WORKING CAPITAL MANAGEMENT IN INDIAN STEEL

INDUSTRY: A CASE STUDY OF SAIL

Abstract

Working capital management is an important component of management of

business finance; since it directly influences firm’s profitability as well as liquidity in
everyday business activities. In any business concern, it is obvious that there must be
sufficient working capital to run day to day operation smoothly. Then, the concern of
working capital management is setting sufficient (optimal level) of working capital and
managing short term assets and liabilities of firms within a specified period of time,
usually one year. It is obvious that, the importance of efficient working capital
management is unquestionable to all business activities. Because, business capability
relies on its ability to effectively use (manage) receivables, inventories and cash.

Analysis of working capital management helps in providing an idea about status

of working capital management of the company. As Steel Authority of India Limited
(SAIL) is a public sector enterprise whose motive is to serve the society. Therefore, it is
important to analyze the financial and operating efficiency of the public sector
companies. As we, all know working capital is an essential element of any enterprise
therefore analysis of working capital management of SAIL to uphold its present and for
its successful implementation of its modernization and expansion activities which is of
great significance.

Objectives of the Study:

 To analyze the cash position and the efficiency with which it is managed.
 To analyze the receivables management.
 To measure the effectiveness of inventory management.
 To assess the adequacy of working capital and the efficiency with which the overall
working capital is managed.
Research Methodology:
For the purpose of the study, the required data have been collected for the period
of ten years starting from 2002-03 to 2011-12. In order to accomplish the objectives the
collected data have been analyzed by using financial ratio analysis and various statistical
tools.

Findings:
Cash Management
 Cash to current assets ratio had tended to fluctuate throughout the study period. The
average of this ratio is 38.83 percent and C.V. at 39.39 percent. In a well financed
concern, cash to current assets should not be less than 5 to 10 percent. By this
standard, an optimum amount of cash is kept by the company.
 The turnover of cash varied from 2.16 times to 40.37 times during the period of the
study. The average of cash turnover ratio is 9.31 times and C.V. at 121.98 percent.
Thus, it may be observed that there is a decreasing trend.
 The cash return of assets ranged between 0.02 times in 2011-12 to 0.31 times in
2004-05 during the period of the study. The cash return on assets had fluctuating
trend with an average of 0.15 times and C.V. at 72.97 percent.
 It is observed from that the CFMR had a fluctuating trend in the first five years and
then a decreasing trend in the remaining years under study. The ratio moved between
0.03 in year 2011-12 to 0.34 in the year 2003-04 with an average of 0.17 and C.V. at
60.29 percent.
 For the purpose of the first objective “to analyze the cash position and the efficiency
with which it is managed”, the null hypothesis is; there is no significant effect of
cash management on the operating profit. After analysis the null hypothesis has been
accepted.

Receivables Management

 The analysis of the turnover of accounts receivables revealed that the unit followed an
increasing trend in most of the years under study and was varied from 6.01 times to
9.70. The average and C.V. of this ratio was 7.96 times and 14.83 percent
 respectively. The increasing trend of accounts receivables turnover ratio indicated
efficiently of credit and collection policies.
 The turnover of sundry debtors in the unit under study had declined trend having
some fluctuation and had ranged between 11.44 times to 18.99 times. The average of
this ratio was 15.20 times and C.V. at 16.37 percent.
 The average collection period in the unit under study adopted the decreasing trend
having some fluctuation throughout the period of the study. The range of average
collection period was from 38 days in 2007-08 to 61 days in 2010-11. The overall
average was 47 days and C.V. at 15.25 percent.
 For examine the second objective “to analyze the receivables management”, the null
hypothesis is; there is no significant effect of receivables management on the
operating profit. After analysis the null hypothesis is accepted.

Inventory Management

 Data relating to percentage of inventory to total current assets depict that absolute
amount of inventory as well as its relative share in the total current assets of SAIL
were marked with frequent fluctuation during the period under study. It ranged
between 23.10 percent and 51.20 percent. The average and C. V. of this ratio had
34.31 and 26.81 percent respectively.
 The analysis of raw materials in terms of months value of consumption ranged from
1.01 months to 2.01 months value of consumption, whereas it never exceeded the
standard norm of 2.7 months prescribed by Large Public Enterprises. In fact, in this
unit under study the average was 1.59 and C.V. at 17.73 percent. It is indicative the
fact that the raw materials inventory had been satisfactory in all the years under
review.
 The inventory turnover ratio, most of the year under study period was low and
unsatisfactory in comparison to our expected norm of 5 times to 9 times. It ranged
between 3.18 times to 5.20 times. The average of this ratio was 4.12 times and C.V. at
18.39 percent. Thus, the SAIL kept excessive stock of inventory during the period
under review.
 For examine the third objective, “to measure the effectiveness of inventory
management”. The hypothesis is; there is no significant effect of inventory
management on operating profit. After analysis of data through multiple regression
model the null hypothesis is accepted.

Working Capital Management in SAIL

 The average period of the operating cycle in the unit during the period under study
had a fluctuating trend with an average of 120 days and C.V. at 17.26 percent. It
moved between 86 days in 2004-05 to 152 days in 2011-12. The reason for increased
GOP was that the ICP had taken time i.e., 73 days for conversion of producing and
selling.
 The working turnover ratio in the unit under study had a declining trend. The average
of this ratio was 8.31 times and C. V. at 463.51 percent. However, the decline in the
ratio was the result of the increase in working capital at a higher rate than the
increases in sales.
 In order to test the significance of difference between the net working capital and net
sales reveals that the correlation, between variables was 0.83 during the period,
showing the highly positive correlation existed between the net working capital and
net sales. ‘t’ test has been applied to test our null hypothesis that ‘there is no
significant difference between the above two variables’. The calculated value is more
than the tabulated critical value so the hypothesis is rejected.
 The analysis of liquidity reveals that the current ratio was less than the generally
accepted norm of 2:1. It has varied from 0.92 to 2.28with an average 1.66 and C.V.
at 27.51% under study. Thus, it indicates inadequacy of current funds in the unit. On
the other hand, the quick ratio in the unit was higher than the standard norm of 1:1.
The average of quick ratio is 1.12 and C.V. at 36.74% which shows an adequacy of
working capital and satisfactory liquid position of the unit. In fact, the absolute
liquidity ratio average is 0.70 and C.V. at 55.76% which is higher than the standard
norm of 0.5:1.
 For the purpose of fourth objective, “to assess the adequacy of working capital
management and the efficiency with which the overall working capital managed”.
 The hypothesis is; there is no significant effect of working capital management on
profitability. After analysis the data through multiple regression model the null
hypothesis has been accepted.

Suggestions:

Keeping in mind the main findings of the study, the following suggestions may be
outlined:

 The cash turnover indicates deterioration in the utilization of cash during the study
period. Therefore, it is suggested that the company should be taken immediate steps
to check downward trend in turnover of cash and proper utilization of idle cash.

 The analysis of the turnover of receivables revealed that the unit followed an
increasing trend in most of the years under study. The increasing trend indicated
efficiently of credit and collection policies. Therefore, it may be suggested that the
credit and collection policy should have been maintained at this level and take action
for their better improvement.

 It is evident from the analysis that the average collection period in the unit under
study adopted the decreasing trend having some fluctuation throughout the period of
the study. It is an indicative of the fact that the management of SAIL was not able to
manage its outstanding accounts. Therefore, it is suggested that the efficiency of the
staff employed for the collection of book debts or accounts receivables should be
improve by keeping close watch on outstanding accounts and taking timely action for
making recovery of overdue.

 SAIL kept the excessive stock of inventory during the study period, excessive stock
are, of course, unproductive and represent an investment with a low or zero rate of
return. This situation reveals the bad impression or inefficient inventory management
and suggests that there is considerable scope for better control and better stimulation
of production and sales activities of SAIL. It is learnt that elements of inefficient sales
and marketing strategy had influenced a lot to this unfavorable trend.
 A low turnover of inventory reflected an inefficient and poor inventory management.
It is suggested that SAIL should make every efforts to reduce the level of inventories
up to a reasonable extent and further it should exercise strict control over inventories
so as to improve its liquidity and profitability.

 The analysis of gross operating cycle showed that the inventory conversion period
was high. It may be suggested that the management of inventory conversion period
should improve to conversion time of raw material, work-in-progress and finished
goods and accounts receivables conversion period should be maintain at this level to
achieve better position of gross operating cycle.

 It is suggested that the company should try to increase their efficiency for the
maximisation of profit. It is essential that SAIL should try to improve its working
capital position. The decline in the working capital turnover ratio was the result of the
increase in working capital at a higher rate than the increases in sales.It is therefore,
suggested that the management of SAIL should make intensive efforts to make a
proper balance between the components of working capital i.e., current assets and
current liabilities.

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