Professional Documents
Culture Documents
"Working Capital Management at Nalco": Project Final Report
"Working Capital Management at Nalco": Project Final Report
ON
BY
RAKESH KUMAR BARAL
(PGDM)
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 by the reader.
ACKNOWLEDGEMENT
I am also grateful to Prof. S.C.GHOSH, CRIC Chief and Mr. RAJIV KUMAR,
DIRECTOR, Accman Institute of Management, for permitting me to undertake this
study.
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.
I do hereby declare that this piece of project report entitled “A Study on Working
capital Management practices in NALCO” 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 Prof. DENESH SINGH, Accman Institute Of Management .This
project work is my own and has neither been submitted nor published elsewhere.
This is to satisfy that the summer project work of Mr. Rakesh Kumar Baral
Titled Working capital management is an original work and this work has not been
submitted elsewhere in any form. The indebtness to other works/publications has
been duly acknowledged at the relevant places. The project work was carried out
during 02.05.2009 to 02.07.2009 in National Aluminum Company Limited
(NALCO).
Date:
Mr. Satyabrata Dash, Manager (finance)
NALCO, Corporate office
NALCO Bhaban, Bhubaneswar
TABLE OF CONTENTS
EXECUTIVE SUMMERY
The major objective of the study is to proper understanding the working capital of
NALCO & 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.
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. An attempt has been made to make critical study of
the various dimensions of the working capital management of NALCO, a Star
Trading House with NAVRATNA Status.
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.
Place of study:-
The project study is carried out at the Finance Department of NALCO Corporate
office Situated at Bhubaneswar, ORISSA. The study is undertaken as a part of the
PGDM curriculum from 02 MAY 2009 to 02 JULY 2009 in the form of summer
placement.
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.
The main operations of the of the India aluminum industry is mining of ores,
refining of the ore, casting, alloying, sheet, and rolling into foils. At present,
Hindalco and Nalco are one of the most economical in the production of aluminum
in the world. For the sustenance of the growth the aluminum industry in India has
to develop research and development units to assist the production and improve on
the quality measures to keep a stringent quality control.
The India aluminum Metal Industries sector in the previous decade experienced
substantial success among the other industries. The India aluminum industry is
developing fast and the advancement in its technologies is boosting the growth
even faster. The utilization of both international and domestic resources was
significant in the rapid development of the India aluminum industry. This rapid
development has made the India aluminum industry prominent among the
investors. The India aluminum industry has a bright future as it can become one of
the largest players in the global aluminum market as in India the consumption is
fairly low, the industry may use the surplus production to cater the international
need for aluminum which is used all over the world for several applications such as
aircraft manufacturing, automobile manufacturing, utensils, etc.
The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg.
In USA, 19 kg.in Japan and 10 kg. In Europe , Even the World’s average per
capita consumption is about 10times of that in India. One reason of low
consumption in the country could be that consumption pattern of aluminium in
India is vastly different from that of developed countries. The demand of
aluminium is expected to grow by about 9 percent per annum from present
consumption levels. This sector is going through a consolidation phase and existing
producers are in the process of enhancing their production capacity so that a
demand supply gap expected in future is bridged. However, India is a net exporter
of alumina and aluminium metal at present.
ALUMINIUM-STRUCTURE
• The aluminium industry in India can be classified as:
(a) The primary producers who produce ingots and billets (primary form of
aluminium) using bauxite.
(b) The secondary producers who add value to the ingots and billets to
produce semi-fabricated products.
• At present there are only five companies in the primary aluminium market
viz. Hindalco, Indian Aluminum (Indal), Madras Aluminum (Malco),
National Aluminum (Nalco) and Bharat Aluminum (Balco). The former
three are private sector companies while the latter two are government
owned.
• All the primary producers have integrated forward into the manufacture of
high value semi-fabricated products like rods, rolled products, extrusions and
foils.
o The ACO was scrapped in 1989 and in 1991 the government lifted
restrictions on capacity additions resulting in a free market environment.
Aluminium – Inputs
• The aluminium industry in India can be classified as: Captive power, ample
bauxite reserves, coupled with cheap labour costs make Indian companies
amongst the most competitive aluminium producers globally.
• The main raw material for the manufacture of aluminium includes bauxite,
caustic soda, calcined petroleum coke, coal tar pitch, and LS/FS furnace oil.
The production process for manufacture of aluminium is briefly outlined
below.
• The mined bauxite ore is mixed with caustic liquor and is refined to produce
alumina. This is then smelted (through electrolysis in a smelter) to obtain
aluminium. Depending on the quality of bauxite, 2.5 – 3 tonnes are required
for manufacture of 1 tonne of alumina. In turn, 2 tonnes of alumina are
required for manufacture of 1 tonne of aluminium.
Bauxite
o Indian bauxite reserves at 3 bn tonnes, are the 5th largest in the world, and
account for 6% of total world reserves. Most alumina refineries are designed
around the bauxite reserves to reduce transportation costs. Cost per tonne of
bauxite varies for players depending on the location of the refinery and
bauxite mines.
o For example, Nalco has an estimated 1,600 m tonnes of bauxite reserves
only 20 kms from its alumina refinery, enabling it to become one of the most
economical bauxite producers in the world.
Power
• Power constitutes the single largest cost component for aluminium
manufacturers (35–40% of operating costs). Almost all the major Indian
companies have captive power plants thus giving them access to cheap
power. This makes India one of the most competitive low cost aluminium
producers in the world.
• Hindalco and Nalco’s production costs are amongst the lowest in the world.
Both companies have the advantage of 100% captive power, vital in a power
intensive industry and in a power deficit country like India.
Aluminium – Products
o Aluminium products can be segregated into rolled products, extrusions, and
foils.
o Production in this segment is widely spread and the top three players control
around 31% of the market (the largest company - Hindalco commands
around 14% market share in this segment).
o Foils are sheets having thickness of less than 0.2 mm up to 0.006 mm finding
application mainly in the packaging sector. Major users of aluminium foils
include the pharmaceutical, consumer products, cigarette and cable
manufacturing industries.
KEY POINTS
Supply - Supply of aluminum is in excess and any deficit can be imported at
low rates of duty. Currently, domestic production comfortably meets domestic
requirements.
FINANCIAL YEAR-08
• Highly concentrated industry with only five primary plants in the country
• All plants have their own captive power units for cheaper and un-interrupted
power Supply
• Energy cost is 40% of manufacturing cost for metal and 30% for rolled
products
• Energy targets are based on best energy figures achieved in their sector /
region and by the plant itself in the past
Bauxite and calcined petroleum coke are primary raw materials for this industry.
However, alumina is raw materials for smelters and aluminium metal is raw
material for fabrication units.
Fuel Usage:
Coal, Furnace oil and electricity are primary energy inputs in aluminium
production. Coal is primarily used to generate steam, which is used in the process
while fuel oil is mainly used in Calcinations of alumina and various furnaces in
fabrication plants. Electricity is the major energy input in aluminium production
and is considered to be prime factor in determining economics of aluminium
production. Hence, all primary metal producers have installed their own captive
power plants to supply cheaper and uninterrupted power for their use. Majority of
electricity consumed in this industry is supplied by their captive power plants.
Technology Status:
Invented over 100 years ago, Bayer-Hall-Heroult is the only available commercial
technology, even today, for the production of aluminium. Alumina is the basic raw
material for the production of aluminium metal through electrolytic process. The
production of alumina obtained from bauxite, a mineral containing up to 60% in
the form of mono/tribhydrate is carried out through the Bayer route, which is an
extractive hydro-metallurgical process.
Electrical – 65%
Transport-21%
Construction -8%
Packaging – 5%
Industrial machinery – 4%
Consumer durables – 4%
Use of Aluminum as an alternative to steel has huge potential in the railways. The
government has taken note of this and has started working on that. Aluminum
castings are primarily used in transport and automobile sectors.
The global casting is currently estimated at around 7.4 million tons, against that
consumption in India as only around 110,000 tons. The country’s share in the
global downstream sector is low as compared to other developed countries.
o 2 x 1.5 tonne induction furnace with a 4 tph alloy ingot casting machine
The water for the Plant is drawn from River Brahmani through a 7 km long
double circuit pipeline. The coal demand is met from a mine of 3.5 million tpa
capacity opened up for Nalco at Bharatpur in Talcher by Mahanadi Coalfields
Limited. The Power Plant is inter-connected with the State Grid.
Brief History:
After the discovery of 1000 million tons of Bauxite reserves in the Eastern Ghats,
the govt. of India on the 28th March, 1978, authorized Aluminum Pechiney of
France to prepare a feasibility report on the industrial exploration of bauxite for the
establishment of an integrated
Aluminum complex. The result of this study led to sifting of focus of attention to
Panchpattermali, 30km.East of Koraput District of Orissa. Nalco was incorporated
in 1981as a public sector Unit. The newly founded NALCO signed an agreement of
collaboration with aluminum Pechiney, the world leader in this field for
incorporation of technical know-how to set up Asia’s largest integrated aluminium
complex.
Location:
Registered office………………………………...Bhubaneswar
Bauxite mine…………………………………….Panchpatmali
Aluminium refinery…………..............................Damanjodi
Aluminium smelter…………………………..…Angul
Port facilities….………………………………….Visakhapatnam
Achievements of Nalco:
1980:
A Memorandum of Understanding was signed in January, by the Government of
India for technical collaboration and financing of an integrated alumina-aluminium
complex with Aluminium Pechiney of France.
1981:
The Company was incorporated on 7th January, as a wholly owned enterprise of
Government of India. The Company Manufacture aluminium hydrate, claimed
alumina, aluminium ingots and aluminium wire rods.
1993:
NALCO signed a project co-operation agreement with Hydro Aluminium AG,
Norway to carry out a joint study for feasibility of setting up a100% export
oriented aluminium plant of 0.9 million tonnes per annum capacity.
1,28,86,19,200 No. of shares allotted
1994:
The Company proposed to undertake expansion of bauxite mine from2.4million
TPA. to 4.8 million tpa. and alumina refinery from 8,00,000 tpa. to 13,50,000 tpa.
This was subject to necessary clearances.
1995:
A Smelter plant at Angul was undertaken with a capacity of 26000 TPY of strip
casting facility. A special Alumina plant at Damanjodi was undertaken with a
Capacity of 20,000 TPY. A 10,000 TPY detergent grade Zeolite (Zeolite-A) plant
at Damanjodi, was undertaken.
1996:
The proposal to expand the capacities of bauxite mine at Panchpatmali from 24
lakh tonnes to 48 lakh tonnes and alumina refinery at Damanjodi from 8 lakh
tonnes to 15.75 lakh tonnes was approved by the Government on 18.12.1996.
1997:
Subject to necessary approvals being obtained the company proposed to convert
50% of its existing equity capital into debt. The public sector aluminium giant,
National Aluminium Company (NALCO) set up in technical collaboration with
Pechiney, France is the largest integrated aluminium company in Asia. National
Aluminium Company Ltd (Nalco), country's largest Aluminium Company, has
opened a stockyard at Bhiwandi in Thane district. National Aluminium Company
(Nalco), India's largest producer andex porter, got the ISO 14001 certification for
environmental excellence. The National Aluminium Company, Bhubaneswar,
signed an agreement of national importance with the NRDC for licensing from the
NRDC the knowhow to manufacture gallium from the sodium alumina plant.
1998:
The company has been forced to curtail its power generation capacity due to a
drastic reduction in intake by Gridco. - the nodal power transmission and
distribution agency in Orissa.
1999:
The National Aluminium Company Ltd (NALCO) a Government of India
undertaking is setting up a plant for extraction of gallium at its aluminium refinery
complex at Damanjodi. The National Aluminium Company (Nalco) will take over
International
2000:
Icra has retained the Laaa rating for the Rs 642.58-crore Non-convertible debenture
issue of the company, while it has assigned an A1 rating to the Rs 5-crore CP issue
of Narmada Chematur Petrochemicals.
2001:
A public sector Aluminium Company making a foray into detergent business
sounds out of place. But if senior officials of National Aluminium Company
(Nalco) are to be believed, the country’s second largest aluminium company will
be doing that at its zeolite plant scheduled to start operations in July end.
2002:
S Behuria appointed as part time official Director of Nalco. Nalco's alumina
refinery capacity increased to 15.75 lakh tone
2003:
Commissions one unit of Captive Power Plant with a capacity of 120 MW and 120
pots of Smelter with a capacity to produce 57,500 MT of Aluminium per year
Nalco members okay delisting of securities from stock exchanges of
Bhubaneshwar, Delhi, Calcutta & Madras
2004:
National Aluminium Company Limited (NALCO) has informed that Madras Stock
Exchange Limited vide its letter dated December 22, 2003 have withdrawn the
admission granted to dealings on their exchange for the securities of NALCO.
Nalco open offer to acquire 20% stake for Ondeo Nalco India.
2005:
Nalco inks agreement with NMDC.
NALCO-PRODUCTS
Aluminium Metal
Ingots
Sows
Billets
Wire rods
Cast strips
Alumina Hydrate
Zeolite-A
6515
5 YEARS PERFORMANCE HIGHLIGHTS
5324
4420
3349
1. SALES – Rs.crores
2740
2586
2306
2200
1717
1501
1562
1235
737
521
37
24.25
19.17
11.44
8.08
Bauxite
PRODUCTION-NEXT 5 YEARS 90
90
80
63 64 64
70
60 50
46.5
Lakh MT
50
40
30
20
10
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year
Alumina
30
30
22.75 22.75
25 21
20 16.3
15.75
15
M
T
h
L
k
a
10
Aluminium
5.85
6
4.7 4.7
4.6
5
3.57 3.7
4
3
M
T
h
L
k
a
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year
Power
9500
10000
8000
7000 6000
5650
6000
Mln KWH
5000
4000
3000
2000
1000
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year
Working Capital
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
o adequate supply of raw materials for processing;
o cash to pay for wages, power and other costs;
o creating a stock of finished goods to feed the market demand regularly; and,
o 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.
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 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:
• 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:
o Stock of Cash
o Value of Debtors
o Miscellaneous current assets like short term investment loans & Advances
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.
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.
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.
• Trade Advances.
• Borrowings.
• Provisions.
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.
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
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
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 then a large inventory/stock
needs to be maintained, thereby calling for substantial investment in the same.
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.
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.
Other Factors
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.
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.
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.
o T
he business may fail to honour its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.
o 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.
o E
xcess of working capital may result in unnecessary accumulation of
inventories.
o It may lead to offer too liberal credit terms to buyers and very poor recovery
system and cash management.
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.
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.
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.
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
• 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.
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.
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.
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.
3.) Stores and spares conversion period= Average stock of Stores and spares/
Average consumption per day.
5.) Debtors collection period=Average book debts/Average credit sales per day.
Management of Receivables
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.
Important Terms
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.
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 You increase your
duration or amount) from suppliers cash resources
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.
If you have insufficient working capital and try to increase sales, you can easily
over-stretch the financial resources of the business.
Frequent short-term emergency requests to the bank (to help pay wages, pending
receipt of a cheque).
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.
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:
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.........
o longer credit terms taken with approval, particularly for smaller orders
o use of post-dated checks by debtors who normally settle within agreed terms
o evidence of customers switching to additional suppliers for the same goods
o new customers who are reluctant to give credit references
o Receiving part payments from debtors.
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 demand 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.
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:
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!).
Remember, a good supplier is someone who will work with you to enhance the
future viability and profitability of your company
The following, easily calculated, ratios are important measures of working capital
utilization.
Ratio Formulae Result Interpretation
On average, you turn over the value of
your entire stock every x days. You may
Average Stock need to break this down into product
Stock
* 365/ =x groups for effective stock management.
Turnover
Cost of Goods days Obsolete stock, slow moving lines will
(in days)
Sold extend overall stock turnover days. Faster
production, fewer product lines, just in
time ordering will reduce average days.
It takes you on average x days to collect
monies due to you. If you’re official credit
Receivables terms are 45 day and it takes you 65 days...
Debtors * 365/ = x
Ratio why?
Sales days
(in days) One or more large or slow debts can drag
out the average days. Effective debtor
management will minimize the days.
On average, you pay your suppliers every
x days. If you negotiate better credit terms
this will increase. If you pay earlier, say, to
Creditors *
Payables get a discount this will decline. If you
365/ =x
Ratio simply defer paying your suppliers
Cost of Sales days
(in days) (without agreement) this will also increase
(or Purchases)
- but your reputation, the quality of service
and any flexibility provided by your
suppliers may suffer.
Current Assets are assets that you can
readily turn in to cash or will do so within
12 months in the course of business.
Current Liabilities are amount you are due
Total Current to pay within the coming 12 months. For
Current Assets/ =x example, 1.5 times means that you should
Ratio Total Current times be able to lay your hands on $1.50 for
Liabilities every $1.00 you owe. Less than 1 times
e.g. 0.75 means that you could have
liquidity problems and be under pressure
to generate sufficient cash to meet
oncoming demands.
(Total Current
Assets - Similar to the Current Ratio but takes
=x
Quick Ratio Inventory)/ account of the fact that it may take time to
times
Total Current convert inventory into cash.
Liabilities
(Inventory +
Working A high percentage means that working
Receivables - As %
Capital capital needs are high relative to your
Payables)/ Sales
Ratio sales.
Sales
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.
B: CURRENT LIABELITIES:
Sundry creditors:
40.09
31.96 32.71
30.09
23.6
31.89
24.79
24.01 23.21
18.3
CONCLUSION
BIBLIOGRAPHY
2. Financial Management…….I.M.Pandey
3. Annual Report of NALCO.
6. www.google.co.in