FM Final Report by Paras

Narmada Chematur Petrochemicals Limited
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The School of Management & Entrepreneurship Partial completion of Master of Business Administration
[Semester-II Block-III assessment]
FINANCIAL REPORT
Narmada
Chematur petrochemical Limited
FINANCIAL MANAGEMENT
Prepared by: Paras K. Savasiya (0120117)
paraskumar.savasiya@aurouniversity.edu.in helloherry_909@yahoo.co.in
Submitted to: Mrs. Meghna Dangi, Professor, AURO UNIVERSITY, SURAT
Report ACKNOWLEDGEMENT
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I pray for the blessing of divine authority governing this world and thank him for all the courage and power that he gave in course of development of my report. Amongst the wide panorama of people who provided me inspiring guidance and encouragement, I wish to take an opportunity to thank those who gave me indebted assistance and constant encouragement for completing this project. I would also like to express my gratitude to Mr. P. K. JAIN who welcomed me enthusiastically and helped me in my project report. At the company, In spite of his busy schedule, he was available whenever I needed his advice and support. He was actively involved throughout the project. I personally would like to thank my project guide, Prof. MEGHNA DANGI for guiding me and also thank to my dean Dr. RANA SINGH to assisting at various stages and for helping me in preparing this project report. I am also thankful to my faculty advisor Mr. CHIRAG GUJARATI to help me throughout the project. I would like to thank all the staff persons of Narmada Chematur petrochemical Limited (BHARUCH), they provided me with the necessary information/data and advice, and many thanks are due for the same they could not have been successful without the valuable input of the chief financial Officer Mr. KHAN. I am also grateful to Mr. TEJAS FUNDAWALA, finance department executive. He provided me a great opportunity to know the practical aspect of the financial management. I am also thankful to Mr. DINESH RAMANI, chartered accountant who helped me to find out the link with Mr. P. K. Jain and also for their great help. He taught me the financial fields practical affairs in the financial department. Last but not the least this acknowledgement could not be considered complete unless I record my gratitude to those who have directly or indirectly helped me in completing my project. This study could not have been successful without the valuable input of the clients of the Narmada Chematur petrochemical Limited
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Table of Contents Sr. No.

1. 2. 3. 4. 5. 6. 7.
Chapter Name
Introduction of Narmada Chematur petrochemical Limited Introduction to Financial Department Working Capital Management Problem Statement and Research Methodology Data analysis and Interpretation Conclusion And Recommendations Limitation of study
Pg. No.
4. 22. 29. 53. 57. 92. 95.
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Chapter 1
Introduction of
Narmada Chematur petrochemical Limited
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Introduction:
Narmada Chematur Petrochemicals Limited is an Indo-Swedish joint venture company of Gujarat Narmada Valley Fertilizers Company Limited Narmada Chematur Petrochemical Limited (NCPL) was launched on 29th Sep. 1992 by the companies Act 1956. Narmada Chematur Petrochemical Limited promoted by GNFC Ltd. With M/S Chematur AB Sweden and IBI Chematur Bombay has been establish and encourage to produce annually 25000 MTPA(Metric ton Per Annum) of Aniline and 12500 MTPA Toluene Di Isocyanate with Du point technology at an established project cost of 3200 million rupees. The project is very beneficial to the chemical industry in the country providing intermediates chemical and substituting imports. Chematur engineering deals in process licensing technical know how and basic engineering since ten year in the whole world. GNFC is also progressive company and produces fertilizers, Chemicals, Electronics components. Aniline and Toluene Di Isocyanate TDI projects have received financial assistance from IDBI, IFDC and ICICI. Nitric Acid, Water, Hydrogen and Steams are provided by GNFC where as the raw materials like Benzene, Toluene, light Diesel Oil, Sulphuric Acid and Caustic soda are also available through other companies. Electrical Power is company 6 MW captive power plants CPP. Until now Aniline was produced by Hindustan Organic Chemical Ltd. Only but now NCPLs product is being better in quality and in high demand. TDI is tube manufactured first time in India using Di Nitro Toluene (DNT), Meta Toluene Di amine (TDI), and Phosgene. This will help in saving foreign exchange. NCPL has already got permission from Gujarat Pollution Control Board regarding effluence discharge effluent from TDI is tube completely incinerated implant. All kind of safety measures are adopted in both aniline and TDI plant to handle such hazardous chemical. In August 1994, NCPL came out with a public issue to part finance the implementation of Aniline and TDI plants. 5
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Beside Aniline and TDI, NCPL also manufactures Nitrobenzene, Liquid Nitrogen, Meta Toluene Di- amine and Ortho Toluene Diamine. It also trying to explore opportunities in the rigid polyurethane business arena, thereby, making it among the most customer oriented companies in its field. The success story of NCPL is one of identifying opportunity areas and providing international quality product at competitive prices. NCPL has thus, aide a giant leap towards redefining success. Accredited with ISO 9001: 2000, ISO 14001: 1996 and OHSAS 18001: 1999 certification by Loyds Register Quality Assurance (LRQA).
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ISO 14001: 1996
Environment Policy
We at Narmada Chematur Petrochemicals Limited, engaged in the production of world class Aniline and toluene Di Isocyanate commit ourselves to: Develop and maintain Environmental Management System for continual improvement in preservation of Environment and pollution abatement in the field of air, water land and solid waste generation. Comply with applicable Environmental legislation and regulations. Conserve energy, raw material and natural resources. Prudent selection of environment friendly technology as possible, with a view to minimize environmental impact. Effective waste management with emphasis on waste minimization and by product recovery. Bring awareness amongst employees, Vendors and Contractor for cleaner environment by ensuring their involvement & imparting required training. Promote awareness amongst local surrounding community for preservation and maintaining clean environment. Develop and maintain the green belt and landscape in & around the company.
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OHSAS 18001: 1999 Occupational Health and Safety Policy

We at Narmada Chematur Petrochemicals Limited, engaged in the production of world class Aniline and toluene Di Isocyanate commit ourselves to: Development and continual improve the Occupational Health and Safety performance and system. Maintain proactive management system for periodical review of various objectives & targets related to Occupational Health & Safety. Ensure compliance of all applicable legal & other requirements prescribed under various Acts & regulations. Enhance awareness and involvement of our Employees, Contractors and Suppliers through effective communication & training for safe work practices. Prevent & minimize risk related to occupational health & safety. Reduce the accidents and harm to environment, people and property.
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ISO 9001: 2000 Quality Policy

We are a chemical manufacturing Company and strive to achieve utmost customer satisfaction by delivering quality products- Nitrobenzene, Aniline, Toluene Di-isocynate, Ortho Toluene Di-amine, Meta Toluene Di- amine and Hydrochloric acid. We are committed to excel in business of manufacturing and supply of quality products. To accomplish above, we are committed to: Continually upgrade manufacturing process and technology & strive for enhancement in overall productivity. Develop, implement and continually improve the effectiveness of the Quality Management System in accordance with the requirement of ISO 90001: 2000. Impart training to employees for continual improvement in their performance. Comply with statutory requirements related to products.
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Main Products of NCPL:

ANILINE Capacity 20,000 MTPA (revamped to 25,000 MTPA) Aniline plant of Narmada Chematur Petrochemicals Limited (NCPL) is Indias largest single stream plant and is based on Du point, USA technology which produces the world class quality Aniline. TDI (Toluene Di Isocyanate): Capacity 10,000 MTPA (revamped to 12,000 MTPA). TDI plant of Narmada Chematur Petrochemicals Limited is SAARC countrys only plant & is based on Du-point, USA technology which produces the world class quality of Toluene Di Isocyanate. NITROBENZENE: Capacity 27,000 MTPA Nitrobenzene plant is based on Pump Nitration technology provided by Chematur Engineering AB, Sweden. It produced as an intermediate to the Aniline plant. MDI (Methylene DI-Phenylene Di Isocyanate): Meta Toluene Diamine (MTD) is high purity aromatic Diamine> MTD finds its primary commercial market as an intermediate in the manufacture of Toluene Di-Isocynate (TDI). MTD can also be used as chain extender, cross linker or intermediate in many applications like rubber chemicals, dyes production and in polyamides.
By-products: Ortho Toluene Diamine Hydrochloric Acid Sodium Hypochlorite Weak Nitric Acid Dilute Sulphuric Acid
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Raw Materials:
Material Benzene Sulphuric Acid Nitric Acid Hydrogen Nitro Benzene Place Reliance , IOCL GSFC , GACL GNFC GNFC NCPL Cost 12000 Rs/KL 900 Rs/MT 7800 Rs/MT 18000 Rs/MT 18000 Rs/MT
Site Location:
NCPL plant is proposed to be located at Narmada Nagar which is 7 kms away from Bharuch city on National highway No. 8. This site is selected on bases of following consideration, There is good facilities for transport system because road line are much nearer so they are useful for easy transport of raw material and products Raw material sources are near Land is cheap Cheap labors are available from village There is no pollution problem for residence area because it is away from main city and village
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List of Competitors:
GNFC (NCPL Unit) has two main products: 1) Aniline and 2) TDI.
ANILINE: The names of competitors are as follows:

USA: 1) Rubicon 2) BASF 3) Bayer 4) Du Pont Brazil: Bayer Belgium (Europe): U. K.: China: : India: Bayer ICI Manjing Chemicals 1) Hindustan Organic Chemicals (HOC) 2) Anirox Pigments Company at Dhanbad.
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TDI: GNFC (NCPL Unit) enjoys monopoly for TDI. GNFC (NCPL Unit) is the first and
the only producer of TDI not only in India but also amongst entire SAARC region. GNFC (NCPL Unit) faces competition from overseas producers only.
PRICE: The pricing methods of various products and by - products is kept confidential, the prices of the product and the material to be sold is solely based on the international markets of the chemicals produced at GNFC (NCPL Unit). The prices vary from party to party because in few cases GNFC (NCPL Unit) has greater strength in bargaining and sometime it is the other way round. Factors influencing the prices of the chemicals produced: Raw material costs Market Scenario domestic as well as international market. Exchange rates Market for the derivatives of companys products Production capacity of the industry 13
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Seasonal Fluctuations.
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Amalgamation with GNFC Ltd.

The Company is a subsidiary Company of GNFC Ltd. The Company was promoted as a joint venture between GNFC, Chematur Engineering AB, Sweden, the technical collaborator and its Indian associates, IBI Chematur (Engineering & consultants) Ltd. for manufacture of TDI and Aniline. IBI Chematur (Engineering & consultants) Limited was associated for detailed engineering of the Aniline and TDI plants. The technical collaborators were also ready for equity participation. Accordingly a separate company was formed. The Technical collaborator having divested its holding in the Company and Chematur Group Directors on the board of the Company, having thereafter resigned the Company has ceased to be joint venture Company. The Company has evolved with strong umbilical ties with GNFC financially through direct and indirect financial support to the Company, operationally through supply of key inputs from a neighboring premise and managerially through deputation of GNFC employees to the key positions in the Company.
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In the background of Globalization it is found that Indian Corporate sector (Public Sector included) is undertaking massive consolidation both at the industry level and at group levels through merger.
GNFC is already in the business of industrial chemical and there would be seamless integration and coordination of operations of both the Companies both legally and organizationally. The Board of Directors has considered various aspects and found that it would be advisable for the Company to merge the Company with its holding Company, GNFC. The necessary to put the amalgamation in effect have begun from 15th February, 2007.
Reasons for Merger

As the return at GNFC (NCPL Unit) were much better in comparison to GNFC Ltd. The investment at GNFC (NCPL Unit) was Rs.400crores and the return was Rs.100crores having manpower of 314 employees. Whereas at GNFC Ltd. the investment was Rs.3000crores and the return was Rs.210crores having manpower of 2500 employees. Major raw material supplier for GNFC (NCPL Unit) was GNFC Ltd. so in order to get the tax benefit like elimination in paying Excise Duty which was paid earlier. Merger will ensure smooth supply of raw materials for GNFC (NCPL Unit).
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GNFC (NCPL Unit) has paid of its all dues. Company has also invested Rs.10crores as fixed deposit during last financial year which depicts sound position of the Company in the market. Expansion: The major reason for the merger is that GNFC (NCPL Unit) alone cannot raise funds for its future expansion of 50000 MT as capacity.
VISION:
To be a world class, growth oriented organization, caring for people, customers and neighborhood, achieving corporate excellence through competence and dynamism with a firm commitment to quality, safety, health and the environment
Mission:
To establish a global presence as a producer of international quality specially chemicals meeting the customers expectation and strive towards excellence through proficiency in operating the eco-friendly state of the art technology.
Values:
Our values are based on the foundation of our unfaltering commitment to our customer, shareholders and colleagues. We work as a team with complete accountability and sheer honesty dignity and respect to create a safe, healthy and pleasant workplace. A firm belief in
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innovation and an optimum use of our resources ensure a better productivity and preservation of the environment.
Technology:
Aniline is manufactured by NCPL using Du point technology from USA. This technology is rated as being more superior to other technique. This aniline manufactured by NCPL is of a much superior quality than that manufacture by competitions. Also NCPL is the only company in India that uses Du point technology manufactured Aniline. Aniline plant of NCPL is the largest in India.
Various Plant at NCPL:

Nitro Benzene plant Sulphuric Acid Concentration plant Aniline Plant Di Nitro Toluene plant Meta toluene Di amine plant Phosgene plant Toluene Di Isocyanate plant Carbon Monoxide Plant Nitrogen plant Effluent Treatment Plant DM plant
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Organization Structure
BOARDS OF DIRECTORS
CHAIRMAN
MAMAGING DIRECTOR
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ADDITIONAL MAMAGING DIRECTOR
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CHIEF MANAGER
SENIOR MANAGER
MANAGER / DEPUTY MANAGER OFFICERS STAFF
GNFC Ltd. at a GLANCE
Gujarat Narmada Valley Fertilizers Company Limited (GNFC) is a joint sector enterprise promoted by Government of Gujarat and the Gujarat State Fertilizer Company Ltd. (GSFC). It was set in Bharuch, Gujarat in 1976. It is located at an extremely prosperous industrial belt. GNFC started its manufacturing and marketing operation by setting up in 1982. It is a worlds largest single stream ammonia urea fertilizer plant. Over the next few years, 19
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GNFC successfully commissioned different projects in fields as diverse as chemicals, fertilizers, electronics and IT. Since inception, GNFC has worked towards an extensive growth as a Company. The Company has taken steps towards the environment protection and to achieve the progressive vision. Year of the establishment: May 10, 1976 Bankers: Following Banks are main bankers of GNFC Bank of Baroda (Lead Banker) State Bank of India Bank of India Canara Bank State Bank of Saurashtra HDFC Bank ICICI Bank Company Secretary: Shri R.B. Panchal
Auditors M/s CC Chokshi & Company, Charted Accountants, Ahmedabad. BOARD OF DIRECTORS: Shri S. G. Mankad (IAS)Chairman Dr. Manjula Subramaniam (IAS) 20
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Dr. Avinash Kumar (IAS) Shri. P. K. Taneja (IAS) Shri. Pankaj Kumar (IAS) Dr. T. T. Ram Mohan Dr. Ashok Shah Shri. D. C. Anjaria Shri. P. N. Vijay Shri Balwant Singh (IAS) MD Shri. T. Natarajan (IAS) Joint MD
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Executive Directors Shri D.S. Taunk Shri P.B. Nanavati Shri R.P. Vyas
Subsidiary:
Narmada Chematur Petrochemicals Ltd. (NCPL) is now merged with GNFC Ltd. w.e.f 15-02-2007
ORGANIZATION STRUCTURE of GNFC Ltd.

GNFC is the company having organization structure of line & staff type. There is a clear line of authority and responsibility, i.e. authority flows from top to bottom level. Following is the authority structure of GNFC:
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Board of Directors Chairman Managing Director Executive Director General Manager Additional General Manager Chief Manager Senior Manager Manager Officer Staff
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Chapter 2 Introduction to Finance Department
Introduction: The financial performance of the Company was buoyant during FY 05-06. The Company achieved ever highest profit tax of Rs. 5,327 lacs during the FY 05-06 as compared to Rs. 23
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5,057 Lacs during the FY 04-05 and thereby registered growth is 5% over the previous financial year. Sales Turnover: The Companys sales for the FY 05-06 reached to the level of Rs. 42,614 lacs as compared to Rs. 44,177 lacs during the FY 04-05. The sales of TDI were higher during the FY 05-06 a compared to the FY 04-05 as the demand for TDI remained high. The Company undertook some export of both Aniline and TDI based on the market sentiments. Dividend: The Board of Directors have recommended dividend @ 16% for the FY 05-06 against 15% for the FY 04-05
Organization Structure of Finance Department (NCPL Unit): -
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General Manager
Additional G.M
Sr. Manager
Officer
Officer
Officer
Officer
Staff (3)
Staff (3)
Staff (3)
Staff (3)
Note: - After merger the Sr. Manager of GNFC (NCPL Unit) is required to report the
Additional General Managers of GNFC Ltd.
Activities of Finance Department: 1) To make annual A/cs of Co. 2) To make the budgets of all department. 3) Raising funds from banks & financial institutions. 25
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4) Regular repayment of loan & interest. 5) To make payment of creditors.
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6) To maintain the debtors & even take legal action in case of overdue.
Areas covered by different officers: (1) Banking (2) Service Tax (3) Use of funds (4) Collection of funds (5) Income tax, Sales tax, Central Accounts (6) Budgeting (7) Raw material (8) Costing (9) Insurance (10) Concurrence (11) Purchase (12) Stores & stores
Purchase: Purchase order (P.O) preparation is the 1st step in purchase section at finance department.
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Details available in Purchase Order (P.O.) are like Party name, dated, Item wise quantity, etc. Sr. No. GNFC Code Qty. Unit Price Unit Total
Terms & Conditions Once goods are received in stores department then they issue the Goods Receipt Note & they send it at Finance Department. After receiving G.R. Note Finance department would make posting at invoice section in SAP. Once entry is parked, then it can only be reversed and no modifications can be made in it. Payment is released and majority of it is done through cheques. Raw Material: Annual contracts take place with suppliers. As it is international product so price changes monthly & generally upward trend is found. Monopoly product so advance payment takes place and Real Time Gross Settlement (R.T.G.S.) is done. To acquire weekly discount proper care is to be taken off. Costing: The Company used to do costing is done on a monthly basis. The strategy used for the costing purpose is in the following way: Consumption norms x per unit price Variable cost + Expenses
Budgeting: There is an established system of preparing operational as well as procurement budget for various cost as well as profit centers at the beginning of each financial year. Actual expenditure is closely monitored against such budget at specific time intervals. Variances are analyzed and corrective actions are taken accordingly. 27
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Steps taken while preparing Budget: -
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Initially production budget is prepared for the company. Points considered in Production Budget: No. Of days plant shall run. Production level based on past experience. Availability of major raw material i.e. from GNFC Plant. (Minor raw material supplier like reliance is not taken into much consideration as it will supply material somehow, but if GNFC plant gets closed then it affects the NCPL plant.) Once production budget is prepared then it goes to different departments like marketing, technical, mechanical, electrical, civil, etc. All the different departments would prepare their own budget based on their past records. (Weighted average price for last few years is taken into consideration. Expense also taken into consideration on the basis of weighted average expense.) The last step is to combine different budget prepared by different departments and the main budget is being prepared and this is required to get approved by board of directors.
Note: - As the budget was prepared before merger i.e. on 15 th February 2007 so it goes on
in the financial year 2007-08.
Insurance: Different types of Insurance at GNFC (NCPL Unit): (1) Mega Insurance, (2) Marine Insurance, (3) Open Insurance. Under mega insurance everything gets insured. 28
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Insurance Process: It is required to get recommended from department along with getting value for insurance. In the next step, GNFC (NCPL Unit) get quotations and select the lowest price.
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Chapter 3 Working Capital Management
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Introduction of Working Capital Management:

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter relationship that exists between them. The term current assets refer to those assets, which in the ordinary course of business can be, or will be converted into cash within one year without undergoing diminution in value and without disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities, which are intended, at their inception, to be paid in the ordinary course of business, within a year out of the current assets or earnings of that concern. The basic current liabilities are account payable, bank overdraft and outstanding expenses. The goal of working capital management is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained. So I include mainly above things in study. 1. 2. 3. 4. Ratio analysis Inventory Management Receivable Management Cash Management
DEFINITION AND CONCEPT: There are two concepts of working capital: GROSS and NET The term gross working capital also refers to as working capital, means that total current assets. The term net working capital can be defined in two ways: 1) The most common definition of net working capital (NWC) is the difference between current assets and current liability. 2) Alternate definition of NCW is that portion of current assets, which is financed with long term fund. By Financial Management M.Y.Khan P.K.Jain
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NCW is commonly defined as the difference between current assets and current assets and current liability. Efficient working capital management requires that firms should operate with some amount varying from firm and depending. Among other things on the nature of industry.
OPERATING CYCLE CONCEPT

The operating cycle can be said to be at heart of the for need for working capital. The continuing flow from cash to suppliers, to inventory, to account receivable and back into cash is what is called the operating cycle. In other words the term cash cycle refers to the length of time necessary to complete the following cycle of events: Raw material & storage stage Work in process stage Finished goods inventory stage Debtors collection stage
This stage affects cash flow, which most of the time neither synchronized nor certain. The firm is therefore required to invest in current assets for a smooth and uninterrupted functioning and to maintain liquidity to purchased raw material and pay expenses. The operating cycle is diagrammatically represented as under:
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Raw material
Work-in-process
Finished goods
Cash
Debtors
Sales
Cash inflows and outflows do not match, firms have to necessarily keep cash or invest in short-term liquid securities so that they will be in a position to meet obligations when they become due. Similarly, firms must have adequate inventory to guard against the possibility of not being able to meet demand for their products. The operating cycle consist of three phases. In phase one, cash gets converted into inventory. This includes purchase of raw materials, conversion of raw materials into workin-progress, finished goods and finally the transfer of goods to stock at the end of the end of the manufacturing process. In phase 2 of the cycle, the inventory is converted into receivable into receivables as credit sales are made to customers. The last phase that is phase 3 represents the stage when receivables are collected. This phase completes the operating cycles. This is the firms has receivables are collected. This phase completes the operating cycles. This the firm has moved from cash to inventory, to receivables and to cash again.
FORMULA FOR OPERATING CYCLE:

GROSS OPERATING CYCLE PERIOD (GOCP) = Raw Materials storage Period + Period for Conversion of raw Materials in to finished goods + Finished Goods storage period + Average Collection period of Sales
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NET OPERATING CYCLE PERIOD (NOCP): = GOCP - Average Payment Period
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Sources of Additional Working Capital

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Sources of additional working capital include the following:

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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 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).
PERMANENT AND TEMPORARY WORKING CAPITAL:

The operating cycle creates the need for current assets (working capital). The need does not come to an end after the cycle is completed. It continues to exist. Business activity does not come to end after the realization of cash from customers. For a company the processes continues and the need for a regular supply of working capital. The magnitude of working capital is fluctuating. To carry on business minimum level of working capital is necessary on a continuous and uninterrupted basis. For all practical purpose this requirements has to be meet permanently as with other fixed assets. This requirement as referred a permanent or fixed working capital. Any amount over an above the permanent level of working capital is temporary or variable working capital. Temporary working capital is fluctuating in accordance with seasonal demand.
CHANGES IN WORKING CAPITAL

The changes in the level of working capital occur for the three basic reasons: 1. Changes in sales and operating expenses: the first factor causing change in the working capital requirement is a change in the sales and operating expenses. The 35
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changes in this factor may be due to three reasons: (1) there may be a long run trend of change. (2) Cyclical changes in the economy leading to up and down in business activity influence the level of working capital.(3) Seasonality can be the operating expenses rise or falls has a similar effect on the level of working capital. 2. Policy changes: The second major cause of changes in the level of working capital is because of policy changes initiated by the management. The term current assets policy may be defined as the relationship between current assets and sales volume. A firm following s conservative policy in this respect having a very high level of current assets in relation to sales may deliberately for a less conservative policy and vice versa. 3. Technological Changes: Technological changes can cause significant changes in the level of working capital. If new process emerges as a result of technological development, which shortens the operating cycle, it reduces the need for working capital and vice versa.
DETERMINANTS OF WORKING CAPITAL:

The following factors are involved in a assessment of the quantum of working capital required: 1) General Nature of Business: The working capital requirements of an enterprise are basically related to the conduct of business. Enterprises fall into broad categories depending on the nature of their business. For instances, public utilities have certain features which bearing on their working capital needs. The two relevant features are, one cash sale, and second sale of services. In view of these features company do not maintain big inventories and therefore require less working capital. 2) Production cycle: The term production or manufacturing cycle refers to the time involved in the manufacturing of goods. It covers the time span between the procurement of raw material and the completion of the manufacturing process leading to the production of finished goods. There is some time gap before raw material becomes finished goods. To sustain such activities the need for working capital is oblivious. The longer the time span , the larger will be the funds to be ied up funds and therefore the larger is the working capital needed and vice versa.
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3) Business cycle: Business fluctuation lead to cyclical and seasonal changes which, in turn, cause a shift in the working capital position particularly for capital requirements. The variation in business conditions may be in two directions : (1) upward phase when boom condition prevail, and (2) downswing phase when economy activity is marked by a decline. During the upswing of increase sales and receipt of cash as well as to finance purchase of additional material to cater to the level of activity. 4) Production Policy : In case of certain line business the demand for products is seasonal, that is they are purchased during certain month of the year as in the case 5) Credit policy: The credit policy relating to the sales and purchase also affects the working capital. The credit policy influences the requirement of working capital in two ways: (a) through credit terms granted by the firm to its customers/buyers of goods; (b) Credit terms available to the firm from its creditor.
RATIO ANALYSIS
Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items variables. The alternative, methods of expressing items, which are related to each other, are for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratio does not add any information not already inherent in the above figures of profits and sales. What ratios do is that they reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them. The rational of ratio analysis lies in the fact that it makes related information comparable. A single figure by itself has no meaning but when expressed in terms of a related figure, it yields significant inferences. For instance, the fact that net profits of a firm amount to say, Rs. 10 lacks throws no light on its adequacy or otherwise. Figure of net profit has to be considered in relation to other variables. How does it stand relation to sales? What does it represent by way of return on total assets used or total capital employed? If therefore net profits are shown in terms of their relationship with items such as sales, assets, capital 37
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employed equity capital and so on; meaningful conclusions can be drawn regarding their adequacy. Ratio is very useful to for grasping the message of the financial statement and understanding them. It helps to enlarge and understand the financial health and travel of the business, it past performance makes it possible to forecast about future state of the business. The ratio use to measure the effectiveness of the employment of resources is termed as Activity Ratio or Turnover Ratio.
Key Working Capital Ratios The following, easily calculated, ratios are important measures of working capital utilization. Ratio Formulae Resul t Interpretation
Stock Turnover (in days)
On average, you turn over the value of your entire stock Average Stock every x days. You may need to break this down into * 365/ = x product groups for effective stock management. Cost of Goods days Obsolete stock, slow moving lines will extend overall Sold stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.
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Receivables Ratio (in days)
Debtors * 365/ =x Sales days
It take you on average x days to collect monies due to you. If your official credit 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.
Creditors * Payables Ratio 365/ =x (in days) Cost of Sales days (or Purchases)
On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.
Current Ratio
Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of Total Current business. Current Liabilities are amount you are due to Assets/ = x pay within the coming 12 months. For example, 1.5 times Total Current times means that you should be able to lay your hands on $1.50 Liabilities for 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 = x Similar to the Current Ratio but takes account of the fact Inventory)/ times that it may take time to convert inventory into cash. Total Current Liabilities (Inventory + Receivables - As % A high percentage means that working capital needs are Payables)/ Sales high relative to your sales. Sales
Quick Ratio
Working Capital Ratio
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Other working capital measures include the following:

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Bad debts expressed as a percentage of sales. 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. Our financial planning software packages - Ex-Plan and Cash flow Plan - can facilitate this task as they provide for the setting of targets for receivables, payables and inventory.
Inventory Management
Inventory is composed of assets that will be sold in future in the normal course of business operations. The assets which firms stores as inventory in anticipation need are (a) raw materials (b) work-in-process, (c) finished goods. The raw material inventory contains items that are purchased by the firm others and are converted into finished goods through the manufacturing process. The work-in-process inventory consists of items currently being used in the production process. Finished goods represent final or completed products, which are available for sale. The job of the financing manager is to reconcile the conflicting viewpoint of the various functional areas regarding the appropriate inventory levels in order to fulfill the overall objective of maximizing the owners wealth.
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Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them. Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the components to be assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up little space, minimize stock-holding and virtually eliminate the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management. The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels include:

What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without compromising best sellers?
Remember that stock sitting on shelves for long periods of time ties up money which is not working for you. For better stock control, try the following:

Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it. Consider having part of your product outsourced to another manufacturer rather than make it yourself. Review your security procedures to ensure that no stock "is going out the back door!"
Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges.
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Our range of financial planners, Ext-Plan and Cash flow Plan, contain extensive facilities for exploring alternative stock-holding strategies. See also the white paper on Making Cash flow Forecasts and Checklist for Improving Cash flow.
OBJECTIVE OF INVENTORY MANAGEMENT:

The basic responsibility of the financial is to make sure the firms cash flows are managed efficiently. Efficient management of inventory should ultimately result in the maximization of the owners wealth. It was indicated that in order to minimize cash requirements, inventory should be turned over as quickly as possible, avoiding stock-outs that might result in closing down the production line or lead to a loss of sales. The main objective of inventory management consists of two parts : 1. To minimize investment in inventory 2. To meet demand for the product by efficiently organizing the production and sales operations. The firm should minimize investment in inventory implies that maintaining inventory involves costs, such that the smaller the inventory, the lower is the cost to the firm. But inventory also provide benefits to the extent that facilitate the smooth functioning of the firms. COSTS OF HOLDING INVENTORY: The costs associated with inventory fall into two basic categories: (A) Ordering costs or set-up costs (B) Carrying costs. {A} Ordering Costs or Set-up Cost: This category of costs is associated with the acquisition or ordering of inventory. Firms have to place orders with supplier to replenish inventory of raw materials. The expenses involved are referred to as ordering cost. Ordering costs involved are referred to as ordering cost. Ordering costs involved in (1) preparing a purchased order or requisition form and (2) receiving. Inspecting and recording the goods received to ensure both quantity and quality. The cost of acquiring materials of clerical costs and cost of stationary. It is therefore, called as set-up-cost. They are generally fixed per order placed, irrespective of the amount of the order. The larger the order placed, or the more frequent the acquisition of inventory made, the higher are the costs. From a different perspective, the larger the inventory, the fewer are the acquisitions and the smaller the order costs.
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{B} Carrying costs or Set-up Cost: The second broad category of cost associated with inventory is the carrying cost. They are involved in maintaining or carrying inventory. The cost of holding inventory may be divided into two categories: a) Those that arise due to storing of inventory. The main components of this category of carrying costs are (1) storing cost, that is tax depreciation, insurance, and maintenances of the building. (2) Insurance of inventory against fire and theft. (3) Deterioration in inventory because of pilferage, fire and price decline (4) Serving costs, such as, labor for handling inventory, clerical and accounting costs. b) The opportunity cost of funds. This consists of expenses in raising funds to finance the acquisition of inventory. If funds were not locked up in inventory, they would have earned a return. This is the opportunity cost of funds or the financial cost component of the cost. The sum of the order and carrying cost represent the total cost of inventory. This is compared with the benefits arising out of inventory to determine the optimum level of inventory.
BENEFITS OF HOLDING INVENTORY:

Inventories perform certain basic functions, which are of crucial importance in the firms production and marketing strategies. The basic function of inventory is to act as a buffer to decuple or uncouple the various activities of a firm. The key activities are (1) Purchasing (2) production and (3) selling.
(a) Benefits in purchasing:

If the purchasing of the raw materials and other goods is not tied to production / sales, that is a firm can purchase independently to ensure the most efficient purchase, several advantages would become available. In the first place a firm can purchase larger quantity then is warranted by usage in production or sales level. This will unable it to avail of discounts that are available on bulk purchase. It will lower the ordering cost. Second, firm can purchase goods before anticipated or announce price increasing. This will lead to a decline in the cost of production. Inventory serves as hedge against price increase as will as shortage of raw materials.
(b) Benefits in production:

Finished goods inventory serves to uncouple and sales. This enables productions at a rate different from that of sales. That is, production can be carried on at a rate higher or lower then the sales rate. This would be of special advantage to firms with seasonal sales 43
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pattern. In their case the sales rate will be higher than the production rate during a part of the year and lower during the off-season. The choice before firm is either to product at a level to meet the actual demand higher production during peak season and lower production during off-season, or produce continuously throughout the year and build up inventory, which will be sold during the period the seasonal demand. Inventory permits least cost production scheduling; production can be carried on more efficiently. (c) Benefits in sales: The maintenance of inventory also helps a firm to enhance its sales efforts. If there are no inventories of finished goods, the level of sales will depend upon the level of current production. A firm will not be able to meet demand instantaneously. There will be a lag depending upon the production process. If the firm has an inventory, actual sales will not have to depending upon the production process. If the firm has an inventory, actual sales will not have to depend on lengthy manufacturing processes. It the firm has an inventory; actual sales will not have to depend on lengthy manufacturing processes. Thus, inventory serves to bridge the gap between current production and actual sales. The manor problem areas that comprise the heart of inventory control are (1) the classification problem to determine the type of control required (2) the order quantity problem (3) the order point problem (4) safety stock. a. classification problem : ABC system : The first in the inventory control process is classification of difference type of inventories to determine the type and degree of control required from each. The ABC system is a widely used classification technique to identify various items of inventory for purpose of inventory for purpose of inventory control. This technique is based on assumption that a firm should not exercise the same degree of control on all items of inventory. On the basis of the involved , the various inventory items are, according to this system, categories into three classes : {1}A,{2}B{3}C, the items included in group A involves the largest investment. Therefore, inventory control should be the most rigorous and intensive and the most sophisticated inventory control technique should be applied to these items. The C group consists of items of inventory, which involve relatively small investment although the number of items is fairly large. These items deserve minimum attention. The B group stands midway. It deserves less attention then A but more than C.
b. Order quantity problem : Economic order Quantity (EOQ) Model : On the basis of ABC analysis, the management becomes aware of the type of control that would be appropriate for each of the three categories of the inventory items. The 44
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problem related to inventories like: how much inventory should be brought? Should the requirement of materials during which period of time? Should the quantity to be purchased be large or small? The EOQ model is the technique to determine the economic order quantity. The EOQ model can be illustrated by the long analytical approach or trial and error approach. Based on EOQ model several working notes are as follows: i. ii. iii. iv. v. Number of orders = Total inventory requirement / order size Average inventory = order size /2 Total carrying cost = avg. inventory x Carrying cost per unit Total ordering cost = No. of order x cost per order Total cost = Cost of items purchased + Total carrying and ordering costs.
EOQ = 2AB/C A = annual usage of inventory B = buying cost per order C = carrying cost per unit c. Order point problem : The EOQ technique determines the size of an order to acquire inventory so as to minimize the carrying as well as the ordering cost. The reorder point is stated in terms of level of inventory at which an order should be place on replenishing the current stock of inventory. Recorder point may be defined as the level of inventory when fresh order should be placed with the supplier for procuring additional inventory equal to the economy order quantity. The formula for calculating reordering reorders point. The reorder point = Lead time in days x Avg. daily usage of inventory The term lead-time refers to the time normally taken in receiving the delivery after placing order with the supplier. It covers the time-spent from the point when a decision tools placed the order for the procurement of inventory is made to the actual receipt of the inventory by the firms. The avg. usage means the quantity of inventory=consumed daily. d. safety stock : safety stock can be defined as the minimum additional inventory to serve as safety margin or buffer or cushion to meet an anticipated increase in usage resulting from an unusually high demand and or an uncontrollable late receipt incoming inventory. The safety stock out cost refers to the stock associated with the shortage (stock-out) of inventory. 45
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Receivable Management
Financial
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 is owing.... for what it is owed.
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. 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:
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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.
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. Here are a few ideas that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... it is yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem. When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying. Make it your objective is to get the money - not to score points or get even.
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Objective of Receivable Management:
Financial
The term receivables defined as debt owned to the firm by customers arising from sales of goods or cervices in the ordinary course of business. Account receivable represents an extension of credit to customer, allowing them a responsible period of time in which to pay for the goods receive. The credit sales are generally made on open account in the sense that there is no formal acknowledgement of debt obligation through a financial instrument. Extension of credit involves risk and cost. Management should weigh the benefits as cost to determine the goal of receivables management. The objective of receivable management is to promote sales and profit until that point reacted where the return on investment is further funding receivable is less than the cost of funds raised to finance.
Costs:
Collection cost: collection cost is administrative costs incurring in collecting the receivables from the customers to whom credit sales have been made. Included in the category of costs are : {a}additional expenses on the creation and maintenance of credit department with staff, accounting records, stationary, postage and other related items. {b} Expenses involved in accruing credit information either though outside specialist agencies or by the staff of the firm itself. These experiences would not be incurred if he firm does not sale on credit. Capital cost: the increase level of the accounts receivable is an assets. They have to be financed there by involving a cost. There is a time lag between the sale of goods to and payment by the customers. The firm has to pay employees and supplier of raw material there by implying that the firm should arrange for additional fund to meet its owe obligations while waiting for payments from its customers. Delinquency cost: this cost arise out of the customers to meet their obligations when payment on credits sales becomes due after the expiry of the credit period. Such costs are the delinquency cost. The important component of this costs are {1}blocking up of funds for an extended period {2} cost associated with steps that have to be initiated to collect the over dues. Default cost: The firm may not be able to recover the overdue because of the inability of the customers. Such debts are treated as bad debts and have to be return off as they cant be realized.
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CASH MANAGEMENT Cash management is one of his key areas of areas working capital management. Cash is the common denominator to which all current assets can e reduced because the other major liquid assets, that us, receivable and inventory get eventually converted into cash. The term cash reference to cash management is used in two senses. In narrow senses, it is used to cover currency and generally accepted equivalent of cash, such as cheques, draft and demand deposits in bank. The board view of cash also included near cash assets such as marketable securities and time deposits in banks.
Materials orders
Materials Received
Payments
Cheques clearance
Goods Sold
Payments from customer
Payments Received
Cheques Deposited
Funds collection
There are for primary motives to maintaining cash balances: A. B. C. D. Transaction motive Precautionary motive Speculative motive Compensating motive 49
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{a} Transaction motive :
Financial
Transaction motive refers to the holding of cash meet routine cash requirement to finance the transaction which a firm caries on in ordinary course of business. A firm enters into variety of transaction to accomplish its objective, which has to be paid for cash. Cash payment is like wages, operating expenses, financial charges like interest, taxes, dividends, and so on. There are regular inflows of cash to the firm from sales operations, return on outside investments and so on. These receipt and payments constitute two-way flow of cash. But the inflow and out flows do not perfectly synchronize. At times, receipt exceeds outflows while payment exceeds outflows while payment exceeds inflows. To ensure that the firm can meet its obligations when payments become due in the situation in which disbursement are in excess of the current receipts, it must have adequate cash balance. The requirement of cash balances to meet routine cash need as known as the transaction motive and such motive refers to the holding of cash to meet anticipated obligations whose timing is not perfectly synchronized with cash receipts. {b} Precautionary motive: A firm may have to pay cash purpose, which cannot be predicated or anticipated. The unexpected cash needs: 1. 2. 3. 4. 5. Floods, strikes and failure of important customers. Bills may be presented for settlement earlier than expected Unexpected slow down is collection of account receivable cancellation of some order for goods as the customer is not satisfied Sharp increase in cost of raw materials
The cash balance held in reserve for such random and unforeseen fluctuations in cash flows are called as precautionary balance. Precautionary cash balance serves to provide a cushion to meet unexpected contingencies. The more unpredictable are the cash flows, the larger is the need for such balance. {c} Speculative motive : The speculative motive helps to take advantages of: 1. An opportunity to purchase raw materials at a reduced price on payment of immediate cash. 2. A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline. 3. Delay purchases of raw materials on the anticipation of decline in prices; and 4. Make purchase at favorable prices. {d} Compensating motive: 50
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Banks provide a variety of services to business firms, such as clearance of cheques, supply of credit information, transfers of funds, and so on. While for some of these services banks charge a commission or fee, for other they seek indirect compensation. Clients are required to maintain minimum balances of cash at the bank. Since these balance cannot be utilized by the firms for transaction purposes, the bank themselves can used the amount to earn a return. Such balances are compensating balances.
OBJECTIVE OF CASH MANAGEMENT:

The basic objective of cash management are to fold: (a) to meet the cash disbursement need (payment schedule); and (b) to minimize fund committed to cash balance. (a) Meeting payments schedule : Firms have to make payments of cash on continuous and regular basic to suppliers of goods, employees and so on. Basic objective of cash management is to meet the payment schedule that is to have sufficient cash to meet the cash disbursement needs of a firm. 1. It prevents insolvency or bankruptcy arising out of the inability of a firm to meet its obligations. 2. the relationship with the bank is not strained 3. it helps in fostering good relations with trade creditors and supplier of raw material, as prompt payments may help their own cash management 4. A cash discount can be availed of if payment is made within 10 days within the due dates. 5. it lead to a strong credit rating which enables a firm to purchase on favorable terms and to maintain its line of credit with bank and other sources of credit 6. to take advantage of favorable business opportunities that may be available periodically 7. The firm can meet unanticipated cash expenditure with a minimum of strain during emergencies.
{b} Minimizing funds committed to cash balances :

The second objective of cash management is to minimize cash balances. It minimizing cash balances two conflicting aspects have to be reconciled. A high level of cash balances will ensure prompt payments together with all the advantages. But it also implies that large funds will remain ideal, as cash ia a non-earning assets and the firm will have to forego profits. A low level of cash balances may means failure to meet the payment schedule. The aim of cash management should be to have an optimal amount of cash balances.
FACTORS DETERMINING CASH NEEDS:

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The factors that determine the required cash balances are 1. synchronization of cash flows 2. Excess cash balance 3. short costs 4. Procurement and management 5. Uncertainty
Financial
1) Synchronization of cash flows: The need for maintaining cash balances arises from the non-synchronization of the inflow and outflow of cash; if the receipt and payments of cash perfectly coincide or balance each other, there would be no need for cash balance. The first consideration in determining the cash need is the extent of no synchronization of cash receipt and disbursements. For this purpose, the inflows and outflows have to be forecast over a period of time. The technique adopted is a cash budget. 2) Short costs : Short costs included following A. Transaction cost associated with raising cash to be tied over the shortage. This is usually the brokerage incurred in relation to the sale of marketable securities. B. Borrowing cost associated with borrowing to cover the shortage. These include items such as interest on loan, commitment charges etc. C. Loss of cash-discounts a substantial loss because of a temporary shortage of cash. D. Penalty rates by banks to meet a shortfall in compensating balances. 3) Excess cash balances costs: The cost of having executively large cash balances is known as the excess cash balance cost. If large fund are idle, the implication is that the firm has missed opportunities to invest those funds and has thereby lost interest, which it would otherwise have earned. 4) Procurement and management: These are the cost associated with establishing and operating cash management staff and activities. They are generally fixed and are mainly accounted for by salary, storage handling of securities and so on. 5) Uncertainty and cash management: The impact of uncertainty on cash management can be mitigated through (1) improved forecasting of tax payments, capital expenditure, dividends and so on (2) increased ability to borrow through overdraft facility.
CASH MANAGEMENT TECHNIQUES/ PROCESS: There are specific and techniques and process for speedy collection of receivable from customers and slowing disbursements. Speedy cash collections 52
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In managing cash efficiently the cash process can be accelerated through systematic planning and refined techniques. There are two approaches to do, first customer should encouraged pay as quickly as possible, and second the payments from customer should be converted into cash without any delay. The use of mechanical devices for billing alone with the enclosure of a self-addressed return envelope will speed up payments by customers. Another technique to encourage prompt payments by customers is the practices are offering cash discount. There is a lag between the time a cheque is prepared and mailed by the customer and the time funds are included in the cash from. Within this time interval 3 steps are involved. A. Transit or mailing time: The time taken by the post offices to transfer the cheques from the customers to the firm. This delay or lag is referred as postal float. B. Time taken in processing the cheques within the firm before they are deposited in the banks, termed as lethargy. C. Collection time within the bank that is the time taken by the bank in collecting the payments from the customers bank. This is called as bank float. The collections of accounts receivable can be considerable accelerated, by reducing transit, processing and collection time. This is possible if a firm adopt a policy of decentralized collections. Decentralized process ensures some of the important processes i.e. it reduce (1) the amount of time that elapses between the mailing of payment by a customer and (2) the point the funds become available to the firm for use. The method that ensures the Decentralized process is (a) Concentration banking (b) Lockbox system. a. Concentration banking : In the system of decentralized collection of accounts receivables, large firms , which have a large number of branches at different places, select some of the strategically located branches as collection centers for receiving payments from customers. Instead of all payments being collected at a head office of the firm the cheques for a certain geographical area are required to sned their cheques to the collection cent recovering the area in which they live and these are deposited in the local account of the concerned collection center after meeting local expenses. A concentration bank is one with which the firm has a major account usually a disbursement account. This arrangement is referred to as Concentration banking.
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It reduces the time needed in the collection process by reducing the mailing time. Since the collection centers are near the customers the time involved in sending the bills to the customer is reduced. The time lag between the dispatch of the cheques by the customer and its receipt by the firm is also reduced. Mailing time is saved both respect of sending the bill to the customer as well as in the receipt of payments. b. Lock box system : Under this arrangement firms hire a post office box at important collection centers. The customers are required to the post office lock-box. The local banks of the firm at the respective places are authorized to open the box and pick up the cheques received from the customers. The authorized to open the box and pick up the cheques several times a day and deposited them in the firms account after crediting the account of the firm, the firm by way of proof and record of the collection. The lock box system is like concentration banking is that the collection is decentralized and is done at the branch level. They differ in one very important respect. The customers send the cheques, under the concentration banking arrangement to the collection centers he sends them to a post office box under the lock-box system. The cheques are directly received by the banks which empties the box, and not from the firm or its local branch. The processing time within the firm before depositing cheques in the bank is eliminated. The lock-box system has two advantages: [1] the bank performs the clerical task of handling the remittances prior to deposits, services which the bank may be able to perform at lower cost; [2] the process of collection through the banking system begins immediately upon the receipt of the cheques and does not have to wait until the firm completed its for internal accounting purposes.
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Chapter 4 Problem Statement and Research Methodology
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Problem Statement:
To find out the efficiency of cash flow and operating cycle with the help of working capital.
Objective of Study:
Primary Objectives: To know how efficiently NCPL managing their Working Capital
Secondary Objectives: To know the financial condition of the company To study cash management To study inventory management To analyze the liquidity position of the company To study receivable management and company credit policy
Literature Review
Financial Management By I.M.Pandey Company Annual Report
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Research Design: A research design is the specification of method and procedure for accruing the information needed. It is overall operational pattern of frame work of project that stipulates what information is to be collected for source by that procedures Descriptive Research design is appropriate for this study. Descriptive study is used to study the situation. This study helps to describe the situation. A detail descriptive about present and past situation can be found out by the descriptive study. In this involves the analysis of the situation using the secondary data.
Data Collection:
This research study is based on secondary data, means data that are already available i.e. the data which have been already collected and analyzed by some one else. Secondary data are used for the study of Working Capital management of this company. To collect the data I have refer Company financial department, inventory statues report maintain by stores, other company records. Book : - I.M. Pandey , Prasanna Chandra , Bagavathi - Pillai
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Method of Analysis:
Ratio analysis : o Net Working capital ratio o Current Ratio o Net Working capital Turn over ratio o Quick Ratio o Inventory Ratio o Inventory turnover Ratio o Debtor turnover ratio o Current assets turn over ratio o Cash Ratio Inventory management : o Inventory conversion Period o EOQ analysis . Receivable Management : o Credit Policy Debtors Conversion Period Cash management : With the help of Cash Flow Statement Operating Cycle 58
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Chapter 5 DATA ANALYSIS AND INTERPRETATION

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5.1 Ratio Calculations

{5.1.1} Net Working Capital Ratio Net Working Capital Net Assets
Net Working Capital Ratio =
Net Assets = Current asset + Fix assets + Miscellaneous expenses Liabilities
For year 02 - 03 03 - 04 04 - 05 05 - 06
= 8015.16 + 31180.46 + 747.81 - 6707.11 = 33239.32 = 6494.82 + 29371.61 + 451.72 - 6137.85 = 30180.30 = 7065.44 + 27518.88 + 175.17 - 6930.60 = 27828.89 = 8318.44 + 26931.46 + 130.38 - 4008.34 = 31371.94
Net Working Capital = Current Assets - Current Liabilities 60
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For year 02 - 03 03 - 04 04 - 05 05 - 06 = 8015.16 - 6707.11 = 6494.82 - 6137.85 = 7065.44 - 6930.60 = 8318.44 - 4008.34 = = = = 1308.05 356.97 134.84 4310.10
Financial
Net Working Capital Ratio For year 02 - 03 = 1380.05 33239.32 356.97 30180.3 134.84 27828.89 4310.1 31371.94 = 0.039 : 1
03 - 04 =
= 0.011 : 1
04 - 05 =
= 0.004 : 1
05 - 06 =
= 0.137 : 1
Net Operating Cycle Period

0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2002-03 2003-04 Year 2004-05 2005-06 0.039 0.011 0.004 Series1 0.137
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Interpretation:
Financial
The difference between current assets and current liabilities excluding short term bank
borrowing is called net working capital or net current assets. Net current assets are some times used as a measure of a firms liquidity. It is considered that between to firms having the large networking capital has the greatest ability meet is current obligation. As shown in the calculation networking capital is highest compare to previous all years. That means company has more working capital and it is able to meet its current obligation. So we can say that the last year working capital position is good
{5.1.2} Current Ratio Current Ratio = Current Assets Current Liabilities
Current Assets For year 02 - 03 03 - 04 04 - 05 05 - 06
= = = =
8015.16 6494.82 7065.44 8318.44
Current Liabilities For year 02 - 03 = 6707.11 62
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03 - 04 = 6137.85 04 - 05 = 6930.60 05 - 06 = 4008.34
Financial
Current Ratio For year 02 - 03 = 03 - 04 = 04 - 05 = 05 - 06 = 8015.16 6707.11 6494.82 6137.85 7065.44 6930.60 8318.44 4008.34 = 1.19 : 1 = 1.05 : 1 = 1.01 : 1 = 2.075 : 1
Current Ratio
2.5 2.075 2 1.5 1 0.5 0 2002-03 2003-04 2004-05 2005-06 1.19
1.05
1.01
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Interpretation: Higher the current rati , the larger is the amount of rupees available per rupee of current liabilities , the more is the firms ability to meet current obligation and greater is safety of fund of short term creditors. From the above calculation we can say that current Ratio of 2006 is 2.075: 1 which is comparatively higher then the previous years. It indicates the company dealing nicely with their current affairs compare to previous years.
{5.1.3} Net working Capital turnover Ratio Net Working Capital Turnover Ratio = Cost of Sales Net Working Capital
Cost of Sales = Total Sales Gross Profit For year 02 - 03 = 28817.25 6505.86 = 22311.39 03 - 04 = 29843.08 5339.60 = 24503.48 04 - 05 = 44177.19 8212.36 = 35964.83 64
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05 - 06 = 42614.33 8211.02 = 34403.31
Financial
Net Working Capital = Current Assets Current Liabilities For year 02 - 03 03 - 04 04 - 05 05 - 06 = 8015.16 - 6707.11 = 6494.82 - 6137.85 = 7065.44 - 6930.60 = 8318.44 - 4008.34 = = = = 1308.05 356.97 134.84 4310.10
Net Working Capital Turnover Ratio For year 02 - 03 = 03 - 04 = 04 - 05 = 05 - 06 = 22311.39 1308.05 24503.48 356.94 35964.83 134.84 34403.31 4310.10 = 17.05 : 1 = 68.64 : 1 = 266.72 : 1 = 7.982 : 1
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Net Working Capital Trnover Ratio
300 250 200 150 100 50 0 2002-03 2003-04 2004-05 17.05 68.64 266.72
Financial
Series1
7.982 2005-06
Interpretation: Net working capital turnover ratio measures the firms efficiency that how a firm manages and utilize its working capital as we can see from the above calculation that year 2004-05 has a higher working capital turnover ratio that is 266.72 : 1 which is higher then the year 2005-06. year 2005-06 has a net working capital turnover ratio is only 7.982 : 1 , which we can consider too low. So we can say that in 2004 05 working capital efficiency is more then the year 2005-06. But then after here we can see that the profit of the year 2005-06 is as equally to year 2004-05 because the net working capital of the year 2006 is 4310.10 which is only 134.84 in the year of 2004-05.
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{5.1.4} Quick Ratio Quick Ratio =
Financial
Quick Assets Current Liabilities- Bank OD
Quick Assets = Current asset Inventories For year 02 - 03 03 - 04 04 - 05 05 - 06 = = = = 8015.16 3897.51 = 4117.5 6494.82 4523.99 = 1970.83 7065.44 3470.81 = 3594.63 8318.44 4143.44 = 4175
Quick Ratio For year 02 - 03 = 03 - 04 = 04 - 05 = 05 - 06 = 4117.65 6707.11 1970.83 6137.85 3594.63 6930.66 4175 4008.34 = 0.6139 : 1 = 0.321 : 1 = 0.51 : 1 = 1.04 : 1
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Quick Ratio
1.2 1 0.8 0.6139 0.6 0.4 0.2 0 2002-03 2003-04 2004-05 0.321 0.51
Financial
1.04
Series1
2005-06
Interpretation: Its also known as Acid test ratio. The quick ratio is calculated to overcome the defect of current ratio. The acid test ratio is superior then current ratio, because here inventory is deducted, as company cannot fastly convert it into cash. Higher the ratio, higher the companys liquidity position is. We can see that Quick ratio of the year 2005-06 is 1.04: 1 which is higher then all previous years indicate companys good liquidity position.
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{5.1.5} Inventory Ratio Inventory Ratio = Inventory Current Assets
Financial
Inventory Ratio For year 02 - 03 = 03 - 04 = 04 - 05 = 05 - 06 = 3897.51 8015.16 4523.99 6494.82 3470.81 7065.44 4143.44 8318.44
Inventory Ratio
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2002-03 2003-04 2004-05 2005-06 0.48 0.695
= 0.48 : 1 = 0.695 : 1 = 0.491 : 1 = 0.498 : 1
0.491
0.498 Series1
Interpretation: The inventory in a company may be assessed by the use of the inventory ratio. The lower the ratio shows that company invests low in inventory. The objective of inventory is that material must available when its required, and to get a discount of bulk purchase.
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As we can see that in the year 2003-04 ratio is 69.5 % that is higher than 2004-05 & 2005-06 that is 49.1% and 49.8% respectively. That means investment in inventory is decrease over the last 2 years, which gives good indication. {5.1.6} Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods Sold Ave. Inventory
Cost of Sales = Total Sales Gross Profit For year 02 - 03 03 - 04 04 - 05 05 - 06 = 28817.25 6505.86 = 29843.08 5339.60 = 44177.19 8212.36 = 42614.33 8211.02 = = = = 22311.39 24503.48 35964.83 34403.31
Ave. Inventories = (Opening stock of inventory + Closing stock of Inventory) / 2 For year 02 - 03 03 - 04 04 - 05 05 - 06 = (4361.30 + 3897.51 ) / 2 = (3897.51 + 4523.99 ) / 2 = (4523.99 + 3470.81 ) / 2 = (3480.81 + 4143.44 ) / 2 = = = = 4129.41 4210.75 3997.4 3807.12
Inventory Turnover Ratio For year 02 03 = 03 04 = 04 05 = 05 06 = 22311.39 4129.41 24503.48 4210.75 35964.83 3997.4 34403.31 3807.12 = 5.403 : 1 = 5.81 : 1 = 8.99 : 1 = 9.03 : 1
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Inventory Turnover Ratio

10 9 8 7 6 5 4 3 2 1 0 2002-03 2003-04 2004-05 2005-06 5.403 5.81 Series1 8.99 9.03
Interpretation:
Inventory stock turnover ratio measure how quickly inventory is sold. It is a test of efficient inventory management. To judge whether the ratio of a firm is satisfactory or not , higher ratio shows efficient use of inventory. As we can see from the graph that in the year 2005-06 ratio is 9.03: 1 which higher then all the previous years, so we can say that inventory is converted into finished goods highest in this year which indicate the highest efficient use of the inventory.
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{5.1.7} Debtors Turnover Ratio Debtors Turnover Ratio = Credit Sales Ave. Debtors
Credit Sales = 60 % of Total Sales For year 02 - 03 03 - 04 04 - 05 05 - 06 = 17290.35 = 17905.84 = 26506.31 = 25568.59
Ave. Debtors = (Opening of debtors + Closing of Debtors) / 2 For year 02 - 03 03 - 04 04 - 05 05 - 06 = (2920.30 + 3003.67 ) / 2 = (3003.67 + 1313.00 ) / 2 = (1313.00 + 2585.98 ) / 2 = (2585.98 + 3070.94 ) / 2 = = = = 2962.18 2158.33 1949.49 2828.46
Debtors Turnover Ratio For year 02 03 = 03 04 = 04 05 = 17290.35 2962.18 17905.84 2158.33 26506.31 1949.49 = 5.83 : 1 = 8.29 : 1 = 13.5 : 1
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05 06 = 25568.59 2828.46
Financial
= 9.03 : 1
Debtor's Turnover Ratio

16 14 12 10 8 6 4 2 0 2002-03 2003-04 2004-05 2005-06 5.83 8.29 9.03 Series1 13.5
Interpretation: The analysis of the debtors turnover ratio supplements the information regarding the liquidity of one item of current asset of the firm. The ratio measure how rapidly debts are collected. A higher ratio is indicator of shorter time lag between credit sales and cash sales. As we can see in the year 2004-05 debtors turnover ratio is highest. But for the year 200506 this ratio is 9.03: 1 which is also higher then the 2003 04 & 2004-05. So we can say that company might face some problem in collecting the money in the year of 2005-06. but the result is quit good. 73
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{5.1.8} Current Asset Turnover Ratio Current Asset Turnover Ratio = Total Sales Current Asset
Current Assets For year 02 - 03 03 - 04 04 - 05 05 - 06 Total Sales For year 02 - 03 03 - 04 04 - 05 05 - 06
= = = =
8015.16 6494.82 7065.44 8318.44
= = = =
28817.25 29843.08 44177.19 42614.33
Current Asset Turnover Ratio For year 02 03 = 03 04 = 28817.25 8015.16 29843.08 6494.82 = 3.59 : 1 = 4.59 : 1
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04 05 = 05 06 = 44177.19 7065.44 42614.33 8318.44 = 6.25 : 1 = 5.12 : 1
Financial
Current Asset Turnover Ratio

7 6 5 4 3 2 1 0 2002-03 2003-04 2004-05 2005-06 3.59 Series1 4.59 6.25 5.12
Interpretation: This ratio indicates the efficiency with which current asset turn into sales. A higher ratio implies by and large more efficient use of fund. Thus a high turnover ratio indicates reduced 75
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lock-up of fund in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm. Current assets turn over ratio is good for the years of 2004-05 and 2005-06 that is 6.25: 1 and 5.12:1 respectively. For the yare 2005-06 it was decrease because company has increased the current assets. But we can say that the companys position is better then the last few years that is 2002-03 and 2003-04.
{5.1.9} Cash Ratio Cash Ratio = Cash in Hand + Cash at bank + Current investment Liquid Assets
Cash in Hand + Cash at bank + Current investment For year 02 - 03 = 71.23 03 - 04 = 20.08 04 - 05 = 545.70 05 - 06 = 71.26
Liquid Assets = Current Liabilities Proposed Dividend Tax on Dividend For year 02 - 03 03 - 04 04 - 05 05 - 06 = 6707.11 462.02 59.18 = 6185.91 = 6137.85 308.01 39.46 = 5790.38 = 6930.66 924.04 129.60 = 5876.96 = 4008.34 985.64 138.24 = 2884.46
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71.23 6185.91 20.08 5790.38 545.70 5876.96 71.26 2884.46
Financial
For year
02 03 = 03 04 = 04 05 = 05 06 =
= 0.0115 : 1 = 0.0034 : 1 = 0.092 : 1 = 0.0247 : 1
Cash Ratio
0.1 0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2002-03 2003-04 2004-05 2005-06 0.0115 0.0034 0.0247 Series1 0.092
Interpretation:
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The cash ratio is perhaps the most stringent measure of liquidity indeed. One can argue that it is overly stringent lack of immediate can may not matter it. The firm can starch its payment or borrow many of short notice cash and bank balance and short term marketable security and liable assets of firm financial analysis looks at cash ratio which is define. Cash ratio is initially high in the year of 2004-05 that is 0.092.but in the next year it was decrease that is 0.0247 because cash and bank balance is decrease and investment increase. In the year 2005-06 current liability decreases.
5.2 Receivable Management

(5.2.1) Credit Policy: (1) Debtors Ave. credit period (Bills Receivables) Bulk Purchasers. - 45 Days for Dealers and Regular
NCPL is taking advance from a new buyers and new dealers and from small quantity purchasers. Credit Cash sales ratio = 60: 40 (2) Ave. creditors credit period - 30 Days for Raw materials 10 Days for Spares and others Purchase 100 % on Credit
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(5.2.2) Debtors conversion Period: Debtors Conversion Period = Debtors Credit Sales x 360
Debtors For year 02 - 03 = 3003.67 03 - 04 = 1313.00 04 - 05 = 2585.98 05 - 06 = 3070.94
Credit Sales For year 02 - 03 = 17290.35 03 - 04 = 17905.84 04 - 05 = 26506.31 05 - 06 = 25568.59 79
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Debtors Conversion Period For year 02 - 03 = 3003.67 17290.35 1313 17905.84 2585.98 26506.31 3070.94 25568.59 x 360 = 62.59 Days
03 - 04 =
x 360
= 26.39 Days
04 - 05 =
x 360
= 35.12 Days
05 - 06 =
x 360
= 43.23 Days
Debtor's Conversion Period

70 60 50 Days 40 30 20 10 0 2002-03 2003-04 Year 2004-05 2005-06 26.39 35.12 Series1 43.23 62.59
Interpretation:
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It measures how long it takes to collect amounts from debtors. The actual collection period can be compared with the stated credit terms of the company. If it is longer than those terms, then this indicates some insufficiency in the procedures for collection debts. Here we can see that for the year 2002-03 debtors conversion period is 63 days, which is higher compare to others. But here we can see that for the last three years company receive the money within their decided well specified period. HeIe for the year 2003-04 Debtors conversion period is less. But for the year 2005-06 debtors conversion period has increased by 8 days. Company need to control receivable management.
5.3 Inventory Management

(5.3.1) Inventory Conversion Period
Ave. Inventory Cost of Good Sold
Inventory Conversion Period =
x 360
Ave. Inventories = (Opening stock of inventory + Closing stock of Inventory) / 2 For year 02 - 03 03 04 04 05 05 06 = (4361.30 + 3897.51 ) / 2 = (3897.51 + 4523.99 ) / 2 = (4523.99 + 3470.81 ) / 2 = (3480.81 + 4143.44 ) / 2 = = = = 4129.41 4210.75 3997.4 3807.12
Cost of Sales = Total Sales Gross Profit
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For year 02 03 03 04 04 05 05 06 = 28817.25 6505.86 = 29843.08 5339.60 = 44177.19 8212.36 = 42614.33 8211.02 = = = = 22311.39 24503.48 35964.83 34403.31
Financial
Inventory Conversion Period

For year 02 - 03 =
4129.40 22311.39 4210.75 24503.48 3997.4 25964.83 3807.12 34403.31
x 360
= 66.62 Days
03 - 04 =
x 360
= 61.86 Days
04 - 05 =
x 360
= 55.42 Days
05 - 06 =
x 360
= 39.83 Days
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Inventory Conversion Period
70 60 50 Days 40 30 20 10 0 2002-03 2003-04 Year 2004-05 66.62 61.86 55.42
Financial
39.83 Series1
2005-06
Interpretation: Inventory conversion period means, time taken to convert raw material in to finished goods to goods sold. It indicates how effectively and efficiently an inventory is controlled. Lesser the inventory conversion period is, the more efficient and effective use of inventory. Here we can see that for the year 2005-06 inventory conversion periods is 39.83 days which is less then the rest of year. As we can see from the graph for the year 2002-03 inventory conversion period is 66.62 days which is highest among the collected data. But as year pass on it decreases. And we can find that it was minimum for the year 2005-06. So we can say that they are able to substantially reduce the inventory holding period from 66.62 days to 39.83 days. It may happen because the average inventory holding period has been decrease and also the cost of goods sold increase.
(5.3.2) EOQ Calculation:

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2AO Economic Order Quantity = EOQ C
Pt. Annual Usage( A) Carrying Cost( C ) Ordering Cost (O)
2002-03 97396 4.92 780
2003-04 111678 4.29 785
2004-05 123204 3.89 795
2005-06 128878 3.72 800
EOQ For the year 2002-03 = 5557 MT 2003-04 = 6393 MT 2004 -05 = 7096 MT 2005- 06 = 7445 MT
5.4 Working Capital Operating Cycle

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Operating Cycle = Time duration required to convert Raw materials in to Cash

Gross Operating Cycle Period = Inventory Conversion Period + Debtors Conversion
Period Inventory Conversion = Raw material Conversion period + Work in progress conversion period + Finish goods conversion period
Raw Material Conversion Period = Raw material Inventory Raw Material consumption
360
Raw Material Inventories For year 02 - 03 03 - 04 04 - 05 05 - 06 = 248.21 = 361.28 = 291.41 = 398.49
Raw Material Consumption For year 02 - 03 03 - 04 04 - 05 05 - 06 = 11139.72 = 14232.01 = 22930.89 = 22006.17
Raw Material Conversion Period

For year 02 - 03 =
248.21
11139.72
360
= 8.02 Days
03 - 04 =
361.28
14232.01
360
= 9.13 Days
04 - 05 =
291.41
22930.89
360
= 4.57 Days
05 - 06 =
398.49
22006.17
360
= 6.15 Days
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Raw Material Conversion Period
10 9 8 7 6 5 4 3 2 1 0 9.13 8.02
Financial
6.15 4.57 Series1
Days
2002-03
2003-04 Year
2004-05
2005-06
Interpretation: Raw material conversion period indicate the smoothness of the production or we can say that how much time taken by the production to convert raw material in to finished good. Smaller the raw material conversion period is, the higher the efficiency of production will. In this case we can say that for the year of 2004-05 and 2005-06 raw material conversion periods are 5 days and 6 days respectively. Which is lower than the previous years? Lowest conversion period is recorded for the year of 2004-05 because in this year raw material inventories is less and raw material consumption is highest. But as we can see that in the year 2005-06 raw material inventories increase dramatically compare to previous year and consumption per day was reduced so here raw material conversion period is increase but we can control this by holding the inventories lower and increase the raw material consumption per day.
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Work in Process Conversion Period

Work in Process Conversion Period = Work in process Inventory Cost of Production
360
Work in Process Inventories For year 02 - 03 03 - 04 04 - 05 05 - 06 = 133.85 = 239.79 = 208.65 = 287.88
Cost of Production For year 02 - 03 03 - 04 04 - 05 05 - 06 = 16140.74 = 18718.92 = 27421.46 = 26973.55

For year 02 - 03 =
133.85
16140.74
360
= 2.98 Days
03 - 04 =
239.79
18718.92
360
= 4.16 Days
04 - 05 =
208.65
27421.46
360
= 2.73 Days
05 - 06 =
287.88
26973.55
360
= 3.84 Days
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4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2002-03 2003-04 Year 2004-05 2005-06 Days 2.98 4.16 3.84 2.73 Series1
Interpretation: It indicate the work-in process inventory (can say semi-finished good) converted in to finished goods. Its also contain the production cost holding by it. Here we can say that for the year 2004-05 due to low work in process inventory. Work in process conversion period is low even though the cost of production is too high compare to others. For his year 2005-06 it was increased by 1 day because, work in process inventory is high compare to all previous year. Work in process conversion period can be controlled by keeping work in process inventory low.
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Finished Goods Conversion Period
Finished Goods Conversion Period =
Finished Goods Inventory
Cost of Goods Sold

360
Finished Goods Inventories For year 02 - 03 03 - 04 04 - 05 05 - 06 = 1983.23 = 2345.15 = 1430.69 = 1923.50
Cost of Goods Sold For year 02 - 03 03 - 04 04 - 05 05 - 06 = 22311.39 = 24503.48 = 35964.83 = 34403.31
Finished Goods Conversion Period

For year 02 - 03 =
1983.23
22311.39
360
= 32 Days
03 - 04 =
2345.15
24503.48
360
= 34.45 Days
04 - 05 =
1430.69
35964.83
360
= 14.32 Days
05 - 06 =
1923.50
34403.31
360
= 20.12 Days
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Inventory Conversion = Raw material Conversion period + Work in progress conversion period + Finish goods conversion period
For year
02 - 03
8.02 + 2.98 + 32.00 = 43.00 Days
03 - 04
9.13 + 4.61 + 34.45 = 48.19 Days
04 05
4.57 + 2.73 + 14.32 = 21.62 Days
05 - 06
6.51 + 3.84 + 20.12 = 30.47 Days
Debtors Conversion Period

For year 02 - 03 =
3003.67 17290.35 1313 17905.84 2585.98 26506.31 3070.94 25568.59
x 360
= 62.59 Days
03 - 04 =
x 360
= 26.39 Days
04 - 05 =
x 360
= 35.12 Days
05 - 06 =
x 360
= 43.23 Days
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Gross Operating Cycle Period = Inventory Conversion Period + Debtors

conversion period
For year
02 - 03
43.00 + 63.40 = 106.4 Days
03 - 04
48.19 + 26.76 = 74.95 Days
04 05
21.62 + 35.60 = 57.22 Days
05 - 06
30.47 + 43.83 = 74.30 Days
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Gross Operating Cycle Period
120 100 80 Days 60 40 20 0 2002-03 2003-04 Year 2004-05 74.95 57.22 106.4
Financial
74.3 Series1
2005-06
Net Operating Cycle Period = Gross Operating cycle period + Payable deferral
period
Payable deferral period
Creditors
Credit Purchase 360
Credit Purchase = Production Cost + (Opening Stock of Inventory Closing Stock of

inventory)
Except Finished Goods

For year 02 - 03 = 16140.74 + ( 2580.62 - 1914.28 ) = 16807.08
03 - 04 =
18718.92 + ( 1914.28 - 2178.84 )
= 18454.36
04 - 05 =
27421.46 + ( 2178.84 - 2040.12 )
= 27560.18
05 - 06 =
26973.55 + ( 2040.12 - 2219.94 )
= 26793.73
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Payable deferral period

For year 02 - 03 =
Creditors
Credit Purchase 360
328.24
16804.08
360
= 7.03 Days
03 - 04 =
332.18
18454.36
360
= 6.48 Days
04 - 05 =
458.51
27560.18
360
= 5.98 Days
05 - 06 =
1023.17
26793.73
360
= 13.74 Days
Net Operating Cycle Period = Gross Operating cycle period + Payable deferral
period
For year 02 - 03 = 106.4 + 7.03 = 113.43
03 - 04 =
74.95 + 6.48
= 81.43
04 - 05 =
57.22 + 5.98
= 63.2
05 - 06 =
74.3 + 13.74
= 88.04
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Net Operating Cycle Period
120 100 80 Days 60 40 20 0 2002-03 2003-04 Year 2004-05 113.43 81.43 63.2
Financial
88.04
Series1
2005-06
Interpretation:
Net operating cycle also represents the cash conversion cycle. It is net time interval product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firms operations. The firms have to negotiate working capital from sources such as commercial banks. If net operating cycle of a firm increases, it means further need for negotiable working capital. As we can see in the year 2004-05 Net operating cycle period is 63 days which is lowest in the above taken data because gross operating cycle as well as payable deferral period is low in this year compare to others. But for the year 2005-06 it was increase up to 25 days it may be due to higher gross operating cycle as well as too high payable deferral period. Here we can control net operating cycle by controlling creditors. In above calculation can see that creditors has a larger amount, its almost 3 times than last year.
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5.5 Comparison of cash Flows for the last 4 years
S r. A Particular 20022003 20032004
Financial
20042005
20052006
CASH FLOW FROM OPERATING ACTIVITIES NET PROFIT BEFORE TAX , EXTRAORDINARY AND PRIOR PERIOD ITEMS Depreciation Interest received Interest charged to Profit & loss Account Provision for doubtful debts Preliminary expenses written off Deferred Expenses written-off-core engine Foreign exchange loss(Unrealized) Profit / Loss on Sale of fixed assets OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES Adjustments for : Trade and other receivables Inventories Trade payables CASH GENERATED FORM OPERATIONS Fringe Benefit Taxes paid Direct Taxes paid Cash flow before extraordinary items NET CASH FROM OPERATING ACTIVITIES
5327.09 2233.03 -29.76 606.11 -1.75 44.79 0 12.37 0.05 8191.93 -594.41 -672.63 -3008.59 3916.3 -11.36 -490.38 3414.56 3414.56 -1645.83 0.15 29.76 1615.93 2858 -876.53 -129.6 -599.87 513.89
5057.29 2154.7 -23.56 853.03 11.34 147.34 138.21 9.71 0.18 8348.24 1138.02 1053.18 9.55 8272.95 0 -300.84 7972.11 7972.11 -302.27 0.13 23.56 -278.58 993.98 -284.54 -40.25 -867.01 3473.53
1991.75 2143.61 -5.79 1047.9 252.37 156.34 139.75 35.46 9.22 5770.61 1841.83 -626.48 -396.75 6589.21 -149.88 6439.33 6439.33 -360.43 16.45 0 5.79 -338.19 0 -447.64 -59.18 -1063.26 -522.45
2845.4 2102.82 -2.39 1411.3 125 146.34 138.98 75.16 1.98 6844.59 -141.61 240.99 -196.79 6747.18 -214.74 6532.44 6532.44 -708.21 0.19 -421.93 2.39 1127.56 4991.93 0 0 1542.36 696.16
CASH FLOW ACTIVITIES
FROM
INVESTING
Purchase of assets Sales of fixed assets Miscellaneous Expenses Capitalized Interest received NET CASH USED IN INVESTING ACTIVITIES Proceeds from term Borrowings and inter Corporate Deposits Dividend paid Dividend Tax paid Interest paid Proceeds/(Repayment)- Working Capital
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Repayment for term Borrowings Proceeds/(Repayment)-of ICD including interest NET CASH FLOW FROM FINANCING ACTIVITIES Net interest in Cash and Cash Equivalents(A + B + C) Cash and Cash Equivalents as at 1st April,2002/03/04/05 Cash and Cash Equivalents as at 31st March,2003/04/05/06 -1466.62 -2572.34 -2273.07 -474.44 545.7 71.26 3396.55 -100 7167.91 525.62 20.08 545.7
Financial
8117.85 1444.98 -5417.1 -12.22 83.45 71.23
-3956.03 -103.74 -6152.3 -51.15 71.23 20.08
As we can see that the net profit for the year 2003-03 was 5327.90 lacs. This is highest among all the year. For the year 2005-06 Net profit was only 2845 lacs. Here Cash generated from the operation was 6747.18 for the year of 2005-06 which is greater then the all financial year. And also the net Cash has the highest value. Provision for doubtful debt: it was 252 lac for the year 2004-05 which is highest. But as we can see that it was decrease 125 lac. It means the fear of not payment of money from he customer is decrease. It might be possible because of the new customer they have received or may be they have started to take an advance payment form their. Direct taxes paid by the company are only 149 lacs for the yare 2004-05 which is lowest. And again in the year 2005-06 it was again increase to 214 lacs.
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Chapter 6 Conclusion And Recommendations
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Conclusion
From the study of the working capital management, I have found that it is very difficult task to manage working capital in such big organization. There are lost of various factors are affecting while managing working capital like credit policy , production cycle etc. but it is very important to manage it every situation. Looking toward the inventory conversion period it continuously decreases from the year 2003-03 to 2005-06. Which need to be maintained and or try to decrease to possible level. NCPL dose not have any fix inventory management system because of their production process is such that they can not predict exact amount of raw material availability and also the raw material is such that they can not take any risk to keep inventory as low as possible because it interrupt the whole production process, which may lead to very big loss in production. NCPL has no proper method of maintaining working capital, because form the data available we can see that there is very big fluctuation in net working capital. For the year 2004-05 total sales was more then the 2005-06 but still we can found that there is very huge difference in net working capital the difference is 4176 lacs. So they need to manage the Net working capital because the demand of the product is uncertain in the market. NCPL strongly follows the credit policy and so that they are able to recover their receivable within the specified period of time. Which is good sign but company need to modify their creditors credit period. Liquidity position of a company can be ensured by the current ratio, it can be said that if the ratio is 2: 1 then the companys liquidity position is sound. In the year 2005-06 only the company liquidity position is good which need to be maintaining for next period of time. It is to be said that the current assets should be double then the current liabilities. But in case of NCPL only 2005-06 financial years have the double current assets compare to current liabilities. And other years does not satisfy this requirement. Less liquidity of company indicates unsafe and unsound position. 98
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Suggestions:
In case of NCPL they need to change their credit policy, because in this case we can see that the average creditors credit period is 30 days in raw materials and 10 days in case of spares. Where as debtors credit period (Bills receivable) is for 45 days. Here debtors credit period is more then creditors credit period which need to be modified. It is possible because NCPL is the only company in SAARC countries who are producing TDI and also have biggest Aniline plant all over India. So we can say they have the monopoly in TDI and also they are the market leader in case of Aniline. So either they can increase the period of creditors credit period or decease the debtors credit period to shorten collection period. NCPL have the 60:40 ratio of credit to cash sales which also can be modified by taking advance payment from the customer that can be used to maintain liquidity for daily cash needs. NCPL need to maintain the raw material conversion period. Sales was decrease but more amount of working capital used in the financial year 2005-06 , so company need to decrease their investment in working capital. It may be there is a huge investment in working capital compare to previous year because company had paid term borrowing of 8117 lacs Rs. As we have seen the Net operating cycle period was increase in the year of 2005-06 by 15 days which need to be maintain as low as possible by reduce raw material conversion period, debtors conversion period , finish good conversion period etc. It helps to keep down the Net operating cycle.
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Chapter 7 Limitations of the Study
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Limitations of Study:
During the study of this project some limitation I have found which are mentioned below, This research is based on the secondary data , and during the study of working capital there are so many data required form various department which was not disclosed by the respective department, for example I need budget to prepare the working capital requirement for the current financial year. Also I have to take some approx data for the calculation purpose, e.g. carrying cost, Ordering cost act which were not calculated by the respective departments. As we had seen that efficient working capital can help to increase the profitability, but from the calculation of working capital I can say that even though there is a very large difference in net working capital but still there is no difference in Gross Profit. Here theoretical concept is not matching with practical reality. Available information for the study of working capital is limited, there are so many things are missing or not given in it which can be very useful for the study.
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FM Final Report by Paras

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Narmada Chematur Petrochemicals Limited

Chematur petrochemical Limited

Submitted to: Mrs. Meghna Dangi, Professor, AURO UNIVERSITY, SURAT

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Table of Contents Sr. No.

Narmada Chematur Petrochemicals Limited

Narmada Chematur petrochemical Limited

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

ISO 14001: 1996

Narmada Chematur Petrochemicals Limited

OHSAS 18001: 1999 Occupational Health and Safety Policy

Narmada Chematur Petrochemicals Limited

ISO 9001: 2000 Quality Policy

Narmada Chematur Petrochemicals Limited

Main Products of NCPL:

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

ANILINE: The names of competitors are as follows:

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Amalgamation with GNFC Ltd.

Narmada Chematur Petrochemicals Limited

Reasons for Merger

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Various Plant at NCPL:

Narmada Chematur Petrochemicals Limited

ADDITIONAL MAMAGING DIRECTOR

Narmada Chematur Petrochemicals Limited

MANAGER / DEPUTY MANAGER OFFICERS STAFF

GNFC Ltd. at a GLANCE

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

ORGANIZATION STRUCTURE of GNFC Ltd.

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Chapter 2 Introduction to Finance Department

Narmada Chematur Petrochemicals Limited

Organization Structure of Finance Department (NCPL Unit): -

Narmada Chematur Petrochemicals Limited

Report Executive Director

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Narmada Chematur Petrochemicals Limited

Chapter 3 Working Capital Management

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Introduction of Working Capital Management:

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OPERATING CYCLE CONCEPT

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FORMULA FOR OPERATING CYCLE:

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Sources of Additional Working Capital

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PERMANENT AND TEMPORARY WORKING CAPITAL:

CHANGES IN WORKING CAPITAL

Narmada Chematur Petrochemicals Limited

DETERMINANTS OF WORKING CAPITAL:

Narmada Chematur Petrochemicals Limited