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A

PROJECT REPORT
ON

OF

KALOL UNIT
Submitted By:

Kumbhar Vijay C.
Roll No:- 10038
Year:- 2010-11

Under The Guidance of

Dr. P. K. Priyan
Submitted
requirement

in

partial

fulfillment

of

the

For the award of the degree of

G. H. Patel Post-graduate Institute of Management,


Vidhyanagar, Anand.
EXECUTIVE SUMMARY
Every business needs adequate liquid resources in order to maintain day-to-day cash
flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if
it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is
not just important in the short-term, sufficient liquidity must be maintained in order to
ensure the survival of the business in the long-term as well. Even a profitable business may
fail if it does not have adequate cash flow to meet its liabilities as they fall due. Therefore,
when businesses make investment decisions they must not only consider the financial outlay
involved with acquiring the new machine or the new building, etc, but must also take
account of the additional current assets that are usually involved with any expansion of
activity. Increased production tends to engender a need to hold additional stocks of raw
materials and work in progress. Increase sales usually mean the level of debtors will
increase. A general increase in the firms scale of operations tends to imply a need for
greater levels of cash.
By minimizing the amount of funds tied up in current assets, firms are able to reduce
financing costs and\or increase the funds available for expansion. The importance of efficient
Working Capital Management is indisputable. Business viability relies on its ability to
effectively manage receivables, inventory, and payables. By minimizing the amount of funds
tied up in current assets and liabilities back towards their optimal levels. The definition of
working capital is fairly simple; it is the difference between an organizations current assets
and its current liabilities.
Thus our project concentrates on the important aspects of the Working Capital
Management in the organization life. There are many private as well as government
companies. The company we have selected for our project is the Cooperative Society which
is IFFCO KALOL.

Indian Farmers Fertilizers Co-operative limited (IFFCO), today is a leading player in


Indias fertilizer industry and is making substantial contribution to the efforts of Indian
Government to increase food grain production in the country. Indian farmers Fertilizers
Cooperative Limited, popularly known as IFFCO emerged as a pioneer venture on the horizon
of fertilizer production and marketing with the objective of attaining self sufficiency in food
grain production.

PREFACE

Any science without its practical application or knowledge is considered to be


unsystematic. Since management is a developing science, the students of Management
course are required to undergo a project. Management of working capital plays a
significant role in the organization as the blood plays its role in the human body .It not
only provides energy to the business but simultaneously it is essential for the success of
any business organization management of working capital has close implication with the
two important factors that judge the overall success of the business profitability and
solvency. Nowa-days, the major problem faced by every business organization is of
finance because of drastic changes in the size and scale of business and increased
competition, which results in the increase in credit business and shortage of financial
brackets. In such an environment, the working capital management has occupied one of
the key positions in the business management.
It gives me great pleasure to acknowledge my indebtness to all those who have
helped me completing this project and bringing it out in its present form. I am very
grateful to my guide under whose kind supervision and able guidance, this work has
completed.

ACKNOWLEDGEMENT

It was a great pleasure working at IFFCO-Kalol. We take this opportunity to extend our
gratitude towards all those persons who have directly or indirectly contributed to this
project.

First of all, we are grateful to Mr. B.A.Shah, Director General Manager (Training)
who gave us opportunity to undertake this project at IFFCO-Kalol, and also for his help and
tips whenever needed.

We would like to thank Mr. Anil Aroda, DGM- (F&A), for allowing us to carry out
this project study and his guidance and support during training period and also Mr.
G.N.Prasad, Sr. General Manager, Mr.Vipin Agrawal (A/Cs) and Mr. Sanket Patel
(A/Cs) for sharing their ideas with us. We thank all of them for their valuable time, which, in
spite of being extremely busy. We also appreciate the supportive attitude of all the head of
departments and the staff of IFFCO.

DECLARATION

I, Vijay C. Kumbhar, the undersigned, an MBA student of G.H.Patel PostGraduate Institute of Business Management, S.P.University, Anand do hereby
declare that this report titled Working Capital Management of Indian Farmers and
Fertilizer Co-operative Ltd (IFFCo) Kalol Unit, under the guidance of Dr. P.K.Pryan, Faculty of
Finance Management, submitted in partial fulfillment of the requirement for the summer
internship project during the Post Graduate Degree in Master of Business Administration
studies.

This is my original work and has not been previously submitted by any student any
Business school or University. The findings and conclusions of this report are based on my
personal study and experience, during the tenure of my summer internship.

Place:
Date:

CERTIFICATE

1. Introduction to the
study
1.1 Objective of the study
1.2 Scope of the study
1.3 Research Methodology
1.4 Limitation of the study

1.1 OBJECTIVE OF STUDY


To analyze 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 analyze 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

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

1.2 SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The
study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital
leverage, operating cycle etc.

Further the study is based on last 5 years Annual Reports of IFFCO and even factors
like Competitors analysis, industry analysis were not considered while preparing this
project.

1.3 RESEARCH METHODOLOGY


6.3.1. Data collection
6.3.1.1. Primary data:
The primary is collected first times. Primary Data is collected on the
basis of personal interviews.

6.3.1.2. Secondary data:


Secondary data are those data which is already collected and
stored. Secondary data can easily get from the Annual Reports,
Journals etc. of the company. It will save the time, money and efforts to
collect the data. Secondary data also made available through trade
magazines, books, Internet etc. This project has a limited primary data
collection based on the interview of the General Manger, Finance and
other concerned member of finance department. But primary data
collection has certain limitation (confidential data information).
Secondary data is gathered from the annual reports, Red Herring
Prospectus, and Internet. The aim of data collection is to gain
familiarity and to achieve new insights into the Working Capital
Management of the company.
Project is based on :
1) Annual Report of 2006-07
2) Annual Report of 2007-08
3) Annual Report of 2008-09

10

4) Annual Report of 2009-10


5) Annual Report of 2010-11

11

1.4 LIMITATIONS OF THE STUDY


The following are the limitations of this summer project training:
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.

12

2.

Indian

Fertilizer

Industry
2.1 Introduction
2.2 Past, Present & Future of
Fertilizer Industry
2.3 IFFCO in Fertilizer
Industry

13

2.1 INTRODUCTION
India is basically an agricultural country which economy depends
largely upon its agrarian produce. Agricultural sphere contributes about 25%
to the countrys GDP. As a result, Indian fertilizer industry has tremendous
scope in and outside the country as it is one of the allied parts of agriculture.
FERTILIZER INDUSTRY IN INDIA CONTRIBUTES 25% TO GDP
Today, Indian Fertilizer Industry is developing in terms of technology.
Indian manufacturers are adopting advanced manufacturing processes to
prepare innovative new products for Indian agriculture. India has entitled as
the third largest producer and exporter of nitrogenous fertilizer.
Growth of Fertilizer Industry in India
Fertilizer industry in India is meeting all the requirements of
agricultural industry since the time of its inception in 1906. The first plant for
fertilizers manufacture was set up in the same year in Ranipet, Chennai.
Then established the first two large-sized fertilizer plants, one was the
Fertilizer & Chemicals Tranvancore of India Ltd. (FACT) in Cochin, Kerala, and
the another one was Fertilizers Corporation of India (FCI) in Sindri, Bihar.
These two were established as pedestal fertilizer units to have self
sufficiency in the production of foodgrains. Afterwards, the industry gained
impetus in its growth due to green revolution in late sixties, followed by
seventies and eighties when fertilizer industry witnessed an incredible boom
in the fertilizer production.
The tremendous demand of fertilizers has led the country to invest
huge in the public, co-operative and in private sectors. At present, India has
more than 57 large sized plants of fertilizers, manufacturing wide assortment
of fertilizers including nitrogenous, phosphatic, Ammonium Sulphate (AS),
Calcium Ammonium Nitrate (CAN) urea, DAP and complex fertilizers. Apart
from it, there are other 64 small and medium scale Indian manufacturers
producing fertilizers.
The speedy growth in the fertilizers production is swaying the Indian
manufacturers to transform into Indian exporters, and helping them create a
long lasting impression on global consumers.

14

2.2 PAST, PRESENT & FUTURE OF FERTILIZER INDUSTRY IN


INDIA
2.2.1. Production:
One of India's key budgetary subsidies is for fertiliser, estimated at around US$ 2.8
billion during 2000-01. As an element for attaining self sufficiency in food production, the
Indian Government has over many decades maintained the necessity of producing a
significant percentage of national fertiliser consumption. India produces about 90 per cent of
its requirements for nitrogen fertilisers, mainly urea, and about 70 per cent of phosphate
fertilisers, while importing all potassium fertilisers. Domestic production of urea by various
government-owned manufacturing units is about 21 million tons. Sixty per cent of India's
installed nitrogen fertiliser capacity is based on gas, with the remaining 40 per cent based
on the now more expensive naphtha or fuel oil feed stocks. Both domestic and imported
fertilisers are sold to farmers at a set price, somewhat well below the prevalent world prices.

2.2.2. Prices and Costs:


India's production costs for urea, until a few years ago was below world prices,
currently average well above world levels and vary across manufacturing units in the
country, ranging from US$ 100/ton to more than US$300/ton. High domestic prices and high
taxes on naphtha/fuel oil/low sulfur feed stocks in most states are a major factor in pushing
the costs up.
Whereas, the import price for urea ranges from US$150/ton to US$188/ton. Indian
farmers pay about Rs. 4600/ton (US$ 98/ton) compared to Bangladesh US$ 119/ton,
Malaysia US$ 191/ton, Pakistan US$ 160/ton and Thailand US$ 174/ton. While a large chunk
of the subsidy goes to the farmer, the urea producers benefit heavily under the retentionprice-cum-subsidy (RPS) scheme, under which they get their cost (calculated by plant) plus
12 per cent reimbursed by the government. Phosphate producers in contrast get a flat
subsidy amount adjusted on an annual basis. As a result, this huge subsidy has enriched
fertiliser producers and rewarded the most inefficient producers in the country.

2.2.3. A Failed Mechanism:


The plant specific RPS price scheme has encouraged urea producers to shift
production to high cost plants and has discouraged efficiency. The industry faces strict
controls, shortages of feed stocks, delayed subsidy payments, a controlled selling price, and
restrictions on new investment, which mainly occurs in planned expansions of capacity at
public sector units, which themselves choose the most expensive options.
The industry has complained that it is not getting its required annual return of 12 per
cent. In fact, the fertiliser industry argues that the real benefit of the subsidy goes to the
petroleum and gas companies, mainly public sector oil enterprises, and comes back to the
government as profits from these undertakings. Further, the higher subsidies on nitrogen
fertilisers have severely distorted the mix of fertilisers used by farmers away from
the optimum ratio of 4:2:1 for nitrogen/phosphate/potassium to 8:3:1.

15

WTO and its implications: As is common knowledge, all nitrogen fertiliser imports are
channeled through the government, which subsidises the price of imported as well as
domestic fertiliser. The imports of phosphate and potassium fertilisers are free, but the
government still subsidizes their sale, though in the case of phosphate fertilisers domestic
production gets a higher subsidy than imported products.
Until recently, fertiliser had a zero duty, though in the last year the government
imposed a five per cent customs duty, despite the fact that the government pays the
additional cost. WTO commitments should eventually force the government to end
channeled imports of urea. The tariff on phosphate fertiliser is bound at 5 per cent but urea
it is not. Though, India would be able to levy urea tariffs to protect domestic industry against
imports but that would complicate farmer subsidies and it would no longer be able to pay
differential subsidies on domestic and imported fertilisers. Thus it is expected that the
fertilizer subsidy to both farmers and industry will get cut or reduced over a short period of
time. To study the impacts of the WTO agreements on the Indian fertiliser industry, the
fertilizer ministry has set up a task force which is being headed by the secretary for fertiliser.

2.2.4. The Changed Scenario:


India has been importing as much as 60-65 per cent of all finished di-ammonium
phosphate (DAP) from the United States. Since decontrolling phosphatic fertilizer imports the
Indian government has constantly adjusted the levels of subsidies to DAP producers and
importers, with higher subsides going to producers. The subsidy for imports has not matched
recent hikes in world prices for DAP, making it uneconomical for private players to import
the product. The government-owned fertiliser trading company has stepped in to cover the
import shortfall at a loss, but the company this time has not chosen from traditional US.
Seeing this step as a major loss to the US fertiliser industry, the representatives from
the US industry have initiated informal discussions with the Indian government and trade
officials to check what has evolved as a "recanalization" of DAP imports and reversal of the
efforts to liberalize fertilizer imports. It may be interesting to note here that the imports of
finished di-ammonium phosphate (DAP), from the United States has reduced from US$ 200300 million down to nil in the current year.

2.2.5. Rationalising Fertiliser Subsidies:


The deadly combination of rising production costs, increased pressure to cut
subsidies and possible new trade requirements is driving a push for reform in the Indian
fertiliser sector.
The complexity of the problem has triggered a heated debate on how best to make a
transition from a protected pricing environment to a market driven regime. The highpowered Hanumantha Rao Committee (HRC) on fertiliser pricing in 1998 recommended
gradually deregulating the industry, discontinuing the RPS for urea plants and instituting a
uniform subsidy based on a referral price.
The Ministry of Chemicals and Fertilizers released a draft long-term fertiliser policy
based on the HRC report, in July this year (2000), which aims to adopt a single retention
price for the entire industry, while providing some cost reimbursements to less efficient units
using naphtha and fuel oil for a limited period. The fertiliser ministry has also started several
"road-shows" to invite the views of farmers, consumer organizations, media, industry,
and government officials on the draft fertilizer policy to incorporate their views in the final
version.

16

Meanwhile, the Expenditure Reforms Commission (ERC), set up by the finance


ministry in September 2000, recommended gradually phasing out fertilizer subsidies by
2006, with a seven per cent annual real increase in urea prices. The ERC proposed group,
rather than unit, pricing for the industry component of the subsidy.
To protect small farmers, the ERC recommends the distribution of subsidized
fertilizers of 120 kgs for each cultivator. A few are of the view that the RPS be replaced with
a flat rate of subsidy of Rs. 1500/ton reduced over several crop seasons. For plants that are
badly hit, a one-time capital subsidy can be considered. Though the industry has opposed
the move away from unit pricing, arguing that half of the urea units would be forced to close
because even their short-term variable costs are higher than import prices. They predict dire
results; lower domestic production would push up import prices and reduce fertilizer use and
agricultural production.

2.2.6. Back to the Future:


Though, varying in detail, most of the recommendations are basically similar, such as
- end the RPS and adopt uniform industry subsidy that is phased out over time. Many
recommend phasing out or at least reducing farmer subsidies. During most of the history of
fertilizer subsidies, farmers were penalized by receiving below world prices for food grain.
Today, in fact, farmers get more than world prices, so little justification remains for
subsidizing a key input.
Further there is evidence that the skewed fertiliser applications encouraged by the
subsidies is one factor behind India's relatively low yields. Ending subsidies could in the end
improve agricultural output. Even though India imports only a modest portion of its fertiliser
needs, it is major importer in the world market. Importing a larger share of its needs could
push up world prices, which at any rate can be volatile given the dependence on carbonbased feed stocks, so much greater reliance on imports is not necessarily a sound solution.
The main need, according to experts, is to encourage a more flexible and efficient domestic
industry and to rationalise input prices. Given the distortions that have built up, the fertiliser
industry will need to receive continued government support in some form or the other during
a transition period.

17

3. IFFCO at a glance
3.1 History
3.2 Vision
3.3 Mission
3.4 Limitation of the study

18

Type

Cooperative

Founded

New Delhi, India (November 03 1967)

Headquarters

New Delhi, India

Key people
Website

U.S. Awasthi, Managing Director


http://www.iffco.nic.in

3.1. History:
During mid- sixties the Co-operative sector in India was responsible for distribution of
70 per cent of fertilizers consumed in the country. This Sector had adequate infrastructure to
distribute fertilizers but had no production facilities of its own and hence dependent on
public/private Sectors for supplies. To overcome this lacuna and to bridge the demand
supply gap in the country, a new cooperative society was conceived to specifically cater to
the requirements of farmers. 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 number of co-operative societies associated with IFFCO has risen from 57 in
1967 to 38,155 at present.

Indian Farmers Fertilizer Co-operative Limited (IFFCO) was registered on November 3,


1967 as a Multi-unit Co-operative Society. On the enactment of the Multistate Co-operative
Societies act 1984 & 2002, the Society is deemed to be registered as a Multistate Cooperative Society. The Society is primarily engaged in production and distribution of
fertilizers. The bylaws of the Society provide a broad frame work for the activities of Indian
Farmers Fertilizer Cooperative Limited as a Co-operative Society.

19

IFFCO commissioned an ammonia - urea complex at Kalol and the NPK/DAP plant at
Kandla both in the state of Gujarat in 1975. 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 program 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 realized without time or cost overruns. All the production units of IFFCO
have established a reputation for excellence and quality. As part of the new vision, IFFCO has
acquired fertilizer unit at Paradeep in Orissa in September 2005.

3.2. VISION
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.

3.3. MISSION

To provide to farmers high quality fertilizer in right time and in adequate quantity
with an objective to increase crop productivity.
To make plants energy efficient and continually review various scheme to converse
energy.
Commitment to health, safety, environment and forestry development to enrich the
quality of community life.
Commitment to social responsibility to strong social fabric.
To institutionalize core value and create a culture of team building, empowerment
and innovation which would help in incremental growth of employees and enable
achievement of strategic objectives.
Building a value driven organization 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 technology and
sourcing raw materials of production of phosphate fertilizers at economical cost by
entering into joint venture outside India.
To ensure growth in core and non-core sector.

20

3.4. VISION 2015


IFFCO successfully implemented its earlier Corporate Plans namely VISION 2000,
MISSION 2005 and VISION 2010 which resulted into becoming one of the largest producer
and marketer of Chemical Fertilisers by expansion of IFFCOs existing units, setting up joint
venture companies overseas and diversification into new sectors.

IFFCO has now visualised a comprehensive Plan entitled VISION-2015 VISION 2015
having objectives of :

Production of fertilisers through expansion of existing units


Setting up of additional fertiliser production facilities in India and Abroad through joint

ventures
Diversification into other profitable sectors
Strengthening raw material sourcing through Strategic joint ventures
Formulation of Strategic Alliances through IFFCO consortium

3.5. UNITS OF IFFCO


Plant

Commissioni Fertilizer

Product

Location

ng Date

Name

Product

Brand

Reassessed
Capacity
('000'MTPA)

Kalol, Gujarat 31.01.1975

Urea

IFFCO Urea

544.5@

Phulpur-I, U.P. 15.10.1980

Urea

IFFCO Urea

511.5

Phulpur-II, U.P. 31.10.1997

Urea

IFFCO Urea

853.4

Aonla-I, U.P.

18.05.1988

Urea

IFFCO Urea

853.4

Aonla-II, U.P.

26.11.1996

Urea

IFFCO Urea

853.4

Kandla-

28.11.1974

NPK/ DAP

IFFCO NPK/DAP

309.1 (P2O5)

10.06.1999

NPK/ DAP

IFFCO NPK/DAP

251.9 (P2O5)

I,Gujarat
Kandla-II,
Gujarat

21

3.6. INVESTMENTS OUTSIDE IFFCO


(As on 31.03.2010)
Indian Potash Ltd (IPL)
IFFCOs Equity
Percentage of Equity held
Activity

: Rs. 2.68 Crore


: 34%

:Marketing of Potash and Imported Fertilizers

Industries Chimiques du Senegal (ICS) I & II


IFFCOs Equity
Percentage of Equity held
Plant Site
Products

: Rs. 80.37 Crore


: 18.54 %
: Darou Darou, Senegal
: Rock Phosphate, Phosphoric Acid and NPK Fertilisers

IFFCO - TOKIO General Insurance Company Ltd. (ITGI)


IFFCOs Equity Investment
Percentage of Equity held
Activity

: Rs. 303.78 Crore


: 72.64%
: General Insurance

Oman India Fertiliser Company (OMIFCO)


IFFCOs Equity
Percentage of Equity held
Plant Site
Products

: Rs. 329.08 Crore


: 25%
: Sur, Oman
: Ammonia, Urea

National Commodity and Derivative Exchange (NCDEX)


IFFCOs Equity Investment : Rs. 13.50 Crore
Percentage of Equity held
: 12%
Redeemable Preference Shares
: Rs. 10 Crore
Activity
: On Line Trading in commodity futures

National Collateral Management Services Ltd. (NCMSL)


IFFCOs Equity
Percentage of Equity held
Activity

: Rs Rs. 4 Crore
: 13.56%
: Collateral Risk Management Services

IFFCO Chhattisgarh Power Ltd


Project Cost (Estimated)
IFFCOs Equity investment
Debt : Equity Ratio
IFFCO Equity
Activity

: Rs. 7500 Crore


: Rs.51.80 Crore
: 70 : 30
: 74%
:Power Generation MW)

Kisan International Trading FZE (KIT)


Investment
IFFCOs Equity
Location
Activity

: Rs. 11 Crore*
: Rs. 1.20 Crore
: Dubai
: Special purpose vehicle (SPV) for shipping, logistics and
investments in new overseas Joint Ventures.
* Includes Rs. 9.80 crore towards 9 bonus shares
received during 2007-08

22

Jordan India Fertiliser Company (JIFCO)


Project Cost
IFFCO Equity
Activity

: USD 640 Million


: 52% (Rs. 59.11 Crore)
: Phosphoric Acid Plant (1500 MT/Day)

IFFCO Kisan Sanchar Ltd. (IKSL)


Paid up Share Capital
IFFCO Equity
% of Equity held
Activity

: Rs. 5 Crore
: Rs. 3.65 Crore
: 72.99 %
: Rural Telecom related Services

LEGEND INTERNATIONAL HOLDING AUSTRALIA


PERCENTAGE EQUITY HELD BY KIT : 11%
ACTIVITY
: Mining of rock phosphate

FREE PLAY ENERGY INDIA LTD.


IFFCO EQUITY
IFFCO INVESTMENT
ACTIVITY

: 30%
: Rs. 4.83 crore
: Non conventional energy products and devices

ARIA CHEMICALS (ORISSA) LTD.


IFFCO EQUITY
IFFCO INVESTMENT
ACTIVITY

: 40%
: 0.45 crore
: Aluminium fluoride facility at Paradeep for production of
20000 MT Aluminium Fluoride

IFFCO Kisan SEZ Ltd.


Project Cost
IFFCO Equity
Activity
Nellore (AP)

: Rs. 660 Crore


: Rs. 0.25 Crore
: Setting up Multi product IFFCO Kisan SEZ at

23

3.7. IFFCO CASH AWARDS IN CO-OPERATION


The Board of Directors in the year 1982 had approved giving a best cooperator Award
on an annual basis, to an individual who has contributed maximum towards development of
Cooperative Movement. The amount of Cash Award was fixed at Rs.10,000/- along with a
citation. This amount was enhanced by the Board in the year 1988 from Rs.10,000/- to
Rs.25,000.
The Board of Directors in the year 1993 while approving IFFCO Cash Award on
Cooperation for the years 1990-1991 & 1991--1992 to the Best Cooperators, inter-alia
approved that in addition to the Best Cooperator Award, IFFCO Sahakarita Bandhu Award
may also be instituted from the year 1993-94. The amount of both the Awards namely
IFFCO Cash Award on Cooperation to the Best Cooperator, (ii) IFFCO Sahakarita Bandhu
Award, was fixed at Rs.51,000/- each from the year 1993-94 to be presented every year. In
the year 1997 the Board of Directors decided that the name of the Best Cooperator Award
should be changed to Sahakarita Ratna Award. In the year 2000 it was decided that the
amount

for

each

award

be

increased

from

Rs.51,000/-

to

Rs.1,01,000/-.

As per the laid down procedure for inviting recommendations for the Awards, a letter
is addressed to all the State Cooperative Unions, IFFCO Directors and NCUI requesting them
to recommend the names of two nominees for the each award. The recommendations so
received are placed before the Sub-Group on Awards of the Board of Directors for Screening
of nominations of Cooperators. The recommendation of the Sub-Group of the Award are
placed before the Board of Directors for their consideration and approval. The Awards are
presented to the Awardees on the occasion of Jawaharlal Nehru Memorial IFFCO Lecture
which is organised generally during Cooperative Week i.e. November 14-20 every year.

The "Sahakarita Ratna" Award for the year 2006-07 was conferred on Shri Ashok
Bandyopadhyay of West Bengal State. The honour of Sahakarita Bandhu Award for the

24

year

2006-07

was

conferred

on

Shri

U.S.

Singhdev

of

Chhatisgarh

State.

25

IFFCO's Corporate Film Wins NCUI's Award.

IFFCO Wins PRSI Award

Phulpur Unit Wins National Energy Conservation Award-2006

Aonla Unit wins National Energy Conservation Award-2006

IFFCO Kalol Wins "National Energy Conservation Award: 2006"

Kandla Unit wins FAI Prize

Kalol unit Wins 'Gujarat State Safety Award'

Kandla Unit Wins - Golden Peacock Environment Management Award

Phulpur Unit bags National Energy Award from Honourable President of India

Best Managed Work Force Award for IFFCO

IFFCO Aonla Unit Wins National Safety Council of India Safety Award-2004

IFFCO Aonla Wins National Safety Award

3.8. BANKERS

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

Cooperative Bank Ltd.


The
Punjab
State

Cooperative Bank Ltd.


ICICI Bank Ltd.
IDBI Bank Ltd.
The
Hongkong
Shanghai

State

and

Banking

Corporation Ltd.

3.9. AUDITORS
(1) M/s. S. Mann & Co.,
Chartered Accountants,
1006, 10th Floor,
Vikrant Tower,
Rajendra Place,
New-Delhi-110 008.

26

27

(2) M/s S. Mohan & Co.,


Chartered Accountants,
G-47, Connaught Circus,
New Delhi-110 001.

(3) M/s. G. S. Mathur & Co.


Chartered Accountants,
A-160, Defence Colony,
New Delhi-110 024.

28

3.10. IFFCO-KALOL
Head Of the Unit: Mr. H. D. Mistry | Senior General Manager
Production Capacities:
Ammonia- Urea Complex Commissioned in 1975
Ammonia - 0.36 million TPA
Urea - 0.55 million TPA

Key Info:

Plant)

State
State Capital
District
Distance from New Delhi
Distance from Mumbai
Nearest Airport

Gujarat, India
Gandhi Nagar, is about 18 Km from the plant site.
Gandhinagar
912 Km
514 Km
Ahemdabad (About 25 Km. away from

Railway Station
Road

Kalol (7 Km from the plant)


Ahmedabad
(25
Km
from
the
plant)
On Ahmedabad-Mehsana State Highway (SH)
96 Hectares
22 Hectares
45 (Maximum) in summer to 4 (Minimum) in

Area under Plant


Area under Township
Temperature (oC )
winter.
Rainfall (mm)
Longitude
Latitude

742
72-31-40
23-12-3

Milestones of Project Implementation


Commissioning

Ammonia Plant
Urea Plant
Dry Ice Plant

Products

Nov.05, 1974
Jan. 31, 1975
Mar. 28, 1978

Present Capacity (In TPA)

AMMONIA
UREA

363000
544500

Raw Materials
Particulars
Natural Gas (GAIL)
Associated Gas (GAIL)
Gas/ R-LNG
Spot Gas
RIL Gas
Naphtha
LSHS
Caustic Sode (46%)
HCI (31%)

Unit
MMSM3
MMSM3
MMSM3
MMSM4
MMSM3
MT
MT
MT
MT

2010-11
0
424
9
749
0
310
910

0
415

Sulphuric Acid (98%)

MT

47

4.

Working

Capital

Management
4.1 Operating Cycle
4.2 Ratios - Inventory Mgt.
4.3 Ratios - Receivable Mgt.

4.1 OPERATING CYCLES


4.1.1. Days Inventory Outstanding (DIO)
Days
Inventory
Outstanding (DIO)

Average Inventory
=

Cost of Goods sold (COGS) /


365
(in Rs. Crores)

Year

Average
Inventory

2006-07
2007-08
2008-09

976.03
1225.57
1901.79

2009-10

1930.52

2010-11

1654.23

COGS

DIO (number
days)

6809.48
9166.48
9578.09
11336.7

of

52.317
48.801
72.473
62.155

31496.7
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 2010-11 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.
The DIO had always been showing a decreasing trend apart from the period of 200607 in which inventory was build up due to the purchase of Paradeep plant.

4.1.2. Days Sales Outstanding


Days Sales
Outstanding
(DSO)
Year

Average
Receivable
Net Sales / 365

Avg.A/c
Receivables
(in crores)

Net Sales
(in
Crores)

Accounts

DSO
(number
days)

of

200607

397.025

7396.87

19.591

399.495

9942.93

14.665

418.04

10330.11

14.771

387.72

12162.82

11.635

410.495

32933.30

4.550

200708
200809
200910
201011

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 2010-11 is 4.550, which is very good for the company. The
DSO is showing a decreasing trend meaning that the days to collect on sales are decreasing
every year.

4.1.3. 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
days)

200607

728.425

6809.48

39.045

934.165

9166.48

37.198

913.425

9578.09

34.809

833.87

11336.77

26.847

1664.225

31496.75

19.286

200708
200809
200910
201011

Analysis

of

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.
The DPO of IFFCO is around 19 days for the year 2010-11. 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.

4.1.4. Gross Operating Cycle


Gross Operating Cycle = DIO + DSO
Year

DIO

DSO

GOC

2006-07
2007-08
2008-09
2009-10
2010-11

52.317
48.801
72.473
62.155
19.170

19.591
14.665
14.771
11.635
4.550

71.908
63.466
87.244
73.791
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 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.

4.1.5. Cash Conversion Cycle (CCC)


Cash Conversion Cycle = DIO + DSO - DPO
(Rs. In Crore)
Year

DIO

DSO

DPO

CCC

2006-07
2007-08
2008-09
2009-10
2010-11

52.317
48.801
72.473
62.155
19.170

19.591
14.665
14.771
11.635
4.550

39.045
37.198
34.809
26.847
19.286

32.863
26.269
52.435
46.943
4.434

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 2010-11. 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.

4.2 RATIOS RELATED TO INVENTORY MANAGEMENT


9.2.1. Inventory Turnover Ratio
Inventory
Turnover
Ratio

Cost of Goods sold


(COGS)
Average Inventory

Average
Year

(in Rs. Crores)


Inventory

COGS
Inventory

Turnover Ratio

200607
2007-

6809.48

976.03

6.977

08
2008-

9166.48

1225.57

7.479

09
2009-

9578.09

1901.79

5.036

10
2010-

11336.77

1930.52

5.872

11

31496.75

1654.23

19.040

Analysis

The inventory turnover ratio at IFFCO is 19.040 in 2010-11. 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.

4.2.2. Inventory to Working Capital Ratio


Inventory to
Working Capital Ratio = Inventory100 /Working Capital

Inventory
Year

(in
Crores)

Working
Capital

(in

Crores)

Inventory to
Working Capital
Ratio

200607
2007-

931.50

1499.14

62.136

08
2008-

1519.64

3387.39

44.862

09
2009-

2283.94

4880.05

46.802

10
2010-

1577.10

4404.17

35.809

11

1731.36

4490.10

38.559

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 2009-10 and in 2010-11.

4.2.3. Inventory to Current Assets Ratio


Inventory to
Current Assets Ratio = Inventory100 /Current Assets
Current
Inventory
Inventory

Assets

Year

Current
(in Crores)

to
Assets

(in
Ratio

2006-07
2007-08
2008-09
2009-10
2010-11

Analysis

931.50
1519.64
2283.94
1577.10
1731.36

Crores)
2603.98
4748.98
6081.28
5775.74
7672.99

35.772
31.999
37.557
27.306
22.564

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%.

4.2.3. Inventory to Sales Ratio


Inventory to
Sales Ratio = Inventory 100 /Sales
Sales
Inventory
Year

Inventory
(in

(in Crores)
2006-07
2007-08
2008-09
2009-10
2010-11

931.50
1519.64
2283.94
1577.10
1731.36

to Sales Ratio
Crores)
7396.87
9942.93
10330.11
12162.82
32933.30

12.593
15.284
22.110
12.967
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 2009-10 but is falling
down consistently after that time, which is a POSITIVE sign indicating good
movement of inventory.

4.3 RATIOS RELATED TO RECEIVABLE MANAGEMENT


4.3.1. Debtors turnover ratio

Debtor Turnover Ratio = Net sales /A/c Recevables


Net
Avg. A/c
Sales

Debtor

Year

Receivables (in
(in

Turnover Ratio
Crores)

2006-07
2007-08
2008-09
2009-10
2010-11

Crores)
7396.87
9942.93
10330.11
12162.82
32933.30

397.03
399.50
418.04
387.72
410.50

18.631
24.888
24.711
31.370
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.

4.3.2. Average collection period


Average Collection Period = 360 / Debtor Turnover Ratio

Year

Sales (In Crores)

Average

Debtor

Average
Debtors Turnover
(in Crors) Ratio

2006-07
2007-08
2008-09
2009-10
2010-11

Analysis

7396.87
9942.93
10330.11
12162.82
32933.30

397.03
399.50
418.04
387.72
410.50

18.631
24.888
24.711
31.370
80.227

Collectio
Period

19.323
14.465
14.569
11.476
4.487

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 2010-11. 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 19
days in the year 2006-07 and is decreasing since then.

5. 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.
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.

6. CONCLUSIONS AND SUGGESTIONS


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.
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.

7. BIBLIOGRAPHY
Books

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, 2nd Edition.

Pandey, I M 2010. Financial Management. Vikas Publishing


House, 10th 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

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 shortterm 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.
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
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.

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


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


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.
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

Working Capital (in Rs.)

business.

Te
mporary
Working
Capital

Per
manent
Working
Capital

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 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

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.

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 to plough back profits. This gains
the confidence of its investors and creates a favorable market to raise additional
funds in the future.

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.

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.
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 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:

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:

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
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.
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

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.