitable investment. Over stocking of assets. High cost of production. Low yield.
Opportunity:
Cost control. Increased efficiency. Quality product. Increased profit
Threats:
Global challenges: Large refractory manufacturers such as RHI have now targeted. Indian refractories market. Business challenge: Existence of large number of small refractories in the unorganized sectors operating at 40-50% capacity utilization. Customer: Customers of refractories product generally belongs to large industrial organization therefore have strong negotiating position. Suppliers: In highly competitive environment & ever increasing customer expectations.
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Key challenge is to meet the need of continuous cost reduction demand through efficient supply chain management. Environment: Intrinsic nature of raw material & manner of their processing result in air pollution, high dust content water contamination.
COMPETITORS OF TRL:
As other fields have competitions, the Refractories market also has a competition. Here we are discussing about the main competitors of TRL. ORISSA CEMENT It has the turnover of 200 crore & the export worth RS 25 crore. Presently they are trying to establish the production & quality of ladle tundish shrouds. OCL is capturing order of the mini steel plant for well blocks in LCC 90 quality & feedback report form mini steel plant is very good. BHARAT REFRACTORIES BRL as around 125 M.T of specialty product per month as INDO FLOGATES are presently taking from OAL, the slide plates. They are approaching MSP & TISCO for supply specialty product.
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ACC CEMENT It has turnover for the year was 179 crore. Along with other competitors, acc is also making his presences in domestic market.
POTENTIAL THREAT:
TRL competitors M/S oil operating from china is a major threat in the Southeast Asia & the Far East. As they available to supply basic bricks at a very low price in view of raw material availability & freight advantages they have already get the order from NAT STEEL (Singapore) & PT ISPAT (INDONESIA) for the magnesia is carbon for supply from there china plant. In spite of all these competition TRL is the leading company in the field of Refractories within country & now trying already to expand its wing in the international market also. It has already set up many of the potential outsiders customer in AUSTRALIA, SRILANKA, BHUTAN. In future this company may become the world number 1 Refractories company.
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Performance
In 2007-08 the company reached new milestones surpassing all previous records of production, sales revenues and exports. The total revenues of the company at Rs. 587 Crores are the highest in its history. The consolidated revenues of the company along with its subsidiary, TRL china limited, breached the Rs. 600 Crores mark to reach Rs. 610 Crores the company retained its position as the no. 1 Refractories manufacturer in India in terms of revenues. Overall sales volume at 2, 56,414 t. of previous year. The production during the year at 2,13,427 t. against 2, 03,234 t. of previous year, was higher by 5%. Prices of raw materials and energy continued to climb steeply during the year. Interest costs have also risen because of higher rates as well as increased borrowings for meeting working capital requirements. Profit before taxes for the year is Rs. 37 Crores against Rs. 31 Crores in the previous year (an increase of 19%) and profit after taxes is Rs. 19 Crores last year (an increase of 16%).
Exports
Driven by the capital flows in the system, the Indian rupees appreciated by 13.25 against the U.S dollar in T-O-Y basis as on December, 2007 thus adversely affecting Indias exports. Despite this adverse condition the company has achieved the highest ever exports of Rs. 68 Crores compared to Rs. 56 Crores of the previous year; an increase of 21% . at present the company is exporting to more than 30 countries, our exports account for over 23% of the total Refractories exported from India, and 12% of companys total turnover comes from exports. The company has taken several measures to strengthen its presence in international markets.
Subsidiary companies
The company has two subsidiary companies viz. TRL Asia Private Limited (special Purpose vehicles and TRL China Limited, a 100% subsidiary of TRL Asia Private Limited is 88%. TRL China started commercial operations from 28 th December 2006. TRL China has earned a profit during the first full year of its operation itself. It has achieved a turn-over of Rs.67 Crores and PBT of Rs.0.63 Crores. Profitability of TRL China has been, however, seriously affected due to withdrawal of VAT benefits by the Chinese government as well as by the strengthening of Chinese currency (RMB) against the dollar. In order to meet market demands, TRL China is undertaking the phase-II expansion of its production facilities at an estimated capital expenditure of Rs. 14.95 Crores. The funds required for phase-II expansion shall be raised by TRL China Limited itself through loans and internal generations.
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3. Future plan of action In the coming year, the Technology Division plans to focus on Microwave heating of Refractories. Synthetic raw materials Plant waste reduction and value added utilization. Use of non oxides and nano materials in Refractories. High performance constables and precast products. Chrome free Refractories for replacing Mag-chorome bricks.
: : :
0.33%
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CHAPTER-3
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INTRODUCTION
Working capital is the life blood and every managers primary task is to help to keep it managing. Good management of working capital generate cash and helps to improves profits and reduce risk. In other words working capital is the current asset the management of which is different from fixed asset. For example the discounting and compounding techniques, in capital budgeting is not required in WCM. Another difference is a large amount of working capital strengthen firms liquidity position but at the same time it also reduces the over all profitability . Current asset can be adjusted with sales fluctuations in the short run. Thus the firm has a greater degree of flexibility in managing current or working capital.
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2 0 14929413 14419547 08 76 Sources: Annual Report, TRL 2. Net Working Capital refers to the difference between current assets and current liabilities. Current liabilities those claims of outsiders which are expected to matured for payment within an accounting year and include creditor, bills payables, and outstanding expanses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceeds current liabilities. Negative net working capital occurs when current liabilities are in excess of current assets.
5 20978263 44
6 17230931 53
The table below shows the net working capital of TRL from 2005 to 2008 i.e. of four accounting years.
A GALANCE AT TRL'S NET WORKING CAPITAL As on As on As on As on 31.03.2008 31.03.2006 31.03.2005 Current Assets 31.03.2007 a) Stores and Spare Parts (at cost) 8,53,67,154 4,35,67,566 4,46,55,042 6,40,02,684 b) Loose Tools 18,22,760 10,77,258 11,69,508 11,64,815 c) Stock-in Trade 85,13,94,581 63,21,91,956 63,65,90,022 58,61,30,368 d) Sundry Debtors 109,44,61,154 78,13,27,686 66,67,41,534 103,75,57,010 e) Cash and Bank Balances 6,47,80,695 3,47,76,842 9,27,98,670 3,42,38,276 Total Current Assets 2,097,826,344 1,723,093,153 1,492,941,308 1,441,954,776 Current liabilities a) Acceptances 6,17,43,902 64,82,700 96,25,532 8,41,65,532 b) Sundry Creditors 66,84,41,252 64,36,62,467 62,39,47,395 56,61,04,791 c) Advances received from customers 10,83,12,593 14,96,82,413 2,82,85,001 10,92,81,991 d) Interst accrued but not due 1,86,88,757 89,06,511 72,91,624 27,30,208 e) Other Liabilities 3,31,894 10,64,452 11,02,460 12,95,679 Total Current Liabilities 85,75,18,398 80,97,98,543 67,02,52,012 76,35,78,201
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1,240,307,946
913,294,610
822,689,296
678,376,575
OPERATING CYCLE
The need for working capital to run the day to day to day business activities cannot be over emphasized. The firm has to invest enough funds in current assets for generating sales. Current assets are needed because sales dont convert in to cash instantaneously. There is always an operating cycle involved in the conversion of sales into cash. Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of TRL includes three phases: Acquisition of resources, such as raw materials, labour, power, and fuel etc. Manufacture of the product which includes conversion of raw material into work-in-progress in to finished goods. Sale of the product either for cash or credit. A credit sale creates accounts receivable for collection.
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The above cycle is the TRLs operating cycle which shows different stages of conversion of raw materials into cash. The length of the operating cycle of TRL is the sum of inventory conversion period and debtor conversion period. The inventory conversion period is the total time taken for producing and selling the product. Typically it includes, raw material conversion period, work-in-progress conversion period, stores and spares conversions period, fuel conversion period, and finished goods conversion period. The debtor conversion period is the time required to collect the outstanding amount from the customer. The total of inventory conversion period and debtors conversion period is refers to as gross operating cycle (GOC). TRL may also acquire resources on credit and temporarily postponed payment of certain expenses. Payables, which the firm can differ, are spontaneous sources of capital to finance investment in current assets. The creditors deferral period (CDP) is the length of time the firm is able to differ payments on various resource purchases. The difference between gross operating cycle and payable deferral period is net operating cycle (NOC).
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We had calculated the raw material conversion period, work-in-progress conversion period and finished goods conversion periods, debtors conversion period, creditor conversion period, and net working capital of TRL for five years from the dates available by the annual report and the other sources as given by our guide at TRL.
ITEMS
NORMS
AS PER NORM
DEBTORS
70 DAYS OF SALES
RAW MATERIAL
45 DAYS OF CONSMN.
7.2
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WIP
-6.56
5.15 (246 DAYS ) 3.56 (23 DAYS ) 39.66 ( 27 DAYS ) 46.59 249.87
2.63
FUEL
15 DAYS OF CONSMN.
1.15
FINISHED GOODS
-5.19
ACTUAL
0.00 -5
12.91
OTHER CREDITORS & PROVISIONS Incl. Not due within one year TOTAL CURRENT LIAB. NETWORKING CAPITAL
ACTUAL
85.39 169.48
98.3 151.57
ITEMS
NORMS
AS PER NORM
006 DEBTORS 60 DAYS OF SALES 86.12 ( 60 DAYS ) 16.39 ( 30 DAYS ) 17.66 ( 15 DAYS ) 2.52 ( 90 DAYS ) 1.96 ( 15 DAYS ) 103.75 ( 73 DAYS ) 19.02 ( 35 DAYS ) 14.06 ( 12 DAYS ) 3.82 (137 DAYS) 2.68 (21 DAYS ) 17.6 3
RAW MATERIAL
30 DAYS OF CONSMN.
2.63
WIP
-3.6
90 DAYS OF CONSMN.
1.3
FUEL
15 DAYS OF CONSMN.
.72
FINISHED GOODS
14.5 6
ACTUAL
ACTUAL
0.00
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Incl. Not due within one year TOTAL CURRENT LIAB. NETWORKING CAPITAL
70.67 131.06
82.7 123.15
12.0 3 7.91
ITEMS
NORMS
DEBTORS
70 DAYS OF SALES
75.61 ( 60 DAYS ) 22.30 ( 45 DAYS ) 14.42 ( 15 DAYS ) 4.66 ( 90 DAYS ) 1.57 ( 15 DAYS )
2.52
RAW MATERIAL
35 DAYS OF CONSMN.
2.97
WIP
0.97
90 DAYS OF CONSMN.
-1.24
FUEL
15 DAYS OF CONSMN.
-0.52
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FINISHED GOODS
-1.53
ACTUAL
OTHER CREDITORS & PROVISIONS Incl. Not due within one year TOTAL CURRENT LIAB. NETWORKING CAPITAL
ACTUAL
53.99
97.18 129.90
117.34 112.91
ITEMS
NORMS
AS PER NORM
DEBTORS
70 DAYS OF SALES
65.57 ( 60 DAYS )
RAW MATERIAL
35 DAYS OF CONSMN.
19.48 ( 45 DAYS ) 9.75 ( 15 DAYS ) 4.40 ( 90 DAYS ) 1.13 ( 15 DAYS ) 24.09 ( 30 DAYS ) 50.53 174.95 37.03
10.8 3
WIP
4.32
90 DAYS OF CONSMN.
-0.49
FUEL
15 DAYS OF CONSMN.
-0.45
FINISHED GOODS
-4.81
ACTUAL
OTHER CREDITORS & PROVISIONS Incl. Not due within one year TOTAL CURRENT LIAB. NETWORKING CAPITAL
ACTUAL
44.34
81.37 93.58
109.36 76.09
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ITEMS
NORMS
AS PER NORM
DEBTORS
70 DAYS OF SALES
60.25 ( 70 DAYS ) 12.19 ( 35 DAYS ) 9.75 ( 15 DAYS ) 4.26 ( 90 DAYS ) 1.00 ( 15 DAYS ) 22.62 ( 30 DAYS )
49.82 ( 58 DAYS ) 23.97 ( 68 DAYS ) 11.64 ( 18 DAYS ) 3.67 ( 78 DAYS ) 0.92 (14 DAYS ) 20.42 ( 27 DAYS )
RAW MATERIAL
35 DAYS OF CONSMN.
11.7 8
WIP
1.89
90 DAYS OF CONSMN.
-0.59
FUEL
15 DAYS OF CONSMN.
-0.08
FINISHED GOODS
-2.20
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ACTUAL
25.01 135.08
25.01 135.45
OTHER CREDITORS & PROVISIONS Incl. Not due within one year TOTAL CURRENT LIAB. NETWORKING CAPITAL
ACTUAL
59.69 75.39
71.05 64.40
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Current Assets in proportion to Total Assets Year Current Total Assets Assets Ratios 2007-2008 540423279 38.82 2097826344 7 % 2006-2007 497933752 34.60 1723093153 5 % 2005-2006 462303631 32.30 1492941308 7 % 2004-2005 369276926 39.04 1441954776 4 % 2003-2004 298477162 37.74 1126367562 6 %
Sources: Annual Report, TRL There is a direct relationship between an firms growth and its working capital needs. As sales grow company needs to invest more in inventories and debtors. As the firms out put and sales increases, the need for current asset increases, but current asset dont increase in direct proportion to output. TRLs sales for five years are shown below. The amount of current asset in relation to current asset in not a function of direct proportionality. These figures are shown below in table and graph.
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Current asset Turnover Ratio Sales Current Assets 584,59,23,088 2097826344 516,75,44,869 455,70,76,293 400,54,21,306 317,07,24,228 1723093153 1492941308 1441954776 1126367562
A conservative policy implies greater liquidity and lower risk; while an aggressive policy indicates higher risk and poor liquidity. Moderate current asset policy fall in the middle of conservative and aggressive policy.
CURRENT ASSETS FINANCING POLICY Current Fixed Years Assets Assets CA/FA 249,72,17,8 330,64,06,4 2007-08 31 53 0.75526 254,66,60,2 325,62,44,3 2006-07 34 72 0.78208 230,24,50,9 313,00,95,0 2005-06 05 09 0.73558 185,44,90,2 225,08,14,4 2004-05 92 88 0.82391 135,45,16,5 185,84,04,0 2003-04 43 64 0.72886
Interpretation: By seeing the increasing and decreasing trend of investment in current asset as compared to investment in fixed assets, it is clears that TRL adopts moderate current asset policy. In other words it pays more attention towards profitability and liquidity.
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LIQUID RATIOS 20072006200508 07 06 2.446 2.128 2.227 2.35 2.04 2.16 0.076 0.042 0.052 155.474 139.59 142.741
200405 2003-04 1.888 2.082 1.83 2.71 0.1215 0.055 159.8 155.57
ii) Activity Ratios Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets the larger the amount the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assts are being converted or turned over into sales. Activity ratio, thus, involve a relationship between sales and assets. A proper balance between sales and assets generally reflects that assets are managed well. Several activity ratios can be calculated to judge the effectiveness of asset utilization.
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200506 5.498
200405 4.764
200304 4.431
Debtors Turnover Ratio Net Asset Turnover Ratio Current Asset Ratio Working Capital Turnover Ratio Report, TRL
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CHAPTER-4
RECEIVABLES MANAGEMENT
INTRODUCTION: ASPECTS OF CREDIT MANAGEMENT MODE OF PAYMENT BY DEBTORS MONITORING RECEIVABLES FACTORING
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INTRODUCTION
A firm grants trade credit to protect it sales from the competitors and to attract the potential customers to buy its product at favorable terms. Trade credit creates accounts receivable or trade debtors that the firm is expected to collect in the near future. The customer from whom receivable or book debt have to be collected in the future are called trade debtors or simply as debtors and represents the firms claim or asset. A credit sale has three characteristics. It involves an element of risk that should be carefully analyzed. Cash sales are riskless, but not the credit sales as the cash payments are yet to be received. It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while the seller expects an equivalent value to be received later on. It implies futurity. The buyer will make the cash payment for goods or services received by him in a future period.
A firms investment in accounts receivables depends on volume of credit sales and collection periods. Trade credit arises when a firm sales it products or services on credit and doesnt receive cash immediately. Due to which debtors are arises in the firm, thus trade debtors represent investment. As substantial amounts are tied-up in trade debtors, it needs careful analysis and proper management, so this arise receivable management. Debtors constitute a substantial portion of current asset of several firms. Basically trade debtors, after inventories, are the major component of current assets. They form about one third of current asset in India. Granting credit and creating debtors amounts to the blocking of the firms fund. The interval between the date of sale and the date of payment has to be financed out of working capital. This necessitates the firm to get funds from banks or other sources.
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Percentage of debtors over current asset of TRL for five years is shown below in the form of table and graph. YEARS 20072008 20062007 20052006 20042005 20032004 DEBTORS 109,44,61, 154 103,75,57, 010 78,13,27,6 86 66,67,41,5 34 49,82,40,4 90 CURRENT ASSETS 249,72,17, 831 209,19,80, 916 209,19,80, 916 185,44,90, 292 135,45,16, 543 RATIOS 43.83% 49.60% 33.94% 35.95% 36.78%
Sources: Annual Report, TRL Interpretation: If we evaluate the gross current asset of TRL we can very well observe that about 49% of it is represented by debtors in the financial 7year 20062007, which are Rs 102.507 corers more than its norms. However it may be observed that in subsequent years TRL has reduced the gap and brought the debtors position at par level of norms. As debtors plays a vital role in working capital management, TRL has properly analyzed in details how exactly debtors are managed here. A firms investment in accounts receivable depends on the volume of credit sales and the collection period. So it is also essential to find out the collection period to know the system of collection on time. It is finding by the following formula i.e.
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Average collection period (ACP) = Debtors/Credit Sales x 360 It also helps to find the firms average investment in account receivable. Average collection period of TRL for five years is shown below in the form of table and graph. YEARS 20072008 20062007 20052006 20042005 20032004 DEBTORS 109,44,61, 154 103,75,57, 010 78,13,27,6 86 66,67,41,5 34 49,82,40,4 90 CREDIT SALES 584,59,23, 088 516,75,44, 869 455,70,76, 293 400,54,21, 306 317,07,24, 228 ACP 67.398 days 72.282 days 61.723 days 59.926 days 56.57 days
So in above table the average collection period i.e. ACP determines the speed of payment by customers. It measures the number of days for which credit sales remains outstanding. The longer the ACP, the higher the firms investment in account receivable.
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Sources: Annual Report, TRL Interpretation : So here we are seeing that in financial year 2006-2007 the average collection period is very high that means TRLs investment in account receivable is also higher.TRL has setup a task force comprising of members from marketing and finance department. The task force is mostly set to identify the loc mina in the system of collection on time and also given more attention for collecting the old dues.
2. Credit policy variables Credit standard: It is the criteria which a firm follows in selecting customers for the purpose of credit extension.TRL gives credit according to the past history and past experience of the customer. Credit period: The credit period given by TRL is generally 60 days. Cash discount: The discount rate is 3% on list price if it is paid on advance.
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3. Credit evaluation of customer TRL adopt traditional credit analysis, so it calls for assessing prospective customers in terms of four C. Character, capacity, condition and collateral. TRL has categories its customers in three categories: Red- It indicates financially very weak, high risk customers. Yellow- It indicates customers with moderate health and risk. Green- It indicates financially strong customers.
4. Credit-granting decision Once the firm has assessed the creditworthiness of a customer, it has to decide weather or not credit should be granted. In TRL the basically there is no thumb rule for credit granting decision. All decisions related to credit granting is taken by the heads of three profit centre i.e. (Basic and Dolomite, Alumina and Silica, Monolithic and Flow control), joint MD and MD. 5. Control of accounts receivables TRL has set up a task force comprising of members from marketing and finance department. The task force is mostly set to identify the loc mina in the system of collection on time and also given more attention for collecting the old dues. 6. Measures commonly employed for studying bad debt losses ratios. Default rate can be measured in terms of bad losses ratios indicates default risk. Default risk is the likelihood that a customer will fail to repay the credit obligation. YEAR CONSIDER ED DOUBTFUL 20072008 12,58,14 2 20062007 29,58,14 2 20052006 29,01,25 5 20042005 1,78,83,5 24 20032004 1,56,66,6 05
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Sources: Annual Report, TRL So while seeing on the above table we can conclude that TRL has taken some major steps to control doubtful debts.
Parties of LC: There are five parties to the letter of credit Issuer Applicant Beneficiary Advising bank Confirming Bank
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Basically LC is win- win situation for both the parties. TRL uses SBI Commercial Branch, Rourkela as an issuer bank for letter of credit. 3. Credit Payment Of 30 days and 60 days: Steel plants are the major customers of the company and they have generally makes the payment for the credit allowed to them in 30 days. For Other customers the credit payment is 30 days or 60 days. 4. Other modes of payment by debtor i) Postdated cheques: many customers of TRL in northern region prefer to make this mode of payment.TRL takes postdated cheques with Bank guarantee certificate. Payment on the basis of performance: For customers like Integrated Steel Plants (ISP) TRL collect the money from them on the basis of performance of the product. Guarantee of the product performance is supported by the help of R&Ds approval certificate with bank guarantee certificate, which is issued by SBI Samada, Belpahar. A slab has been made by TRL which shows the payment procedure. 10% of payment at the time of delivering the product, for that bank guarantees, 80% of payment during the performance of the product and another 10% of payment after customer satisfaction.
ii)
MONITORING RECEIVABLES
A firm needs continuously monitoring and controlling its receivables to ensure the success of collection effort. TRL uses Aging Schedule method for evaluating the management of receivables. Aging Schedule shows the outstanding amount with a limited credit period which is remains uncollected that period. It breakdown the receivables according to the length of time for which they have been outstanding. Aging Schedule provides more information about the collection experience. It helps to spot out the slow paying debtors. The Aging Schedule of TRL for the financial year 2006-2007 has been shown below.
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D07243 D10008 D50001 D16003 D96001 D95020 D15005 D20012 D07014 D07175 D50007 D10031 D10001 D15017 D20010 D15018 D97008 D15023 D15024 D27001 D15027 D95001 D15028 D96066 D65009 D95030 D95006
GLOBAL HITECH INDUSTRIES LIMIT HARYANA STEEL & ALLOYS LIMITED HINDALCO INDUSTRIES LTD. HITECH SERVICES IFGL REFRACTORIES LIMITED INTEGRATED SERVICES ISMT LIMITED ISPAT INDUSTRIES LIMITED JAMSHEDPUR ENGG.& MACHINE JAYASWALS NECO LIMITED JHAGADIA COPPER LIMITED JINDAL STAINLESS LIMITED JINDAL STAINLESS LIMITED JINDAL STEEL & POWER LIMITED-U JSW STEEL LIMITED KALYANI CARPENTER SPECIAL STEE LARSEN & TOUBRO LIMITED MAHINDRA UGINE STEEL CO. LTD., MARMAGOA STEEL LIMITED MEENA AGENCY PRIVATE LIMITED MODERN STEELS LIMITED MORTEX (INDIA) MUKAND LIMITED NAVEEN TRADERS NEUTRAL GLASS & ALLIED INDS. L OSWAL HYDRAULICS & PNEUMATICS PADMAJA INC Total Grand Total
0 30 0 10 0 10 0 40 0 30 0 40 0 30 0 10 0 30 0 50 0 10 0 60 0 10 0 30 0 20 0 30 0 20 0 10 0 30 0 30 0 30 0 40 0 10 0 40 0 20 0 40 0 40 0
30.94 18.77 283.04 47.75 74.00 83.28 23.23 265.02 16.08 18.56 32.33 96.70 33.94 148.95 54.53 24.45 1,016.4 4 22.37 33.51 533.04 20.05 38.81 41.18 12.36 11.57 11.52 116.45 5,215.3 0 8,375.5 4
30.94 15.13 250.60 34.94 74.00 83.28 19.03 265.02 5.93 0.00 2.64 96.70 29.02 31.06 33.75 22.09 1,014.1 0 22.37 33.51 0.07 19.97 38.81 33.24 12.36 11.57 11.52 104.38 4,127.5 3 6,547.3 0
0.00 3.64 3.03 4.34 0.00 0.00 4.19 0.00 10.15 0.00 3.53 0.00 2.96 11.69 0.00 0.06 2.34 0.00 0.00 38.30 0.00 0.00 2.20 0.00 0.00 0.00 12.08 239.14 428.90
0.00 0.00 2.94 3.94 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.85 15.53 17.65 0.00 0.00 0.00 0.00 46.12 0.00 0.00 0.65 0.00 0.00 0.00 0.00 188.64 433.12
0.00 0.00 5.00 4.43 0.00 0.00 0.00 0.00 0.00 12.60 26.17 0.00 0.11 17.35 3.14 2.29 0.00 0.00 0.00 263.15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 347.22 493.32
0.00 0.00 21.46 0.00 0.00 0.00 0.00 0.00 0.00 5.96 0.00 0.00 1.00 73.31 0.00 0.00 0.00 0.00 0.00 185.41 0.01 0.00 0.00 0.00 0.00 0.00 0.00 306.28 459.82
0.00 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.06 0.00 5.10 0.00 0.00 0.00 0.00 6.48 13.08
FACTORING
Factoring is a popular mechanism of managing, financing and collecting receivables by companies.It is a method of converting a non-productive, inactive asset into a productive asset by selling receivables to a company that specializes in
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their collection and administration. In other words it means getting the money before due date (selling bills receivables to bank) The factor is the financial institution that purchases the clients accounts receivable and in relation thereto, controls the credit, extended to customers. Factoring facility is given by TRL only to its green customers. The factor (bank) which gives service to TRL for bills discounting facility is HSBC, Bhubaneswar.
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CHAPTER-5
INVENTORY MANAGEMENT
INTRODUCTION DECISION IN INVENTORY MANAGEMENT
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INTRODUCTION
Inventory constitutes about 60 percent of current assets of public limited companies. The inventories can be in the form of raw materials, work-in-process and finished goods, fuel, stores and spares.
1. A fundamental requirement for good inventory management is extensive database with respect to monthly consumption and lead time 2. Higher the fluctuation in either of the parameter larger should be the database that is data to be available for a longer period of time. In order to reduce the working capital days TRL has to force on inventory control. In TRL the Baan ERP software system has been implemented. This makes easier for the control of inventory. For procurement and control of raw material stock the material management department in TRL looks at the following in display item data Safety stock. Inventory on hand. Inventory on hold. Inventory on order. Allocated inventory. Economic stock.
For inventory control EOQ method, max level, min level, reordering level is used. i) Average monthly consumption= total consumption No. of month ii) Lead time = Lead for procurement.
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The formula used for inventory control is: a) Minimum stock level: MSL 1.65*L.T*std.deviation (AMC) b) Maximum stock level: Max.S.Level=min S.L+ (LT*AMC) c) Reordering quantity: = 2*AMC*Ord.cost Inventory cost
Definition
Monthly Consumption (MC) - Average of monthly consumption of the three months in the previous quarter. Q1- April- June Q2- June- September Q3- October- December Q4- January- March Note The MC for the months of Q2 will be the avg. of consumption during the Q1 quarter month.
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High MC- Avg. MC is higher than a days/ shifts production (Each department to decide this norm for itself.) Low MC- Where the MC is less than the above norm. FormulasMSL- High MC item= .5MC Low MC item= MC ROP- High MC item= MC Low MC item= 2MC
MSL .5MC MC
ROP MC 2MC
ROQ MC 3MC
Note: - In the above formulas lead time has been eliminated for the sake of simplification to that extent there will be some inaccuracy which can mostly be corrected after 3months of experience.
of
inventory
management
Constant MC and constant lead time (LT). Constant MC and variable LT. Variable MC and variable LT. Varying MC and constant LT.
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Note: - Model 1 is the simplest and model 4 is the most complex. In our case 4 is normally applicable.
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For example: ALT= 5 dm= .0228 AMC= 29.832 dl= 1.619 So, Z= (5*.0228 + 29.832*1.619) Z= 6.958 F= 1.64(constant) Therefore, MSL= 6.958*1.64 = 11.411 For calculating the ROP, ROQ, AMC and MSL, We have taken data from TRLs ERP software system. We have taken ten items for calculating the above mentioned values. Baan ERP uses the formulas for calculating these values. Those formulas are displayed earlier on the above. On the date 9th July 2008 the ROP, ROQ, AMC, and MSL for ten items are given below.
st. on Ha nd 10 6 2 3 5 8 10 11 14 MS L val ue 0 0.02 0.02 0.13 0.06 0 0 0 0 RO Q Qty . 0.88 0.65 0.31 0 0.45 0.35 0.88 0.51 1.04 7 AM C Qty . 5.3 1 3.9 1 1.8 8 0 2.7 1 2.1 4 5.3 3.1 1 6.2 8 AM C Val ue 195 6 492 4 595 8 0 389 7 176 258 143 373 LT in da ys 5 5 5 10 5 5 5 5 5
Item 223000 35 223000 40 223000 55 223001 00 223001 60 223002 50 223003 16 223003 20 223003 25
46 59
0 0
10 10
10.5 11.6
484.42 688.32
23.92 62.27
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Descripti on Bearing ball 1211 K Bearing ball 1213 K.TV.C Bearing ball 1218 K.C3 Bearing ball 1318 K Bearing ball 2308 K Bearing ball 60042 RS Bearing ball 6202 ZZ
MS L 1 2 0 2 4 2 6
Interpretation: Inventory amount to forty percent of current asset investment of TRL. Inventories are stock of the product, company is manufacturing for sale and component that make up the product.
CHAPTER-6
CASH MANAGEMENT
INTRODUCTION CASH PLANNING MANAGING CASH COLLECTIONS AND DISBURSMENTS
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INTRODUCTION
Cash is one of the most important current assets of the firm. Cash or fund is the basic input needed to keep the business in a running condition; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle, without contributing anything towards the firms profitability. So to effective cash flow inside and outside the firm there should be effective management of cash. Basically in TRL cash management is known as funds management. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset. Other assets that are considered relatively liquid and included in quick assets are debtors, loose tools, and marketable securities. Inventories are considered to be less liquid. Inventories normally require some time for realizing in to cash; their value also has a tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities. Quick Ratio = (Current Assets Inventories) / Current liabilities) Percentage of Quick assets over current liabilities of TRL for five years is shown below in the form of table and graph. CURRENTASSE TS 201,24,59,190 165,90,90,469 144,93,73,742 139,72,99,734 108,14,21,667 CURRENT LIABILITIES 85,75,18,398 80,97,98,543 67,02,52,012 76,35,78,201 39,96,72,264
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Sources: Annual Report, TRL Interpretation: A quick ratio of 1 to 1 is considered to represent a satisfactory current financial condition. Although quick ratio is a more penetrating test of liquidity than the current ratio, a quick ratio of 1 to 1 or more does not necessarily imply sound liquidity position. It should be remembered that all debtors may not be liquid, and cash may be immediately needed to pay operating expenses. It should also be noted that inventories are not absolutely non-liquid. To a measurable extent, inventories are available to meet current obligations. So here TRL is having high value of quick ratio which tends to shortage of funds if it has slow paying, doubtful and long duration outstanding debtors. Since we know that cash is the most important liquid asset, so here TRL has to also examine cash ratio and its equivalent to current liability. Cash Ratio = (Cash + marketable securities) / current liabilities. The Ratio of cash over current liabilities of TRL for five years is shown below in the form of table and graph. CASH AND BANK 6,47,80,695 3,42,38,276 3,47,76,842 9,27,98,670 2,19,89,892 CURRENT LIABILITIES 85,75,18,398 80,97,98,543 67,02,52,012 76,35,78,201 39,96,72,264
0.055
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Sources: Annual Report, TRL Interpretation: So here TRL dont have to be worried about the lack of cash because its having a high reserve borrowing power and it also having a credit limit sanctioned from banks and can easily draw cash in future.
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CASH PLANNING
Its a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash balances(which lowers firms profitability) and cash deficits(which can cause the firms failure). Cash planning protects the financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. The forecast may be based on the present operations or the anticipated future operations. Cash plans are very crucial in developing the overall operating plans of the firm. In TRL the management makes 5 year business plan for future, if it requires they also make 10 year business plan. Taking this into consideration they make cash planning for annual business plan for one year.
Cash Budgeting
Cash budget is the most significant device to plan for and control cash receipts and payments. Cash budget is a summary statement of the firms expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. In TRL the cash budgeting is done for every month for determining cash requirements if cash flows show extreme fluctuations. It is highly advantageous because it helps to determine the net cash inflow or outflow so that at the end it can arrange its funds. Cash forecasts are needed to prepare cash budgets. In TRL cash forecasting is done on short term and long term basis. For short term decisions the head of finance department takes his own decision and for long term board of directors (BOD) of TRL takes decision. The cash inflow includes sales realization, export packing credit, short term loan, term loan, receipt of fixed deposit etc. The cash outflows from the firm are raw materials, fuel, salary and wages, gratuity, bonus, stores and spares, repairs, power, sales tax, income tax, interest capital expenditure (CAPEX) etc. The Projected cash
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inflow and cash outflow statement for the financial year 2008-2009 has been prepared by TRL and it has been shown in the below table
PARTICULARS IN-FLOW Sales Realization Export Packing Credit Miscellaneous Income Short Term Loan Term Loan Receipt of Fixed Deposits. Recourse bill discounting TOTAL IN-FLOW OUT-FLOW Raw Materials Fuels Salaries & Wages Gratuity/Superannuation Bonus &Cash reward Stores, Spares and Repairs Power Other Expenses Freight & Forwarding Excise Duty Sales Tax Income Tax Interest Capital Expenditure Repayment of F.D. Repayment of Packing Credit Repayment of TL - CBI Repayment of TL - SBI Repayment of STL Repayment of HSBC Friendly Departure Scheme Dividend Tax TOTAL OUT-FLOW Surplus/(Deficit) for the month Opening Balance Closing Balance Sanctioned Cash Credit Apr 2008 51.00 2.00 0.50 0.02 53.52 27.00 6.00 2.60 May 2008 51.00 2.00 0.50 0.02 5.00 58.52 27.00 6.00 2.60 June 2008 56.00 2.00 0.50 20.00 10.00 0.02 5.00 93.52 28.50 6.00 4.10 0.30 2.40 1.10 2.50 2.10 4.00 1.50 1.86 0.95 11.55 0.02 2.00 2.50 1.00 20.00 2.45 0.23 95.06 (1.54) (22.14) (23.68) 38.00 July 2008 58.00 5.00 0.50 0.02 5.00 68.52 28.50 6.00 3.06 Aug 2008 58.00 2.00 0.50 0.02 5.00 65.52 28.50 6.00 3.06 1.70 2.40 1.10 2.50 2.10 1.00 1.50 0.95 0.60 0.02 2.00 2.40 1.10 2.50 2.10 4.00 1.50 0.95 2.05 0.02 2.00 2.40 1.20 3.13 2.10 4.00 1.50 1.05 2.00 0.02 2.00 2.40 1.20 3.13 2.10 4.00 1.50 1.05 3.26 0.02 2.00 2.40 1.20 3.13 2.10 4.00 1.50 3.66 1.05 3.04 0.02 2.00 2.50 1.00 20.00 5.00 0.23 90.69 6.83 (28.80) (21.97) 38.00 2.40 1.20 3.45 2.20 4.00 1.50 1.05 1.56 0.02 2.00 2.40 1.20 3.45 2.30 4.00 1.50 1.05 5.00 0.02 2.00 2.40 1.25 3.45 2.30 4.00 1.50 3.66 1.05 7.05 0.02 2.00 2.50 1.00 20.00 5.00 0.23 95.27 (7.25) (13.81) (21.06) 38.00 Sep 2008 60.00 2.00 0.50 20.00 10.00 0.02 5.00 97.52 28.50 6.00 3.06 0.30 Oct 2008 60.00 2.00 1.00 0.02 5.00 68.02 28.50 6.00 3.06 Nov 2008 60.00 2.00 1.00 0.02 5.00 68.02 28.50 6.00 3.06 Dec 2008 60.00 2.00 1.00 20.00 0.02 5.00 88.02 28.50 6.00 3.06 0.30 Jan 2009
88.02
2.00
5.00
0.23
77.91
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Once the cash budget has been prepared and appropriate net cash flow established, so TRL should ensure that there does not exist a significant deviation between projected cash flows and actual cash flows. TRL prepares every year the projected cash flow for the next financial year. The projected and actual cash flows are compared and differences are calculated and the variances are highlighted. The comparison between the projected and actual cash flow for the previous year 20072008 is shown below.
CASH FLOW ACTUAL VS PROJECTION FOR THE PERIOD FROM APR'07 TO MARCH'08
( Rupees in Crores ) Apr'07 N o. 1 . 2 . Miscellaneous Income 12.16 3 Recourse bill . discounting 41.84 TOTAL PAYMENT 1 2 3 597.56 6.00 6 07.00 6 Total Payments 572.80 Borrowings, Other than CC (Net) 6.31 Repayment of bill discounting 29.43 TOTAL CASH CREDIT Surplus/(Deficit) Opening Balance Closing Balance Sanctioned Cash Credit 608.54 ( 10.98) (8.75) ( 19.73) 38.00 27.22) 38.00 (18.47) (8.75) ( 7.49
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to Mar'08 Projectio n 6
DIFF.
PARTICULARS RECEIPT
Actual
543.56
01.00
(1 6.93) 7.49 -
Interpretation: It can be seen from above table that only 90 percent i.e.Rs.543.56 Crores had been collected from debtors and remaining 10 percent i.e. Rs.57.44 Crores are expected to be collecting in next financial year. So here TRL has to be more conscious about its collection procedure. To achieve this, cash management efficiency will have to be improved through a proper control of cash collection and disbursement. The twin objective in managing the cash flows should be to accelerate cash collections as much as possible and to decelerate or delay cash disbursements as much as possible.
2. Stretching
cash management is to stretch the accounts payables. In other words, a firm should pay its accounts payable as late as possible without damaging its credit standing. It should, however take advantages of the cash discount available on prompt payment.
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As in TRL collection procedure is very fast in same way it also makes prompt payment to their suppliers. So TRL does not adopt the policy of stretching
account payables. It pays to their suppliers according to their convenience in one of the following ways: i) Multicity cheques The banker issuing this cheque is SBI Belpahar. With this cheque being presented in any of the SBI branches, the amount due thereon is immediately paid and the a/c of TRL with SBI, Samada is debited respectively. At par cheque The banker issuing this cheque is SBI, Samada and CBI, Gomadera. No charges are deducted by the bank when encashed. MICR The banker issuing this instrument is SBI. In this the clearing process has been highly automated. Electronic data is used instead of paper. So TRL have started using MICR to automate the clearing process. They maintain an account with Reserve Bank of India (RBI) which is debited for inward clearing and credited for outward clearing.
ii)
iii)
Note:-TRL does not invest its surplus cash in short term marketable securities. The surplus cash is used to repay the debts .
(B) Limited funds Unsecured loan Secured loan (hypothecation of working capital)
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LOAN
Unsecured loan
Promissory note
Letter of delivery
Working capital
Term loan
Cash credit
Demand loan
Short-term loan
DEMAND LOAN
A loan which is repayable on demand (i.e. without prior notice), rather than on a specific date. Certain loan limit is set-aside to the company the loan as and when required. Generally, the rate of interest of the above said loan is higher than the short term loan. TRL takes demand loan from CBI, Gomadera and SBI, Samada. 80% of the demand loan is payable in a certain period of time while remaining 20% is can be withdrawn and deposited as per its convenience.
CASH CREDIT
Cash credit means the firm can overdraw up to a certain limit. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount. This type of financing is similar to a line of credit.
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TRL takes cash credit from CBI, Gomadera having a cash credit limit of 21 Crores with an interest rate of 13 %.
PACKING CREDIT
You have an extended, flexible finance period usually 90 days before the shipment date The credit covers manufacturing costs such as raw materials and employee wages Supports cash flow while goods are being packed and waiting for shipment Simple pro-rata repayment from Documentary Credit proceeds or buyer remittance Credit terms can be structured to suit your business You can win new business by offering more competitive terms to trading partners
Purpose: It is given to procure the given raw material, fuel after the placement of the order. 1) This is specifically meant to encourage exports. Rate of interest will be lesser than the STL as well as Demand Loan. It can be avoided both in Rupee as well as any foreign currency. The loan is adjusted against export realization. Packing credit is available to TRL at an interest rate of 7.5% to 9%.
2) Margin (75%, 80%, 90%) EXAMPLE 75% of 100,000 orders Loan 75% of loan = 75,000 3) Realization should be done in 180 Days from the date of disbursement. (Reserve Bank Notification) 4) In case your material is rejected and unable to realize in 180 days it is to be reported to RBI. 5) Some private banks demand ECGC (Export Credit Guarantee Corporation) these conditions.
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CHAPTER-7
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INTRODUCTION
External funds available for a period of one year or less are called short term finance. In TRL, short term funds are used to finance working capital. Two most significant short term sources of finance for working capital are: trade credit and bank borrowing. Trade credit as a ratio of current asset is about forty percent. Bank borrowing is the next important source of working capital finance. Two other sources of working capital finance which have recently used in TRL are factoring and commercial paper.
Trade credit
Trade credit refers to the credit that of customer gets from supplier of goods in the normal course of business. In practice, immediate cash payment is not required to be made for the purchase. This deferral of payments is a short term financing called trade credit. Trade credit is mostly an informal arrangement, and is granted on an open account basis. A supplier sends goods to the buyer on credit which the buyer accepts, and thus, in effect, agrees to pay the amount due as per sales terms in the invoice.
Credit term
It refers to the condition under which the supplier sells on credit to the buyer, and the buyer is required to repay the credit. This condition includes the due date and the cash discount given for prompt payment. Due date is the date by which supplier expects payment. Credit term indicate the length and beginning date of the credit period. The due date for trade credit for TRL Normal goods - 30 to 90 days. Imported goods- 60 to 90 days.
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Cash discount
Cash discount is the concession offered to the buyer by the supplier to encourage him to make payment him promptly. The cash discount can be availed by the buyer if he pays by a certain date which is quite earlier than the due date. The cash discount enjoyed by TRL is about 10 to 15 percent per annum. In context of TRL there are three types of creditors Suppliers, Employees and Miscellaneous creditors. In addition to trade credit deferred income are other spontaneous source of short term financing. Deferred income represents funds received by the firm for goods and services which it has agreed to supply in future. This receipt increases the firms liquidity in the form of cash; therefore they constitute an important source of financing. Advance payments made by customer constitute the main item of deferred income. These payments are not recorded as revenue until goods and services have been delivered to the customers.
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3. Manufacturing cycle of a product does effect the working capital cycle days. If individual production department can reduce the manufacturing cycle days by implementing better technology and proper planning to reduce time. 4. The production departments can try to improve the quality and minimize the rejections with aid of suitable techniques. 5. The finished stocks should be stored properly other wise some of the products which get hydrated very fast will be damaged quickly and they will be treated as non-moving current asset.
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6. Special care should be taken to reduce the non-moving finished stock should be evaluated and production departments have to plan to minimize occurrence of such causes. 7. TRL gets coal from MCL which is very near to Belpahar working unit. TRL can negotiate with MCL and receive coal on regular basis thus stock of coal can be reduced more. 8. Material management department along with finance department can try to bargain with supplier to reduce the price and change the mode off payment, which is suitable for the company. 9. Individual person assigned for different task which directly or indirectly effects the working capital should be made realize their responsibilities. This can be done by giving the persons at work more authority, responsibility, remuneration for increasing their efficiency. All different works relating persons, as it is needed as together form a team. 10. The work-in-process at different stages kept in the plant is high considering their cycle time. Steps may by taken to reduce such high stock, which will help in reducing current assets.
By studying the working capital of a company the efficiency of different functional departments come into picture along with that of finance department. Though TRL is managing its working capital well, a thorough study of the working capital management of the company brings out many opportunities for improvement of the company.
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BIBLIOGRAPHY
Annual report (2003-04 to 2007-08) The Analyst (magazine published by CFA) Magazines (published by TATA group and TRL) The Hindu Business Standard www.tataref.com www.irmaindia.org www.skpsecurities.com www.ifgl.com www.bharatrefractories.com www.tatasteel.com
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ANNEXURE
BALANCE SHEET AS ON 31ST MARCH, 2008 AND 2007
Particulars FUNDS EMPLOYED 1. Share Capital 2. Reserves and Surplus 3. Share Application Money Pending Allotment 4. Total Shareholders Funds 5. Loans : a) Secured b) Unsecured 6. Deferred Payment Credit 7. Deferred Tax Liability (Net) 8. Provision for Employee Separation Compensation 9. Total Funds Employed APPLICATION OF FUNDS 10. Fixed Assets a) Gross Block b) Less : Depreciation c) Net Block 11. Investments 12. Current Assets, Loans and Advances a) Stores and Spare Parts (at cost) b) Loose Tools c) Stock-in Trade d) Sundry Debtors e) Cash and Bank Balances f) Income accrued on deposits g) Loans and Advances Total Current Assets 13. Less: Current Liabilities & Provisions a) Current Liabilities b) Provisions 14. Net Current Assets 15. Total Assets (Net) 8,53,67,154 18,22,760 85,13,94,581 109,44,61,154 6,47,80,695 7,945 39,93,83,542 249,72,17,831 6,40,02,684 11,64,815 58,61,30,368 103,75,57,010 3,42,38,276 52,627 36,88,35,136 254,66,60,234 As at 31.3.2008 Rupees 20,90,00,000 179,96,37,740 Nil 200,86,37,740 As at 31.3.2007 Rupees 20,90,00,000 166,86,67,304 Nil 187,76,67,304
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301,39,50,835
185,85,23,599
143,56,08,143
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2008 & 2007
Particulars INCOME 1. Sale of products and services Less : Excise duty 2. Other income 3. Total Income EXPENDITURE 4. Manufacturing and Other Expenses 5. Depreciation 6. Interest 7. Less : Expenditure included in above items (other than interest) capitalized 8. Employee Separation Compensation Total Expenditure PROFIT BEFORE TAXES 9. Provision for Income Tax : a) Current b) Deferred c) Fringe Benefit Tax d) Taxation for earlier years PROFIT AFTER TAXES 10. Balance brought forward from last year 11. Amount available for appropriation 12. Appropriations : a) Proposed dividend b) Corporate dividend tax c) Transferred to General Reserve Balance carried to Balance sheet Earnings per share 464,17,32,539 18,10,51,81 11,74,80,260 (1,45,08,497 ) 54,04,319 493,11,59,802 36,76,31,781 (12,60,00,000) 3,68,69,669 (38,00,000) (5,81,49,171) 21,65,52,279 19,30,09,320 40,95,61,599 7,31,50,000 1,24,31,843 15,00,00,000 17,39,79,756 10.36 Nil 10 410,69,91,619 17,17,71,165 8,82,37,087 (4,00,65,0 89) 66,90,836 433,36,25,618 30,59,49,696 (5,00,00,000) (6,29,52,787) (33,52,637) 1,48,492 18,97,92,664 23,87,98,499 42,85,91,163 7,31,50,000 1,24,31,843 15,00,00,000 19,30,09,320 9.08 Nil 10 31st March 2008 584,59,23,088 57,38,24,714 527,20,98,374 2,66,93,209 529,87,91,583 31st March 2007 516,75,44,869 57,20,23,668 459,55,21,201 4,40,54,013 463,95,75,214
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PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2006, 2005 AND 2004
Particulars INCOME 1. Sale of products and services Less : Excise duty 2. Other income 3. Total Income EXPENDITURE 4. Manufacturing and Other Expenses 5. Depreciation 6. Interest 7. Less : Expenditure included in above items (other than interest) capitalized 8. Employee Separation Compensation Total Expenditure PROFIT BEFORE TAXES 9. Provision for Income Tax : a) Current b) Deferred c) Fringe Benefit Tax d) Taxation for earlier years PROFIT AFTER TAXES 10. Balance brought forward from last year 11. Amount available for appropriation 12. Appropriations : a) Proposed dividend b) Corporate dividend tax c) Transferred to General Reserve Balance carried to Balance sheet Earnings per share 354,40,72,995 11,13,17,185 3,16,49,521 (14,47,43,641) 1,20,63,999 355,43,60,059 51,67,15,482 (14,45,00,000) (1,13,44,152) (68,29,895) Nil 35,40,41,435 12,93,97,586 48,34,39,021 8,29,99,800 1,16,40,722 15,00,00,000 23,87,98,499 21.33 21.33 10 306,62,56,350 8,15,97,822 3,37,40,749 (9,61,31,330) 1,10,53,529 309,65,17,120 46,65,54,651 (13,26,00,000) (4,06,72,916) Nil (27,20,604) 29,,05,61,131 5,10,24,268 34,15,85,399 5,50,00,000 71,87,813 15,00,00,000 12,93,97,586 26.41 25.73 10 242,00,72,065 8,22,55,900 4,94,81,837 (3,18,02,514) 2,90,73,092 254,90,80,380 26,58,49,299 (8,60,00,000) (1,43,80,862) Nil Nil 16,54,68,437 2,27,83,956 18,82,52,393 3,30,00,000 42,28,125 10,00,00,000 5,10,24,268 15.04 15.04 10 31st march 2006 455,70,76,293 63,31,74,649 402,39,01,644 4,71,73,897 407,10,75,541 31st March 2005 400,54,21,306 47,24,81,890 353,29,39,416 3,01,32,355 356,30,71,771 31st March 2004 317,07,24,228 37,28,14,875 279,79,09,353 1,70,20,326 281,49,29,679
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CASH FLOW STATEMENT FOR THE YEAR END 31st March (Rs. In Lakhs)
Sl No. A. PARTICULARS Cash Flow from Operating Activities Net Profit Before Tax & Extraordinary Item Adjustment for Depreciation Profit/Loss on Sale of Assets Profit on Sale of Investment Interest Income Dividend Income Miscellaneous Expenses (Amortized) Interest Charged to P/L Account Employee Separation Compensation Refund of Sale Tax Provision for Wealth Tax TOTAL Operating Profit before W.C Changes Trade & Other Receivables Inventories Trade Payables & Other Liabilities Cash Generated from Operation Direct Tax Refund Sales Tax Cash Flow Before Extraordinary Item Employee Separation Compensation Net Cash from Operating Activities (A) Cash Flow from Investing Activities Purchase of Fixed Assets Sales of Fixed Assets Purchase/Sale of Investment Interest Received Dividend Received Net Movement in Creditor Advance of TRL Asia Pvt. Ltd. Net Cash from Investing Activities (B) Cash Flow from Financing Activities Proceeds from Share Application Deferred Payment Credit Borrowings Interest Paid Dividend Paid Net Cash from Financing Activities (C) Net Inc/Dec in Cash & Cash Equivalent(A+B+C) Add: Opening Cash and Cash Equivalent Closing Cash and Cash Equivalent 2007-08 3676.32 1810.51 19.29 0.00 (118.87) (14.34) 0.00 1174.80 54.04 0.00 1.18 2926.61 6602.93 (94.24) (2872.87) (467.66) 3168.16 (666.00) 0.00 2502.16 (302.37) 2199.79 (728.66) 20.45 0.00 5.04 14.34 (265.90) 0.00 (954.73) 0.00 0.00 993.17 (1076.98) (855.82) (939.63) 305.43 342.38 647.81 2006-07 3059.50 1717.71 71.05 0.00 (112.97) (19.76) 0.00 882.37 66.91 (112.13) 1.18 2498.36 5557.55 (2426.71) 255.39 2684.64 6067.18 (884.57) 112.13 5294.74 (329.07) 4965.67 (1876.04) 30.60 (2679.98) 112.97 19.76 (1263.02) 0.00 (5655.71) 0.00 (202.28) 2699.57 (866.22) (946.41) 684.66 (5.38) 347.76 342.38
B.
C.
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CASH FLOW STATEMENT FOR THE YEAR END 31st March (Rs. In Lakhs)
Sl No. A. PARTICULARS Cash Flow from Operating Activities Net Profit Before Tax & Extraordinary Item Adjustment for Depreciation Profit/Loss on Sale of Assets Profit on Sale of Investment Interest Income Dividend Income Miscellaneous Expenses (Amortized) Interest Charged to P/L Account Employee Separation Compensation Refund of Sale Tax Provision for Wealth Tax TOTAL Operating Profit before W.C Changes Trade & Other Receivables Inventories Trade Payables & Other Liabilities Cash Generated from Operation Direct Tax Refund Sales Tax Cash Flow Before Extraordinary Item Employee Separation Compensation Net Cash from Operating Activities (A) Cash Flow from Investing Activities Purchase of Fixed Assets Sales of Fixed Assets Purchase/Sale of Investment Interest Received Dividend Received Net Movement in Creditor Advance of TRL Asia Pvt. Ltd. Net Cash from Investing Activities (B) Cash Flow from Financing Activities Proceeds from Share Application Deferred Payment Credit Borrowings Interest Paid Dividend Paid Net Cash from Financing Activities (C) Net Inc/Dec in Cash & Cash Equivalent(A+B+C) Add: Opening Cash and Cash Equivalent Closing Cash and Cash Equivalent 2005-06 5167.15 1113.17 (113.05) (12.89) (6.46) (25.33) 0.00 316.50 120.64 0.00 1.06 1393.64 6560.79 (2695.85) 55.77 (182.85) 3737.86 (1811.37) 0.00 1926.49 (358.11) 1568.38 (9187.65) 312.07 12.89 6.46 25.33 (900.95) (608.40) (10340.25) 5770.30 (585.50) 3899.48 (270.76) (621.88) 8191.64 (580.23) 927.99 347.76 2004-05 4665.55 815.98 (107.53) (17.76) (8.15) (21.90) 0.00 337.41 110.54 (40.00) 1.25 1069.84 5735.39 (1737.25) (762.77) 1359.85 4595.22 (1818.85) 40.00 2816.37 (363.27) 2453.10 (4329.04) 310.34 36.31 8.15 21.90 1165.74 0.00 (2786.60) 2644.70 (510.80) (342.47) (379.11) (370.73) 1041.59 708.09 219.90 927.99 2003-04 2658.49 822.56 (57.38) 0.00 (4.67) (17.01) 290.73 489.83 0.00 0.00 0.36 1524.42 4182.91 (982.30) (913.21) 1471.23 3758.63 (924.10) 100.25 2934.78 (349.42) 2585.36 (2676.50) 57.79 0.00 4.16 17.01 0.00 0.00 (2597.54) 0.00 854.44 (305.27) (548.87) (198.51) (198.21) (210.39) 430.29 219.90
B.
C.
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4. Performance of Company:
Turnover Total expenditure Profit before tax Profit after tax Earnings per share (EPS) in Rs Dividend rate % 584,59,23,088 493,11,59,802 36,76,31,781 21,65,52,279 10.36 35
C)
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Product description.
GRAPHS
GROSS REVENUE (Rupees in Crores) YEARS 20072008 20062007 20052006 20042005 20032004 GROSS REVENUE 587.26 521.17 460.43 403.55 318.77
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