Beruflich Dokumente
Kultur Dokumente
ON
“RATIO ANALYSIS, INVENTORY MANAGEMENT
RECEIVABLES AND PAYABLES”
PREPARED BY:-
MAHESH KUMAR JAJU
INSTITUTE FOR TECHNOLOGY & MANAGEMENT (ITM).
WARANGAL.
ANDHRA PRADESH.
DECLARATION
2
CERTIFICATE
This is to certified that Mr. Mahesh Kumar Jaju has satisfactory completed his
project entitled “ RATIO ANALYSIS, INVENTORY MANAGEMENT,
RECEIVABLE AND PAYABLES” .
Place: __________
3
PREFACE
India, our country has been developing since its liberalization and has never
looked back. Now it is heading towards the no1 economy in the world.
A few more days to be seen after which India will be counted in “Developed
Country” rather than a Developing country.
These all are possible due to improvement and development in infrastructure i.e.
Industries. A strong management is mandatory to lead the firm to success.
Management students handle 3 things: Man, Money and Market. Theoretically
These are taught, but a practical experience is necessary.
This project is purely a bridge which links between the theoretical concepts and
its application in practical.
4
ACKNOWLEDGEMENT
I would like to express my sincere feeling to all those who have guided and taken
kind interest to see that the project allotted to me is useful to business and industry.
Mr. T.L.Benarji for allowing me to join as a summer trainee for eight weeks in
their esteemed organization, Essar steel ltd.
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INDEX
6
Introduction
After preparation of the financial statement one may be interested in knowing
the position of an enterprise from different points of view. This can be done by
analyzing the financial statements with the help of different tools of analysis
such as ratio analysis, funds flow analysis, cash flow analysis, comparative
statement analysis, etc. in this process, a meaningful relationship is established
between two or more accounting figures for comparison. I have learn about the
analysis of ratio analysis.
Inventories are assets of the firm and require investment and hence involve the
commitment of firm’s resources. The inventories need not be viewed as an idle
asset rather these are an integral part of firm’s operations. But the question
usually is as to how much inventories be maintained by a firm? If the
inventories are too big, they become a strain on the resources, however, if they
are too small, the firm may lose the sales. Therefore, the firm must have an
optimum level of inventories. Inventory keeps changing, but the level may
remain the same. The basic financial problem is to determine the proper level of
investment in the inventories and to decide how much inventory must be
acquired during each period to maintain that level.
The receivables are assets as it represents a claim of the firm against its
customers, expected to be realized in near future. Since a credit sale assumes a
sizable proportion of total sales in any firm, the receivable management
becomes an area of attention. Every firm has to set of credit terms and policies
under which goods are sold on credit, and every policy has a cost and benefit
associated with it.
7
Steel scenario
11 3
Japan
Italy 118.70 mT
30.6 mT
USA
91.4 mT
S. Korea
53.6mT
4
7
Brazil 6
33.7 mT
10
Government Policy
• Stable currency • Encouraging trade relations with
ASEAN and other countries
• Easing of regulations
• Infrastructure building
• Strong Banking & judicial
system • Exploring new Energy resources
8
National Steel Policy-2005
• Approved by Government of India in September 2005
Milion Tonnes
Steel Imports Exports Consumption
Production
2004-05 38 2 4 36
2019-20 110 6 26 90
Major Emphasis:
•Critical Input Raw Materials: Iron Ore and Coking Coal
•Infrastructure facilities like Roads, Railways and Ports.
Focus:
•Human Resources
•Technology
• Research and Development
•Market outlook on prices of steel
•Environmental Concerns.
2004-05 54 27 13
9
Iron Ore - Reserve Availability
Iron Ore Reserves
9000 8897
8000
7000
6000
5000 3985
Million Tonnes
4014
4000 2651 3254
3000
2000
803
1000
0
Jh Or Ch Ka Go Ot
ark iss ha rn he
ha a ttis ata an rs
nd ga ka
rh
TISCO 10
Noamundi,Joda
GOA 30
Karnataka,Orissa,Jharkhand 58
Total 145
10
Iron ore - Future Perspective
New Capacities by 2011-12
Sl.No. Area Mine Expected Capacity
(mT/annum)
11
COMPANY PROFILE
No wonder we are India's largest exporter of flat products, selling almost one-
third of our production to the highly demanding US and European markets, and
to the growing markets of South
East Asia and the Middle East. A
number of major client companies
have approved our steel for their
use, including Caterpillar,
Hyundai, Swaraj Mazda, the
Konkan Railway and Maruti
Suzuki. Essar Steel is among the
25 percentile of lowest cost
producers world-wide and has
acquired extensive quality
accreditations. Our lean team gives us one of the highest productivities and
lowest manpower costs among steel plants internationally.
Visakhapatnam Pelletisation
Plant
Our steel complex at Hazira, Gujarat, houses a 5.0 MTPA sponge iron plant, the
world's largest gas-based HBI producer. The plant provides raw materials for
our state-of-the-art 3.0 MTPA hot
rolled coil (HRC) plant, the first
and largest of India's new
generation steel mills. This plant,
fed with inputs from three electric
arc furnaces and three casters,
increasing its capacity to 4.6
MTPA. The complex's
sophisticated infrastructure
includes independent water supply and power, oxygen and lime plants, a
township and a captive port capable of handling up to 8 MTPA of cargo with
modern handling equipment like barges and floating cranes.
At the other end of the value chain, the Company's downstream facilities
include a 1.2 MTPA Cold Rolling
Complex, adds further muscle to
our steel making facilities. The
complex comprises two pickling
lines of 1.4 MTPA capacity, a
reversing mill and a 1.2 MTPA
Tandem Mill, two Galvanizing
lines of 0.5 MTPA, Batch
Annealing Furnace of 0.5 MTPA, a Skin Pass Mill of 1.0 MTPA , Cold Rolling
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and Tandem mills and a Galvanizing plant. This enables Essar Steel to get into
the genre of products that are tailor-made for automotive, white goods,
shipbuilding, agriculture and construction industries - segments that were the
exclusive domain of a few international manufacturers.
Customer-driven excellence
Product overview
1) Hot rolled products
a) coils
b) plates
c) sheets
d) Shot Blasted and Primed
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2) Cold rolled products
3) Galvanized products
Essar Steel is the largest steel producer in western India, with a current capacity
of 4.6 MTPA at Hazira, Gujarat,
and plans to increase this to 9
MTPA. The Indian operations
also include an 8 MTPA
beneficiation plant at Bailadilla,
Chattisgarh, and an 8 MTPA
pellet complex at Visakhapatnam.
Essar Steel adds substantial value to its world-class hot rolled coils through a
sophisticated Cold Rolling complex
for further processing. The complex
includes two flying shear lines of
capacity 0.2 MTPA each, and two
slitting lines of capacity 0.2 MTPA
each, catering to the market of plates
and sheets. Essar is also the only
Indian steel maker with a 1.2 MTPA
hot skin pass mill, from Clecim, the
leading manufacturer from France.
The mill allows it to enhance the
steel's surface quality to match
international standards. Its "service centre" concept, unique in India, reduces
15
multiple handling costs for customers because it allows Essar Steel's plates and
sheets to be used directly by the end-user.
16
Strengths: High-end, custom-made products, as well as proximity to the
demand-driven North American market and Fortune 500 customers make
Essar Steel Algoma a significant element of Essar’s global expansion plans.
History
The Essar Group was founded in 1969 by brothers Shri Shashi Ruia and Shri
Ravi Ruia.
The Ruia family’s origins are in Rajasthan. Sometime in the 19th century, it
moved to Mumbai and set up its own business. In 1956, Shri Nandkishore Ruia,
father to Shri Shashi and Ravi Ruia, moved to Chennai, capital of the south
Indian state of Tamil Nadu, to begin independent business activities. He
mentored his two sons in the intricacies of business. When Shri Nandkishore
Ruia passed away in 1969, the brothers laid the foundation of the Group.
The Essar Group began its operations with the construction of an outer
breakwater in Chennai port. It quickly moved to capitalise on every emerging
business opportunity, becoming India’s first private company to buy a tanker in
1976. The Group also invested in a diverse shipping fleet and oil rigs, when the
Government of India opened up the shipping and drilling businesses to private
players in the 1980s.
Then, in the 1990s, Essar began its steelmaking business by setting up India’s
first sponge iron plant in Hazira, a coastal town in the western Indian state of
Gujarat. The Group went on to build a pellet plant in Visakhapatnam and
eventually a fully integrated steel plant in Hazira.
Through the 1990s, with the gradual liberalisation of the Indian economy, Essar
seized every opportunity that came its way. It diversified its shipping fleet,
started oil & gas exploration and production, laid the foundation of its oil
refinery at Vadinar, Gujarat, and set up a power plant near the steel complex in
Hazira. The Construction business helped the Group build most of its business
assets. Essar also entered the GSM telephony business, establishing India’s first
mobile phone service in Delhi (branded Essar Cellphone) with Swiss PTT as the
joint venture partner.
The 21st century for the Essar Group has been all about consolidating and
growing the businesses, with M&As, new revenue streams and strategic
geographical expansion.
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Vision
Mission
18
Management Team
Shashi Ruia, chairman, essar global ltd, is a first generation entrepreneur
industrialist. Mr ruia began his career in the family
business in1965 under the guidance of his father, the
late nand kishore ruia, Along with his brother ravi .
Ravi Ruia, Vice Chairman, Essar Global Limited, belongs to the generation of
industrialists, who have played a significant role in leading India’s industrial
renaissance. An engineer by training, his
entrepreneurial abilities have enabled the Essar Group
to become one of theleading names in global
industry, Essar employs more than 50,000 people
across offices in Asia, Africa, Europe and the
Americas.
Mr Ravi Ruia has been the mastermind behind the Group’s
globalisation plans, including new ventures in Trinidad &
Tobago, Vietnam and the Middle East, as well as the recent
acquisitions of Algoma Steel (now called Essar Steel Algoma),
Canada, and Minnesota Steel, USA (now called Essar Steel
Minnesota).
Prashant Ruia is the Promoter Director and Group Chief Executive of Essar
Global Limited. He has been involved with the
Group’s operation and management since
1985.Prashant Ruia is on the Board of the
International Iron and Steel Institute. He is also a
member of Confederation Indian Industry (CII)
National Committee on Steel & Non Ferrous Metals
and Chairman of CII National Committee on Hydro
carbon and Petroleum. Mr. Ruia is also on the Board
of Trade of the Ministry of Commerce and Industry,
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Government of India. He is also a member of the Young Presidents’
Organisation, Mumbai Chapter.
Anshuman Ruia is a Director on the Board of
major companies of Essar Global Limited. Essar
Global Limited is a diversified business corporation
operating in the manufacturing and services sectors
of Steel, Energy, Power, Communications,Shi pping
Ports & Logistics, Construction and Mining &
Minerals. Essar has an asset base of USD 14.5
billion and employs more than 50,000 people across
offices in Asia, Africa, Europe and the Americas.
He currently oversees Essar’s Shipping Ports &
Logistics, Telecom & BPO,and Power businesses.
He is responsible for the expansion and diversification of the Power business
into new, renewable energy sources and its entry into the transmission and
distribution segment. Mr Ruia is also involved in new business ventures of the
Group in India and overseas.
20
Mr Ruia completed his schooling from the Hackley School, New York, in
1999,and holds a degree in Business Management from Bentley College,
Boston, USA. He has a keen interest in music and sports.
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OBJECTIVES OF THE STUDY
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RESEARCH METHODOLOGY
Data collection –
DATA ANALYSIS:-
1. Tabulation.
2. Graphs.
3. Diagrams.
4. Ratio analysis.
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PROJECT REPORT ON RATIO ANALYSIS
TYPE OF RATIO
1) Profitability Ratio
2) Performance Ratio
3) Liquidity Ratio
4) Solvency Ratio
Gross profit
Gross profit ratio = ------------------ * 100
Net sale
Objective and Significance: Gross Profit Ratio provides guidelines to the concern whether it
is earning sufficient profit to cover administration and marketing expenses and is able to
cover its fixed expenses. The gross profit ratio of current year is compared to previous years’
ratios or it is compared with the ratios of the other concerns. The minor change in the ratio
24
from year to year may be ignored but in case there is big change, it must be investigated. This
investigation will be helpful to know about any departure from the standard mark-up and
would indicate losses on account of theft, damage, bad stock system, bad sales policies and
other such reasons. It gives a good indication of financial health. Without an adequate gross
margin, a company will be unable to pay its operating and other expenses. Firm that have a
high gross profit margin are more liquid and thus have more cash flow to spend on research
and development expenses.
07-08 06-07
2573.23 2964.37
Gross profit (06-07) = -------------- * 100 = 31.40% (07-08) = ------------- * 100 = 27.59%
8194.35 10743.32
Gross profit ratio analysis – gross profit for the year 07-08 is more as compare to 06-07.
Even net turnover of 07-08 is more as compare to 06-07. But gross profit to turnover ratio of
07-08 is decline which is not good sign for the company & more over gross profit should not
be much fluctuates. It shows 3.81% point difference. It may be because of recession,
company may reduce the prices of their product in order to increase the demand of their
product. As a result turnover is increases but the margin which the company was earlier
getting it is reduced.
Suggestion for improvement – gross profit can be increase if the company efficiently utilize
its resources and try to produce better quality of product and maximize its output with low
input. Because major direct expenditure is on material so that must be efficiently utilize.
Company should give more emphasis on enhancing its productivity and even try to get better
return on that.
b) Net profit ratio-- Net Profit Ratio shows the relationship between Net Profit of the
concern and Its Net Sales.
Net profit
Net sales
25
Where Net Profit = Gross Profit – operating expenses – Non Operating Expenses + Non
Operating Incomes.
And Net Sales = Total Sales – Sales Return
Objective and Significance: In order to work out overall efficiency of the concern Net Profit
ratio is calculated. This ratio is helpful to determine the operational ability of the concern.
While comparing the ratio to previous years’ ratios, the increment shows the efficiency of the
concern. Net profit includes all the factors that influence profitability whether under
management control or not. The higher the ratio, the more effective a company is at cost
control.
436.49 428.62
Net profit ratio (06-07) = -------------- * 100 = 5.33% (07-08) = -------------* 100 = 3.99%
8194.35 10743.32
Net profit ratio analysis -- Net profit for the year 07-08 is less as compare to 06-07. But
turnover is just the reverse. So decrease in net profit ratio indicates that the efficiency of the
company decrease. As the ratio decrease the less effective a company is at cost control.
Suggestion for improvement – the company have to put major control on all expenses.
Reductions in expenses result in more profit. As a result the net profit ratio shows increment.
c) Operating profit ratio-- Operating Profit means profit earned by the concern from its
business operation and not from the other sources. While calculating the net profit of the
concern all incomes either they are not part of the business operation like Rent from tenants,
Interest on Investment etc. are added and all non-operating expenses are deducted. So, while
calculating operating profits these all are ignored and the concern comes to know about its
business income from its business operations.
Operating profit
Net sales
Objective and Significance: Operating Profit Ratio indicates the earning capacity of the
concern on the basis of its business operations and not from earning from the other sources. It
shows whether the business is able to stand in the market or not. Operating profit ratio
measure a company’s operating efficiency with its successful cost control. The higher the
26
ratio, the better the company is. A higher operating profit ratio means that a company has
lower fixed cost and a better gross margin or increasing sales faster than costs.
07-08 06-07
2308.09 1936.03
1936.03
Operating profit ratio (06-07) = ------------------- * 100 = 23.63%
8194.35
2308.09
Operating profit ratio analysis – operating profit for the year 07-08 is more as compare to
06-07 but operating profit ratio is decrease by 2.15% point which is not good sign for the
company. The higher the ratio, the better the company is. Here the net turnover is increase by
31.11% but the operating profit is increase by 19.22% so that why operating profit ratio is
decrease.
Suggestion for improvement – the company has to control its operating expenses. Because
less operating expenses will result in more net profit and more net profit will create wealth of
company and its shareholder’s. A higher operating profit put the company to stand in the
market. This ratio can be improved by effective utilization of asset that is investment of
company.
d) Operating cost ratio- Operating Ratio matches the operating cost to the net sales of
the business.
Operating cost
Net sales
27
Where Operating Cost = Cost of goods sold + Operating Expenses
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock
Operating Expenses = Selling and Distribution Expenses, Office and Administration
Expenses, Repair and Maintenance.
Objective and Significance: Operating Ratio is calculated in order to calculate the operating
efficiency of the concern. As this ratio indicates about the percentage of operating cost to the
net sales, so it is better for a concern to have this ratio in less percentage. The less percentage
of cost means higher margin to earn profit. Operating cost ratios are often used by production
managers to monitor trends and identify problems. If a significant change occurs, the problem
must be identified as either internal (such as operations) or external (such as economic
conditions). Since investors and other outsiders don't have access to operating information,
operating ratios are rarely used outside the organization.
06-07 07-08
5621.12 7778.95
637.20 656.28
6258.32
8194.35
8435.23
10743.32
28
Operating cost ratio analysis -- Operating ratio for the year 07-08 is higher than 06-07.
Decrease in operating cost ratio represents good sign for the company because the less
percentage of cost means higher margin to earn profit. But here in the year 07-08 operating
expenses is increase more than the turnover as a result the operating cost ratio increases.
Suggestion for improvement – The Company has to put close look on all operational
expenses and try to control all these expenses where ever it is possible. A continuous increase
in operating cost ratio is not good sign for the company as it is going to reduce it operating
profit and net profit.
Capital employed
Where Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus +
Long-term Loans – Fictitious Assets
or Capital Employed = Fixed Assets + Current Assets – Current Liabilities
Objective and Significance: Return on capital employed measures the profit, which a firm
earns on investing a unit of capital. The profit being the net result of all operations, the return
on capital expresses all efficiencies and inefficiencies of a business. This ratio has a great
importance to the shareholders and investors and also to management. To shareholders it
indicates how much their capital is earning and to the management as to how efficiently it has
been working. This ratio influences the market price of the shares. The higher the ratio, the
better it is.
07-08 06-07
10159 11167.69
29
1324.21
11167.69
1557.78
10159
Return on capital employed analysis – Return on capital employed for the year 07-08 is
more than 06-07. Increase in return on capital employed is good sign for the investors and to
the management. To shareholders it indicates how much their capital is earning and to the
management as to how efficiently it has been working.
Suggestion for further improvement -- The Company has to increase its net profit and
company has to reduce borrowing by paying through the internal accruals.
Where Equity Shareholders’ Funds = Equity Share Capital + Reserves and Surplus –
Fictitious Assets
Return on Equity judges the profitability from the point of view of equity
shareholders.
This ratio has great interest to equity shareholders.
The return on equity measures the profitability of equity funds invested in the firm.
The investors favor the company with higher ROE.
07-08 06-07
4587.73 4221.43
30
Net profit after interest, tax & preference dividend = 423.28 431.15
431.15
4221.43
423.28
4587.73
Return on equity analysis – return on equity for the year 07-08 is less as compare to 06-07.
It is less by .98% point. ROE is referred to as Stockholder's return on investment, it tells the
rate that shareholders are earning on their shares. So higher the rate represent the better return
on investment which result in increase the shareholder’s wealth.
Suggestion for improvement -- If new shares are issued then use the weighted average of
the number of shares throughout the year. The company should try to increase net profit.
g) Earnings per Share: Earnings per share is calculated by dividing the net profit (after
interest, tax and preference dividend) by the number of equity shares.
Objective and Significance: Earning per share helps in determining the market price of the
equity share of the company. It also helps to know whether the company is able to use its
equity share capital effectively with compare to other companies. It also tells about the
capacity of the company to pay dividends to its equity shareholders. The higher the earnings
per share, the higher each share should be worth. The earnings per share growth rate indicate
the amount of growth for investors.
07-08 06-07
31
4,311,500,000
985,041,908
4,232,800,000
1,139,810,888
Earnings per share analysis -- earnings per share (EPS) is one of the most important
measure of a company’s strength. Obviously, the higher this number, the more money the
company is making. But in the year 07-08 earnings per share is decrease by .67 paisa. This is
not good sign for the company even for shareholders.
Suggestion for improvement – earning per share can be improve by increasing the net
profit.
2) Performance Ratio
a) Capital turnover ratio-- Capital turnover ratio establishes a relationship between net
sales and capital employed. The ratio indicates the times by which the capital employed is
used to generate sales.
Net sales
Capital employed
Objective and Significance: The objective of capital turnover ratio is to calculate how
efficiently the utilization of assets in the business is being used and how many times the
capital is turned into sales. Higher the ratio, better the efficiency of utilization of capital and it
would lead to higher profitability.
32
07-08 06-07
10743.32 8194.35
8194.35 10743.32
11167.69 10159.00
Capital turnover ratio analysis – capital turnover ratio for the year 07-08 is more as
compare to 06-07 which is good sign for the company. As in the 07-08, 1.06 times the capital
is turn into sales. Higher the ratio, better the efficiency of utilization of capital and it would
lead to higher profitability.
Suggestion for improvement – capital turnover ratio can be increase if we increase the
turnover by utilizing the best of available capital. We have to maximize the no. if times.
b) Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a relationship
between net sales and net fixed assets. This ratio indicates how well the fixed assets are being
utilized.
Net sales
Objective and Significance: This ratio expresses the number to times the fixed assets are
being turned over in a stated period. It measures the efficiency with which fixed assets are
employed. A high ratio means a high rate of efficiency of utilization of fixed asset and low
ratio means improper use of the assets.
07-08 06-07
33
8194.35 10743.32
Fixed asset turnover ratio (06-07) = -------------- = .82 (07-08) = -------------- = 1.09
9997.37 9849.01
Fixed asset turnover ratio analysis – fixed asset turnover ratio for the year 07-08 is more as
compare to 06-07 which is good sign for the company. The fixed-asset turnover ratio
measures a company's ability to generate net sales from fixed-asset investments. A higher
fixed-asset turnover ratio shows that the company has been more effective in using the
investment in fixed assets to generate revenues.
Suggestion for improvement – fixed asset should be efficiently utilized up to its maximum
capacity. Idle fixed asset should be dispose so that the amount which is realize from that can
be used in the operation.
Net sales
Objective and Significance: This ratio indicates the number of times the utilization of
working capital in the process of doing business. The higher is the ratio, the lower is the
investment in working capital and the greater are the profits. However, a very high turnover
indicates a sign of over-trading and puts the firm in financial difficulties. The working capital
turnover ratio measures the efficiency with which the working capital is being used by a firm.
A high ratio indicates efficient utilization of working capital. A low working capital turnover
ratio indicates that the working capital has not been used efficiently.
07-08 06-07
8194.35 10743.32
Working capital turnover ratio (06-07) = ------------- = 9.02 (07-08) = ---------------- = 19.25
908.58 557.98
34
Working capital turnover ratio analysis – working capital turnover ratio for the year 07-08
is more as compare to 06-07. This shows that the working capital is efficiently utilized. It is
increase by 10.23% point.
Suggestion for improvement – working capital is based on various aspects like debtor’s
collection should be favorable and inventory turnover ratio, this shows that more frequently
the stocks are sold.
d) Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold and
average stock. This ratio is also known as stock velocity or inventory turnover ratio.
Average stock
Objective and Significance: Stock is a most important component of working capital. This
ratio provides guidelines to the management while framing stock policy. It measures how fast
the stock is moving through the firm and generating sales. It helps to maintain a proper
amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes
the business to earn a reasonable margin of profit.
06-07 07-08
5621.12 7778.95
5621.12 7778.95
1203.80 1532.75
35
Stock turnover ratio analysis – stock turnover ratio for the year 07-08 is more than 06-07.
As it is increase it is good sign for the company. This shows that more frequently the stocks
are sold; the lesser amount of money is required to finance the inventory.
E) Debtors’ Turnover Ratio: Debtors turnover ratio indicates the relation between net
credit sales and average accounts receivables of the year.
Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and
B/R]/2
Credit Sales = Total Sales – Cash Sales
Objective and Significance: This ratio indicates the efficiency of the concern to collect the
amount due from debtors. It determines the efficiency with which the trade debtors are
managed. Higher the ratio, better it is as it proves that the debts are being collected very
quickly. Debtors’ turnover ratio indicates the number of times the debtors are turned over a
year. The higher the value of debtors’ turnover the more efficient is the management of
debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies
inefficient management of debtors or less liquid debtors.
06-07 07-08
8194.35 10743.32
543.50 453.62
Debtor’s turnover ratio analysis – Debtors’ turnover ratio for the year 07-08 is more than
06-07 which is good sign for company. For the year 07-08 the debtors are efficiently manage
as compare to 06-07. As increase in ratio shows that debtors are more liquid. Even we can
say that liquidity of the debtors is increase.
36
f) Debt Collection Period: Debt collection period is the period over which the debtors
are collected on an average basis. It indicates the rapidity or slowness with which the money
is collected from debtors.
365 days
Objective and Significance: This ratio measures the quality of debtors. This ratio indicates
how quickly and efficiently the debts are collected. The shorter the period the better it is and
longer the period more the chances of bad debts. Although no standard period is prescribed
anywhere, it depends on the nature of the industry.
06-07 07-08
365 365
15.077 23.68
Debt collection period analysis – debt collection period for the year 07-08 is less as
compare to 06-07. This is quite good for the company. Company efficiency is increase in
collecting the debts. A short collection period implies prompt payment by debtors. As per the
ratio the no. of days is reduce by 8 days.
Suggestion for improvement – the company has to sale the goods to those debtors who are
making the payment very frequently.
3) Liquidity Ratio
a) Current Ratio -- Current ratio is calculated in order to work out firm’s ability to pay
off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains
the relationship between current assets and current liabilities of a business. Where current
assets are those assets which are either in the form of cash or easily convertible into cash
within a year. Similarly, liabilities, which are to be paid within an accounting year, are called
current liabilities.
Current asset
Current liability
37
Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Stock
of Goods, Short-term Investments, Prepaid Expenses, Accrued Incomes etc.
Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding
Expenses etc.
Objective and Significance: Current ratio shows the short-term financial position of the
business. This ratio measures the ability of the business to pay its current liabilities. The ideal
current ratio is supposed to be 2:1 i.e. current assets must be twice the current liabilities. In
case, this ratio is less than 2:1, the short-term financial position is not supposed to be very
sound and in case, it is more than 2:1, it indicates idleness of working capital. Firms having
less than 2 : 1 ratio may be having a better liquidity than even firms having more than 2 : 1
ratio. This is because of the reason that current ratio measures the quantity of the current
assets and not the quality of the current assets. If a firm's current assets include debtors which
are not recoverable or stocks which are slow-moving or obsolete, the current ratio may be
high but it does not represent a good liquidity position.
06-07 07-08
4397.41 3935.19
3488.83 3377.21
Current ratio analysis – current ratio for the year 07-08 is less as compare to 06-07 this is
because current asset is decrease more than current liabilities. A generally acceptable current
ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the
business and the characteristics of its current assets and liabilities. The minimum acceptable
current ratio is obviously 1:1.
38
Limitation of current asset ratio –
1. It is crude ratio because it measures only the quantity and not the quality of the
current assets.
2. Even if the ratio is favorable, the firm may be in financial trouble, because of more
stock and work in process which is not easily convertible into cash, and, therefore
firm may have less cash to pay off current liabilities.
3. Valuation of current assets and window dressing is another problem. An equal
increase in both current assets and current liabilities would decrease the ratio and
similarly equal decrease in current assets and current liabilities would increase current
ratio.
b) Liquid Ratio: Liquid ratio shows short-term solvency of a business in a true manner. It
is also called acid-test ratio and quick ratio. It is calculated in order to know how quickly
current liabilities can be paid with the help of quick assets. Quick assets mean those assets,
which are quickly convertible into cash.
Liquid asset
Current liability
Where liquid assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable,
Short-term Investments etc. In other words, all current assets are liquid assets except stock
and prepaid expenses.
Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding
Expenses etc.
Objective and Significance: Liquid ratio is calculated to work out the liquidity of a business.
This ratio measures the ability of the business to pay its current liabilities in a real way. The
ideal liquid ratio is supposed to be 1:1 i.e. liquid assets must be equal to the current liabilities.
In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in
case, it is more than 1:1, it shows a better short-term financial position.
(06-07) (07-08)
3488.83 3377.21
Liquid ratio analysis – liquid ratio for the year 07-08 is less as compare to 06-07 even liquid
ratio of 06-07 is not good. It should be 1or more than that and for the year 07-08 it is further
less so financial position is not good. The liquid ratio is decrease because liquid asset is
decrease more than current liabilities. Current asset is decrease by 241.56 crores where as
current liability is decrease by 111.62 crores.
Suggestion for improvement – As 1:1 standard should not be used blindly. A liquid ratio of
1:1 does not necEssarily mean satisfactory liquidity position of the firm if all the debtors
cannot be realized and cash is needed immediately to meet the current obligations. A firm
having a high liquidity ratio may not have a satisfactory liquidity position if it has slow-
paying debtors. On the other hand, a firm having a low liquid ratio may have a good liquidity
position if it has fast moving inventories.
4) Solvency ratio—
a) Debt equity ratio-- Debt equity ratio shows the relationship between long-term debts
and shareholders funds’. It is also known as ‘External-Internal’ equity ratio.
Debt
Equity
Where Debt includes Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from
financial institution etc.
Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus
– Fictitious Assets
Objective and Significance: This ratio is a measure of owner’s stock in the business.
Proprietors are always keen to have more funds from borrowings because:
(i) Their stake in the business is reduced and subsequently their risk too
(ii) Interest on loans or borrowings is a deductible expenditure while computing taxable
profits. Dividend on shares is not so allowed by Income Tax Authorities.
The owners want to do the business with maximum of outsider's funds in order to take lesser
risk of their investment and to increase their earnings (per share) by paying a lower fixed rate
of interest to outsiders. The outsider creditors) on the other hand, want that shareholders
(owners) should invest and risk their share of proportionate investments. A ratio of 2:1 is
40
usually considered to be satisfactory ratio although there cannot be rule of thumb or standard
norm for all types of businesses.
06-07 07-08
7109.66 6261.14
4467.95 4631.33
7109.66 6261.14
4467.95 4631.33
Debt equity ratio analysis – Debt equity ratio of both the year is not satisfactory because
standard debt equity ratio is 2:1. Here it gives clear picture that company’s share capital is
decreasing where as reserve and surplus is increasing. It means that reserve & surplus is
increasing at a high rate as compare to the rate at which share capital is decreasing so that’s
why the overall figure in the year 07-08 is increasing.
Suggestion for improvement – company should raise its fund by the combination of both
equity and debt and try to maintain 2:1 ratio that is debt equity ratio.
b) Debt to Total Funds Ratio: This ratio gives same indication as the debt-equity ratio
as this is a variation of debt-equity ratio. This ratio is also known as solvency ratio. This is a
ratio between long-term debt and total long-term funds.
Debt
Total fund
Where Debt (long term loans) includes Debentures, Mortgage Loan, Bank Loan, Public
Deposits, Loan from financial institution etc.
41
Total Funds = Equity + Debt
Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus
– Fictitious Assets
Objective and Significance: Debt to Total Funds Ratios shows the proportion of long-term
funds, which have been raised by way of loans. This ratio measures the long-term financial
position and soundness of long-term financial policies. In India debt to total funds ratio of 2:3
or 0.67 is considered satisfactory. A higher proportion is not considered good and treated an
indicator of risky long-term financial position of the business. It indicates that the business
depends too much upon outsiders’ loans.
06-07 07-08
4467.95 4631.33
6699.74 5527.67
6699.74 5527.67
Debt to total fund ratio (06-07) = --------------- = .60 (07-08) = -------------- = .54
11167.69 10159
Debt to total fund ratio analysis – debt to total fund ratio is for the both year is quite
satisfactory. A higher proportion is not considered good and treated an indicator of risky
long-term financial position of the business.
Suggestion for improvement – as company current debt to total fund ratio is satisfactory so
in order to maintain this company has to maintain a proper balance between debt and equity.
c) Fixed Assets Ratio: Fixed Assets Ratio establishes the relationship of Fixed Assets to
Long-term Funds.
42
Long term funds
Where Long-term Funds = Share Capital (Equity + Preference) + Reserves and Surplus +
Long-term Loans – Fictitious Assets
Net Fixed Assets means Fixed Assets at cost less depreciation. It will also include trade
investments.
Objective and Significance: This ratio indicates as to what extent fixed assets are financed
out of long-term funds. It is well established that fixed assets should be financed only out of
long-term funds. This ratio workout the proportion of investment of funds from the point of
view of long-term financial soundness. This ratio should be equal to 1. If the ratio is less than
1, it means the firm has adopted the impudent policy of using short-term funds for acquiring
fixed assets. On the other hand, a very high ratio would indicate that long-term funds are
being used for short-term purposes, i.e. for financing working capital.
06-07 07-08
11001.27 10014.44
11001.27 10014.44
9997.37 9849.01
Fixed asset ratio analysis -- fixed asset ratio for the 07-08 is less as compare to 06-07. Even
it good sign for the company that fixed ratio for the year 07-08 is very close 1 which is
standard. This shows that fixed asset is financed out of long term fund.
Suggestion for improvement – In order to maintain this ratio the company has to increase its
long term fund equal to its fixed asset.
43
d) Proprietary Ratio: Proprietary Ratio establishes the relationship between proprietors’
funds and total tangible assets. This ratio is also termed as ‘Net Worth to Total Assets’ or
‘Equity-Assets Ratio’.
Proprietary funds
Total assets
Total Assets include only Fixed Assets and Current Assets. Any intangible assets without any
market value and fictitious assets are not included.
Objective and Significance: This ratio indicates the general financial position of the
business concern. This ratio has a particular importance for the creditors who can ascertain
the proportion of shareholder’s funds in the total assets of the business. Higher the ratio,
greater the satisfaction for creditors of all types.
06-07 07-08
4467.95 4631.33
14394.78 13784.20
4467.95 4631.33
14394.78 13784.20
Proprietary ratio analysis – proprietary ratio for the year 07-08 is more than the 06-07. As
the ratio is increase it is good sign for company. Higher the ratio better is the long-term
solvency position of the company. A low proprietary ratio will include greater risk to the
creditors.
44
Suggestion for improvement – Idle fixed asset should be dispose so that the amount which
is realize from that can be used in the operation.
e) Interest Coverage Ratio: Interest Coverage Ratio is a ratio between ‘net profit before
interest and tax’ and ‘interest on long-term loans’. This ratio is also termed as ‘Debt Service
Ratio’.
Objective and Significance: This ratio expresses the satisfaction to the lenders of the
concern whether the business will be able to earn sufficient profits to pay interest on long-
term loans. This ratio indicates that how many times the profit covers the interest. It measures
the margin of safety for the lenders. The higher the number, more secure the lender is in
respect of periodical interest.
06-07 07-08
1324.21 1557.78
563.62 609.89
Interest coverage ratio analysis -- Interest coverage ratio for the year 07-08 is quite more
than 06-07. Which is quite good sign for the company. For the 07-08, 2.55 times interests are
covered by the profits. The weakness of the ratio may create some problems to the financial
manager in raising funds from debt sources.
Suggestion for improvement – loan should be taken at reasonable rate. Interest should be
paid at fixed exchange rate. The exchange rate should be settle at the time of taking loan.
45
Comparison of Essar steel ratio with other steel companies
Suggestion for improvement – gross profit can be increase if the company efficiently utilize
its raw material and try to produce better quality of product and maximize its output with low
input. Because major direct expenditure is on material so that must be efficiently utilize.
Company should give more emphasis on enhancing its productivity and even try to get better
return on that.
46
NET PROFIT RATIO
Suggestion for improvement – the company have to put major control on all expenses.
Reductions in expenses result in more profit. As a result the net profit ratio shows increment.
47
OPERATING PROFIT RATIO
Suggestion for improvement – the company has to control its operating expenses. Because
less operating expenses will result in more net profit and more net profit will create wealth of
company and its shareholder’s. A higher operating profit put the company to stand in the
market.
48
RETURN ON CAPITAL EMPLOYED
Suggestion for further improvement -- The Company has to increase its net profit and
company has to reduce borrowing by paying through the internal accruals. The company has
to maintain its increasing trends.
49
EARNING PER SHARE
Suggestion for improvement – earning per share can be improve by increasing the net
profit. Company is not able to use efficiently its equity share capital as compare to other
companies.
50
FIXED ASSET TURNOVER RATIO
Suggestion for improvement – fixed asset should be efficiently utilized up to its maximum
capacity. Idle fixed asset should be dispose so that the amount which is realize from that can
be used in the operation.
51
INVENTORY TURNOVER RATIO
52
LIQUID RATIO
Suggestion for improvement – As 1:1 standard should not be used blindly. A liquid ratio of
1:1 does not necEssarily mean satisfactory liquidity position of the firm if all the debtors
cannot be realized and cash is needed immediately to meet the current obligations. A firm
having a high liquidity ratio may not have a satisfactory liquidity position if it has slow-
paying debtors. On the other hand, a firm having a low liquid ratio may have a good liquidity
position if it has fast moving inventories.
53
CURRENT RATIO
54
DEBT EQUITY RATIO
NAME OF
COMPANY 2003-04 2004-05 2005-06 2006-07 2007-08
ESSAR STEEL 7.69 3.96 4.55 1.5 1.19
JINDAL STEEL 3.73 1.3 0.96 0.78 1.01
TATA STEEL 0.72 0.37 0.25 0.67 1.07
Suggestion for improvement – company should raise its fund by the combination of both
equity and debt and try to maintain 2:1 ratio that is debt equity ratio.
55
PROPRITORS RATIO
NAME OF
COMPANY 2003-04 2004-05 2005-06 2006-07 2007-08
ESSAR STEEL 11.12 18.27 15.18 31.03 33.6
JINDAL STEEL 19.4 41.09 48.23 54.31 48.53
TATA STEEL 57.24 72.04 79.49 59.12 48.15
Suggestion for improvement – Idle fixed asset should be dispose so that the amount which
is realize from that can be used in the operation.
56
INTEREST COVERAGE RATIO
NAME OF
COMPANY 2003-04 2004-05 2005-06 2006-07 2007-08
ESSAR STEEL 1.87 2.73 3.3 2.34 2.55
JINDAL STEEL 3.21 3.72 4.65 5.67 5.88
TATA STEEL 11.29 18.89 26.42 21.07 6.94
Suggestion for improvement – loan should be taken at reasonable rate. Interest should be
paid at fixed exchange rate. The exchange rate should be settle at the time of taking loan.
57
INVENTORY MANAGEMENT
INVENTORY
ISSUE SECTION RECEIPT SECTION CODIFICATION
MANAGEMEN
T
1) VARSHA PATEL 1) SATISH SIR 1) HITESH 1) SARJANMAHIDA
2) NIRAV BHAGAT 2) RAJIV JHA RAVAL
3) ARVIND PATEL 2) TEJAS PATEL
4) RAKESH PATEL
5) TAJESH
CHUDASHMA GOODS RECEIPT
1) SEEMA MEHTA
59
User through system he check all the item what kind of all spare of his department is
there in store. In case suppose the required quantity of spare is not at store in that case
he order the spare through reservation slip. Spare as per available reserve to him and
rest quantity PR is automatically prepare through SAP system. That PR is release by
store as well as user department head. Once PR is release then purchase department
place order for purchase of that particular spare.
6) Rejection of spare – when user is called for quality check at that time user
specify that spare is rejected and through system he reject the spare (122). When he
reject the spare. the rejection department as well as purchase department
automatically get mail that concern item no. and the reason of rejection.
The purchase department send mail to vendor that due to this reason spare is rejected
. if the vendor says I correct the spare then they keep that otherwise the vendor says
ok return the spars .
As per PO terms& condition of spare is mentioned and as per that spare is rejected .
once the purchase department allow for rejection then rejection department work start.
Some time if purchase department not give any response in that case rejection
department give comment for quick response to that.
Rejection authority verify that whether excisable or non excisable . if it excisable then
excise duty is paid or not if paid then he order the excise department that concern
spare no. is rejected so refund the excise duty. So after the excise duty clearance then
spare is rejected and send from store to vendor.
7) Codification – user through system check that require spare is there in store of his
department or not. If it is not their then through KADMS install software in system he
send the request.
First of all they check that the data user is given is correct or not . means all the
technical term are corrects or not . if it not correct then through comment option they
give message to user to make change and save that.
Codification section verify all the thing in the detail, item name and other all the
technical particles of the items whether the spare which the user want for that code is
existing or not. If there is no existing code then they save that and new code for spare
is automatically created. Once the code is created the user automatically get the code
for his request spare.
It is very much important process because if a spare don’t have any code that spare
cannot come to plant . on the basis of code all the thing are run. Code represents the
spare part. There should not be any duplication because company spends lot of money
on maintaining, the duplication of code occupies the unnecessary space but company
wants to save spare. Space available is limited. If it is full then company have to
install new server and other thing which require huge expenses.
60
SPARE CONTROL TECHNIQUE
1) LEVEL SETTING
2) XYZ ANALYSIS
3) VED ANALYSIS
4) FNSD ANALYSIS
5) JUST IN TIME.
6) PERPETUAL INVENTORY SYSTEM
1) LEVEL SETTING
A) ANNUAL BASE
B) SINGLE USER THEN USER DECIDE
C) MORE THEN ONE USER THEN STORE DEPTT DECIDE
Store department set the level of general store item which is order by them. In that
case they look the annual base consumption and as per base they set the level while
setting the level they see consumption +VED as well as no. of transaction and FNSD
analysis after considering all they set the level.
Once the reorder, maximum level is set. When the quantity goes below reorder level,
automatically the PR is release to purchase department for purchase of that item. The
quantity in PR is difference between the maximum level and no. of quantity goes
below reorder level.
When the user is single for particular item then he decides when to order and same
procedure follows.
2) XYZ ANALYSIS – It is like ABC system where the quantity is categories into XYZ
so it is called XYZ analysis. Manufacturing organization find it useful to divide
material into three categories for the purpose of exercising selective control on
materials. An analysis of the material costs will show that a smaller percentage of
items of materials in the stores may contribute to a large percentage of the value of
consumption and on the other hand, a large percentage of items may represent a
smaller percentage of the value of item consumed. Between these two extremes will
fall those items the percentage number of which is more or less equal to their value of
consumption. Items falling in the first category are treated as ‘X’ items, of the second
category as ‘Y’ items and item of the third category are taken as ‘Z’ items; such an
analysis of material is known as XYZ analysis. It is also further categories as per each
unit value so that item which is having higher value cannot be left out.
3) VED ANALYSIS – VED analysis is generally done by user because he knows very
well that which spare is what for the plant. So he assigns the VED for the spare which
is under him or of his department.
Vital, essential and desirable – analysis is used primarily for control of spare parts.
The spare parts can be divided into three categories- vital, essential & desirable --
keeping in view the criticality to production. The spares, the stock out of which even
for a short time will stop production for quite some time and where the cost of stock
out is very high, are known as vital spares. The spares, the absence of which can’t be
tolerated for more than a few hours a day and the cost of lost production is highand
which are essential for the production to continue are known as essential spares. The
61
desirables spares are those spares which are needed but their absence for even a week
or so will not lead to stoppage of production.
4) FNSD ANALYSIS – F Stand for fast moving. The store department decides FNS, D
is deciding by user. As per company policy like if a spare is transaction is done in a
year that is fast moving and 1to 3 years in between it is normal moving and more than
3 year it is slow moving. So the store department gives the slow moving spare list to
user on the basis of that slow moving list user decide which is dead items. Once he
declare the dead item that item are declared as absolute. that spare is listed in essar
site any plant want that spare then that is given to them otherwise it is send to
secondary sale department for sale of spare which is declared as dead.
5) JUST IN TIME – keeping in view the enormous carrying cost of inventory in the
stores and godowns, manufacturers & merchandisers are asking for more frequent
deliveries with shorter purchase order lead time from their suppliers. Now-a-days
organizations are becoming more and more interested in getting potential gains from
making smaller and more frequent purchase order. In other words they are becoming
interested in just in time purchasing system, just in time purchasing is the purchase of
material or goods in such a way that delivery of purchase items is assured before their
use or demand.
6) PERPETUAL INVENTORY SYSTEM – perpetual inventory as “ a system of
records maintained by the controlling department which reflects the physical
movement of stocks and their current balance. To ensure the accuracy of perpetual
inventory records, physical verification of stores is made by a program of continuous
stock taking. It is possible that the balance of stock shown in system may differ from
the actual balance of stock as ascertained by physical verification.
1) FIFO – Under this method material is first issued from the earliest consignment on
hand and priced at the cost at which that consignment was placed in the stores. In other
wards materials received first are issue first.
This method is most suitable in times of falling prices because the issue price of material
to jobs or works order will be high while the cost of replacement of material will be low.
But in case of rising prices this method is not suitable because the issue price of material
to production will be low while the cost of replacement of material will be high.
2) LIFO -- as against the first in first out method the issues under this method are priced
in the reverse order of purchase that is the price of the latest available consignment is
taken. this method is sometimes know as the replacement cost method because material
are issued at current cost to jobs or work orders except when purchase were made long
ago.
This method is suitable in times of rising prices because material will be issued from the
latest consignment at a price which is closely related to the current price levels.
62
Replenishment system – in this system, ordering quantity is not fixed but goes on
changing at every time of order. There is a fixed ordering time when stock are reviewed
and level orders are placed for a varying quantity which is equal to the maximum level
minus stock in hand on the fixed date of review. In this system, maximum stock level is
fixed beyond which the stock is not expected to exceed. This system is useful where there
are fluctuations in the pattern of consumption, where as fixed order quantity system is
useful when there is stability in the pattern of consumption.
SPGS (07-08)
VALUE ARE IN CRORES
Spare and general store item – Here the table shows that average consumption
of spare around 30 crores and receipt is around 34 crores. The company have to
63
continuously review various analysis to control its spares. The company have to
do physical verification once in a quarter.
PRCM(07-08)
VALUES ARE IN CRORES
MONTHS OPENING STOCK RECEIPT CONSUMPTION CLOSING STOCK
APR (07-08) 180.48 53.95 70.03 164.4
MAY 164.4 76.03 85.73 154.7
JUN 154.7 83.74 75.81 162.63
JULY 162.63 63.33 77.7 148.26
AUG 148.26 71.95 71.72 148.49
SEP 148.49 67.1 69.92 145.67
OCT 145.67 85.05 78.87 151.85
NOV 151.85 71.85 57.03 166.67
DEC 166.67 91.07 73.26 184.48
JAN 184.48 81.79 53.66 212.61
FEB 212.61 80.63 70.87 222.37
MAR 222.37 69.22 91.59 200
TOTAL 895.71 876.19
PROJECT (07-08)
VALUES ARE IN CRORES
OPENING CLOSING
MONTHS STOCK RECEIPT CONSUMPTION STOCK
APR (07-08) 41.53 16.4 11.99 45.94
MAY 45.94 19.02 21.32 43.64
JUN 43.64 10.41 10.82 43.23
JULY 43.23 16.61 3.02 56.82
AUG 56.82 7.58 5.78 58.62
SEP 58.62 12.37 23.52 47.47
OCT 47.47 17.19 19.91 44.75
NOV 44.75 65.48 64.04 46.19
DEC 46.19 15.26 16.07 45.38
JAN 45.38 5 8.16 42.22
FEB 42.22 2.61 4.96 39.87
MAR 39.87 13.06 16.2 36.73
TOTAL 200.99 205.79
Spare and general store item interpretation -- Here the table shows that
average consumption of spare around 25 crores and receipt is around 26 crores.
The receipt and consumption is decrease from last year even closing stock is
66
increase .The company have to continuously review various analysis to control
its spares. The company have to do physical verification once in a quarter.
PRCM (08-09)
VALUES ARE IN CRORES
MONTHS OPENING STOCK RECEIPT CONSUMPTION CLOSING STOCK
APR 08-09 200 114.33 87.16 227.17
MAY 227.17 151.1 98.32 279.95
JUN 279.95 89.77 80.04 289.68
JULY 289.68 76.22 88.92 276.98
AUG 276.98 81.52 89.19 269.31
SEP 269.31 89.96 94.38 264.89
OCT 264.89 77.76 91.09 251.56
NOV 251.56 95.38 70.17 276.77
DEC 276.77 37.63 68.75 245.65
JAN 245.65 73.78 98.69 220.74
FEB 220.74 54.09 69.77 205.06
MAR 205.06 36.04 78.16 162.94
TOTAL 977.58 1014.64
67
Companies last year closing stock is 200 crores but this year it is reduce which
is good sign for company and they are try to reduce it .
PROJECT (08-09)
VALUES ARE IN CRORES
OPENING CLOSING
MONTHS STOCK RECEIPT CONSUMPTION STOCK
APR 08-09 38.7 3.39 2.99 39.1
MAY 39.1 9.62 5.01 43.71
JUN 43.71 11.22 7.44 47.49
JULY 47.49 20.51 12.83 55.17
AUG 55.17 30.59 7.45 78.31
SEP 78.31 11.03 11.12 78.22
OCT 78.22 76.74 98.42 56.54
NOV 56.54 12.88 10.73 58.69
DEC 58.69 3.37 2.63 59.43
JAN 59.43 3.36 3.69 59.1
FEB 59.1 9.56 4.64 64.02
MAR 64.02 5.96 6.3 55.53
TOTAL 198.23 173.25
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RECEIVABLES MANAGEMENT
DEBTORS -- It is used to define as debt owed to the firm by customers arising
from sale of goods and services in the ordinary course of business. A firm grants
trade credit to maintain its sales from the hands of the competitors and at the
same time to attract the potential customers to purchase its products at favorable
terms. Trade credit arises only when the firm sells its products to the customers
but does not receive cash immediately. Debtors are created out of trade credit
and which are collected in future.
Marginal benefits and costs associated with changes in credit standards, credit
terms, collection period are analyzed to formulate an optional credit policy.
70
Sales pattern in Essar steel
1) Letter of credit.
2) Bank guarantee.
3) Credit sales.
4) Advance sales.
71
How Does the Letter of Credit Process Work?
The seller (known in the Letter of Credit as the "Beneficiary") advises the
buyer (known in the Letter of Credit as the "Applicant") that the purchase
order is acceptable. The Beneficiary also sends the Applicant a copy of
their "Letter of Credit Guidelines" to ensure that the credit is opened
properly and will not require any costly amendments.
The Advising Bank then sends a copy of the Letter of Credit to the
Beneficiary, either electronically, by fax, or by mail.
The Beneficiary must now carefully review the requirements of the Letter
of Credit to ensure it has been issued per the agreed terms. The
Beneficiary should make sure that they can comply with all stipulations,
such as shipping terms, documentary requirements, shipping and/or
expiration dates and packing and marking conditions.
If the Letter of Credit has terms that are not per the agreement, the
Beneficiary should request an amendment to the Letter of Credit. This
request is made directly to the Applicant, who then instructs the Opening
Bank to amend the Letter of Credit.
Once the Letter of Credit is in order and the shipment is ready for export,
the Beneficiary ships the goods to the freight forwarder.
The seller (or third party, such as L/C Solutions) can now begin
preparation of documentation required under the Letter of Credit terms.
After goods have shipped, the transport document is acquired by the
Beneficiary (or L/C Solutions), is checked for accuracy, matched up with
other created documentation, and presented to the Negotiating Bank. (The
Negotiating Bank may or may not be the same as the Advising Bank,
depending on the requirements of the Letter of Credit and the wishes of
the Beneficiary.)
The Negotiating Bank checks over the documentation and advises any
problems they may find with the paperwork. They then either issue
72
payment to the Beneficiary, or forward the documents to the Opening
Bank for payment, depending on the terms of the Letter of Credit.
3) Credit sales -- Sales made to customers during the current period for which
cash was not received at the time of sales.
Debtors’ Turnover Ratio: Debtors turnover ratio indicates the relation between net credit
sales and average accounts receivables of the year.
Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and
B/R]/2
Credit Sales = Total Sales – Cash Sales
Objective and Significance: This ratio indicates the efficiency of the concern to collect the
amount due from debtors. It determines the efficiency with which the trade debtors are
managed. Higher the ratio, better it is as it proves that the debts are being collected very
73
quickly. Debtors’ turnover ratio indicates the number of times the debtors are turned over a
year. The higher the value of debtors’ turnover the more efficient is the management of
debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies
inefficient management of debtors or less liquid debtors.
06-07 07-08
8194.35 10743.32
543.50 453.62
Debtor’s turnover ratio analysis – Debtors’ turnover ratio for the year 07-08 is more than
06-07 which is good sign for company. For the year 07-08 the debtors are efficiently manage
as compare to 06-07. As increase in ratio shows that debtors are more liquid. Even we can
say that liquidity of the debtors is increase.
f) Debt Collection Period: Debt collection period is the period over which the debtors
are collected on an average basis. It indicates the rapidity or slowness with which the money
is collected from debtors.
365 days
Debt collection period = ----------------------------------
Objective and Significance: This ratio measures the quality of debtors. This ratio indicates
how quickly and efficiently the debts are collected. The shorter the period the better it is and
longer the period more the chances of bad debts. Although no standard period is prescribed
anywhere, it depends on the nature of the industry.
06-07 07-08
365 365
15.077 23.68
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Debt collection period analysis – debt collection period for the year 07-08 is less as
compare to 06-07. This is quite good for the company. Company efficiency is increase in
collecting the debts. A short collection period implies prompt payment by debtors. As per the
ratio the no. of days is reduce by 8 days.
Suggestion for improvement – the company has to sale the goods to those debtors who are
making the payment very frequently.
7) Sale return – sales department will initiate the return process and SSC will
release the R.O in SAP subsequent to verification of supporting documents.
Final settlement with customer whether by way of payment or on account
adjustment is also performed by SSC.
9) Debit credit note process – debit/credit notes are raised subsequently to sale
for price increase on the goods sold, for discount on sale or on account of sales
return and any other cause that result in increase in the financial liability or
benefit to the parties to the contract. Sales will initiate the credit/debit note, SSC
will release the same in SAP ensuring adequate approval was obtained. Further
subsequent settlement of amount is also done by SSC.
11) Exposure monitoring – it is use to change in the credit limit for a particular
customer and transferring of the credit limit between units of the same
customer.
At present, for customers having multiple locations, different codes and credit
limit are being maintained in SAP and therefore the need for this process.
This sub process elaborates the activities involved in transferring credit limit
from one location to another location for the same customer. Customer
operating from multiple locations is provided with a blanket credit limit. The
blanket credit limit is divided into different locations. Many a times it is
observed that, for some location there is some unutilized credit limit and for
some location the credit limit is exhausted to utilized the unused.
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Payables management
All invoices relating to purchase of raw materials, production consumables, stores & spares
and for all other purchases (Including capex items) are scanned at nominated location and are
electronically forwarded to SSC through a workflow. The scanned invoices are processed at
SSC to facilitate accounting and payment.
A 3-way match/ 2-way match, as applicable of PO, GRN and Invoice is carried out for all
invoices relating to purchase of raw materials, production consumables, stores & spares and
for all other purchases (Including capex items).
On arrival of goods at the port the customs department prepares a bill of entry on the basis
of advance documents received from supplier. Procurement team authorizes the BOE &
advance documents received and forwards to nominated location for scanning. Scanned
documents are electronically forwarded to SSC through a workflow to facilitate accounting
and payment. SSC prepares & process the delivery cost invoice on basis of these
documents to facilitate the payment of custom duty, port charges, etc.
This document details the flow of transactions involved in receiving the advance documents
from supplier / BOE from customs, scanning of advance documents / BOE to SSC,
verification of required information by SSC, preparation & posting of delivery cost invoices to
facilitate payments. Starting point of this sub process is receipt of Advance documents from
supplier and the end point is posting of delivery cost invoice in SAP.
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documents are electronically forwarded to SSC through a workflow to facilitate processing of
delivery cost invoice.
This document details the flow of transactions involved in periodic and transactional
processing of debit notes / credit notes with respect to their preparation, approval and posting.
Periodical processing of debit notes/ credit notes will be done by SSC as per agreed base data
available in SAP and defined methodology. The statement will be prepared by SSC and
approved by local unit before issuing and accounting debit notes / credit notes. In case of
debit notes / credit notes based on certain event or transaction, statement will be prepared and
approved by local unit and sent to SSC for issuance and accounting.
The document covers two variants for this process. One variant shows steps involved where
the expense statement is submitted and processed manually. The second variant shows steps
where the employee fills up expense statement in the online system which is integrated with
the SAP travel management module. This document does not cover the process of travel
planning whereby the employee enters requests for booking of tickets and advance.
This document details the flow of transactions involved in extracting the vendor balances,
follow with vendor and reconciling of differences. Starting point of the sub process is
extraction of vendor balances and end on reconciling the difference, if any, found during
balance confirmation.
This document details the flow of transactions involved in receiving down payment request,
processing of the same by SSC for payment & removal of DPR posting block in SAP to
facilitate payment. Starting point in the sub process is receipt of down payment request and
end point is removal of DPR posting block in SAP.
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10) Vendor Ageing & Write-back
This document details the flow of transactions involved in generation of vendor ageing
report, ageing analysis, approval for write back & processing write back in SAP. Starting
point in the sub process is generation of vendor ageing report and end point is processing
write back in SAP.
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LIMITATIONS
1) Since the procedure and policies of the company will not allow disclosing
confidential financial information, the project has to be completed with
the available data given to us.
2) There was no scope for providing information about the current financial
year (08-09) as the financial statements for the current year were not
released by the time, the project was completed.
3) The study is carried basing on the information and documents provided
by the organization and based on the interaction with the various
employees of the respective departments.
4) The period of study of 8weeks is not enough to conduct depth study.
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BIBLIOGRAPHY
BOOKS
JAIN AND NARANG (COST ACCOUNTING)
I.M.PANDEY (FINANCIAL MANAGEMENT)
JAIN AND NARANG (FINANCIAL ACCOUNTING)
REPORTS
ESSAR STEEL
JINDAL STEEL
TATA STEEL
WEB SITES
www.essar.com
www.investopedia.com
www.wikipedia.com
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