Company Profile

Company Background:
Consequence upon the abscondment of the owner of the project after liberation of the country on 16 the December, 1971, the unit was declared as an abundant property and was subsequently nationalised and placed under the control and management of Bangladesh Engineering and Ship Building Corporation in 1972 as par provision of the Bangladesh Industrial Enterprises (Nationalisation) Order, 1972(P.O. No. 27 of 1972). In the year 1976, Bangladesh Engineering and Ship Building Corporation and Bangladesh Steel Mills Corporation were merged into Bangladesh Steel and Engineering Corporation as par provision of ordinance number no. XXV of 1976 and since then the unit has been operating under the control, coordination and supervision of Bangladesh Steel and Engineering Corporation. During the period of operation of the unit of the corporation, it has expended twice and further to separate mills were established. It is now consist of three separate mills. Mill no 1,2 and 3 having annual production capacity of 6000 Metric Ton, 9000 Metric Ton and 30000 Metric ton respectively. Mill 1 produces 0.5 to 3 diameter, mill 2 produces 0.5 to 4 diameter and mill 3 produces 4 to 8 diameter pipes. It is also a well-equipped galvanizing section, which can undertake galvanization job of outside parties as commercial basis. The pipes are used for domestic and other water supplies such as tube-wells, shallow and deep tube-wells, and irrigation project and gas supply and distribution purposes. The unit was incorporated as a public Limited Company on 5 th November 1980 with a paid up share capital of Tk. 25,000000 divided into 2,50,000 ordinary shares of Tk.100 each issued to the Government of Peoples Republic of Bangladesh and its 7 other nominees. The certificates of commencement of business were also obtained on the same date. On pursuance of the policy of the Government of Peoples Republic of Bangladesh, 49% of the shares of the company have been offered for public subscription by transfer after revaluation of assets as well as finalisation of the net worth of the company. The final restructure has been made by the government under P.O No. of 1972 as amended by the Bangladesh Industries Enterprise (nationalization) (amended) Order,1987 (Ordinance No. VII of 1987). The company was listed in Dhaka Stock Exchange in 1989.The net worth of the company after re-valuation has been estimated Tk. 136,558,559.

Management Structure:
The company had 7 directors including the chairman of the board. Who will be nominee of the corporation and represent group shareholders. The number of shareholders of the company is currently 2556. After issuance of shares of the company to the public the total number of directors are 9 until otherwise decided in the general meeting and they shall be nominated / appointed / elected.

Company Site:
The company owns and operates at 131-142 Tangi Industrial Area, Gazipur. It has 14.31 acres of land in its possession. The company enjoys all industrial and infrastructure facilities.

Production Capacity:
The company established in 1964. The mill no 1 of the company went into commercial production in the financial year 1964-65 and subsequently two new mills were established which started commercial production in financial year 1979-1980 and financial year 1981-82. The total production of these mills is 45000 Metric Ton per year. But due to declaration of the 1st unit as abandoned in 1993 the installed capacity stood at 39000 Metric Ton of which attainable capacity is 10000 Metric Ton.

Products:
The company is the largest MS and GI Pipe manufacturing project of the country and for manufacturing of the lighter diameter pipes. These are produced according to the British Standard BS-1387 and Bangladesh Standerd-1031. It is the lone manufacturer of APC (American Petroleum Institution) grade pipes. These pipes are produced according to the requirements of API specification Q1 and 5L.

Buyers:
The buyers of the products can be divided in two main categories. Institutional buyers and private buyers. The main buyers are: i) ii) iii) iv) BGSL Titas Gas Transmission and Distribution Company Limited Jalalabad Gas Transmission and Distribution Company Limited Pachimanchal Gas Project

Reputation and Demand:

The company has the highest reputation in the market for its superior quality of products and for this enjoys highest demand from customers. The company plays important role in national economy in general and agricultural irrigation and gas supply sector in particular. Besides, the company is alone meeting almost full requirement of domestic water supply pipes. As it covers all development activities of the country and infrastructure improvement the demand of the companys product would increase day by day and these would not be any marketing problem.

Business and Ownership Pattern:

National Tubes Limited (NTL) was a government owned pipe production company before privatization. Since then Bangladesh Steel & Engineering Corporation has been holding 51% of total share The companys business and ownership pattern can be broadly categorized and 3 groups where Group A is Bangladesh Steel & Engineering Corporation; Group B(1) belongs Shares of general public and Group B(2) belongs shares of workers staffs and officers. 2

Management of Working Capital

National Tubes different components of working capital:
In general working capital refers to all these assets and liabilities. Frequently by the concept of working capital we mean the net amount of working capital, which is the difference between current assets and current liabilities (Working capital= Current asset Current liabilities).

Current Assets:
The current Assets of National Tubes Ltd. Includes 1. Stock of Goods 2. Raw materials and chemicals 3. Stores and spares 4. Work in progress 5. Finished goods 6. Stores in Transit 7. Trade Debtors 8. Inter project current account 9. Current Account with disinvested BSEC Mills 10. Advances Deposits and pre payments 11. Advance income tax payments 12. Cash and Bank Balances

Current Liabilities:
The current liabilities of National Tubes Ltd. includes 1. 2. 3. 4. 5. 6. 7. 8. 9. Current liabilities Bank loan Short Term BSEC (current Account) Inter project current account Current account with disinvested BSEC mills Deposits Liabilities for goods supplied Liabilities for expenses Liabilities for other finance 3

10. Advance against sales 11. Unpaid dividends 12. Workers welfare fund 13. Workers profit participation fund 14. Provision for income tax 15. Proposed Dividend 16. Provision for dividend distribution

Strategies of working capital of National Tubes:

National Tubes Ltd. is using Traditional or Conservative approaches of working capital management as its current assets are financed through long-term liabilities significantly. This is a sign of a healthy firm. The firms current ratios for last 3 years are 2.42, 2.21, and 2.43. This magnitude of the ratio indicates that most of the investment comes from long term funds of the firm.

Working capital of National Tubes Ltd.

30.06.03 (Tk.) Current Liabilities Bank loan Short Term BSEC (current Account) Inter project current account Current account with disinvested BSEC mills Deposits Liabilities for goods supplied Liabilities for expenses Liabilities for other finance Advance against sales Unpaid dividents Workers welfare fund Workers profit participation fund Provision for income tax Proposed Dividend Provision for divident distribution tax

30.06.04 (Tk.)

30.06.05 (Tk.)

30.06.06 (Tk.)

30.06.07 (Tk.)

14877205 7408909 761527 216361 3862904 216304 13845393 36196751 6775215 7704725 0 3505178 153232846 18750000 1875000 269228318

0 2908240 324942 216361 3574833 43864 15094335 36381362 41853045 11580225 0 6710100 171909563 11250000 1125000 302971870

0 3319958 324442 216361 3756891 47106 17670873 14510359 8536315 10435525 8680478 221388287 21000000 0 309886595

0 0 316508 216361 3722096 418999 15696274 13960014 10274347 6685000 0 4081540 244653062 42000000 0 341647101

36032233 0 185761 216361 3704356 41899 21175193 14200440 7542966 17090487 497485 1989938 171319997 7000000 0 280997116

Current Assets Raw materials and chamicals Stores and spares Work in progress Finished goods Stores in Transit Stock of Goods BSEC Current Accounts Trade Debtors Inter project current account Current Account with disinvested BSEC Mills Advances Deposits and pre payments Advance income tax payments Cash and Bank Balances

43753146 37629053 50874112 74947615 5174705 212378631 0 79965142 13396031 4344953 86351419 151800136 777901 549014213

22857380 35644191 28750764 33254847 5116500 125623682 0 115018936 13451374 3245189 85375132 163197784 150461305 656373402

150451561 35754132 25901859 26291476 62455863 300854891 0 103108837 13436234 3245189 67197768 231898139 29659213 749400271

58569797 38654920 25944081 31009245 5126588 159304631 342961 126551041 7394494 9344073 51039383 265116871 134831196 753924650

186342780 40130648 26220159 23716781 6389550 282799918 2580930 93934238 7291506 9344073 51882289 225396704 8370508 681600166

Net Working capital Change in working Capital

279785895

353401532 26.31%

439513676 24.37%

412277549 -6.20%

400603050 -2.83%

Accrued direct labor & Material Production Process

Accrued Fixed operating Expense

Fixed Assets Inventory

1) Raw Materials 2) Stores & Supplies 3) Finished Goods 4) Stores in Transit

Cash & Marketable Securities

(Debenture sold to Rupali and Pubali Bank)

1) Land 2) Building 3) Plant & Machinery 4) Furniture 5) Roads & culverts 6) Vehicles

Suppliers of Capital
ADP GOB Public Banks

Dividend/ Interest
1) Cash 2) Bonus

Accounts Receivable

Figure: Working Capital Cycle of National Tubes Limited

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Aggregate Liquidity
The overall relationship between a firms potentially available cash and its potential cash needs is known as a firms aggregate liquidity position. The liquidity position of National Tubes Ltd. represents gross hedge of its larger volume of current assets which provides much more cash then is needed for meeting cash needs for1) Current liabilities 2) Minimize changes of a cash stock situation. Cash is required to measure and manage its aggregate liquidity position as it has significant risk and return implications. Proper management of a firms liquidity requires proper measurement of its liquidity position which can also help to take the credit granting decisions.

Traditional Measurements of liquidity:

Liquidity can be thought of as the firms ability to quickly generate cash versus the firms need for cash on short notice. Below in the table these are the ratios of National Tubes Ltd. from year 2003 to 2007.
Year Current Ratio Quick Ratio Cash Ratio Receivables Turnover Avg. Receivables Collection Period Inventory Turnover Avg Inventory Processing Period 2003 2.04 1.25 0.37 4.04 90.25 0.99 367.76 2004 2.17 1.75 0.83 4.27 85.49 2.51 145.16 2005 2.42 1.45 0.18 8.18 44.62 2.07 176.18 2006 2.21 2.21 0.21 4.79 76.19 3.02 120.80 2007 2.43 2.43 0.13 7.72 47.31 2.21 165.06

Now we will explain the liquidity situation of the company from the calculated ratios.

1.

Current Ratio: Clearly the best known liquidity measure is the current ratio which examines the relationship between current assets and current liabilities. The formula of calculating current ratio is Current Ratio = Current Asset / Current Liabilities 8

Current ratio 2.60 2.40 2.20 2.00 1.80 2003 2004 2005 2006 2007

This ratio of National Tubes experienced a significant gain during these 5 years and is very much consistent with this type of ratio. This means that the current assets of the company are increasing more then the current liability. This significant growth has been achieved mainly by increase of Raw materials and chemicals.

2.

Quick Ratio: When we calculate liquidity position of National Tubes we can see that there are items in current asset which are in nature not to liquid. So quick ratio is calculated to measure the most liquidated assets of the company. The formula of calculating quick ratio is

Quick ratio = (Current Asset Inventories) / Current Liability

Qu Ratio ick

2.5 0 2.00 1 0 .5 1 .00 0.5 0 0.00 2003 2004 2005 2006 2007

The ratio from year 2003 to 2007 has increased as like as the current ratio which means that the inventory increase of the company has very little effect on the liquid assets of the company. The liquidity position is quite good for the company. For every 1 taka of current liability the company has around 2 taka of liquid assets.

3.

Cash Ratio: The most conservative liquidity ratio is the cash ratio, which relates the firms cash and short-term marketable securities to its current liabilities. The formula of calculating cash ratio is Cash Ratio = Cash and Marketable Securities / Current Liabilities
Cash Ratio

1 .00 0.80 0.60 0.40 0.20 0.00 2003 2004 2005 2006 2007

The cash ratio of National Tubes Ltd decreased gradually from year 2004 to 2007 due to repayment of Debentures which were sold to Rupali and Pubali bank. But cash holdings are sufficient for company needs.

4.

Receivables Turnover: In addition to examining liquid assets relative to near-term liabilities, it is useful to analyze the quality of the accounts receivable. One way to do this is to calculate how often the firms receivable turn over, which implies an average collection period. The faster these accounts are paid, the sooner the firm gets the funds that can be used to pay off its own current liabilities. The formula to calculate receivable turnover is Receivable Turnover = Net Annual Sales / Average Receivables

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Receivables Turnover

1 0.00 8.00 6.00 4.00 2.00 0.00 2003 2004 2005 2006 2007

The receivables of National tubes Ltd. is around 5 on average. If we analyze the receivables turnover pattern we can see that at 2007 it raised to around 8 which can be a concern for the company cause this indicates the increased debtors which can lead to default.

5.

Inventory Turnover: Another current asset that should be examined in terms of its liquidity is inventory-the firms inventory turnover and the implied processing time. Inventory turnover can be calculated relative to sales or cost of goods sold. The preferred turnover ratio is relative to cost of cost sold because CGS does not include the profit implied in sales. The formula to calculate Inventory Turnover is Inventory Turnover = CGS / Average Inventory

Inventory Turnover

3.50 3.00 2.50 2.00 1 .50 1 .00 0.50 0.00 2003 2004 2005 2006 2007

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The inventory turnover of National tubes Ltd. is around 2.5. Which we can say good as the companies main manufactured products are industrial pipes which are not required a vast amount. So if we compare with other companies of this sector which mainly produces general use pipes the ratio is quite good position.

6.

Average Receivables Collection Period: With the help of receivables turnover we can calculate the average receivable collection period or the period of time at which the receivables are collected from the debtors of the firm. The formula to calculate Average Receivables Collection Period is Average Receivables Collection Period = 365 / Annual Receivables Turnover
Avg Inventory Processing Period 380.00 280.00 180.00 80.00 -20.00 Avg. Recivables Collection Period

2003 367.76 90.25

2004 145.16 85.49

2005 176.18 44.62

2006 120.80 76.19

2007 165.06 47.31

Avg Inventory Processing Period Avg. Recivables Collection Period

7.

Average Inventory Processing Period: Average inventory processing period implies the days or time takes to end a process which has started. The formula to calculate Average Inventory Processing Period is

Average Inventory Processing Period = 365 / Annual Inventory Turnover Average inventory processing period has gradually decreased over the last 5 years. So we can say firms capital is tied up in inventory for fewer periods.

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Sophisticated Techniques for Measuring Liquidity:

There are some relatively new ratios to measure the liquidity position of a company. These techniques can over-come most limitations of the traditional techniques and yet give a comprehensive in sight into a firms liquidity position. Below in the table are the advanced ratios of National Tubes Ltd. from year 2003 to 2007.
Year Operating Cycle Time Payment Deferral Period Cash Conversion Cycle Net Liquid Balance Initial Reserve Expected Cash flow 2003 451.74 0.0804 452 0.16 98403226 49053946 2004 227.49 0.0576 227 0.35 251530630 91556184 2005 217.78 0.0298 218 0.07 56047213 118206214 2006 194.29 0.0370 194 0.25 206331862 56436504 2007 209.46 0.0379 209 0.06 45378852 35399486

Now we will explain the liquidity situation of the company from the calculated ratios.

1) Cash Conversion Cycle: An alternative measure of overall internal liquidity is the cash conversion cycle, which combines information from the receivables turnover, the inventory turnover, and the accounts payable turnover. The point is, cash is tied up in assets for a certain number of days. Specifically, cash is committed to receivables for the collection period and is also tied up for a number of days in inventory-the inventory processing period. The formula to calculate Cash Conversion Cycle is Cash Conversion Cycle = Operating Cycle Time Payment Deferral Period
Cash Conversion Cycle 450 400 Days 350 300 250 200 150 2003 2004 2005 2006 2007

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2) Net Liquid Balance: Considers A/c receivable and inventory as additional assets to be financed. The A/c payable and other accruals that are part of current liabilities are treated not as maturing obligations but as part of the firms permanent financing package similar to long term debt. The formula to calculate Net Liquid Balance is Net Liquid Balance = (Cash + Marketable securities + Notes payable) / Total Assets
N Liquid Balance et 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 2003 2004 2005 2006 2007

Results of NLB show that the liquidity position is favorable in terms of considered variables. 3) Initial Reserve: Initial reserve combines cash, marketable securities and line of credit which are the most liquid sources of funding. The formula to calculate receivable turnover is Initial Reserve = Cash + Marketable Securities + Line of credit
Initial Reserve

300 250 Millions 200 150 100 50 0 2003

2004

2005

2006

2007

Initial reserve is gradually declining with a volatile trend 14

4) Expected Cash Flow: Expected cash flow in the total cash which can be generated by a firm in definite period of time. The formula to calculate receivable turnover is Expected Cash Flow = EBIT + Depreciation

Expected Cashflow 140 120 100 Millions 80 60 40 20 0 2003 2004 2005 2006 2007

From the graph we can see that the cash flow has drastically dropped from 120 million to 38 million. This indicates poor performance for last 2 years

Managing Cash Inflows & Outflows

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How hold cash & marketable securities Cash for transactions: One very important for holding cash in the form of non-interest bearing currency & checking deposits in transaction demand. Since debts are settled via the exchange of cash, the firm must hold some cash in the bank to pay suppliers & some currency to make change if it makes sales for cash. Cash & near-cash assets & hedge: Unfortunately, the firms future cash needs for transaction purposes are often uncertain, emergencies are often may arise for which the firm needs immediate cash. The must hedge against the possibility of these unexpected needs. Several types of hedges are possible. Temporary investments: Many firms experience some seasonality in sales. Often, there will be time during the year where such firms have excess cash that will be needed later in the year. Firms, in this situation have several choices. One alternative is to pay out the excess cash to its security holders when this cash is available & then issue new securities later in the year when funding is needed. However, cost of issuing new securities usually makes this a disadvantageous strategy. More commonly, firms will temporarily invest the cash in interest- earning marketable securities from the time cash is available until the time is in needed.

The money market There are some elements of money market which we are going to discuss in the following stages. Term structure of interest-rate: This is relates the markets required return on an asset to the time to maturity of that asset. Treasury bills: These are securities sold by the government. Commercial papers: It is a large denomination, unsecured debt, generally in maturity of 30days. Certificates of deposits: These are large denomination instruments issued by bank.

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Bankers acceptances: Like certificates of deposits, these are issued by banks but are slightly safer because of the security arrangements entitled. Euro Dollars: These are dollar denominated loans & certificates of deposit in NON U.S. banks. Hedged dividend capture strategies: The securities previously described constitute only a partial list of the more popular short-term investment vehicles used by firms.

Flotation & check clearing Mail Float (1 to 5days) Transit time for a typical check Selection of banks with Accelerated Clearing Capabilities Acceleration of check processing at the firm Use of electronic collection procedure Use of lock boxes Cash concentration strategies Once the remittance from the firms customers have been received & cleared, the resulting cash balances are available in the firm to gather these balances from the lock box banks into a central bank account, the process of collecting funds is called cash concentration. There are two reasons why cash concentrations are advantageous. First, the collection process result in a larger pool of funds. The larger pool makes any temporary interest-earning investments more economical because it reduces the transaction cost per dollar investment. EXAMPLE: If the firm gathers $10,000 from each of 10 accounts, the firm will have $100,000 to invest, resulting in one purchase of securities rather than 10. Also the larger amount of funds may enable the firm to take advantage of higher interest investments that require a larger minimum purchase. Second, with all the cash in a central location, keeping track of the cash (controlling the cash) is considerably simplified. At firm float (0.25 to 1.0days) Clearing float (0 to 2days)

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Concentration banks The concentration of banks is not a simple one & is not easily quantified. For best clearing availabilities, these banks are usually located in major Fed cities & firms often have a regional con-concentration bank located in each of the Federal Reserve districts in which it does a major amount of business. Concentration mechanism Several mechanisms are available for the firm to use in transferring funds from its collection banks to regional con-concentration banks & from there to the central concentration bank. These mechanisms differ in cost & in the availability of funds that they provide. The cheapest transfer mechanism is the depository transfer check. A second alternative is the automated clearing house (ACH) electronic transfer. The most expensive vehicle is the wire transfer. Frequency of transfer Similar t the decision of what transfer vehicle to use is the decision on how frequently to make transfers. Frequent transfer to the concentration banks are costly but result in funds being available more quickly for use. Less frequent transfers reduce the out-of-pocket cost of these transfers but slow the availability of funds.

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Disbursement Management Lockbox systems address the collection of cash from the point at which the customer mails the check until the money is collected. Concentration system addresses the gathering of this collected cash so that it may be used. Disbursement management addresses the efficient paying out of this cash once it is concentrated. (a). Management of disbursement float In this set of technique, the disbursing firm tries to defeat, the receiving firm attempts to reduce the float on incoming checks. For example: The disbursing firm may intentionally address checks to the firms office address rather then its lockbox, creating at firm float. (b). Zero balance account These accounts are very common strategy for finding disbursement as the checks are presented. In this strategy, an account for disbursement is first established at a bank. For the zero balance system to be effective, the participating bank mist be one on which most disbursements are made via the Feds clearance system & not a bank where disbursements occur throughout the day.

(c). Controlled disbursing If the zero balance system is not feasible another is the use of Controlled disbursing, which is often, use when the firms disbursing bank receives checks throughout the day. For example: The probability distribution for disbursement is normal that the firm wishes to have only a 1.0% chance that initial cash will be insufficient to cover the presented checks & that for a particular day the expected presentments are $500,000 with a standard deviation of $50,000. Since the Z-score for 1% of the normal distribution is 2.72, the firm will need to start with an additional $136000 (2.72 times $50,000) in its disbursement account, above the expected requirement of $500,000 to have only a 1% chance of having insufficient finds. Thus the firm should arrange to have $636000 in its account to cover disbursements for that day. The additional $136000 is a hedge & its carrying cost is the result of uncertainty regarding the firms disbursement figure for the day.

______________

Inventory Management
19

1. Inventory is one of the most important element of a firm. 2. Management of inventory is financial issue but nature of the inventory is physical issue. Three sources 1. Outside of the firm 2. Inside of the firm 3. Extract from natural resources Three types 1. Raw material 2. Working process 3. Finished goods We are going to discuss these elements in the following stages: 1. RAW MATERIAL The item which is required for further process of getting FG. Example: Oil. WORKING PROCESS Items which are in the process of production. This is only the accounting standard at any point of time. FINISHED GOODS For manufacturing firm- output of the finished goods. For trading firm- By accumulated other firm. Whatever the source of FG, it means for sale.

2.

3.

Inventory has some characteristics, those are:

01.Current assets Inventory itself is a CA. AR = A/R Inventory ( CA ) 02.Degree of liquidity 20

Inventory is liquid asset In case of credit sales, it is not that much liquid as CA When credit sales occur, then we can convert it into A/R.

03.Liquidity lags There are three type of lags: (a). Creation lag : Time from order placing to delivery at the firm. Also known as lead time. (b). Storage lag: This time from delivery from the supplier to delivery to the customers of the firm. (c). Sale lag: The time required to convert into cash often customer repays its debt. 04. Level of risk In case of managing inventory, there are 2 types of risk involved: (a). From lead time during creation lag. (b). Level of demands during storage lag.

05.Static v/s Dynamic Problems 2 types of dynamic problem: (a). Price (b). Demand.

06. Replenishment rate (a).Frequency of order depends on the replenishment rate Benefits of holding inventory Continue the production process without break-down If size of the order is more then it reduces. If machinery problem occurs, it can use storage inventories.

Cost involved to inventory Having its opportunity cost. Not having its stock out cost.

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 Cost

Firm must hold some level of inventory which will minimize the level of the cost.

There are 2 types of cost: 1. Directly proportionate cost: Inventory level maintain by the firm which is also known as (a). Storage & handling cost: All activities dealing with the physical handling of the goods are included in here. (b). Insurance: Inventory & warehouse must be insured. (Premium depends on the value of the inventory) 2. Semi-variable cost: Which are not related directly with the inventory but very much depends on the size of the inventory. 3. (a).This cost include damage or theft. Instead of safekeeping there are some part which must be damaged. (b). Spoils & obsolescence cost: In which a product is not saleable because of physical detoriation. Obsolesce due to fashion in market in technology

Cost directly proportional no. of order placed: Communication Inspection upon arrival Banking cost for funds transfer

4. Cost / price per unit of inventory order 05. Stock out cost: The firm can not supply product in the market. 06. Opportunity cost: The inventory will require significant amount of investment.

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Indicators/ Factors of inventory level 1. Use or production level: Production or sale plan of a firm determines how much inventory will be required by a firm for its production or sale purpose. 2. Sales forecast: Significantly depends on sale forecast. 3. Seasonal / Cyclical variable: Fluctuation of sales volume depends on some seasonal / cyclical variable. 4. Highly sophisticated technology: If the inventory includes MST, then the possibility of obsolesces will , then we have to control level of inventory at low level. What kind of strategy firm should adopt (a).Cost (b). Characteristics of inventory: It has 2 approaches , Certainty approach: Demand is certain but there is variability in delivery time. Firm can minimize risk by holding inventory (safety stock). Uncertainty approach: It must be dynamic. (c). Importance of inventory: If firm concentrate importance of inventory then we can manage it by using ABC analysis which is also known as management by importance. Following items are considered as importance in any of the category: High cost item: Required huge volume of investment. High volume/ High profit: Which is sold frequently or which is most profitable & major profit making item. Bottle neck item: Which are neither cost nor major component but worthily used by almost all producers of the firm as essential items. ABC, MBI Approach Economic order quantity approach (EOQ) If firm holds this amount of order then carrying cost & total cost will be minimum. This model assume some pre-condition in its basic forms: * Known demand for inventory uses in a given time period. 23

* The sale takes place at a continuous process through out the year. * Cost of being stock out in negligible. * Safety stock is not required. * There are only 2types of cost for any level of inventory: 01. Carrying cost, 02. Ordering cost. * Semi-variable cost is considered as direct cost. * There may be lead time or time to deliver inventory of any length of time. *The replenishment rate for inventory in infinite thus it is possible to replenish inventory at any moment & it can reach from any level from zero to order size provided that the delivery takes place at the time when inventory become zero.

How can we find EOQ? Note: (Here we assume some numerical numbers because of; we do not have enough data to calculate EOQ) Here, S = Total no. of inventory Q/2 = Order (avg.) S/Q = No. of order Per order cost = F Per quantity price = P C = CP (Q/2) S = Annual uses of demand S/2 = Total uses of inventory S = Total no. of inventory Order cost = F (S/Q) Carrying cost = certain % of P TC = CC + OC = CP (Q/2) + F * S/Q

So, Inventory in 2007- Tk.282799918 (original info) Price- Tk. 2000 C- 20% of P Q- ? F- 50 S- 10,000units TC = CP (Q/2) + F(S/Q) = 0 TC = 400*2000(Q/2) + 50 (10,000/1000) = 0 Q* = root over 2FS/CP = 2*50*10,000/2000*400 = 141421.35 No. of order = S/Q = 10,000/ 141421.35 = .070710681 times OC = F*S/Q = 50*10,000/1000 = 500 CC = CP (Q/2) = 2000*400 ( 141421.35/2) = 565685 TC = CC + OC = 565685 + 500 = 566185

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Finite replenishment model Under FRM, it is assume that the replenishment of inventory takes places gradually thus at the time of replenishing inventory the firm continue to using its inventory. So, the maximum inventory never reaches its pick. (we have used some hypothetical numerical numbers to calculate FRM in the following) R = Replenishment time Q = Quantity ordered = 1000 R time, Q/R = 1000/200 = 5times D = Daily uses of inventory = 100units, so, D = 8*100 = 800 units So, Maximum amount of inventory level: 1000 800 = 200 COST OF OPSOLISUS Uncertainty arises from two situations 1. Uncertain demand situation 2. Variable delivery time. Consider: 1. Only demand is uncertain, 2. Only supply is uncertain, 3. Both are uncertain. To minimize these uncertainty firm goes for safety stock & the amount is optimum no of inventory. Safety stock model Assumptions 1. 2. 3. 4. The firm uses EOQ order point system to generate order quantity. If the firm faces stock out of goods it causes a one time cash cost, which is independent on the amount of shortage. Holding cost of the safety stock are linear function of the amount held by the firm. The probability distributions of uncertain variables are normal.

Cost of safety stock 1. 2. 3. Carrying cost + cost of expected stock out CPA + XAK (S/Q*) Optimum level of safety stock = XAK ( S/Q*) = 0

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Models for the Mgt. of cash & Temporary Investment

Cash flow forecasting

Cash flow forecasting is enormously significant for most firms. It enables them to anticipate period of surplus cash & periods where financing will be necessary. The types of cash forecast generated by firms on the basis of, length of the period and Approach to cash flows. In case of National Tubes, the cash forecasting based on yearly flows and relatively for a long period. There are two common approaches of cash forecasting receipts and disbursement approaches of cash and adjusted net income approaches. I have used the receipts and disbursement approaches. It was easy to predict Operating cash flows item, but the most difficult part was investing and financing cash flows. For the cash flow forecasting purpose I assumed that: Collection from sales, Purchase of raw materials based on the percentage of sales. Bank interest as a percentage of short term bank loans. Income tax & workers profit participation fund calculated as percentage Net income. Purchase of fixed assets calculated as a percentage of sales growth. Because when a firm grows rapidly in sales then it needs to enhance its production capacity through purchasing the fixed assets. Invest amount calculated on the basis of idle cash & collection from sales because when a firms idle cash increase as well as its collection from sales then they have enough potency to invest in others sources of earnings. Capital work in progress forecasting based on historical data is not possible because it is totally depend on firms efficiency to the project Interest received totally depends on firms short term loan and short term bank loan provided to other bank. Long term loan received and payment depend on firms investing policy in fixed assets. Dividend payments depend on firms net income. Here the most important issue was forecasting the repayment / acquisition of temporary loan and long term liabilities as it was assessed that the firm will have volatile excess cash generated from operation. But those forecasting is completely related with firms capital structure policy, thus a major aspects of decision making by top level of top level management. As a matter of fact, as an external party it was not possible for to assess those information. So, my prediction of net cash flow has shown a abruptly volatile balance for the forecasted period. 26

C a s h f lo w f r o m o p R e c e ip t s :
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BAUMOL MODEL:
From the analysis of Cash transaction pattern and cash management procedure of national tube we have found that the national tube uses the BAUMOL model. According to this model two task of national tube is identified. These two are: 1. They hold some level of cash over a number of period while 2. Invest the balance amount in interest earning deposits. Baumol methodology is assumed appropriate for national tubes, because it follows the following assumptions: 1. The company receives cash once in a month from big buyers like TITAS, B.G.S.L, Jalalabad Gas transmission and Distribution Company etc. 2. The company spends this money on a weekly basis for payment against utility bills, wages, import cost of raw materials and administrative expense. Following information were found from firms operating activities: The firm receives approximately 12% interest from its deposit Though the bank does not charge any weekly fee for withdrawal of fund from the deposit, it charges an annual fee (Which is Tk.1500 for corporate deposits). But the company itself has a cost for depositing and withdrawing fund by its employee. For simplicity of calculation we have assumed Tk. 500 cost per transaction. The company collects Tk. 455998599 on a yearly basis. If we divide Optimum number of transaction is found in the following way Using Baumol model it was estimated that the company extracted a profit in different years were-

2004 Profit 2212465

2005 4183848

2006 2843558

2007 3703009

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Here over all detail of the estimated usage of Baumol model is given

Does cash management procedure of national tubes matches with the MILLER ORR model?

Finding the appropriate cash balance to be maintained by National Tubes using MILLER ORR MODEL:

If we want to determine the appropriate cash balance to be maintained by National Tubes using MILLER-ORR MODEL. Then some variables are required to be determined. These variables are: What is the model determined cash balance, R? To determine R we need following things. >> Transaction Cost (a) >> Standard deviation of daily average cash balance (V) >> Interest Rate ( i ) Exogenous cash balance (L) to be determined by the firm. Return point R+L. Upper control Limit. Lower control limit.

Transaction cost Investment amou Interest rate (i) Optimum number Profit
1. What is the model determined cash balance, R?: To determine R we need following things. 29

>> Transaction Cost (a) : as we have determined earlier that transaction cost per time as tk. 500. here same amount is taken. >> Standard deviation of daily average cash balance (V): It is assumed that 20% of variosion will occur in case of firms daily estimated cash balance. >> Interest Rate ( i ): The firm receives approximately 12% interest from its deposit

2. Exogenous cash balance (L) to be determined by the firm: National tube has a current liability turnover ratio of 2 times. It indicates that on an average the company pays off its current liability within 180 days. So the company will be required to maintain half yearly cash balance equivalent to its current liability. On a daily basis it will be required to maintain 1/180 amount of half yearly cash balance. In year 2007 the balance was tk. 173708. Here the calculation of how the exogenous cash balance is determined is given below:

3. Return point R+L: We know that the return point is equivalent to R +L.Return point or optimum cash balance will be tk.2251067 for National Tubes in year 2007. 4. Upper control Limit. Upper control limit o f cash balance for the using this model firm would have been tk.3279038 in year 2007.

C ost of goods so C u r r e n t lia b ilitie s

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5.Lower control limit. Lower control limit of the firm would be tk.173708 for 2007

MILLER-ORR MODEL
Detail of cash balance of National Tubes using Miller-Orr model is given below:

m o d e l d e te r m in e T r a n s a c tio n C o s S ta n d a r d d e v ia tio
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Terms of sales Decision

Our company National Tubes is using simple terms of sale for its buyers. Current sales figure is tk.72476448 in the year 2007. for next some period the growth of sales is expected to be 20%. Accounts receivable turnover ratio is 47 days. Variable cost is around 85% of sales. Bad and doubtful debt is expected to be equal proportional to sales and expected to grow at 20% rate. We have assumed new policy for the company and assumed whether the new policy will fruitful for the company. Under this policy for next some period the growth of sales is expected to be 29%. Accounts receivable turnover ratio is expected to rise from 47 days to 70 days. Variable cost is around 85% of sales. Bad debt level is expected to see a rise equivalent to 40% growth rate compared to existing 20%. Details of calculation under different sales policy: Current scenario Growth of sales is expected to be 20%. Accounts receivable turnover ratio is 47 days. Variable cost is around 85% of sales. Bad and doubtful debt expected to grow at 20% rate.

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Under this existing policy net present value will be tk.447904763.9. Proposed Scenario Sales are expected to be 29%. Accounts receivable turnover ratio from 47 days to 70 days. Variable cost is around 85% of sales. Bad debt to grow 40% growth rate compared to existing 20%.

Sales Bad Debt Net of bad debt A/R Balance Collection from Sa
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Under the new policy net present value will be tk.457300346.

From our spreadsheet analysis it is found that the present value of net cash flows over the forecasted five years is substantially positive which will certainly overweigh the NPV under the existing policy. So it seems to be rational to change sales policy. Under the new policy greater amount of NPV is generated. So, the company should actively consider the new sales policy.

Analysis of Credit granting decision of National tubes for its buyers

National Tube is public limited company whose majority is owned by the government. Most of its products are supplied to big government organization like TITAS, B.G.S.L, Jalalabad

Sales Bad debt Net of bad debt A/R Balance Collection from S
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Gas transmission and Distribution Company etc. Here the analysis of credit granting decision is analyzed in the light of traditional approach of 5Cs model: Capital: Most of the buyers of National tube are very big government owned organization. They have sufficient capital base. So it is much less riskier for National tube to sell product at credit. Character: Generally they didnt have any default history. Even if they default national tube will be able to recover this amount from the government or by not paying utility bills to these companies. Collateral: An indirect collateral option is available to national tubes. Because the government provide sovereign guarantee for this purchase by nationalized company. Capacity: Most of the buyers of national tubes have high capacity to payoff the debt. So it is quite risk free. Condition: The general economic and business condition is quite favorable for national tubes to grant credit. Economic growth in this industry is reasonably good. So there is low risk of default.

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