Working Capital Management: A Project Report

A PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
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Working Capital Management
Table of Contents
Summer Project Certificate 2
Industry Guide Declaration 3
Faculty Guide Declaration 4
Acknowledgement 5
Executive Summary 7
Objectives of the Study 8
Methodology of the Study 9
Limitations of the Study 9
IFFCO The Organization 10
Chapter 1 Working Capital Management 29
Data Analysis 30
Findings 58
Conclusion and Suggestions 59
Chapter 2 Cash Management 61
Cash Management at IFFCO 62
Observations 73
Conclusion 76
Suggestions 77
References 78
Appendix
A Working Capital Management 79
B Cash Management 108
C Financial Statement 112
D Significant Financial Indicators 116
E
Provisional highlights of IFFCO performance during
2008-09
117
F Value Added Statement 118
G Some of the well known fertilisers used in India 119
H Some Calculations 120
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Executive Summary
Indian Farmers Fertiliser Co-operative Limited (IFFCO) is a Multistate
Co-operative Society. It was a unique venture in which the farmers of the
country through their own Co-operative Societies created this new institution
to safeguard their interests. IFFCO manufactures Urea and NPK/ DAP
fertilizers and sells them to the co-operative societies.
The project is Working Capital Management of IFFCO. The objectives of the
project are:
To analyse the working capital and working capital management
policies at IFFCO
To analyse the cash management practices at IFFCO
The study is mainly based on the secondary data which refers to that form of
information that has already been collected and is available. The analysis of
working capital is based on ratio analysis to monitor overall trends in
working capital and to identify areas requiring closer management.
Working capital is not measurable by only current assets & current liabilities
but there are some other factors also that have an influence on the working
capital. From the analysis of the components of working capital, it was found
that the organization is utilizing its funds properly, the inventory is managed
efficiently and the organization is able to get sufficient short term financing.
It is clear that the working capital of IFFCO is in sound position. The
suggestions can be made in the management of inventory by
implementation of JIT or Kanban and management of liquid assets including
the subsidy provided by the government.
The Cash Management System at IFFCO is very sound and efficient. It has
enabled the organization to manage its funds in a proper manner resulting
in better utilization and availability of funds in cash deficit periods. IFFCO
has a tie up with banks such as IOB, HSBC Bank, ICICI Bank that are
providing IFFCO with facilities such as cash management services,
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personalized financial MIS to enable IFFCO to accelerate the collection and
payment of funds, debit sweep option, Anywhere banking facility, etc. The
suggestion that can be given to the organization is the implementation of
RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund
Transfer) facilities which will improve the cash transfer at IFFCO.
Objectives of the Study
To analyse the Working Capital and Working Capital Management
policies at IFFCO
To understand Working Capital Management of the organization
To analyze Liquidity position of the organization
To find out the Profitability and operating efficiency of the
organization
To understand the importance of Working Capital Management
To analyze the short term financing patterns, which affect the
working capital of the organization
To study the factors that affects the Working Capital
Management at IFFCO
To analyze the data and information of the previous years to
know the actual position of funds, investments and liabilities of
the organization
To identify some broad policy measures to improve the working
capital position of the organization
To estimate the working capital requirements of the
organization in the near future
To analyse the Cash Management Practices at IFFCO
To understand the cash management process followed at the
organization
To study the factors both intrinsic and extrinsic that influences
the cash management at the organization
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To study and analyze the changes being brought about the
existing cash management system
To study the salient features, methodology and advantages of
the new cash management system being implemented at the
organization
To suggest some recommendations to the organizations for the
improvement of the cash management practices and the new
cash management MIS
Methodology of the study
The basic type of research used to prepare this report is Descriptive.
The study is mainly based on the secondary data which refers to that form of
information that has already been collected and is available. These include
some internal sources within the company and externally these sources
include books and periodicals, published reports and data of IFFCO and the
annual reports of the company. Interaction with the various employees of the
marketing accounts department has also been a major source of information.
No primary data has been used as a part of this study.
The analysis of working capital is based on ratio analysis to monitor overall
trends in working capital and to identify areas requiring closer management.
Limitations of the Study
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The following are the limitations of this summer project training:
The study is limited to five financial years i.e. from 2005-2009.
The data used in this study has been taken from the Financial
Statements & their related schedules of IFFCO Ltd., New Delhi as per
the requirement.
Some of the information that was essential for this study cannot
however be given in this report due to their confidential nature.
The scope and area of the study was limited to corporate office of
IFFCO, New Delhi only.
IFFCO The Organization
Indian Farmers Fertiliser Co-operative
Limited (IFFCO) was registered on
November 3, 1967 as a Multi-unit
Co-operative Society. It was a unique
venture in which the farmers of the
country through their own
Co-operative Societies created this
new institution to safeguard their
interests. The numbers of
co-operative societies associated with IFFCO have risen from 57 in 1967 to
38, 155 at present. On the enactment of the Multistate Cooperative Societies
act 1984 & 2002, the Society is deemed to be registered as a Multistate
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Cooperative Society. The byelaws of the Society provide a broad frame work
for the activities of IFFCO as a Cooperative Society.
IFFCO commissioned an Ammonia - urea complex at Kalol and the NPK/DAP
plant at Kandla both in the state of Gujarat in 1975. Another Ammonia -
urea complex was set up at Phulpur in the state of Uttar Pradesh in 1981.
The ammonia - urea unit at Aonla was commissioned in 1988.
In 1993, IFFCO had drawn up a major expansion programme of all the four
plants under overall aegis of IFFCO VISION 2000. The expansion projects at
Aonla, Kalol, Phulpur and Kandla have been completed on schedule. Thus all
the projects conceived as part of Vision 2000 have been realised without
time or cost overruns. All the production units of IFFCO have established a
reputation for excellence and quality.
A new growth path has been chalked out to realise newer dreams and
greater heights through Vision 2010 which is presently under
implementation. As part of the new vision, IFFCO has acquired fertiliser unit
at Paradeep in Orissa in September 2005. As a result of these expansion
projects and acquisition, IFFCO's annual capacity has been increased to 3.69
million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes of
P2O5.
Mission
IFFCO's mission is "to enable Indian farmers to prosper through timely
supply of reliable, high quality agricultural inputs and services in an
environmentally sustainable manner and to undertake other activities to
improve their welfare."
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To provide to farmers high quality fertilizers in right time and in
adequate quantities with an objective to increase crop productivity.
To make plants energy efficient and continually review various
schemes to conserve energy.
Commitment to health, safety, environment and forestry development
to enrich the quality of community life.
Commitment to social responsibilities for a strong social fabric.
To institutionalise core values and create a culture of team building,
empowerment and innovation which would help in incremental growth
of employees and enable achievement of strategic objectives.
Foster a culture of trust, openness and mutual concern to make
working a stimulating and challenging experience for stake holders.
Building a value driven organisation with an improved and responsive
customer focus. A true commitment to transparency, accountability
and integrity in principle and practice.
To acquire, assimilate and adopt reliable, efficient and cost effective
technologies.
Sourcing raw materials for production of phosphatic fertilisers at
economical cost by entering into Joint Ventures outside India.
To ensure growth in core and non-core sectors.
A true Cooperative Society committed for fostering cooperative movement in
the country.
IFFCO is emerging as a dynamic organisation, focussing on strategic
strengths, seizing opportunities for generating and building upon past
success, enhancing earnings to maximise the shareholders' value.
Vision
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To augment the incremental incomes of farmers by helping them to increase
their crop productivity through balanced use of energy efficient fertilizers,
maintain the environmental health and to make cooperative societies
economically & democratically strong for professionalized services to the
farming community to ensure an empowered rural India.
Vision 2010
Encouraged by the success of Vision 2000, IFFCO has charted on a new
course of action to realise a fresh set of dreams. A high powered committee
has been constituted to steer the organisation through this Road Map.
Activities being actively pursued through the strategy are:
Phosphoric Acid plant
Foray into Power Sector to set up a 500 MW power project
Ammonia Plant for supplies to Kandla Unit
IFFCO Kisan Bazar
IFFCO Bank
Multi Commodity Exchange
Acquisition of Fertilizer Plants
Nellore Fertilizer Project
Agri business
The Approach
To achieve their mission, IFFCO as a cooperative society, undertakes several
activities covering a broad spectrum of areas to promote welfare of member
cooperatives and farmers. The activities envisaged to be covered are
exhaustively defined in IFFCOs Bye-laws.
The Commitment
The thirst for ever improving the services to farmers and member
co-operatives is insatiable, commitment to quality is insurmountable and
harnessing of mother earths' bounty to drive hunger away from India in an
ecologically sustainable manner is the prime mission.
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Plants owned by IFFCO
Kalol Unit (Ammonia - Urea complex)
P. O. Kasturinagar, District Gandhinagar, Gujarat - 382423
Kandla Unit (NPK/DAP plant)
P. O. Kandla, Gandhidham, Kandla (Kachchh), Gujarat - 370201
Phulpur Unit (Ammonia - urea complex)
P. O. Ghiyanagar, District Allahabad, Uttar Pradesh - 212404
Aonla Unit (Ammonia - Urea unit)
P. O. IFFCO Township, Paul Pothen Nagar, Bareilly, Uttar Pradesh -
243403
Paradeep Unit (NPK/DAP and Phosphoric Acid Fertiliser unit)
Village Musadia, P. O. Paradeep, District Jagatsinghpur, Orissa -
754142
Production and Sales
During the year 2008-09 IFFCO produced 71.68 Lakh (7.168 million) MT
(Metric Tonnes) of fertiliser material, consisting of 40.68 lakh MT of Urea and
31.00 lakh MT NPK/DAP. It contributes 21.4% of countrys total nitrogenous
fertiliser production and 27% of total phosphatic fertiliser production in the
same period.
PRODUCTION
(in LAKH MT)
YEAR UREA NPK / DAP TOTAL
2006-07 37.87 32.26 70.13
2007-08 39.63 28.84 68.47
2008-09 40.68 31 71.68
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PLANT WISE PRODUCTION
Unit 2008-09 2007-08
Production
Capacity
Utilization
Production
Capacity
Utilization
(Lakh MT) (percent) (Lakh MT) (percent)
UREA
Kalol 5.60 102.80 5.45 100.00
SALES OF FERTILIZER MATERIAL
(in Lakh MT)
Material 2008-09 2007-08 2006-07
UREA 58.69 54.29 52.41
NPK/ DAP 53.89 38.95 33.69
TOTAL 112.58 93.24 86.10
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Phulpur I 6.63 120.30 6.30 114.30
Phulpur II 8.40 97.20 9.24 106.90
Aonla I 9.87 114.10 8.76 101.30
Aonla II 10.18 117.80 9.89 114.40
SUB TOTAL UREA 40.68 110.30 39.63 107.40
NPK / DAP
Kandla 17.94 74.30 20.18 83.50
Paradeep 13.06 68.00 8.66 45.10
SUB TOTAL NPK / DAP 31.00 71.40 28.84 66.50
TOTAL PRODUCTION 71.68 89.20 68.47 85.30
All India Capacity, Production and Capacity Utilization of Fertilizer
Industry
Year N P2O5
Capacity Production
Capacity
Utilization
(%)
Capacity Production
Capacity
Utilization
(%)
2004-05 12208 11304.9 93.4 5480.4 4038.4 75.5
2005-06 12288.4 11332.9 94.5 5459.6 4202.6 78.5
2006-07 12290.4 11524.9 95.6 5736.3 4440 78.5
2007-08 12290.4 10902.8 95.2 5874.6 3714.3 64.7
2008-09 12290.4 10900.2 95.2 5892.3 3417.3 58.5
Sector Wise Capacity and Production of N and P2O5
(capacity: As on 1.11.20
(production: 2008
April-Ma
(Figures in '000 tonne nutrie
Sector N P2O5
Capacity Production Capacity Production
NP/NPKs SSP Total NP/NPK SSP To
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s
Public 3591.5 2973.2 386.7 - 386.7 191.7 - 191
Private 6030.3 4829.9 2860.1 1225 4085.1 1903.9 405.4 230
Cooperative 3423.4 3133.1 1712.8 - 1712.8 916.3 - 916
Total 13045.2 10900.2 4959.6 1225 6184.6 3011.9 405.4 341
Capacity and Investment in the Fertilizer Industry
Year / Period Capacity During the
Investments During the Period ( in Rs.
Crore )
Period
(in '000 tonnes) Sectors
N P2O5 Public Cooperative Private Total
2004-2005 62 39 - - 10 10
(as on
1.11.2004) 12229 5427 7474.5 4231.5 14227.9 25933.9
2005-2006 -21 1 - - 3 3
(as on
1.11.2005) 12208 5428 7474.5 4231.5 14230.9 25936.9
2006-2007 52 243 350 - 35 385
(as on
1.11.2006) 12260 5671 7824.5 4231.5 14265.9 26321.9
2007-2008 30 204 - - 15 15
(as on
1.11.2007) 12290 5875 7824.5 4231.5 14280.9 26336.9
2008-2009 - 17 - - 55 55
(as on
1.11.2008) 12290 5892 7824.5 4231.5 14335.9 26391.9
2009-2010 755 293 - 350 470 820
(as on
1.11.2009) 13045 6185 7824.5 4581.5 14805.9 27211.9
BIO FERTILISERS
Bio-fertilisers are capable of fixing atmospheric nitrogen when suitable
crops are inoculated with them. Bio-fertilisers are low cost, effective,
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environmental friendly and renewable source of plant nutrients to
supplement fertilisers. Integration of chemical, organic and biological
sources of plant nutrients and their management is necessary for
maintaining soil health for sustainable agriculture. The bacterial organisms
present in the bio-fertiliser either fix atmospheric nitrogen or solubilise
insoluble forms of soil phosphate. The range of nitrogen fixed per ha/year
varies from crop to crop; it is 80 - 85 kg for cow pea, 50 - 60 kg for
groundnut, 60 - 80 kg for soybean and 50 - 55 kg for moongbean.
All India Production and Dispatches of Bio
Fertilizers
( in tonnes)
Year Production Dispatches
2004-05 10479 10427.6
2005-06 11752.4 11357.6
2006-07 15871 15745
2007-08 20111.1 20100
2008-09 24455 24400
Prices of IFFCO's Fertilisers
(Applicable only within India)
UREA NPK DAP MOP
N-46% 10-26-26 12-32-16 20:20:00 18-46-0 K-60%
M.R.P. 4830 7197 7637 6295 9350 4455
Local Taxes Extra, where ever applicable.
Joint Ventures of IFFCO
Indian Potash Limited (IPL)
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The Society holds an investment of Rs. 2.68 Crore (2008-09) in Indian
Potash Limited (IPL) with equity share holding of 34 per cent in the
paid up equity share capital of IPL. IPL is primarily engaged in trading
of imported Potassic and Non-Potassic Fertilisers.
Industries Chimiques Du Senegal (ICS)
The Society holds 18.54 per cent equity (2008-09) in ICS, which
manufactures Phosphoric Acid for exports and Phosphatic Fertilisers
for domestic consumption. ICS has the capacity to produce 660000 MT
of Phosphoric Acid (as P2O5) per year. The Government of Senegal and
IFFCO signed an Agreement on 16th July, 2007 and Amendment on
14th January, 2008, for the debt restructuring and recapitalisation of
ICS. Post restructuring and recapitalisation, the new Board has been
reconstituted and the IFFCO Consortium has taken over the
management control of ICS.
Indo Egyptian Fertilisers Company, SAE (IEFC)
The Society promoted a joint venture in Egypt, namely Indo Egyptian
Fertilisers Company SAE (IEFC) along with El Nasr Mining Company of
Egypt to set up a Phosphoric Acid plant with a capacity of 1500 tonnes
P2O5 per day. IEFC was incorporated in Egypt as a Joint Stock
Company on 15
th
November, 2005 with shareholding of IFFCO and its
affiliates at 76 percent and El Nasr Mining Co. Egypt holding 24 per
cent equity.
Oman India Fertiliser Company (OMIFCO)
Oman India Fertiliser Company (OMIFCO) is a Joint Venture Company
in Oman in which the Society has invested an amount of Rs. 329.08
Crore (2008-09) to acquire 25 percent equity in OMIFCO, which has an
installed capacity of 16.52 lakh tonne Urea and 2.5 lakh tonne surplus
Ammonia. OMIFCO commenced commercial production at its plant at
Sur (Oman) with effect from 14
th
July, 2005.
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Jordan India Fertilizer Company (JIFCO)
IFFCO and Jordan Phosphate Mines Company (JPMC), Jordan have
formed a Limited Liability Joint Venture Company, namely Jordan India
Fertilizer Company (JIFCO) on 6th March, 2008 in Amman, Jordan
under the Free Zone system to set up a phosphoric acid plant of
capacity 1500 tonnes per day P2O5 at Eshidiya in Jordan. In this
company, IFFCO holds 52 per cent equity, while JPMC holds 48 per
cent equity.
Aria Chemicals (Orissa) Limited
Aria Chemicals (Orissa) Ltd. is a joint venture between IFFCO and Aria
Chemicals Private Limited, Chennai wherein IFFCO holds 40 percent
equity in this project. This Company will set up an Aluminium Fluoride
facility at Paradeep.
Sector Diversification of IFFCO
IFFCO-TOKIO General Insurance Company Limited (ITGI)
IFFCO TOKIO General Insurance Company Limited (ITGI) was formed as
a Joint Venture Company in the year 2000 for underwriting general
insurance business in India. Out of total equity capital of Rs. 247 Crore
in ITGI, the Society and its associates hold 74 percent equity and Tokio
Marine Asia holds 26 percent.
ITGI had launched products like, Barish Bima Yojna, Mausam Bima
Yojna and Kisan Suvidha Bima Yojna to cater to the insurance
requirements of the farmers. During the year ITGI has launched
various micro insurance policies like Janta Bima Yojna, Jansuraksha
Bima Yojna, Janswasthya Bima Yojna and Mahila Suraksha Bima
Yojna to provide protection to the farmers and their families and also
poorer sections for their household goods, personal accident and
health.
IFFCO Chhattisgarh Power limited (ICPL)
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The Society has diversified into the Power Sector by incorporating a
Joint Venture Company namely IFFCO Chhattisgarh Power Limited
(ICPL) with Chhattisgarh State Electricity Board (CSEB) to set up a 1320
MW coal-based Mega Power Plant in District Surguja of Chhattisgarh.
The Society will hold 74 per cent equity in ICPL.
National Commodity and Derivatives Exchange Ltd. (NCDEX)
The Society holds 12 percent equity in the Paid-up Share Capital (Rs.
30 Crore) and the entire preference capital of Rs. 10 Crore in the
National Commodity and Derivative Exchange Limited (NCDEX).
NCDEX is a demutualised, on-line national level commodity exchange
providing a trading platform for futures trading in commodities in the
country and offers its market participants opportunity at price
discovery and price risk hedging. Currently, NCDEX offers contracts in
56 commodities, that is, 42 agricultural commodities, 2 bullion, 6
metals, 2 energy and 3 polymers and 1 environment (carbon credit).
National Collateral Management Services Ltd. (NCMSL)
Along with other reputed institutions, IFFCO co-promoted National
Collateral Management Services Limited (NCMSL) in the year 2004. The
Society holds 13.56 per cent of the paid up equity capital in NCMSL.
NCMSL is engaged in providing various risk management services
related to commodities like Storage and Preservation services,
Collateral Management services, Procurement services, Quality Testing
and Certification services and Information services.
Freeplay Energy India Pvt. Ltd.
During the year 2008-09, the Society made an investment of Rs. 4.83
Crore to acquire 30 percent shareholding in Freeplay Energy India Pvt.
Ltd. (FPEI), which is engaged in the field of non-conventional energy
products and devices suitable for rural India. These products are being
marketed to co-operative societies through Societys another
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subsidiary company, that is, IFFCO Kisan Sanchar Ltd. The utility of
these products has been greatly appreciated by the rural farmers.
Organizations promoted by IFFCO
IFFCO has promoted several institutions and organisations to work for the
welfare of farmers, strengthening cooperative movement, improve Indian
agriculture.
Indian Farm Forestry Development Cooperative (IFFDC)
Indian Farm Forestry Development Cooperative, a multi-state
cooperative society promoted by IFFCO, has been implementing
afforestation projects in Uttar Pradesh, Rajasthan & Madhya Pradesh.
The Society has been floated under contribution agreement signed
between IFFCO and India - Canada Environment Facility (ICEF).
Development of Primary Farm Forestry Cooperative Societies (PFFCS) is
an important activity undertaken towards afforestation of waste lands.
High participation of women is an important feature of the IFFDC.
Cooperative Rural Development Trust (CORDET)
IFFCO promoted Cooperative Rural Development Trust (CORDET) in the
year 1979 to provide education and training to farmers on various
aspects of crop production, horticulture, animal husbandry, farm
machinery etc.
IFFCO Kisan Sewa Trust (IKST)
Objective: A Relief Trust for the Welfare of the Victims of Natural
Calamities
Kisan Sewa Trust Fund was created out of contributions from:
IFFCO
Employees of IFFCO
Cooperative Societies and others
TOTAL
Rs 100 million
Rs 10 million
Rs 90 million
Rs 200 million
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IFFCO had always been in the forefront of activities for the rescue of
victims of natural calamities. Every year significant contributions, both
monetary as well as in kind, are made by IFFCO along with separate
contributions by the employees.
IFFCO Kisan Sanchar Limited (IKSL)
IFFCO Kisan Sanchar Limited was incorporated in April, 2007 with the
objective to use the information technology to empower farmers in
rural areas and to strengthen the cooperative network in the country.
The highlight of IKSLs services in the rural telecom domain continues
to be Valued Added Services (VAS) extended to the subscribers. Five
free voice messages of immediate relevance to people living in rural
areas, a Help Line with experts to provide information inputs to the
farmers and several other innovative activities for subscribers
constitute a major source of knowledge transfer.
An ambitious project 'ICT Initiatives for Farmers and Cooperatives' is
launched to promote e-culture in rural India. IFFCO obsessively nurtures its
relations with farmers and undertakes a large number of agricultural
extension activities for their benefit every year.
At IFFCO, the thirst for ever improving the services to farmers and member
co-operatives is insatiable, commitment to quality is insurmountable and
harnessing of mother earths' bounty to drive hunger away from India in an
ecologically sustainable manner is the prime mission.
All that IFFCO cherishes in exchange is an everlasting smile on the face of
Indian Farmer who forms the moving spirit behind this mission.
IFFCO, to day, is a leading player in India's fertiliser industry and is making
substantial contribution to the efforts of Indian Government to increase food
grain production in the country.
IFFCO is also behind several other companies with the sole intention of
benefitting farmers.
The distribution of IFFCO's fertiliser is undertaken through over 38155
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co-operative societies. The entire activities of Distribution, Sales and
Promotion are co-ordinated by Marketing Central Office (MKCO) at New Delhi
assisted by the Marketing offices in the field.
In addition, essential agro-inputs for crop production are made available to
the farmers through a chain of 158 Farmers Service Centre (FSC).
Subsidiaries of IFFCO
Kisan International Trading FZE (KIT)
Kisan International Trading FZE (KIT) was set up as a wholly owned
subsidiary of the Society in Dubai in April 2005. KIT has become a
leading international trading organisation, which handles the import
and export of various fertilisers and fertiliser Raw Materials and
Intermediates.
IFFCO Kisan Bazar Ltd.
IFFCO Kisan Bazar Ltd. (IKBL) was incorporated on 26th February, 2004
as IFFCOs wholly owned subsidiary company for inter-alia
undertaking business in agri-inputs and consumer goods for the
benefit of farmers/cooperatives.
Business and Financial Review of Subsidiaries and Associates
Even in the year of global economic meltdown, the business portfolio has
been steadily growing in tandem with the high growth aspirations. The
organization have stepped up investments in related businesses through
various Joint Ventures and Associate Companies in order to strengthen
themselves further by looking at new opportunities that are unfolding and
create value addition in the core fertiliser sector.
On 31st March 2009, the total investments were Rs. 914 Crore in
comparison to Rs.770.57 Crore on 31st March 2008 as per the following
break-up:
(Rs. In Crore)
As on 31st
March
2009 2008
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Investment in Jt. Ventures/Subsidiaries 888.27
750.13
Investment in Business Associates 25.73
20.44
Total 914.00 770.57
Financial Performance
As per its tradition, the Society has again exhibited an impressive financial
performance in all its major parameters, namely, Revenue Growth and
Resource Utilisation, testifying to the robustness of its Corporate Strategy of
creating multiple drivers of growth in spite of constraints in the availability
of raw materials, the Global Economic Meltdown and inordinate delays in
receipt of large subsidy amounts from the Government of India. This was
possible due to higher production, sales volume and improvement in
operating efficiencies.
The Society achieved the highest ever sales turnover of Rs 32,933 Crore.
This represents an increase of 170 per cent over the previous year. While,
the sales volume of fertiliser material increased by 20 per cent to 112.58
lakh MT fertiliser during 2008-09, as against 93.24 lakh MT in the previous
year, the major increase in the sales turnover was on account of substantial
increase in the commodity prices. The performance is even more satisfying
when viewed in the light of the challenging business environment of the
fertiliser industry.
Sources and Uses of Funds
The Cash Flow from Operating, Investing and Financing activities as reflected
in the Cash Flow Statement is summarised in the following table:
(Rs. In Crore)
2008-09 2007-08
Cash provided by operating activities 1560
1072
Cash Used in Investing activities (6578)
(970)
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Cash provided by financing activities 4844
(190)
Decrease in cash and cash equivalents (174) (88)
Corporate Governance
The Society has consistently followed transparent, democratic and
professional practices in Corporate Governance since its inception. We have
carved out a strong Cooperative Identity and are making sincere efforts to
uphold the Cooperative Values by cherishing Cooperative Principles. The
Societys endeavour has been to achieve the highest levels of transparency,
accountability and full disclosure to its shareholders in a bid to uphold the
spirit of Cooperative Principles and Cooperative Values by following the
charter as lay down by International Cooperative Alliance (ICA). The activities
of the Society have been conducted within the provisions of the Multi State
Cooperative Societies Act/Rules and IFFCO Bye-laws. A separate detailed
report on Corporate Governance is given along with the Annual Report.
Financial Ratings
The Societys excellent credit ratings with bankers and rating agencies allows
access to short term funds including foreign currency borrowings at
competitive rates. Ratings assigned by different Rating Agencies to the
Society were as under:
CRISIL Ratings
Rating for Governance and Value Creation (GVC) Practices of
IFFCO
CRISIL has, assigned a GVC Level 2 rating to IFFCO. This rating
indicates that the capability of the Society with respect to wealth
creation for all its stakeholders, while adopting sound corporate
governance practices, is high.
Rating for the Rs. 100 crore Commercial Paper Programme of
IFFCO
CRISIL has assigned a P1+ (pronounced P One Plus) rating to
IFFCOs Rs.100 Crore Commercial Paper Programme. This rating
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indicates that the degree of safety with regard to timely payment of
interest and principal on the instrument is Very Strong.
Rating for the Rs. 400 crore Bonds Programme of IFFCO
CRISIL has assigned the rating on IFFCOs Long Term Borrowing
Programme to AA/Stable. The rating indicates high degree of
safety with regard to timely payment of interest and principal on
the instrument.
FITCH Ratings
Rating for the Rs. 100 crore Commercial Paper Programmes of
IFFCO
FITCH Ratings has assigned a National Short Term Rating of F1+
(Ind)to IFFCOs Rs. 100 crore Commercial Paper Programme. This
rating indicates that the degree of safety with regard to timely
payment of interest and principal on the instrument is Very Strong.
Rating for Long Term Borrowing Programme of IFFCO
FITCH Ratings assigned National Long - Term Rating of AA+ (Ind)
to the Long Term Debt Programme of IFFCO. The outlook on the
Long Term Rating is Stable. This rating indicates high degree of
safety with regard to timely payment of interest and principal on
the instrument.
CARE Ratings
PR 1+ (P One Plus) rating to IFFCOs Working Capital facilities/Short
Term Loans having tenure of up to one year.
CARE AA (Double A) rating to External Commercial Borrowings and
other existing long term borrowings having tenure of over one year.
24
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Value Added
Value Added is the wealth which an enterprise has been able to create
through the collective effort of capital, management and employees. In
economic terms, value added is the market price of the output of an
enterprise less the price of the goods and services acquired by transfer.
Value Added can provide a useful measure in gauging performance and
activity of the company.
Figure: Allocation of Value Added
Significant Accounting Policies
1. Basis of Preparation of Financial Statements
The Financial Statements are prepared on accrual basis of accounting
under the historical cost convention in accordance with the generally
accepted accounting principles in India, the Accounting Standards
issued by the Institute of Chartered Accountants of India and the
relevant provisions of Multi State Co-operative Societies Act, 2002.
2. Use of Estimates
The preparation of financial statements, in conformity with the
generally accepted accounting principles, require estimates and
assumptions to be made that affect the reported amount of assets and
25
SAAB MARFIN MBA
liabilities as of the date of the financial statements and the reported
amount of revenues and expenses during the reporting period.
Difference between the actual results and estimates are recognized in
the period in which the results materialise.
3. Fixed Assets
(i). Fixed Assets are stated at historical cost less accumulated
depreciation. Cost comprises of the purchase price and any
attributable cost of bringing the asset to its working condition
for its intended use.
(ii). Assets retired from active use and held for disposal are shown
separately under Fixed Assets at lower of net book value and
estimated realisable value.
4. Expenditure incurred during Construction Period
In respect of new/major expansion of units, the indirect expenditure
incurred during construction period up to the date of the
commencement of commercial production, which is attributable to the
construction of the project, is capitalised on proportionate basis.
5. Intangible Assets
An intangible asset is recognised where it is probable that the future
economic benefits attributable to the asset will flow to the Society and
the cost of the asset can be measured reliably. Such assets are stated
at cost less accumulated amortisation.
6. Impairment of Assets
At each balance sheet date an assessment is made whether any
indication exists that an asset has been impaired. If any such
indication exists, an impairment loss i.e. the amount by which the
carrying amount of an asset exceeds its recoverable amount, is
provided in the books of account.
7. Investments
i) Long Term Investments are carried at cost. Provision for diminution
in the value of such investments is made to recognise a decline,
other than temporary, in the value of the investments.
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SAAB MARFIN MBA
ii) Current Investments are valued at lower of cost and fair value
determined on an individual investment basis.
8. Depreciation / Amortisation
(a) Depreciation on Fixed Assets is provided on Straight Line
Method as follows:
(i) In respect of assets acquired up to 31
st
March, 1990 at the
rates prescribed under Income tax Act, 1961 and rules
framed there under.
(ii) In respect of assets acquired after 31
st
March,1990 at the
rates based on schedule XIV to the Companies Act,1956
except for fixed assets taken over at Paradeep Unit which
are depreciated based on useful life of such assets.
(b) Assets are depreciated to the extent of 95% of the original
cost except assets individually costing up to Rs.5000/- which
are fully depreciated in the year of acquisition.
(c) Railway wagons under "Own Your Wagon Scheme" are
depreciated over a period of ten years.
(d) Machinery Spares which can be used only in connection with
an item of Plant & Machinery and its use is expected to be
irregular, are fully depreciated over the remaining useful life
of the related asset.
(e) Premium paid for acquisition of leasehold land, other than
those acquired under perpetual lease basis, is amortised over
the period of lease.
(f) Leasehold Buildings are fully depreciated over the period of
lease in case period of lease is less than the useful life
derived from the rates as per Schedule- XIV of Companies
Act.
(g) Additions to assets are depreciated for the full year
irrespective of the date of addition and no depreciation is
provided on assets sold/ discarded during the year. However,
in the case of capitalisation of project, depreciation is
27
SAAB MARFIN MBA
provided on a pro-rata basis from the date of
commencement of commercial production.
(h) Intangible assets are amortised over their estimated useful
lives but not exceeding ten years when the asset is available
for use.
9. Provisions, Contingent Liabilities and Contingent Assets
(a) Provisions are recognised for liabilities that can be measured by
using a substantial degree of estimation, if:
i) The Company has a present obligation as a result of a past event;
ii) A probable outflow of resources embodying economic benefits
is expected to
settle the obligation; and
iii) The amount of the obligation can be reliably estimated.
(b) Contingent liability is disclosed in case of :
i) Present obligation arising from a past event when it is not
probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.
ii) Possible obligation, unless the probability of outflow in
settlement is remote.
(c) Reimbursement expected in respect of expenditure required to
settle a provision is recognised only when it is virtually certain that
the reimbursement will be received.
(d) Contingent assets are neither recognised nor disclosed in the
financial statements.
10. Operating Leases
Assets acquired on leases wherein a significant portion of the risks
and rewards of ownership are retained by the lessors are classified as
operating leases. Lease rentals paid for such leases are recognised as
an expense on straight line basis over the term of lease.
11. Prior Period Income / Expenditure
Income/Expenditure items relating to prior period(s) not exceeding
Rs.2,00,000/- each is treated as Income/ Expenditure for the current
year.
28
SAAB MARFIN MBA
12. Pre-Paid Expenses
Expenditure up to Rs.50000/- in each case except Insurance Premium
is accounted for in the year in which the same is incurred.
29
SAAB MARFIN MBA
30
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Data Analysis
Operating Cycles
1. Days Inventory Outstanding (DIO)
Days Inventory
Outstanding (DIO)
=
Average Inventory
Cost of Goods sold (COGS) / 365
(in Rs. Crores)
Year
Average
Inventory
COGS
DIO (number of
days)
2004-05 976.03 6809.48 52.317
2005-06 1225.57 9166.48 48.801
2006-07 1901.79 9578.09 72.473
2007-08 1930.52 11336.77 62.155
2008-09 1654.23 31496.75 19.170
Analysis
The smaller the number of days of inventory outstanding, the more efficient
a company is. IFFCO day inventory outstanding is around 19 days for the
year 2008-09 which is very good. Inventory is held for less time and less
money is tied up in inventory. Instead, money is freed up for things like
research and development, marketing or even share buybacks and dividend
payments.
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SAAB MARFIN MBA
The DIO had always been showing a decreasing trend apart from the period
of 2006-07 in which inventory was build up due to the purchase of Paradeep
plant.
2. Days Sales Outstanding
Days Sales
Outstanding
(DSO)
=
Average Accounts Receivable
Net Sales / 365
Year
Avg. A/c
Receivables
(in crores)
Net Sales
(in Crores)
DSO (number of
days)
2004-05 397.025 7396.87 19.591
2005-06 399.495 9942.93 14.665
2006-07 418.04 10330.11 14.771
2007-08 387.72 12162.82 11.635
2008-09 410.495 32933.30 4.550
Analysis
Days Sales Outstanding (DSO) looks at the number of days needed to collect
on sales and involves Accounts Receivables. While cash-only sales have a
DSO of zero, people do use credit extended by the company, so this number
is going to be positive.
Most of sales of IFFCO are on cash basis and sales to large institutions
only are on credit basis. The DSO for the year 2008-09 is 4.550, which is
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SAAB MARFIN MBA
very good for the company. The DSO is showing a decreasing trend
meaning that the days to collect on sales are decreasing every year.
3. Days Payable Outstanding
Days Payable
Outstanding (DPO)
=
Average Accounts Payable
Cost of Goods sold (COGS) / 365
(in Rs. Crores)
Year
Average
Accounts Payable
COGS
DPO (number of
days)
2004-05 728.425 6809.48 39.045
2005-06 934.165 9166.48 37.198
2006-07 913.425 9578.09 34.809
2007-08 833.87 11336.77 26.847
2008-09 1664.225 31496.75 19.286
Analysis
This involves the company's payment of its own bills or Accounts Payables. If
this can be maximized, the company holds onto cash longer, maximizing its
investment potential.
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SAAB MARFIN MBA
The DPO of IFFCO is around 19 days for the year 2008-09. It is also
observed that DPO is decreasing every year. From the data provided, it is
found out that IFFCO had sufficient funds to make payments of its own bills
and make investments in various activities.
4. Gross Operating Cycle
Gross Operating
cycle (GOC)
= DIO + DSO
(in Days)
Year DIO DSO GOC
2004-05 52.317 19.591 71.908
2005-06 48.801 14.665 63.466
2006-07 72.473 14.771 87.244
2007-08 62.155 11.635 73.791
2008-09 19.170 4.550 23.720
Analysis
Gross operating cycle is a tool which measures the total number of days
from the day the purchases are made or the stock arrives to the day all the
34
SAAB MARFIN MBA
collections are made. Cash is said to be blocked till the collections have been
collected. So the sooner the cash is received from the consumers the better
is for the company as they get cash for further production.
IFFCO gross operating cycle is around 24 days. This is very good for the
company as a fast turnover rate of these assets is what creates real liquidity
and is a positive indication of the quality and the efficient management of
inventory and receivables.
5. Cash Conversion Cycle (CCC)
Cash
Conversion
Cycle (CCC)
=
DIO + DSO -
DPO
(in Days)
Year DIO DSO DPO CCC
2004-05 52.317 19.591 39.045 32.863
2005-06 48.801 14.665 37.198 26.269
2006-07 72.473 14.771 34.809 52.435
2007-08 62.155 11.635 26.847 46.943
2008-09 19.170 4.550 19.286 4.434
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SAAB MARFIN MBA
Analysis
The cash conversion cycle (CCC) measures how fast a company can convert
cash on hand into even more cash on hand. The CCC does this by following
the cash as it is first converted into inventory and accounts payable (AP),
through sales and accounts receivable (AR), and then back into cash.
IFFCO CCC is of around 4.4 days in the year 2008-09. This means that the
company is able to generate the cash within this period after making it
payments of its own bills. Since it is very low, it is good for the company.
Ratios related to Inventory Management
1. Inventory Turnover Ratio
Inventory
Turnover
Ratio
=
Cost of Goods sold
(COGS)
Average Inventory
(in Rs. Crores)
Year COGS
Average
Inventory
Inventory
Turnover Ratio
2004-05 6809.48 976.03 6.977
2005-06 9166.48 1225.57 7.479
2006-07 9578.09 1901.79 5.036
2007-08 11336.77 1930.52 5.872
2008-09 31496.75 1654.23 19.040
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SAAB MARFIN MBA
Analysis
The inventory turnover ratio at IFFCO is 19.040 in 2008-09. It means that
that the company is turning its inventory of finished goods into sales 19.040
times in a year and is in good position. There had been a decrease in the
inventory turnover ratio from 7.479 in 2005-06 to 5.036 in 2006-07. During
this period, there was a large amount of inventory in the company because
of the purchase of the Paradeep production plant. During all other period,
the turnover is always increasing.
2. Inventory to Working Capital Ratio
Inventory to
Working
Capital Ratio
=
Inventory
X 100
Working Capital
Year
Inventory
(in Crores)
Working Capital
(in Crores)
Inventory to
Working Capital
Ratio
2004-05 931.50 1499.14 62.136
2005-06 1519.64 3387.39 44.862
2006-07 2283.94 4880.05 46.802
2007-08 1577.10 4404.17 35.809
2008-09 1731.36 4490.10 38.559
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SAAB MARFIN MBA
Analysis
The Inventory to Working Capital Ratio measures how well the company is
able to generate cash using working capital at its current inventory level. An
increasing inventory to working capital ratio is generally a negative sign,
showing the company may be having operational problems. If a company has
too much working capital invested in inventory, they may have difficulty
having enough working capital to make payments on short term liabilities
and accounts payable.
Inventory to working capital ratio for IFFCO has been decreasing consistently
with increasing very marginally in the year 2006-07 and in 2008-09.
3. Inventory to Current Assets Ratio
Inventory to
Current
Assets Ratio
=
Inventory
X 100
Current Assets
Year
Inventory
(in Crores)
Current Assets
(in Crores)
Inventory to
Current Assets
Ratio
2004-05 931.50 2603.98 35.772
2005-06 1519.64 4748.98 31.999
2006-07 2283.94 6081.28 37.557
2007-08 1577.10 5775.74 27.306
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SAAB MARFIN MBA
2008-09 1731.36 7672.99 22.564
Analysis
The Inventory to Current Assets Ratio measures that how much percentage
of current assets is formed by the inventories. An increasing inventory to
current assets ratio is a negative sign. It means that more & more percentage
of current assets is being constituted by the inventories. This indicates poor
operational efficiency of the organization. Also it shows that the funds
invested in current assets to meet obligations on a short notice are actually
illiquid to some extent and it may be difficult to convert them into cash
immediately. Normally, less than 50 % of current assets are treated as
average position of inventory.
IFFCO has shown a decrease in this ratio over the past years, which
indicates a GOOD inventory position for IFFCO and, the ratio was never been
above 38%.
4. Inventory to Sales Ratio
Inventory to
Sales Ratio
=
Inventory
X 100
Sales
Year
Inventory
(in Crores)
Sales
(in Crores)
Inventory to Sales
Ratio
2004-05 931.50 7396.87 12.593
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2005-06 1519.64 9942.93 15.284
2006-07 2283.94 10330.11 22.110
2007-08 1577.10 12162.82 12.967
2008-09 1731.36 32933.30 5.257
Analysis
The Inventory to Sales Ratio measures the percentage of inventory the
company currently has on hand to support the current amount of sales. An
increasing Inventory to Sales ratio is generally a negative sign, showing the
company may be having trouble keeping inventory down and/or Net Sales
have slowed, and can sometimes indicate larger financial problems the
company may be facing.
As per the data of IFFCO, this ratio had increased initially till the year
2006-07 but is falling down consistently after that time, which is a POSITIVE
sign indicating good movement of inventory.
Ratios related to Receivable Management
1. Debtors turnover ratio
Debtor
Turnover
Ratio
=
Net Sales
Average Accounts
Receivable
40
SAAB MARFIN MBA
Year
Net Sales
(in Crores)
Avg. A/c
Receivables (in
Crores)
Debtor Turnover
Ratio
2004-05 7396.87 397.03 18.631
2005-06 9942.93 399.50 24.888
2006-07 10330.11 418.04 24.711
2007-08 12162.82 387.72 31.370
2008-09 32933.30 410.50 80.227
Analysis
This ratio is also known as Accounts Receivable Turnover Ratio and
measures the number of times Accounts Receivables were collected during
the year. This is also a measure of how well the company collects sales on
credit from its customers.
IFFCO have a high and increasing Accounts Receivable Turnover which is
a Positive Sign. The company is able to turnover its debtors 80.227 times in
a year.
2. Average collection period
Average
Collection
Period
=
360
Debtor Turnover
Ratio
41
SAAB MARFIN MBA
Year
Sales
(in Crores)
Average
Debtors
(in Crores)
Debtor
Turnover
Ratio
Average
Collection
Period
2004-05 7396.87 397.03 18.631 19.323
2005-06 9942.93 399.50 24.888 14.465
2006-07 10330.11 418.04 24.711 14.569
2007-08 12162.82 387.72 31.370 11.476
2008-09 32933.30 410.50 80.227 4.487
Analysis
The Average Collection Period represents the average number of days for
which a firm takes to collect accounts receivables. It measures the quantity
of debtors.
The Average Collection Period for IFFCO was around 4.5 days in 2008-09.
This is extremely good considering the fact that IFFCO is a fertilizer company,
and functions as a cooperative. The maximum collection period during this
five year period is around 17 days in the year 2005-06 and is decreasing
since then.
3. Debtors to current assets ratio
Debtors to = Debtors X 100
42
SAAB MARFIN MBA
Current
Assets Ratio
Current Assets
Year
Debtors
(in Crores)
Current Assets
(in Crores)
Debtors to Current
Assets Ratio
2004-05 324.59 2603.98 12.465
2005-06 474.40 4748.98 9.990
2006-07 361.68 6081.28 5.947
2007-08 413.76 5775.74 7.164
2008-09 407.23 7672.99 5.307
Analysis
Debtors to Current Assets Ratio indicates the position of debtors in total
current assets. This ratio is calculated by debtors with current assets. If
debtors are average or less than average, it indicates proper realization of
debtors. On the other hand, if debtors are very heavy in respect of other
current assets, it indicates poor recovery of the company.
As Per the table, the Debtors to Current Assets Ratio for IFFCO decreased
from 2004-05 to 2006-07 and then increased in the year 2007-08 and then
decreasing onwards. The decrease is a healthy sign showing proper
realization of debts in 2008-09.
43
SAAB MARFIN MBA
4. Debtors to working capital ratio
Debtors to
Working
Capital Ratio
=
Debtors
X 100
Working Capital
Year
Debtors
(in Crores)
Working Capital
(in Crores)
Debtors to
Working Capital
Ratio
2004-05 324.59 1499.14 21.652
2005-06 474.40 3387.39 14.005
2006-07 361.68 4880.05 7.411
2007-08 413.76 4404.17 9.395
2008-09 407.23 4490.10 9.070
Analysis
Working capital is directly related with the position of debtors. If debtors are
lower as compared to Working Capital, then it indicates proper and smooth
utilization of working capital. But on the other hand, the amount of debtor is
very large in that condition, Working capital blocked and operational
efficiency is directly affected.
From the data, it can be seen that this ratio for IFFCO has been decreasing
which is good for the company. There was a increment in the year 2007-08
due to increase in the debtors but again it continued to decrease.
44
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5. Debt to Equity Ratio
Debt to
Equity Ratio
=
Debt
Total Equity
Year
Debt
(in Crores)
Equity
(in Crores)
Debt to Equity
Ratio
2004-05 647.09 3301.15 0.196
2005-06 5035.39 3555.38 1.416
2006-07 6486.12 3641.84 1.781
2007-08 6775.64 3688.66 1.837
2008-09 12802.78 3958.87 3.234
Analysis
The ratio shows the extent to which debt financing has been used in the
business. A high ratio means that claims of creditors are greater than those
of owners. A high level of debt introduces inflexibility in the firms
operations due to the increasing interference and pressure from creditors. A
low debt-equity ratio implies a greater claim of owners than capital.
At IFFCO, this ratio is increasing every year. It means that increase in debt
of the company is more than the increase in the equity. In the year 2008-09,
it increased to 3.234 from 1.837 in the year 2007-08 because of the major
increase in the short term loans from the banks.
45
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Ratios Related to Cash Management
1. Working capital ratio or current ratio
Current Ratio
=
Current Assets
Current Liabilities
Year
Current Assets
(in Crores)
Current
Liabilities
(in Crores)
Current Ratio
2004-05 2603.98 1104.84 2.357
2005-06 4748.98 1361.58 3.488
2006-07 6081.28 1201.23 5.063
2007-08 5775.74 1371.57 4.211
2008-09 7672.99 3182.89 2.411
Analysis
Working Capital Ratio is used to analyze the short term solvency of the
company. Usually a ratio of 2:1 is considered to be the best current ratio.
Higher the ratio, greater is the ability of the firm to meet its short term
obligations.
46
SAAB MARFIN MBA
Current Ratio at IFFCO is always greater than 2 in all five years for which
data has been analyzed indicating that IFFCO never really face a major
problem in meeting its short-term liabilities.
2. Liquid ratio or Acid-test ratio or Quick ratio
Quick Ratio
=
Current Assets - Inventories
Current Liabilities
Year
Current
Assets
(in
Crores)
Inventories
(in Crores)
Quick
Assets
(in
Crores)
Current
Liabilities
(in Crores)
Quick Ratio
2004-05 2603.98 931.50 1672.48 1104.84 1.514
2005-06 4748.98 1519.64 3229.34 1361.58 2.372
2006-07 6081.28 2283.94 3797.34 1201.23 3.161
2007-08 5775.74 1577.10 4198.64 1371.57 3.061
2008-09 7672.99 1731.36 5941.63 3182.89 1.867
Analysis
47
SAAB MARFIN MBA
Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered
to be satisfactory. This is so because if the quick assets are equal to the
current liabilities then the company may be able to meet its entire
short-term obligations pretty conveniently.
The quick ratio of the company is above 1 for all the five years. The quick
ratio was 3.161 and 3.061 during the year 2006-07 and 2007-08
respectively. This is due to large amount of inventory at IFFCO during that
period. However, the reason for this is the purchase of Paradeep production
plant during that period.
3. Cash to current assets ratio
Cash to
Current
Asset Ratio
=
Cash
X 100
Current Assets
Year
Cash
(in Crores)
Current Assets
(in Crores)
Cash to Current
Asset Ratio (%)
2004-05 199.10 2603.98 7.646
2005-06 98.22 4748.98 2.068
2006-07 330.84 6081.28 5.440
2007-08 243.32 5775.74 4.213
2008-09 69.63 7672.99 0.907
48
SAAB MARFIN MBA
Analysis
The Cash to Current Assets Ratio indicates what percentage of current assets
is comprised of cash at hand and cash at bank.
Upon analyzing the data of the past 5 years for IFFCO it was observed that
the cash balances formed only a very small percentage of the current assets.
In the last 5 years, the highest was 7.65% in the year 2004-05 after which it
is decreasing. The ratio had variations in this period an in the year 2008-09,
it was 0.91%. This is a POSITIVE SIGN as it shows effective utilization of the
funds of the organization and there is not much of idle cash with the
organization.
4. Sales to current assets ratio
Sales to
Current Asset
Ratio
=
Sales
Current Assets
Year
Sales
(in Crores)
Current Assets
(in Crores)
Sales to Current
Asset Ratio
2004-05 7396.87 2603.98 2.841
2005-06 9942.93 4748.98 2.094
2006-07 10330.11 6081.28 1.699
2007-08 12162.82 5775.74 2.106
2008-09 32933.30 7672.99 4.292
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SAAB MARFIN MBA
Analysis
The Sales to Current Assets Ratio basically measures how well a company is
making use of its assets in generating sales. An increasing sale to current
assets ratio is a POSITIVE SIGN as it indicates that the company has a healthy
production scenario because of which most of inventory is being converted
into sales for the company.
IFFCO has shown a decrease in its sales to current assets ratio from
2004-05 to 2006-07 after which it is constantly increasing which implies
that the company is doing well and inventory is not being held up at any
stage in the production process.
5. Working capital turnover ratio
Working Capital = Current Assets - Current Liabilities
Working
Capital
Turnover
Ratio
=
Sales
Average Working Capital
Year
Sales
(in Crores)
Working Capital
(in Crores)
Working Capital
Turnover Ratio
50
SAAB MARFIN MBA
2004-05 7396.87 1580.36 4.680
2005-06 9942.93 2443.27 4.070
2006-07 10330.11 4133.72 2.499
2007-08 12162.82 4642.11 2.620
2008-09 32933.30 4447.14 7.406
Analysis
IFFCO has a high working capital turnover ratio.
A high or increasing Working Capital Turnover is usually a Positive Sign,
showing the company is better able to generate sales from its Working
Capital. The company has been able to gain more Net Sales with the smaller
amount of Working Capital in 2008-09 as compared to that in 2007-08. The
working capital turnover had been decreasing from 4.860 in the year
2004-05 to 2.499 in 2006-07 but it increasing since then to 7.406 in the
year 2008-09.
6. Sales to working capital ratio
Working Capital = Current Assets - Current Liabilities
Sales to
Working
Capital Ratio
=
Sales
51
SAAB MARFIN MBA
Year
Sales
(in Crores)
Working Capital
(in Crores)
Sales to Working
Capital Ratio
2004-05 7396.87 1580.36 4.680
2005-06 9942.93 2443.27 4.070
2006-07 10330.11 4133.72 2.499
2007-08 12162.82 4642.11 2.620
2008-09 32933.30 4447.14 7.406
Analysis
The Sales to Working Capital ratio measures how well the company's working
capital is being used to generate sales. Working Capital represents the
major items typically closely tied to sales, and each item will directly affect
this ratio. Increasing Sales to Working Capital ratio is usually a positive sign,
indicating the company is more able to use its working capital to generate
sales.
The sales to working capital ratio has been increasing from 2007-08 for
IFFCO which is good as it implies that the company is generating more &
more sales and is able to utilize its working capital more efficiently with the
passing years. The decrease of the ratio in the previous years was due to the
increase in inventory holding which was required for the Paradeep production plant.
Profitability Ratios
1. Return on Assets
Return on Assets =
Profit After Tax
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SAAB MARFIN MBA
(ROA)
Average Total Assets
Analysis
ROA is an indicator of how profitable a company is relative to its total
assets. The ROA figure gives investors an idea of how effectively the
company is converting the money it has to invest into net income. The
higher the ROA number, the better, because the company is earning more
money on less investment.
At IFFCO, the ROA is increasing from the year 2006-07 which is good for
the company. Earlier it was decreasing as there was increase in the assets
due to purchase of the production plants.
2. Return on Equity
Return on
Equity (ROE)
=
Profit After Tax
Average Equity
Year
Profit After
Tax (in
Crores)
Average Total
Assets
(in crores)
ROA
2004-05 319.64 4449.22 0.072
2005-06 341.35 6709.33 0.051
2006-07 175.02 9855.58 0.018
2007-08 257.59 10830.24 0.024
2008-09 360.01 14151.13 0.025
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Year
Profit After Tax
(in Crores)
Average Equity
(in crores)
ROE
2004-05 319.64 3205.37 0.100
2005-06 341.35 3428.27 0.100
2006-07 175.02 3598.61 0.049
2007-08 257.59 3665.25 0.070
2008-09 360.01 3823.77 0.094
Analysis
Return on Equity measures the rate of return on the ownership interest of
the common stock owners. It measures a firm's efficiency at generating
profits from every unit of shareholders' equity. ROE shows how well a
company uses investment funds to generate earnings growth.
From the data, IFFCO ROE had always been good. There was a decrease in
the year 2006-07 due to the purchase of Paradeep plant which increased the
purchases of the organization.
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3. Return on Capital Employed
Year
Profit Before Tax
(in Crores)
Average Capital
Employed
(in crores)
ROCE
2004-05 470.92 4449.22 0.1058
2005-06 481.90 6709.33 0.0718
2006-07 251.25 9855.58 0.0255
2007-08 380.52 10830.24 0.0351
2008-09 441.95 14151.13 0.0312
Analysis
ROCE is used to prove the value the business gains from its assets and
liabilities. It basically can be used to show how much a business is gaining
for its assets, or how much it is losing for its liabilities. At IFFCO, ROCE had
shown variable changes. This is due to the variable increments in the
capital employed (majorly the loan funds) as compared to the profit before
tax.
Return on
Capital
Employed
(ROCE)
=
Profit Before Tax
Average Capital Employed
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4. Net Profit Margin
Net Profit
Margin
=
Profit After Tax
Sales
Year
Profit After Tax
(in Crores)
Sales
(in Crores)
Net Profit Margin
2004-05 319.64 7396.87 0.043
2005-06 341.35 9942.93 0.034
2006-07 175.02 10330.11 0.017
2007-08 257.59 12162.82 0.021
2008-09 360.01 32933.30 0.011
Analysis
Net profit margin ratio establishes a relationship between net profit and
sales and indicates managements efficiency in manufacturing, administering
and selling the products. This ratio is the overall measure of the firms ability
to turn each rupee sales into net profit.
From the data, IFFCO have a variable net profit margin. The sales turnover
depend upon the element of subsidy which is decided by the government
from time - to - time depending on the condition of international market.
During the year 2008-09, the component of subsidy increased tremendously
due to high international fertilizer price. Looking at the turnover of 2008-09,
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the subsidy amounted to Rs. 25545.60 crores vis--vis to subsidy amounted
to Rs. 6194.35 crores for the year 2007-08.
Loans and Advances to Current Assets
Loans and
Advances to
Current Assets
Ratio
=
Loans and
Advances X 100
Current Assets
Year
Loans and
Advances (in
Crores)
Current Assets
(in Crores)
Loans and
Advances to
Current Assets
Ratio
2004-05 1148.77 2603.98 44.116
2005-06 2656.70 4748.98 55.943
2006-07 3104.82 6081.28 51.055
2007-08 3541.56 5775.74 61.318
2008-09 5464.77 7672.99 71.221
Analysis
As per the data, it can be clearly said that the position of the Loans &
Advances with respect to current assets is increasing every year (a marginal
decrease in the year 2006-07) which is very Good for IFFCO. The ratio was
around 44.116% in 2004-05 which had increased to 71.221% in 2008-09.
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Loans and Advances to Working Capital
Loans and
Advances to
Working Capital
Ratio
=
Loans and
Advances
X 100
Working Capital
Year
Loans and
Advances (in
Crores)
Working Capital
(in Crores)
Loans and
Advances to
Working Capital
Ratio (%)
2004-05 1148.77 1499.14 76.629
2005-06 2656.70 3387.39 78.429
2006-07 3104.82 4880.05 63.623
2007-08 3541.56 4404.17 80.414
2008-09 5464.77 4490.10 121.707
Analysis
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This ratio shows how significant Loans & Advances Are to Working Capital
and that Loans & Advances plays an important role in working capital
management of IFFCO. This ratio shows that the company has more cash in
hand and can utilize these funds as per the company requirement.
At IFFCO, this ratio has always been increasing which is good for the
organization. This means that company is having enough cash and utilizing
it effectively.
Working Capital Position
Working Capital
=
Current Assets - Current
Liabilities
Year
Current Assets
(in Crores)
Current
Liabilities
(in Crores)
Working Capital
(in Crores)
2004-05 2603.98 1104.84 1499.14
2005-06 4748.98 1361.58 3387.40
2006-07 6081.28 1201.23 4880.05
2007-08 5775.74 1371.57 4404.17
2008-09 7672.99 3182.89 4490.10
Analysis
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Working Capital Position indicates changes in Current Assets and Current
Liabilities over the study period and also during a particular year. Working
capital position shows operational efficiency & proper utilization of short
term resources in an organization.
The trend of working capital with respect to Current Assets and Current
Liabilities for IFFCO is increasing. This shows a GOOD GROWTH of the
company. The Working Capital is managed properly & efficiently by the
organization. However, there was decrease in the year 2007-08 due to
decrease in the level of inventory.
Comparison with some competitors in the Industry
IFFCO
Coromandel
International
National
Fertilizers
Fertilizers
and
Chemicals
Travancore
Chambal
Fertilizers
Net Worth 3958.87 1127.14 1470.70 647.94 1234.35
Sales Turnover 32933.30 9374.98 5127.10 706.89 4595.53
Net Profit 360.01 496.38 97.46 42.95 230.56
Inventory 1731.36 1347.51 348.68 412.60 316.82
Total Current Assets 7672.99 3726.38 1525.51 823.53 1566.28
Total Current Liability 3182.89 1755.02 886.65 392.21 1288.58
Working Capital 4490.10 1971.36 638.86 431.32 277.70
Total Assets 17303.77 2926.50 1851.19 1457.77 3982.04
Working Capital to Sales
Turnover 0.136 0.210 0.125 0.610 0.060
Inventory to Working
Capital 0.386 0.684 0.546 0.957 1.141
Working Capital Ratio 2.41 2.12 1.72 2.10 1.22
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Findings
After the analysis of the components of current assets & current
liabilities and the trends of working capital, we find that
Current assets are increasing more than current liabilities. But the
current ratio has decreased as the percentage increase in current
liabilities is more than the current assets.
Cash and Bank Balances have decreased during this period which
indicates proper utilization of funds at IFFCO.
Position of inventory is Very Good in current assets (22.564%).
Inventory Turnover Ratio increases consistently, which shows greater
degree of utilization of inventory during the study period.
Position of Debtors to Current Assets is 5.307%. This ratio had
decreased during this period with an increase in the year 2007-08.
This increase was due to the significant increase in the debts of the
company.
Loans and Advances are increasing every year and contribute majorly
to current assets. This means that the company is not facing any
problem to get the required short term financing.
Working Capital
Turnover 7.41 6.21 7.06 1.97 9.63
Inventory to Current
Assets 0.226 0.362 0.229 0.501 0.202
Inventory to Sales 0.053 0.144 0.068 0.584 0.069
Net Profit Margin 0.011 0.053 0.019 0.061 0.050
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Large part of working capital is involved in maintaining inventory and
it depends on the level of inventory every year.
Working capital of the company had increased till 2006-07 after which
it has remain constant with small changes.
Debt to equity ratio increased during the year 2008-09 as the debt
increased due to increase in short term borrowings.
Inventory as a component of current assets was high during the
beginning of the period after which it has continuously decreasing.
Net profit margin decreased in the year 2008-09 because of the
significant increase in the raw material prices and consequent increase
in subsidy. Looking on the trends, IFFCO has been able to manage the
profits.
The major variation in the ratios during this period is due to the
purchase of Paradeep production plant.
Conclusions and Suggestions
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Working capital is one of the most important aspects of operational
efficiency of business. Working Capital plays a very important role in the
functioning of any organization. Both the current assets and current
liabilities are very much influencing factors on the working capital of an
organization.
After the discussion and analysis of the financial position of IFFCO Ltd., it is
clear that the working capital of IFFCO is in sound position. Working capital
is not measurable by only current assets & current liabilities but there
are some other factors also that have an influence on the working capital.
In current assets, there are two most important factors, Debtors and
Inventory that affect working capital. In IFFCO Ltd., Inventory and Debtors
are efficiently managed to strengthen the position of the organization both
in short term and long terms.
After analyzing and interpreting the financial data of INDIAN FARMERS
FERTILIZER COOPERATIVE LIMITED (IFFCO) with the help of Ratio Analysis,
the following suggestions were given to the organization for further
betterment & improvement in the working capital:
The present status and levels of current assets is extremely good and
therefore it requires proper maintenance.
The current percentage of inventory is high which is not good for
operational efficiency and sound working capital and thus, it need to
be controlled by using various inventory management techniques such
as JIT or Kanban. Another alternative would be to have varying stock or
inventory levels during the different seasons or even months and,
thereby, altering the production to suit such needs.
Cash balances have a lower percentage in current assets. This requires
some concern as cash and bank balances are the most liquid of all
current assets.
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As the sales turnover majorly consists of subsidiary, the company shall
also depend less on subsidy which is dependent on the annual budget
fixed by the government of India, i.e., when the total outflow of any
financial year is more than the budgeted subsidiary, the
manufacturers/ importers have to wait for additional budget or their
subsidiary get realized in the next financial year.
As the Government of India wants the fertilizers to be supplied at
minimum price, they are compensating manufacturers/ importers by
means of subsidy. The government should device a method whereby
the price of fertilizers should increase every year to some extent. This
will reduce the subsidy burden on the government and companies will
be able to realize cash against their sales.
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CASH MANAGEMENT AT IFFCO
IFFCO, a large co-operative society, has been generating large amount of
profits over the years from the date of its commercial production. Its internal
sources generation has been adequate enough to finance the working capital
need besides its other long term commitments though to meet its working
capital requirements. The main objective of Cash Management of IFFCO is
not different from the basic objective of cash.
Figure: Cash flow at the Organization
The cash is collected by Marketing Central Office (Mkco) and is transferred to
the Head Office (HO). From the Head Office, the cash is provided to the
plants depending on their requirements. The plants produce fertilizers and
the sale of products provides cash which is collected by Marketing Central
Office. Sales are often termed as Release Order (RO).
The fertilizers are sold to corporate societies and most of the payments are
made on prepaid basis. The payments are done through the means of
demand drafts/ pay orders. The system of payment through cheques is not
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SAAB MARFIN MBA
used further. There are very few service centres which transacts in cash.
There is very small amount of credit for a defined credit period, only to large
federations. The Field Representatives (FR) takes Demand Drafts/ pay orders
from the corporate societies before the Release Order.
IFFCO has been effectively managing the cash in the following ways:
To measure the cash flow time line and assess the magnitude of
savings that could result from the alternative management strategies.
To compare the length of timeline with that of other companies in the
industry or standard set by the company.
To not permit cash to stand idle for as much as a day
To know the requirements of funds at various units at different
periods of time
Repayment of loans and debt has been one of the prime objectives
To make every effort to speed up the flow
Bankers of IFFCO
Indian Overseas Bank
State Bank of India
Bank of Baroda
Standard Chartered Bank
The Maharashtra State Cooperative Bank Ltd.
The West Bengal State Cooperative Bank Ltd.
Madhya Pradesh State Cooperative Bank Ltd.
The Karnataka State Cooperative Bank Ltd.
The Punjab State Cooperative Bank Ltd.
The Hong Kong and Shanghai Banking Corporation Ltd. (HSBC)
ICICI Bank Ltd.
IDBI Bank Ltd.
HDFC Bank Ltd.
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Punjab National Bank
Axis Bank
BNP Paribas
Implementation of Cash Management at IFFCO
In order to effectively manage its cash, so as to sustain liquidity and
profitability, IFFCO has chosen to go for a Centralized Cash Management
System. The Centralized Cash Management System means that the cash of
IFFCO is basically managed from the Head Office situated at New Delhi. In
order to smoothly manage the cash, IFFCO takes the service of IOB, its main
bank from the consortium of bank. IOB plays the part of maintaining the
daily fund position of IFFCO i.e. on a daily basis the cash inflows and
outflows are recorded in computer and are daily analyzed by the cash and
bank section of IFFCO, which also carries out its daily position on the fund
statement book.
This Centralized Cash Management at IFFCO also helps in to check the idle
cash, which would otherwise have a cost structure attaches to it. Through
this system, the cash is not allowed to remain idle at various branches and is
used by the co-operative giant to pay its short term liabilities, which may
arise. This system of centralized cash management gives an added
advantage to IFFCO to effectively implement a policy of cash flow timeline
management. IFFCO maintains a strict vigil on the movement of funds for
collection and payments both. Although manufacturing units are
independent enough to issue cheques, but they still have to inform the head
office. It also prepares the budgets and forecasts and matches the actual
with that, so as to have a proper control over transaction.
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A very efficient Management Information System has been introduced at
IFFCO which facilitates:
Forecasting of cash flows on monthly basis or weekly or daily basis,
Helps in cash planning
A Consolidated Statement is prepared at the corporate office which forms
the main basis for planning of funds flow for the continuing month.
Sales Procedure in IFFCO
In IFFCO, there are three systems of sales:
1. Sales through Societies
In the case of Sales through societies, Demand Drafts are received in
advance by IFFCO, i.e. no credit sales are allowed to them. The
Demand Drafts are collected from them and then they are either
deposited with the concern district bank or are sent to state office for
deposit with the respective bank.
2. Sales through Federation
In the case of Sales through Federation, the sales are normally made
on credit basis with a defined credit period. The payments are
normally received by IFFCOs State Office and are deposited with the
respective bank.
3. Sales through IFFCOs Own Service Centre
The sales through IFFCOs own outlets are made on cash basis. These
outlets are called as Farmers Service Outlet (FSC). The funds are
deposited with the bank on daily basis and are transferred by the bank
to IFFCOs state office.
In IFFCO, all the realization of sale proceeds is centralized to IFFCOs Delhi
Office i.e. the funds are ultimately reaching Delhi for utilization, for IFFCOs
manufacturing units. The funds that are sent to Delhi are then again
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SAAB MARFIN MBA
redistributed to the manufacturing units and all the other offices, farmer
service centers, cooperative societies etc. for meeting their expenses.
Collection Procedure
In earlier times, Field Representatives takes the Demand Drafts/ pay orders
and deposits into Area Office. From Area Office it goes to State Office. From
State Office, Demand Draft goes to Marketing Central Office and in the end,
to the Head Office. This process takes around six days. Due to this delay, the
transaction cost was high and there was a loss of interest on the payments
received.
After the implementation of CMS, bank services are hired for better
management of cash. The Field Representatives collects the Demand Drafts
from the societies. The bank agent collects these Demand Drafts and
deposits them into the State offices, either in person or through courier.
From State Offices, the drafts get deposited into the banks through bank
agents only. The bank then transfers the money to the Head Office. This
process takes one day or a maximum of two days. Thus, it saves at least four
days and cash of the organization. There are different banks for different
state offices. For the service provided by the banks, different banks charge
the organization differently.
Cash savings can be classified as follows:
Direct savings
Direst Savings are the savings on the interest of the days for which the
organisation has received its cash earlier.
Indirect savings
It includes administrative cost reduction (transaction and
transportation cost). Since the bank is agreement bound, in case of
delays, it covers up some of the losses of the organisation.
The savings can be explained as following. The collection through CMS in the
year 2008-09 was approximately Rs. 5250 crores. As there is more than one
bank in the CMS, an approximate interest rate of 8 % p.a. is taken for
calculations. Also, a difference of four days is taken. On calculating, the
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interest comes out to be Rs. 4.6 crores. This means that IFFCO saves around
Rs. 4.6 crores in the year 2008-09 due to implementation of CMS.
Cash Management Services (CMS)
The Cash Management Services (CMS) is a technology driven system in which
bank is under contractual obligation to make payment at the designated
branch on the stipulated date as agreed in the agreement. Under this system,
the banks pick up the Demand Drafts from IFFCOs designated locations and
pool the same with them. A High Value Demand Draft of the consolidated
amount is deposited by the collecting bankers in IFFCOs central account for
which IFFCO receives the credit the same day. Thus, the amounts which are
collected on day zero are received on IFFCOs Central Account on day one.
Salient features of Cash Management Services (CMS)
Cash Management is the stewardship or proper use of an entitys cash
resources. It serves as the means to keep an organization functioning by
making the best use of cash or liquid resources of the organization. At the
same time, the organization has the responsibility to use timely, reliable and
comprehensive financial information systems. Cash Management helps the
organization in:
Eliminating idle cash balances
Monitoring exposure and reducing risks
Ensuring timely deposit of collections
Properly timing the disbursements
Reducing the interest costs
Improving the liquidity as it reduces the transit time enabling the firm
to realize drafts earlier.
Better accounting and Reconciliations as detailed information on drafts
deposited are made available on a daily, weekly/periodically basis,
thus simplifying accounting, reconciliation and query resolution.
Customized Management Information System (MIS) as per
requirements of the firm can also be made available.
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SAAB MARFIN MBA
Interconnectivity with the branch offices increases as these banks
provide a host of internet software on the CMS account that allows the
firm to view current account balances, download statements, view CMS
collections, effect payments/receive payments online, plus a host of
other activities.
Collection Services by these banks ensure quick realization of local
and outstation drafts on day zero and provide the funds in a central
collection account on day one.
Costs and Benefits of CMS
Before the introduction of cash management services, various
branches of banks at area offices used to take 2-3 days in transferring
the funds to IFFCOs Central Account. But with the coming of the CMS,
the amount which are collected (as a high value drafts) on day zero,
are received on IFFCOs Central Account on day one.
Due to late transfer of funds, late payments were made due to which
IFFCO was losing a lot of amount of money in the form of interests and
penalties. But now, since the transfer of funds is done through CMS,
IFFCO is saving a lot of interest as the cash credit utilization has been
reduced to the extent of amount received in that account.
With the introduction of CMS, there is a timely remittance of funds and
in the case the bank with whom the CMS agreement has been made
fails to make timely remittance, then they are bound to pay interest on
late transfer of funds.
DETAILS OF STATE WISE EXISTING CMS BANKS
NAME OF BANK STATE
PICK UP
LOCATION
SERVICE
CHARGES
PAY OUT
DAY
HSBC Punjab Chandigarh NIL Day 1
Haryana Chandigarh NIL Day 1
Rajasthan Jaipur NIL Day 1
West Bengal Kolkata NIL Day 0 (HV)
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Day 1
Maharashtra Mumbai NIL Day 0 (HV)
Day 1
Pune NIL Day 1
Nagpur NIL Day 1
Aurangabad NIL Day 2
Other Districts NIL Day 2
BNP PARIBAS Nasik 0.15/1000 Day 2
Kholapur 0.15/1000 Day 2
Other Districts 0.15/1000 Day 2
Standard
Chartered Assam Assam NIL Day 1
Bank A. P. A. P. NIL Day 1
Karnataka Karnataka NIL Day 1
Tamil Nadu Tamil Nadu NIL Day 1
Orissa Orissa NIL Day 1
Kerala Kerala NIL Day 1
HDFC Bank HP NIL Day 2
J & K NIL Day 1
Bihar Patna NIL Day 1
Gaya NIL Day 2
Bhagalpur NIL Day 2
Muzzafarpur NIL Day 2
Jharkhand Ranchi NIL Day 2
Uttaranchal Dehradoon NIL Day 2
Haldwani NIL Day 2
Rudraprayag NIL Day 2
ICICI Bank Uttar Pradesh Lucknow NIL Day 0 (HV)
Day 1
All 13 Area
Offices 0.02/1000 Day 1
IOB Gujrat Ahemdabad NIL Day 1
Chhatisgarh Raipur NIL Day 1
MP Bhopal NIL Day 1
SBI Uttar Pradesh FSC NIL Day 1
Axis Bank Uttar Pradesh 38 Districts NIL Day 1
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HV: High Value
FSC: Farmers Service Centre
Cash Management Services (CMS) Agreement through the HSBC
Bank
Introduction of Cash Management Services (CMS)
IFFCO is availing the cash management services of m/s HSBC bank for
remittances of sale proceeds in the states of Punjab, Haryana, Rajasthan,
West Bengal and Maharashtra. Collection services agreement was made on
28
th
December2001 between IFFCO and HSBC. The bank will be providing its
services known as Collection Services in the manner and subject to terms
and conditions set out hereunder:
1. These services shall cover instruments (demand drafts/ pay orders)
favouring IFFCO and marked A/c Payee only, that are
Locally payable at specified HSBC branch locations
Locally payable at other specified locations
Outstation instruments payable at specified locations
Outstation instruments payable at all other locations
2. Demand drafts etc., pickups by courier services shall be arranged at
IFFCOs offices in Mumbai, Pune, Aurangabad, Nagpur, at 1000 hrs
and 1430 hrs by HSBC free of charge. This will aid HSBC in maintaining
their service levels of Day 1 credits for Mumbai, Day 1 credit for Pune,
Day 1 credit for Nagpur and Day 2 credit for Aurangabad for all
cheques picked up on Day 0. (Day 0 being the date of collection in the
clearing locations.)
3. HSBC shall refund interest @ HSBC PLR 15.50% - 4 % to IFFCO in case
of delayed credits to IFFCOs account. IFFCO will be required to pay
interest @ HSBC PLR 15.50% - 4% to HSBC in case of demand draft
returns for the period during which the bank will be out of funds.
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SAAB MARFIN MBA
4. In the unlikely event of an instrument being misplaced whilst in transit
after being picked up/ acknowledged by HSBCs courier and credit not
made available to IFFCO as per the contracted agreement, HSBC shall
pay interest to IFFCO @ HSBC PLR 15.50% - 4% for the delayed period
to a maximum period of 30 days. HSBC shall provide all assistance to
IFFCO to procure a duplicate demand draft to put a stop payment in
order that a duplicate instrument is issued at the earliest.
5. In the event drafts are lost in transit, HSBC shall debit IFFCO for the
same, and HSBCs statement intimating the non-payment of the
instrument(s) will be final and binding on IFFCO.
6. HSBC can make MIS available at the check pickup points, the State
Offices as well as Marketing Head office in New Delhi to aid
reconciliation and to help IFFCO exercised greater control on the
collections. The MIS can be amended to contained draft wise or
deposit slip wise details as per IFFCOs requirements.
Management information system (MIS) report
MIS report contains the demand draft number, amount collected and the
cheques deposit slip number. Marketing Central Office checks the amount
collected by different State Offices and verifies it to that collected by banks.
A customized MIS provided by HSBC bank can include:
Daily report of deposits made at various locations
Location wise report
Credit Forecast report
Monthly cumulative report-date wise/location wise
Monthly charging statement
Monthly draft return statement
Customized reports as per mutual agreement
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HSBC has a large pool account which has a dummy account of IFFCO. The
bank takes one day for realization of money and deposits it directly in the
account of Head Office at New Delhi. The bank provides details to Marketing
Central Office (Mkco) and other offices (SO, AO, FR) through Management
Information System (MIS) report.
If there is any mismatch in the value of MIS report or any other problem/
query, the department contacts it immediate lower department only.
In CMS, the banks used are as follows:
The HSBC Bank
BNP Paribas
Indian Overseas Bank
Standard Chartered Bank
The ICICI Bank
State Bank of India,
HDFC Bank
Axis Bank
The collection of BNP Paribas, Standard Chartered Bank, ICICI Bank, HDFC
Bank and Axis Bank are deposited into the centralized account of IOB
whereas the collection of HSBC bank is deposited into centralized account of
SBI. SBI manages the collection of 5 states only out of total of 20 states. As
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SAAB MARFIN MBA
the money comes into these banks, it is transferred to the Head Office by the
evening. Through Head Office, the money is distributed into various
departments as per the requirements.
For Collecting Payment
Current Features
1. DDs collected by the state/area offices are picked up by an authorized
agent of the banks and sent for collection.
2. Banks also pick up the high value instruments from the pickup
location before the high value cut off time, present for clearing and
effect the pooling on the same day at the nodal account.
3. Banks gives credit to the main pooling account on a pre agreed day.
4. The collections are transferred the same day to the cash credit account
of IFFCO as per the standing instructions through a high value
instrument.
5. Banks gives detailed management information system report as per
the requirements of IFFCO.
6. This collection account is used for funding the disbursement of
manufacturing units.
Reporting
The month wise projections of collections for the year are made in advance.
Daily reports of collection against sales proceeds are made and are
submitted in the higher departments for comparison with the projections.
Disbursement of Funds
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In addition to CMS, IFFCO has an innovative disbursement scheme known as
Anywhere Banking Overdraft Account facility with IDBI and HDFC Bank.
Under this scheme, the balances of all the state offices maintain are
transferred to the Central Account having overdraft facilities whereby the
balances with the state offices remain zero.
Anywhere banking (ANB) Facility
ANB facility offers IFFCO the flexibility of making at par payments across
multiple locations by using a single current account maintained at Delhi.
All the payments are made through IDBI and HDFC banks. IDBI is used in 17
states and HDFC in 3 states (Jammu, Assam, HP). Overdraft limit of IDBI is Rs.
229 crores whereas that of HDFC bank is Rs. 20 crores. Till the overdraft
amount is being paid, interest is debited by the bank to Head Office through
Marketing Central Office.
For all transactions within the local region (within the New Delhi offices), IOB
is used. It also transacts all the local expenses of the Marketing Central
Office.
All payments are made through cheques only. But, all employee payments
and reimbursements are made through cash.
Advantages of ANB Facility
Better Fund Management by Reducing Idle Balances: ANB obviates
the need to maintain idle funds at multiple locations leading to better
funds management.
Minimum Multiple Bank Account: ANB obviates the need for having
multiple accounts at different locations. It, thus, reduces the number
of bank accounts at different locations leading to lower administrative
load and reduces bank reconciliation.
No service charges: As there is no need of transfer of funds under
anywhere banking system, the organization saves service charges
which they used to pay earlier under the traditional system.
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Observations
70 % of Sales activity in the business of fertilizers is in Monsoons and
the balance 30% is spread throughout the rest of the year. The month
from April to September is known as Kharif Season and from October
to March is known as Rabi Season. The GOI is estimating the demand
based on Kharif and Rabi season and is allocating the supply plans
accordingly.
Investments made by IFFCO
As on 31st March 2009, the Society holds Government of India
Fertilizer Bonds amounting to Rs. 6,638.95 Crores (previous year Rs.
646.16 Crores) bearing different rates of interest as per details
hereunder:
Investments
(in Rs.
Crores)
As at
31.03.2009
As at
31.03.2008
7.95% Fertilizer Companies GOI Special
Bonds, 2026 646.16
Bonds, 2022 2900.97
Bonds, 2022 2106.33
Bonds, 2023 1631.65
TOTAL 6638.95 646.16
Since the GOI was short of funds, they have issued the above bonds which
have disturbed the cash position of the society.
Subsidies from government
The entire fertilizer industry gets subsidy from the government of
India.
In IFFCO, since the society is dealing in Urea and Phosphate
Fertilizer, there are two system of claiming subsidy.
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The subsidy on urea is received on the retention price fixed for the
group of companies. That is, under this the subsidy is given as a
difference between the sales price and the retention price.
Retention Price includes cost of production (i.e. cost of raw
materials, utilities, fixed cost, freight cost, marketing & selling &
distribution expenses). Norms are set in by GOI for fixing retention
price from time to time.
The basic intention of following the retention price scheme is to
give fertilizers to the farmers at a subsidized rate.
In addition to the retention price subsidy, GOI is also reimbursing
Freight towards primary and secondary freights to the
manufacturers of controlled fertilizers (Urea) to cover the cost of
transportation from the production plants to the consumption
centres.
Nitrogenous Fertilisers are under the Concession Scheme as
notified by Government of India (GOI) from time to time. The
subsidy on Nitrogenous Fertilisers is decided on month to month
basis depending upon the input price escalation/ de-escalation
based on the norms prescribed or notified under the subsidy
scheme. The GOI is also reimbursing the actual fright on primary
transportation and fixed amount on secondary transportation.
The Phosphatic Fertilizer has been decontrolled and Concession on
Phosphatic Fertilisers has been accounted for based on monthly
concession rate as notified by Government of India. Pending
notification of monthly concession rate applicable for the period
January, 2009 to March, 2009, the same has been accounted for on
an estimated basis in line with the known policy parameters.
However, in order to make available the fertilizer at a low rate to the
farmers, the government is allowing subsidy to the manufacturers. This
amount is notified by the government for every month on the basis of the
raw material prices of fertilizer.
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Central Subsidy on Fertilizers
Year Urea Decontrolled Total Subsidy
Imported Indigenous Total
P & K
Fertilizers
on all
Fertilizers
2004-05 494 10243 10737 5142 15879
2005-06 1211 10653 11864 6596 18460
2006-07 3274 12650 15924 10298 26222
2007-08 6606 16450 23056 16934 39990
2008-09 10981 19517 30498 65351 95849
2009-10 5948 9780 15728 34252 49980*
*budgeted
In the year 2008-09, there was a large increase in the subsidy. This was due
to the increase in the prices of the imported raw materials and finished
goods (for resale). The price for these goods is usually US$370 per metric
tonne but during 2008-09 it was US$1200 per metric tonne.
Conclusion
The organization IFFCO is basically a Farmers Organization. It
functions in the cooperative sector of India and is owned by the
Government of India along with the cooperative societies. IFFCO is one
of the most profitable and financially secure fertilizer companies in
India.
The generation of funds through sale is a seasonal factor. 70% of Sales
activity in the business of fertilizers is in Monsoons and the balance
30% is spread throughout the rest of the year. The month from April to
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September is known as Kharif Season and from October to March is
known as Rabi Season. Thus, it becomes imperative for the
organization to have such cash management system in place that
would enable the organization to plan the excess cash obtained during
surplus periods and ploughs them back into the operations of the
organization during deficit periods.
The Cash Management System at IFFCO is very sound and efficient. It
has enabled the organization to manage its funds in a proper manner
resulting in better utilization and availability of funds in cash deficit
periods.
Today IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI
Bank that are providing IFFCO with facilities such as cash management
services, personalized financial MIS to enable IFFCO to accelerate the
collection and payment of funds, debit sweep option, Anywhere
banking facility, etc. All these facilities have helped IFFCO in having
faster, more secure and more reliable collection and payments of
funds and cheques from its various Area/State Offices.
However, despite all the advantages of this New Cash Management
System such as receiving the proceeds from the sale of fertilizers
within First day of sale, reduction in the amount of interest loss
suffered by IFFCO due to late arrival of payments, daily report of
deposits made at various locations, location wise report, credit
forecast report, monthly cumulative report date wise/ location wise,
monthly charging statement, monthly cheque return statement,
customized reports as per mutual agreement etc. the cash
management system can be further improved.
Suggestions to Improve the Cash Management System
By making an analysis of all the collection at other locations and
implementing the same at state offices also.
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At present, the banks with whom the CMS agreements have been made
are not the consortium members of IFFCOs Lead bank. In case, these
banks are also included as consortium members, IFFCO shall have an
additional advantage as they shall be in the position to utilize their
payments directly from their Cash Credit Accounts.
IFFCO should focus on implementation of RTGS (Real Time Gross
Settlement) and NEFT (National Electronic Fund Transfer) facilities
which will improve the cash transfer at IFFCO.
References
Books
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Brealey, R A, Myers, S C, Alan, F and Mohanty, P 2008. Principles
of Corporate Finance. Tata McGraw-Hill Publications, New Delhi,
8
th
SIE Edition.
Chandra, T K, Seti, Kuldeep and Robertson, C 2010. Fertilizers
Statistics 2008-09. Fertilizers Association of India (FAI), New
Delhi.
Ramachandran, N and Kakani, Ram 2008. Financial Accounting
for Management. Tata McGraw-Hill Publications, 2
nd
Edition.
Pandey, I M 2005. Financial Management. Vikas Publishing
House, 9
th
Edition
Reports
Annual reports of IFFCO
Agreement files of IFFCO
Websites and Internet
www.iffco.nic.in
www.wikipedia.com
www.investopedia.com
www.fert.nic.in
www.faidelhi.org
www.moneycontrol.com
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Appendix A: Working Capital Management
Working Capital Management is the interaction between current assets and
current liabilities. The current assets refer to those assets, which in ordinary
course of business can be, or will be turned into cash within one year
without undergoing a diminution in value and without disrupting the
operation of the firm.
Decisions relating to working capital and short term financing are referred to
as Working Capital Management. This involves managing the relationship
between a firm's short-term assets and its short-term liabilities. The major
thrust is on managing the current assets because a current liability arises in
context of current assets.
The goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both
maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing of:
Accounts receivable (current asset)
Inventory (current assets),
Accounts payable (current liability), and
Cash (current asset)
The management of current assets is similar to that of fixed assets in the
sense that in both cases the firm analyses their effects on its return and risk.
However, the management of fixed and current assets differs in THREE ways:
1. In the management of fixed assets, time is very important
consequently, discounting and compounding aspects of time element
play a significant role in capital budgeting and a minor one in the
management of current assets.
2. Large holdings of current assets especially cash strengthen times
liquidity (and reduces riskiness) but also reduces overall profitability.
3. The levels of fixed as well as current assets depend upon the
expected sales, but it is only the current assets, which can be
adjusted with sales fluctuations in short runs.
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In examining the management of current assets, answers will be sought to
the following questions:
What is the need to invest funds in the current assets?
How much funds should be invested in each type of current assets?
What should be the proportion of long term and short term funds to finance
current assets?
What appropriate sources of funds should be there to finance current assets?
A company can be endowed with assets and profitability but short of
liquidity if its assets cannot readily be converted into cash. Positive working
capital is required to ensure that a firm is able to continue its operations and
that it has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses.
Working Capital Management is a significant part of financial management.
Its importance arises from two reasons:
Investment in current represents assets a substantial portion of total
management.
Investment in current assets and the level of current liabilities have to
be geared quickly to changes in sales. To be sure, fixed assets
investment and long term financing are also responsive to variations in
sales. However this relationship is not as close and direct as it is in the
case of Working Capital Management.
Hence in this study an attempt has been made to analyze the size and
composition of working capital and whether such an investment has
increased or declined over a period of time.
Financial manager now a day is responsible for shaping the fortunes of the
enterprise, and is involved in the most vital decision of the allocation of
capital. There is a need to have a broader and farsighted outlook and must
ensure that the funds of the enterprise are utilized in the most efficient
manner .One of the most important task of financial manager is to select an
assortment of appropriate sources of finance for the current assets. Normally
the excess of current assets over current liabilities should be financed by
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long-term sources. Precisely it is not possible to find out which long term
sources has been used to finance current assets, but it can be examined as
to what proportion of current assets has been financed by long term funds.
Therefore, an attempt has been made in this regard.
In working capital analysis the direction of change over a period of time is of
crucial importance. Not only that, analysis of working capital trends provides
a base to judge whether the practice and prevailing policy of the
management with regards to the working capital is good enough or an
improvement is to be made in managing the working capital funds.
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Hence in this study, an attempt is made about the trends of the working
capital management of selected enterprise. In addition, to have higher
profitability the firms may sacrifice solvency and maintained a relatively low
of current assets. When the firms do so their profitability will improve and
less are tied up in the idle current assets, but their solvency will be
threatened. Hence, an attempt is made to study the association of
profitability with the working capital ratios. With this view, an effort has been
made in this project report to make an in-depth study of IFFCO in respect of
its performance and its working capital management.
Types of Capital
Every business needs funds for two purposes for its establishment to carry
out its day-to-day operations. Capital required for business can be classified
under two main categories:
1) Fixed Capital
2) Working Capital
Fixed Capital
Long term funds are required to create production facilities through
purchase of fixed assets such as plant & machinery, land, buildings,
furniture, etc. investments in these assets represents that part of firms
capital, which is blocked on a permanent or fixed basis and is called fixed
capital.
Working Capital
Funds are also needed for short-term purpose for the purchase of raw
materials, payment of wages and other day-to-day expenses, etc. These
funds are known as Working Capital. There are two concepts of working
capital:
1. Gross working Capital
2. Net working Capital
Gross Working Capital
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Gross working capital refers to the firms investment in current assets.
Current assets are the assets which can be converted into cash within an
accounting year or within an operating cycle. The items comprising of
current assets are:
Cash
Marketable securities
Accounts receivable
Notes or bills receivable
Prepaid expenses
Merchandise inventory
Manufacturing inventory
Net Working Capital
Net Working Capital refers to the difference between the current assets and
current liabilities. Current liabilities are those claims of outsiders which are
expected to mature for payment within an accounting year or the operating
cycle of the business. The items comprising of current liabilities are:
Accounts Payable
Acceptance
Promissory Notes Payable
Accrued Liabilities
Estimated Liabilities or Provisions
Bank Overdraft
Contingent Liabilities
Net working capital can be positive or negative. A positive net working
capital will arise when current assets exceed current liabilities. A negative
net working capital occurs when current liabilities are in excess of current
assets. If current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit.
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
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An increase in working capital indicates that the business has either
increased current assets (that is received cash, or other current assets) or
has decreased current liabilities.
Types of Working Capital
Working Capital can be further divided into two types namely:
1) Permanent or fixed working capital
2) Variable or temporary working capital
Permanent or Fixed working capital
There is always a minimum level of current assets which is continuously
required by a firm to carry on its business operations. Permanent or Fixed
working capital is the minimum level of current asset. It is permanent in the
same way as the firms fixed assets are. Depending upon the changes in
production and sales, the need for working capital, over and above
permanent working capital will fluctuate. For example: every firm has to
maintain a minimum level of raw material, work-in-progress, finished goods
and cash balance. As the business grows, the requirements of permanent
working capital also increase due to the increases in current assets.
Temporary or Variable Working Capital
Variable working capital is the extra working capital needed to support the
changing production and sales activities of the firm. Both kinds of working
capital permanent and temporary are necessary to facilitate production
and sale through the operating cycle. But the firm to meet liquidity
requirements that will last only temporarily creates a temporary working
capital. Variable working capital can be further classified as seasonal
working capital and special working capital. Most of the enterprises have to
provide additional working capital to meet the seasonal and special needs.
The capital required to meet the seasonal needs of the enterprise is called
seasonal working capital. Special working capital is that part which is
required to meet the special exigencies such as launching of extensive
marketing campaigns for conducting research etc.
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Temporary working capital differs from Permanent working capital in the
sense that it is required for short periods and cannot be permanently
employed gainfully in the business.
W
o
r
k
i
n
g
C
a
p
i
t
a
l
(
i
n
R
s
.
)
Temporary
Working
Capital
Permanent
Working
Capital
Time
Good Management of Working Capital
Good management of working capital is part of good financial
management. Effective use of working capital will contribute to the
operational efficiency of a department; optimum use will help to
generate maximum returns.
Ratio analysis can be used to identify working capital areas, which
require closer management. Various techniques and strategies are
available for managing specific working capital items.
The areas of working capital management are as follows:
Cash management: Identify the cash balance which allows for
the business to meet day to day expenses, but reduces cash
holding costs.
Inventory management: Identify the level of inventory which
allows for uninterrupted production but reduces the investment
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in raw materials - and minimizes reordering costs - and hence
increases cash flow
Debtor management: Identify the appropriate credit policy, i.e.
credit terms which will attract customers, such that any impact
on cash flows and the cash conversion cycle will be offset by
increased revenue and hence Return on Capital (or vice versa);
Short term financing: Identify the appropriate source of
financing, given the cash conversion cycle: the inventory is
ideally financed by credit granted by the supplier; however, it
may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".
Objectives of Working Capital Management
Liquidity vs. Profitability
The basic objective of working capital is to provide adequate
support for the smooth functioning of the normal business
operations of the company. The quantum of investment in current
assets has to be made in such a manner that it not only meets the
needs of the forecasted sales but also provides a built in cushion in
form of safety stocks to meet unforeseen contingencies.
Based on this the companies can follow any of the two approaches
or even a combination of both. A company opting for high
investment in current assets follows the Conservative Approach i.e.
subjected to lower degree of risk. This approach imparts greater
LIQUIDITY to the company.
The other approach is the Aggressive Approach in which the firm
goes for fewer investments in current assets, thus leaving more
amounts of funds for investment in more profitable ventures. This
approach imparts greater PROFITABILITY to the company. An ideal
policy would be the moderate policy, which strikes a balance
between the two approaches.
Choosing the pattern of financing
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The management of financing the chosen level of current assets
once again takes into consideration the attitude of management
towards risk.
Determinants of Working Capital
The working capital requirements of a concern depend upon a large number
of factors. It is not possible to rank them because all such factors are of
different importance and the influence of individual factors changes for a
firm over time. However the following are the factors generally influencing
the working capital requirements:
Nature or character of business
The working capital requirements of a firm basically depend upon the
nature of the business. Public undertakings like electricity, water
supply, and railways need very limited working capital because they
offer cash sales only and supply services. Trading and financial firms
require less investment in fixed assets but have to invest large
amounts in current assets, as they need large amount of working
capital. The manufacturing undertakings also require sizable working
capital along with fixed investments.
Size of business
The working capital requirements of a concern are directly influenced
by the size of the business. Greater the size of a business unit,
generally larger will be the requirements of working capital.
Manufacturing process
In manufacturing business, the requirements of working capital
increase in direct proportion to length of manufacturing process.
Larger the process period of manufacture, larger is the amount of
working capital required. The longer the manufacturing time, the raw
material and other supplies have to be carried far a longer period in
the process with progressive increment of labor and service costs the
finished product is finally obtained.
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Seasonal variations
In certain industries raw material is not available throughout the year.
They have to buy raw materials in bulk during the season to ensure the
uninterrupted flow and process them during the entire year. A huge
amount is thus blocked in the form of material inventories during such
seasons, which gives rise to more working capital requirements.
Rate of stock turnover
There is a high degree of inverse co-relationship between the
quantum of working capital and the velocity or speed with which the
sales are affected. A firm having a high rate of stock turnover will need
lower amount of working capital as compared to a firm having low rate
of turnover.
Firms credit policy
A concern that purchases its requirements on credit and sells its
products/services on cash requires lesser amount of working capital.
On the other hand the concern buying its requirements for cash and
allowing credit to its customers shall need larger amount of working
capital.
Advantages of Adequate Working Capital
The main advantages of maintaining adequate amount of working capital
are as follows:
Solvency of the business
Adequate working capital helps in maintaining solvency of the
business by providing uninterrupted flow of production.
Goodwill
Sufficient working capital enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
Quick and regular return on investments
Every investor wants a quick and regular return on his investments.
Sufficiency of working capital enables a concern to pay quick and
regular dividends to its investors, as there may not be much pressure
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to plough back profits. This gains the confidence of its investors and
creates a favorable market to raise additional funds in the future.
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Ability to face crises
Adequate working capital enables a concern to face business crises in
emergencies such as depression because during such periods,
generally, there is much pressure on working capital.
Regular payments of salaries, wages and other day-to-day
commitments
A company which has ample working capital can make regular
payments of salaries, wages and other day-to-day commitments which
raise the morale of its employees, increases their efficiency, reduces
wastages and costs and enhances production and profits.
Easy loans
A concern having adequate working capital, high solvency and good
credit standing can arrange loans from the banks and others on easy
and favorable terms.
Regular supply of raw materials
Sufficient working capital ensures regular supply of raw materials and
continuous production.
Balanced Working Capital
Every business concern should have adequate working capital to run its
business operations. It should have neither redundant for excess working
capital nor inadequate or shortage of working capital. Both Excess, as well
as short Working capital positions is bad for any business.
Disadvantages of Redundant or Excessive Working Capital
Excessive working capital means idle funds, which earn no profit for
the business, and hence the business cannot earn proper rate of return
on investments.
When there is a redundant working capital, it may lead to unnecessary
purchasing and accumulation of inventories causing more changes of
theft, losses and waste.
Excessive working capital implies excessive debtors and defective
credit policy, which may cause higher incidents of bad debts.
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When there is excessive working capital, relations with the bank and
other financial institutions may not be maintained.
It may result into overall inefficiency in the organization and also due
to low rate of return on investments the value of shares may also falls.
Dangers of Inadequate Working Capital
A concern, which has inadequate working capital, can pay its
short-term liabilities in time. Thus, it will lose its reputation and shall
not be able to get good credits facilities.
It becomes difficult for the firm to exploit favorable market conditions
and undertake profitable projects due to lack of working capital.
The firm cannot pay day-to-day expenses of its operations and
creates inefficiencies, increase costs and reduces the profits if the
business.
It becomes impossible to utilize efficiently the fixed assets due to
non-availability of liquid funds.
It cannot buy its requirements in bulk and cannot avail of discounts,
etc. and also the rate of return on investments also falls with the falls
with the shortage of working capital.
Issues in Working Capital
The financial manager must determine levels and composition of current
assets. He must see that right sources are tapped to finance current assets,
and that current liabilities are paid in time.
There are many aspects of working capital management which make it an
important function of the financial manager:
Time Working capital management requires much of the financial
managers time.
Investment Working Capital represents a large portion of the total
investment in assets.
Critically working Capital management has great significance for all
firms but it is very critical for small firms.
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Growth The need for working capital is directly related to the firms
growth.
It is necessary for a financial manager to manage working capital in the best
possible way to get the maximum benefit.
Financial manager should pay special attention to the management of
current assets on a continuing basis. Actions should be taken to curtail
unnecessary investment in current assets.
There is a direct relationship between a firms growth and its working capital
needs. As sales grow, the firm needs to invest more in inventories and
debtors. These needs become very frequent and fast when sales grow
continuously. The financial manager should be aware of such needs and
finance them quickly. Continuous growth in sales may also require additional
investment in fixed assets.
The finance manager should pay particular attention to levels of current
assets and the financing of current assets.
Policies for Financing Current Assets
A firm can adopt different financing policies vis--vis current assets. Three
types of financing may be distinguished:
Long-term financing The sources of long-term financing include
ordinary share capital, preference share capital, debentures,
long-term borrowings from financial institutions and reserve and
surplus (retained earnings).
Short-term financing The short-term financing is obtained for a
period less than one year. It is arranged in advance from banks and
other suppliers of short-term finance in the money market.
Short-term finances include working capital funds from banks, public
deposits, commercial paper, factoring of receivable etc.
Spontaneous financing Spontaneous financing refers to the automatic
sources of short-term funds arising in the normal course of business.
Trade (suppliers) credit and outstanding expenses are examples of
spontaneous financing. There is no explicit cost of spontaneous
financing. A firm is expected to utilize these sources of finances to the
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fullest extent. The real choice of financing current assets, once the
spontaneous sources of financing have been fully utilized, is between
the long-term and short-term sources of finances.
Depending on the mix of short-term and long-term financing, the
approach followed by a company may be referred to as:
Matching approach
Conservative approach
Aggressive approach
Approaches to Working Capital Management
The objective of working capital management is to maintain the optimum
balance of each of the working capital components. This includes making
sure that funds are held as cash in bank deposits for as long as and in the
largest amounts possible, thereby maximizing the interest earned. However,
such cash may more appropriately be "invested" in other assets or in
reducing other liabilities.
Working Capital Management takes place on two levels:
Ratio analysis can be used to monitor overall trends in working capital
and to identify areas requiring closer management
The individual components of working capital can be effectively
managed by using various techniques and strategies
When considering these techniques and strategies, departments need to
recognize that each department has a unique mix of working capital
components. The emphasis that needs to be placed on each component
varies according to department. For example, some departments have
significant inventory levels; others have little if any inventory.
Furthermore, working capital management is not an end in itself. It is an
integral part of the department's overall management. The needs of efficient
working capital management must be considered in relation to other aspects
of the department's financial and non-financial performance.
The main purposes of Working Capital Ratio Analysis are:
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To indicate working capital management performance; and
To assist in identifying areas requiring closer management
Three key points need to be taken into account when analyzing financial
ratios. These key points are as follows:
The results are based on highly summarized information.
Consequently, situations, which require control, might not be apparent,
or situations, which do not warrant significant effort, might be
unnecessarily highlighted.
Different departments face very different situations. Comparisons
between them, or with global ideal ratio values, can be misleading.
Ratio analysis is somewhat one-sided; favourable results mean little,
whereas unfavourable results are usually significant.
However, financial ratio analysis is valuable because it raises questions
and indicates directions for more detailed investigation.
Sources of Cash
The various sources of cash that provide the money to fund the working
capital include the following:
Existing cash reserves
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit
Long term loans
Profit or net income
Inventory Management
Inventories constitute the most significant part of current assets. Inventories
are stock of the product, a company is manufacturing for sale and
components to make that product. The various forms of inventory in a
fertilizer manufacturing company are:
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Raw Materials are those basic inputs that are converted into the
finished products through the process of manufacturing.
Work-In-Progress inventories are semi-manufactured products.
Finished Goods inventories are completely manufactured products.
Stores & Spares, loose tools, chemical catalysts, packing &
Construction materials
Objectives of Inventory Management
The problems faced by an organization in the context of inventory
management are:
To maintain a large size of inventory for efficient and smooth
production & sales operation
To maintain minimum investment in inventories to maximize
profitability
To ensure continuous supply of materials, spares & finished goods.
To avoid both overstocking & under stocking of inventory
To eliminate duplicate stock orders. This is possible with the help of a
centralized purchasing system.
To design proper organization for inventory management
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Both Excessive & Inadequate Inventories are not desirable. The objective of
Inventory Management is to determine & maintain the optimum level of
inventory investment. The optimum level of inventory will lie between two
danger points of excessive & inadequate inventories.
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 the stocks are moving or how long each item
of stock sits on shelves before being sold. Average stock holding periods are
influenced by the nature of the business.
The key issue for a business is to identify the fast and slow stock movers
with the objective of establishing optimum stock levels for each category and
thereby minimize the cash tied up in the stocks.
Factors to be considered when determining the optimum stock levels include:
What are the projected sales of each product?
How widely available are each component, raw materials, etc.?
How long does it take for delivery by the suppliers?
Can one remove the slow movers from ones product range without
compromising on the best- sellers?
For better stock control, following measures can be adopted:
Review the effectiveness of existing purchasing & inventory systems.
Know the stock turnover for all major items of inventory.
Apply tight controls to the significant few items & supply control for
the remaining.
Sell off outdated or slow moving merchandise.
Consider the idea of outsourcing the manufacturing of the product to
another manufacturer.
Review security procedures to minimize losses through deterioration,
pilferage, wastage & damages.
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To facilitate furnishing of data for short-term & long-term planning &
control of inventory
Receivable Management
Accounts Receivable refers to the amount owed by the debtors to the
business. They are usually created because of trade credit that is given to the
customers of the business.
These receivables have three characteristics:
It involves an element of risk, which should be carefully analyzed.
It is based on economic value
It implies futurity.
To maintain a proper flow of funds in the business in order to make timely
payments to the creditors, to buy raw materials & to run the day-to-day
activities of the business, it is essential that the debtors make their
payments on time. The interval between the date of sale & the date of
payment has to be financed out of the working capital. Thus, trade debtors
represent investment.
Objectives of Receivable Management
The objective of Receivable Management is to promote sales & profits until
that point is reached where the returns that the company gets from funding
receivables is less than the cost that the company has to incur in order to
fund these receivables. However, to maintain these receivables the
company has to incur certain costs such as:
Additional fund requirements for the company When a firm
maintains receivables, some of its resources remain blocked in them
so to finance the activities during that time gap the firm requires funds.
Administrative Costs
Collecting Costs
Defaulting Costs
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The size of receivables or investment in Receivable Management is
determined by the firms credit policy & level of sales. Receivable
management is the process of making the decision of selection of trade
debtors in which the funds could be invested or to whom money can be
given.
Receivable management involves the careful consideration of the
following aspects: -
Forming the credit policy
Executing the credit policy
Formulating & executing the collection policy
The Credit Policy is the policy followed by the company with respect to the
credit standards adopted, any incentive in the form of cash discount offered,
and also the period over which the discount can be utilized by the customers
& the collection effort made by the company. All these variables underlying a
companys credit policy influence the volume of sales and hence the profits
of the company.
Cash Management
Cash, the most liquid asset and also referred to as the life blood of a
business enterprise and is of vital importance to the daily operations of the
business firms. Its efficient management is crucial to the solvency of the
business because cash is the focal point of the fund flows in a business. If a
business has no cash and no way of getting any cash, it will have to close
down.
Cash Management is concerned with the managing of:
Cash flows into and out of the firm.
Cash flows within the firm
Cash balances held by the firm at a point of time for financing deficits
or investing Surplus cash.
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Cash Management refers to management of cash balance and the bank
balance and also short term deposits. The term cash may be used in two
different ways:
1) It may include currency, cheques, drafts, demand deposits held by
the firm i.e. pure cash or generally accepted cash equivalents.
2) In a broader sense, it also includes near cash assets such as
marketable securities and short term deposits with banks. For cash
management purposes, the term cash is used in this broader sense
i.e. it covers cash, cash equivalents and those assets which are
immediately convertible to cash.
Objectives of Cash Management
The cash management strategies are generally built around two goals:
To provide cash needed to meet the obligations, and
To minimize the idle cash held by the firm
The risk return trade-off of any firm can be reduced to two prime objectives
for the firms Cash Management System:
1) Meeting the Cash Outflows: This will help the firm in avoiding the
chance to default in meeting financial obligations otherwise the
goodwill of the firm is adversely affected. Also this will further help in
availing the opportunities of getting cash discounts by making early
or prompt payments and meeting unexpected cash outflows without
much problem.
2) Minimizing the Cash Balance
Loans and Advances
Loans and Advances are one of the important factors of working capital. In
current assets loans and advances play a significant role. When we talk about
the working capital management it is necessary to consider Loans &
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Advances, as they are a major component of Current assets and along with
the equity of the company for a source of generating cash in the
organization.
While analyzing the loans & advances position of IFFCO the following ratios
have to be calculated for better understanding i.e.
Loans and advances to Current Assets ratio
Loans and advances to Working capital ratio
Operating Cycle
Operating Cycle is the times duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of a
manufacturing company involves three phases:
Acquisition of resources such as raw material, labour, power and fuel
etc.
Manufacture of the product which includes conversion of raw
material into work-in-progress into finished goods.
Sale of the product either for cash or on credit. Credit sales create
account receivable for collection.
Purchases
Credit Sales Collection
Inventory Period
Accounts Receivable
Period
Accounts
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Payable
Period Cash Conversion Cycle
Payments
Operating Cycle
The operating cycles are of two types:
1. Gross Operating Cycle
2. Net Operating Cycle or Cash Conversion Cycle
Gross Operating Cycle
Gross operating cycle is a tool which measures the total number of days
from the day the purchases are made or the stock arrives to the day all the
collections are made. Cash is said to be blocked till the collections have been
collected. So the sooner the cash is received from the consumers the better
is for the company as they get cash for further production. Gross Operating
Cycle is given as follows:
Operating cycle
(OC)
=
Days Inventory
Outstanding(DIO) + Days
Sales Outstanding(DSO)
Cash Conversion Cycle
The cash conversion cycle (also referred to as CCC or the net operating cycle)
is the analytical tool of choice for determining the investment quality of two
critical assets - inventory and accounts receivable. The CCC tells us the time
(number of days) it takes to convert these two important assets into cash. A
fast turnover rate of these assets is what creates real liquidity and is a
positive indication of the quality and the efficient management of inventory
and receivables.
The cash conversion cycle is comprised of three standard, so-called activity
ratios relating to the turnover of inventory, trade receivables and trade
payables. These components of the CCC can be expressed as a number of
times per year or as a number of days.
CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO)
- Days Payable Outstanding (DPO)
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The cash conversion cycle (CCC) measures how fast a company can convert
cash on hand into even more cash on hand. The CCC does this by following
the cash as it is first converted into inventory and accounts payable (AP),
through sales and accounts receivable (AR), and then back into cash.
Generally, the lower this number is the better for the company.
The components of CCC are calculated as follows:
Days Inventory Outstanding (DIO)
This addresses the question of how many days it takes to sell the
entire inventory. The smaller this number is the better.
Days Inventory
Outstanding
(DIO)
=
Average Inventory
Cost of Goods sold (COGS) /
365
Broadly, the smaller number of days, the more efficient a company -
inventory is held for less time and less money is tied up in inventory.
Instead, money is freed up for things like research and development,
marketing or even share buybacks and dividend payments. If the
number of days is high, that could mean that sales are poor and
inventories are piling up in warehouses.
If inventory days are increasing, thats not necessarily a bad thing.
Companies normally let inventories build up when they are introducing
a new product in the market or ahead of a busy sales period. However,
if you dont foresee an obvious pickup in demand coming, the increase
could mean that unsold goods will simply collecting dust in the
stockroom.
Days Sales Outstanding (DSO)
This looks at the number of days needed to collect on sales and
involves Accounts Receivables. While cash-only sales have a DSO of
zero, people do use credit extended by the company, so this number
is going to be positive. Again, smaller is better.
Days Sales
Outstanding
=
Average Accounts
Receivable
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(DSO) Net Sales / 365
If a company's collection period is growing longer, it could mean
problems ahead. The company may be letting customers stretch their
credit in order to recognize greater top-line sales and that can spell
trouble later on especially if customers face a cash crunch. Getting
money right away is preferable to waiting for it - especially since some
of what is owed may never get paid. The quicker a company gets its
customers to make payments, the sooner it has cash to pay for
salaries, merchandise and equipment, loans and, best of all, dividends
and growth opportunities.
Days Payables Outstanding (DPO)
This involves the company's payment of its own bills or Accounts
Payables. If this can be maximized, the company holds onto cash
longer, maximizing its investment potential; therefore, a longer DPO is
better.
Days Payable
Outstanding
(DPO)
=
Average Accounts Payable
Cost of Goods sold
(COGS) / 365
Key Ratios
The ratios can be divided into following categories according to financial
activity or functions to be evaluated:
Ratios related to Receivables Management
Ratios related to Cash Management
2. Inventory to Working Capital Ratio
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The inventory turnover measures that how well the company can
manage to sell its inventory. Another way of saying is how efficiently
the company turns inventory into sales. The purpose is to ensure the
blocking of only required minimum funds in inventory.
Importance of Inventory Turnover
If the company can quickly sell its inventory, the inventory turnover
will be higher. Conversely, if the company cannot sell its inventory well,
then the inventory turnover will be low. One has to watch this figure
closely if the inventory ratio climbs too high, then the company may
be keeping too little inventory. This could cause lost profits due to
customer orders that had to wait until inventory arrived.
Inventory
Turnover
Ratio
=
Cost of Goods sold (COGS)
Average Inventory
2. Inventory to Working Capital ratio
The inventory to working capital ratio measures how well the company
is able to generate cash using working capital at its current inventory
level. This ratio shows the relationship between investments made in
inventory & the total net investment in working capital. Inventory is an
important part of working because of its direct impact on the profits of
the organization. The value of inventory is susceptible to changing
price levels, fluctuation in business activities, variation in consumer
demand, obsolescence & other unpredictable factors that determine
the market conditions. Therefore, working capital should be sufficient
to provide a cover for the possible losses in inventory value.
Importance of Inventory to Working Capital
An increasing Inventory to Working Capital ratio is generally a negative
sign, showing the company may be having operational problems. If a
company has too much Working Capital invested in Inventory, they
may have difficulty having enough Working Capital to make payments
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on Short-Term Liabilities and Accounts Payable. This is a great ratio
to be used with several others to really pick apart the inner workings
of a company.
Inventory to
Working Capital
Ratio
=
Inventory
X 100
Working Capital
Inventory is one of the largest components of the current assets. The
position of inventory indicates operational efficiency of organization.
The inventory to current assets ratio measures how much percentage
of current assets is formed by the inventories. This ratio is essential as
inventories are the most illiquid of all current assets as sometimes it
becomes difficult to convert inventory ( raw materials,
work-in-progress and finished products ) into cash on a short notice.
Importance of inventory to current assets
An increasing inventory to current assets ratio is a negative sign. It
means that more & more percentage of current assets is being
constituted by the inventories. This indicates poor operational
efficiency of the organization. Also it shows that the funds invested in
current assets to meet obligations on a short notice are actually illiquid
to some extent & it may be difficult to convert them into cash
immediately. On the other hand, if the position of inventory is lower in
current assets, it indicates higher operational efficiency of the
organization. Normally, less than 50 % of current assets are treated as
average position of inventory.
Inventory to
Current Assets
Ratio
=
Inventory
X 100
Current Assets
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The Inventory to Sales ratio measures the percentage of inventory the
company currently has on hand to support the current amount of
sales.
Importance of Inventory to Sales
An increasing Inventory to Sales ratio is generally a negative
sign, showing the company may be having trouble keeping inventory
down and/or Net Sales have slowed, and can sometimes indicate
larger financial problems the company may be facing. Viewing this
ratio over several periods reveals the important aspect of the
company's ability to manage inventory while attempting to increase
sales. It is also important to compare this ratio among
several companies to gauge how well each one performs, and to
compare their ratios to industry averages.
Inventory to
Sales Ratio
=
Inventory
X 100
Sales
Ratios related to Receivable Management
1. Debtors turnover ratio
2. Average collection period
3. Debtors to current assets ratio
4. Debtors to working capital ratio
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1. Debtors Turnover Ratio
This ratio is also known as Accounts Receivable Turnover Ratio.
Accounts Receivable is the amount that customers owe the company.
The Accounts Receivable Turnover measures the number of times
Accounts Receivables were collected during the year. This is also a
measure of how well the company collects sales on credit from its
customers, just as Average Collection Period measures this in days.
Importance of Accounts Receivable Turnover
A high or increasing Accounts Receivable Turnover is usually a positive
sign showing the company is successfully executing its credit
policies and quickly turning its Accounts Receivables into cash. A
possible negative aspect to an increasing Accounts Receivable
Turnover is that the company may be too strict in its credit policies
and missing out on potential sales.
Debtor
Turnover
Ratio
=
Net Sales
Average Accounts Receivable
2. Average Collection Period
The Average Collection Period measures the average number of days it
takes for the company to collect revenue from its credit sales. The
Average Daily Sales is the Net Sales divided by 365 days in the year.
The company will usually state its credit policies in its financial
statement, so the Average Collection Period can be easily gauged as to
whether or not it is indicating positive or negative information.
Importance of Average Collection Period
This ratio reflects how easily the company can collect on its
customers. It also can be used as a gauge of how loose or tight the
company maintains its credit policies. A particular thing to watch out
for is if the Average Collection Period is rising over time. This could be
an indicator that the company's customers are in trouble, which could
spell trouble ahead. This could also indicate the company has
loosened its credit policies with customers, meaning that they may
have been extending credit to companies where they normally would
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not have. This could temporarily boost sales, but could also result in
an increase in sales revenue that cannot be recovered, as shown in the
Allowance for Doubtful Accounts.
Average
Collection
Period
=
360
Debtor Turnover
Ratio
3. Debtors to Current Assets Ratio
Debtor to current assets ratio indicates the position of debtors in total
current assets. This ratio is calculated by debtors with current assets.
Debtors are one of the largest components of current assets. If debtors
are average or less than average, it indicates proper realization of
debtors. On the other hand, if debtors are very heavy on respect of
other current assets, it indicates poor recovery of the company.
Debtors to
Current
Assets Ratio
=
Debtors
X 100
Current Assets
4. Debtors to Working Capital Ratio
Debtor to working capital ratio is one of the important ratios for
analysis of working capital management. Working capital is directly
related with the position of debtors. If debtors are lower as compared
to working capital, it indicates proper and smooth utilization of
working capital. But on the other hand, the amount of debtor is very
large in that condition, working capital blocked and operational
efficiency is directly affected.
Debtors to
Working
Capital Ratio
=
Debtors
X 100
Working Capital
Debt to Equity ratio describes the lenders contribution for each rupee
of the owners contribution. The ratio is directly computed by dividing
total debt by equity or net worth.
Debt to Equity
Ratio
=
Debt
Equity
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Importance of Debt to Equity Ratio
The ratio shows the extent to which debt financing has been used in
the business. A high ratio means that claims of creditors are greater
than those of owners. A high level of debt introduces inflexibility in
the firms operations due to the increasing interference and pressure
from creditors. A low debt-equity ratio implies a greater claim of
owners than capital.
Ratios Related to Cash Management
1. Working capital ratio or current ratio
2. Liquid ratio or Acid-test ratio
3. Cash to current assets ratio
4. Sales to current assets ratio
5. Working capital turnover ratio
6. Sales to working capital ratio
1. Working Capital Ratio or Current Ratio
The working capital ratio (or current ratio) attempts to measure the
level of liquidity, that is, the level of safety provided by the excess of
current assets over current liabilities. The current ratio compares all
the Current Assets of a company to all the Current Liabilities. What
this ratio basically tells us is if the company had to sell all its readily
available assets, would it be able to pay off its immediate debt?
Importance of Working capital ratio or current ratio
At a minimum, you would hope the company whose financial
performance you are analyzing could meet to pay its Current Liabilities
if it were to liquidate all its Current Assets. This would translate to a
Current Ratio of 1:1 - the point where the Current Assets equal the
Current Liabilities. As with all the other performance ratios, the
Current Ratio value depends on the industry in which the company is
operating. It is also important to know what assets make up most of
the Current Assets. Inventory and Accounts Receivable, which are part
of the Current Assets, cannot always be counted on as easily
transferred to cash. Cash and Marketable Securities comprising the
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majority of the Current Assets would definitely be favorable. Knowing
this, would the company you are analyzing truly be able to meet its
financial obligations is it in fact had to sell its Current Assets? The
Current Ratio rising over time will be favorable.
Current Ratio
=
Current Assets
Current
Liabilities
2. Liquid Ratio or Acid-Test Ratio or Quick Ratio
Liquid ratio is also known as Acid-test ratio or Quick ratio. Liquid ratio
is a more vigorous test of liquidity than current ratio. The term
liquidity refers to the ability of the firm to pay its short term
obligations as & when they become due. Current assets include
inventories and prepaid expenses, which are not easily converted into
cash within a short span of time. So, quick ratio may be referred to as
the relationship between quick assets i.e. (current assets inventories)
& current liabilities. An asset is said to be liquid if it can be converted
into cash within a short span of period without loss of value.
Importance of Liquid Ratio
If a company one is analyzing looks good while testing it against the
Current Ratio, then the Quick Ratio should be your next test to apply.
Companies with steadily rising Inventories may look good with the
Current Ratio, but will have a deteriorating effect on the Quick Ratio,
since we subtract the Inventory out. The Quick Ratio rising over time is
favorable.
Quick Ratio
=
Current Assets Inventories
Current Liabilities
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3. Cash to Current Assets Ratio
This ratio basically measures what percentage of the current assets is
formed by the cash component. This is a more stringent measure of
liquidity as it considers the most liquid current asset.
Importance of Cash to Current Assets Ratio
High or increasing Cash to Current Assets ratio is generally a positive
sign, showing the company's liquid assets represent a larger portion of
its Total Current Assets. It also indicates the company may be better
able to convert its non-liquid assets, such as inventory, into cash.
Cash to
Current Asset
Ratio
=
Cash
X 100
Current Assets
4. Sales to Current Assets Ratio
The Sales to Current Assets ratio measures how well a company is
making use of its assets in generating sales. This ratio is most valid in
industries where companies hold the majority of their own inventories
in-house, as opposed to having their customers hold their inventory
for them.
Importance of Sales to Current Assets
The Sales to Current Assets ratio is best measured over several periods
compared to industry averages, as the amount of Current Assets varies
widely among companies and industries. Decreasing Sales to Current
Assets ratio is generally a negative sign, indicating the company may
have slowed production, decreasing the amount of inventory and
resultantly the Current Assets.
Sales to
Current Asset
Ratio
=
Sales
Current Assets
5. Working Capital Turnover Ratio
The Working Capital Turnover ratio measures the company's Net Sales
from the Working Capital generated. Note that another ratio exists, the
Sales to Working Capital Ratio also measures Net Sales to Working
Capital. We chose to interchange the usual components of Working
Capital (Total Current Assets - Total Current Liabilities) with an
alternate method (shown above). With two similar ratios using slightly
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different methods to compute Working Capital, plotting both of these
ratios together to see their differences would be wise.
Importance of Working Capital Turnover
A high or increasing Working Capital Turnover is usually a positive
sign, showing the company is better able to generate sales from its
Working Capital. Either the company has been able to gain more Net
Sales with the same or smaller amount of Working Capital, or it has
been able to reduce its Working Capital while being able to maintain
its sales. Efforts to streamline the operations of the company will
often show favorably in this ratio.
Working
Capital
Turnover
Ratio
=
Sales
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6. Sales to Working Capital Ratio
The Sales to Working Capital ratio measures how well the company's
cash is being used to generate sales. Working Capital represents the
major items typically closely tied to sales, and each item will directly
affect this ratio.
Importance of Sales to Working Capital
An increasing Sale to Working Capital ratio is usually a positive sign,
indicating the company is more able to use its working capital to
generate sales. Although measuring the performance of a company for
just one period reveals how well it is using its cash for that single
period, this ratio is much more effectively used over a number of
periods. This ratio can help uncover questionable management
decisions such as relaxing credit requirements to potential customers
to increase sales, increasing inventory levels to reduce order
fulfillment cycle times, and slowing payment to vendors and suppliers
in an effort to hold on to its cash.
Working
Capital
Turnover
Ratio
=
Sales
1. Return on Assets (ROA)
2. Return on Equity (ROE)
3. Return on Capital Employed (ROCE)
4. Net Profit Margin
1. Return on Assets (ROA)
ROA is an indicator of how profitable a company is relative to its total
assets. ROA tells how efficient management is at using its assets to
generate earnings. The ROA figure gives investors an idea of how
effectively the company is converting the money it has to invest into
net income. The higher the ROA number, the better, because the
company is earning more money on less investment.
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Return on
Assets (ROA)
=
Profit After Tax
Average Total
Assets
2. Return on Equity (ROE)
The return on equity is net profit after taxes divided by average equity.
It measures the rate of return on the ownership interest of the
common stock owners. It measures a firm's efficiency at generating
profits from every unit of shareholders' equity. ROE shows how well a
company uses investment funds to generate earnings growth.
Return on
Equity (ROE)
=
Profit After Tax
Average Equity
3. Return on Capital Employed (ROCE)
ROCE is used to prove the value the business gains from its assets and
liabilities, a business which owns lots of land but has little profit will
have a smaller ROCE to a business which owns little land but makes
the same profit.
It basically can be used to show how much a business is gaining for its
assets, or how much it is losing for its liabilities.
4. Net Profit
Margin
Net Profit Margin ratio is measured by dividing profit after tax by sales:
Net Profit
Margin
=
Profit After Tax
Sales
Importance of Net Profit Margin
Net profit margin ratio establishes a relationship between net profit
and sales and indicates managements efficiency in manufacturing,
administering and selling the products. This ratio is the overall
measure of the firms ability to turn each rupee sales into net profit.
Return on
Capital
Employed
(ROCE)
=
Profit Before Tax
Average Capital Employed
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Appendix B: Cash Management
Cash, the most liquid asset and also referred to as the life blood of a
business enterprise and is of vital importance to the daily operations of the
business firms. Its efficient management is crucial to the solvency of the
business because cash is the focal point of the fund flows in a business. If a
business has no cash and no way of getting any cash, it will have to close
down.
Cash Management refers to management of cash balance and the bank
balance and also short term deposits. A Cash Management System is
essential for a company for the following two reasons:
Uncertainty of cash flows
Lack of synchronization of inflows and outflows
Cash Management is concerned with the managing of:
Cash flows into and out of the firm.
Cash flows within the firm
Cash balances held by the firm at a point of time for financing deficits
or investing Surplus cash.
Goals of Cash Management
The Cash Management Strategies are generally built around Two Goals:
To provide cash needed to meet the obligations, and
To minimize the idle cash held by the firm
In order to resolve the uncertainty about cash flow prediction and the lack of
synchronization between cash receipts and payments, the firm should
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develop appropriate strategies for cash management. The firm should evolve
strategies regarding the following four facets of Cash Management:
Cash Budgeting/ forecasting: Cash inflows and Cash Outflows should
be planned to protect cash surplus or deficit for each period of
planning. Cash Budget should be prepared for this purpose.
Manage the Cash Flows: The flow of cash should be managed
properly. The cash inflows should be accelerated, while, as far as
possible, decelerating the cash outflows. Managing of cash is done
through:
Organized collection management
Proper disbursement management
Optimum Cash Level: The firm should decide about the optimum level
of cash balances. The cost of excess cash and danger of cash
deficiency should be matched to determine the optimum level of cash
balances.
Investment of Surplus Cash: The surplus cash balances should be
properly invested to earn profits. The firm should decide about the
division of such cash balance between bank deposits, marketable
securities and inter-corporate lending.
Motives for Holding Cash
There are four primary motives for holding cash.
1. Transaction Motive
Business firms as well as individuals keep cash because they require it
for meeting demand for cash flow arising out of day-to-day
transactions. The firm needs cash primarily to make payments for
purchases, wages & salaries, other operating expenses, taxes,
dividends, etc. The need to hold cash would not arise if there were
perfect synchronization between cash payments and cash receipts, i.e.
enough cash is received when the payment has to be made. For those
periods, when cash payments exceeds the cash receipts, the firm
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should maintain some cash balance to be able to make required
payments. For transaction purpose, a firm may invest its funds in
marketable securities. The Transaction Motive mainly refers to holding
cash to meet anticipated payments whose timing is not perfectly
matched with cash receipts. In other words, the necessity of keeping
minimum cash balance to meet payment obligations arising out of
expected transactions is known as Transaction Motive for holding cash.
2. Precautionary Motive
A firm should maintain larger cash balance that required for
day-to-day transactions in order to avoid any unforeseen situation
arising because of insufficient cash. The necessity of keeping cash
balance to meet any unforeseen situation or unpredictable obligation
is known as Precautionary motive for holding cash. The Precautionary
motive for holding cash depends on the predictability of cash flows.
The amount of precautionary cash is also influenced by the firms
ability to borrow at short notice when the need arises. Stronger the
ability of the firm to borrow at short notice less is the need for
precautionary balance. The precautionary balance may be kept in the
form of cash or marketable securities. Marketable securities play an
important role here. The amount of cash set aside for precautionary
reasons may not earn anything, but if these funds are invested in high
liquid marketable securities, then they can give a lot of profits.
Hence, the amount of cash, a firm holds for transaction and
precautionary depends upon:
The expected cash inflows and cash outflows based on the cash
budget and forecasts, encompassing long and short range cash
needs of the firm i.e. Degree of Predictability of its cash flows
The degree of deviation between the expected and actual cash
flows
Efficient planning and control of cash
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The firms ability to borrow at short notice in the event of any
emergency
The willingness and the capacity of the firm to take risk of
running short of cash
3. Speculative Motive
The firms desire to keep some cash balance to capitalize an
opportunity of making an unexpected profit is known as Speculative
Motive for holding cash. The Speculative Motive provides affirm with
sufficient liquidity to take advantage of unexpected profitable
opportunities that may suddenly appear (And just as suddenly
disappear if not capitalize immediately). However, not many firms
engage their funds in speculative motives to a great extent. Thus, the
primary motives to hold cash and marketable securities are:
Transaction Motive and Precautionary Motive.
Cash Management, thus, deals with optimization of cash as an asset and for
this purpose the financial manager has to take various decisions from time
to time. He has to deal as the cash flows in the direction of the firm. Even if a
firm is highly profitable, its cash inflows may not exactly match the cash
outflows.
He has to manipulate and synchronize the two for the advantage of the firm
by investing excess cash if any as well as arranging funds to cover the
deficiency.
Factors affecting the Cash Needs
Intrinsic factors influencing the cash management
Cash Cycle: The term cash cycle refers to the length of the time
between the payment for the purchase of raw materials and the
receipts of the sales revenue.
Cash Inflows and Cash Outflows
Cost of Cash Balance
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Other Consideration: There may be several subjective considerations
such as uncertainties of a particular trade, staff required for cash
management etc., which will have a bearing on determining the cash
balance required by a firm.
Extrinsic factors influencing the cash management
Management Information System (MIS) of the banks: They provide
full details of the payments received. The details provided by them
contain information of the payment of the Field Representative (FR),
Area Office (AO) and State Office (SO). The report is made such that it
can be used by the Marketing Central office (Mkco), State Office, Area
Office and Field Representative for verification of payments received
and to find out any discrepancies, if there any.
Innovative Schemes: Banks generates various new schemes time to
time which changes the cash flow of the organization.
Interest Lost: If any payment gets delayed even by one day, there is a
loss of investment over that income. So banks are bound by the
agreement by which they pay interest for any delay on their part.
Bank Charges: Banks arrange their representatives for pick up of
demand drafts from the Field Representatives, Area Offices and State
Offices and deposit them in the banks. For this service they charges
transportation cost and transaction cost, which vary depending on the
banks.
Appendix C: Financial Statements
BALANCE SHEET
125
SAAB MARFIN MBA
(Rs. in Crores)
Schedule As At 31.03.2009 As At 31.03.2008
SOURCES OF FUNDS
Shareholders' funds:
Share capital 1 426.28 423.93
Share Application Money
Reserve and Surplus 2 3532.59 3958.87 3264.73 3688.66
Loan Funds:
Secured Loans 3 7373.18 2404.67
Unsecured Loans 4 5429.6 12802.78 4370.97 6775.64
Deferred Tax Liability (
Net ) 542.12 534.19
TOTAL 17303.77 10998.49
APPLICATION OF FUNDS
Fixed Assets: 5
Gross block 8808 8138.98
Less: Accumulated
Depreciation 3842.16 3400.04
Net Block 4965.84 4738.94
Capital Work-In-Progress 6 290.98 5256.82 430.85 5169.79
Investments 7 7552.95 1416.73
Current Assets, Loans and
Advances
Inventories 8 1731.36 1577.1
Sundry Debtors 9 407.23 413.76
Cash and Bank Balances 10 69.63 243.32
Loans and Advances 11 5464.77 3541.56
7672.99 5775.74
Less: Current Liabilities and
Provisions
Current Liabilities 12 2860.18 1048.49
Provisions 13 322.71 323.08
3182.89 1371.57
Net Current Assets 4490.10 4404.17
Miscellaneous Expenditure
(to the extent not written
off)
Voluntary Retirement
Scheme Expenses 3.9 7.8
TOTAL 17303.77 10998.49
PROFIT AND LOSS ACCOUNT
(Rs. in Crores)
Schedule For yr 31.03.2009 For yr 31.03.2008
126
SAAB MARFIN MBA
INCOME FROM OPERATIONS
Turnover
Sales 7387.70 5968.47
Less: Excise
Duty - -
7387.70 5968.47
Subsidy on
Fertilizers 25545.60 32933.30 6194.35 12162.82
Other Revenue 14 499.00 345.77
Increase/ (Decrease) in Stocks 15 280.51 (1136.21)
33712.81 11381.38
LESS: COST OF OPERATIONS
Consumption of Raw Materials, Stores
etc.
Raw Materials 13997.22 6646.44
Stores and
Spares 108.34 96.26
Chemicals and Catalysts 41.38 38.22
Packing
Materials 200.39 170.43
Power, Fuel and Water 981.80 756.48
15329.13 7707.83
Less: Stock Transfer for Self
Consumption 159.41 15169.72 118.81 7589.02
Purchase of products for resale 14539.23 1245.44
Employees' Remuneration & Benefits 16 595.96 405.75
Manufacturing, Administration,
Distribution and Other Expenses 17 1481.91 959.49
Interest 18 1023.20 389.37
Depreciation/ Amortisation 470.40 410.93
Prior Period Adjustments (Net) 19 (13.46) (3.00)
Deferred Revenue Exp. Written-off 3.90 3.86
(Voluntary Retirement Scheme
Expenses)
33270.86 11000.86
Profit Before Tax 441.95 380.52
Provision for
Taxation Current Tax 92.80 61.80
Fringe Benefit Tax 8.02 6.50
Deferred Tax 7.93 56.14
Earlier Years (26.81) 81.94 (1.51) 122.93
Profit After Tax 360.01 257.59
Profit transferred
to:
Capital Repatriation Fund 0.47 0.46
Dividend Equalisation Fund
Contribution towards Approved
Donations 1.00 1.47 - 0.46
(Under Income Tax Act, 1961)
127
SAAB MARFIN MBA
Net Profit as per Multi state
Cooperative Societies Act, 2002 358.54 257.13
CASH FLOW STATEMENT
(Rs. In Crores)
Year Ended
31.3.2009
Year Ended
31.3.2008
(A) Cash Flow from Operating Activities:
Net Profit before Tax 441.95 380.52
Adjustment for:
Depreciation 470.40 410.93
Interest (Net) 857.19 362.71
Provision for Doubtful Debts 0.01 0.31
Loss on Damaged Goods 17.60 -
Write down of Value of Goods-in-Transit 107.68 -
Amount charged off / adjusted 0.04 0.20
Assets Written-off 13.41 2.27
Loss on Sale of Investments (Net) 83.16 15.47
Exchange Rate Variations (Net) 148.84 5.10
Loss on Sale of Fixed Assets (Net) 4.29 2.75
Dividend Income (274.42) (132.54)
Profit on sale of Investments - (115.22)
Deferred Revenue Exp. Written off - VRS 3.90 3.97
Diminution in value of Long Term Investments 81.16 -
Liabilities / Provision written back (3.88) (14.12)
Prior Period Depreciation (0.12) 1509.26 2.95 544.78
Operating Profit before Working
Capital Changes 1951.21 925.30
Adjustment for:
Inventories (279.54) 706.83
Trade and Other Receivables (1717.19) (487.06)
Trade Payable and Provisions 1747.04 (249.69) 3.43 223.20
Cash Generated from Operations 1701.52 1148.50
Direct Taxes Paid
(Net of Refunds) (135.23) (72.07)
Payment towards Cooperative Education Fund (2.57) (1.75)
Payment to Cooperative Welfare Fund (1.90) (1.60)
Donations Paid (1.87) (141.57) (0.67) (76.09)
Net Cash From Operating Activities (A): 1559.95 1072.41
(B) Cash Flow from Investing Activities:
Purchase of fixed Assets including C.W.I.P. (590.82) (594.93)
Proceeds from Sale of Fixed Assets 11.50 31.89
Purchase of Investments (Net) (6300.54) (691.73)
128
SAAB MARFIN MBA
Dividend Received 246.61 132.74
Profit on Sale of Investments - 115.22
Interest received 55.66 26.26
Net Cash used in Investing Activities (B): (6577.59) (970.55)
(C) Cash Flow from Financing Activities:
Proceeds from issue of Share Capital 2.35 0.01
Repayment of Term Loans (362.67) (153.97)
Repayment of Deferred Trade Tax Loan (Net) (9.21) (4.10)
Increase in Cash Credit 589.37 160.88
Increase in Short Term Loans 5809.65 286.72
Interest Paid (1008.14) (389.37)
Dividend Paid (84.53) (84.45)
Exchange Rate Variation (Net) (92.87) (5.10)
Net Cash used in Financing Activities (C): 4843.95 (189.38)
NET INCREASE/ (DECREASE) IN CASH
AND CASH EQUIVALENTS (A+B+C) (173.69) (87.52)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 243.32 330.84
CASH AND CASH EQUIVALENTS AT THE
CLOSE OF THE YEAR 69.63 243.32
NET INCREASE/ (DECREASE) IN CASH
AND CASH EQUIVALENTS (173.69) (87.52)
129
SAAB MARFIN MBA
Appendix D: Significant Financial Indicators
2008-0
9
2007-0
8
2006-0
7
2005-0
6
2004
-05
FINANCIAL RATIOS :
Operating Profit to Sales (%) 6.5 7.8 6.69 6.92 6.52
Profit before Tax to Sales (%) 1.34 3.13 2.43 4.85 6.37
Return on Capital Employed (%) 3.12 3.5 2.53 7.18 10.58
Profit before Tax to Net Worth
(%)
11.16 10.31 6.9 13.55 14.27
Profit After Tax to Net Worth (%) 9.09 6.99 4.81 9.6 9.68
Fixed Assets Turnover (Times) 6.32 2.38 2.2 3.01 3.57
Working Capital Turnover
(Times)
7.41 2.62 2.5 4.07 4.58
Inventory of Finished Goods
(Months Sales)
0.12 0.76 1.48 0.74 0.9
Inventory of Raw Material &
Packing
Material (Months Consumption) 0.74 1.25 1.01 0.86 0.79
Sundry Debtors (Months Sales) 0.67 0.78 0.9 0.89 1.17
Current Ratio 2.41:1 4.21:1 5.06:1 3.49:1 2.36:1
Quick Ratio 1.87:1 3.06:1 3.15:1 2.37:1 1.51:1
Debt Equity Ratio 3.23:1 1.84:1 1.78:1 1.42:1 2.20:1
Employees Productivity
No. of Employees 6757 6743 6826 6506 5752
Sales per Employee (Rs. Crore) 4.87 1.8 1.51 1.77 1.29
130
SAAB MARFIN MBA
Appendix E: Provisional highlights of IFFCO performance
during 2008-09
Highest Production of Fertilisers
(Previous Best 70.12 lakh MT in
2006-07)
71.68 lakh MT
Highest Production of Urea
(Previous Best 39.63 lakh MT in
2007-08)
40.68 lakh MT
Production of NPK/DAP/NP
(Best 32.26 lakh MT in 2006-07)
31.00 lakh MT
Highest Sales of Fertilisers
(Previous best 93.24 lakh MT in
2007-08)
112.58 lakh MT
Highest Sales of Urea
2007-08)
58.69 lakh MT
Highest Sales of NPK/DAP
2007-08)
53.89 lakh MT
Profit Before Tax
(Best PBT 807.1 crore in 2002-03)
Rs.441.95 crore
Profit After Tax
(Best PAT 557.2 crore in 2002-03)
Rs.360.01 crore
Highest Turnover
(Previous best Rs.12163 crore in
2007-08)
Rs 32933 crore
131
SAAB MARFIN MBA
Plant Productivity
(Best 1669 MT in 2005-06)
1376 MT per employee
Highest Marketing Productivity
(Previous best 6158 MT in 2007-08)
7397 MT per employee
Composite Energy Consumption
(Lowest 5.907Gcal / MT in 2007-08)
5.941 Gcal/ MT
Appendix F: VALUE ADDED STATEMENT
(Rs. In Crore)
Particulars
Year ended
31.3.2009
Year ended
31.3.2008
Income from Sales 32933.30 12162.82
Dividend and Other Income 499.00 354.77
33432.30 12517.59
Less:
Cost of Materials 29418.89 9971.54
Manufacturing, Admn.,
Distribution 1481.91 959.49
& Other Expenses
Total Value Added 2531.50 1586.56
Applied to meet:
Employee Cost 595.96 405.75
Interest Payment 1023.20 389.37
Income Tax (Net) 74.00 66.79
Dividend 85.10 84.53
Donations 1.75 0.75
Cooperative Education Fund 3.59 2.57
Retained Cash Profit 747.90 636.80
132
SAAB MARFIN MBA
Total Utilisation of Value
Added 2531.50 1586.56
Ratios
Value added to Total Income
(%) 7.57 12.67
Value added to Capital
Employed (%) 17.89 14.65
Value added to Net Worth (%) 63.95 43.01
Value added per Employee
(Rs. Lakh) 37.46 23.53
Appendix G: Some of the well known fertilisers used in India
Nitrogenous Fertilisers
Urea 46%N
Ammonium Sulphate (As) 21%N
Ammonium Chloride (ACl) 26%N
Calcium Ammonium Nitrate (CAN) 25%N
Phosphatic & Potassic Fertilisers
Single Super Phosphate (SSP) 16% P2O5
Muriate of Potash (MOP) 60%K2O
Sulphate of Potash (SOP) 48%K2O
Di-ammonium Phosphate (DAP) 18 46
Rock Phosphate (RP) 16 - 20% P2O5
NPK Grades
133
SAAB MARFIN MBA
10:26:26
12:32:16
14:35:14
15:15:15
16:20:00
17:17:17
19:19:19
20:20:00
23:23:00
28:28:00
Appendix H: Some Calculations
Calculation of Cost of Goods Sold (COGS)
(in Rs. Crores)
Year Opening Stock Closing Stock Purchases COGS
2004-05 495.27 353.65 6667.86 6809.48
2005-06 353.65 593.33 9406.16 9166.48
2006-07 593.33 1347.34 10332.1 9578.09
2007-08 1347.34 211.13 10200.56 11336.77
2008-09 211.13 491.64 31777.26 31496.75
Calculation of Average Inventory
(in Rs. Crores)
134
SAAB MARFIN MBA
Year
Opening
Inventory
Closing
Inventory
Average
Inventory
2004-05 1020.56 931.50 976.03
2005-06 931.50 1519.64 1225.57
2006-07 1519.64 2283.94 1901.79
2007-08 2283.94 1577.10 1930.52
2008-09 1577.10 1731.36 1654.23

Working Capital Management: A Project Report

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