Punj Lloyd Project

report
On
“Working capital
management and cash
flow analysis”

By
Arindam Mitra
(PGDM)

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 ITM Business school, Navi Mumbai
Summer Internship Project
(Batch 2009-11)
Preface
To start any business, First of all we need finance and the success of that
business entirely depends on the proper management of day-to-day
finance and the management of this short-term capital or finance of the
business is called Working capital Management.

Working Capital is the money used to pay for the everyday trading
activities carried out by the business - stationery needs, staff salaries and
wages, rent, energy bills, payments for supplies and so on.

I have tried to put my best effort to complete this task on the basis of skill
that I have achieved during the last one year study in the institute.

I have tried to put my maximum effort to get the accurate statistical data.
However I would appreciate if any mistakes are brought to my consideration
by the reader.

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Acknowledgement
A work is never a work of an individual. The satisfaction and euphoria that
accompanies the successful completion of any task would be incomplete
without mentioning the names of the people who made it possible, whose
constant guidance and encouragement crown all the efforts with success. I
owe a sense of gratitude to the intelligence and co-operation of those people
who had been so easy to let me understand what I needed from time to time
for completion of this exclusive project.

I’m deeply indebted to all people who have guided, inspired and helped us in
the successful completion of this project. I owe a debt of gratitude to all of
them, who were so generous with their time and expertise.

I would like to thank my guides Dr. C S Adhikari, project guide (summer

internship), ITM Business School, Navi Mumbai, Mrs. Preeti Bakshi, finance
professor, ITM Business School, Navi Mumbai & Mr. Parag Nerurkar,
Manager - Accounts, KAEFER Punj Lloyd limited, Navi Mumbai, for their
constant guidance, advice and help which enabled me to finish this project
report properly in time .

Last but not the least, I would like to forward my gratitude to my friends &
other faculty members who always endured me and stood with me and
without whom I could not have completed the project.

Arindam Mitra

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Declaration
I do hereby declare that this piece of project report entitled “A Study on
Working capital Management and cash flow analysis in KAEFER Punj
Lloyd” for partial fulfillment of the requirements for the award of the degree
of “POST GRADUATE DIPLOMA IN MANAGEMENT” is a record of original
work done by me under the supervision and guidance of Dr. C S Adhikari,
ITM Business School, Navi Mumbai. This project work is my own and has
neither been submitted nor published elsewhere.

Place:
Arindam Mitra

Date:

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1.Executive summary
The major objective of the study is to properly understanding the working
capital of KAEFER Punj Lloyd & to suggest measures to overcome the
shortfalls if any.

Funds needed for short term needs for the purpose like raw materials,
payment of wages and other day to day expenses are known as working
capital. Decisions relating to working capital (Current assets-Current
liabilities) and short term financing are known as working capital
management. It involves the relationship between a firm’s short-term assets
and its short term liabilities. By definition, working capital management
entails short-term definitions, generally relating to the next one year period.

The goal of working capital management is to ensure that the firm is able to
continue its operation and that it has sufficient cash flow to satisfy both
maturing short term debt and upcoming operational expenses.

Working capital is primarily concerned with inventories management,

Receivable management, cash management & Payable management.

Inventories management at Punj Lloyd:

Punj Lloyd is a large scale construction &engineering company involved in

refractories, insulation, in oil & gas, petrochemicals, power and civil

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engineering. Therefore, it has to maintain large quantity of inventories at
production units for its smooth running and functioning.

Cash management at Punj Lloyd:

Punj Lloyd has been accumulating huge cash surpluses over last several
years, which enables the organization to maintain adequate cash
reserves and to generate required amount of cash.

Receivables management at Punj Lloyd:

Punj Lloyd has set up its marketing office at all metro cities in India i.e.
Mumbai, New Delhi. This marketing office obtains job orders in India as well
as globally. On the basis of order received for different jobs it marks
production planning.

2.Introduction

Working Capital:
The life blood of business, as is evident, signified funds required for day-to-
day operations of the firm. The management of working capital assumes
great importance because shortage of working capital funds is perhaps the
biggest possible cause of failure of many business units in recent times.
There it is of great importance on the part of management to pay particular
attention to the planning and control for working capital.

Decisions relating to working capital and short term financing are referred to
as working capital management. These involve managing the relationship
between a firm's short-term assets and its short-term liabilities. The goal of
Working capital management is to ensure that the firm is able to continue its
operations and that it has sufficient money flow to satisfy both maturing
short-term debt and upcoming operational expenses.

2.1 Objective of the study:

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The following are the main objective which has been undertaken in the
present study:

1. To determine the amount of working capital requirement and to calculate

various ratios relating to working capital.

2. To make an item wise study of the components of the working capital.

3. To suggest the steps to be taken to increase the efficiency in

management of working capital.

Place of study:
The project study is carried out at the Finance Department of Punj Lloyd
office situated at Belapur, Navi Mumbai. The study is undertaken as a part of
the PGDM curriculum from 10th May 2010 to 02nd July 2010 in the form of
summer placement.

2.2 Study design and methodology:

Two types of data are collected, one is primary data and second one is
secondary data. The primary data were collected from the Department of
finance, Punj Lloyd. The secondary data were collected from the Annual
Report of Punj Lloyd, Punj Lloyd website, etc.

2.3 Limitations:
There may be limitations to this study because the study duration
(summer placement) is very short and it’s not possible to observe every
aspect of working capital management practices.

2.4 Deliverables:
This project on “working capital management and cash flow analysis” will
help the company to identify its working capital requirements and the
discrepancies in cash flows, between projected and actual expenses and
incomes. It will also aid the company in finding out the ways for financing its

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working capital requirements through short term or long term financing and
help in identifying the various resources available in doing so.

3.Introduction

Indian Industry overview

3.1 Oil & Gas

The oil and gas industry has been instrumental in fuelling the rapid growth of
the Indian economy. India has total reserves of 775 million metric tonnes
(MT) of crude oil and 1074 billion cubic metres (BCM) of natural gas as on
April 1, 2009, according to the Ministry of Petroleum.

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Petroleum exports during 2008-09 were US$ 26.2 billion according to the
Ministry of Petroleum.

Under New Exploration Licensing Policy (NELP VIII), 1.62 sq km of area

comprising 70 blocks was put up for bidding.

The Cabinet Committee on Economic Affairs (CCEA) has approved award of

33 out of 36 oil and gas blocks that were bid for in New Exploration Licensing
Policy (NELP-VIII), for which bidding closed on October 12, 2009.

Production

By the end of the Eleventh Plan the refinery capacity is expected to reach
240.96 MMTPA.

• Crude oil production during 2009-10 was 33.68 MT, compared to 33.50
MT in 2008-09.

• Refinery production in terms of crude throughput was 160.03 MT in

2009-10.

• The production of natural gas went up to 47.57 billion cubic metres

tonnes (BCM) in 2009-10 from 32.84 BCM in 2008-09.

Consumption

The sales/consumption of petroleum products during 2008-09 were 133.40

MT (including sales through private imports), an increase of 3.45 per cent
over sales of 128.94 MT during 2007-08, according to the Ministry of
Petroleum.

India's domestic demand for oil and gas is on the rise. As per the Ministry of
Petroleum, demand for oil and gas is likely to increase from 186.54 million
tonnes of oil equivalent (mmtoe) in 2009-10 to 233.58 mmtoe in 2011-12.

The refining capacity in the country increased to 177.97 million tonnes per
annum (MTPA) as on April 1, 2009 as compared to 148.968 MTPA as on April
1, 2008.

Gas

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India's natural gas demand is expected to nearly double to 320 million
standard cubic meters per day by 2015, according to a report released by
global consultancy firm McKinsey at the VI Asia Gas Partnership Summit.

According to the report, the current demand of 166 million standard cubic
metres per day (mscmd)—made up of nearly 132 mscmd supplies from
domestic fields and the rest from imported LNG-- is likely to rise to at least a
minimum of 230 mscmd and a maximum of 320 mscmd by 2015.

In January 2010, Gas Authority of India Ltd (GAIL) said that gas availability in
India is expected to grow at 23 per cent compounded annual growth rate
(CAGR) to 312 mscmd by FY14, buoyed by trebling of domestic production to
254 mscmd and doubling of regasified liquefied natural gas imports to 58
mscmd.

To capture the opportunity presented by the impending gas surge in India,

GAIL is investing significantly in its pipeline network. Over the next three
years, it will invest US$ 660.7 million –US$ 770.8 million, expanding its
transmission capacity from the current 150 mscmd to 300 mscmd.

State-owned Oil and Natural Gas Corp (ONGC) has added 83 million tonnes
of oil and gas reserves in the 2009-10 fiscal, the highest in two decades.

The ultimate reserve accretion of ONGC including its joint ventures (with
firms like Cairn India) in domestic fields in 2009-10 has been 87.37 million
tonnes of oil and oil equivalent gas against the target of 76.28 million
tonnes.

ONGC on a standalone basis added 82.98 million tonnes of oil and oil
equivalent gas reserves.

Investments and Acquisitions

• Indian Oil Corp aims to expand the capacity of its Panipat plant by 25
per cent to 300,000 barrels per day (bpd) by October 2010 to meet
growing fuel demand. The refinery expansion will cost US$ 224.8
million.

• Mahanagar Gas Ltd (MGL) will invest over US$ 3.37 billion in a span of
5-6- years to lay infrastructure for the supply of both Compressed
Natural Gas (CNG) and Piped Natural Gas (PNG)

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 • The Ruias of Essar Group have injected US$ 293 million in Essar Oil by
subscribing to global depository shares (GDS) to part finance its US$
1.7-billion expansion plans. The proposed expansion plan includes
scaling up of the Jamnagar refinery capacity by 25 per cent to 375,000
barrels.

• State-owned gas firm GAIL India will invest about US$ 3.37 billion over
the next 2-3 years in laying pipelines to connect consumption centres
in North India to fuel sources.

• Energy major Reliance Industries gained an overseas foothold by

agreeing to pay US$ 1.7 billion to form a joint venture with U.S.-based
Atlas Energy

• Gujarat State Petroleum Corporation (GSPC) has inked an agreement

with government of Egypt for oil and gas exploration in the African
nation where the Indian firm has been alloted blocks.

• Templeton Strategic Emerging Markets Fund (TSEMF) has invested US$

20.6 million investment in Shiv-Vani Oil & Gas Exploration Services.

• Indian state-run Oil & Natural Gas Corp will invest US$ 7.11 billion for
the first phase development of three marginal fields located in Mumbai
offshore on the western coast.

Government Initiatives

The government has been taking many progressive measures to create a

conducive policy and regulatory framework for attracting investments.

• FDI up to 100 per cent under the automatic route is permitted in

exploration activities of oil and natural gas fields, infrastructure related
to marketing of petroleum products, actual trading and marketing of
petroleum products, petroleum product pipelines, natural gas and LNG
pipelines, market study and formulation and petroleum refining in the
private sector.

• FDI up to 49 per cent is permitted under the government route in

petroleum refining by the public sector undertakings.

• Vision-2015 approved in 2009, for the oil sector which will focus on
expanding the marketing network as well as quality of the products

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 and services to customers covering four broad areas of LPG (liquefied
petroleum gas), kerosene, auto fuels and compressed natural
gas/piped natural gas.

• In 2009, the government announced a seven-year tax holiday for

commercial production of gas in respect of contract to be signed under
NELP VIII & Coal Bed Methane (CBM) IV with a view to give a boost to
exploration and production.

India will complete building its first strategic crude oil storage by October
2011 in an effort to insulate itself from supply disruptions.

The country is building underground storages at Visakhapatnam in Andhra

Pradesh and Mangalore and Padur in Karnataka to store about 5.33 million
tonnes of crude oil. This is enough to meet nation's oil requirement of 13-14
days.

The storage at Visakhapatnam will have capacity to store 1.33 million tonnes
of crude oil in underground rock caverns and will be completed by 2011,
while the Mangalore facility will be able to store 1.55 million tonnes and
would be completed by November 2012. A 2.5-million tonnes storage at
Padur, near Mangalore, would be completed by December 2012.

3.2 Civil & Engineering

The country’s core sector, comprising six key infrastructure industries,
accelerated by 5.1 per cent year-on-year in April 2010, compared with 3.7
per cent in April 2009, according to the data released by the Union Ministry
of Commerce and Industry. The growth was primarily led by an increase in
the production of cement, which stood at 18.87 million tonnes (MT),
compared to 17.36 MT during April 2009.

Electricity production grew by 6 per cent in April 2010, as against 6.7 per
cent in the same month of the previous fiscal. Finished steel production
registered a growth of 4.7 per cent during the month, against a decline of
1.3 per cent in the corresponding period of 2009. Among other industries,
production of crude petroleum rose by 5.2 per cent, as against minus 3.1 per
cent, while production of petro-products registered an increase of 5.3 per
cent, as compared to a contraction of 4.5 per cent during April 2009.

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Infrastructure investment in India is set to grow dramatically. As per Union
Minister for Finance, Mr Pranab Mukherjee, India would require to develop a
rupee-denominated long-term bond market for funding the infrastructure
sector that requires an investment of around US$ 459 to US$ 500 billion by
2012.

Further, investment in the infrastructure sector is expected to be around US$

425.2 billion during the Eleventh Five Year Plan (2007-12), as against US$
191.3 billion during the Tenth Plan. Meanwhile, private investment into the
sector is also projected to increase to US$ 157.3 billion in the Eleventh Plan,
as compared to US$ 47.84 billion in the Tenth Plan. This investment is likely
to be fulfilled through public-private-partnership (PPP) projects that are
based on long-term concessions.

Clearance has been given to nine new investment proposals of around US$
1.05 billion by the State Level Single Window Clearance Authority (SLSWCA).
Out of these nine proposals, five were from the cement sector, two for
setting up aluminium conductor units, and one each for developing a
petroleum coke plant and a maize processing unit.

Meanwhile, a committee on infrastructure under Prime Minister Dr

Manmohan Singh will conduct quarterly review of development of power,
road, ports, civil aviation and railways sectors, announced the Planning
Commission of India recently. Further, the cabinet committee on
infrastructure (CCI) will handle specific infrastructure cases that may require
necessary policy correction or solving issues affecting projects.

Notably, truck sales, a key indicator of goods movement, registered a growth

of 74 per cent during May 2010, as per the data released by the Indian
Foundation for Transport Research and Training (IFTRT). The increase in the
demand for cargo transportation from the agricultural and manufacturing
sectors was one of the contributing factors in the increase in the truck sales.

In order to develop eco-friendly infrastructure for new cities in the Delhi-

Mumbai Industrial Corridor (DMIC), Japan-based consultants such as Nikken
Sekkei, Mitsubishi and IBM Japan would work along with DMIDC and three
state governments. The project, expected to be completed by 2018, as per
Mr Anand Sharma, Union Minister for Commerce and Industry is “by far the
world’s biggest infrastructure project.”

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Ports

The major ports in India handled 45.8 million tonnes cargo in February 2010,
as compared to 45.2 million tonnes in February 2009. The cargo growth
during April-February 2010 registered an increase of 5.5 per cent as
compared to the corresponding period in the 2009 fiscal, as per data
released by the Indian Ports Association (IPA).

The annual combined capacity of the major and non-major ports in the
country will be 1.5 billion tonnes by 2012, stated by Minister of Shipping, Mr
G K Vasan, while speaking at the Logistics Outsourcing Summit organised by
the Confederation of Indian Industry (CII).

The Union Cabinet has given the approval to the Shipping Ministry for
declaring Andaman and Nicobar ports as major port, stated Union Minister of
Shipping, Mr G K Vasan.

The Cabinet Committee on Infrastructure (CCI) has approved a proposal to

develop the fourth container terminal at the Jawaharlal Nehru Port (JNPT),
the country's busiest port, at an estimated cost of US$ 1.44 billion. The
government also cleared a proposal to build standalone container handling
facility at Mumbai port at a cost of US$ 129.6 million. The project would be
implemented within two years from the date of the award of the project.

Airports

The domestic airlines flew about 4.78 million passengers in May 2010, an
increase of almost 22 per cent over the number carried in the same period in
the previous year.

The Union Minister of State for Civil Aviation, Mr Praful Patel, stated that the
country will become the top-five civil aviation markets in the world in the
next five years. India is the ninth largest civil aviation market in the world at
present.

The Airports Authority of India (AAI), the agency responsible for civil aviation
infrastructure, is likely to spend over US$ 1.01 billion on the modernisation
of non-metro airports in the current year.

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Aircraft manufacturing companies, Boeing and Airbus, remain upbeat over
India's aviation growth potential. Airbus has forecast that India will need
1,032 new aircraft worth US$ 138 billion by 2028, while Boeing has forecast
that the country will require 1,000 aircraft worth US$ 100 billion over the
next two decades.

Mumbai Airport posted its highest ever monthly passenger traffic in its
history in December 2009. According to Mumbai International Airport (MIAL),
the Chhatrapati Shivaji International Airport (CSIA) saw a record 2.53 million
passengers in December 2009. This number is the highest-ever passenger
volume handled by the airport in its history, with the previous high standing
at 2.38 million passengers in January 2008.

The government has mandated MIAL with the task of upgrading and
modernising CSIA, which is a joint venture between the Airports Authority of
India and the GVK-SA consortium.

Railroads

During the first month of the 2010-11 fiscal, the Railways reported an
increase of 9.69 per cent in its total earnings at US$ 1.62 billion, as
compared to US$ 1.5 billion in the same month last fiscal. The Railways
garnered US$ 459 million in total passenger earnings in April 2010,
compared to US$ 411.6 million in April 2009.

According to the Department of Industrial Policy and Promotion (DIPP), the

foreign direct investment (FDI) inflow into railways related components has
been US$ 109.56 million from April 2000 to March 2010.

Roads

An in-principal approval for converting 10,000 km of state roads to national

highways has been given by the Empowered Group of Ministers (EGoM). It is
estimated that around US$ 3.3 billion would be required over the next five
years to undertake this project.

Further, the Cabinet Committee on Infrastructure (CCI) has approved four

highway projects of about US$ 543.8 million on June 10, 2010. These
projects would cover states such as Gujarat, West Bengal, Bihar, Uttar
Pradesh and Madhya Pradesh.

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Anil Dhirubhai Ambani Group (ADAG)’s flagship company Reliance
Infrastructure Ltd (R-Infra) won a US$ 197.3 million project from the National
Highways Authority of India (NHAI). It is the tenth road project it won from
the NHAI.

Earlier, R-Infra won a US$ 218.3 million road project from the Gujarat
government, within a week after winning the US$ 380 million Pune-Satara
Road project from the National Highway Authority of India (NHAI). The
project is to execute a 71 kilometre four-six lane corridor connecting the
ports of Mundra and Kandla in Gujarat.

Recently, the elevated expressway between Silk Board junction and

Electronic City junction, built for US$ 165.5 million, was opened to public
use. A consortium comprising Soma Enterprise Ltd, Nagarjuna Construction
Company and Maytas Infra Ltd constructed the 9.985 km long elevated road
project. The project, executed through a special purpose vehicle, Bangalore
Elevated Tollway Ltd, was built on a build operate transfer basis for the
NHAI.

Investments

The infrastructure sector seems to have emerged as a favourite for the

private equity (PE) in 2010. According to Venture Intelligence data, so far in
2010, there have been 19 deals in this sector at an approximate investment
of US$ 1.1 billion, as compared to 14 deals with an investment of US$ 257.5
million during the same period last year.

JSW Energy (Bengal) Limited, a special purpose vehicle (SPV) for the Bengal
power and coal project, plans to invest around US$ 423.6 million in coal mine
development.

Sembcorp Utilities, a Singapore-based company, has bought 49 per cent

stake in Thermal Powertech Corporation India Ltd, a SPV and subsidiary of
Gayatri Projects Ltd, for US$ 235.1 million.

An investment of around US$ 425 million has been made by a consortium of

investors led by Morgan Stanley Infrastructure Partners along with Goldman
Sachs Investment Management, General Atlantic LLC (GA), Everstone
Capital, Norwest Venture Partners and others in Asian Genco Pte (AGPL), an
infrastructure company.

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Larsen & Toubro (L&T), the country’s largest engineering company, will
invest around US$ 5.46 billion to build its thermal power business in the next
five years. L&T Power, the wholly-owned subsidiary of L&T, will have a
generation capacity of 5,500 MW, including hydro power, by 2015. Larsen
and Toubro Ltd also formed a joint venture with Malaysia-based SapuraCrest
Petroleum to install pipelines and construct offshore rigs and platforms in
India, the Middle East and South East Asia.

Tata Power has lined up investments of US$ 5.19 billion for its upcoming
plants in Mundra, Maithon and Jojobera over the next three years. Tata
Power and Reliance Power are coming up with UMPPs with a combined
generation capacity of close to 16,000 MW. Jindal Steel & Power, which has a
production capacity of 1,000 MW, plans to add another 4,380 MW thermal
power and 6,100 MW hydro power capacity in the next five years.

Government Initiatives

The infrastructure finance companies (IFC) are being included in the

category of non-banking finance company (NBFC) by the Reserve Bank of
India (RBI). The IFCs would require a capital adequacy ratio of 15 per cent
and the similar criteria of NBFCs would be applied to IFCs as well. Further,
RBI stated that at least 75 per cent of the assets of these institutions should
be used in infrastructure and their net owned funds should be US$ 64.6
million or more.

While presenting the Union Budget this year, the Finance Minister has
announced the allocation of US$ 37.7 billion, around 46 per cent of the total
plan outlay of US$ 81 billion for 2010-11 to infrastructure sectors. In the last
fiscal, this proportion was about 30 per cent.

The Government of India has envisaged capacity addition of 100,000 MW by

2012 to meet its mission of power to all. Recently, a ministerial group
discussing large power plants with a capacity to generate 4,000 MW of
power has approved, in principle, a proviso requiring such plants that will be
awarded in the future to use local power generation equipment. The move is
expected to provide a fillip to domestic manufacturing. The decision on so-
called ultra mega power plants, or UMPPs, will also benefit domestic power
generation equipment manufacturers such as state-owned Bharat Heavy
Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T), which has a joint
venture with Mitsubishi Heavy Industries Ltd (MHI) of Japan. At least three

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joint ventures, between Toshiba Corp. of Japan and JSW Group; Ansaldo
Caldaie SpA of Italy and GB Engineering Enterprises Pvt. Ltd; and Alstom SA
of France and Bharat Forge Ltd are looking to start manufacturing power
equipment in India.

Further, the government is also implementing the National Solar Mission,

aimed at setting up 20,000 MW of solar power capacity by 2020.

The Asian Development Bank (ADB) has approved a financial assistance for
US$ 200 million under the Assam Power Sector Enhancement Investment
Programme. The project has some innovative features like franchisee-based
distribution, off-grid electrification with renewable energy, reduction in CHG
emissions through efficiency gains.

The road transport and highways ministry has proposed priority sector status
for road development, allowing private highway developers more funds from
banks.

3.3 Petrochemicals
Petrochemicals are chemicals made from petroleum (crude oil) and natural
gas. The petrochemical industry of today is an indispensable part of the
manufacturing and consuming sectors, churning out products which include
paint, plastic, rubber, detergents, dyes, fertilizers and textiles. "Primary
Petrochemicals" include olefins (ethylene, propylene and butadiene)
aromatics (benzene, toluene, and xylenes); and methanol. Olefins and
aromatics are the building blocks for a wide range of materials such as
solvents, detergents, and adhesives. Olefins are the basis for polymers and
oligomers used in plastics, resins, fibers, elastomers, lubricants, and gels.
Notwithstanding the wide range of products derived from this sector, it
consumes only ~5% of annual oil and gas production.

Over the past 10 years, despite the traditional dominance American and
Western European players, there has been a paradigm shift from West to
East, with the Middle East emerging as global production hub with natural
advantages of low cost feedstock and Asia becoming a major consumption
centers.

A job in the petrochemical industry offers lucrative income, employee

welfare facilities and career development opportunities. Career opportunities
for educated, highly skilled and motivated workers include jobs as engineers,

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operating technicians, lab technicians, electricians, environmental, health
and safety technicians and managers and supervisors. Undoubtedly, there is
a very strong emphasis on technical proficiency, efficiency and being a team
player.

Performance

The global petrochemicals sector was ravaged by a huge drop in demand for
its products due to the global economic slowdown in 2008-2009,
exacerbated by increasing input costs with oil prices skyrocketing to $110.
That said, most of the big players still made a profit, just not as big as the
profits they made over the past two or three boom years. The largest global
petrochemicals companies (by 2008 revenue) are BASF (Germany), Dow
Chemical (USA), ExxonMobil Chemical (USA), LyondellBasell Industries
(Netherlands), INEOS (UK) and Saudi Basic Industries Corporation (Saudi
Arabia).

The Indian petrochemical industry has been one of India’s fastest growing
domestic industries, comprising both small and large scale enterprises. Due
to its linkages with various domestic manufacturing industries such as
pharmaceuticals, construction, agriculture, and textiles etc it is undoubtedly
an integral part of the energy value chain. In recent years, India has
experienced significant industrial and economic development and as a result
has become a net exporter of chemicals leveraging the tremendous growth
in overseas sales of dyes, intermediates and specialty chemicals. In addition,
the government’s decision to revamp eight public sector fertilizer units has
helped buoy the domestic market demand. Also, the strong demand for end
products such as plastics has ensured that the industry top line remained
robust.

The leading players in India are Reliance Industries, Gujarat State Fertilizer
and Chemicals, Tata Chemicals, Haldia Petrochemicals and Hindustan
Organic chemicals. Like their global counterparts, these players too suffered
a subdued 2 years. It is important for players to remain aware of the lessons
learnt from this period, which acted as a rude wake-up call for all the
euphoric predictors of sustained double digit growth.

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The sector reeled under the pressure of escalating crude oil prices, lowered
domestic and export demand, resulting in compressed bottom lines. With
more balanced predictions, and the economic gloom slowly lifting, optimism
is returning once again.

Future Prospects

The aggregate demand of all the key segments in the petrochemical industry
is likely to regain a sharp positive trajectory over the next 12 months, with
key players aiming to ramp up scale and increase recruitment. Hence, those
graduates with a strong technical and/ or engineering background should
remain confident of being able to find decent employment opportunities.
This is not an industry suitable for the initiated, and freshers with general
degrees would be best advised to seek alternate options elsewhere.

Petrochemicals Production

The petrochemicals industry primarily consists of synthetic fibres, polymers,

elastomers, synthetic detergents, intermediates and performance plastics.
Presently, petrochemical products span the entire spectrum of daily use
items, from housing, clothing, construction, packaging, medical appliances
etc.

Table: production of selected major chemicals (In ‘000 MT)

Year Alkali Inorganic Organic Pesticides Dyes & Total

chemicals chemicals chemicals (Tech) Dyestuffs Major
Chemicals

2004-05 4792 404 1353 70 26 6645

2005-06 5070 441 1474 85 26 7096

2006-07 5272 508 1506 94 28 7408

2007-08 5475 544 1545 82 30 7676

2008-09 5269 602 1545 85 33 7534

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The industrial units of the petrochemical industry are located mainly in 18
states covering 30-35 districts within them. The industry is concentrated in
the states of Gujarat and Maharashtra on account of the easy availability of
raw materials, infrastructure etc. Gujarat alone accounted for more than
50% of the total production of major chemicals in FY09.

Industrial Investment

Proposed investments in the chemicals & petrochemicals industry was

almost 10% of the total proposed investment between the periods, Aug 1991
to Oct 2009. Of the actual investment during this period, around 17%
investments of total investments belonged to the petrochemicals industry.

Table: Proposed and Actual Implementation of Industrial Investment

(Aug 1991 to Oct 2009)

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 Sector Proposed %age of Grand Actual %age of grand
Investment Total investment total
(Rs mn) (Rs mn)

Chemicals & 3049780 9.66 436760 16.80

Petrochemic
als

Fertilizers 260350 0.82 37050 1.43

3.4 Power
As per leading market research firm RNCOS (2008) report on “Indian Power
Sector Analysis” more than 64% of India’s total installed capacity is
contributed by thermal power. Significant jump in unit size and steam
parameters will result in higher efficiencies and better economics for the
Indian power sector.

Western region accounts for largest share (30.09%) of the installed power in
India followed by Southern region with 27.76%.

Unbalanced growth remains the cause of concern for the Indian power
sector. Only about 56% of households have access to electricity, with the
rural access being 44% and urban access about 82%.

Southern region remains the dominant region in renewable energy source

accounting for more than 57% of the total renewable energy installed
capacity.

Key players currently operating in the Indian power sector are

National Thermal Power Corporation Limited, Nuclear Power
Corporation of India Limited, North Eastern Electric Power
Corporation Limited, Power Grid Corporation of India, Tata Power,
etc.

Size

The total installed capacity in India is calculated to be 145,554.97 mega

watt, out of which 75,837.93 mega watt (52.5%) is from State, 48,470.99
mega watt (34%) from Centre, and 21,246.05 mega watt (13.5%) is from
Private sector initiative.

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 • Generation capacity of 141 GW; 663 billion units produced (1 unit =
1kwh)-January 2008. CAGR of 5% over the last 5 years

• India has the fifth largest electricity generation capacity in the world.
Low per capita consumption at 631 units; less than half of China

• Transmission & Distribution network of 6.6 million circuit km - the third

largest in the world

• Coal fired plants constitute 54% of the installed generation capacity,

followed by 25% from hydel power, 10% gas based, 3% from nuclear
energy and 8% from renewable sources

Structure

• Majority of Generation, Transmission and Distribution capacities are

with either public sector companies or with State Electricity Boards
(SEBs)

• Private sector participation is increasing especially in Generation and

Distribution

• Distribution licenses for several cities are already with the private
sector

• Three large ultra-mega power projects of 4000MW each have been

recently awarded to the private sector on the basis of global tenders.

Policy

• 100% FDI permitted in Generation, Transmission & Distribution - the

Government is keen to draw private investment into the sector

• Policy framework: Electricity Act 2003 and National Electricity Policy

2005

• Incentives: Income tax holiday for a block of 10 years in the first 15

years of operation; waiver of capital goods' import duties on mega
power projects (above 1,000 MW generation capacity)

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 • Independent Regulators: Central Electricity Regulatory Commission for
central PSUs and inter-state issues. Each state has its own Electricity
Regulatory Commission

Blueprint of ministry

The Ministry of Power has set a goal - Mission 2012: Power for All.

A comprehensive Blueprint for Power Sector development has been prepared

encompassing an integrated strategy for the sector development with
following objectives:-

• Sufficient power to achieve GDP growth rate of 8%

• Reliable of power

• Quality power

• Optimum power cost

• Commercial viability of power industry

• Power for all

Strategies to Achieve The Objectives:

Power Generation Strategy with focus on low cost generation, optimization of

capacity utilization, controlling the input cost, optimisation of fuel mix,
Technology upgradation and utilization of Non Conventional energy sources

Transmission Strategy with focus on development of National Grid

including Interstate connections, Technology upgradation & optimization of
transmission cost.

Distribution strategy to achieve Distribution Reforms with focus on

System upgradation, loss reduction, theft control, consumer service
orientation, quality power supply commercialization, Decentralized
distributed generation and supply for rural areas

Regulation Strategy aimed at protecting Consumer interests and making

the sector commercially viable

Financing Strategy to generate resources for required growth of the power

sectorConservation Strategy to optimise the utilization of .electricity with

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focus on Demand Side management, Load management and Technology
upgradation to provide energy efficient equipment / gadgets.

Communication Strategy for political consensus with media support to

enhance the general public awareness.

Power Sector at a glance - all India - as on February 28, 2009

4.Economic and business overview

India
The official GDP growth numbers released on 29 May 2009 is 6.8% for 2008-
09, with Q4 GDP growth at 5.8%. But that is just one part of the problem. At

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the time of writing this Management Discussion and Analysis, India is facing
two conflicting situations. The first is a hugely positive uplift in sentiments,
with the Congress winning 206 seats in the recent elections for the 15th Lok
Sabha and the United Progressive Alliance (UPA) comfortably securing a
majority. The fact that Dr. Manmohan Singh will be again leading his team —
this time unfettered by the compulsions of meeting the demands of the Left
parties — has created a universally positive milieu throughout India. But
there are disquieting trends. Industrial growth has been falling sharply. While
there seems to be no dearth of liquidity in the financial system, banks are
still not lending enough, and there doesn’t seem to be an adequate credit
uptick. The consolidated fiscal deficit for 2008-09 is estimated at 11% of
GDP; and, given the government’s objective of increasing spends on
education, health, social infrastructure and support for families below the
poverty line, there is little likelihood of the consolidated deficit reducing
sharply in 2009-10. Thus, there are concerns of interest rates hardening in
the second half of 2009-10. Equally, with the rise in crude oil prices — it is
now at US$ 70 per barrel — there is a scope of rising inflation during the
second half of the year.

Thus, as far as India goes 2009-10 may be an unpredictable year. The

baseline GDP growth forecast remains at around 6% to 6.5%. However, if the
new government shows speed and determination — as people think it will —
we could see a significant upsurge in investment demand and, with it, a rise
in growth rate to the 7% to 7.5% range. We will have to wait and see.

5.Introduction

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Company Profile

5.1 Punj Lloyd group

Punj Lloyd Group is a diversified global conglomerate providing Engineering
& Construction services in Oil & Gas, Infrastructure and Petrochemicals, and
with interests in Defence, Aviation, Marine and Upstream sectors.

With a turnover of US $2.6 billion, the Group’s three brands - Punj Lloyd
headquartered in India, Sembawang Engineers & Constructors in Singapore,
and Simon Carves in the United Kingdom, each with its own subsidiaries and
joint ventures, converge to offer complementary services, rich experiences
and the best practices from across the globe. 16 international offices and
entities across the Middle East, the Caspian, Asia Pacific, Africa, South Asia,
China and Europe, have established Punj Lloyd as a proven and reputable
Group.

Having built projects across the world, the Group continues to provide
integrated design, engineering, procurement, construction and project
management services for the energy, infrastructure and petrochemical
sectors. From pipelines, tanks and terminals to refineries, power plants to
renewables, airports, rail transit systems to expressways, the Group can
offer EPC solutions across a wide spectrum of businesses.

A dynamic enterprise, the Group explores and pursues the enormous

opportunity in markets globally. Partnering with the best in their own arenas,
Punj Lloyd brings technology and quality to clients worldwide and reiterates
its belief of delivering the best, in services and manufacturing. An excellent
track record for successful completion of projects within tight schedules,
lends credibility to the Group, encouraging clients to trust it with repeat
orders.

The skilled multicultural workforce has the experience of working in different

geographies and diverse terrain, empowering the Group to aggressively
pursue its vigorous plans.

The Group’s key strengths are its varied experience, rich knowledge of local
conditions, high standards of health, safety, quality and environment,
accolades and recognitions from industry bodies and clients, its ability to
manage operations in diverse industries and economies, long-term

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relationships with world-class clients and ability to mobilise financial
resources. The huge fleet of equipment Punj Lloyd owns gives the company
an edge over its competitors.

5.2 The business segments of Punj Lloyd

As shown in Table 1, Punj Lloyd Ltd. (‘Punj Lloyd’ or ‘the Company’) operates
in four major segments: Oil and Gas, Civil and Infrastructure, Petrochemicals
and Power. Table 1 gives the figures.

1 R EV EN U E S A ND OR D E R BA CK L OG : BY B US IN ES S S E GME N T IN R S C R O RE

Segments Oil & Gas Civil & Infrastructure Petrochemicals Power Total

Total Revenue 7,233.76 3,007.37 1,017.64 457.13 11,715.90

(2008-09) 61% 26% 9% 4% 100%

Percentage Share 4,118.83 1,624.72 1,003.24 352.81 7,099.60

Of which, Top 15 revenue earners 58% 23% 14% 5% 100%

Percentage 10,514.67 6,425.99 2,525.83 1,218.72 20,685.21

Share Order 51% 31% 12% 6% 100%

Backlog

5.3 Oil & Gas

The oil & gas business contributes to 61% of Punj Lloyd’s total revenues and
about 58% of Punj Lloyd’s top 15 revenue earning projects in 2008-09. This
business offers services in process engineering, pipelines, both onshore and
offshore, and tankages. The segment earned revenues of Rs. 7,234 crore
during the year and as on 31 March 2009, has an order backlog of Rs.
10,515 crore. In 2008-09, Punj Lloyd won the Strategic Gas Transmission
Project for Qatar Petroleum, valued at Rs. 3,636 crore and involved laying
two new 36” dia pipelines and 24 Core FOC laying. This is the largest project
that the Company has undertaken in the oil & gas business till date. The
Company’s capabilities in the oil & gas sector are also well recognised in
India. In 2008-09, the Company has won big ticket projects both for the
refineries as well as for pipelines. Some of the projects that Punj Lloyd has
been awarded are highlighted in Table 2 below.

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2 MA J O R PR OJ E CT S : A W A RD E D A ND U ND E R EX EC U T IO N F OR 2 0 08 - 0 9 : OI L & G AS IN R S
C R O RE

Project Client Contract

Value
Delayed Coker Unit IOCL, Vadodara 590

Sulphur Block for Bina Refinery Project Bharat Oman Refinery, Bina 590

Motor Spirit Quality Upgradation IOCL, Barauni 649

EPC Contract for Pipeline Gujarat State Petronet Ltd. 239

Heated and Insulated Gas Pipeline: Three Sections Cairn India Ltd. 141

Dense Phase Ethylene and Butane Pipelines between Ras Laffan and Ras Laffan Olefins Company Ltd, 191
Mesaieed Qatar
EPC for 21 Storage Tanks Eastern Bechtel Co. Ltd., Abu Dhabi 140

Offsite and Utilities Yemen LNG, Yemen 322

Construction of Two Gas Pipelines in Libya Sirte Oil Company of Libya 1,349

In tankage, the Company has the expertise to execute a complete EPC

project for tank farms and terminals, including cryogenic storage. Punj Lloyd
is one of the few companies in the world having its own design capabilities
and construction expertise for cryogenic and floating roof tanks.

Among the projects under execution during the year, the ‘EPCC 8 packages’
for IOCL Panipat is worth separate mention. The Rs. 350 crore project is for
the design and construction of offsites and storage facilities for the naphtha
cracker project at IOCL’s Panipat refinery. Unlike other projects, here all
kinds of storage equipment are being manufactured at site, including
spheres, moulded bullets, atmospheric tanks and propylene and ethylene
cryogenic tanks.

Some of the other major projects that have been executed are detailed
below:

• Two orders for New Doha International Airport fuel system; contract
value Rs. 608 crore.

• Two order for mechanical work, including steel, equipment and

pipeline fabrication and erection for Abu Dhabi Polymers Company
(Borouge); contract value Rs. 762 crore.

Offshore Projects in Oil & Gas

During 2008-09, this business unit (in association with our wholly owned
subsidiary, PT Sempec of Indonesia) was executing an offshore EPC project,
with a contract value of Rs. 1,289 crore, involving four well head platforms,
pipelines, flexibles, cable laying and SBM, etc, for ONGC at Heera.

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Subsequently, in April 2009, Punj Lloyd has successfully commissioned and
handed over the first of the four offshore wellhead platforms to ONGC for it
to commence drilling and production operations. Heera is the first of Punj
Lloyd’s offshore platform projects in India and the successful technical
execution of the project has established the Company’s credentials in
offshore.

It also completed the Uran Trombay Gas Pipeline (the UTG pipeline), where a
substantial part of the project was offshore. The project scope included 24
km of 20” dia pipeline and terminal work and was completed before time.

During 2008-09, Punj Lloyd bid for a US$ 130 million project in Thailand, as
well as for the ZADCO block in Abu Dhabi. It has also submitted bids to
ONGC with a combined value of more than US$ 2.5 billion. In the offshore
business, Punj Lloyd identifies two issues critical to success: equipment and
the skills to effectively deploy them. Punj Lloyd has acquired sophisticated
equipment and machinery over the past few years, especially during 2008-
09. Pipe-laying barges are used to lay sections of the pipeline at various
water depths; the Company has acquired two such barges, one operating in
depths up to 60 metres; the other can lay pipes in depths of 150 metres.
Punj Lloyd is one of the few companies in the world that has such
sophisticated equipment. In 2008-09, the Company also acquired an
accommodation and crane barge. Punj Lloyd has a long term growth
objective of being able to graduate to deep water offshore work, both in
India and abroad, especially in the gulf region.

5.4 Civil, Infrastructure & Power

The Civil, Infrastructure & Power business of Punj Lloyd comprises two
elements (Civil Engineering, Building & Power, and Roads & Other
Infrastructure). Together, they have contributed Rs. 3,465 crore of topline to
Punj Lloyd during the year ended 31 March 2009, with a residual order book
of Rs. 7,645 crore as on that date (Table 4). Civil & Infrastructure work is
executed through three entities: Punj Lloyd Ltd. (which mainly executes
projects in India), Sembawang Engineers and Constructors Pte Ltd. (SEC) and
Sembawang UAE.

Power

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There are two parts to the power business: thermal and conventional and
nuclear power. During the year, the power business segment of Punj Lloyd
generated revenues of Rs. 457 crore, with an order backlog of Rs. 1,219
crore as on 31 March 2009.

Thermal and Conventional Power

During the year, Punj Lloyd is executing the complete EPC, including civil
work of balance of plant (BOP) package for 2 x 250 MW Chhabra Thermal
Power Project in Rajasthan; the order value of the project is Rs. 823 crore.
The first unit was synchronised on 16 April 2009 and the project is expected
to be completed by July 2009. Punj Lloyd has also been awarded the EPC for
BOP at the 2 x 270 MW Govindwal Sahib Power project in the Tarn Taran
district of Punjab. Punj Lloyd has already started the engineering work for
the project, which is valued at Rs. 1,005 crore.

On the business development front, the power segment has entered into an
agreement with General Electric (GE) to work together in Indian and
international markets, with Punj Lloyd as

the EPC contractor for the entire plant (including turbine) and GE as the
equipment and technology supplier. Over the next few years, Punj Lloyd
wishes to migrate from being an EPC player of BOP in power plants to a full
EPC player.

Nuclear Power

India will need to develop its nuclear power generation capability if it is to

meet its growing demand for power. The power shortage for 2008-09 is
estimated at 11.0%8. Currently, only 4,120 MW (2.8%) of India’s total
generation is met through nuclear power. The country proposes to add
another 3,380 MW of generation capacity by the end of the 11th Plan
period9; have 20,000 MW of nuclear power by 2020 and targets 25% of its
electricity supply to come from nuclear power by 205010. This will not be
possible without Private Public Partnerships (PPPs); though, currently, the
sole authority supervising India’s civil nuclear programme is the Nuclear
Power Corporation of India Ltd (NPCIL). Punj Lloyd recognises that this area
offers long term growth opportunities for its engineering and construction
businesses. Punj Lloyd envisages that, over a period of time, the following

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business opportunities will arise for the Company in the nuclear power
generation business:

• In EPC.

• Decommissioning of Nuclear Power Plants and nuclear waste

management; using the experience of Simon Carves Ltd (UK), which
has 3.5 million man hours of experience in nuclear de-commissioning,
spent-fuel management and engineering advisory services.

• In Nuclear Fuel and Consultancy.

• In Components.

• In Operations & Maintenance.

The team is establishing relationships with leading global nuclear technology

providers for EPC jobs, as well as exploring qualification opportunities jointly
with the appropriate international EPC majors. Punj Lloyd has also been
issued the pre-qualification (PQ) documents for civil work contract for the
Pressurised Heavy Water Reactors (PHWR) of 700 MW each, worth Rs. 650
crore at Kakarpara in Gujarat.

5.5 Petrochemicals

In 2008-09, the petrochemicals segment generated revenues of Rs, 1,018

crore, with an order backlog of Rs. 2,526 crore as on 31 March 2009 (Table
6).

Simon Carves

Simon Carves Limited, UK (SC)

Simon Carves Limited provides comprehensive Engineering, Procurement,

Construction and Commissioning (EPCC) services the across the global
process industry sector, focusing on petrochemicals and renewables,
especially bio- fuel manufacture. Its expertise lies in the following areas:

Polymers and Petrochemicals, which have been designed and supplied

over 80 manufacturing facilities to its customers worldwide.

Chemicals, with its own acid technology and through strategic licensor
relationships for other technologies: SCL has built over 350 chemical

1
manufacturing facilities worldwide; the company has extensive experience in
the Pharmaceutical and Agro chemical markets particularly in Europe having
worked closely in partnership with AstraZeneca over a long period of time.

Nuclear Power, where it has been involved in the design and build of new
installations in the UK particularly fuel fabrication, waste treatment and
processing.

In 2008-09, Simon Carves generated revenues of £169 million (2007-08:

£177 million).

At 31 March 2009, the Punj Lloyd Group reorganised its holding structure of
Simon Carves Limited. Simon Carves Singapore Pte. Ltd. is now the parent
company. There will be no effect on Simon Carves Limited, and is a reflection
of the Group wide focus on projects in Asia and the Middle East. The Abu
Dhabi office becoming the global headquarters of Simon Carves will allow it
to exploit opportunities in the Middle East and Asia.

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6.Working Capital
Introduction

Every business needs investment to procure fixed assets, which remain in

use for a longer period. Money invested in these assets is called ‘Long term
Funds’ or ‘Fixed Capital’.

Business also needs funds for short-term purposes to finance current

operations. Investment in short term assets like cash, inventories, debtors
etc., is called ‘Short- term Funds’ or ‘Working Capital’. The ‘Working Capital’
can be categorized, as funds needed for carrying out day-to-day operations
of the business smoothly. The management of the working capital is equally
important as the management of long-term financial investment.

Every running business needs working capital. Even a business which is fully
equipped with all types of fixed assets required is bound to collapse without

• adequate supply of raw materials for processing;

• cash to pay for wages, power and other costs;

• creating a stock of finished goods to feed the market demand

regularly; and,

• the ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of
a business. The business will not be able to carry on day-to-day activities
without the availability of adequate working capital.

Working capital cycle involves conversions and rotation of various

constituents Components of the working capital. Initially ‘cash’ is converted
into raw materials.

Subsequently, with the usage of fixed assets resulting in value additions, the
raw materials get converted into work in process and then into finished
goods. When sold on credit, the finished goods assume the form of debtors
who give the business cash on due date. Thus ‘cash’ assumes its original
form again at the end of one such working capital cycle but in the course it
passes through various other forms of current assets too. This is how various
components of current assets keep on changing their forms due to value

1
addition. As a result, they rotate and business operations continue. Thus, the
working capital cycle involves rotation of various constituents of the working
capital.

While managing the working capital, two characteristics of current assets

should be kept in mind viz. (i) short life span, and (ii) swift transformation
into other form of current asset.

Each constituent of current asset has comparatively very short life span.
Investment remains in a particular form of current asset for a short period.
The life span of current assets depends upon the time required in the
activities of procurement; production, sales and collection and degree of
synchronization among them. A very short life span of current assets results
into swift transformation into other form of current assets for a running
business.

These characteristics have certain implications:

Decision regarding management of the working capital has to be taken

frequently and on a repeat basis. The various components of the working
capital are closely related and mismanagement of any one component
adversely affects the other components too.

The difference between the present value and the book value of profit is not
significant. The working capital has the following components, which are in
several forms of current assets:

• Stock of Cash

• Stock of Raw Material

• Stock of Finished Goods

• Value of Debtors

• Miscellaneous current assets like short term investment loans &

Advances

A number of definitions have been formulated: perhaps the most

widely acceptable would be;

1
“WORKING CAPITAL represents the excess of CURRENT ASSETS over
CURRENT LIABILITIES “

The same may be designated in the following equation:

Working capital= current assets – current liabilities: Funds thus

invested in current assets keep revolving fast and are being constantly
converted in to cash and this cash flows out again in exchange for other
current assets. Thus it is known as revolving or circulating capital or short
term capital.

These are two concepts of working capital:

a. Gross Working Capital.

b. Net Working Capital.

Gross working capital is the total of all current assets. Net working capital is
the difference between current assets and current liabilities. Though the
later concept of working capital is commonly used it is an accounting
concept with little sense to say that a firm manages its net working capital.
What a firm really does is to take decisions with respect to various current
assets and current liabilities. The constituents of current assets and
current liabilities are shown in table A.

6.1 Constituents of Current Assets and Current Liabilities

Current Assets

• Inventories – Raw materials and components, Work in progress,

Finished goods, other.

• Trade Debtors.

• Loans and Advances.

• Investments.

• Cash and Bank balance.

Current Liabilities

• Sundry Creditors.

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 • Trade Advances.

• Borrowings.

• Provisions.

The working capital needs of a business are influenced by numerous

factors. The important ones are discussed in brief as given below:

Nature of Enterprise

The nature and the working capital requirements of an enterprise are

interlinked. While a manufacturing industry has a long cycle of operation of
the working capital, the same would be short in an enterprise involved in
providing services. The amount required also varies as per the nature;
an enterprise involved in production would require more working capital
than a service sector enterprise.

Manufacturing/Production Policy

Each enterprise 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 others may follow the principle of 'demand-based
production' in which production is based on the demand during that
particular phase of time. Accordingly, the working capital requirements
vary for both of them.

Working Capital Cycle

In manufacturing concern, working capital cycle starts with the purchase of

raw materials and ends with realization of cash from the sale of finished
goods. The cycle involves the purchase of raw materials and ends with the
realization of cash from the sale of finished products. The cycle involves
purchase of raw materials and stores, its conversion in to stock of finished
goods through work in progress with progressive increment of labor and
service cost, conversion of finished stick in to sales and receivables and
ultimately realization of cash and this cycle continuous again from cash to
purchase of raw materials and so on.

Operations

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The requirement of working capital fluctuates for seasonal business. The
working capital needs of such businesses may increase considerably during
the busy season and decrease during the slack season. Ice creams and cold
drinks have a great demand during summers, while in winters the sales are
negligible.

Market Condition

If there is high competition in the chosen product category, then one shall
need to offer sops like credit, immediate delivery of goods etc. for which the
working capital requirement will be high. Otherwise, if there is no
competition or less competition in the market then the working capital
requirements will be low.

Credit Policy

The credit policy is concerned in its dealings with debtors and creditors
influence considerably the requirements of the working capital. A concern
that purchases its requirements on credit and sells its products/services
on cash requires lesser amount of working capital. On the other hand a
concern buying its requirements for cash and allowing credit to its
customers, shall need larger amount of funds are bound to be tied up in
debtors or bills receivables.

Business Cycle

Business Cycle refers to alternate expansion and contraction in general

business activities. In a period of born i.e. when the business is prosperous
there is a need for larger amount of working capital due to increase in sales,
rise in prices, optimistic expansion of business etc. On the country at the
time of depression i.e. when there is a down swing of the cycle, business
contracts, sales decline, difficulties are faced in collections from debtors and
firms may have a large amount of working capital lying ideal.

Availability of Raw Material

If raw material is readily available then one need not maintain a large stock
of the same, thereby reducing the working capital investment in raw
material stock. On the other hand, if raw material is not readily available

1
then a large inventory/stock needs to be maintained, thereby calling for
substantial investment in the same.

Growth and Expansion

Growth and expansion in the volume of business result in enhancement of

the working capital requirement. As business grows and expands, it needs a
larger amount of working capital. Normally, the need for increased working
capital funds precedes growth in business activities.

Earning capacity and Dividend Policy

Some firms have more earning capacity than others due to the quality of
their products, monopoly conditions etc. Such firms with high earning
capacity may generate cash profits from operations and contribute to their
capital. The dividend policy of a concern also influences the requirements of
the working capital. A firm that maintains steady high rate of cash dividend
irrespective of its generation of profits needs more capital than the firm
retains larger part of its profits and does not pay high rate of cash dividend.

Price Level Changes

Generally, rising price level requires a higher investment in the working

capital. With increasing prices, the same level of current assets needs
enhanced investment.

Manufacturing Cycle

The 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. At
times, business needs to estimate the requirement of working capital in
advance for proper control and management. The factors discussed above
influence the quantum of working capital in the business. The assessment of
working capital requirement is made keeping these factors in view. Each
constituent of working capital retains its form for a certain period and that
holding period is determined by the factors discussed above. So for correct
assessment of the working capital requirement, the duration at various
stages of the working capital cycle is estimated. Thereafter, proper value is
assigned to the respective current assets, depending on its level of
completion.

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Other Factors

Certain other factors such as operating efficiency, management ability,

irregularities a supply, import policy, asset structure, importance of labor,
banking facilities etc. also influences the requirement of working capital.

Component of Working Capital

Basis of Valuation

• Stock of raw material Purchase cost of raw materials

• Stock of work in process at cost or market value, whichever is lower

• Stock of finished goods Cost of production

• Debtors Cost of sales or sales value

• Cash working expenses.

Each constituent of the working capital is valued on the basis of valuation

Enumerated above for the holding period estimated. The total of all such
valuation becomes the total estimated working capital requirement.

The assessment of the working capital should be accurate even in the case
of small and micro enterprises where business operation is not very large.
We know that working capital has a very close relationship with day-to-
day operations of a business. Negligence in proper assessment of the
working capital, therefore, can affect the day-to-day operations severely. It
may lead to cash crisis and ultimately to liquidation. An inaccurate
assessment of the working capital may cause either under-assessment or
over-assessment of the working capital and both of them are dangerous.

7.Working capital management

Introduction

Working Capital Management refers to management of current assets and

current liabilities. The major thrust of course is on the management of
current assets .This is understandable because current liabilities arise in the

1
context of current assets. Working Capital Management is a significant fact
of financial management. Its importance stems from two reasons:-

• Investment in current assets represents a substantial portion of total

investment.

• Investment in current assets and the level of current liabilities have to

be geared quickly to change in sales. To be sure, fixed asset
investment and long term financing are responsive to variation in
sales. However, this relationship is not as close and direct as it is in the
case of working capital components.

The importance of working capital management is effected in the fact that

financial manages spend a great deal of time in managing current assets
and current liabilities. Arranging short term financing, negotiating favorable
credit terms, controlling the movement of cash, administering the accounts
receivable, and monitoring the inventories consume a great deal of time of
financial managers.

The problem of working capital management is one of the “best” utilization

of a scarce resource. Thus the job of efficient working capital management is
a formidable one, since it depends upon several variables such as character
of the business, the lengths of the merchandising cycle, rapidity of turnover,
scale of operations, volume and terms of purchase & sales and seasonal and
other variations.

Consequences of under assessment of working capital

• Growth may be stunted. It may become difficult for the enterprise to

undertake profitable projects due to non-availability of working capital.

• Implementation of operating plans may become difficult and

consequently the profit goals may not be achieved.

• Cash crisis may emerge due to paucity of working funds.

• Optimum capacity utilization of fixed assets may not be achieved due

to non availability of the working capital.

• The business may fail to honor its commitment in time, thereby

adversely affecting its credibility. This situation may lead to business
closure.

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 • The business may be compelled to buy raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing
cost of purchases and reducing selling prices by offering discounts.
Both these situations would affect profitability adversely.

• Non-availability of stocks due to non-availability of funds may result in

production stoppage.

• While underassessment of working capital has disastrous implications

on business, over assessment of working capital also has its own
dangers.

Consequences of over assessment of working capital

• Excess of working capital may result in unnecessary accumulation of

inventories.

• It may lead to offer too liberal credit terms to buyers and very poor
recovery system and cash management.

• It may make management complacent leading to its inefficiency.

• Over-investment in working capital makes capital less productive and

may reduce return on investment. Working capital is very essential for
success of a business and, therefore, needs efficient management and
control. Each of the components of the working capital needs proper
management to optimize profit.

The working capital in certain enterprise may be classified into the

following kinds.

1. Initial working capital. The capital, which is required at the time of the
commencement of business, is called initial working capital. These are the
promotion expenses incurred at the earliest stage of formation of the
enterprise which include the incorporation fees, attorney's fees, office
expenses and other expenses.

2. Regular working capital. This type of working capital remains always in

the enterprise for the successful operation. It supplies the funds necessary to
meet the current working expenses i.e. for purchasing raw material and
supplies, payment of wages, salaries and other sundry expenses.

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3. Fluctuating working capital. This capital is needed to meet the
seasonal requirements of the business. It is used to raise the volume of
production by improvement or extension of machinery. It may be secured
from any financial institution which can, of course, be met with short term
capital. It is also called variable working capital.

4. Reserve margin working capital. It represents the amount utilized at

the time of contingencies. These unpleasant events may occur at any time in
the running life of the business such as inflation, depression, slump, flood,
fire, earthquakes, strike, lay off and unavoidable competition etc. In this case
greater amount of capital is required for maintenance of the business.

7.1 Financing Working Capital

Now let us understand the means to finance the working capital. Working
capital or current assets are those assets, which unlike fixed assets change
their forms rapidly. Due to this nature, they need to be financed through
short-term funds. Short-term funds are also called current liabilities. The
following are the major sources of raising short-term funds:

I. Supplier’s Credit

At times, business gets raw material on credit from the suppliers. The cost of
raw material is paid after some time, i.e. upon completion of the credit
period. Thus, without having an outflow of cash the business is in a position
to use raw material and continue the activities. The credit given by the
suppliers of raw materials is for a short period and is considered current
liabilities. These funds should be used for creating current assets like stock
of raw material, work in process, finished goods, etc.

ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to
businesses to help them create necessary current assets so as to achieve
the required business level. The loans are available for creating the following
current

Assets:

• Stock of Raw Materials

• Stock of Work in Process

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 • Stock of Finished Goods

• Debtors

Banks give short-term loans against these assets, keeping some security
margin. The advances given by banks against current assets are short-term
in nature and banks have the right to ask for immediate repayment if they
consider doing so. Thus bank loans for creation of current assets are also
current liabilities.

iii. Promoter’s Fund

It is advisable to finance a portion of current assets from the promoter’s

funds. They are long-term funds and, therefore do not require immediate
repayment. These funds increase the liquidity of the business.

Important Terms

7.2 Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's
life blood and every manager's primary task is to help keep it flowing and to
use the cash flow to generate profits. If a business is operating profitably,
then it should, in theory, generate cash surpluses. If it doesn't generate
surpluses, the business will eventually run out of cash and expire.

The faster a business expands the more cash it will need for working capital
and investment. The cheapest and best sources of cash exist as working
capital right within business. Good management of working capital will
generate cash will help improve profits and reduce risks. Bear in mind that
the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash - Inventory
(stocks and work-in-progress) and Receivables (debtors owing you money).
The main sources of cash are Payables (your creditors) and Equity and
Loans. Each component of working capital (namely inventory, receivables
and payables) has two dimensions ........TIME ......... and MONEY. When it
comes to managing working capital - TIME IS MONEY. If you can get money
to move faster around the cycle (e.g. collect monies due from debtors more
quickly) or reduce the amount of money tied up (e.g. reduce inventory levels

1
relative to sales), the business will generate more cash or it will need to
borrow less money to fund working capital.

As a consequence, you could reduce the cost of bank interest or you'll have
additional free money available to support additional sales growth or
investment. Similarly, if you can negotiate improved terms with suppliers
e.g. get longer credit r an increased credit limit; you effectively create free
finance to help fund future sales.

If you....... Then......

Collect receivables (debtors) faster, you release cash from the cycle

Collect receivables (debtors) slower, your receivables soak up cash

Get better credit (in terms of duration or amount) from suppliers, you
increase your cash resources

Shift inventory (stocks) faster, you free up cash

Move inventory (stocks) slower, you consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers,
plant, vehicles etc. If you do pay cash, remember that this is now longer
available for working capital. Therefore, if cash is tight, consider other ways
of financing capital investment - loans, equity, leasing etc. Similarly, if you
pay dividends or increase drawings, these are cash outflows and, like water
flowing downs a plug hole, they remove liquidity from the business.

More businesses fail for lack of cash than for want of profit.

7.3 Sources of Additional Working Capital

Sources of additional working capital include the following:

• Existing cash reserves

• Profits (when you secure it as cash!)

• Payables (credit from suppliers)

• New equity or loans from shareholders

• Bank overdrafts or lines of credit

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 • Long-term loans

If you have insufficient working capital and try to increase sales, you can
easily over-stretch the financial resources of the business.

This is called overtrading. Early warning signs include:

• Pressure on existing cash

• Exceptional cash generating activities e.g. offering high discounts for

early cash payment

• Bank overdraft exceeds authorized limit

• Seeking greater overdrafts or lines of credit

• Part-paying suppliers or other creditors

• Paying bills in cash to secure additional supplies

• Management pre-occupation with surviving rather than managing

frequent short-term emergency requests to the bank (to help pay
wages, pending receipt of a cheque).

7.4 Estimating working capital needs

1. Liquidity vs. Profitability: Risk Return Trade Off.

The firm would make just enough investment in current assets if it were
possible to estimate working capital needs exactly. Under perfect certainty,
current assets holdings would be at the minimum level. A larger investment
in current assets under certainty would mean a low rate of return of
investment for the firm, as excess investment in current assets will not
earn enough return. A small invest in current assets, on the other hand,
would mean interrupted production and sales, because of frequent stock-
cuts and inability to pay to creditors in time due to restrictive policy.

As it is not possible to estimate working capital needs accurately, the firm

must decide about levels of current assets to be carried.

2. The Cost Trade Off:

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A different way of looking into the risk return trade off is in terms of the cost
of maintaining a particular level of current assets. There are two types of
cost involved:-

I. Cost of liquidity

II. Cost of illiquidity

• If the firm’s level of current assets is very high, it has excessive

liquidity. Its return on assets will be low, as funds tied up in idle cash
and stocks earn nothing and high levels of debtors reduce profitability.
Thus, the cost of liquidity increases with the level of current assets.

• The cost of illiquidity is the cost of holding insufficient current assets.

The firm will not be in a position to honor its obligations if it carries to
little cash. This may force the firm to borrow at high rates of interests.
This will also adversely affect the credit-worthiness of the firm and it
will face difficulties in obtaining funds in the future. All this may force
the firm into insolvency. Similarly, the low levels of stock will result in
loss of sales and customers may shift to competitors. Also, low level of
debtors may be due to right credit policy which would impair sales
further. Thus the low level of current assets involves cost that increase
as this level falls.

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7.5 Policies for financing current assets

The following policies for financing current assets in Punj Lloyd:-

Long term financing: The sources of long term financing include ordinary
shares capital, preference share capital debentures, long term borrowings
from financial institutions and reserves and surplus. It manages its long term
financing from capital reserve, share premium A/C, foreign project reserve,
bonds redemption reserve and general reserve.

Short term financing: The short term financing is obtained for a period
less than one year. It is arranged in advance from banks and other suppliers
of short term finance include working capital funds from banks, public
deposits, commercial paper, factoring of receivables etc.

Punj Lloyd manages secured loans as:-

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1) Loans and advances from banks

2) Other loans and advances:

(i) Debentures/bonds

(ii) Loans from State Govt.

(iii) Loans from financial institutions(secured by pledge

of PSU bonds and bills accepted
guaranteed by banks)

3) Interest accrued and due on loans

(a) From State Govt.

(b) From financial institutions bonds and other

(c) packing credit

Punj Lloyd manages unsecured loans as:-

1) Public deposits

2) Short term loans and advances:

(1)From banks

(a) Commercial papers

(2)From others

(a) From companies

(b)From financial institutions

3) Other loans and advances

(a) From banks

(b)From others

(i) from govt. of India

(ii) from state govt.

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 (iii) from financial institutions

(iv) from foreign financial institution

(v) post shipment credit exim bank

(vi) credit for assets taken on lease

4) Interest accrued and due on

(a) Post shipment credit

(b)Govt. credit

(c) State Govt. loans

(d)Credits for assets taken on lease

(e) Financial institutions and others

(f) Foreign financial institutions

(g)Public deposits

Spontaneous financing:-

Spontaneous financing refers to the automatic sources of short term funds

arising in the normal course of a business. Trade Credit and outstanding
expenses are examples of spontaneous financing.

A firm is expected to utilize these sources of finances to the fullest extent.

The real choice of financing current assets, once the spontaneous sources of
financing have been fully utilized, is between the long term and short term
sources of finances.

What should be the mix of short and long term sources in financing
current assets?

Depending on the mix of short and long term financing, the approach
followed by a company may be referred to as:

1. matching approach

2. conservative approach

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 3. aggressive approach

Matching approach

The firm can adopt a financial plan which matches the expected life of assets
with the expected life of the source of funds raised to finance assets. Thus, a
ten year loan may be raised to finance a plant with an expected life of ten
year; stock of goods to be sold in thirty days may be financed with a thirty
day commercial paper or a bank loan. The justification for the exact
matching is that, since the purpose of financing is to pay for assets, the
source of financing and the asset should be relinquished simultaneously.
Using long term financing for short term assets is expensive as funds will not
be utilized for the full period. Similarly, financing long term assets with short
term financing is costly as well as inconvenient as arrangement for the new
short term financing will have to be made on a continuing basis.

When the firm follows matching approach (also known as hedging approach)
long term financing will be used to finance fixed assets and permanent
current assets and short term financing to finance temporary or variable
current assets. However, it should be realized that exact matching is not
possible because of the uncertainty about the expected lives of assets.

The firm fixed assets and permanent current assets are financed with long
term funds and as the level of these assets in increases, the long term
financing level also increases. The temporary or variable current assets are
financed with short term funds and as their level increases, the level of short
term financing also increases. Under matching plan, no short term financing
will be used if the firm has a fixed current assets need only.

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Conservative approach

A firm in practice may adopt a conservative approach in financing its current

and fixed assets. The financing policy of the firm is said to be conservative
when it depends more on long term funds for financing needs. Under a
conservative plan, the firm finances its permanent assets and also a part of
temporary current assets with long term financing. In the period when the
firm has no need for temporary current assets, the idle long term funds can
be invested in the tradable securities to conserve liquidity. The conservative
plan relies heavily on long term financing and, therefore, the firm has less
risk of facing the problem of shortage of funds. The conservative financing
policy is shown below. Note that when the firm has no temporary current
assets, the long term funds released can be invested in marketable
securities to build up the liquidity position of the firm.

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Aggressive Approach

A firm may be aggressive in financing its assets. An aggressive policy is said

to be followed by the firm when it uses more short term financing than
warranted by the matching plan. Under an aggressive policy, the firm
finances a part of its permanent current assets with short term financing.
Some extremely aggressive firms may even finance a part of their fixed
assets with short term financing. The relatively more use of short term
financing makes the firm more risky. The aggressive financing is illustrated
in fig below.

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Short term vs long term financing: A Risk Return Trade off

A firm should decide whether or not it should use short term financing. If
short term financing has to be used, the firm must determine its position in
total financing. This decision of the firm will be guided by the risk return
trade off. Short term financing may be preferred over long term financing.
For two reasons:

1. The cost advantage

2. Flexibility

But short term financing is more risky than long term financing.

Cost: short term financing should generally be less costly than long term
financing. It has been found in developed countries like USA, the rate of
interest is related to the maturity of debt. The relationship between the
maturity of debt and its cost is called the term structure of interest rates.
The curve, relating to maturity of debt and interest rates, is called the yield
curve. The yield curve may assume any shape, but it is generally upward
sloping.

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The justification for the higher cost of long term financing can be found in
the liquidity preference theory. This theory says that since lenders are risk
averse, and risk generally increases with the length of lending time (because
it is more difficult to forecast the more distant future), most lenders would
prefer to make short term loans. The only way to induce these lenders to
lend for longer periods is to offer them higher rates of interest.

The cost of financing has an impact on the firm’s return. Both short and long
term financing have a leveraging effect on shareholders’ return. But the
short term financing ought to cost less than the long term financing;
therefore, it gives relatively higher return to shareholders.

It is noticeable that in India short term loans cost more than the long term
loans. Banks are the major suppliers of the working capital finance in India.
Their rates of interest on working capital finance are quite high. The main
sources of long term loans are financial institutions which till recently were
not charging interest at differential rates. The prime rate of interest rate
charged by financial institutions is lower than the rate charged by banks.

Flexibility: it is relatively easy to refund short term funds when the need for
funds diminishes. Long term funds such as debenture loan or preference
capital cannot be refunded before time. Thus, if a firm anticipates that its
requirement for funds will diminish in near future, it would choose short term
funds.

Risk: although short term financing may involve less cost, it is more risky
than long term financing. If the firm uses short term financing to finance its
current assets, it runs the risk of renewing borrowing again and again. This is
particularly so in the case of permanent assets. As discussed earlier,
permanent current assets refer to the minimum level of current assets which
a firm should always maintain. If the firm finances it permanent current
assets with short term debt, it will have to raise new short term funds as
debt matures. This continued financing exposes the firm to certain risks. It
may be difficult for the firm to borrow during stringent credit periods. At
times, the firm may be unable to raise any funds and consequently, it
operating activities may be disrupted. In order to avoid failure, the firm may
have to borrow at most inconvenient terms. These problems are much less
when the firm finances with long term funds. There is less risk of failure
when the long term financing is used.

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Risk returned trade-off: Thus, there is conflict between long term and short
term financing. Short term financing is less expensive than long term
financing, but, at the same time, short term financing involves greater risk
than long term financing. The choice between long term and short term
financing involves a trade-off between risk and return.

Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to a business

are collected faster. Every business needs to know, who owes them money,
how much is owed, how long it owes, for what it is owed etc.

Late payments erode profits and can lead to bad debts.

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

businesses who can least afford it. If you don't manage debtors, they
will begin to manage your business as you will gradually lose control
due to reduced cash flow and, of course, you could experience an increased
incidence of bad debt.

The following measures will help manage your debtors:

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

2. Establish clear credit practices as a matter of company policy.

3. Make sure that these practices are clearly understood by staff,

suppliers and customers.

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

ones.

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

6. Establish credit limits for each customer... and stick to them.

7. Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.

8. Keep very close to your larger customers.

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 9. Invoice promptly and clearly.

10. Consider charging penalties on overdue accounts.

11. Consider accepting credit /debit cards as a payment option.

12. Monitor your debtor balances and ageing schedules, and don't let any
debts get too large or too old.

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

• weak credit judgement

• poor collection procedures

• lax enforcement of credit terms

• slow issue of invoices or statements

• errors in invoices or statements

• Customer dissatisfaction.

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

• longer credit terms taken with approval, particularly for smaller orders

• use of post-dated checks by debtors who normally settle within agreed

terms

• evidence of customers switching to additional suppliers for the same

goods

• new customers who are reluctant to give credit references

• Receiving part payments from debtors.

Profits only come from paid sales.

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

Managing Payables (Creditors) Creditors are a vital part of effective cash

management and should be managed carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function
can create liquidity problems. Consider the following:

• Who authorizes purchasing in your company - is it tightly managed or

spread among a number of (junior) people?

• Are purchase quantities geared to demand forecasts?

• Do you use order quantities which take account of stock-holding and

purchasing costs?

• Do you know the cost to the company of carrying stock?

• Do you have alternative sources of supply? If not, get quotes from

major suppliers and shop around for the best discounts, credit terms,
and reduce dependence on a single supplier.

• How many of your suppliers have a returns policy?

• Are you in a position to pass on cost increases quickly through price

increases to your customers?

• If a supplier of goods or services lets you down can you charge back
the cost of the delay?

• Can you arrange (with confidence!) to have delivery of supplies

staggered or on a just-in-time basis?

There is an old adage in business that if you can buy well then you can
sell well. Management of your creditors and suppliers is just as important as
the management of your debtors. It is important to look after your creditors -
slow payment by you may create ill-feeling and can signal that your
company is inefficient (or in trouble!).

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7.6 Management of Inventory

Inventories constitute the most significant part of current assets of a large

majority of companies in India. On an average, inventories are
approximately 60 % of current assets in public limited companies in India.
Because of the large size of inventories maintained by firms maintained by
firms, a considerable amount of funds is required to be committed to them.
It is, therefore very necessary to manage inventories efficiently and
effectively in order to avoid unnecessary investments. A firm neglecting a
firm the management of inventories will be jeopardizing its long run
profitability and may fail ultimately. The purpose of inventory management
is to ensure availability of materials in sufficient quantity as and when
required and also to minimize investment in inventories at considerable
degrees, without any adverse effect on production and sales, by using
simple inventory planning and control techniques.

Needs to hold inventories:-

There are three general motives for holding inventories:-

• Transaction motive emphasizes the need to maintain inventories to

facilitate smooth production and sales operation.

• Precautionary motive necessities holding of inventories to guard

against the risk of unpredictable changes in demand and supply forces
and other factors.

• Speculative motive influences the decision to increases or reduce

inventory levels to take advantage of price fluctuations and also for
saving in reordering costs and quantity discounts etc.

Objective of Inventory Management:-

The main objectives of inventory management are operational and financial.

The operational mean that means that the materials and spares should be
available in sufficient quantity so that work is not disrupted for want of
inventory. The financial objective means that investments in inventories
should not remain ideal and minimum working capital should be locked in it.

The following are the objectives of inventory management:-

• To ensure continuous supply of materials, spares and finished goods.

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 • To avoid both over-stocking of inventory.

• To maintain investments in inventories at the optimum level as

required by the operational and sale activities.

• To keep material cost under control so that they contribute in reducing

cost of production and overall purchases.

• To eliminate duplication in ordering or replenishing stocks. This is

possible with the help of centralizing purchases.

• To minimize losses through deterioration, pilferage, wastages and

damages.

• To design proper organization for inventory control so that

management. Clear cut account ability should be fixed at various
levels of the organization.

• To ensure perpetual inventory control so that materials shown in stock

ledgers should be actually lying in the stores.

• To ensure right quality of goods at reasonable prices.

• To facilitate furnishing of data for short-term and long term planning

and control of inventory

7.7 Management of cash

Cash is the important current asset for the operation of the business. Cash is
the basic input needed to keep the business running in the continuous basis,
it is also the ultimate output expected to be realized by selling or product
manufactured by the firm. The firm should keep sufficient cash neither more
nor less. Cash shortage will disrupt the firm’s manufacturing operations
while excessive cash will simply remain ideal without contributing anything
towards the firm’s profitability. Thus a major function of the financial
manager is to maintain a sound cash position. Cash is the money, which a
firm can disburse immediately without any restriction. The term cash
includes coins, currency and cheques held by the firm and balances in its
bank account. Sometimes near cash items such as marketing securities or
bank term deposits are also included in cash. Generally when a firm has
excess cash, it invests it is marketable securities. This kind of investment
contributes some profit to the firm.

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Need to hold cash

The firm’s need to hold cash may be attributed to the following three
motives:-

The Transaction Motive: The transaction motive requires a firm to hold

cash to conduct its business in the ordinary course. The firm needs cash
primarily to make payments for purchases, wages and salaries, other
operating expenses, taxes, dividends, etc.

The Precautionary Motive: A firm is required to keep cash for meeting

various contingencies. Though cash inflows and outflows are anticipated but
there may be variations in these estimates. For example a debtor who pays
after 7 days may inform of his inability to pay, on the other hand a supplier
who used to give credit for 15 days may not have the stock to supply or he
may not be in opposition to give credit at present.

Speculative Motive: - The speculative motive relates to the holding of

cash for investing in profit making opportunities as and when they arise. The
opportunities to make profit changes. The firm will hold cash, when it is
expected that interest rates will rise and security price will fall.

Components of working capital are calculated as follows:

1) Raw Materials Storage Period=Average stock of raw

materials/Average cost of raw material consumption per day.

2) W-I-P Holding period=Average w-i-p in inventory/Average cost of

production per day.

3) Stores and spares conversion period= Average stock of Stores and

spares/ Average consumption per day.

4) Finished goods conversion period= Average stock of finished

goods/Average cost of goods sold per day.

5) Debtors collection period=Average book debts/Average credit sales

per day.

6) Credit period availed=Average trade creditors/Average credit purchase

per day.

7.8 Management of Receivables

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A sound managerial control requires proper management of liquid assets
and inventory. These assets are a part of working capital of the business. An
efficient use of financial resources is necessary to avoid financial distress.
Receivables result from credit sales. A concern is required to allow credit
sales in order to expand its sales volume. It is not always possible to sell
goods on cash basis only. Sometimes other concern in that line might have
established a practice of selling goods on credit basis. Under these
circumstances, it is not possible to avoid credit sales without adversely
affecting sales.

The increase in sales is also essential to increases profitability. After a

certain level of sales the increase in sales will not proportionately increase
production costs. The increase in sales will bring in more profits. Thus,
receivables constitute a significant portion of current assets of a firm. But for
investment in receivables, a firm has to insure certain costs. Further, there is
a risk of bad debts also. It is therefore, very necessary to have a proper
control and management of receivables.

Needs to hold cash:

Receivables management is the process of making decisions relating to

investment in trade debtors. Certain investments in receivables are
necessary to increase the sales and the profits of a firm. But at the same
time investment in this asset involves cost consideration also. Further, there
is always a risk of bad debts too. Thus, the objective of receivable
management is to take a sound decision as regards investments in debtors.
In the words of Bolton, S.E., the need of receivables management is “to
promote sales and profits until that point is reached where the return of
investment in further funding of receivables is less than the cost of funds
raised to finance that additional credit.”

8.Financials of Punj Lloyd ltd

8.1 Income Statement

31-Mar- 31-Mar- 31-Mar-

09(12) 08(12) 07(12)

Profit / Loss A/C Rs mn %OI Rs mn %OI Rs mn %OI

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 Net Sales (OI) 68879.5 100. 44885.6 100. 22388.4 100.0
0 00 8 00 7 0

Material Cost 23817.6 34.5 16253.6 36.2 5873.55 26.23

1 8 3 1

Increase Decrease 0.00 0.00 0.00 0.00 4.97 0.02

Inventories

Personnel 5701.88 8.28 3475.74 7.74 2365.63 10.57

Expenses

Manufacturing 23901.4 34.7 15043.7 33.5 8805.23 39.33

Expenses 7 0 7 2

Gross Profit 15458.5 22.4 10112.5 22.5 5339.09 23.85

4 4 4 3

Administration 8049.85 11.6 4968.23 11.0 3186.30 14.23

Selling and 9 7
Distribution
Expenses

EBITDA 7408.69 10.7 5144.31 11.4 2152.79 9.62

6 6

Depreciation 1194.81 1.73 1133.87 2.53 844.61 3.77

Depletion and
Amortisation

EBIT 6213.88 9.02 4010.44 8.93 1308.18 5.84

Interest Expense 1942.80 2.82 1132.81 2.52 1001.16 4.47

Other Income 676.67 0.98 531.88 1.18 666.31 2.98

Pretax Income 4947.75 7.18 3409.51 7.60 973.33 4.35

Provision for Tax 1736.79 2.52 1195.08 2.66 357.49 1.60

Extra Ordinary 0.00 0.00 0.00 0.00 0.00 0.00

and Prior Period

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Items Net

Net Profit 3210.98 4.66 2214.43 4.93 615.85 2.75

Adjusted Net Profit 3210.98 4.66 2214.43 4.93 615.85 2.75

Dividend - 0.00 0.00 0.00 0.00 0.00 0.00

Preference

Dividend - Equity 91.05 0.13 121.38 0.27 78.38 0.35

8.2 Balance Sheet

31- %BT 31- %BT 31- %BT

Mar-09 Mar-08 Mar-07

Equity Capital 606.96 0.74 606.89 1.14 522.52 1.34

Preference Capital 0.00 0.00 0.00 0.00 0.00 0.00

Share Capital 606.96 0.74 606.89 1.14 522.52 1.34

Reserves and Surplus 25482.6 31.0 23538.8 44.2 10519.6 26.95

3 3 2 4 7

Loan Funds 29378.5 35.7 13676.4 25.7 15186.4 38.91

4 8 8 1 0

Current Liabilities 24006.2 29.2 13635.1 25.6 11895.0 30.48

1 3 0 3 9

Provisions 1463.05 1.78 726.78 1.37 297.40 0.76

Current Liabilities 25469.2 31.0 14361.8 27.0 12192.4 31.24

and Provisions 6 2 9 0 8

Total Liabilities and 82117.6 100. 53201.6 100. 39027.1 100.0

Stockholders Equity 1 00 3 00 5 0
(BT)

Tangible Assets 0.00 0.00 0.00 0.00 8312.98 21.30

Net

Intangible Assets 0.00 0.00 0.00 0.00 199.23 0.51

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Net

Net Block 10722.7 13.0 9894.34 18.6 8512.21 21.81

7 6 0

Capital Work In 1236.54 1.51 928.48 1.75 40.34 0.10

Progress Net

Fixed Assets 11959.3 14.5 10822.8 20.3 8552.55 21.91

1 6 2 4

Investments 9933.47 12.1 7277.56 13.6 3177.97 8.14

0 8

Inventories 29502.8 35.9 15051.4 28.2 11628.3 29.80

7 3 8 9 6

Accounts Receivable 15235.6 18.5 9639.67 18.1 5615.05 14.39

2 5 2

Cash and Cash 3589.26 4.37 2144.23 4.03 3379.01 8.66

Equivalents

Other Current 924.05 1.13 812.47 1.53 590.42 1.51

Assets

Current Assets 49251.8 59.9 27647.8 51.9 21212.8 54.35

1 8 6 7 4

Loans & Advances 10973.0 13.3 7452.31 14.0 6083.67 15.59

2 6 1

Miscellaneous 0.00 0.00 0.00 0.00 0.00 0.00

Expenditure Other
Assets

Total Assets (BT) 82117.6 100. 53201.6 100. 39027.1 100.0

1 00 3 00 5 0

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9.Ratio Analysis
As on 31-Mar- 31-Mar- 31-Mar-
09 08 07

Working Capital

Working Capital to Sales (x) 0.40 0.30 0.40

Working Capital Days (days gross 133.80 113.90 151.90

sales)

Receivables (days gross sales) 80.70 78.40 91.50

Creditors (days cost of sales) -- 70.20 86.50

FG Inventory (days cost of sales) -- 0.10 0.10

RM Inventory (days consumption) -- -- --

Cash Flow Indicator

Operating Cash Flow/Sales (%) -9.40 -5.20 -8.20

Following steps have been taken to control inventory:

• An inventory monitoring cell is constituted at the corporate office.

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 • The purchases were controlled by the materials management group
reporting to the Director of Finance.

• The company provided for weekly meetings between material

planning, production control and purchase departments for better
matched material availability.

• Monthly review of total inventory at the level of chief executives of

plants and corporate management is introduced.

• Inventory control is dovetailed with the budgeting system. Top 100

inventory items are identified for closer scrutiny and control

Key Working Capital Ratios

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

capital utilization.

Ratio Formula Result Interpretation

Stock Average = x days On average, you turnover the value of

Turnover Stock * your entire stock every x days. You may
(in days) 365/ Cost need to break this down into product
of Goods groups for effective stock management.
Sold Obsolete stock, slow moving lines will
extend overall stock turnover days.
Faster production, fewer product lines,
just in time ordering will reduce average
days.

Receivabl Debtors * = x days It takes you on average x days to collect

es Ratio 365/ monies due to you. If you’re official credit
(in days) Sales terms are 45 day and it takes you 65
days... why? One or more large or slow
debts can drag out the average days.
Effective debtor management will
minimize the days.

Payables Creditors = x days On average, you pay your suppliers

Ratio (in * 365/ every x days. If you negotiate better
days) Cost of credit terms this will increase. If you pay

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 Sales (or earlier, say, to get a discount this will
Purchase decline. If you simply defer paying your
s) suppliers (without agreement) this will
also increase - but your reputation, the
quality of service and any flexibility
provided by your suppliers may suffer.

Current Total = x times Current Assets are assets that you can
Ratio Current readily turn in to cash or will do so within
Assets/ 2 months in the course of business.
Total Current Liabilities are amount you are
Current due to pay within the coming 12 months.
Liabilities For example, 1.5 times means that you
should be able to lay your hands on
$1.50 for every $1.00 you owe. Less than
1 time e.g. 0.75 means that you could
have liquidity problems and be under
pressure to generate sufficient cash to
meet oncoming demands.

Quick (Total = x times Similar to the Current Ratio but takes

Ratio Current account of the fact that it may take time
Assets - to convert inventory into cash.
Inventory
)/ Total
Current
Liabilities

Working (Inventor As % A high percentage means that working

Capital y + Sales capital needs are high relative to your
Ratio Receivabl sales.
es -
Payables)
/ Sales

Other working capital measures include the following:

• Bad debts expressed as a percentage of sales.

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 • Cost of bank loans, lines of credit, invoice discounting etc.

• Debtor concentration - degree of dependency on a limited number of

customers.

Once ratios have been established for your business, it is important to track
them over time and to compare them with ratios for other comparable
businesses or industry sectors. When planning the development of a
business, it is critical that the impact of working capital be fully assessed
when making cash flow forecasts.

Calculation of current assets to fixed asset ratio

A firm needs current and fixed assets to support a particular level of output.
However, to support the same level of output the firm can have different
levels of current assets. As the firm’s output and sales increases, the need
for current asset increases. Generally the current assets do not increase in
direct proportion to output; current assets may increase at a decreasing rate
with input. This relationship is based upon the notion that it takes a greater
proportional investment in current assets when only a few units of output are
produced than it does later on when the firm can use its current assets more
efficiently.

The level of the current assets can be measured by relating current assets to
fixed assets.

There are three policies:-

1) conservative current assets policy:

CA/FA is higher. It implies greater liquidity and lower risk.

2) aggressive current assets policy:

CA/FA is lower; it implies higher risk and poor liquidity.

3) moderate current assets policy:

CA/FA ratio falls in the middle of conservative and aggressive

policies.

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In case of Punj Lloyd, the ratio of current assets to fixed assets is:

2008-09 (Rs 2007-08 (Rs 2006-07 (Rs

mn) mn) mn)

Current Assets 49251.81 27647.86 21212.84

Fixed Assets 11959.31 10822.82 8552.55

CA/FA 4.12 2.55 2.48

10.Cash Flow Analysis

Cash flow analysis is a method of analyzing the financing, investing, and
operating activities of a company. The primary goal of cash flow analysis is
to identify, in a timely manner, cash flow problems as well as cash flow

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opportunities. The primary document used in cash flow analysis is the cash
flow statement. Since 1988, the Securities and Exchange Commission (SEC)
has required every company that files reports to include a cash flow
statement with its quarterly and annual reports. The cash flow statement is
useful to managers, lenders, and investors because it translates the earnings
reported on the income statement—which are subject to reporting
regulations and accounting decisions—into a simple summary of how much
cash the company has generated during the period in question. "Cash flow
measures real money flowing into, or out of, a company's bank account,"
Harry Domash notes on his Web site, WinningInvesting.com. "Unlike
reported earnings, there is little a company can do to overstate its bank
balance."

The cash flow statement

A typical cash flow statement is divided into three parts: cash from
operations (from daily business activities like collecting payments from
customers or making payments to suppliers and employees); cash from
investment activities (the purchase or sale of assets); and cash from
financing activities (the issuing of stock or borrowing of funds). The final total
shows the net increase or decrease in cash for the period.

Cash flow statements facilitate decision making by providing a basis for

judgments concerning the profitability, financial condition, and financial
management of a company. While historical cash flow statements facilitate
the systematic evaluation of past cash flows, projected (or pro forma) cash
flow statements provide insights regarding future cash flows. Projected cash
flow statements are typically developed using historical cash flow data
modified for anticipated changes in price, volume, interest rates, and so on.

To enhance evaluation, a properly-prepared cash flow statement

distinguishes between recurring and nonrecurring cash flows. For example,
collection of cash from customers is a recurring activity in the normal course
of operations, whereas collections of cash proceeds from secured bank loans
(or issuances of stock, or transfers of personal assets to the company) is
typically not considered a recurring activity. Similarly, cash payments to
vendors is a recurring activity, whereas repayments of secured bank loans
(or the purchase of certain investments or capital assets) is typically not
considered a recurring activity in the normal course of operations.

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In contrast to nonrecurring cash inflows or outflows, most recurring cash
inflows or outflows occur (often frequently) within each cash cycle (i.e.,
within the average time horizon of the cash cycle). The cash cycle (also
known as the operating cycle or the earnings cycle) is the series of
transactions or economic events in a given company whereby:

1. Cash is converted into goods and services.

2. Goods and services are sold to customers.

3. Cash is collected from customers.

Reasons for Creating a Cash Flow Budget

Think of cash as the ingredient that makes the business operate smoothly
just as grease is the ingredient that makes a machine function smoothly.
Without adequate cash a business cannot function because many of the
transactions require cash to complete them.

By creating a cash flow budget you can project your sources and
applications of funds for the upcoming time periods. You will identify any
cash deficit periods in advance so you can take corrective actions now to
alleviate the deficit. This may involve shifting the timing of certain
transactions. It may also determine when money will be borrowed. If
borrowing is involved, it will also determine the amount of cash that needs to
be borrowed.

Periods of excess cash can also be identified. This information can be used to
direct excess cash into interest bearing assets where additional revenue can
be generated or to scheduled loan payments.

Cash Flow is not Profitability

People often mistakenly believe that a cash flow statement will show the
profitability of a business or project. Although closely related, cash flow and
profitability are different. A cash flow statement lists cash inflows and cash
outflows while the income statement lists income and expenses. A cash flow
statement shows liquidity while an income statement shows profitability.

Many income items are also cash inflows. The sales of crops and livestock
are usually both income and cash inflows. The timing is also usually the
same as long as a check is received and deposited in your account at the

1
time of the sale. Many expense items are also cash outflow items. The
purchase of livestock feed (cash method of accounting) is both an expense
and a cash outflow item. The timing is also the same if a check is written at
the time of purchase.

However, there are many cash items that are not income and expense
items, and vice versa. For example, the purchase of a tractor is a cash
outflow if you pay cash at the time of purchase. If money is borrowed for the
purchase using a term loan, the down payment is a cash outflow at the time
of purchase and the annual principal and interest payments are cash
outflows each year.

10.1 Cash Flow Statement of Punj Lloyd

Year ended March 31, 2009 Year ended March 31, 2008
Cash Flows used in Operating Activities
Net Profit before Taxation 13,356 4,834,834
Adjustments for -
Depreciation/Amortization 1,770,765 1,462,386
Loss / (Profit) on Sale / Discard of Fixed Assets (Net) (402,479) 30,163
Loss / (Profit) on Sale of Non Trade Long Term Investments 95,320 (363,901)
Loss / (Profit) on Liquidation of Subsidiaries & ISP Business (Net) 118,810 -
Interest Income (98,322) (276,689)
Dividend on Long Term Investments (2) (345)
Unrealised Foreign Exchange Fluctuation (Net) 503,313 277,499
Interest Expenses 2,207,606 1,292,129
Amortisation of Foreign Currency Monetary Items Translation (346,902) -
Bad Debts/ Advances Written Off - 76,481
Unspent Liabilitiesand Provisions Written Back (189,719) (132,684)
Provision for Doubtful Receivable 80,181 52,882
Operating Profit before Working Capital Changes 3,751,927 7,252,755
Movements in Working Capital:
(Increase) in Inventories (16,093,979) (3,729,198)
(Increase) in Sundry Debtors (5,692,411) (8,720,340)
(Increase) / Decrease in Other Current Assets 337,988 (314,941)
(Increase) in Margin Money Deposits (578,904) (479,708)
(Increase) in Loans and Advances (3,389,536) (2,420,500)
Increase in Current Liabilitiesand Provisions 15,198,031 4,052,425
Cash Used in Operations (6,466,884) (4,359,507)
Direct Taxes Paid (1,227,020) (823,518)
Net Cash Used in Operating Activities (7,693,903) (5,183,025)
Cash Flows Used in Investing Activities
Purchase of Fixed Assets (Including Capital Work in Progress) (7,945,806) (4,995,765)
Purchase of Investments (1,499,010) (3,832,746)
Cash Outflow on Acquisition of Subsidiaries (150,814) -
Proceeds from Sale of Investments 203,155 404,186
Proceeds from Sale of Fixed Assets 1,581,986 787,558
Outflow for Misc. Expenses - (1)
Dividend Received 2 345
Interest Received 109,873 288,615
Net Cash Used in Investing Activities (7,700,614) (7,347,808)
Cash Flows from Financing Activities
Inflow in Share Capital 72 338,371
Share Issue Expenses - (106,475)
Increase in Premium on Issue of Share Capital 6,972 11,068,258
Increase in Short-Term Working Capital Loans 9,372,124 2,124,550
Repayment of Long-Term Borrowings (1,965,863) (7,424,358)
Proceeds from Long-Term Borrowings 12,114,172 4,379,446
Interest Paid (2,152,226) (1,270,907)
Dividend Paid (121,372) (78,378)
Tax on Dividend Paid (20,628) (13,320)

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Net Cash from Financing Activities 17,233,251 9,017,187
Net Increase / (Decrease) in Cash and Cash Equivalents 1,838,734 (3,513,646)
(A+B+C)
Exchange Fluctuation Translation Difference (1,152,203) (94,755)
Total 686,531 (3,608,401)
Cash and Cash Equivalentsat the Beginning of the Year 6,347,013 9,955,414
Cash Outflow due to Disposal of a Branch and a Subsidiary (66,270) -
Cash Inflow due to Acquisition of Subsidiaries 24,762 -
Cash and Cash Equivalents at the End of the Year 6,992,036 6,347,013
Components of Cash and Cash Equivalents
Cash on Hand (Including Cheque on Hand Rs. Nil) 109,388 77,115
Balance with Banks
On Current Accounts 3,359,582 2,506,307
On Cash Credit Accounts 98,771 52,264
On EEFC Accounts 25,082 400,279
On Fixed Deposits 4,529,206 3,862,137
Less : Margin Money Deposits (1,129,993) (551,089)
Total 6,992,036 6,347,013

10.2 Cash Flow of Jobs

10.2.1 Monthly cash flow of a Job

PARTICULARS Last period Apr-10

Actual Budget Actual Budget
ed ed
CASH OUTFLOWS
CHARGED WAGES
Charged wages 384406 420000 55539 420000
5 0 5
SOCIAL COST ON WAGES
Employer Cont EPF- wages 76623 588000 58800
SALARIES OF HIRED EMPLOYEES
INTER-DIVISION COSTS (FROM TWO
DIVISIONS)
INTRA-DIVISION COSTS (FROM TWO
DEPARTMENTS)
TEMPORARY WORKERS
SUB CONTRACTORS AND
CONSULTANTS
Sub contractors and consultants 780224 159583 159583
3 .3
COSTS AFFILIATED COMPANIES
MATERIAL
Consumables 359838 52727
5
CENTRAL SALES TAX
CST- MH
CST- CG
CST- GJ

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CST- RJ
CST- HR
CST- PJ
CST- JK
CST- TN
CST- WB
CST- AP
CST- MP
CST- OR
CST- UP
CST- BH
RENTAL COST OF SCAFFOLDING
CHARGED RENTAL COSTS
CHARGED INTEREST EXPENSES
SITE COST
Accommodation 352030 450000 45000
Conveyance 22764 41666. 4166.6
7 7
LC/BG bank charges 61941. 20833. 16846. 2083.3
94 3 85 3
Site consumables and safety gadgets 350000 350000
0
Equipment hired 942741 157833 157833
3 .3
Food and site allowance 86029 50000 5000
Fuel and services 83817 958333 95833.
.3 33
Insurance cost workmen 30312 2756
compensation
Local taxes 20833. 2083.3
3 3
IT costs 700
Medical services 4714 83333. 274 8333.3
3 3
Printing and stationery 16346 41666. 130 4166.6
7 7
Vehicle hired 180651 408333 40833.
.3 33
Telephone and internet 26805 41666. 4166.6
7 7
Temporary shed/ warehouse 41666. 4166.6
7 7
TRAVELLING

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Hotel cost- domestic 101087 83333. 8333.3
3 3
Ticket cost- domestic 150453 83333. 13713 8333.3
.7 3 3
Other cost- domestic 36923 41666. 4166.6
7 7
Other site costs 25051 100
Courier and postage 4609 20833. 110 2083.3
3 3
Transportation and octroi 4500 83333. 8333.3
3 3
Engineering services 811257 666666 66666.
.7 67
Testing and inspection 9484 133333 13333.
.3 33
Repair and maintenance 11105 125000 12500
Training and seminar expenses
Uniform and Dress
Power and water 2197 112500 11250
Charity and donation 26655 83333. 8333.3
3 3
Client entertainment 17413 41666. 4166.6
7 7
Commission and brokerage 300
CHARGED SALARY INCLUDING SOCIAL
COST
CHARGED SALARY
Charged salary 109434 145833 97201 145833
8 3 .3
SOCIAL COST ON SALARY
Employer Cont EPF- salary 45463 240000 24000
Employer Cont ESIC- salary
MISCELLANEOUS PROJECT COST 208333 20833.
.3 33
OUTPUT TAX
CHARGED OTHER COST

TOTAL CASH OUTFLOW 124489 170021 73925 167938

93 66 2.9 3

CASH INFLOWS
Cash payment received 546833 243125 243125
0 00 0
TOTAL CASH INFLOW 546833 243125 0 243125

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 0 00 0

NET CASH FLOW - 731033 - 751866

698066 4 73925 .7
3 3

Projected Cash Flows from individual projects (in Rs.)

Jo Job Job Cash Outflows Cash Inflows Budget Actual
b start completi Budgeted Actual Estimat Actual ed Margin
no date on date project Project ed revenue Margin (%)
. expenses cost value of earned (%)
job
47 Jun-09 May-10 20402600 1244899 291750 8972765. 30 -
3.4 00 21 38.7420

10.3 Job Cash flow Analysis & Interpretation

The monthly cash flows from this project show varied results as cash inflows
occur only in the months of October, December, January and March. The
other months do not show any cash inflows as no payment is received on
these months from the client. As there is no cash inflow these months show
negative net cash flows. In spite of payment being received march shows a
negative net cash flow as the inflows are not enough to cover the cash
outflows.

Barring few expenses it can be seen that the budgeted costs for most of the
listed expenses are extremely high. This shows that funds are not optimally
utilized as most of the funds are lying idle. Some expenses are projected at
extremely high expected rates as they are more than thrice or four times of
the actual costs. The cash position of the project is mostly negative even if
the actual costs are well within the limits of the budgeted costs.

Though the net monthly cash flows are mostly negative it does not mean
that the company is in immediate need of cash which can be funded by short
term borrowings as the budgeted costs are quite higher and the company’s
financial position assures that it can meet the expenses at the stipulated
time as and when required.

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The budgeted costs that are set aside by the company are quite high and it
can be reduced by carefully considering certain costs, like, power and fuel
costs, repairs and maintenance costs etc. which are projected at four to five
times their actual expenses made.

Overall this project was a failure as we see that the company incurred a
heavy loss of around 38% though the budgeted margin was expected around
30%. This tells us the budgets made for this project were highly inflated. The
job order might have looked lucrative but it yielded unfavorable results due
to poor forecasts made in this regard.

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11.Conclusion
Let us summarize our discussion on the structure and financing of current
assets. The relative liquidity of the firm’s assets structure is measured by
current to fixed assets or current asset to total asset ratio. The greater this
ratio, the less risky as well as the less profitable will be the firm and vice
versa. Similarly, the relative liquidity of the firm’s financial structure can be
measured by short-term financing to total financing ratio. The lower this
ratio the less risky as well as profitable will be the firm and vice-versa. In
shaping its working capital policy, the firm should keep in mind these two
dimensions: relative asset liquidity (level of current assets) and relative
financing liquidity (level of short term financing) of the working capital
management. A firm will be following a very conservative working capital
policy if it combines a high level of current assets with a high level of long
term financing (or low level of short term financing). Such a policy will not be
risky at all but would be less profitable. An aggressive firm on the other hand
would combine low level of current assets with a low level of long term
financing (or high level of short term financing). This firm will have high
profitability and high risk. In fact, the firm the firm may follow a conservative
financing policy to counter its relatively liquid asset structure in practice. The
conclusion of all this is that the considerations of assets and financing mix
are crucial to the working capital management.

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12.Recommendations
There is a great need for effective management of working capital in any
firm. There is no precise way to determine the exact amount of gross or net
working capital for any firm. The data and problems of each company should
be analyzed to determine the working capital. There is no specific rule as to
how current assets should be financed. It is not feasible in practice to finance
current assets by short-term sources only. Keeping in view the constraints of
the company, a judicious mix of short and long term finances should be
invested in current assets. Since current assets involve cost of funds, they
should be put to productive use.

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13.Bibliography
1. Financial Management by Khan & Jain

2. Financial Management by Prasanna Chandra

3. Financial Management by I.M.Pandey

4. Annual Reports of Punj Lloyd

5. Auditor’s report, Director’s report & Investor’s report

6. www.punjlloydgroup.com

7. www.google.com